CONFERENCE REPORT ON H.R. 3448, SMALL BUSINESS JOB PROTECTION ACT OF 1996
(House of Representatives - August 01, 1996)

Text of this article available as:

Formatting necessary for an accurate reading of this text may be shown by tags (e.g., <DELETED> or <BOLD>) or may be missing from this TXT display. For complete and accurate display of this text, see the PDF.

        


[Pages H9568-H9670]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 CONFERENCE REPORT ON H.R. 3448, SMALL BUSINESS JOB PROTECTION ACT OF 
                                  1996

  Mr. ARCHER submitted the following conference report and statement on 
the bill (H.R. 3448) to provide tax relief for small businesses, to 
protect jobs, to create opportunities, to increase the take home pay of 
workers, to amend the Portal-to-Portal Act of 1947 relating to the 
payment of wages to employees who use employer owned vehicles, and to 
amend the Fair Labor Standards Act of 1938 to increase the minimum wage 
rate and to prevent job loss by providing flexibility to employers in 
complying with minimum wage and overtime requirements under that Act:

                  Conference Report (H. Rept. 104-737)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendments of the Senate to the bill (H.R. 
     3448), to provide tax relief for small businesses, to protect 
     jobs, to create opportunities, to increase the take home pay 
     of workers, to amend the Portal-to-Portal Act of 1947 
     relating to the payment of wages to employees who use 
     employer owned vehicles, and to amend the Fair Labor 
     Standards Act of 1938 to increase the minimum wage rate and 
     to prevent job loss by providing flexibility to employers in 
     complying with minimum wage and overtime requirements under 
     that Act, having met, after full and free conference, have 
     agreed to recommend and do recommend to their respective 
     Houses as follows:

                                TITLE I

       That the House recede from its disagreement to the 
     amendment of the Senate numbered 1, and agree to the same 
     with an amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:
       (b) Table of Contents.--

Sec. 1. Short title; table of contents.

            TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS

Sec. 1101. Amendment of 1986 Code.
Sec. 1102. Underpayments of estimated tax.

                      Subtitle A--Expensing; Etc.

Sec. 1111. Increase in expense treatment for small businesses.
Sec. 1112. Treatment of employee tips.
Sec. 1113. Treatment of storage of product samples.
Sec. 1114. Treatment of certain charitable risk pools.
Sec. 1115. Treatment of dues paid to agricultural or horticultural 
              organizations.
Sec. 1116. Clarification of employment tax status of certain fishermen.
Sec. 1117. Modifications of tax-exempt bond rules for first-time 
              farmers.
Sec. 1118. Newspaper distributors treated as direct sellers.
Sec. 1119. Application of involuntary conversion rules to 
              presidentially declared disasters.
Sec. 1120. Class life for gas station convenience stores and similar 
              structures.
Sec. 1121. Treatment of abandonment of lessor improvements at 
              termination of lease.
Sec. 1122. Special rules relating to determination whether individuals 
              are employees for purposes of employment taxes.
Sec. 1123. Treatment of housing provided to employees by academic 
              health centers.

          Subtitle B--Extension of Certain Expiring Provisions

Sec. 1201. Work opportunity tax credit.
Sec. 1202. Employer-provided educational assistance programs.
Sec. 1203. FUTA exemption for alien agricultural workers.
Sec. 1204. Research credit.
Sec. 1205. Orphan drug tax credit.
Sec. 1206. Contributions of stock to private foundations.
Sec. 1207. Extension of binding contract date for biomass and coal 
              facilities.
Sec. 1208. Moratorium for excise tax on diesel fuel sold for use or 
              used in diesel-powered motorboats.

           Subtitle C--Provisions Relating to S Corporations

Sec. 1301. S corporations permitted to have 75 shareholders.
Sec. 1302. Electing small business trusts.
Sec. 1303. Expansion of post-death qualification for certain trusts.
Sec. 1304. Financial institutions permitted to hold safe harbor debt.
Sec. 1305. Rules relating to inadvertent terminations and invalid 
              elections.
Sec. 1306. Agreement to terminate year.
Sec. 1307. Expansion of post-termination transition period.
Sec. 1308. S corporations permitted to hold subsidiaries.
Sec. 1309. Treatment of distributions during loss years.
Sec. 1310. Treatment of S corporations under subchapter C.
Sec. 1311. Elimination of certain earnings and profits.
Sec. 1312. Carryover of disallowed losses and deductions under at-risk 
              rules allowed.
Sec. 1313. Adjustments to basis of inherited S stock to reflect certain 
              items of income.
Sec. 1314. S corporations eligible for rules applicable to real 
              property subdivided for sale by noncorporate taxpayers.
Sec. 1315. Financial institutions.
Sec. 1316. Certain exempt organizations allowed to be shareholders.
Sec. 1317. Effective date.

                   Subtitle D--Pension Simplification

                Chapter 1--Simplified Distribution Rules

Sec. 1401. Repeal of 5-year income averaging for lump-sum 
              distributions.

[[Page H9569]]

Sec. 1402. Repeal of $5,000 exclusion of employees' death benefits.
Sec. 1403. Simplified method for taxing annuity distributions under 
              certain employer plans.
Sec. 1404. Required distributions.

            Chapter 2--Increased Access to Retirement Plans


                    SUBCHAPTER A--SIMPLE SAVINGS PLANS

Sec. 1421. Establishment of savings incentive match plans for employees 
              of small employers.
Sec. 1422. Extension of simple plan to 401(k) arrangements.


                      SUBCHAPTER B--OTHER PROVISIONS

Sec. 1426. Tax-exempt organizations eligible under section 401(k).
Sec. 1427. Homemakers eligible for full IRA deduction.

                Chapter 3--Nondiscrimination Provisions

Sec. 1431. Definition of highly compensated employees; repeal of family 
              aggregation.
Sec. 1432. Modification of additional participation requirements.
Sec. 1433. Nondiscrimination rules for qualified cash or deferred 
              arrangements and matching contributions.
Sec. 1434. Definition of compensation for section 415 purposes.

                  Chapter 4--Miscellaneous Provisions

Sec. 1441. Plans covering self-employed individuals.
Sec. 1442. Elimination of special vesting rule for multiemployer plans.
Sec. 1443. Distributions under rural cooperative plans.
Sec. 1444. Treatment of governmental plans under section 415.
Sec. 1445. Uniform retirement age.
Sec. 1446. Contributions on behalf of disabled employees.
Sec. 1447. Treatment of deferred compensation plans of State and local 
              governments and tax-exempt organizations.
Sec. 1448. Trust requirement for deferred compensation plans of State 
              and local governments.
Sec. 1449. Transition rule for computing maximum benefits under section 
              415 limitations.
Sec. 1450. Modifications of section 403(b).
Sec. 1451. Special rules relating to joint and survivor annuity 
              explanations.
Sec. 1452. Repeal of limitation in case of defined benefit plan and 
              defined contribution plan for same employee; excess 
              distributions.
Sec. 1453. Tax on prohibited transactions.
Sec. 1454. Treatment of leased employees.
Sec. 1455. Uniform penalty provisions to apply to certain pension 
              reporting requirements.
Sec. 1456. Retirement benefits of ministers not subject to tax on net 
              earnings from self-employment.
Sec. 1457. Sample language for spousal consent and qualified domestic 
              relations forms.
Sec. 1458. Treatment of length of service awards to volunteers 
              performing fire fighting or prevention services, 
              emergency medical services, or ambulance services.
Sec. 1459. Alternative nondiscrimination rules for certain plans that 
              provide for early participation.
Sec. 1460. Clarification of application of ERISA to insurance company 
              general accounts.
Sec. 1461. Special rules for chaplains and self-employed ministers.
Sec. 1462. Definition of highly compensated employee for pre-ERISA 
              rules for church plans.
Sec. 1463. Rule relating to investment in contract not to apply to 
              foreign missionaries.
Sec. 1464. Waiver of excise tax on failure to pay liquidity shortfall.
Sec. 1465. Date for adoption of plan amendments.

                   Subtitle E--Foreign Simplification

Sec. 1501. Repeal of inclusion of certain earnings invested in excess 
              passive assets.

                      Subtitle F--Revenue Offsets

                       Part I--General Provisions

Sec. 1601. Modifications of Puerto Rico and possession tax credit.
Sec. 1602. Repeal of exclusion for interest on loans used to acquire 
              employer securities.
Sec. 1603. Certain amounts derived from foreign corporations treated as 
              unrelated business taxable income.
Sec. 1604. Depreciation under income forecast method.
Sec. 1605. Repeal of exclusion for punitive damages and for damages not 
              attributable to physical injuries or sickness.
Sec. 1606. Repeal of diesel fuel tax rebate to purchasers of diesel-
              powered automobiles and light trucks.
Sec. 1607. Extension and phasedown of luxury passenger automobile tax.
Sec. 1608. Termination of future tax-exempt bond financing for local 
              furnishers of electricity and gas.
Sec. 1609. Extension of Airport and Airway Trust Fund excise taxes.
Sec. 1610. Basis adjustment to property held by corporation where stock 
              in corporation is replacement property under involuntary 
              conversion rules.
Sec. 1611. Treatment of certain insurance contracts on retired lives.
Sec. 1612. Treatment of modified guaranteed contracts.
Sec. 1613. Treatment of contributions in aid of construction.
Sec. 1614. Election to cease status as qualified scholarship funding 
              corporation.
Sec. 1615. Certain tax benefits denied to individuals failing to 
              provide taxpayer identification numbers.
Sec. 1616. Repeal of bad debt reserve method for thrift savings 
              associations.
Sec. 1617. Exclusion for energy conservation subsidies limited to 
              subsidies with respect to dwelling units.

          Part II--Financial Asset Securitization Investments

Sec. 1621. Financial Asset Securitization Investment Trusts.

                   Subtitle G--Technical Corrections

Sec. 1701. Coordination with other subtitles.
Sec. 1702. Amendments related to Revenue Reconciliation Act of 1990.
Sec. 1703. Amendments related to Revenue Reconciliation Act of 1993.
Sec. 1704. Miscellaneous provisions.

                      Subtitle H--Other Provisions

Sec. 1801. Exemption from diesel fuel dyeing requirements with respect 
              to certain States.
Sec. 1802. Treatment of certain university accounts.
Sec. 1803. Modifications to excise tax on ozone-depleting chemicals.
Sec. 1804. Tax-exempt bonds for sale of Alaska Power Administration 
              facility.
Sec. 1805. Nonrecognition treatment for certain transfers by common 
              trust funds to regulated investment companies.
Sec. 1806. Qualified State tuition programs.
Sec. 1807. Adoption assistance.
Sec. 1808. Removal of barriers to interethnic adoption.
Sec. 1809. 6-month delay of electronic fund transfer requirement.

                Subtitle I--Foreign Trust Tax Compliance

Sec. 1901. Improved information reporting on foreign trusts.
Sec. 1902. Comparable penalties for failure to file return relating to 
              transfers to foreign entities.
Sec. 1903. Modifications of rules relating to foreign trusts having one 
              or more United States beneficiaries.
Sec. 1904. Foreign persons not to be treated as owners under grantor 
              trust rules.
Sec. 1905. Information reporting regarding foreign gifts.
Sec. 1906. Modification of rules relating to foreign trusts which are 
              not grantor trusts.
Sec. 1907. Residence of trusts, etc.

             Subtitle J--Generalized System of Preferences

Sec. 1951. Short title.
Sec. 1952. Generalized System of Preferences.
Sec. 1953. Effective date.
Sec. 1954. Conforming amendments.

                       TITLE II--PAYMENT OF WAGES

Sec. 2101. Short title.
Sec. 2102. Proper compensation for use of employer vehicles.
Sec. 2103. Effective date.
Sec. 2104. Minimum wage increase.
Sec. 2105. Fair Labor Standards Act Amendments.
            TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS

     SEC. 1101. AMENDMENT OF 1986 CODE.

       Except as otherwise expressly provided, whenever in this 
     title 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.

     SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX.

       No addition to the tax shall be made under section 6654 or 
     6655 of the Internal Revenue Code of 1986 (relating to 
     failure to pay estimated tax) with respect to any 
     underpayment of an installment required to be paid before the 
     date of the enactment of this Act to the extent such 
     underpayment was created or increased by any provision of 
     this title.
                      Subtitle A--Expensing; Etc.

     SEC. 1111. INCREASE IN EXPENSE TREATMENT FOR SMALL 
                   BUSINESSES.

       (a) General Rule.--Paragraph (1) of section 179(b) 
     (relating to dollar limitation) is amended to read as 
     follows:
       ``(1) Dollar limitation.--The aggregate cost which may be 
     taken into account under subsection (a) for any taxable year 
     shall not exceed the following applicable amount:

                                                  ``If thThe applicable
                                                             amount is:
      1997..................................................... 18,000 
      1998..................................................... 18,500 
      1999..................................................... 19,000 
      2000..................................................... 20,000 
      2001 or 2002............................................. 24,000 
      2003 or thereafter.................................... 25,000.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 1112. TREATMENT OF EMPLOYEE TIPS.

       (a) Employee Cash Tips.--
       (1) Reporting requirement not considered.--Subparagraph (A) 
     of section 45B(b)(1) (relating to excess employer social 
     security tax) is amended by inserting ``(without regard to 
     whether such tips are reported under section 6053)'' after 
     ``section 3121(q)''.
       (2) Taxes paid.--Subsection (d) of section 13443 of the 
     Revenue Reconciliation Act of 1993

[[Page H9570]]

     is amended by inserting ``, with respect to services 
     performed before, on, or after such date'' after ``1993''.
       (3) Effective date.--The amendments made by this subsection 
     shall take effect as if included in the amendments made by, 
     and the provisions of, section 13443 of the Revenue 
     Reconciliation Act of 1993.
       (b) Tips for Employees Delivering Food or Beverages.--
       (1) In general.--Paragraph (2) of section 45B(b) is amended 
     to read as follows:
       ``(2) Only tips received for food or beverages taken into 
     account.--In applying paragraph (1), there shall be taken 
     into account only tips received from customers in connection 
     with the providing, delivering, or serving of food or 
     beverages for consumption if the tipping of employees 
     delivering or serving food or beverages by customers is 
     customary.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to tips received for services performed after 
     December 31, 1996.

     SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES.

       (a) In General.--Paragraph (2) of section 280A(c) is 
     amended by striking ``inventory'' and inserting ``inventory 
     or product samples''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1995.

     SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS.

       (a) General Rule.--Section 501 (relating to exemption from 
     tax on corporations, certain trusts, etc.) is amended by 
     redesignating subsection (n) as subsection (o) and by 
     inserting after subsection (m) the following new subsection:
       ``(n) Charitable Risk Pools.--
       ``(1) In general.--For purposes of this title--
       ``(A) a qualified charitable risk pool shall be treated as 
     an organization organized and operated exclusively for 
     charitable purposes, and
       ``(B) subsection (m) shall not apply to a qualified 
     charitable risk pool.
       ``(2) Qualified charitable risk pool.--For purposes of this 
     subsection, the term `qualified charitable risk pool' means 
     any organization--
       ``(A) which is organized and operated solely to pool 
     insurable risks of its members (other than risks related to 
     medical malpractice) and to provide information to its 
     members with respect to loss control and risk management,
       ``(B) which is comprised solely of members that are 
     organizations described in subsection (c)(3) and exempt from 
     tax under subsection (a), and
       ``(C) which meets the organizational requirements of 
     paragraph (3).
       ``(3) Organizational requirements.--An organization 
     (hereinafter in this subsection referred to as the `risk 
     pool') meets the organizational requirements of this 
     paragraph if--
       ``(A) such risk pool is organized as a nonprofit 
     organization under State law provisions authorizing risk 
     pooling arrangements for charitable organizations,
       ``(B) such risk pool is exempt from any income tax imposed 
     by the State (or will be so exempt after such pool qualifies 
     as an organization exempt from tax under this title),
       ``(C) such risk pool has obtained at least $1,000,000 in 
     startup capital from nonmember charitable organizations,
       ``(D) such risk pool is controlled by a board of directors 
     elected by its members, and
       ``(E) the organizational documents of such risk pool 
     require that--
       ``(i) each member of such pool shall at all times be an 
     organization described in subsection (c)(3) and exempt from 
     tax under subsection (a),
       ``(ii) any member which receives a final determination that 
     it no longer qualifies as an organization described in 
     subsection (c)(3) shall immediately notify the pool of such 
     determination and the effective date of such determination, 
     and
       ``(iii) each policy of insurance issued by the risk pool 
     shall provide that such policy will not cover the insured 
     with respect to events occurring after the date such final 
     determination was issued to the insured.
     An organization shall not cease to qualify as a qualified 
     charitable risk pool solely by reason of the failure of any 
     of its members to continue to be an organization described in 
     subsection (c)(3) if, within a reasonable period of time 
     after such pool is notified as required under subparagraph 
     (C)(ii), such pool takes such action as may be reasonably 
     necessary to remove such member from such pool.
       ``(4) Other definitions.--For purposes of this subsection--
       ``(A) Startup capital.--The term `startup capital' means 
     any capital contributed to, and any program-related 
     investments (within the meaning of section 4944(c)) made in, 
     the risk pool before such pool commences operations.
       ``(B) Nonmember charitable organization.--The term 
     `nonmember charitable organization' means any organization 
     which is described in subsection (c)(3) and exempt from tax 
     under subsection (a) and which is not a member of the risk 
     pool and does not benefit (directly or indirectly) from the 
     insurance coverage provided by the pool to its members.''
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1115. TREATMENT OF DUES PAID TO AGRICULTURAL OR 
                   HORTICULTURAL ORGANIZATIONS.

       (a) General Rule.--Section 512 (defining unrelated business 
     taxable income) is amended by adding at the end the following 
     new subsection:
       ``(d) Treatment of Dues of Agricultural or Horticultural 
     Organizations.--
       ``(1) In general.--If--
       ``(A) an agricultural or horticultural organization 
     described in section 501(c)(5) requires annual dues to be 
     paid in order to be a member of such organization, and
       ``(B) the amount of such required annual dues does not 
     exceed $100,

     in no event shall any portion of such dues be treated as 
     derived by such organization from an unrelated trade or 
     business by reason of any benefits or privileges to which 
     members of such organization are entitled.
       ``(2) Indexation of $100 amount.--In the case of any 
     taxable year beginning in a calendar year after 1995, the 
     $100 amount in paragraph (1) shall be increased by an amount 
     equal to--
       ``(A) $100, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 1994' for 
     `calendar year 1992' in subparagraph (B) thereof.
       ``(3) Dues.--For purposes of this subsection, the term 
     `dues' means any payment (whether or not designated as dues) 
     which is required to be made in order to be recognized by the 
     organization as a member of the organization.''.
       (b) Effective Dates.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years beginning after December 31, 1986.
       (2) Transitional rule.--If--
       (A) for purposes of applying part III of subchapter F of 
     chapter 1 of the Internal Revenue Code of 1986 to any taxable 
     year beginning before January 1, 1987, an agricultural or 
     horticultural organization did not treat any portion of 
     membership dues received by it as income derived in an 
     unrelated trade or business, and
       (B) such organization had a reasonable basis for not 
     treating such dues as income derived in an unrelated trade or 
     business,

     then, for purposes of applying such part III to any such 
     taxable year, in no event shall any portion of such dues be 
     treated as derived in an unrelated trade or business.
       (3) Reasonable basis.--For purposes of paragraph (2), an 
     organization shall be treated as having a reasonable basis 
     for not treating membership dues as income derived in an 
     unrelated trade or business if the taxpayer's treatment of 
     such dues was in reasonable reliance on any of the following:
       (A) Judicial precedent, published rulings, technical advice 
     with respect to the organization, or a letter ruling to the 
     organization.
       (B) A past Internal Revenue Service audit of the 
     organization in which there was no assessment attributable to 
     the reclassification of membership dues for purposes of the 
     tax on unrelated business income.
       (C) Long-standing recognized practice of agricultural or 
     horticultural organizations.

     SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CERTAIN 
                   FISHERMEN.

       (a) Clarification of Employment Tax Status.--
       (1) Amendments of internal revenue code of 1986.--
       (A) Determination of size of crew.--Subsection (b) of 
     section 3121 (defining employment) is amended by adding at 
     the end the following new sentence:

     ``For purposes of paragraph (20), the operating crew of a 
     boat shall be treated as normally made up of fewer than 10 
     individuals if the average size of the operating crew on 
     trips made during the preceding 4 calendar quarters consisted 
     of fewer than 10 individuals.''.
       (B) Certain cash remuneration permitted.--Subparagraph (A) 
     of section 3121(b)(20) is amended to read as follows:
       ``(A) such individual does not receive any cash 
     remuneration other than as provided in subparagraph (B) and 
     other than cash remuneration--
       ``(i) which does not exceed $100 per trip;
       ``(ii) which is contingent on a minimum catch; and
       ``(iii) which is paid solely for additional duties (such as 
     mate, engineer, or cook) for which additional cash 
     remuneration is traditional in the industry,''.
       (C) Conforming amendment.--Section 6050A(a) is amended by 
     striking ``and'' at the end of paragraph (3), by striking the 
     period at the end of paragraph (4) and inserting ``; and'', 
     and by adding at the end the following new paragraph:
       ``(5) any cash remuneration described in section 
     3121(b)(20)(A).''.
       (2) Amendment of social security act.--
       (A) Determination of size of crew.--Subsection (a) of 
     section 210 of the Social Security Act is amended by adding 
     at the end the following new sentence:

     ``For purposes of paragraph (20), the operating crew of a 
     boat shall be treated as normally made up of fewer than 10 
     individuals if the average size of the operating crew on 
     trips made during the preceding 4 calendar quarters consisted 
     of fewer than 10 individuals.''.
       (B) Certain cash remuneration permitted.--Subparagraph (A) 
     of section 210(a)(20) of such Act is amended to read as 
     follows:
       ``(A) such individual does not receive any additional 
     compensation other than as provided in subparagraph (B) and 
     other than cash remuneration--
       ``(i) which does not exceed $100 per trip;
       ``(ii) which is contingent on a minimum catch; and
       ``(iii) which is paid solely for additional duties (such as 
     mate, engineer, or cook) for which additional cash 
     remuneration is traditional in the industry,''.
       (3) Effective Dates.--
       (A) In general.--The amendments made by this subsection 
     shall apply to remuneration paid--
       (i) after December 31, 1994, and
       (ii) after December 31, 1984, and before January 1, 1995, 
     unless the payor treated such remuneration (when paid) as 
     being subject to tax

[[Page H9571]]

     under chapter 21 of the Internal Revenue Code of 1986.
       (B) Reporting requirement.--The amendment made by paragraph 
     (1)(C) shall apply to remuneration paid after December 31, 
     1996.
       (b) Information Reporting.--
       (1) In general.--Subpart B of part III of subchapter A of 
     chapter 68 (relating to information concerning transactions 
     with other persons) is amended by inserting after section 
     6050Q the following new section:

     ``SEC. 6050R. RETURNS RELATING TO CERTAIN PURCHASES OF FISH.

       ``(a) Requirement of Reporting.--Every person--
       ``(1) who is engaged in the trade or business of purchasing 
     fish for resale from any person engaged in the trade or 
     business of catching fish; and
       ``(2) who makes payments in cash in the course of such 
     trade or business to such a person of $600 or more during any 
     calendar year for the purchase of fish,

     shall make a return (at such times as the Secretary may 
     prescribe) described in subsection (b) with respect to each 
     person to whom such a payment was made during such calendar 
     year.
       ``(b) Return.--A return is described in this subsection if 
     such return--
       ``(1) is in such form as the Secretary may prescribe, and
       ``(2) contains--
       ``(A) the name, address, and TIN of each person to whom a 
     payment described in subsection (a)(2) was made during the 
     calendar year;
       ``(B) the aggregate amount of such payments made to such 
     person during such calendar year and the date and amount of 
     each such payment, and
       ``(C) such other information as the Secretary may require.
       ``(c) Statement To Be Furnished With Respect to Whom 
     Information is Required.--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 a 
     written statement showing--
       ``(1) the name and address of the person required to make 
     such a return, and
       ``(2) the aggregate amount of payments to the person 
     required to be shown on the return.

     The written statement required under the preceding sentence 
     shall be furnished to the person on or before January 31 of 
     the year following the calendar year for which the return 
     under subsection (a) is required to be made.
       ``(d) Definitions.--For purposes of this section:
       ``(1) Cash.--The term `cash' has the meaning given such 
     term by section 6050I(d).
       ``(2) Fish.--The term `fish' includes other forms of 
     aquatic life.''.
       (2) Technical amendments.--
       (A) Subparagraph (A) of section 6724(d)(1) is amended by 
     striking ``or'' at the end of clause (vi), by striking 
     ``and'' at the end of clause (vii) and inserting ``or'', and 
     by adding at the end the following new clause:
       ``(viii) section 6050R (relating to returns relating to 
     certain purchases of fish), and''.
       (B) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (R) through (U) as subparagraphs 
     (S) through (V), respectively, and by inserting after 
     subparagraph (Q) the following new subparagraph:
       ``(R) section 6050R(c) (relating to returns relating to 
     certain purchases of fish),''.
       (C) The table of sections for subpart B of part III of 
     subchapter A of chapter 68 is amended by inserting after the 
     item relating to 6050Q the following new item:

``Sec. 6050R. Returns relating to certain purchases of fish.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to payments made after December 31, 1997.

     SEC. 1117. MODIFICATIONS OF TAX-EXEMPT BOND RULES FOR FIRST-
                   TIME FARMERS.

       (a) Acquisition From Related Person Allowed.--Section 
     147(c)(2) (relating to exception for first-time farmers) is 
     amended by adding at the end the following new subparagraph:
       ``(G) Acquisition from related person.--For purposes of 
     this paragraph and section 144(a), the acquisition by a 
     first-time farmer of land or personal property from a related 
     person (within the meaning of section 144(a)(3)) shall not be 
     treated as an acquisition from a related person, if--
       ``(i) the acquisition price is for the fair market value of 
     such land or property, and
       ``(ii) subsequent to such acquisition, the related person 
     does not have a financial interest in the farming operation 
     with respect to which the bond proceeds are to be used.''.
       (b) Substantial Farmland Amount Doubled.--Clause (i) of 
     section 147(c)(2)(E) (defining substantial farmland) is 
     amended by striking ``15 percent'' and inserting ``30 
     percent''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after the date of the enactment 
     of this Act.

     SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.

       (a) In General.--Section 3508(b)(2)(A) is amended by 
     striking ``or'' at the end of clause (i), by inserting ``or'' 
     at the end of clause (ii), and by inserting after clause (ii) 
     the following new clause:
       ``(iii) is engaged in the trade or business of the 
     delivering or distribution of newspapers or shopping news 
     (including any services directly related to such trade or 
     business),''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to services performed after December 31, 1995.

     SEC. 1119. APPLICATION OF INVOLUNTARY CONVERSION RULES TO 
                   PRESIDENTIALLY DECLARED DISASTERS.

       (a) In General.--Section 1033(h) is amended by 
     redesignating paragraphs (2) and (3) as paragraphs (3) and 
     (4), respectively, and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Trade or business and investment property.--If a 
     taxpayer's property held for productive use in a trade or 
     business or for investment is compulsorily or involuntarily 
     converted as a result of a Presidentially declared disaster, 
     tangible property of a type held for productive use in a 
     trade or business shall be treated for purposes of subsection 
     (a) as property similar or related in service or use to the 
     property so converted.''.
       (b) Conforming Amendments.--Section 1033(h) is amended--
       (1) by striking ``residence'' in paragraph (3) (as 
     redesignated by subsection (a)) and inserting ``property'',
       (2) by striking ``Principal Residences'' in the heading and 
     inserting ``Property'', and
       (3) by striking ``(1) In general.--'' and inserting ``(1) 
     Principal residences.--''.
       (c) Expansion of Oklahoma City Enterprise Community.--
     Notwithstanding sections 1391 and 1392(a)(3)(D) of the 
     Internal Revenue Code of 1986, the boundaries of the 
     enterprise community for Oklahoma City, Oklahoma, designated 
     by the Secretary of Housing and Urban Development on December 
     21, 1994, may be extended with respect to census tracts 
     located in the area damaged due to the bombing of the Alfred 
     P. Murrah Federal Building in Oklahoma City on April 19, 
     1995, primarily in the area bounded on the south by Robert S. 
     Kerr Avenue, on the north by North 13th Street, on the east 
     by Oklahoma Avenue, and on the west by Shartel Avenue.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to disasters declared after December 31, 1994, in 
     taxable years ending after such date.
       (2) Subsection (c).--Subsection (c) shall take effect on 
     the date of the enactment of this Act.

     SEC. 1120. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND 
                   SIMILAR STRUCTURES.

       (a) In General.--Section 168(e)(3)(E) (classifying certain 
     property as 15-year property) is amended by striking ``and'' 
     at the end of clause (i), by striking the period at the end 
     of clause (ii) and inserting ``, and'', and by adding at the 
     end the following new clause:
       ``(iii) any section 1250 property which is a retail motor 
     fuels outlet (whether or not food or other convenience items 
     are sold at the outlet).''.
       (b) Conforming Amendment.--Subparagraph (B) of section 
     168(g)(3) is amended by inserting after the item relating to 
     subparagraph (E)(ii) in the table contained therein the 
     following new item:

``(E)(iii).........................................................20''

       (c)Effective Date.--The amendments made by this section 
     shall apply to property which is placed in service on or 
     after the date of the enactment of this Act and to which 
     section 168 of the Internal Revenue Code of 1986 applies 
     after the amendment made by section 201 of the Tax Reform Act 
     of 1986. A taxpayer may elect (in such form and manner as the 
     Secretary of the Treasury may prescribe) to have such 
     amendments apply with respect to any property placed in 
     service before such date and to which such section so 
     applies.

     SEC. 1121 TREATMENT OF ABANDONMENT OF LESSOR IMPROVEMENTS AT 
                   TERMINATION OF LEASE.

       (a) In General.--Paragraph (8) of section 168(i) is amended 
     to read as follows:
       ``(8) Treatment of leasehold improvements.--
       ``(A) In general.--In the case of any building erected (or 
     improvements made) on leased property, if such building or 
     improvement is property to which this section applies, the 
     depreciation deduction shall be determined under the 
     provisions of this section.
       ``(B) Treatment of lessor improvements which are abandoned 
     at termination of lease.--An improvement--
       ``(i) which is made by the lessor of leased property for 
     the lessee of such property, and
       ``(ii) which is irrevocably disposed of or abandoned by the 
     lessor at the termination of the lease by such lessee,

     shall be treated for purposes of determining gain or loss 
     under this title as disposed of by the lessor when so 
     disposed of or abandoned.''.
       (b) Effective Date.--Subparagraph (B) of section 168(i)(8) 
     of the Internal Revenue Code of 1986, as added by the 
     amendment made by subsection (a), shall apply to improvements 
     disposed of or abandoned after June 12, 1996.

     SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER 
                   INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF 
                   EMPLOYMENT TAXES.

       (a) In General.--Section 530 of the Revenue Act of 1978 is 
     amended by adding at the end the following new subsection:
       ``(e) Special Rules for Application of Section.--
       ``(1) Notice of availability of section.--An officer or 
     employee of the Internal Revenue Service shall, before or at 
     the commencement of any audit inquiry relating to the 
     employment status of one or more individuals who perform 
     services for the taxpayer, provide the taxpayer with a 
     written notice of the provisions of this section.
       ``(2) Rules relating to statutory standards.--For purposes 
     of subsection (a)(2)--
       ``(A) a taxpayer may not rely on an audit commenced after 
     December 31, 1996, for purposes of subparagraph (B) thereof 
     unless such audit included an examination for employment tax 
     purposes of whether the individual involved (or any 
     individual holding a position substantially similar to the 
     position held by the individual involved) should be treated 
     as an employee of the taxpayer,

[[Page H9572]]

       ``(B) in no event shall the significant segment requirement 
     of subparagraph (C) thereof be construed to require a 
     reasonable showing of the practice of more than 25 percent of 
     the industry (determined by not taking into account the 
     taxpayer), and
       ``(C) in applying the long-standing recognized practice 
     requirement of subparagraph (C) thereof--
       ``(i) such requirement shall not be construed as requiring 
     the practice to have continued for more than 10 years, and
       ``(ii) a practice shall not fail to be treated as long-
     standing merely because such practice began after 1978.
       ``(3) Availability of safe harbors.--Nothing in this 
     section shall be construed to provide that subsection (a) 
     only applies where the individual involved is otherwise an 
     employee of the taxpayer.
       ``(4) Burden of proof.--
       ``(A) In general.--If--
       ``(i) a taxpayer establishes a prima facie case that it was 
     reasonable not to treat an individual as an employee for 
     purposes of this section, and
       ``(ii) the taxpayer has fully cooperated with reasonable 
     requests from the Secretary of the Treasury or his delegate,

     then the burden of proof with respect to such treatment shall 
     be on the Secretary.
       ``(B) Exception for other reasonable basis.--In the case of 
     any issue involving whether the taxpayer had a reasonable 
     basis not to treat an individual as an employee for purposes 
     of this section, subparagraph (A) shall only apply for 
     purposes of determining whether the taxpayer meets the 
     requirements of subparagraph (A), (B), or (C) of subsection 
     (a)(2).
       ``(5) Preservation of prior period safe harbor.--If--
       ``(A) an individual would (but for the treatment referred 
     to in subparagraph (B)) be deemed not to be an employee of 
     the taxpayer under subsection (a) for any prior period, and
       ``(B) such individual is treated by the taxpayer as an 
     employee for employment tax purposes for any subsequent 
     period,

     then, for purposes of applying such taxes for such prior 
     period with respect to the taxpayer, the individual shall be 
     deemed not to be an employee.
       ``(6) Substantially similar position.--For purposes of this 
     section, the determination as to whether an individual holds 
     a position substantially similar to a position held by 
     another individual shall include consideration of the 
     relationship between the taxpayer and such individuals.''.
       (b) Effective Dates.--
       (1) In general.--The amendment made by this section shall 
     apply to periods after December 31, 1996.
       (2) Notice by internal revenue service.--Section 530(e)(1) 
     of the Revenue Act of 1978 (as added by subsection (a)) shall 
     apply to audits which commence after December 31, 1996.
       (3) Burden of proof.--
       (A) In general.--Section 530(e)(4) of the Revenue Act of 
     1978 (as added by subsection (a)) shall apply to disputes 
     involving periods after December 31, 1996.
       (B) No inference.--Nothing in the amendments made by this 
     section shall be construed to infer the proper treatment of 
     the burden of proof with respect to disputes involving 
     periods before January 1, 1997.

     SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EMPLOYEES BY 
                   ACADEMIC HEALTH CENTERS.

       (a) In General.--Paragraph (4) of section 119(d) (relating 
     to lodging furnished by certain educational institutions to 
     employees) is amended to read as follows:
       ``(4) Educational institution, etc.--For purposes of this 
     subsection--
       ``(A) In general.--The term `educational institution' 
     means--
       ``(i) an institution described in section 170(b)(1)(A)(ii) 
     (or an entity organized under State law and composed of 
     public institutions so described), or
       ``(ii) an academic health center.
       ``(B) Academic health center.--For purposes of subparagraph 
     (A), the term `academic health center' means an entity--
       ``(i) which is described in section 170(b)(1)(A)(iii),
       ``(ii) which receives (during the calendar year in which 
     the taxable year of the taxpayer begins) payments under 
     subsection (d)(5)(B) or (h) of section 1886 of the Social 
     Security Act (relating to graduate medical education), and
       ``(iii) which has as one of its principal purposes or 
     functions the providing and teaching of basic and clinical 
     medical science and research with the entity's own 
     faculty.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1995.
          Subtitle B--Extension of Certain Expiring Provisions

     SEC. 1201. WORK OPPORTUNITY TAX CREDIT.

       (a) Amount of Credit.--Subsection (a) of section 51 
     (relating to amount of credit) is amended by striking ``40 
     percent'' and inserting ``35 percent''.
       (b) Members of Targeted Groups.--Subsection (d) of section 
     51 is amended to read as follows:
       ``(d) Members of Targeted Groups.--For purposes of this 
     subpart--
       ``(1) In general.--An individual is a member of a targeted 
     group if such individual is--
       ``(A) a qualified IV-A recipient,
       ``(B) a qualified veteran,
       ``(C) a qualified ex-felon,
       ``(D) a high-risk youth,
       ``(E) a vocational rehabilitation referral,
       ``(F) a qualified summer youth employee, or
       ``(G) a qualified food stamp recipient.
       ``(2) Qualified iv-a recipient.--
       ``(A) In general.--The term `qualified IV-A recipient' 
     means any individual who is certified by the designated local 
     agency as being a member of a family receiving assistance 
     under a IV-A program for at least a 9-month period ending 
     during the 9-month period ending on the hiring date.
       ``(B) IV-A program.--For purposes of this paragraph, the 
     term `IV-A program' means any program providing assistance 
     under a State plan approved under part A of title IV of the 
     Social Security Act (relating to assistance for needy 
     families with minor children) and any successor of such 
     program.
       ``(3) Qualified veteran.--
       ``(A) In general.--The term `qualified veteran' means any 
     veteran who is certified by the designated local agency as 
     being--
       ``(i) a member of a family receiving assistance under a IV-
     A program (as defined in paragraph (2)(B)) for at least a 9-
     month period ending during the 12-month period ending on the 
     hiring date, or
       ``(ii) a member of a family receiving assistance under a 
     food stamp program under the Food Stamp Act of 1977 for at 
     least a 3-month period ending during the 12-month period 
     ending on the hiring date.
       ``(B) Veteran.--For purposes of subparagraph (A), the term 
     `veteran' means any individual who is certified by the 
     designated local agency as--
       ``(i)(I) having served on active duty (other than active 
     duty for training) in the Armed Forces of the United States 
     for a period of more than 180 days, or
       ``(II) having been discharged or released from active duty 
     in the Armed Forces of the United States for a service-
     connected disability, and
       ``(ii) not having any day during the 60-day period ending 
     on the hiring date which was a day of extended active duty in 
     the Armed Forces of the United States.
     For purposes of clause (ii), the term `extended active duty' 
     means a period of more than 90 days during which the 
     individual was on active duty (other than active duty for 
     training).
       ``(4) Qualified ex-felon.--The term `qualified ex-felon' 
     means any individual who is certified by the designated local 
     agency--
       ``(A) as having been convicted of a felony under any 
     statute of the United States or any State,
       ``(B) as having a hiring date which is not more than 1 year 
     after the last date on which such individual was so convicted 
     or was released from prison, and
       ``(C) as being a member of a family which had an income 
     during the 6 months immediately preceding the earlier of the 
     month in which such income determination occurs or the month 
     in which the hiring date occurs, which, on an annual basis, 
     would be 70 percent or less of the Bureau of Labor Statistics 
     lower living standard.
     Any determination under subparagraph (C) shall be valid for 
     the 45-day period beginning on the date such determination is 
     made.
       ``(5) High-risk youth.--
       ``(A) In general.--The term `high-risk youth' means any 
     individual who is certified by the designated local agency--
       ``(i) as having attained age 18 but not age 25 on the 
     hiring date, and
       ``(ii) as having his principal place of abode within an 
     empowerment zone or enterprise community.
       ``(B) Youth must continue to reside in zone.--In the case 
     of a high-risk youth, the term `qualified wages' shall not 
     include wages paid or incurred for services performed while 
     such youth's principal place of abode is outside an 
     empowerment zone or enterprise community.
       ``(6) Vocational rehabilitation referral.--The term 
     `vocational rehabilitation referral' means any individual who 
     is certified by the designated local agency as--
       ``(A) having a physical or mental disability which, for 
     such individual, constitutes or results in a substantial 
     handicap to employment, and
       ``(B) having been referred to the employer upon completion 
     of (or while receiving) rehabilitative services pursuant to--
       ``(i) an individualized written rehabilitation plan under a 
     State plan for vocational rehabilitation services approved 
     under the Rehabilitation Act of 1973, or
       ``(ii) a program of vocational rehabilitation carried out 
     under chapter 31 of title 38, United States Code.
       ``(7) Qualified summer youth employee.--
       ``(A) In general.--The term `qualified summer youth 
     employee' means any individual--
       ``(i) who performs services for the employer between May 1 
     and September 15,
       ``(ii) who is certified by the designated local agency as 
     having attained age 16 but not 18 on the hiring date (or if 
     later, on May 1 of the calendar year involved),
       ``(iii) who has not been an employee of the employer during 
     any period prior to the 90-day period described in 
     subparagraph (B)(i), and
       ``(iv) who is certified by the designated local agency as 
     having his principal place of abode within an empowerment 
     zone or enterprise community.
       ``(B) Special rules for determining amount of credit.--For 
     purposes of applying this subpart to wages paid or incurred 
     to any qualified summer youth employee--
       ``(i) subsection (b)(2) shall be applied by substituting 
     `any 90-day period between May 1 and September 15' for `the 
     1-year period beginning with the day the individual begins 
     work for the employer', and
       ``(ii) subsection (b)(3) shall be applied by substituting 
     `$3,000' for `$6,000'.

     The preceding sentence shall not apply to an individual who, 
     with respect to the same employer, is certified as a member 
     of another targeted group after such individual has been a 
     qualified summer youth employee.

[[Page H9573]]

       ``(C) Youth must continue to reside in zone.--Paragraph 
     (5)(B) shall apply for purposes of subparagraph (A)(iv).
       ``(8) Qualified food stamp recipient.--
       ``(A) In general.--The term `qualified food stamp 
     recipient' means any individual who is certified by the 
     designated local agency--
       ``(i) as having attained age 18 but not age 25 on the 
     hiring date, and
       ``(ii) as being a member of a family--

       ``(I) receiving assistance under a food stamp program under 
     the Food Stamp Act of 1977 for the 6-month period ending on 
     the hiring date, or
       ``(II) receiving such assistance for at least 3 months of 
     the 5-month period ending on the hiring date, in the case of 
     a member of a family who ceases to be eligible for such 
     assistance under section 6(o) of the Food Stamp Act of 1977.

       ``(B) Participation information.--Notwithstanding any other 
     provision of law, the Secretary of the Treasury and the 
     Secretary of Agriculture shall enter into an agreement to 
     provide information to designated local agencies with respect 
     to participation in the food stamp program.
       ``(9) Hiring date.--The term `hiring date' means the day 
     the individual is hired by the employer.
       ``(10) Designated local agency.--The term `designated local 
     agency' means a State employment security agency established 
     in accordance with the Act of June 6, 1933, as amended (29 
     U.S.C. 49-49n).
       ``(11) Special rules for certifications.--
       ``(A) In general.--An individual shall not be treated as a 
     member of a targeted group unless--
       ``(i) on or before the day on which such individual begins 
     work for the employer, the employer has received a 
     certification from a designated local agency that such 
     individual is a member of a targeted group, or
       ``(ii)(I) on or before the day the individual is offered 
     employment with the employer, a pre-screening notice is 
     completed by the employer with respect to such individual, 
     and
       ``(II) not later than the 21st day after the individual 
     begins work for the employer, the employer submits such 
     notice, signed by the employer and the individual under 
     penalties of perjury, to the designated local agency as part 
     of a written request for such a certification from such 
     agency.

     For purposes of this paragraph, the term `pre-screening 
     notice' means a document (in such form as the Secretary shall 
     prescribe) which contains information provided by the 
     individual on the basis of which the employer believes that 
     the individual is a member of a targeted group.
       ``(B) Incorrect certifications.--If--
       ``(i) an individual has been certified by a designated 
     local agency as a member of a targeted group, and
       ``(ii) such certification is incorrect because it was based 
     on false information provided by such individual,

     the certification shall be revoked and wages paid by the 
     employer after the date on which notice of revocation is 
     received by the employer shall not be treated as qualified 
     wages.
       ``(C) Explanation of denial of request.--If a designated 
     local agency denies a request for certification of membership 
     in a targeted group, such agency shall provide to the person 
     making such request a written explanation of the reasons for 
     such denial.''.
       (c) Minimum Employment Period.--Paragraph (3) of section 
     51(i) (relating to certain individuals ineligible) is amended 
     to read as follows:
       ``(3) Individuals not meeting minimum employment period.--
     No wages shall be taken into account under subsection (a) 
     with respect to any individual unless such individual 
     either--
       ``(A) is employed by the employer at least 180 days (20 
     days in the case of a qualified summer youth employee), or
       ``(B) has completed at least 400 hours (120 hours in the 
     case of a qualified summer youth employee) of services 
     performed for the employer.''.
       (d) Termination.--Paragraph (4) of section 51(c) (relating 
     to wages defined) is amended to read as follows:
       ``(4) Termination.--The term `wages' shall not include any 
     amount paid or incurred to an individual who begins work for 
     the employer--
       ``(A) after December 31, 1994, and before October 1, 1996, 
     or
       ``(B) after September 30, 1997.''.
       (e) Redesignation of Credit.--
       (1) Sections 38(b)(2), 41(b)(2)(D)(iii), 45A(b)(1)(B), 51 
     (a) and (g), and 196(c) are each amended in the text by 
     striking ``targeted jobs credit'' each place it appears and 
     inserting ``work opportunity credit''.
       (2) The subpart heading for subpart F of part IV of 
     subchapter A of chapter 1 is amended by striking ``Targeted 
     Jobs Credit'' and inserting ``Work Opportunity Credit''.
       (3) The table of subparts for such part IV is amended by 
     striking ``targeted jobs credit'' and inserting ``work 
     opportunity credit''.
       (4) The headings for sections 41(b)(2)(D)(iii) and 
     1396(c)(3) are each amended by striking ``targeted jobs 
     credit'' and inserting ``work opportunity credit''.
       (5) The heading for subsection (j) of section 51 is amended 
     by striking ``Targeted Jobs Credit'' and inserting ``Work 
     Opportunity Credit''.
       (f) Technical Amendment.--Paragraph (1) of section 51(c) is 
     amended by striking ``, subsection (d)(8)(D),''.
       (g) Effective Date.--The amendments made by this section 
     shall apply to individuals who begin work for the employer 
     after September 30, 1996.

     SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

       (a) Extension.--Subsection (d) of section 127 (relating to 
     educational assistance programs) is amended by striking 
     ``December 31, 1994.'' and inserting ``May 31, 1997. In the 
     case of any taxable year beginning in 1997, only expenses 
     paid with respect to courses beginning before July 1, 1997, 
     shall be taken into account in determining the amount 
     excluded under this section.''.
       (b) Limitation to Education Below Graduate Level.--The last 
     sentence of section 127(c)(1) is amended by inserting before 
     the period the following: ``, 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) Effective Dates.--
       (1) Extension.--The amendment made by subsection (a) shall 
     apply to taxable years beginning after December 31, 1994.
       (2) Graduate education.--The amendment made by subsection 
     (b) shall apply with respect to expenses relating to courses 
     beginning after June 30, 1996.
       (3) Expedited procedures.--The Secretary of the Treasury 
     shall establish expedited procedures for the refund of any 
     overpayment of taxes imposed by the Internal Revenue Code of 
     1986 which is attributable to amounts excluded from gross 
     income during 1995 or 1996 under section 127 of such Code, 
     including procedures waiving the requirement that an employer 
     obtain an employee's signature where the employer 
     demonstrates to the satisfaction of the Secretary that any 
     refund collected by the employer on behalf of the employee 
     will be paid to the employee.

     SEC. 1203. FUTA EXEMPTION FOR ALIEN AGRICULTURAL WORKERS.

       (a) In General.--Subparagraph (B) of section 3306(c)(1) 
     (defining employment) is amended by striking ``before January 
     1, 1995,''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to services performed after December 31, 1994.

     SEC. 1204. RESEARCH CREDIT.

       (a) In General.--Subsection (h) of section 41 (relating to 
     credit for research activities) is amended to read as 
     follows:
       ``(h) Termination.--
       ``(1) In general.--This section shall not apply to any 
     amount paid or incurred--
       ``(A) after June 30, 1995, and before July 1, 1996, or
       ``(B) after May 31, 1997.

     Notwithstanding the preceding sentence, in the case of a 
     taxpayer making an election under subsection (c)(4) for its 
     first taxable year beginning after June 30, 1996, and before 
     July 1, 1997, this section shall apply to amounts paid or 
     incurred during the first 11 months of such taxable year.
       ``(2) Computation of base amount.--In the case of any 
     taxable year with respect to which this section applies to a 
     number of days which is less than the total number of days in 
     such taxable year, the base amount with respect to such 
     taxable year shall be the amount which bears the same ratio 
     to the base amount for such year (determined without regard 
     to this paragraph) as the number of days in such taxable year 
     to which this section applies bears to the total number of 
     days in such taxable year.''.
       (b) Base Amount for Start-Up Companies.--Clause (i) of 
     section 41(c)(3)(B) (relating to start-up companies) is 
     amended to read as follows:
       ``(i)  Taxpayers to which subparagraph applies.--The fixed-
     base percentage shall be determined under this subparagraph 
     if--

       ``(I) the first taxable year in which a taxpayer had both 
     gross receipts and qualified research expenses begins after 
     December 31, 1983, or

       ``(II) there are fewer than 3 taxable years beginning after 
     December 31, 1983, and before January 1, 1989, in which the 
     taxpayer had both gross receipts and qualified research 
     expenses.''.

       (c) Election of Alternative Incremental Credit.--Subsection 
     (c) of section 41 is amended by redesignating paragraphs (4) 
     and (5) as paragraphs (5) and (6), respectively, and by 
     inserting after paragraph (3) the following new paragraph:
       ``(4) Election of alternative incremental credit.--
       ``(A) In general.--At the election of the taxpayer, the 
     credit determined under subsection (a)(1) shall be equal to 
     the sum of--
       ``(i) 1.65 percent of so much of the qualified research 
     expenses for the taxable year as exceeds 1 percent of the 
     average described in subsection (c)(1)(B) but does not exceed 
     1.5 percent of such average,
       ``(ii) 2.2 percent of so much of such expenses as exceeds 
     1.5 percent of such average but does not exceed 2 percent of 
     such average, and
       ``(iii) 2.75 percent of so much of such expenses as exceeds 
     2 percent of such average.
       ``(B) Election.--An election under this paragraph may be 
     made only for the first taxable year of the taxpayer 
     beginning after June 30, 1996. Such an election shall apply 
     to the taxable year for which made and all succeeding taxable 
     years unless revoked with the consent of the Secretary.''.
       (d) Increased Credit for Contract Research Expenses With 
     Respect to Certain Research Consortia.--Paragraph (3) of 
     section 41(b) is amended by adding at the end the following 
     new subparagraph:
       ``(C) Amounts paid to certain research consortia.--
       ``(i) In general.--Subparagraph (A) shall be applied by 
     substituting `75 percent' for `65 percent' with respect to 
     amounts paid or incurred by the taxpayer to a qualified 
     research consortium for qualified research on behalf of the 
     taxpayer and 1 or more unrelated taxpayers. For purposes of 
     the preceding sentence, all persons

[[Page H9574]]

     treated as a single employer under subsection (a) or (b) of 
     section 52 shall be treated as related taxpayers.
       ``(ii) Qualified research consortium.--The term `qualified 
     research consortium' means any organization which--

       ``(I) is described in section 501(c)(3) or 501(c)(6) and is 
     exempt from tax under section 501(a),
       ``(II) is organized and operated primarily to conduct 
     scientific research, and
       ``(III) is not a private foundation.''.

       (e)  Conforming Amendment.--Subparagraph (D) of section 
     28(b)(1) is amended by inserting ``, and before July 1, 1996, 
     and periods after May 31, 1997'' after ``June 30, 1995''.
       (f) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     ending after June 30, 1996.
       (2) Subsections (c) and (d).--The amendments made by 
     subsections (c) and (d) shall apply to taxable years 
     beginning after June 30, 1996.
       (3) Estimated tax.--The amendments made by this section 
     shall not be taken into account under section 6654 or 6655 of 
     the Internal Revenue Code of 1986 (relating to failure to pay 
     estimated tax) in determining the amount of any installment 
     required to be paid for a taxable year beginning in 1997.

     SEC. 1205. ORPHAN DRUG TAX CREDIT.

       (a) Recategorized as a Business Credit.--
       (1) In general.--Section 28 (relating to clinical testing 
     expenses for certain drugs for rare diseases or conditions) 
     is transferred to subpart D of part IV of subchapter A of 
     chapter 1, inserted after section 45B, and redesignated as 
     section 45C.
       (2) Conforming amendment.--Subsection (b) of section 38 
     (relating to general business credit) is amended by striking 
     ``plus'' at the end of paragraph (10), by striking the period 
     at the end of paragraph (11) and inserting ``, plus'', and by 
     adding at the end the following new paragraph:
       ``(12) the orphan drug credit determined under section 
     45C(a).''.
       (3) Clerical amendments.--
       (A) The table of sections for subpart B of such part IV is 
     amended by striking the item relating to section 28.
       (B) The table of sections for subpart D of such part IV is 
     amended by adding at the end the following new item:

``Sec. 45C. Clinical testing expenses for certain drugs for rare 
              diseases or conditions.''.

       (b) Credit Termination.--Subsection (e) of section 45C, as 
     redesignated by subsection (a)(1), is amended to read as 
     follows:
       ``(e) Termination.--This section shall not apply to any 
     amount paid or incurred--
       ``(1) after December 31, 1994, and before July 1, 1996, or
       ``(2) after May 31, 1997.''.
       (c) No Pre-July 1, 1996 Carrybacks.--Subsection (d) of 
     section 39 (relating to carryback and carryforward of unused 
     credits) is amended by adding at the end the following new 
     paragraph:
       ``(7) No carryback of section 45c credit before july 1, 
     1996.--No portion of the unused business credit for any 
     taxable year which is attributable to the orphan drug credit 
     determined under section 45C may be carried back to a taxable 
     year ending before July 1, 1996.''.
       (d) Additional Conforming Amendments.--
       (1) Section 45C(a), as redesignated by subsection (a)(1), 
     is amended by striking ``There shall be allowed as a credit 
     against the tax imposed by this chapter for the taxable 
     year'' and inserting ``For purposes of section 38, the credit 
     determined under this section for the taxable year is''.
       (2) Section 45C(d), as so redesignated, is amended by 
     striking paragraph (2) and by redesignating paragraphs (3), 
     (4), and (5) as paragraphs (2), (3), and (4).
       (3) Section 29(b)(6)(A) is amended by striking ``sections 
     27 and 28'' and inserting ``section 27''.
       (4) Section 30(b)(3)(A) is amended by striking ``sections 
     27, 28, and 29'' and inserting ``sections 27 and 29''.
       (5) Section 53(d)(1)(B) is amended--
       (A) by striking ``or not allowed under section 28 solely by 
     reason of the application of section 28(d)(2)(B),'' in clause 
     (iii), and
       (B) by striking ``or not allowed under section 28 solely by 
     reason of the application of section 28(d)(2)(B)'' in clause 
     (iv)(II).
       (6) Section 55(c)(2) is amended by striking ``28(d)(2),''.
       (7) Section 280C(b) is amended--
       (A) by striking ``section 28(b)'' in paragraph (1) and 
     inserting ``section 45C(b)'',
       (B) by striking ``section 28'' in paragraphs (1) and (2)(A) 
     and inserting ``section 45C'', and
       (C) by striking ``subsection (d)(2) thereof'' in paragraphs 
     (1) and (2)(A) and inserting ``section 38(c)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred in taxable years 
     ending after June 30, 1996.

     SEC. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

       (a) In General.--Subparagraph (D) of section 170(e)(5) 
     (relating to special rule for contributions of stock for 
     which market quotations are readily available) is amended to 
     read as follows:
       ``(D) Termination.--This paragraph shall not apply to 
     contributions made--
       ``(i) after December 31, 1994, and before July 1, 1996, or
       ``(ii) after May 31, 1997.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions made after June 30, 1996.

     SEC. 1207. EXTENSION OF BINDING CONTRACT DATE FOR BIOMASS AND 
                   COAL FACILITIES.

       (a) In General.--Subparagraph (A) of section 29(g)(1) 
     (relating to extension of certain facilities) is amended by 
     striking ``January 1, 1997'' and inserting ``July 1, 1998'' 
     and by striking ``January 1, 1996'' and inserting ``January 
     1, 1997''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR 
                   USE OR USED IN DIESEL-POWERED MOTORBOATS.

       Subparagraph (D) of section 4041(a)(1) (relating to the 
     imposition of tax on diesel fuel and special motor fuels) is 
     amended by redesignating clauses (i) and (ii) as clauses (ii) 
     and (iii), respectively, and by inserting before clause (ii) 
     (as redesignated) the following new clause:
       ``(i) no tax shall be imposed by subsection (a) or (d)(1) 
     during the period beginning on the date which is 7 days after 
     the date of the enactment of the Small Business Job 
     Protection Act of 1996 and ending on December 31, 1997,''.
           Subtitle C--Provisions Relating to S Corporations

     SEC. 1301. S CORPORATIONS PERMITTED TO HAVE 75 SHAREHOLDERS.

       Subparagraph (A) of section 1361(b)(1) (defining small 
     business corporation) is amended by striking ``35 
     shareholders'' and inserting ``75 shareholders''.

     SEC. 1302. ELECTING SMALL BUSINESS TRUSTS.

       (a) General Rule.--Subparagraph (A) of section 1361(c)(2) 
     (relating to certain trusts permitted as shareholders) is 
     amended by inserting after clause (iv) the following new 
     clause:
       ``(v) An electing small business trust.''.
       (b) Current Beneficiaries Treated as Shareholders.--
     Subparagraph (B) of section 1361(c)(2) is amended by adding 
     at the end the following new clause:
       ``(v) In the case of a trust described in clause (v) of 
     subparagraph (A), each potential current beneficiary of such 
     trust shall be treated as a shareholder; except that, if for 
     any period there is no potential current beneficiary of such 
     trust, such trust shall be treated as the shareholder during 
     such period.''.
       (c) Electing Small Business Trust Defined.--Section 1361 
     (defining S corporation) is amended by adding at the end the 
     following new subsection:
       ``(e) Electing Small Business Trust Defined.--
       ``(1) Electing small business trust.--For purposes of this 
     section--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the term `electing small business trust' means any trust if--
       ``(i) such trust does not have as a beneficiary any person 
     other than (I) an individual, (II) an estate, or (III) an 
     organization described in paragraph (2), (3), (4), or (5) of 
     section 170(c) which holds a contingent interest and is not a 
     potential current beneficiary,
       ``(ii) no interest in such trust was acquired by purchase, 
     and
       ``(iii) an election under this subsection applies to such 
     trust.
       ``(B) Certain trusts not eligible.--The term `electing 
     small business trust' shall not include--
       ``(i) any qualified subchapter S trust (as defined in 
     subsection (d)(3)) if an election under subsection (d)(2) 
     applies to any corporation the stock of which is held by such 
     trust, and
       ``(ii) any trust exempt from tax under this subtitle.
       ``(C) Purchase.--For purposes of subparagraph (A), the term 
     `purchase' means any acquisition if the basis of the property 
     acquired is determined under section 1012.
       ``(2) Potential current beneficiary.--For purposes of this 
     section, the term `potential current beneficiary' means, with 
     respect to any period, any person who at any time during such 
     period is entitled to, or at the discretion of any person may 
     receive, a distribution from the principal or income of the 
     trust. If a trust disposes of all of the stock which it holds 
     in an S corporation, then, with respect to such corporation, 
     the term `potential current beneficiary' does not include any 
     person who first met the requirements of the preceding 
     sentence during the 60-day period ending on the date of such 
     disposition.
       ``(3) Election.--An election under this subsection shall be 
     made by the trustee. Any such election shall apply to the 
     taxable year of the trust for which made and all subsequent 
     taxable years of such trust unless revoked with the consent 
     of the Secretary.
       ``(4) Cross reference.--

  ``For special treatment of electing small business trusts, see 
section 641(d).''.

       (d) Taxation of Electing Small Business Trusts.--Section 
     641 (relating to imposition of tax on trusts) is amended by 
     adding at the end the following new subsection:
       ``(d) Special Rules for Taxation of Electing Small Business 
     Trusts.--
       ``(1) In general.--For purposes of this chapter--
       ``(A) the portion of any electing small business trust 
     which consists of stock in 1 or more S corporations shall be 
     treated as a separate trust, and
       ``(B) the amount of the tax imposed by this chapter on such 
     separate trust shall be determined with the modifications of 
     paragraph (2).
       ``(2) Modifications.--For purposes of paragraph (1), the 
     modifications of this paragraph are the following:
       ``(A) Except as provided in section 1(h), the amount of the 
     tax imposed by section 1(e) shall be determined by using the 
     highest rate of tax set forth in section 1(e).
       ``(B) The exemption amount under section 55(d) shall be 
     zero.
       ``(C) The only items of income, loss, deduction, or credit 
     to be taken into account are the following:

[[Page H9575]]

       ``(i) The items required to be taken into account under 
     section 1366.
       ``(ii) Any gain or loss from the disposition of stock in an 
     S corporation.
       ``(iii) To the extent provided in regulations, State or 
     local income taxes or administrative expenses to the extent 
     allocable to items described in clauses (i) and (ii).

     No deduction or credit shall be allowed for any amount not 
     described in this paragraph, and no item described in this 
     paragraph shall be apportioned to any beneficiary.
       ``(D) No amount shall be allowed under paragraph (1) or (2) 
     of section 1211(b).
       ``(3) Treatment of remainder of trust and distributions.--
     For purposes of determining--
       ``(A) the amount of the tax imposed by this chapter on the 
     portion of any electing small business trust not treated as a 
     separate trust under paragraph (1), and
       ``(B) the distributable net income of the entire trust,

     the items referred to in paragraph (2)(C) shall be excluded. 
     Except as provided in the preceding sentence, this subsection 
     shall not affect the taxation of any distribution from the 
     trust.
       ``(4) Treatment of unused deductions where termination of 
     separate trust.--If a portion of an electing small business 
     trust ceases to be treated as a separate trust under 
     paragraph (1), any carryover or excess deduction of the 
     separate trust which is referred to in section 642(h) shall 
     be taken into account by the entire trust.
       ``(5) Electing small business trust.--For purposes of this 
     subsection, the term `electing small business trust' has the 
     meaning given such term by section 1361(e)(1).''.
       (e) Technical Amendment.--Paragraph (1) of section 1366(a) 
     is amended by inserting ``, or of a trust or estate which 
     terminates,'' after ``who dies''.

     SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN 
                   TRUSTS.

       Subparagraph (A) of section 1361(c)(2) (relating to certain 
     trusts permitted as shareholders) is amended--
       (1) by striking ``60-day period'' each place it appears in 
     clauses (ii) and (iii) and inserting ``2-year period'', and
       (2) by striking the last sentence in clause (ii).

     SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE 
                   HARBOR DEBT.

       Clause (iii) of section 1361(c)(5)(B) (defining straight 
     debt) is amended by striking ``or a trust described in 
     paragraph (2)'' and inserting ``a trust described in 
     paragraph (2), or a person which is actively and regularly 
     engaged in the business of lending money''.

     SEC. 1305. RULES RELATING TO INADVERTENT TERMINATIONS AND 
                   INVALID ELECTIONS.

       (a) General Rule.--Subsection (f) of section 1362 (relating 
     to inadvertent terminations) is amended to read as follows:
       ``(f) Inadvertent Invalid Elections or Terminations.--If--
       ``(1) an election under subsection (a) by any corporation--
       ``(A) was not effective for the taxable year for which made 
     (determined without regard to subsection (b)(2)) by reason of 
     a failure to meet the requirements of section 1361(b) or to 
     obtain shareholder consents, or
       ``(B) was terminated under paragraph (2) or (3) of 
     subsection (d),
       ``(2) the Secretary determines that the circumstances 
     resulting in such ineffectiveness or termination were 
     inadvertent,
       ``(3) no later than a reasonable period of time after 
     discovery of the circumstances resulting in such 
     ineffectiveness or termination, steps were taken--
       ``(A) so that the corporation is a small business 
     corporation, or
       ``(B) to acquire the required shareholder consents, and
       ``(4) the corporation, and each person who was a 
     shareholder in the corporation at any time during the period 
     specified pursuant to this subsection, agrees to make such 
     adjustments (consistent with the treatment of the corporation 
     as an S corporation) as may be required by the Secretary with 
     respect to such period,

     then, notwithstanding the circumstances resulting in such 
     ineffectiveness or termination, such corporation shall be 
     treated as an S corporation during the period specified by 
     the Secretary.''.
       (b) Late Elections, Etc.--Subsection (b) of section 1362 is 
     amended by adding at the end the following new paragraph:
       ``(5) Authority to treat late elections, etc., as timely.--
     If--
       ``(A) an election under subsection (a) is made for any 
     taxable year (determined without regard to paragraph (3)) 
     after the date prescribed by this subsection for making such 
     election for such taxable year or no such election is made 
     for any taxable year, and
       ``(B) the Secretary determines that there was reasonable 
     cause for the failure to timely make such election,

     the Secretary may treat such an election as timely made for 
     such taxable year (and paragraph (3) shall not apply).''.
       (c) Effective Date.--The amendments made by subsection (a) 
     and (b) shall apply with respect to elections for taxable 
     years beginning after December 31, 1982.

     SEC. 1306. AGREEMENT TO TERMINATE YEAR.

       Paragraph (2) of section 1377(a) (relating to pro rata 
     share) is amended to read as follows:
       ``(2) Election to terminate year.--
       ``(A) In general.--Under regulations prescribed by the 
     Secretary, if any shareholder terminates the shareholder's 
     interest in the corporation during the taxable year and all 
     affected shareholders and the corporation agree to the 
     application of this paragraph, paragraph (1) shall be applied 
     to the affected shareholders as if the taxable year consisted 
     of 2 taxable years the first of which ends on the date of the 
     termination.
       ``(B) Affected shareholders.--For purposes of subparagraph 
     (A), the term `affected shareholders' means the shareholder 
     whose interest is terminated and all shareholders to whom 
     such shareholder has transferred shares during the taxable 
     year. If such shareholder has transferred shares to the 
     corporation, the term `affected shareholders' shall include 
     all persons who are shareholders during the taxable year.''.

     SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.

       (a) In General.--Paragraph (1) of section 1377(b) (relating 
     to post-termination transition period) is amended by striking 
     ``and'' at the end of subparagraph (A), by redesignating 
     subparagraph (B) as subparagraph (C), and by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) the 120-day period beginning on the date of any 
     determination pursuant to an audit of the taxpayer which 
     follows the termination of the corporation's election and 
     which adjusts a subchapter S item of income, loss, or 
     deduction of the corporation arising during the S period (as 
     defined in section 1368(e)(2)), and''.
       (b) Determination Defined.--Paragraph (2) of section 
     1377(b) is amended by striking subparagraphs (A) and (B), by 
     redesignating subparagraph (C) as subparagraph (B), and by 
     inserting before subparagraph (B) (as so redesignated) the 
     following new subparagraph:
       ``(A) a determination as defined in section 1313(a), or''.
       (c) Repeal of Special Audit Provisions for Subchapter S 
     Items.--
       (1) General rule.--Subchapter D of chapter 63 (relating to 
     tax treatment of subchapter S items) is hereby repealed.
       (2) Consistent treatment required.--Section 6037 (relating 
     to return of S corporation) is amended by adding at the end 
     the following new subsection:
       ``(c) Shareholder's Return Must Be Consistent With 
     Corporate Return or Secretary Notified of Inconsistency.--
       ``(1) In general.--A shareholder of an S corporation shall, 
     on such shareholder's return, treat a subchapter S item in a 
     manner which is consistent with the treatment of such item on 
     the corporate return.
       ``(2) Notification of inconsistent treatment.--
       ``(A) In general.--In the case of any subchapter S item, 
     if--
       ``(i)(I) the corporation has filed a return but the 
     shareholder's treatment on his return is (or may be) 
     inconsistent with the treatment of the item on the corporate 
     return, or
       ``(II) the corporation has not filed a return, and
       ``(ii) the shareholder files with the Secretary a statement 
     identifying the inconsistency,

     paragraph (1) shall not apply to such item.
       ``(B) Shareholder receiving incorrect information.--A 
     shareholder shall be treated as having complied with clause 
     (ii) of subparagraph (A) with respect to a subchapter S item 
     if the shareholder--
       ``(i) demonstrates to the satisfaction of the Secretary 
     that the treatment of the subchapter S item on the 
     shareholder's return is consistent with the treatment of the 
     item on the schedule furnished to the shareholder by the 
     corporation, and
       ``(ii) elects to have this paragraph apply with respect to 
     that item.
       ``(3) Effect of failure to notify.--In any case--
       ``(A) described in subparagraph (A)(i)(I) of paragraph (2), 
     and
       ``(B) in which the shareholder does not comply with 
     subparagraph (A)(ii) of paragraph (2),

     any adjustment required to make the treatment of the items by 
     such shareholder consistent with the treatment of the items 
     on the corporate return shall be treated as arising out of 
     mathematical or clerical errors and assessed according to 
     section 6213(b)(1). Paragraph (2) of section 6213(b) shall 
     not apply to any assessment referred to in the preceding 
     sentence.
       ``(4) Subchapter s item.--For purposes of this subsection, 
     the term `subchapter S item' means any item of an S 
     corporation to the extent that regulations prescribed by the 
     Secretary provide that, for purposes of this subtitle, such 
     item is more appropriately determined at the corporation 
     level than at the shareholder level.
       ``(5) Addition to tax for failure to comply with section.--

  ``For addition to tax in the case of a shareholder's negligence in 
connection with, or disregard of, the requirements of this section, see 
part II of subchapter A of chapter 68.''.

       (3) Conforming amendments.--
       (A) Section 1366 is amended by striking subsection (g).
       (B) Subsection (b) of section 6233 is amended to read as 
     follows:
       ``(b) Similar Rules in Certain Cases.--If a partnership 
     return is filed for any taxable year but it is determined 
     that there is no entity for such taxable year, to the extent 
     provided in regulations, rules similar to the rules of 
     subsection (a) shall apply.''.
       (C) The table of subchapters for chapter 63 is amended by 
     striking the item relating to subchapter D.

     SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

       (a) In General.--Paragraph (2) of section 1361(b) (defining 
     ineligible corporation) is amended by striking subparagraph 
     (A) and by redesignating subparagraphs (B), (C), (D), and (E) 
     as subparagraphs (A), (B), (C), and (D), respectively.
       (b) Treatment of Certain Wholly Owned S Corporation 
     Subsidiaries.--Section 1361(b) (defining small business 
     corporation) is amended by adding at the end the following 
     new paragraph:

[[Page H9576]]

       ``(3) Treatment of certain wholly owned subsidiaries.--
       ``(A) In general.--For purposes of this title--
       ``(i) a corporation which is a qualified subchapter S 
     subsidiary shall not be treated as a separate corporation, 
     and
       ``(ii) all assets, liabilities, and items of income, 
     deduction, and credit of a qualified subchapter S subsidiary 
     shall be treated as assets, liabilities, and such items (as 
     the case may be) of the S corporation.
       ``(B) Qualified subchapter s subsidiary.--For purposes of 
     this paragraph, the term `qualified subchapter S subsidiary' 
     means any domestic corporation which is not an ineligible 
     corporation (as defined in paragraph (2)), if--
       ``(i) 100 percent of the stock of such corporation is held 
     by the S corporation, and
       ``(ii) the S corporation elects to treat such corporation 
     as a qualified subchapter S subsidiary.
       ``(C) Treatment of terminations of qualified subchapter s 
     subsidiary status.--For purposes of this title, if any 
     corporation which was a qualified subchapter S subsidiary 
     ceases to meet the requirements of subparagraph (B), such 
     corporation shall be treated as a new corporation acquiring 
     all of its assets (and assuming all of its liabilities) 
     immediately before such cessation from the S corporation in 
     exchange for its stock.
       ``(D) Election after termination.--If a corporation's 
     status as a qualified subchapter S subsidiary terminates, 
     such corporation (and any successor corporation) shall not be 
     eligible to make--
       ``(i) an election under subparagraph (B)(ii) to be treated 
     as a qualified subchapter S subsidiary, or
       ``(ii) an election under section 1362(a) to be treated as 
     an S corporation,

     before its 5th taxable year which begins after the 1st 
     taxable year for which such termination was effective, unless 
     the Secretary consents to such election.''.
       (c) Certain Dividends Not Treated as Passive Investment 
     Income.--Paragraph (3) of section 1362(d) is amended by 
     adding at the end the following new subparagraph:
       ``(F) Treatment of certain dividends.--If an S corporation 
     holds stock in a C corporation meeting the requirements of 
     section 1504(a)(2), the term `passive investment income' 
     shall not include dividends from such C corporation to the 
     extent such dividends are attributable to the earnings and 
     profits of such C corporation derived from the active conduct 
     of a trade or business.''.
       (d) Conforming Amendments.--
       (1) Subsection (c) of section 1361 is amended by striking 
     paragraph (6).
       (2) Subsection (b) of section 1504 (defining includible 
     corporation) is amended by adding at the end the following 
     new paragraph:
       ``(8) An S corporation.''.

     SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.

       (a) Adjustments for Distributions Taken Into Account Before 
     Losses.--
       (1) Subparagraph (A) of section 1366(d)(1) (relating to 
     losses and deductions cannot exceed shareholder's basis in 
     stock and debt) is amended by striking ``paragraph (1)'' and 
     inserting ``paragraphs (1) and (2)(A)''.
       (2) Subsection (d) of section 1368 (relating to certain 
     adjustments taken into account) is amended by adding at the 
     end the following new sentence:

     ``In the case of any distribution made during any taxable 
     year, the adjusted basis of the stock shall be determined 
     with regard to the adjustments provided in paragraph (1) of 
     section 1367(a) for the taxable year.''.
       (b) Accumulated Adjustments Account.--Paragraph (1) of 
     section 1368(e) (relating to accumulated adjustments account) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Net loss for year disregarded.--
       ``(i) In general.--In applying this section to 
     distributions made during any taxable year, the amount in the 
     accumulated adjustments account as of the close of such 
     taxable year shall be determined without regard to any net 
     negative adjustment for such taxable year.
       ``(ii) Net negative adjustment.--For purposes of clause 
     (i), the term `net negative adjustment' means, with respect 
     to any taxable year, the excess (if any) of--
       ``(I) the reductions in the account for the taxable year 
     (other than for distributions), over
       ``(II) the increases in such account for such taxable 
     year.''.
       (c) Conforming Amendments.--Subparagraph (A) of section 
     1368(e)(1) is amended--
       (1) by striking ``as provided in subparagraph (B)'' and 
     inserting ``as otherwise provided in this paragraph'', and
       (2) by striking ``section 1367(b)(2)(A)'' and inserting 
     ``section 1367(a)(2)''.

     SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.

       Subsection (a) of section 1371 (relating to application of 
     subchapter C rules) is amended to read as follows:
       ``(a) Application of Subchapter C Rules.--Except as 
     otherwise provided in this title, and except to the extent 
     inconsistent with this subchapter, subchapter C shall apply 
     to an S corporation and its shareholders.''.

     SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROFITS.

       (a) In General.--If--
       (1) a corporation was an electing small business 
     corporation under subchapter S of chapter 1 of the Internal 
     Revenue Code of 1986 for any taxable year beginning before 
     January 1, 1983, and
       (2) such corporation is an S corporation under subchapter S 
     of chapter 1 of such Code for its first taxable year 
     beginning after December 31, 1996,

     the amount of such corporation's accumulated earnings and 
     profits (as of the beginning of such first taxable year) 
     shall be reduced by an amount equal to the portion (if any) 
     of such accumulated earnings and profits which were 
     accumulated in any taxable year beginning before January 1, 
     1983, for which such corporation was an electing small 
     business corporation under such subchapter S.
       (b) Conforming Amendments.--
       (1) Paragraph (3) of section 1362(d), as amended by section 
     1308, is amended--
       (A) by striking ``subchapter c'' in the paragraph heading 
     and inserting ``accumulated'',
       (B) by striking ``subchapter C'' in subparagraph (A)(i)(I) 
     and inserting ``accumulated'', and
       (C) by striking subparagraph (B) and redesignating the 
     following subparagraphs accordingly.
       (2)(A) Subsection (a) of section 1375 is amended by 
     striking ``subchapter C'' in paragraph (1) and inserting 
     ``accumulated''.
       (B) Paragraph (3) of section 1375(b) is amended to read as 
     follows:
       ``(3) Passive investment income, etc.--The terms `passive 
     investment income' and `gross receipts' have the same 
     respective meanings as when used in paragraph (3) of section 
     1362(d).''.
       (C) The section heading for section 1375 is amended by 
     striking ``SUBCHAPTER C'' and inserting ``ACCUMULATED''.
       (D) The table of sections for part III of subchapter S of 
     chapter 1 is amended by striking ``subchapter C'' in the item 
     relating to section 1375 and inserting ``accumulated''.
       (3) Clause (i) of section 1042(c)(4)(A) is amended by 
     striking ``section 1362(d)(3)(D)'' and inserting ``section 
     1362(d)(3)(C)''.

     SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS 
                   UNDER AT-RISK RULES ALLOWED.

       Paragraph (3) of section 1366(d) (relating to carryover of 
     disallowed losses and deductions to post-termination 
     transition period) is amended by adding at the end the 
     following new subparagraph:
       ``(D) At-risk limitations.--To the extent that any increase 
     in adjusted basis described in subparagraph (B) would have 
     increased the shareholder's amount at risk under section 465 
     if such increase had occurred on the day preceding the 
     commencement of the post-termination transition period, rules 
     similar to the rules described in subparagraphs (A) through 
     (C) shall apply to any losses disallowed by reason of section 
     465(a).''.

     SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK TO 
                   REFLECT CERTAIN ITEMS OF INCOME.

       (a) In General.--Subsection (b) of section 1367 (relating 
     to adjustments to basis of stock of shareholders, etc.) is 
     amended by adding at the end the following new paragraph:
       ``(4) Adjustments in case of inherited stock.--
       ``(A) In general.--If any person acquires stock in an S 
     corporation by reason of the death of a decedent or by 
     bequest, devise, or inheritance, section 691 shall be applied 
     with respect to any item of income of the S corporation in 
     the same manner as if the decedent had held directly his pro 
     rata share of such item.
       ``(B) Adjustments to basis.--The basis determined under 
     section 1014 of any stock in an S corporation shall be 
     reduced by the portion of the value of the stock which is 
     attributable to items constituting income in respect of the 
     decedent.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply in the case of decedents dying after the date of 
     the enactment of this Act.

     SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLICABLE TO 
                   REAL PROPERTY SUBDIVIDED FOR SALE BY 
                   NONCORPORATE TAXPAYERS.

       (a) In General.--Subsection (a) of section 1237 (relating 
     to real property subdivided for sale) is amended by striking 
     ``other than a corporation'' in the material preceding 
     paragraph (1) and inserting ``other than a C corporation''.
       (b) Conforming Amendment.--Subparagraph (A) of section 
     1237(a)(2) is amended by inserting ``an S corporation which 
     included the taxpayer as a shareholder,'' after ``controlled 
     by the taxpayer,''.

     SEC. 1315. FINANCIAL INSTITUTIONS.

       Subparagraph (A) of section 1361(b)(2) (defining ineligible 
     corporation), as redesignated by section 1308(a), is amended 
     to read as follows:
       ``(A) a financial institution which uses the reserve method 
     of accounting for bad debts described in section 585,''.

     SEC. 1316. CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO BE 
                   SHAREHOLDERS.

       (a) Eligibility To Be Shareholders.--
       (1) In general.--Subparagraph (B) of section 1361(b)(1) 
     (defining small business corporation) is amended to read as 
     follows:
       ``(B) have as a shareholder a person (other than an estate, 
     a trust described in subsection (c)(2), or an organization 
     described in subsection (c)(7)) who is not an individual,''.
       (2) Eligible exempt organizations.--Section 1361(c) 
     (relating to special rules for applying subsection (b)) is 
     amended by adding at the end the following new paragraph:
       ``(7) Certain exempt organizations permitted as 
     shareholders.--For purposes of subsection (b)(1)(B), an 
     organization which is--
       ``(A) described in section 401(a) or 501(c)(3), and
       ``(B) exempt from taxation under section 501(a),

     may be a shareholder in an S corporation.''.
       (b) Contributions of S Corporation Stock.--Section 
     170(e)(1) (relating to certain contributions of ordinary 
     income and capital gain property) is amended by adding at the 
     end the following new sentence: ``For purposes of

[[Page H9577]]

     applying this paragraph in the case of a charitable 
     contribution of stock in an S corporation, rules similar to 
     the rules of section 751 shall apply in determining whether 
     gain on such stock would have been long-term capital gain if 
     such stock were sold by the taxpayer.''.
       (c) Treatment of Income.--Section 512 (relating to 
     unrelated business taxable income), as amended by section 
     1113, is amended by adding at the end the following new 
     subsection:
       ``(e) Special Rules Applicable to S Corporations.--
       ``(1) In general.--If an organization described in section 
     1361(c)(7) holds stock in an S corporation--
       ``(A) such interest shall be treated as an interest in an 
     unrelated trade or business; and
       ``(B) notwithstanding any other provision of this part--
       ``(i) all items of income, loss, or deduction taken into 
     account under section 1366(a), and
       ``(ii) any gain or loss on the disposition of the stock in 
     the S corporation

     shall be taken into account in computing the unrelated 
     business taxable income of such organization.
       ``(2) Basis reduction.--Except as provided in regulations, 
     for purposes of paragraph (1), the basis of any stock 
     acquired by purchase (within the meaning of section 1012) 
     shall be reduced by the amount of any dividends received by 
     the organization with respect to the stock.''.
       (d) Certain Benefits not Applicable to S Corporations.--
       (1) Contribution to esops.--Paragraph (9) of section 404(a) 
     (relating to certain contributions to employee ownership 
     plans) is amended by inserting at the end the following new 
     subparagraph:
       ``(C) S corporations.--This paragraph shall not apply to an 
     S corporation.''.
       (2) Dividends on employer securities.--Paragraph (1) of 
     section 404(k) (relating to deduction for dividends on 
     certain employer securities) is amended by striking ``a 
     corporation'' and inserting ``a C corporation''.
       (3) Exchange treatment.--Subparagraph (A) of section 
     1042(c)(1) (defining qualified securities) is amended by 
     striking ``domestic corporation'' and inserting ``domestic C 
     corporation''.
       (e) Conforming Amendment.--Clause (i) of section 
     1361(e)(1)(A), as added by section 1302, is amended by 
     striking ``which holds a contingent interest and is not a 
     potential current beneficiary''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1317. EFFECTIVE DATE.

       (a) In General.--Except as otherwise provided in this 
     subtitle, the amendments made by this subtitle shall apply to 
     taxable years beginning after December 31, 1996.
       (b) Treatment of Certain Elections Under Prior Law.--For 
     purposes of section 1362(g) of the Internal Revenue Code of 
     1986 (relating to election after termination), any 
     termination under section 1362(d) of such Code in a taxable 
     year beginning before January 1, 1997, shall not be taken 
     into account.
                   Subtitle D--Pension Simplification

                CHAPTER 1--SIMPLIFIED DISTRIBUTION RULES

     SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM 
                   DISTRIBUTIONS.

       (a) In General.--Subsection (d) of section 402 (relating to 
     taxability of beneficiary of employees' trust) is amended to 
     read as follows:
       ``(d) Taxability of Beneficiary of Certain Foreign Situs 
     Trusts.--For purposes of subsections (a), (b), and (c), a 
     stock bonus, pension, or profit-sharing trust which would 
     qualify for exemption from tax under section 501(a) except 
     for the fact that it is a trust created or organized outside 
     the United States shall be treated as if it were a trust 
     exempt from tax under section 501(a).''.
       (b) Conforming Amendments.--
       (1) Subparagraph (D) of section 402(e)(4) (relating to 
     other rules applicable to exempt trusts) is amended to read 
     as follows:
       ``(D) Lump-sum distribution.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `lump sum distribution' means 
     the distribution or payment within one taxable year of the 
     recipient of the balance to the credit of an employee which 
     becomes payable to the recipient--

       ``(I) on account of the employee's death,
       ``(II) after the employee attains age 59\1/2\,
       ``(III) on account of the employee's separation from 
     service, or
       ``(IV) after the employee has become disabled (within the 
     meaning of section 72(m)(7)),

     from a trust which forms a part of a plan described in 
     section 401(a) and which is exempt from tax under section 501 
     or from a plan described in section 403(a). Subclause (III) 
     of this clause shall be applied only with respect to an 
     individual who is an employee without regard to section 
     401(c)(1), and subclause (IV) shall be applied only with 
     respect to an employee within the meaning of section 
     401(c)(1). For purposes of this clause, a distribution to two 
     or more trusts shall be treated as a distribution to one 
     recipient. For purposes of this paragraph, the balance to the 
     credit of the employee does not include the accumulated 
     deductible employee contributions under the plan (within the 
     meaning of section 72(o)(5)).
       ``(ii) Aggregation of certain trusts and plans.--For 
     purposes of determining the balance to the credit of an 
     employee under clause (i)--

       ``(I) all trusts which are part of a plan shall be treated 
     as a single trust, all pension plans maintained by the 
     employer shall be treated as a single plan, all profit-
     sharing plans maintained by the employer shall be treated as 
     a single plan, and all stock bonus plans maintained by the 
     employer shall be treated as a single plan, and
       ``(II) trusts which are not qualified trusts under section 
     401(a) and annuity contracts which do not satisfy the 
     requirements of section 404(a)(2) shall not be taken into 
     account.

       ``(iii) Community property laws.--The provisions of this 
     paragraph shall be applied without regard to community 
     property laws.
       ``(iv) Amounts subject to penalty.--This paragraph shall 
     not apply to amounts described in subparagraph (A) of section 
     72(m)(5) to the extent that section 72(m)(5) applies to such 
     amounts.
       ``(v) Balance to credit of employee not to include amounts 
     payable under qualified domestic relations order.--For 
     purposes of this paragraph, the balance to the credit of an 
     employee shall not include any amount payable to an alternate 
     payee under a qualified domestic relations order (within the 
     meaning of section 414(p)).
       ``(vi) Transfers to cost-of-living arrangement not treated 
     as distribution.--For purposes of this paragraph, the balance 
     to the credit of an employee under a defined contribution 
     plan shall not include any amount transferred from such 
     defined contribution plan to a qualified cost-of-living 
     arrangement (within the meaning of section 415(k)(2)) under a 
     defined benefit plan.
       ``(vii) Lump-sum distributions of alternate payees.--If any 
     distribution or payment of the balance to the credit of an 
     employee would be treated as a lump-sum distribution, then, 
     for purposes of this paragraph, the payment under a qualified 
     domestic relations order (within the meaning of section 
     414(p)) of the balance to the credit of an alternate payee 
     who is the spouse or former spouse of the employee shall be 
     treated as a lump-sum distribution. For purposes of this 
     clause, the balance to the credit of the alternate payee 
     shall not include any amount payable to the employee.''.
       (2) Section 402(c) (relating to rules applicable to 
     rollovers from exempt trusts) is amended by striking 
     paragraph (10).
       (3) Paragraph (1) of section 55(c) (defining regular tax) 
     is amended by striking ``shall not include any tax imposed by 
     section 402(d) and''.
       (4) Paragraph (8) of section 62(a) (relating to certain 
     portion of lump-sum distributions from pension plans taxed 
     under section 402(d)) is hereby repealed.
       (5) Section 401(a)(28)(B) (relating to coordination with 
     distribution rules) is amended by striking clause (v).
       (6) Subparagraph (B)(ii) of section 401(k)(10) (relating to 
     distributions that must be lump-sum distributions) is amended 
     to read as follows:
       ``(ii) Lump-sum distribution.--For purposes of this 
     subparagraph, the term `lump-sum distribution' has the 
     meaning given such term by section 402(e)(4)(D) (without 
     regard to subclauses (I), (II), (III), and (IV) of clause (i) 
     thereof).''.
       (7) Section 406(c) (relating to termination of status as 
     deemed employee not to be treated as separation from service 
     for purposes of limitation of tax) is hereby repealed.
       (8) Section 407(c) (relating to termination of status as 
     deemed employee not to be treated as separation from service 
     for purposes of limitation of tax) is hereby repealed.
       (9) Section 691(c) (relating to deduction for estate tax) 
     is amended by striking paragraph (5).
       (10) Paragraph (1) of section 871(b) (relating to 
     imposition of tax) is amended by striking ``section 1, 55, or 
     402(d)(1)'' and inserting ``section 1 or 55''.
       (11) Subsection (b) of section 877 (relating to alternative 
     tax) is amended by striking ``section 1, 55, or 402(d)(1)'' 
     and inserting ``section 1 or 55''.
       (12) Section 4980A(c)(4) is amended--
       (A) by striking ``to which an election under section 
     402(d)(4)(B) applies'' and inserting ``(as defined in section 
     402(e)(4)(D)) with respect to which the individual elects to 
     have this paragraph apply'',
       (B) by adding at the end the following new flush sentence:

     ``An individual may elect to have this paragraph apply to 
     only one lump-sum distribution.'', and
       (C) by striking the heading and inserting:
       ``(4) Special one-time election.--''.
       (13) Section 402(e) is amended by striking paragraph (5).
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 1999.
       (2) Retention of certain transition rules.--The amendments 
     made by this section shall not apply to any distribution for 
     which the taxpayer is eligible to elect the benefits of 
     section 1122 (h)(3) or (h)(5) of the Tax Reform Act of 1986. 
     Notwithstanding the preceding sentence, individuals who elect 
     such benefits after December 31, 1999, shall not be eligible 
     for 5-year averaging under section 402(d) of the Internal 
     Revenue Code of 1986 (as in effect immediately before such 
     amendments).

     SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES' DEATH 
                   BENEFITS.

       (a) In General.--Subsection (b) of section 101 is hereby 
     repealed.
       (b) Conforming Amendments.--
       (1) Subsection (c) of section 101 is amended by striking 
     ``subsection (a) or (b)'' and inserting ``subsection (a)''.
       (2) Sections 406(e) and 407(e) are each amended by striking 
     paragraph (2) and by redesignating paragraph (3) as paragraph 
     (2).
       (3) Section 7701(a)(20) is amended by striking ``, for the 
     purpose of applying the provisions of section 101(b) with 
     respect to employees' death benefits''.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to decedents dying after the date of 
     the enactment of this Act.

[[Page H9578]]

     SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBUTIONS 
                   UNDER CERTAIN EMPLOYER PLANS.

       (a) General Rule.--Subsection (d) of section 72 (relating 
     to annuities; certain proceeds of endowment and life 
     insurance contracts) is amended to read as follows:
       ``(d) Special Rules for Qualified Employer Retirement 
     Plans.--
       ``(1) Simplified method of taxing annuity payments.--
       ``(A) In general.--In the case of any amount received as an 
     annuity under a qualified employer retirement plan--
       ``(i) subsection (b) shall not apply, and
       ``(ii) the investment in the contract shall be recovered as 
     provided in this paragraph.
       ``(B) Method of recovering investment in contract.--
       ``(i) In general.--Gross income shall not include so much 
     of any monthly annuity payment under a qualified employer 
     retirement plan as does not exceed the amount obtained by 
     dividing--

       ``(I) the investment in the contract (as of the annuity 
     starting date), by
       ``(II) the number of anticipated payments determined under 
     the table contained in clause (iii) (or, in the case of a 
     contract to which subsection (c)(3)(B) applies, the number of 
     monthly annuity payments under such contract).

       ``(ii) Certain rules made applicable.--Rules similar to the 
     rules of paragraphs (2) and (3) of subsection (b) shall apply 
     for purposes of this paragraph.
       ``(iii) Number of anticipated payments.--


   ``If the age of the primary annuitant on the annuity starting date 
  is:                            The number of anticipated payments is:
         Not more than 55..........................................360 
         More than 55 but not more than 60.........................310 
         More than 60 but not more than 65.........................260 
         More than 65 but not more than 70.........................210 
         More than 70..............................................160.

       ``(C) Adjustment for refund feature not applicable.--For 
     purposes of this paragraph, investment in the contract shall 
     be determined under subsection (c)(1) without regard to 
     subsection (c)(2).
       ``(D) Special rule where lump sum paid in connection with 
     commencement of annuity payments.--If, in connection with the 
     commencement of annuity payments under any qualified employer 
     retirement plan, the taxpayer receives a lump sum payment--
       ``(i) such payment shall be taxable under subsection (e) as 
     if received before the annuity starting date, and
       ``(ii) the investment in the contract for purposes of this 
     paragraph shall be determined as if such payment had been so 
     received.
       ``(E) Exception.--This paragraph shall not apply in any 
     case where the primary annuitant has attained age 75 on the 
     annuity starting date unless there are fewer than 5 years of 
     guaranteed payments under the annuity.
       ``(F) Adjustment where annuity payments not on monthly 
     basis.--In any case where the annuity payments are not made 
     on a monthly basis, appropriate adjustments in the 
     application of this paragraph shall be made to take into 
     account the period on the basis of which such payments are 
     made.
       ``(G) Qualified employer retirement plan.--For purposes of 
     this paragraph, the term `qualified employer retirement plan' 
     means any plan or contract described in paragraph (1), (2), 
     or (3) of section 4974(c).
       ``(2) Treatment of employee contributions under defined 
     contribution plans.--For purposes of this section, employee 
     contributions (and any income allocable thereto) under a 
     defined contribution plan may be treated as a separate 
     contract.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply in cases where the annuity starting date is after 
     the 90th day after the date of the enactment of this Act.

     SEC. 1404. REQUIRED DISTRIBUTIONS.

       (a) In General.--Section 401(a)(9)(C) (defining required 
     beginning date) is amended to read as follows:
       ``(C) Required beginning date.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `required beginning date' means 
     April 1 of the calendar year following the later of--

       ``(I) the calendar year in which the employee attains age 
     70\1/2\, or
       ``(II) the calendar year in which the employee retires.

       ``(ii) Exception.--Subclause (II) of clause (i) shall not 
     apply--

       ``(I) except as provided in section 409(d), in the case of 
     an employee who is a 5-percent owner (as defined in section 
     416) with respect to the plan year ending in the calendar 
     year in which the employee attains age 70\1/2\, or
       ``(II) for purposes of section 408 (a)(6) or (b)(3).

       ``(iii) Actuarial adjustment.--In the case of an employee 
     to whom clause (i)(II) applies who retires in a calendar year 
     after the calendar year in which the employee attains age 
     70\1/2\, the employee's accrued benefit shall be actuarially 
     increased to take into account the period after age 70\1/2\ 
     in which the employee was not receiving any benefits under 
     the plan.
       ``(iv) Exception for governmental and church plans.--
     Clauses (ii) and (iii) shall not apply in the case of a 
     governmental plan or church plan. For purposes of this 
     clause, the term `church plan' means a plan maintained by a 
     church for church employees, and the term `church' means any 
     church (as defined in section 3121(w)(3)(A)) or qualified 
     church-controlled organization (as defined in section 
     3121(w)(3)(B)).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to years beginning after December 31, 1996.

            CHAPTER 2--INCREASED ACCESS TO RETIREMENT PLANS

                   Subchapter A--Simple Savings Plans

     SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS FOR 
                   EMPLOYEES OF SMALL EMPLOYERS.

       (a) In General.--Section 408 (relating to individual 
     retirement accounts) is amended by redesignating subsection 
     (p) as subsection (q) and by inserting after subsection (o) 
     the following new subsection:
       ``(p) Simple Retirement Accounts.--
       ``(1) In general.--For purposes of this title, the term 
     `simple retirement account' means an individual retirement 
     plan (as defined in section 7701(a)(37))--
       ``(A) with respect to which the requirements of paragraphs 
     (3), (4), and (5) are met; and
       ``(B) with respect to which the only contributions allowed 
     are contributions under a qualified salary reduction 
     arrangement.
       ``(2) Qualified salary reduction arrangement.--
       ``(A) In general.--For purposes of this subsection, the 
     term `qualified salary reduction arrangement' means a written 
     arrangement of an eligible employer under which--
       ``(i) an employee eligible to participate in the 
     arrangement may elect to have the employer make payments--

       ``(I) as elective employer contributions to a simple 
     retirement account on behalf of the employee, or
       ``(II) to the employee directly in cash,

       ``(ii) the amount which an employee may elect under clause 
     (i) for any year is required to be expressed as a percentage 
     of compensation and may not exceed a total of $6,000 for any 
     year,
       ``(iii) the employer is required to make a matching 
     contribution to the simple retirement account for any year in 
     an amount equal to so much of the amount the employee elects 
     under clause (i)(I) as does not exceed the applicable 
     percentage of compensation for the year, and
       ``(iv) no contributions may be made other than 
     contributions described in clause (i) or (iii).
       ``(B) Employer may elect 2-percent nonelective 
     contribution.--
       ``(i) In general.--An employer shall be treated as meeting 
     the requirements of subparagraph (A)(iii) for any year if, in 
     lieu of the contributions described in such clause, the 
     employer elects to make nonelective contributions of 2 
     percent of compensation for each employee who is eligible to 
     participate in the arrangement and who has at least $5,000 of 
     compensation from the employer for the year. If an employer 
     makes an election under this subparagraph for any year, the 
     employer shall notify employees of such election within a 
     reasonable period of time before the 60-day period for such 
     year under paragraph (5)(C).
       ``(ii) Compensation limitation.--The compensation taken 
     into account under clause (i) for any year shall not exceed 
     the limitation in effect for such year under section 
     401(a)(17).
       ``(C) Definitions.--For purposes of this subsection--
       ``(i) Eligible employer.--

       ``(I) In general.--The term `eligible employer' means, with 
     respect to any year, an employer which had no more than 100 
     employees who received at least $5,000 of compensation from 
     the employer for the preceding year.
       ``(II) 2-year grace period.--An eligible employer who 
     establishes and maintains a plan under this subsection for 1 
     or more years and who fails to be an eligible employer for 
     any subsequent year shall be treated as an eligible employer 
     for the 2 years following the last year the employer was an 
     eligible employer. If such failure is due to any acquisition, 
     disposition, or similar transaction involving an eligible 
     employer, the preceding sentence shall apply only in 
     accordance with rules similar to the rules of section 
     410(b)(6)(C)(i).

       ``(ii) Applicable percentage.--

       ``(I) In general.--The term `applicable percentage' means 3 
     percent.
       ``(II) Election of lower percentage.--An employer may elect 
     to apply a lower percentage (not less than 1 percent) for any 
     year for all employees eligible to participate in the plan 
     for such year if the employer notifies the employees of such 
     lower percentage within a reasonable period of time before 
     the 60-day election period for such year under paragraph 
     (5)(C). An employer may not elect a lower percentage under 
     this subclause for any year if that election would result in 
     the applicable percentage being lower than 3 percent in more 
     than 2 of the years in the 5-year period ending with such 
     year.
       ``(III) Special rule for years arrangement not in effect.--
     If any year in the 5-year period described in subclause (II) 
     is a year prior to the first year for which any qualified 
     salary reduction arrangement is in effect with respect to the 
     employer (or any predecessor), the employer shall be treated 
     as if the level of the employer matching contribution was 
     at 3 percent of compensation for such prior year.
       ``(D) Arrangement may be only plan of employer.--
       ``(i) In general.--An arrangement shall not be treated as a 
     qualified salary reduction arrangement for any year if the 
     employer (or any predecessor employer) maintained a qualified 
     plan with respect to which contributions were made, or 
     benefits were accrued, for service in any year in the period 
     beginning with the year such arrangement became effective and 
     ending with the year for which the determination is being 
     made.
       ``(ii) Qualified plan.--For purposes of this subparagraph, 
     the term `qualified plan' means a

[[Page H9579]]

     plan, contract, pension, or trust described in subparagraph 
     (A) or (B) of section 219(g)(5).
       ``(E) Cost-of-living adjustment.--The Secretary shall 
     adjust the $6,000 amount under subparagraph (A)(ii) 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 ending September 30, 1996, and any increase 
     under this subparagraph which is not a multiple of $500 shall 
     be rounded to the next lower multiple of $500.
       ``(3) Vesting requirements.--The requirements of this 
     paragraph are met with respect to a simple retirement account 
     if the employee's rights to any contribution to the simple 
     retirement account are nonforfeitable. For purposes of this 
     paragraph, rules similar to the rules of subsection (k)(4) 
     shall apply.
       ``(4) Participation requirements.--
       ``(A) In general.--The requirements of this paragraph are 
     met with respect to any simple retirement account for a year 
     only if, under the qualified salary reduction arrangement, 
     all employees of the employer who--
       ``(i) received at least $5,000 in compensation from the 
     employer during any 2 preceding years, and
       ``(ii) are reasonably expected to receive at least $5,000 
     in compensation during the year,
     are eligible to make the election under paragraph (2)(A)(i) 
     or receive the nonelective contribution described in 
     paragraph (2)(B).
       ``(B) Excludable employees.--An employer may elect to 
     exclude from the requirement under subparagraph (A) employees 
     described in section 410(b)(3).
       ``(5) Administrative requirements.--The requirements of 
     this paragraph are met with respect to any simplified 
     retirement account if, under the qualified salary reduction 
     arrangement--
       ``(A) an employer must--
       ``(i) make the elective employer contributions under 
     paragraph (2)(A)(i) not later than the close of the 30-day 
     period following the last day of the month with respect to 
     which the contributions are to be made, and
       ``(ii) make the matching contributions under paragraph 
     (2)(A)(iii) or the nonelective contributions under paragraph 
     (2)(B) not later than the date described in section 
     404(m)(2)(B),
       ``(B) an employee may elect to terminate participation in 
     such arrangement at any time during the year, except that if 
     an employee so terminates, the arrangement may provide that 
     the employee may not elect to resume participation until the 
     beginning of the next year, and
       ``(C) each employee eligible to participate may elect, 
     during the 60-day period before the beginning of any year 
     (and the 60-day period before the first day such employee is 
     eligible to participate), to participate in the arrangement, 
     or to modify the amounts subject to such arrangement, for 
     such year.
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Compensation.--
       ``(i) In general.--The term `compensation' means amounts 
     described in paragraphs (3) and (8) of section 6051(a).
       ``(ii) Self-employed.--In the case of an employee described 
     in subparagraph (B), the term `compensation' means net 
     earnings from self-employment determined under section 
     1402(a) without regard to any contribution under this 
     subsection.
       ``(B) Employee.--The term `employee' includes an employee 
     as defined in section 401(c)(1).
       ``(C) Year.--The term `year' means the calendar year.
       ``(7) Use of designated financial institution.--A plan 
     shall not be treated as failing to satisfy the requirements 
     of this subsection or any other provision of this title 
     merely because the employer makes all contributions to the 
     individual retirement accounts or annuities of a designated 
     trustee or issuer. The preceding sentence shall not apply 
     unless each plan participant is notified in writing (either 
     separately or as part of the notice under subsection 
     (l)(2)(C)) that the participant's balance may be transferred 
     without cost or penalty to another individual account or 
     annuity in accordance with subsection (d)(3)(G).''.
       (b) Tax Treatment of Simple Retirement Accounts.--
       (1) Deductibility of contributions by employees.--
       (A) Section 219(b) (relating to maximum amount of 
     deduction) is amended by adding at the end the following new 
     paragraph:
       ``(4) Special rule for simple retirement accounts.--This 
     section shall not apply with respect to any amount 
     contributed to a simple retirement account established under 
     section 408(p).''.
       (B) Section 219(g)(5)(A) (defining active participant) is 
     amended by striking ``or'' at the end of clause (iv) and by 
     adding at the end the following new clause:
       ``(vi) any simple retirement account (within the meaning of 
     section 408(p)), or''.
       (2) Deductibility of employer contributions.--Section 404 
     (relating to deductions for contributions of an employer to 
     pension, etc. plans) is amended by adding at the end the 
     following new subsection:
       ``(m) Special Rules for Simple Retirement Accounts.--
       ``(1) In general.--Employer contributions to a simple 
     retirement account shall be treated as if they are made to a 
     plan subject to the requirements of this section.
       ``(2) Timing.--
       ``(A) Deduction.--Contributions described in paragraph (1) 
     shall be deductible in the taxable year of the employer with 
     or within which the calendar year for which the contributions 
     were made ends.
       ``(B) Contributions after end of year.--For purposes of 
     this subsection, contributions shall be treated as made for a 
     taxable year if they are made on account of the taxable year 
     and are made not later than the time prescribed by law for 
     filing the return for the taxable year (including extensions 
     thereof).''.
       (3) Contributions and distributions.--
       (A) Section 402 (relating to taxability of beneficiary of 
     employees' trust) is amended by adding at the end the 
     following new subsection:
       ``(k) Treatment of Simple Retirement Accounts.--Rules 
     similar to the rules of paragraphs (1) and (3) of subsection 
     (h) shall apply to contributions and distributions with 
     respect to a simple retirement account under section 
     408(p).''.
       (B) Section 408(d)(3) is amended by adding at the end the 
     following new subparagraph:
       ``(G) Simple retirement accounts.--This paragraph shall not 
     apply to any amount paid or distributed out of a simple 
     retirement account (as defined in subsection (p)) unless--
       ``(i) it is paid into another simple retirement account, or
       ``(ii) in the case of any payment or distribution to which 
     section 72(t)(6) does not apply, it is paid into an 
     individual retirement plan.''.
       (C) Clause (i) of section 457(c)(2)(B) is amended by 
     striking ``section 402(h)(1)(B)'' and inserting ``section 
     402(h)(1)(B) or (k)''.
       (4) Penalties.--
       (A) Early withdrawals.--Section 72(t) (relating to 
     additional tax in early distributions) is amended by adding 
     at the end the following new paragraph:
       ``(6) Special rules for simple retirement accounts.--In the 
     case of any amount received from a simple retirement account 
     (within the meaning of section 408(p)) during the 2-year 
     period beginning on the date such individual first 
     participated in any qualified salary reduction arrangement 
     maintained by the individual's employer under section 
     408(p)(2), paragraph (1) shall be applied by substituting `25 
     percent' for `10 percent'.''.
       (B) Failure to report.--Section 6693 is amended by 
     redesignating subsection (c) as subsection (d) and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Penalties Relating to Simple Retirement Accounts.--
       ``(1) Employer penalties.--An employer who fails to provide 
     1 or more notices required by section 408(l)(2)(C) shall pay 
     a penalty of $50 for each day on which such failures 
     continue.
       ``(2) Trustee penalties.--A trustee who fails--
       ``(A) to provide 1 or more statements required by the last 
     sentence of section 408(i) shall pay a penalty of $50 for 
     each day on which such failures continue, or
       ``(B) to provide 1 or more summary descriptions required by 
     section 408(l)(2)(B) shall pay a penalty of $50 for each day 
     on which such failures continue.
       ``(3) Reasonable cause exception.--No penalty shall be 
     imposed under this subsection with respect to any failure 
     which the taxpayer shows was due to reasonable cause.''.
       (5) Reporting requirements.--
       (A) Section 408(l) is amended by adding at the end the 
     following new paragraph:
       ``(2) Simple retirement accounts.--
       ``(A) No employer reports.--Except as provided in this 
     paragraph, no report shall be required under this section by 
     an employer maintaining a qualified salary reduction 
     arrangement under subsection (p).
       ``(B) Summary description.--The trustee of any simple 
     retirement account established pursuant to a qualified salary 
     reduction arrangement under subsection (p) shall provide to 
     the employer maintaining the arrangement, each year a 
     description containing the following information:
       ``(i) The name and address of the employer and the trustee.
       ``(ii) The requirements for eligibility for participation.
       ``(iii) The benefits provided with respect to the 
     arrangement.
       ``(iv) The time and method of making elections with respect 
     to the arrangement.
       ``(v) The procedures for, and effects of, withdrawals 
     (including rollovers) from the arrangement.
       ``(C) Employee notification.--The employer shall notify 
     each employee immediately before the period for which an 
     election described in subsection (p)(5)(C) may be made of the 
     employee's opportunity to make such election. Such notice 
     shall include a copy of the description described in 
     subparagraph (B).''.
       (B) Section 408(l) is amended by striking ``An employer'' 
     and inserting the following:
       ``(1) In general.--An employer''.
       (6) Reporting requirements.--Section 408(i) is amended by 
     adding at the end the following new flush sentence:

     ``In the case of a simple retirement account under subsection 
     (p), only one report under this subsection shall be required 
     to be submitted each calendar year to the Secretary (at the 
     time provided under paragraph (2)) but, in addition to the 
     report under this subsection, there shall be furnished, 
     within 30 days after each calendar year, to the individual on 
     whose behalf the account is maintained a statement with 
     respect to the account balance as of the close of, and the 
     account activity during, such calendar year.''.
       (7) Exemption from top-heavy plan rules.--Section 416(g)(4) 
     (relating to special rules for top-heavy plans) is amended by 
     adding at the end the following new subparagraph:
       ``(G) Simple retirement accounts.--The term `top-heavy 
     plan' shall not include a simple retirement account under 
     section 408(p).''.
       (8) Employment taxes.--
       (A) Paragraph (5) of section 3121(a) is amended by striking 
     ``or'' at the end of subparagraph (F), by inserting ``or'' at 
     the end of subparagraph (G), and by adding at the end the 
     following new subparagraph:

[[Page H9580]]

       ``(H) under an arrangement to which section 408(p) applies, 
     other than any elective contributions under paragraph 
     (2)(A)(i) thereof,''.
       (B) Section 209(a)(4) of the Social Security Act is amended 
     by inserting ``; or (J) under an arrangement to which section 
     408(p) of such Code applies, other than any elective 
     contributions under paragraph (2)(A)(i) thereof'' before the 
     semicolon at the end thereof.
       (C) Paragraph (5) of section 3306(b) is amended by striking 
     ``or'' at the end of subparagraph (F), by inserting ``or'' at 
     the end of subparagraph (G), and by adding at the end the 
     following new subparagraph:
       ``(H) under an arrangement to which section 408(p) applies, 
     other than any elective contributions under paragraph 
     (2)(A)(i) thereof,''.
       (D) Paragraph (12) of section 3401(a) is amended by adding 
     the following new subparagraph:
       ``(D) under an arrangement to which section 408(p) applies; 
     or''.
       (9) Conforming amendments.--
       (A) Section 280G(b)(6) is amended by striking ``or'' at the 
     end of subparagraph (B), by striking the period at the end of 
     subparagraph (C) and inserting ``, or'' and by adding after 
     subparagraph (C) the following new subparagraph:
       ``(D) a simple retirement account described in section 
     408(p).''.
       (B) Section 402(g)(3) is amended by striking ``and'' at the 
     end of subparagraph (B), by striking the period at the end of 
     subparagraph (C) and inserting ``, and'', and by adding after 
     subparagraph (C) the following new subparagraph:
       ``(D) any elective employer contribution under section 
     408(p)(2)(A)(i).''.
       (C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of 
     section 414 are each amended by inserting ``408(p),'' after 
     ``408(k),''.
       (D) Section 4972(d)(1)(A) is amended by striking ``and'' at 
     the end of clause (ii), by striking the period at the end of 
     clause (iii) and inserting ``, and'', and by adding after 
     clause (iii) the following new clause:
       ``(iv) any simple retirement account (within the meaning of 
     section 408(p)).''.
       (c) Repeal of Salary Reduction Simplified Employee 
     Pensions.--Section 408(k)(6) is amended by adding at the end 
     the following new subparagraph:
       ``(H) Termination.--This paragraph shall not apply to years 
     beginning after December 31, 1996. The preceding sentence 
     shall not apply to a simplified employee pension if the terms 
     of such pension, as in effect on December 31, 1996, provide 
     that an employee may make the election described in 
     subparagraph (A).''.
       (d) Modifications of ERISA.--
       (1) Reporting requirements.--Section 101 of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1021) is 
     amended by redesignating subsection (g) as subsection (h) and 
     by inserting after subsection (f) the following new 
     subsection:
       ``(g) Simple Retirement Accounts.--
       ``(1) No employer reports.--Except as provided in this 
     subsection, no report shall be required under this section by 
     an employer maintaining a qualified salary reduction 
     arrangement under section 408(p) of the Internal Revenue Code 
     of 1986.
       ``(2) Summary description.--The trustee of any simple 
     retirement account established pursuant to a qualified salary 
     reduction arrangement under section 408(p) of such Code shall 
     provide to the employer maintaining the arrangement each year 
     a description containing the following information:
       ``(A) The name and address of the employer and the trustee.
       ``(B) The requirements for eligibility for participation.
       ``(C) The benefits provided with respect to the 
     arrangement.
       ``(D) The time and method of making elections with respect 
     to the arrangement.
       ``(E) The procedures for, and effects of, withdrawals 
     (including rollovers) from the arrangement.
       ``(3) Employee notification.--The employer shall notify 
     each employee immediately before the period for which an 
     election described in section 408(p)(5)(C) of such Code may 
     be made of the employee's opportunity to make such election. 
     Such notice shall include a copy of the description described 
     in paragraph (2).''
       (2) Fiduciary duties.--Section 404(c) of such Act (29 
     U.S.C. 1104(c)) is amended by inserting ``(1)'' after 
     ``(c)'', by redesignating paragraphs (1) and (2) as 
     subparagraphs (A) and (B), respectively, and by adding at the 
     end the following new paragraph:
       ``(2) In the case of a simple retirement account 
     established pursuant to a qualified salary reduction 
     arrangement under section 408(p) of the Internal Revenue Code 
     of 1986, a participant or beneficiary shall, for purposes of 
     paragraph (1), be treated as exercising control over the 
     assets in the account upon the earliest of--
       ``(A) an affirmative election among investment options with 
     respect to the initial investment of any contribution,
       ``(B) a rollover to any other simple retirement account or 
     individual retirement plan, or
       ``(C) one year after the simple retirement account is 
     established.

     No reports, other than those required under section 101(g), 
     shall be required with respect to a simple retirement account 
     established pursuant to such a qualified salary reduction 
     arrangement.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) ARRANGEMENTS.

       (a) Alternative Method of Satisfying Section 401(k) 
     Nondiscrimination Tests.--Section 401(k) (relating to cash or 
     deferred arrangements) is amended by adding at the end the 
     following new paragraph:
       ``(11) Adoption of simple plan to meet nondiscrimination 
     tests.--
       ``(A) In general.--A cash or deferred arrangement 
     maintained by an eligible employer shall be treated as 
     meeting the requirements of paragraph (3)(A)(ii) if such 
     arrangement meets--
       ``(i) the contribution requirements of subparagraph (B),
       ``(ii) the exclusive plan requirements of subparagraph (C), 
     and
       ``(iii) the vesting requirements of section 408(p)(3).
       ``(B) Contribution requirements.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if, under the arrangement--

       ``(I) an employee may elect to have the employer make 
     elective contributions for the year on behalf of the employee 
     to a trust under the plan in an amount which is expressed as 
     a percentage of compensation of the employee but which in no 
     event exceeds $6,000,
       ``(II) the employer is required to make a matching 
     contribution to the trust for the year in an amount equal to 
     so much of the amount the employee elects under subclause (I) 
     as does not exceed 3 percent of compensation for the year, 
     and
       ``(III) no other contributions may be made other than 
     contributions described in subclause (I) or (II).

       ``(ii) Employer may elect 2-percent nonelective 
     contribution.--An employer shall be treated as meeting the 
     requirements of clause (i)(II) for any year if, in lieu of 
     the contributions described in such clause, the employer 
     elects (pursuant to the terms of the arrangement) to make 
     nonelective contributions of 2 percent of compensation for 
     each employee who is eligible to participate in the 
     arrangement and who has at least $5,000 of compensation from 
     the employer for the year. If an employer makes an election 
     under this subparagraph for any year, the employer shall 
     notify employees of such election within a reasonable period 
     of time before the 60th day before the beginning of such 
     year.
       ``(C) Exclusive plan requirement.--The requirements of this 
     subparagraph are met for any year to which this paragraph 
     applies if no contributions were made, or benefits were 
     accrued, for services during such year under any qualified 
     plan of the employer on behalf of any employee eligible to 
     participate in the cash or deferred arrangement, other than 
     contributions described in subparagraph (B).
       ``(D) Definitions and special rule.--
       ``(i) Definitions.--For purposes of this paragraph, any 
     term used in this paragraph which is also used in section 
     408(p) shall have the meaning given such term by such 
     section.
       ``(ii) Coordination with top-heavy rules.--A plan meeting 
     the requirements of this paragraph for any year shall not be 
     treated as a top-heavy plan under section 416 for such 
     year.''.
       (b) Alternative Methods of Satisfying Section 401(m) 
     Nondiscrimination Tests.--Section 401(m) (relating to 
     nondiscrimination test for matching contributions and 
     employee contributions) is amended by redesignating paragraph 
     (10) as paragraph (11) and by adding after paragraph (9) the 
     following new paragraph:
       ``(10) Alternative method of satisfying tests.--A defined 
     contribution plan shall be treated as meeting the 
     requirements of paragraph (2) with respect to matching 
     contributions if the plan--
       ``(A) meets the contribution requirements of subparagraph 
     (B) of subsection (k)(11),
       ``(B) meets the exclusive plan requirements of subsection 
     (k)(11)(C), and
       ``(C) meets the vesting requirements of section 
     408(p)(3).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 1996.

                     Subchapter B--Other Provisions

     SEC. 1426. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER SECTION 
                   401(k).

       (a) In General.--Subparagraph (B) of section 401(k)(4) is 
     amended to read as follows:
       ``(B) Eligibility of state and local governments and tax-
     exempt organizations.--
       ``(i) Tax-exempts eligible.--Except as provided in clause 
     (ii), any organization exempt from tax under this subtitle 
     may include a qualified cash or deferred arrangement as part 
     of a plan maintained by it.
       ``(ii) Governments ineligible.--A cash or deferred 
     arrangement shall not be treated as a qualified cash or 
     deferred arrangement if it is part of a plan maintained by a 
     State or local government or political subdivision thereof, 
     or any agency or instrumentality thereof. This clause shall 
     not apply to a rural cooperative plan or to a plan of an 
     employer described in clause (iii).
       ``(iii) Treatment of indian tribal governments.--An 
     employer which is an Indian tribal government (as defined in 
     section 7701(a)(40)), a subdivision of an Indian tribal 
     government (determined in accordance with section 7871(d)), 
     an agency or instrumentality of an Indian tribal government 
     or subdivision thereof, or a corporation chartered under 
     Federal, State, or tribal law which is owned in whole or in 
     part by any of the foregoing may include a qualified cash or 
     deferred arrangement as part of a plan maintained by the 
     employer.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to plan years beginning after December 31, 1996, 
     but shall not apply to any cash or deferred arrangement to 
     which clause (i) of section 1116(f)(2)(B) of the Tax Reform 
     Act of 1986 applies.

     SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUCTION.

       (a) Spousal IRA Computed on Basis of Compensation of Both 
     Spouses.--Subsection (c) of section 219 (relating to special 
     rules for

[[Page H9581]]

     certain married individuals) is amended to read as follows:
       ``(c) Special Rules for Certain Married Individuals.--
       ``(1) In general.--In the case of an individual to whom 
     this paragraph applies for the taxable year, the limitation 
     of paragraph (1) of subsection (b) shall be equal to the 
     lesser of--
       ``(A) the dollar amount in effect under subsection 
     (b)(1)(A) for the taxable year, or
       ``(B) the sum of--
       ``(i) the compensation includible in such individual's 
     gross income for the taxable year, plus
       ``(ii) the compensation includible in the gross income of 
     such individual's spouse for the taxable year reduced by the 
     amount allowed as a deduction under subsection (a) to such 
     spouse for such taxable year.
       ``(2) Individuals to whom paragraph (1) applies.--Paragraph 
     (1) shall apply to any individual if--
       ``(A) such individual files a joint return for the taxable 
     year, and
       ``(B) the amount of compensation (if any) includible in 
     such individual's gross income for the taxable year is less 
     than the compensation includible in the gross income of such 
     individual's spouse for the taxable year.''.
       (b) Conforming Amendments.--
       (1) Paragraph (2) of section 219(f) (relating to other 
     definitions and special rules) is amended by striking 
     ``subsections (b) and (c)'' and inserting ``subsection (b)''.
       (2) Section 219(g)(1) is amended by striking ``(c)(2)'' and 
     inserting ``(c)(1)(A)''.
       (3) Section 408(d)(5) is amended by striking ``$2,250'' and 
     inserting ``the dollar amount in effect under section 
     219(b)(1)(A)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

                CHAPTER 3--NONDISCRIMINATION PROVISIONS

     SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES; REPEAL 
                   OF FAMILY AGGREGATION.

       (a) In General.--Paragraph (1) of section 414(q) (defining 
     highly compensated employee) is amended to read as follows:
       ``(1) In general.--The term `highly compensated employee' 
     means any employee who--
       ``(A) was a 5-percent owner at any time during the year or 
     the preceding year, or
       ``(B) for the preceding year--
       ``(i) had compensation from the employer in excess of 
     $80,000, and
       ``(ii) if the employer elects the application of this 
     clause for such preceding year, was in the top-paid group of 
     employees for such preceding year.

     The Secretary shall adjust the $80,000 amount under 
     subparagraph (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 ending September 30, 1996.''.
       (b) Repeal of Family Aggregation Rules.--
       (1) In general.--Paragraph (6) of section 414(q) is hereby 
     repealed.
       (2) Compensation limit.--Paragraph (17)(A) of section 
     401(a) is amended by striking the last sentence.
       (3) Deduction.--Subsection (l) of section 404 is amended by 
     striking the last sentence.
       (c) Conforming Amendments.--
       (1)(A) Subsection (q) of section 414 is amended by striking 
     paragraphs (2), (5), and (12) and by redesignating paragraphs 
     (3), (4), (7), (8), (9), (10), and (11) as paragraphs (2) 
     through (8), respectively.
       (B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii), 408(k)(2)(C), 
     and 416(i)(1)(D) are each amended by striking ``section 
     414(q)(7)'' and inserting ``section 414(q)(4)''.
       (C) Section 416(i)(1)(A) is amended by striking ``section 
     414(q)(8)'' and inserting ``section 414(q)(5)''.
       (D) Subparagraph (A) of section 414(r)(2) is amended by 
     striking ``subsection (q)(8)'' and inserting ``subsection 
     (q)(5)''.
       (E) Section 414(q)(5), as redesignated by subparagraph (A), 
     is amended by striking ``under paragraph (4), or the number 
     of officers taken into account under paragraph (5)''.
       (2) Section 1114(c)(4) of the Tax Reform Act of 1986 is 
     amended by adding at the end the following new sentence: 
     ``Any reference in this paragraph to section 414(q) shall be 
     treated as a reference to such section as in effect on the 
     day before the date of the enactment of the Small Business 
     Job Protection Act of 1996.''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to years beginning after December 31, 1996, except that 
     in determining whether an employee is a highly compensated 
     employee for years beginning in 1997, such amendments shall 
     be treated as having been in effect for years beginning in 
     1996.
       (2) Family aggregation.--The amendments made by subsection 
     (b) shall apply to years beginning after December 31, 1996.

     SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION 
                   REQUIREMENTS.

       (a) General Rule.--Section 401(a)(26)(A) (relating to 
     additional participation requirements) is amended to read as 
     follows:
       ``(A) In general.--In the case of a trust which is a part 
     of a defined benefit plan, such trust shall not constitute a 
     qualified trust under this subsection unless on each day of 
     the plan year such trust benefits at least the lesser of--
       ``(i) 50 employees of the employer, or
       ``(ii) the greater of--

       ``(I) 40 percent of all employees of the employer, or
       ``(II) 2 employees (or if there is only 1 employee, such 
     employee).''.

       (b) Separate Line of Business Test.--Section 401(a)(26)(G) 
     (relating to separate line of business) is amended by 
     striking ``paragraph (7)'' and inserting ``paragraph (2)(A) 
     or (7)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 1996.

     SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR 
                   DEFERRED ARRANGEMENTS AND MATCHING 
                   CONTRIBUTIONS.

       (a) Alternative Methods of Satisfying Section 401(k) 
     Nondiscrimination Tests.--Section 401(k) (relating to cash or 
     deferred arrangements), as amended by section 1422, is 
     amended by adding at the end the following new paragraph:
       ``(12) Alternative methods of meeting nondiscrimination 
     requirements.--
       ``(A) In general.--A cash or deferred arrangement shall be 
     treated as meeting the requirements of paragraph (3)(A)(ii) 
     if such arrangement--
       ``(i) meets the contribution requirements of subparagraph 
     (B) or (C), and
       ``(ii) meets the notice requirements of subparagraph (D).
       ``(B) Matching contributions.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if, under the arrangement, the employer makes 
     matching contributions on behalf of each employee who is not 
     a highly compensated employee in an amount equal to--

       ``(I) 100 percent of the elective contributions of the 
     employee to the extent such elective contributions do not 
     exceed 3 percent of the employee's compensation, and
       ``(II) 50 percent of the elective contributions of the 
     employee to the extent that such elective contributions 
     exceed 3 percent but do not exceed 5 percent of the 
     employee's compensation.

       ``(ii) Rate for highly compensated employees.--The 
     requirements of this subparagraph are not met if, under the 
     arrangement, the rate of matching contribution with respect 
     to any elective contribution of a highly compensated employee 
     at any rate of elective contribution is greater than that 
     with respect to an employee who is not a highly compensated 
     employee.
       ``(iii) Alternative plan designs.--If the rate of any 
     matching contribution with respect to any rate of elective 
     contribution is not equal to the percentage required under 
     clause (i), an arrangement shall not be treated as failing to 
     meet the requirements of clause (i) if--

       ``(I) the rate of an employer's matching contribution does 
     not increase as an employee's rate of elective contributions 
     increase, and
       ``(II) the aggregate amount of matching contributions at 
     such rate of elective contribution is at least equal to the 
     aggregate amount of matching contributions which would be 
     made if matching contributions were made on the basis of the 
     percentages described in clause (i).

       ``(C) Nonelective contributions.--The requirements of this 
     subparagraph are met if, under the arrangement, the employer 
     is required, without regard to whether the employee makes an 
     elective contribution or employee contribution, to make a 
     contribution to a defined contribution plan on behalf of each 
     employee who is not a highly compensated employee and who is 
     eligible to participate in the arrangement in an amount equal 
     to at least 3 percent of the employee's compensation.
       ``(D) Notice requirement.--An arrangement meets the 
     requirements of this paragraph if, under the arrangement, 
     each employee eligible to participate is, within a reasonable 
     period before any year, given written notice of the 
     employee's rights and obligations under the arrangement 
     which--
       ``(i) is sufficiently accurate and comprehensive to 
     appraise the employee of such rights and obligations, and
       ``(ii) is written in a manner calculated to be understood 
     by the average employee eligible to participate.
       ``(E) Other requirements.--
       ``(i) Withdrawal and vesting restrictions.--An arrangement 
     shall not be treated as meeting the requirements of 
     subparagraph (B) or (C) of this paragraph unless the 
     requirements of subparagraphs (B) and (C) of paragraph (2) 
     are met with respect to all employer contributions (including 
     matching contributions) taken into account in determining 
     whether the requirements of subparagraphs (B) and (C) of this 
     paragraph are met.
       ``(ii) Social security and similar contributions not taken 
     into account.--An arrangement shall not be treated as meeting 
     the requirements of subparagraph (B) or (C) unless such 
     requirements are met without regard to subsection (l), and, 
     for purposes of subsection (l), employer contributions under 
     subparagraph (B) or (C) shall not be taken into account.
       ``(F) Other plans.--An arrangement shall be treated as 
     meeting the requirements under subparagraph (A)(i) if any 
     other plan maintained by the employer meets such requirements 
     with respect to employees eligible under the arrangement.''.
       (b) Alternative Methods of Satisfying Section 401(m) 
     Nondiscrimination Tests.--Section 401(m) (relating to 
     nondiscrimination test for matching contributions and 
     employee contributions), as amended by section 1422(b), is 
     amended by redesignating paragraph (11) as paragraph (12) and 
     by adding after paragraph (10) the following new paragraph:
       ``(11) Alternative method of satisfying tests.--
       ``(A) In general.--A defined contribution plan shall be 
     treated as meeting the requirements of paragraph (2) with 
     respect to matching contributions if the plan--
       ``(i) meets the contribution requirements of subparagraph 
     (B) or (C) of subsection (k)(12),
       ``(ii) meets the notice requirements of subsection 
     (k)(12)(D), and
       ``(iii) meets the requirements of subparagraph (B).
       ``(B) Limitation on matching contributions.--The 
     requirements of this subparagraph are met if--
       ``(i) matching contributions on behalf of any employee may 
     not be made with respect to an

[[Page H9582]]

     employee's contributions or elective deferrals in excess of 6 
     percent of the employee's compensation,
       ``(ii) the rate of an employer's matching contribution does 
     not increase as the rate of an employee's contributions or 
     elective deferrals increase, and
       ``(iii) the matching contribution with respect to any 
     highly compensated employee at any rate of an employee 
     contribution or rate of elective deferral is not greater than 
     that with respect to an employee who is not a highly 
     compensated employee.''.
       (c) Year for Computing Nonhighly Compensated Employee 
     Percentage.--
       (1) Cash or deferred arrangements.--Section 401(k)(3)(A) is 
     amended--
       (A) by striking ``such year'' in clause (ii) and inserting 
     ``the plan year'',
       (B) by striking ``for such plan year'' in clause (ii) and 
     inserting ``for the preceding plan year'', and
       (C) by adding at the end the following new sentence: ``An 
     arrangement may apply clause (ii) by using the plan year 
     rather than the preceding plan year if the employer so 
     elects, except that if such an election is made, it may not 
     be changed except as provided by the Secretary.''.
       (2) Matching and employee contributions.--Section 
     401(m)(2)(A) is amended--
       (A) by inserting ``for such plan year'' after ``highly 
     compensated employees'',
       (B) by inserting ``for the preceding plan year'' after 
     ``eligible employees'' each place it appears in clause (i) 
     and clause (ii), and
       (C) by adding at the end the following flush sentence:

     ``This subparagraph may be applied by using the plan year 
     rather than the preceding plan year if the employer so 
     elects, except that if such an election is made, it may not 
     be changed except as provided the Secretary.''.
       (d) Special Rule for Determining Average Deferral 
     Percentage for First Plan Year, Etc.--
       (1) Paragraph (3) of section 401(k) is amended by adding at 
     the end the following new subparagraph:
       ``(E) For purposes of this paragraph, in the case of the 
     first plan year of any plan (other than a successor plan), 
     the amount taken into account as the actual deferral 
     percentage of nonhighly compensated employees for the 
     preceding plan year shall be--
       ``(i) 3 percent, or
       ``(ii) if the employer makes an election under this 
     subclause, the actual deferral percentage of nonhighly 
     compensated employees determined for such first plan year.''.
       (2) Paragraph (3) of section 401(m) is amended by adding at 
     the end the following: ``Rules similar to the rules of 
     subsection (k)(3)(E) shall apply for purposes of this 
     subsection.''.
       (e) Distribution of Excess Contributions and Excess 
     Aggregate Contributions.--
       (1) Subparagraph (C) of section 401(k)(8) (relating to 
     arrangement not disqualified if excess contributions 
     distributed) is amended by striking ``on the basis of the 
     respective portions of the excess contributions attributable 
     to each of such employees'' and inserting ``on the basis of 
     the amount of contributions by, or on behalf of, each of such 
     employees''.
       (2) Subparagraph (C) of section 401(m)(6) (relating to 
     method of distributing excess aggregate contributions) is 
     amended by striking ``on the basis of the respective portions 
     of such amounts attributable to each of such employees'' and 
     inserting ``on the basis of the amount of contributions on 
     behalf of, or by, each such employee''.
       (f) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to years beginning after December 31, 1998.
       (2) Exceptions.--The amendments made by subsections (c), 
     (d), and (e) shall apply to years beginning after December 
     31, 1996.

     SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 
                   PURPOSES.

       (a) General Rule.--Section 415(c)(3) (defining 
     participant's compensation) is amended by adding at the end 
     the following new subparagraph:
       ``(D) Certain deferrals included.--The term `participant's 
     compensation' shall include--
       ``(i) any elective deferral (as defined in section 
     402(g)(3)), and
       ``(ii) any amount which is contributed or deferred by the 
     employer at the election of the employee and which is not 
     includible in the gross income of the employee by reason of 
     section 125 or 457.''.
       (b) Conforming Amendments.--
       (1) Section 414(q)(4), as redesignated by section 1431, is 
     amended to read as follows:
       ``(4) Compensation.--For purposes of this subsection, the 
     term `compensation' has the meaning given such term by 
     section 415(c)(3).''.
       (2) Section 414(s)(2) is amended by inserting ``not'' after 
     ``elect'' in the text and heading thereof.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 1997.

                  CHAPTER 4--MISCELLANEOUS PROVISIONS

     SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVIDUALS.

       (a) Aggregation Rules.--Section 401(d) (relating to 
     additional requirements for qualification of trusts and plans 
     benefiting owner-employees) is amended to read as follows:
       ``(d) Contribution Limit on Owner-Employees.--A trust 
     forming part of a pension or profit-sharing plan which 
     provides contributions or benefits for employees some or all 
     of whom are owner-employees shall constitute a qualified 
     trust under this section only if, in addition to meeting the 
     requirements of subsection (a), the plan provides that 
     contributions on behalf of any owner-employee may be made 
     only with respect to the earned income of such owner-employee 
     which is derived from the trade or business with respect to 
     which such plan is established.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 1996.

     SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR 
                   MULTIEMPLOYER PLANS.

       (a) Amendments to 1986 Code.--Paragraph (2) of section 
     411(a) (relating to minimum vesting standards) is amended--
       (1) by striking ``subparagraph (A), (B), or (C)'' and 
     inserting ``subparagraph (A) or (B)''; and
       (2) by striking subparagraph (C).
       (b) Amendments to ERISA.--Paragraph (2) of section 203(a) 
     of the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1053(a)) is amended--
       (1) by striking ``subparagraph (A), (B), or (C)'' and 
     inserting ``subparagraph (A) or (B)''; and
       (2) by striking subparagraph (C).
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning on or after the earlier 
     of--
       (1) the later of--
       (A) January 1, 1997, or
       (B) the date on which the last of the collective bargaining 
     agreements pursuant to which the plan is maintained 
     terminates (determined without regard to any extension 
     thereof after the date of the enactment of this Act), or
       (2) January 1, 1999.

     Such amendments shall not apply to any individual who does 
     not have more than 1 hour of service under the plan on or 
     after the 1st day of the 1st plan year to which such 
     amendments apply.

     SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS.

       (a) Distributions for Hardship or After a Certain Age.--
     Section 401(k)(7) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Special rule for certain distributions.--A rural 
     cooperative plan which includes a qualified cash or deferred 
     arrangement shall not be treated as violating the 
     requirements of section 401(a) or of paragraph (2) merely by 
     reason of a hardship distribution or a distribution to a 
     participant after attainment of age 59\1/2\. For purposes of 
     this section, the term `hardship distribution' means a 
     distribution described in paragraph (2)(B)(i)(IV) (without 
     regard to the limitation of its application to profit-sharing 
     or stock bonus plans).''.
       (b) Public Utility Districts.--Clause (i) of section 
     401(k)(7)(B) (defining rural cooperative) is amended to read 
     as follows:
       ``(i) any organization which--

       ``(I) is engaged primarily in providing electric service on 
     a mutual or cooperative basis, or
       ``(II) is engaged primarily in providing electric service 
     to the public in its area of service and which is exempt from 
     tax under this subtitle or which is a State or local 
     government (or an agency or instrumentality thereof), other 
     than a municipality (or an agency or instrumentality 
     thereof),''.

       (c) Effective Dates.--
       (1) Distributions.--The amendments made by subsection (a) 
     shall apply to distributions after the date of the enactment 
     of this Act.
       (2) Public utility districts.--The amendments made by 
     subsection (b) shall apply to plan years beginning after 
     December 31, 1996.

     SEC. 1444. TREATMENT OF GOVERNMENTAL PLANS UNDER SECTION 415.

       (a) Compensation Limit.--Subsection (b) of section 415 is 
     amended by adding immediately after paragraph (10) the 
     following new paragraph:
       ``(11) Special limitation rule for governmental plans.--In 
     the case of a governmental plan (as defined in section 
     414(d)), subparagraph (B) of paragraph (1) shall not 
     apply.''.
       (b) Treatment of Certain Excess Benefit Plans.--
       (1) In general.--Section 415 is amended by adding at the 
     end the following new subsection:
       ``(m) Treatment of Qualified Governmental Excess Benefit 
     Arrangements.--
       ``(1) Governmental plan not affected.--In determining 
     whether a governmental plan (as defined in section 414(d)) 
     meets the requirements of this section, benefits provided 
     under a qualified governmental excess benefit arrangement 
     shall not be taken into account. Income accruing to a 
     governmental plan (or to a trust that is maintained solely 
     for the purpose of providing benefits under a qualified 
     governmental excess benefit arrangement) in respect of a 
     qualified governmental excess benefit arrangement shall 
     constitute income derived from the exercise of an essential 
     governmental function upon which such governmental plan (or 
     trust) shall be exempt from tax under section 115.
       ``(2) Taxation of participant.--For purposes of this 
     chapter--
       ``(A) the taxable year or years for which amounts in 
     respect of a qualified governmental excess benefit 
     arrangement are includible in gross income by a participant, 
     and
       ``(B) the treatment of such amounts when so includible by 
     the participant,

     shall be determined as if such qualified governmental excess 
     benefit arrangement were treated as a plan for the deferral 
     of compensation which is maintained by a corporation not 
     exempt from tax under this chapter and which does not meet 
     the requirements for qualification under section 401.
       ``(3) Qualified governmental excess benefit arrangement.--
     For purposes of this subsection, the term `qualified 
     governmental excess benefit arrangement' means a portion of a 
     governmental plan if--
       ``(A) such portion is maintained solely for the purpose of 
     providing to participants in the plan

[[Page H9583]]

     that part of the participant's annual benefit otherwise 
     payable under the terms of the plan that exceeds the 
     limitations on benefits imposed by this section,
       ``(B) under such portion no election is provided at any 
     time to the participant (directly or indirectly) to defer 
     compensation, and
       ``(C) benefits described in subparagraph (A) are not paid 
     from a trust forming a part of such governmental plan unless 
     such trust is maintained solely for the purpose of providing 
     such benefits.''.
       (2) Coordination with section 457.--Subsection (e) of 
     section 457 is amended by adding at the end the following new 
     paragraph:
       ``(14) Treatment of qualified governmental excess benefit 
     arrangements.--Subsections (b)(2) and (c)(1) shall not apply 
     to any qualified governmental excess benefit arrangement (as 
     defined in section 415(m)(3)), and benefits provided under 
     such an arrangement shall not be taken into account in 
     determining whether any other plan is an eligible deferred 
     compensation plan.''.
       (3) Conforming amendment.--Paragraph (2) of section 457(f) 
     is amended by striking ``and'' at the end of subparagraph 
     (C), by striking the period at the end of subparagraph (D) 
     and inserting ``, and'', and by inserting immediately 
     thereafter the following new subparagraph:
       ``(E) a qualified governmental excess benefit arrangement 
     described in section 415(m).''.
       (c) Exemption for Survivor and Disability Benefits.--
     Paragraph (2) of section 415(b) is amended by adding at the 
     end the following new subparagraph:
       ``(I) Exemption for survivor and disability benefits 
     provided under governmental plans.--Subparagraph (C) of this 
     paragraph and paragraph (5) shall not apply to--
       ``(i) income received from a governmental plan (as defined 
     in section 414(d)) as a pension, annuity, or similar 
     allowance as the result of the recipient becoming disabled by 
     reason of personal injuries or sickness, or
       ``(ii) amounts received from a governmental plan by the 
     beneficiaries, survivors, or the estate of an employee as the 
     result of the death of the employee.''.
       (d) Revocation of Grandfather Election.--
       (1) In general.--Subparagraph (C) of section 415(b)(10) is 
     amended by adding at the end the following new clause:
       ``(ii) Revocation of election.--An election under clause 
     (i) may be revoked not later than the last day of the third 
     plan year beginning after the date of the enactment of this 
     clause. The revocation shall apply to all plan years to which 
     the election applied and to all subsequent plan years. Any 
     amount paid by a plan in a taxable year ending after the 
     revocation shall be includible in income in such taxable year 
     under the rules of this chapter in effect for such taxable 
     year, except that, for purposes of applying the limitations 
     imposed by this section, any portion of such amount which is 
     attributable to any taxable year during which the election 
     was in effect shall be treated as received in such taxable 
     year.''.
       (2) Conforming amendment.--Subparagraph (C) of section 
     415(b)(10) is amended by striking ``This'' and inserting:
       ``(i) In general.--This''.
       (e) Effective Date.--
       (1) In general.--The amendments made by subsections (a), 
     (b), and (c) shall apply to years beginning after December 
     31, 1994. The amendments made by subsection (d) shall apply 
     with respect to revocations adopted after the date of the 
     enactment of this Act.
       (2) Treatment for years beginning before january 1, 1995.--
     Nothing in the amendments made by this section shall be 
     construed to imply that a governmental plan (as defined in 
     section 414(d) of the Internal Revenue Code of 1986) fails to 
     satisfy the requirements of section 415 of such Code for any 
     taxable year beginning before January 1, 1995.

     SEC. 1445. UNIFORM RETIREMENT AGE.

       (a) Discrimination Testing.--Paragraph (5) of section 
     401(a) (relating to special rules relating to 
     nondiscrimination requirements) is amended by adding at the 
     end the following new subparagraph:
       ``(F) Social security retirement age.--For purposes of 
     testing for discrimination under paragraph (4)--
       ``(i) the social security retirement age (as defined in 
     section 415(b)(8)) shall be treated as a uniform retirement 
     age, and
       ``(ii) subsidized early retirement benefits and joint and 
     survivor annuities shall not be treated as being unavailable 
     to employees on the same terms merely because such benefits 
     or annuities are based in whole or in part on an employee's 
     social security retirement age (as so defined).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to years beginning after December 31, 1996.

     SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES.

       (a) All Disabled Participants Receiving Contributions.--
     Section 415(c)(3)(C) is amended by adding at the end the 
     following: ``If a defined contribution plan provides for the 
     continuation of contributions on behalf of all participants 
     described in clause (i) for a fixed or determinable period, 
     this subparagraph shall be applied without regard to clauses 
     (ii) and (iii).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to years beginning after December 31, 1996.

     SEC. 1447. TREATMENT OF DEFERRED COMPENSATION PLANS OF STATE 
                   AND LOCAL GOVERNMENTS AND TAX-EXEMPT 
                   ORGANIZATIONS.

       (a) Special Rules for Plan Distributions.--Paragraph (9) of 
     section 457(e) (relating to other definitions and special 
     rules) is amended to read as follows:
       ``(9) Benefits not treated as made available by reason of 
     certain elections, etc.--
       ``(A) Total amount payable is $3,500 or less.--The total 
     amount payable to a participant under the plan shall not be 
     treated as made available merely because the participant may 
     elect to receive such amount (or the plan may distribute such 
     amount without the participant's consent) if--
       ``(i) such amount does not exceed $3,500, and
       ``(ii) such amount may be distributed only if--

       ``(I) no amount has been deferred under the plan with 
     respect to such participant during the 2-year period ending 
     on the date of the distribution, and
       ``(II) there has been no prior distribution under the plan 
     to such participant to which this subparagraph applied.

     A plan shall not be treated as failing to meet the 
     distribution requirements of subsection (d) by reason of a 
     distribution to which this subparagraph applies.
       ``(B) Election to defer commencement of distributions.--The 
     total amount payable to a participant under the plan shall 
     not be treated as made available merely because the 
     participant may elect to defer commencement of distributions 
     under the plan if--
       ``(i) such election is made after amounts may be available 
     under the plan in accordance with subsection (d)(1)(A) and 
     before commencement of such distributions, and
       ``(ii) the participant may make only 1 such election.''.
       (b) Cost-of-Living Adjustment of Maximum Deferral Amount.--
     Subsection (e) of section 457, as amended by section 
     1444(b)(2) (relating to governmental plans), is amended by 
     adding at the end the following new paragraph:
       ``(15) Cost-of-living adjustment of maximum deferral 
     amount.--The Secretary shall adjust the $7,500 amount 
     specified in subsections (b)(2) and (c)(1) at the same time 
     and in the same manner as under section 415(d), except that 
     the base period shall be the calendar quarter ending 
     September 30, 1994, and any increase under this paragraph 
     which is not a multiple of $500 shall be rounded to the next 
     lowest multiple of $500.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION PLANS 
                   OF STATE AND LOCAL GOVERNMENTS.

       (a) In General.--Section 457 is amended by adding at the 
     end the following new subsection:
       ``(g) Governmental Plans Must Maintain Set-Asides for 
     Exclusive Benefit of Participants.--
       ``(1) In general.--A plan maintained by an eligible 
     employer described in subsection (e)(1)(A) shall not be 
     treated as an eligible deferred compensation plan unless all 
     assets and income of the plan described in subsection (b)(6) 
     are held in trust for the exclusive benefit of participants 
     and their beneficiaries.
       ``(2) Taxability of trusts and participants.--For purposes 
     of this title--
       ``(A) a trust described in paragraph (1) shall be treated 
     as an organization exempt from taxation under section 501(a), 
     and
       ``(B) notwithstanding any other provision of this title, 
     amounts in the trust shall be includible in the gross income 
     of participants and beneficiaries only to the extent, and at 
     the time, provided in this section.
       ``(3) Custodial accounts and contracts.--For purposes of 
     this subsection, custodial accounts and contracts described 
     in section 401(f) shall be treated as trusts under rules 
     similar to the rules under section 401(f).''.
       (b) Conforming Amendment.--Paragraph (6) of section 457(b) 
     is amended by inserting ``except as provided in subsection 
     (g),'' before ``which provides that''.
       (c) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to assets and 
     income described in section 457(b)(6) of the Internal Revenue 
     Code of 1986 held by a plan on and after the date of the 
     enactment of this Act.
       (2) Transition rule.--In the case of a plan in existence on 
     the date of the enactment of this Act, a trust need not be 
     established by reason of the amendments made by this section 
     before January 1, 1999.

     SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS 
                   UNDER SECTION 415 LIMITATIONS.

       (a) In General.--Subparagraph (A) of section 767(d)(3) of 
     the Uruguay Round Agreements Act is amended to read as 
     follows:
       ``(A) Exception.--A plan that was adopted and in effect 
     before December 8, 1994, shall not be required to apply the 
     amendments made by subsection (b) with respect to benefits 
     accrued before the earlier of--
       ``(i) the later of the date a plan amendment applying the 
     amendments made by subsection (b) is adopted or made 
     effective, or
       ``(ii) the first day of the first limitation year beginning 
     after December 31, 1999.

     Determinations under section 415(b)(2)(E) of the Internal 
     Revenue Code of 1986 before such earlier date shall be made 
     with respect to such benefits on the basis of such section as 
     in effect on December 7, 1994 (except that the modification 
     made by section 1449(b) of the Small Business Job Protection 
     Act of 1996 shall be taken into account), and the provisions 
     of the plan as in effect on December 7, 1994, but only if 
     such provisions of the plan meet the requirements of such 
     section (as so in effect).''.
       (b) Modification of Certain Assumptions for Adjusting 
     Benefits of Defined Benefit Plans for Early Retirees.--
     Subparagraph (E) of section 415(b)(2) (relating to limitation 
     on certain assumptions) is amended--
       (1) by striking ``Except as provided in clause (ii), for 
     purposes of adjusting any benefit or limitation under 
     subparagraph (B) or (C),'' in

[[Page H9584]]

     clause (i) and inserting ``For purposes of adjusting any 
     limitation under subparagraph (C) and, except as provided in 
     clause (ii), for purposes of adjusting any benefit under 
     subparagraph (B),'', and
       (2) by striking ``For purposes of adjusting the benefit or 
     limitation of any form of benefit subject to section 
     417(e)(3),'' in clause (ii) and inserting ``For purposes of 
     adjusting any benefit under subparagraph (B) for any form of 
     benefit subject to section 417(e)(3),''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the provisions of section 
     767 of the Uruguay Round Agreements Act.
       (d) Transitional Rule.--In the case of a plan that was 
     adopted and in effect before December 8, 1994, if--
       (1) a plan amendment was adopted or made effective on or 
     before the date of the enactment of this Act applying the 
     amendments made by section 767 of the Uruguay Round 
     Agreements Act, and
       (2) within 1 year after the date of the enactment of this 
     Act, a plan amendment is adopted which repeals the amendment 
     referred to in paragraph (1),
     the amendment referred to in paragraph (1) shall not be taken 
     into account in applying section 767(d)(3)(A) of the Uruguay 
     Round Agreements Act, as amended by subsection (a).

     SEC. 1450. MODIFICATIONS OF SECTION 403(b).

       (a) Multiple Salary Reduction Agreements Permitted.--
       (1) General rule.--For purposes of section 403(b) of the 
     Internal Revenue Code of 1986, the frequency that an employee 
     is permitted to enter into a salary reduction agreement, the 
     salary to which such an agreement may apply, and the ability 
     to revoke such an agreement shall be determined under the 
     rules applicable to cash or deferred elections under section 
     401(k) of such Code.
       (2) Constructive receipt.--Section 402(e)(3) is amended by 
     inserting ``or which is part of a salary reduction agreement 
     under section 403(b)'' after ``section 401(k)(2))''.
       (3) Effective date.--This subsection shall apply to taxable 
     years beginning after December 31, 1995.
       (b) Treatment of Indian Tribal Governments.--
       (1) In general.--In the case of any contract purchased in a 
     plan year beginning before January 1, 1995, section 403(b) of 
     the Internal Revenue Code of 1986 shall be applied as if any 
     reference to an employer described in section 501(c)(3) of 
     the Internal Revenue Code of 1986 which is exempt from tax 
     under section 501 of such Code included a reference to an 
     employer which is an Indian tribal government (as defined by 
     section 7701(a)(40) of such Code), a subdivision of an Indian 
     tribal government (determined in accordance with section 
     7871(d) of such Code), an agency or instrumentality of an 
     Indian tribal government or subdivision thereof, or a 
     corporation chartered under Federal, State, or tribal law 
     which is owned in whole or in part by any of the foregoing.
       (2) Rollovers.--Solely for purposes of applying section 
     403(b)(8) of such Code to a contract to which paragraph (1) 
     applies, a qualified cash or deferred arrangement under 
     section 401(k) of such Code shall be treated as if it were a 
     plan or contract described in clause (ii) of section 
     403(b)(8)(A) of such Code.
       (c) Elective Deferrals.--
       (1) In general.--Subparagraph (E) of section 403(b)(1) is 
     amended to read as follows:
       ``(E) in the case of a contract purchased under a salary 
     reduction agreement, the contract meets the requirements of 
     section 401(a)(30),''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to years beginning after December 31, 1995, 
     except a contract shall not be required to meet any change in 
     any requirement by reason of such amendment before the 90th 
     day after the date of the enactment of this Act.

     SEC. 1451. SPECIAL RULES RELATING TO JOINT AND SURVIVOR 
                   ANNUITY EXPLANATIONS.

       (a) Amendment to Internal Revenue Code.--Section 417(a) is 
     amended by adding at the end the following new paragraph:
       ``(7) Special rules relating to time for written 
     explanation.--Notwithstanding any other provision of this 
     subsection--
       ``(A) Explanation may be provided after annuity starting 
     date.--
       ``(i) In general.--A plan may provide the written 
     explanation described in paragraph (3)(A) after the annuity 
     starting date. In any case to which this subparagraph 
     applies, the applicable election period under paragraph (6) 
     shall not end before the 30th day after the date on which 
     such explanation is provided.
       ``(ii) Regulatory authority.--The Secretary may by 
     regulations limit the application of clause (i), except that 
     such regulations may not limit the period of time by which 
     the annuity starting date precedes the provision of the 
     written explanation other than by providing that the annuity 
     starting date may not be earlier than termination of 
     employment.
       ``(B) Waiver of 30-day period.--A plan may permit a 
     participant to elect (with any applicable spousal consent) to 
     waive any requirement that the written explanation be 
     provided at least 30 days before the annuity starting date 
     (or to waive the 30-day requirement under subparagraph (A)) 
     if the distribution commences more than 7 days after such 
     explanation is provided.''
       (b) Amendment to ERISA.--Section 205(c) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)) is 
     amended by adding at the end the following new paragraph:
       ``(8) Notwithstanding any other provision of this 
     subsection--
       ``(A)(i) A plan may provide the written explanation 
     described in paragraph (3)(A) after the annuity starting 
     date. In any case to which this subparagraph applies, the 
     applicable election period under paragraph (7) shall not end 
     before the 30th day after the date on which such explanation 
     is provided.
       ``(ii) The Secretary may by regulations limit the 
     application of clause (i), except that such regulations may 
     not limit the period of time by which the annuity starting 
     date precedes the provision of the written explanation other 
     than by providing that the annuity starting date may not be 
     earlier than termination of employment.
       ``(B) A plan may permit a participant to elect (with any 
     applicable spousal consent) to waive any requirement that the 
     written explanation be provided at least 30 days before the 
     annuity starting date (or to waive the 30-day requirement 
     under subparagraph (A)) if the distribution commences more 
     than 7 days after such explanation is provided.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 1996.

     SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT 
                   PLAN AND DEFINED CONTRIBUTION PLAN FOR SAME 
                   EMPLOYEE; EXCESS DISTRIBUTIONS.

       (a) In General.--Section 415(e) is repealed.
       (b) Excess Distributions.--Section 4980A is amended by 
     adding at the end the following new subsection:
       ``(g) Limitation on Application.--This section shall not 
     apply to distributions during years beginning after December 
     31, 1996, and before January 1, 2000, and such distributions 
     shall be treated as made first from amounts not described in 
     subsection (f).''.
       (c) Conforming Amendments.--
       (1) Paragraph (1) of section 415(a) is amended--
       (A) by adding ``or'' at the end of subparagraph (A),
       (B) by striking ``, or'' at the end of subparagraph (B) and 
     inserting a period, and
       (C) by striking subparagraph (C).
       (2) Subparagraph (B) of section 415(b)(5) is amended by 
     striking ``and subsection (e)''.
       (3) Paragraph (1) of section 415(f) is amended by striking 
     ``subsections (b), (c), and (e)'' and inserting ``subsections 
     (b) and (c)''.
       (4) Subsection (g) of section 415 is amended by striking 
     ``subsections (e) and (f)'' in the last sentence and 
     inserting ``subsection (f)''.
       (5) Clause (i) of section 415(k)(2)(A) is amended to read 
     as follows:
       ``(i) any contribution made directly by an employee under 
     such an arrangement shall not be treated as an annual 
     addition for purposes of subsection (c), and''.
       (6) Clause (ii) of section 415(k)(2)(A) is amended by 
     striking ``subsections (c) and (e)'' and inserting 
     ``subsection (c)''.
       (7) Section 416 is amended by striking subsection (h).
       (d) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to limitation 
     years beginning after December 31, 1999.
       (2) Excess distributions.--The amendment made by subsection 
     (b) shall apply to years beginning after December 31, 1996.

     SEC. 1453. TAX ON PROHIBITED TRANSACTIONS.

       (a) In General.--Section 4975(a) is amended by striking ``5 
     percent'' and inserting ``10 percent''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to prohibited transactions occurring after the 
     date of the enactment of this Act.

     SEC. 1454. TREATMENT OF LEASED EMPLOYEES.

       (a) General Rule.--Subparagraph (C) of section 414(n)(2) 
     (defining leased employee) is amended to read as follows:
       ``(C) such services are performed under primary direction 
     or control by the recipient.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to years beginning after December 31, 1996, but 
     shall not apply to any relationship determined under an 
     Internal Revenue Service ruling issued before the date of the 
     enactment of this Act pursuant to section 414(n)(2)(C) of the 
     Internal Revenue Code of 1986 (as in effect on the day before 
     such date) not to involve a leased employee.

     SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN 
                   PENSION REPORTING REQUIREMENTS.

       (a) Penalties.--
       (1) Statements.--Paragraph (1) of section 6724(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 new subparagraph:
       ``(C) any statement of the amount of payments to another 
     person required to be made to the Secretary under--
       ``(i) section 408(i) (relating to reports with respect to 
     individual retirement accounts or annuities), or
       ``(ii) section 6047(d) (relating to reports by employers, 
     plan administrators, etc.).''.
       (2) Reports.--Paragraph (2) of section 6724(d) is amended 
     by striking ``or'' at the end of subparagraph (U), by 
     striking the period at the end of subparagraph (V) and 
     inserting a comma, and by inserting after subparagraph (V) 
     the following new subparagraphs:
       ``(W) section 408(i) (relating to reports with respect to 
     individual retirement plans) to any person other than the 
     Secretary with respect to the amount of payments made to such 
     person, or
       ``(X) section 6047(d) (relating to reports by plan 
     administrators) to any person other than the Secretary with 
     respect to the amount of payments made to such person.''.
       (b) Modification of Reportable Designated Distributions.--

[[Page H9585]]

       (1) Section 408.--Subsection (i) of section 408 (relating 
     to individual retirement account reports) is amended by 
     inserting ``aggregating $10 or more in any calendar year'' 
     after ``distributions''.
       (2) Section 6047.--Paragraph (1) of section 6047(d) 
     (relating to reports by employers, plan administrators, etc.) 
     is amended by adding at the end the following new sentence: 
     ``No return or report may be required under the preceding 
     sentence with respect to distributions to any person during 
     any year unless such distributions aggregate $10 or more.''.
       (c) Qualifying Rollover Distributions.--Section 6652(i) is 
     amended--
       (1) by striking ``the $10'' and inserting ``$100'', and
       (2) by striking ``$5,000'' and inserting ``$50,000''.
       (d) Conforming Amendments.--
       (1) Paragraph (1) of section 6047(f) is amended to read as 
     follows:

  ``(1) For provisions relating to penalties for failures to file 
returns and reports required under this section, see sections 6652(e), 
6721, and 6722.''.

       (2) Subsection (e) of section 6652 is amended by adding at 
     the end the following new sentence: ``This subsection shall 
     not apply to any return or statement which is an information 
     return described in section 6724(d)(1)(C)(ii) or a payee 
     statement described in section 6724(d)(2)(X).''.
       (3) Subsection (a) of section 6693 is amended by adding at 
     the end the following new sentence: ``This subsection shall 
     not apply to any report which is an information return 
     described in section 6724(d)(1)(C)(i) or a payee statement 
     described in section 6724(d)(2)(W).''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to returns, reports, and other statements the due 
     date for which (determined without regard to extensions) is 
     after December 31, 1996.

     SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO 
                   TAX ON NET EARNINGS FROM SELF-EMPLOYMENT.

       (a) In General.--Section 1402(a)(8) (defining net earning 
     from self-employment) is amended by inserting ``, but shall 
     not include in such net earnings from self-employment the 
     rental value of any parsonage or any parsonage allowance 
     (whether or not excludable under section 107) provided after 
     the individual retires, or any other retirement benefit 
     received by such individual from a church plan (as defined in 
     section 414(e)) after the individual retires'' before the 
     semicolon at the end.
       (b) Effective Date.--The amendments made by this section 
     shall apply to years beginning before, on, or after December 
     31, 1994.

     SEC. 1457. SAMPLE LANGUAGE FOR SPOUSAL CONSENT AND QUALIFIED 
                   DOMESTIC RELATIONS FORMS.

       (a) Development of Sample Language.--Not later than January 
     1, 1997, the Secretary of the Treasury shall develop--
       (1) sample language for inclusion in a form for the spousal 
     consent required under section 417(a)(2) of the Internal 
     Revenue Code of 1986 and section 205(c)(2) of the Employee 
     Retirement Income Security Act of 1974 which--
       (A) is written in a manner calculated to be understood by 
     the average person, and
       (B) discloses in plain form--
       (i) whether the waiver to which the spouse consents is 
     irrevocable, and
       (ii) whether such waiver may be revoked by a qualified 
     domestic relations order, and
       (2) sample language for inclusion in a form for a qualified 
     domestic relations order described in section 414(p)(1)(A) of 
     such Code and section 206(d)(3)(B)(i) of such Act which--
       (A) meets the requirements contained in such sections, and
       (B) the provisions of which focus attention on the need to 
     consider the treatment of any lump sum payment, qualified 
     joint and survivor annuity, or qualified preretirement 
     survivor annuity.
       (b) Publicity.--The Secretary of the Treasury shall include 
     publicity for the sample language developed under subsection 
     (a) in the pension outreach efforts undertaken by the 
     Secretary.

     SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS TO 
                   VOLUNTEERS PERFORMING FIRE FIGHTING OR 
                   PREVENTION SERVICES, EMERGENCY MEDICAL 
                   SERVICES, OR AMBULANCE SERVICES.

       (a) In General.--Paragraph (11) of section 457(e) (relating 
     to deferred compensation plans of State and local governments 
     and tax-exempt organizations) is amended to read as follows:
       ``(11) Certain plans excluded.--
       ``(A) In general.--The following plans shall be treated as 
     not providing for the deferral of compensation:
       ``(i) Any bona fide vacation leave, sick leave, 
     compensatory time, severance pay, disability pay, or death 
     benefit plan.
       ``(ii) Any plan paying solely length of service awards to 
     bona fide volunteers (or their beneficiaries) on account of 
     qualified services performed by such volunteers.
       ``(B) Special rules applicable to length of service award 
     plans.--
       ``(i) Bona fide volunteer.--An individual shall be treated 
     as a bona fide volunteer for purposes of subparagraph (A)(ii) 
     if the only compensation received by such individual for 
     performing qualified services is in the form of--

       ``(I) reimbursement for (or a reasonable allowance for) 
     reasonable expenses incurred in the performance of such 
     services, or
       ``(II) reasonable benefits (including length of service 
     awards), and nominal fees for such services, customarily paid 
     by eligible employers in connection with the performance of 
     such services by volunteers.

       ``(ii) Limitation on accruals.--A plan shall not be treated 
     as described in subparagraph (A)(ii) if the aggregate amount 
     of length of service awards accruing with respect to any year 
     of service for any bona fide volunteer exceeds $3,000.
       ``(C) Qualified services.--For purposes of this paragraph, 
     the term `qualified services' means fire fighting and 
     prevention services, emergency medical services, and 
     ambulance services.''.
       (b) Exemption From Social Security Taxes.--
       (1) Subsection (a)(5) of section 3121, as amended by 
     section 1421, is amended by striking ``(or)'' at the end of 
     subparagraph (G), by inserting ``or'' at the end of 
     subparagraph (H), and by adding at the end the following new 
     subparagraph:
       ``(I) under a plan described in section 457(e)(11)(A)(ii) 
     and maintained by an eligible employer (as defined in section 
     457(e)(1)).''.
       (2) Section 209(a)(4) of the Social Security Act is amended 
     by inserting ``; or (K) under a plan described in section 
     457(e)(11)(A)(ii) of the Internal Revenue Code of 1986 and 
     maintained by an eligible employer (as defined in section 
     457(e)(1) of such Code)'' before the semicolon at the end 
     thereof.
       (c) Effective Date.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to accruals of length of service awards after 
     December 31, 1996.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to remuneration paid after December 31, 1996.

     SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN 
                   PLANS THAT PROVIDE FOR EARLY PARTICIPATION.

       (a) Cash or Deferred Arrangements.--Paragraph (3) of 
     section 401(k) (relating to application of participation and 
     discrimination standards), as amended by section 1433(d)(1) 
     of this Act, is amended by adding at the end the following 
     new subparagraph:
       ``(F) Special rule for early participation.--If an employer 
     elects to apply section 410(b)(4)(B) in determining whether a 
     cash or deferred arrangement meets the requirements of 
     subparagraph (A)(i), the employer may, in determining whether 
     the arrangement meets the requirements of subparagraph 
     (A)(ii), exclude from consideration all eligible employees 
     (other than highly compensated employees) who have not met 
     the minimum age and service requirements of section 
     410(a)(1)(A).''.
       (b) Matching Contributions.--Paragraph (5) of section 
     401(m) (relating to employees taken into consideration) is 
     amended by adding at the end the following new subparagraph:
       ``(C) Special rule for early participation.--If an employer 
     elects to apply section 410(b)(4)(B) in determining whether a 
     plan meets the requirements of section 410(b), the employer 
     may, in determining whether the plan meets the requirements 
     of paragraph (2), exclude from consideration all eligible 
     employees (other than highly compensated employees) who have 
     not met the minimum age and service requirements of section 
     410(a)(1)(A).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 1998.

     SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE 
                   COMPANY GENERAL ACCOUNTS.

       (a) In General.--Section 401 of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1101) is amended by 
     adding at the end the following new subsection:
       ``(c)(1)(A) Not later than June 30, 1997, the Secretary 
     shall issue proposed regulations to provide guidance for the 
     purpose of determining, in cases where an insurer issues 1 or 
     more policies to or for the benefit of an employee benefit 
     plan (and such policies are supported by assets of such 
     insurer's general account), which assets held by the insurer 
     (other than plan assets held in its separate accounts) 
     constitute assets of the plan for purposes of this part and 
     section 4975 of the Internal Revenue Code of 1986 and to 
     provide guidance with respect to the application of this 
     title to the general account assets of insurers.
       ``(B) The proposed regulations under subparagraph (A) shall 
     be subject to public notice and comment until September 30, 
     1997.
       ``(C) The Secretary shall issue final regulations providing 
     the guidance described in subparagraph (A) not later than 
     December 31, 1997.
       ``(D) Such regulations shall only apply with respect to 
     policies which are issued by an insurer on or before December 
     31, 1998, to or for the benefit of an employee benefit plan 
     which is supported by assets of such insurer's general 
     account. With respect to policies issued on or before 
     December 31, 1998, such regulations shall take effect at the 
     end of the 18-month period following the date on which such 
     regulations become final.
       ``(2) The Secretary shall ensure that the regulations 
     issued under paragraph (1)--
       ``(A) are administratively feasible, and
       ``(B) protect the interests and rights of the plan and of 
     its participants and beneficiaries (including meeting the 
     requirements of paragraph (3)).
       ``(3) The regulations prescribed by the Secretary pursuant 
     to paragraph (1) shall require, in connection with any policy 
     issued by an insurer to or for the benefit of an employee 
     benefit plan to the extent that the policy is not a 
     guaranteed benefit policy (as defined in subsection 
     (b)(2)(B))--
       ``(A) that a plan fiduciary totally independent of the 
     insurer authorize the purchase of such policy (unless such 
     purchase is a transaction exempt under section 408(b)(5)),
       ``(B) that the insurer describe (in such form and manner as 
     shall be prescribed in such regulations), in annual reports 
     and in policies issued to the policyholder after the date on 
     which such regulations are issued in final form pursuant to 
     paragraph (1)(C) --

[[Page H9586]]

       ``(i) a description of the method by which any income and 
     expenses of the insurer's general account are allocated to 
     the policy during the term of the policy and upon the 
     termination of the policy, and
       ``(ii) for each report, the actual return to the plan under 
     the policy and such other financial information as the 
     Secretary may deem appropriate for the period covered by each 
     such annual report,
       ``(C) that the insurer disclose to the plan fiduciary the 
     extent to which alternative arrangements supported by assets 
     of separate accounts of the insurer (which generally hold 
     plan assets) are available, whether there is a right under 
     the policy to transfer funds to a separate account and the 
     terms governing any such right, and the extent to which 
     support by assets of the insurer's general account and 
     support by assets of separate accounts of the insurer might 
     pose differing risks to the plan, and
       ``(D) that the insurer manage those assets of the insurer 
     which are assets of such insurer's general account 
     (irrespective of whether any such assets are plan assets) 
     with the care, skill, prudence, and diligence under the 
     circumstances then prevailing that a prudent man acting in a 
     like capacity and familiar with such matters would use in the 
     conduct of an enterprise of a like character and with like 
     aims, taking into account all obligations supported by such 
     enterprise.
       ``(4) Compliance by the insurer with all requirements of 
     the regulations issued by the Secretary pursuant to paragraph 
     (1) shall be deemed compliance by such insurer with sections 
     404, 406, and 407 with respect to those assets of the 
     insurer's general account which support a policy described in 
     paragraph (3).
       ``(5)(A) Subject to subparagraph (B), any regulations 
     issued under paragraph (1) shall not take effect before the 
     date on which such regulations become final.
       ``(B) No person shall be subject to liability under this 
     part or section 4975 of the Internal Revenue Code of 1986 for 
     conduct which occurred before the date which is 18 months 
     following the date described in subparagraph (A) on the basis 
     of a claim that the assets of an insurer (other than plan 
     assets held in a separate account) constitute assets of the 
     plan, except--
       ``(i) as otherwise provided by the Secretary in regulations 
     intended to prevent avoidance of the regulations issued under 
     paragraph (1), or
       ``(ii) as provided in an action brought by the Secretary 
     pursuant to paragraph (2) or (5) of section 502(a) for a 
     breach of fiduciary responsibilities which would also 
     constitute a violation of Federal or State criminal law.

     The Secretary shall bring a cause of action described in 
     clause (ii) if a participant, beneficiary, or fiduciary 
     demonstrates to the satisfaction of the Secretary that a 
     breach described in clause (ii) has occurred.
       ``(6) Nothing in this subsection shall preclude the 
     application of any Federal criminal law.
       ``(7) For purposes of this subsection, the term `policy' 
     includes a contract.''.
       (b) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendment made by this section shall take effect on January 
     1, 1975.
       (2) Civil actions.--The amendment made by this section 
     shall not apply to any civil action commenced before November 
     7, 1995.

     SEC. 1461. SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED 
                   MINISTERS.

       (a) In General.--Section 414(e) (defining church plan) is 
     amended by adding at the end the following new paragraph:
       ``(5) Special rules for chaplains and self-employed 
     ministers.--
       ``(A) Certain ministers may participate.--For purposes of 
     this part--
       ``(i) In general.--An employee of a church or a convention 
     or association of churches shall include a duly ordained, 
     commissioned, or licensed minister of a church who, in 
     connection with the exercise of his or her ministry--

       ``(I) is a self-employed individual (within the meaning of 
     section 401(c)(1)(B)), or
       ``(II) is employed by an organization other than an 
     organization described in section 501(c)(3).

       ``(ii) Treatment as employer and employee.--

       ``(I) Self-employed.--A minister described in clause (i)(I) 
     shall be treated as his or her own employer which is an 
     organization described in section 501(c)(3) and which is 
     exempt from tax under section 501(a).
       ``(II) Others.--A minister described in clause (i)(II) 
     shall be treated as employed by an organization described in 
     section 501(c)(3) and exempt from tax under section 501(a).

       ``(B) Special rules for applying section 403(b) to self-
     employed ministers.--In the case of a minister described in 
     subparagraph (A)(i)(I)--
       ``(i) the minister's includible compensation under section 
     403(b)(3) shall be determined by reference to the minister's 
     earned income (within the meaning of section 401(c)(2)) from 
     such ministry rather than the amount of compensation which is 
     received from an employer, and
       ``(ii) the years (and portions of years) in which such 
     minister was a self-employed individual (within the meaning 
     of section 401(c)(1)(B)) with respect to such ministry shall 
     be included for purposes of section 403(b)(4).
       ``(C) Effect on non-denominational plans.--If a duly 
     ordained, commissioned, or licensed minister of a church in 
     the exercise of his or her ministry participates in a church 
     plan (within the meaning of this section) and in the exercise 
     of such ministry is employed by an employer not eligible to 
     participate in such church plan, then such employer may 
     exclude such minister from being treated as an employee of 
     such employer for purposes of applying sections 401(a)(3), 
     401(a)(4), and 401(a)(5), as in effect on September 1, 1974, 
     and sections 401(a)(4), 401(a)(5), 401(a)(26), 401(k)(3), 
     401(m), 403(b)(1)(D) (including section 403(b)(12)), and 410 
     to any stock bonus, pension, profit-sharing, or annuity plan 
     (including an annuity described in section 403(b) or a 
     retirement income account described in section 403(b)(9)). 
     The Secretary shall prescribe such regulations as may be 
     necessary or appropriate to carry out the purpose of, and 
     prevent the abuse of, this subparagraph.
       ``(D) Compensation taken into account only once.--If any 
     compensation is taken into account in determining the amount 
     of any contributions made to, or benefits to be provided 
     under, any church plan, such compensation shall not also be 
     taken into account in determining the amount of any 
     contributions made to, or benefits to be provided under, any 
     other stock bonus, pension, profit-sharing, or annuity plan 
     which is not a church plan.''
       (b) Contributions by Certain Ministers to Retirement Income 
     Accounts.--Section 404(a) (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 paragraph:
       ``(10) Contributions by certain ministers to retirement 
     income accounts.--In the case of contributions made by a 
     minister described in section 414(e)(5) to a retirement 
     income account described in section 403(b)(9) and not by a 
     person other than such minister, such contributions--
       ``(A) shall be treated as made to a trust which is exempt 
     from tax under section 501(a) and which is part of a plan 
     which is described in section 401(a), and
       ``(B) shall be deductible under this subsection to the 
     extent such contributions do not exceed the limit on elective 
     deferrals under section 402(g), the exclusion allowance under 
     section 403(b)(2), or the limit on annual additions under 
     section 415.

     For purposes of this paragraph, all plans in which the 
     minister is a participant shall be treated as one plan.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 1996.

     SEC. 1462. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE FOR PRE-
                   ERISA RULES FOR CHURCH PLANS.

       (a) In General.--Section 414(q) (defining highly 
     compensated employee), as amended by section 1431(c)(1)(A) of 
     this Act, is amended by adding at the end the following new 
     paragraph:
       ``(7) Certain employees not considered highly compensated 
     and excluded employees under pre-erisa rules for church 
     plans.--In the case of a church plan (as defined in 
     subsection (e)), no employee shall be considered an officer, 
     a person whose principal duties consist of supervising the 
     work of other employees, or a highly compensated employee for 
     any year unless such employee is a highly compensated 
     employee under paragraph (1) for such year.''.
       (b) Safeharbor Authority.--The Secretary of the Treasury 
     may design nondiscrimination and coverage safe harbors for 
     church plans.
       (c) Effective Date.--The amendments made by subsection (a) 
     shall apply to years beginning after December 31, 1996.

     SEC. 1463. RULE RELATING TO INVESTMENT IN CONTRACT NOT TO 
                   APPLY TO FOREIGN MISSIONARIES.

       (a) In General.--The last sentence of section 72(f) is 
     amended by inserting ``, or to the extent such credits are 
     attributable to services performed as a foreign missionary 
     (within the meaning of section 403(b)(2)(D)(iii))'' before 
     the end period.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 1464. WAIVER OF EXCISE TAX ON FAILURE TO PAY LIQUIDITY 
                   SHORTFALL.

       (a) In General.--Section 4971(f) (relating to failure to 
     pay liquidity shortfall) is amended by adding at the end the 
     following new paragraph:
       ``(4) Waiver by secretary.--If the taxpayer establishes to 
     the satisfaction of the Secretary that--
       ``(A) the liquidity shortfall described in paragraph (1) 
     was due to reasonable cause and not willful neglect, and
       ``(B) reasonable steps have been taken to remedy such 
     liquidity shortfall,

     the Secretary may waive all or part of the tax imposed by 
     this subsection.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the amendment made by 
     clause (ii) of section 751(a)(9)(B) of the Retirement 
     Protection Act of 1994 (108 Stat. 5020).

     SEC. 1465. DATE FOR ADOPTION OF PLAN AMENDMENTS.

       If any amendment made by this subtitle requires an 
     amendment to any plan or annuity contract, such amendment 
     shall not be required to be made before the first day of the 
     first plan year beginning on or after January 1, 1998, if--
       (1) during the period after such amendment takes effect and 
     before such first plan year, the plan or contract is operated 
     in accordance with the requirements of such amendment, and
       (2) such amendment applies retroactively to such period.

     In the case of a governmental plan (as defined in section 
     414(d) of the Internal Revenue Code of 1986), this section 
     shall be applied by substituting ``2000'' for ``1998''.
                   Subtitle E--Foreign Simplification

     SEC. 1501. REPEAL OF INCLUSION OF CERTAIN EARNINGS INVESTED 
                   IN EXCESS PASSIVE ASSETS.

       (a) In General.--
       (1) Repeal of inclusion.--Paragraph (1) of section 951(a) 
     (relating to amounts included in gross income of United 
     States shareholders) is

[[Page H9587]]

     amended by striking subparagraph (C), by striking ``; and'' 
     at the end of subparagraph (B) and inserting a period, and by 
     adding ``and'' at the end of subparagraph (A).
       (2) Repeal of inclusion amount.--Section 956A (relating to 
     earnings invested in excess passive assets) is repealed.
       (b) Conforming Amendments.--
       (1) Subparagraph (G) of section 904(d)(3), as amended by 
     section 1703(i)(1), is amended by striking ``subparagraph (B) 
     or (C) of section 951(a)(1)'' and inserting ``section 
     951(a)(1)(B)''.
       (1) Paragraph (1) of section 956(b) is amended to read as 
     follows:
       ``(1) Applicable earnings.--For purposes of this section, 
     the term `applicable earnings' means, with respect to any 
     controlled foreign corporation, the sum of--
       ``(A) the amount (not including a deficit) referred to in 
     section 316(a)(1), and
       ``(B) the amount referred to in section 316(a)(2),

     but reduced by distributions made during the taxable year and 
     by earnings and profits described in section 959(c)(1).''.
       (2) Paragraph (3) of section 956(b) is amended to read as 
     follows:
       ``(3) Special rule where corporation ceases to be 
     controlled foreign corporation.--If any foreign corporation 
     ceases to be a controlled foreign corporation during any 
     taxable year--
       ``(A) the determination of any United States shareholder's 
     pro rata share shall be made on the basis of stock owned 
     (within the meaning of section 958(a)) by such shareholder on 
     the last day during the taxable year on which the foreign 
     corporation is a controlled foreign corporation,
       ``(B) the average referred to in subsection (a)(1)(A) for 
     such taxable year shall be determined by only taking into 
     account quarters ending on or before such last day, and
       ``(C) in determining applicable earnings, the amount taken 
     into account by reason of being described in paragraph (2) of 
     section 316(a) shall be the portion of the amount so 
     described which is allocable (on a pro rata basis) to the 
     part of such year during which the corporation is a 
     controlled foreign corporation.''..
       (3) Subsection (a) of section 959 (relating to exclusion 
     from gross income of previously taxed earnings and profits) 
     is amended by adding ``or'' at the end of paragraph (1), by 
     striking ``or'' at the end of paragraph (2), and by striking 
     paragraph (3).
       (4) Subsection (a) of section 959 is amended by striking 
     ``paragraphs (2) and (3)'' in the last sentence and inserting 
     ``paragraph (2)''.
       (5) Subsection (c) of section 959 is amended by adding at 
     the end the following flush sentence:

     ``References in this subsection to section 951(a)(1)(C) and 
     subsection (a)(3) shall be treated as references to such 
     provisions as in effect on the day before the date of the 
     enactment of the Small Business Job Protection Act of 
     1996.''.
       (6) Paragraph (1) of section 959(f) is amended to read as 
     follows:
       ``(1) In general.--For purposes of this section, amounts 
     that would be included under subparagraph (B) of section 
     951(a)(1) (determined without regard to this section) shall 
     be treated as attributable first to earnings described in 
     subsection (c)(2), and then to earnings described in 
     subsection (c)(3).''.
       (7) Paragraph (2) of section 959(f) is amended by striking 
     ``subparagraphs (B) and (C) of section 951(a)(1)'' and 
     inserting ``section 951(a)(1)(B)''.
       (8) Subsection (b) of section 989 is amended by striking 
     ``subparagraph (B) or (C) of section 951(a)(1)'' and 
     inserting ``section 951(a)(1)(B)''.
       (9) Paragraph (9) of section 1297(b) is amended by striking 
     ``subparagraph (B) or (C) of section 951(a)(1)'' and 
     inserting ``section 951(a)(1)(B)''.
       (10) Subsections (d)(3)(B) and (e)(2)(B)(ii) of section 
     1297 are each amended by striking ``or section 956A''.
       (11) Subparagraph (G) of section 904(d)(3) is amended by 
     striking ``subparagraph (B) or (C) of section 951(a)(1)'' and 
     inserting ``section 951(a)(1)(B)''.
       (c) Clerical Amendment.--The table of sections for subpart 
     F of part III of subchapter N of chapter 1 is amended by 
     striking the item relating to section 956A.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 1996, and to taxable years of 
     United States shareholders within which or with which such 
     taxable years of foreign corporations end.
                      Subtitle F--Revenue Offsets

                       PART I--GENERAL PROVISIONS

     SEC. 1601. TERMINATION OF PUERTO RICO AND POSSESSION TAX 
                   CREDIT.

       (a) In General.--Section 936 is amended by adding at the 
     end the following new subsection:
       ``(j) Termination.--
       ``(1) In general.--Except as otherwise provided in this 
     subsection, this section shall not apply to any taxable year 
     beginning after December 31, 1995.
       ``(2) Transition rules for active business income credit.--
     Except as provided in paragraph (3)--
       ``(A) Economic activity credit.--In the case of an existing 
     credit claimant--
       ``(i) with respect to a possession other than Puerto Rico, 
     and
       ``(ii) to which subsection (a)(4)(B) does not apply,

     the credit determined under subsection (a)(1)(A) shall be 
     allowed for taxable years beginning after December 31, 1995, 
     and before January 1, 2002.
       ``(B) Special rule for reduced credit.--
       ``(i) In general.--In the case of an existing credit 
     claimant to which subsection (a)(4)(B) applies, the credit 
     determined under subsection (a)(1)(A) shall be allowed for 
     taxable years beginning after December 31, 1995, and before 
     January 1, 1998.
       ``(ii) Election irrevocable after 1997.--An election under 
     subsection (a)(4)(B)(iii) which is in effect for the 
     taxpayer's last taxable year beginning before 1997 may not be 
     revoked unless it is revoked for the taxpayer's first taxable 
     year beginning in 1997 and all subsequent taxable years.
       ``(C) Economic activity credit for puerto rico.--

  ``For economic activity credit for Puerto Rico, see section 30A.

       ``(3) Additional restricted credit.--
       ``(A) In general.--In the case of an existing credit 
     claimant--
       ``(i) the credit under subsection (a)(1)(A) shall be 
     allowed for the period beginning with the first taxable year 
     after the last taxable year to which subparagraph (A) or (B) 
     of paragraph (2), whichever is appropriate, applied and 
     ending with the last taxable year beginning before January 1, 
     2006, except that
       ``(ii) the aggregate amount of taxable income taken into 
     account under subsection (a)(1)(A) for any such taxable year 
     shall not exceed the adjusted base period income of such 
     claimant.
       ``(B) Coordination with subsection (a)(4).--The amount of 
     income described in subsection (a)(1)(A) which is taken into 
     account in applying subsection (a)(4) shall be such income as 
     reduced under this paragraph.
       ``(4) Adjusted base period income.--For purposes of 
     paragraph (3)--
       ``(A) In general.--The term `adjusted base period income' 
     means the average of the inflation-adjusted possession 
     incomes of the corporation for each base period year.
       ``(B) Inflation-adjusted possession income.--For purposes 
     of subparagraph (A), the inflation-adjusted possession income 
     of any corporation for any base period year shall be an 
     amount equal to the sum of--
       ``(i) the possession income of such corporation for such 
     base period year, plus
       ``(ii) such possession income multiplied by the inflation 
     adjustment percentage for such base period year.
       ``(C) Inflation adjustment percentage.--For purposes of 
     subparagraph (B), the inflation adjustment percentage for any 
     base period year means the percentage (if any) by which--
       ``(i) the CPI for 1995, exceeds
       ``(ii) the CPI for the calendar year in which the base 
     period year for which the determination is being made ends.

     For purposes of the preceding sentence, the CPI for any 
     calendar year is the CPI (as defined in section 1(f)(5)) for 
     such year under section 1(f)(4).
       ``(D) Increase in inflation adjustment percentage for 
     growth during base years.--The inflation adjustment 
     percentage (determined under subparagraph (C) without regard 
     to this subparagraph) for each of the 5 taxable years 
     referred to in paragraph (5)(A) shall be increased by--
       ``(i) 5 percentage points in the case of a taxable year 
     ending during the 1-year period ending on October 13, 1995;
       ``(ii) 10.25 percentage points in the case of a taxable 
     year ending during the 1-year period ending on October 13, 
     1994;
       ``(iii) 15.76 percentage points in the case of a taxable 
     year ending during the 1-year period ending on October 13, 
     1993;
       ``(iv) 21.55 percentage points in the case of a taxable 
     year ending during the 1-year period ending on October 13, 
     1992; and
       ``(v) 27.63 percentage points in the case of a taxable year 
     ending during the 1-year period ending on October 13, 1991.
       ``(5) Base period year.--For purposes of this subsection--
       ``(A) In general.--The term `base period year' means each 
     of 3 taxable years which are among the 5 most recent taxable 
     years of the corporation ending before October 14, 1995, 
     determined by disregarding--
       ``(i) one taxable year for which the corporation had the 
     largest inflation-adjusted possession income, and
       ``(ii) one taxable year for which the corporation had the 
     smallest inflation-adjusted possession income.
       ``(B) Corporations not having significant possession income 
     throughout 5-year period.--
       ``(i) In general.--If a corporation does not have 
     significant possession income for each of the most recent 5 
     taxable years ending before October 14, 1995, then, in lieu 
     of applying subparagraph (A), the term `base period year' 
     means only those taxable years (of such 5 taxable years) for 
     which the corporation has significant possession income; 
     except that, if such corporation has significant possession 
     income for 4 of such 5 taxable years, the rule of 
     subparagraph (A)(ii) shall apply.
       ``(ii) Special rule.--If there is no year (of such 5 
     taxable years) for which a corporation has significant 
     possession income--

       ``(I) the term `base period year' means the first taxable 
     year ending on or after October 14, 1995, but
       ``(II) the amount of possession income for such year which 
     is taken into account under paragraph (4) shall be the amount 
     which would be determined if such year were a short taxable 
     year ending on September 30, 1995.

       ``(iii) Significant possession income.--For purposes of 
     this subparagraph, the term `significant possession income' 
     means possession income which exceeds 2 percent of the 
     possession income of the taxpayer for the taxable year (of 
     the period of 6 taxable years ending with the first taxable 
     year ending on or after October 14, 1995) having the greatest 
     possession income.
       ``(C) Election to use one base period year.--

[[Page H9588]]

       ``(i) In general.--At the election of the taxpayer, the 
     term `base period year' means--

       ``(I) only the last taxable year of the corporation ending 
     in calendar year 1992, or
       ``(II) a deemed taxable year which includes the first ten 
     months of calendar year 1995.

       ``(ii) Base period income for 1995.--In determining the 
     adjusted base period income of the corporation for the deemed 
     taxable year under clause (i)(II), the possession income 
     shall be annualized and shall be determined without regard to 
     any extraordinary item.
       ``(iii) Election.--An election under this subparagraph by 
     any possession corporation may be made only for the 
     corporation's first taxable year beginning after December 31, 
     1995, for which it is a possession corporation. The rules of 
     subclauses (II) and (III) of subsection (a)(4)(B)(iii) shall 
     apply to the election under this subparagraph.
       ``(D) Acquisitions and dispositions.--Rules similar to the 
     rules of subparagraphs (A) and (B) of section 41(f)(3) shall 
     apply for purposes of this subsection.
       ``(6) Possession income.--For purposes of this subsection, 
     the term `possession income' means, with respect to any 
     possession, the income referred to in subsection (a)(1)(A) 
     determined with respect to that possession. In no event shall 
     possession income be treated as being less than zero.
       ``(7) Short years.--If the current year or a base period 
     year is a short taxable year, the application of this 
     subsection shall be made with such annualizations as the 
     Secretary shall prescribe.
       ``(8) Special rules for certain possessions.--
       ``(A) In general.--In the case of an existing credit 
     claimant with respect to an applicable possession, this 
     section (other than the preceding paragraphs of this 
     subsection) shall apply to such claimant with respect to such 
     applicable possession for taxable years beginning after 
     December 31, 1995, and before January 1, 2006.
       ``(B) Applicable possession.--For purposes of this 
     paragraph, the term `applicable possession' means Guam, 
     American Samoa, and the Commonwealth of the Northern Mariana 
     Islands.
       ``(9) Existing credit claimant.--For purposes of this 
     subsection--
       ``(A) In general.--The term `existing credit claimant' 
     means a corporation--
       ``(i)(I) which was actively conducting a trade or business 
     in a possession on October 13, 1995, and
       ``(II) with respect to which an election under this section 
     is in effect for the corporation's taxable year which 
     includes October 13, 1995, or
       ``(ii) which acquired all of the assets of a trade or 
     business of a corporation which--

       ``(I) satisfied the requirements of subclause (I) of clause 
     (i) with respect to such trade or business, and
       ``(II) satisfied the requirements of subclause (II) of 
     clause (i).

       ``(B) New lines of business prohibited.--If, after October 
     13, 1995, a corporation which would (but for this 
     subparagraph) be an existing credit claimant adds a 
     substantial new line of business (other than in an 
     acquisition described in subparagraph (A)(ii)), such 
     corporation shall cease to be treated as an existing credit 
     claimant as of the close of the taxable year ending before 
     the date of such addition.
       ``(C) Binding contract exception.--If, on October 13, 1995, 
     and at all times thereafter, there is in effect with respect 
     to a corporation a binding contract for the acquisition of 
     assets to be used in, or for the sale of assets to be 
     produced from, a trade or business, the corporation shall be 
     treated for purposes of this paragraph as actively conducting 
     such trade or business on October 13, 1995. The preceding 
     sentence shall not apply if such trade or business is not 
     actively conducted before January 1, 1996.
       ``(10) Separate application to each possession.--For 
     purposes of determining--
       ``(A) whether a taxpayer is an existing credit claimant, 
     and
       ``(B) the amount of the credit allowed under this section,
     this subsection (and so much of this section as relates to 
     this subsection) shall be applied separately with respect to 
     each possession.''.
       (b) Economic Activity Credit for Puerto Rico.--
       (1) In general.--Subpart B of part IV of subchapter A of 
     chapter 1 is amended by adding at the end the following new 
     section:

     ``SEC. 30A. PUERTO RICAN ECONOMIC ACTIVITY CREDIT.

       ``(a) Allowance of Credit.--
       ``(1) In general.--Except as otherwise provided in this 
     section, if the conditions of both paragraph (1) and 
     paragraph (2) of subsection (b) are satisfied with respect to 
     a qualified domestic corporation, there shall be allowed as a 
     credit against the tax imposed by this chapter an amount 
     equal to the portion of the tax which is attributable to the 
     taxable income, from sources without the United States, 
     from--
       ``(A) the active conduct of a trade or business within 
     Puerto Rico, or
       ``(B) the sale or exchange of substantially all of the 
     assets used by the taxpayer in the active conduct of such 
     trade or business.
     In the case of any taxable year beginning after December 31, 
     2001, the aggregate amount of taxable income taken into 
     account under the preceding sentence (and in applying 
     subsection (d)) shall not exceed the adjusted base period 
     income of such corporation, as determined in the same manner 
     as under section 936(j).
       ``(2) Qualified domestic corporation.--For purposes of 
     paragraph (1), the term `qualified domestic corporation' 
     means a domestic corporation--
       ``(A) which is an existing credit claimant with respect to 
     Puerto Rico, and
       ``(B) with respect to which section 936(a)(4)(B) does not 
     apply for the taxable year.
       ``(3) Separate application.--For purposes of determining--
       ``(A) whether a taxpayer is an existing credit claimant 
     with respect to Puerto Rico, and
       ``(B) the amount of the credit allowed under this section,
     this section (and so much of section 936 as relates to this 
     section) shall be applied separately with respect to Puerto 
     Rico.
       ``(b) Conditions Which Must Be Satisfied.--The conditions 
     referred to in subsection (a) are--
       ``(1) 3-year period.--If 80 percent or more of the gross 
     income of the qualified domestic corporation for the 3-year 
     period immediately preceding the close of the taxable year 
     (or for such part of such period immediately preceding the 
     close of such taxable year as may be applicable) was derived 
     from sources within a possession (determined without regard 
     to section 904(f)).
       ``(2) Trade or business.--If 75 percent or more of the 
     gross income of the qualified domestic corporation for such 
     period or such part thereof was derived from the active 
     conduct of a trade or business within a possession.
       ``(c) Credit Not Allowed Against Certain Taxes.--The credit 
     provided by subsection (a) shall not be allowed against the 
     tax imposed by--
       ``(1) section 59A (relating to environmental tax),
       ``(2) section 531 (relating to the tax on accumulated 
     earnings),
       ``(3) section 541 (relating to personal holding company 
     tax), or
       ``(4) section 1351 (relating to recoveries of foreign 
     expropriation losses).
       ``(d) Limitations on Credit for Active Business Income.--
     The amount of the credit determined under subsection (a) for 
     any taxable year shall not exceed the sum of the following 
     amounts:
       ``(1) 60 percent of the sum of--
       ``(A) the aggregate amount of the qualified domestic 
     corporation's qualified possession wages for such taxable 
     year, plus
       ``(B) the allocable employee fringe benefit expenses of the 
     qualified domestic corporation for such taxable year.
       ``(2) The sum of--
       ``(A) 15 percent of the depreciation allowances for the 
     taxable year with respect to short-life qualified tangible 
     property,
       ``(B) 40 percent of the depreciation allowances for the 
     taxable year with respect to medium-life qualified tangible 
     property, and
       ``(C) 65 percent of the depreciation allowances for the 
     taxable year with respect to long-life qualified tangible 
     property.
       ``(3) If the qualified domestic corporation does not have 
     an election to use the method described in section 
     936(h)(5)(C)(ii) (relating to profit split) in effect for the 
     taxable year, the amount of the qualified possession income 
     taxes for the taxable year allocable to nonsheltered income.
       ``(e) Administrative Provisions.--For purposes of this 
     title--
       ``(1) the provisions of section 936 (including any 
     applicable election thereunder) shall apply in the same 
     manner as if the credit under this section were a credit 
     under section 936(a)(1)(A) for a domestic corporation to 
     which section 936(a)(4)(A) applies,
       ``(2) the credit under this section shall be treated in the 
     same manner as the credit under section 936, and
       ``(3) a corporation to which this section applies shall be 
     treated in the same manner as if it were a corporation 
     electing the application of section 936.
       ``(f) Definitions.--For purposes of this section, any term 
     used in this section which is also used in section 936 shall 
     have the same meaning given such term by section 936.
       ``(g) Application of Section.--This section shall apply to 
     taxable years beginning after December 31, 1995, and before 
     January 1, 2006.''.
       (2) Conforming amendments.--
       (A) Paragraph (1) of section 55(c) is amended by striking 
     ``and the section 936 credit allowable under section 27(b)'' 
     and inserting ``, the section 936 credit allowable under 
     section 27(b), and the Puerto Rican economic activity credit 
     under section 30A''.
       (B) Subclause (I) of section 56(g)(4)(C)(ii) is amended--
       (i) by inserting ``30A,'' before ``936'', and
       (ii) by striking ``and (i)'' and inserting ``, (i), and 
     (j)''.
       (C) Clause (iii) of section 56(g)(4)(C) is amended by 
     adding at the end the following new subclause:

       ``(VI) Application to section 30a corporations.--References 
     in this clause to section 936 shall be treated as including 
     references to section 30A.''.

       (D) Subsection (b) of section 59 is amended by striking 
     ``section 936,'' and all that follows and inserting ``section 
     30A or 936, alternative minimum taxable income shall not 
     include any income with respect to which a credit is 
     determined under section 30A or 936.''.
       (E) The table of sections for subpart B of part IV of 
     subchapter A of chapter 1 is amended by adding at the end the 
     following new item:

``Sec. 30A. Puerto Rican economic activity credit.''.

       (F)(i) The heading for subpart B of part IV of subchapter A 
     of chapter 1 is amended to read as follows:

                     ``Subpart B--Other Credits''.

       (ii) The table of subparts for part IV of subchapter A of 
     chapter 1 is amended by striking the item relating to subpart 
     B and inserting the following new item:

``Subpart B. Other credits.''.

       (c) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 1995.

[[Page H9589]]

       (2) Special rule for qualified possession source investment 
     income.--The amendments made by this section shall not apply 
     to qualified possession source investment income received or 
     accrued before July 1, 1996, without regard to the taxable 
     year in which received or accrued.
       (3) Special transition rule for payment of estimated tax 
     installment.--In determining the amount of any installment 
     due under section 6655 of the Internal Revenue Code of 1986 
     after the date of the enactment of this Act and before 
     October 1, 1996, only \1/2\ of any increase in tax (for the 
     taxable year for which such installment is made) by reason of 
     the amendments made by subsections (a) and (b) shall be taken 
     into account. Any reduction in such installment by reason of 
     the preceding sentence shall be recaptured by increasing the 
     next required installment for such year by the amount of such 
     reduction.

     SEC. 1602. REPEAL OF EXCLUSION FOR INTEREST ON LOANS USED TO 
                   ACQUIRE EMPLOYER SECURITIES.

       (a) In General.--Section 133 (relating to interest on 
     certain loans used to acquire employer securities) is hereby 
     repealed.
       (b) Conforming Amendments.--
       (1) Subparagraph (B) of section 291(e)(1) is amended by 
     striking clause (iv) and by redesignating clause (v) as 
     clause (iv).
       (2) Section 812 is amended by striking subsection (g).
       (3) Paragraph (5) of section 852(b) is amended by striking 
     subparagraph (C).
       (4) Paragraph (2) of section 4978(b) is amended by striking 
     subparagraph (A) and all that follows and inserting the 
     following:
       ``(A) first from qualified securities to which section 1042 
     applied acquired during the 3-year period ending on the date 
     of the disposition, beginning with the securities first so 
     acquired, and
       ``(B) then from any other employer securities.

     If subsection (d) applies to a disposition, the disposition 
     shall be treated as made from employer securities in the 
     opposite order of the preceding sentence.''.
       (5)(A) Section 4978B (relating to tax on disposition of 
     employer securities to which section 133 applied) is hereby 
     repealed.
       (B) The table of sections for chapter 43 is amended by 
     striking the item relating to section 4978B.
       (6) Subsection (e) of section 6047 is amended by striking 
     paragraphs (1), (2), and (3) and inserting the following new 
     paragraphs:
       ``(1) any employer maintaining, or the plan administrator 
     (within the meaning of section 414(g)) of, an employee stock 
     ownership plan which holds stock with respect to which 
     section 404(k) applies to dividends paid on such stock, or
       ``(2) both such employer or plan administrator,''.
       (7) Subsection (f) of section 7872 is amended by striking 
     paragraph (12).
       (8) The table of sections for part III of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     133.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to loans made after the date of the enactment of this 
     Act.
       (2) Refinancings.--The amendments made by this section 
     shall not apply to loans made after the date of the enactment 
     of this Act to refinance securities acquisition loans 
     (determined without regard to section 133(b)(1)(B) of the 
     Internal Revenue Code of 1986, as in effect on the day before 
     the date of the enactment of this Act) made on or before such 
     date or to refinance loans described in this paragraph if--
       (A) the refinancing loans meet the requirements of section 
     133 of such Code (as so in effect),
       (B) immediately after the refinancing the principal amount 
     of the loan resulting from the refinancing does not exceed 
     the principal amount of the refinanced loan (immediately 
     before the refinancing), and
       (C) the term of such refinancing loan does not extend 
     beyond the last day of the term of the original securities 
     acquisition loan.

     For purposes of this paragraph, the term ``securities 
     acquisition loan'' includes a loan from a corporation to an 
     employee stock ownership plan described in section 133(b)(3) 
     of such Code (as so in effect).
       (3) Exception.--Any loan made pursuant to a binding written 
     contract in effect before June 10, 1996, and at all times 
     thereafter before such loan is made, shall be treated for 
     purposes of paragraphs (1) and (2) as a loan made on or 
     before the date of the enactment of this Act.

     SEC. 1603. CERTAIN AMOUNTS DERIVED FROM FOREIGN CORPORATIONS 
                   TREATED AS UNRELATED BUSINESS TAXABLE INCOME.

       (a) General Rule.--Subsection (b) of section 512 (relating 
     to modifications) is amended by adding at the end the 
     following new paragraph:
       ``(17) Treatment of certain amounts derived from foreign 
     corporations.--
       ``(A) In general.--Notwithstanding paragraph (1), any 
     amount included in gross income under section 951(a)(1)(A) 
     shall be included as an item of gross income derived from an 
     unrelated trade or business to the extent the amount so 
     included is attributable to insurance income (as defined in 
     section 953) which, if derived directly by the organization, 
     would be treated as gross income from an unrelated trade or 
     business. There shall be allowed all deductions directly 
     connected with amounts included in gross income under the 
     preceding sentence.
       ``(B) Exception.--
       ``(i) In general.--Subparagraph (A) shall not apply to 
     income attributable to a policy of insurance or reinsurance 
     with respect to which the person (directly or indirectly) 
     insured is--

       ``(I) such organization,

       ``(II) an affiliate of such organization which is exempt 
     from tax under section 501(a), or
       ``(III) a director or officer of, or an individual who 
     (directly or indirectly) performs services for, such 
     organization or affiliate but only if the insurance covers 
     primarily risks associated with the performance of services 
     in connection with such organization or affiliate.

       ``(ii) Affiliate.--For purposes of this subparagraph--

       ``(I) In general.--The determination as to whether an 
     entity is an affiliate of an organization shall be made under 
     rules similar to the rules of section 168(h)(4)(B).
       ``(II) Special Rule.--Two or more organizations (and any 
     affiliates of such organizations) shall be treated as 
     affiliates if such organizations are colleges or universities 
     described in section 170(b)(1)(A)(ii) or organizations 
     described in section 170(b)(1)(A)(iii) and participate in an 
     insurance arrangement that provides for any profits from such 
     arrangement to be returned to the policyholders in their 
     capacity as such.

       ``(C) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this paragraph, including regulations for the 
     application of this paragraph in the case of income paid 
     through 1 or more entities or between 2 or more chains of 
     entities.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts included in gross income in any 
     taxable year beginning after December 31, 1995.

     SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD.

       (a) General Rule.--Section 167 (relating to depreciation) 
     is amended by redesignating subsection (g) as subsection (h) 
     and by inserting after subsection (f) the following new 
     subsection:
       ``(g) Depreciation Under Income Forecast Method.--
       ``(1) In general.--If the depreciation deduction allowable 
     under this section to any taxpayer with respect to any 
     property is determined under the income forecast method or 
     any similar method--
       ``(A) the income from the property to be taken into account 
     in determining the depreciation deduction under such method 
     shall be equal to the amount of income earned in connection 
     with the property before the close of the 10th taxable year 
     following the taxable year in which the property was placed 
     in service,
       ``(B) the adjusted basis of the property shall only include 
     amounts with respect to which the requirements of section 
     461(h) are satisfied,
       ``(C) the depreciation deduction under such method for the 
     10th taxable year beginning after the taxable year in which 
     the property was placed in service shall be equal to the 
     adjusted basis of such property as of the beginning of such 
     10th taxable year, and
       ``(D) such taxpayer shall pay (or be entitled to receive) 
     interest computed under the look-back method of paragraph (2) 
     for any recomputation year.
       ``(2) Look-back method.--The interest computed under the 
     look-back method of this paragraph for any recomputation year 
     shall be determined by--
       ``(A) first determining the depreciation deductions under 
     this section with respect to such property which would have 
     been allowable for prior taxable years if the determination 
     of the amounts so allowable had been made on the basis of the 
     sum of the following (instead of the estimated income from 
     such property)--
       ``(i) the actual income earned in connection with such 
     property for periods before the close of the recomputation 
     year, and
       ``(ii) an estimate of the future income to be earned in 
     connection with such property for periods after the 
     recomputation year and before the close of the 10th taxable 
     year following the taxable year in which the property was 
     placed in service,
       ``(B) second, determining (solely for purposes of computing 
     such interest) the overpayment or underpayment of tax for 
     each such prior taxable year which would result solely from 
     the application of subparagraph (A), and
       ``(C) then using the adjusted overpayment rate (as defined 
     in section 460(b)(7)), compounded daily, on the overpayment 
     or underpayment determined under subparagraph (B).

     For purposes of the preceding sentence, any cost incurred 
     after the property is placed in service (which is not treated 
     as a separate property under paragraph (5)) shall be taken 
     into account by discounting (using the Federal mid-term rate 
     determined under section 1274(d) as of the time such cost is 
     incurred) such cost to its value as of the date the property 
     is placed in service. The taxpayer may elect with respect to 
     any property to have the preceding sentence not apply to such 
     property.
       ``(3) Exception from look-back method.--Paragraph (1)(D) 
     shall not apply with respect to any property which had a cost 
     basis of $100,000 or less.
       ``(4) Recomputation year.--For purposes of this subsection, 
     except as provided in regulations, the term `recomputation 
     year' means, with respect to any property, the 3d and the 
     10th taxable years beginning after the taxable year in which 
     the property was placed in service, unless the actual income 
     earned in connection with the property for the period before 
     the close of such 3d or 10th taxable year is within 10 
     percent of the income earned in connection with the property 
     for such period which was taken into account under paragraph 
     (1)(A).
       ``(5) Special rules.--
       ``(A) Certain costs treated as separate property.--For 
     purposes of this subsection, the following costs shall be 
     treated as separate properties:

[[Page H9590]]

       ``(i) Any costs incurred with respect to any property after 
     the 10th taxable year beginning after the taxable year in 
     which the property was placed in service.
       ``(ii) Any costs incurred after the property is placed in 
     service and before the close of such 10th taxable year if 
     such costs are significant and give rise to a significant 
     increase in the income from the property which was not 
     included in the estimated income from the property.
       ``(B) Syndication income from television series.--In the 
     case of property which is 1 or more episodes in a television 
     series, income from syndicating such series shall not be 
     required to be taken into account under this subsection 
     before the earlier of--
       ``(i) the 4th taxable year beginning after the date the 
     first episode in such series is placed in service, or
       ``(ii) the earliest taxable year in which the taxpayer has 
     an arrangement relating to the future syndication of such 
     series.
       ``(C) Special rules for financial exploitation of 
     characters, etc.--For purposes of this subsection, in the 
     case of television and motion picture films, the income from 
     the property shall include income from the exploitation of 
     characters, designs, scripts, scores, and other incidental 
     income associated with such films, but only to the extent 
     that such income is earned in connection with the ultimate 
     use of such items by, or the ultimate sale of merchandise 
     to, persons who are not related persons (within the 
     meaning of section 267(b)) to the taxpayer.
       ``(D) Collection of interest.--For purposes of subtitle F 
     (other than sections 6654 and 6655), any interest required to 
     be paid by the taxpayer under paragraph (1) for any 
     recomputation year shall be treated as an increase in the tax 
     imposed by this chapter for such year.
       ``(E) Determinations.--For purposes of paragraph (2), 
     determinations of the amount of income earned in connection 
     with any property shall be made in the same manner as for 
     purposes of applying the income forecast method; except that 
     any income from the disposition of such property shall be 
     taken into account.
       ``(F) Treatment of pass-thru entities.--Rules similar to 
     the rules of section 460(b)(4) shall apply for purposes of 
     this subsection.''
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to property placed in service after September 13, 1995.
       (2) Binding contracts.--The amendment made by subsection 
     (a) shall not apply to any property produced or acquired by 
     the taxpayer pursuant to a written contract which was binding 
     on September 13, 1995, and at all times thereafter before 
     such production or acquisition.
       (3) Underpayments of income tax.--No addition to tax shall 
     be made under section 6662 of such Code as a result of the 
     application of subsection (d) of that section (relating to 
     substantial understatements of income tax) with respect to 
     any underpayment of income tax for any taxable year ending 
     before such date of enactment, to the extent such 
     underpayment was created or increased by the amendments made 
     by subsection (a).

     SEC. 1605. REPEAL OF EXCLUSION FOR PUNITIVE DAMAGES AND FOR 
                   DAMAGES NOT ATTRIBUTABLE TO PHYSICAL INJURIES 
                   OR SICKNESS.

       (a) In General.--Paragraph (2) of section 104(a) (relating 
     to compensation for injuries or sickness) is amended to read 
     as follows:
       ``(2) the amount of any damages (other than punitive 
     damages) received (whether by suit or agreement and whether 
     as lump sums or as periodic payments) on account of personal 
     physical injuries or physical sickness;''.
       (b) Emotional Distress as Such Treated as Not Physical 
     Injury or Physical Sickness.--Section 104(a) is amended by 
     striking the last sentence and inserting the following new 
     sentence: ``For purposes of paragraph (2), emotional distress 
     shall not be treated as a physical injury or physical 
     sickness. The preceding sentence shall not apply to an amount 
     of damages not in excess of the amount paid for medical care 
     (described in subparagraph (A) or (B) of section 213(d)(1)) 
     attributable to emotional distress.''.
       (c) Application of Prior Law for States in Which Only 
     Punitive Damages May Be Awarded in Wrongful Death Actions.--
     Section 104 is amended by redesignating subsection (c) as 
     subsection (d) and by inserting after subsection (b) the 
     following new subsection:
       ``(c) Application of Prior Law in Certain Cases.--The 
     phrase `(other than punitive damages)' shall not apply to 
     punitive damages awarded in a civil action--
       ``(1) which is a wrongful death action, and
       ``(2) with respect to which applicable State law (as in 
     effect on September 13, 1995 and without regard to any 
     modification after such date) provides, or has been construed 
     to provide by a court of competent jurisdiction pursuant to a 
     decision issued on or before September 13, 1995, that only 
     punitive damages may be awarded in such an action.

     This subsection shall cease to apply to any civil action 
     filed on or after the first date on which the applicable 
     State law ceases to provide (or is no longer construed to 
     provide) the treatment described in paragraph (2).''.
       (d) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to amounts 
     received after the date of the enactment of this Act, in 
     taxable years ending after such date.
       (2) Exception.--The amendments made by this section shall 
     not apply to any amount received under a written binding 
     agreement, court decree, or mediation award in effect on (or 
     issued on or before) September 13, 1995.

     SEC. 1606. REPEAL OF DIESEL FUEL TAX REBATE TO PURCHASERS OF 
                   DIESEL-POWERED AUTOMOBILES AND LIGHT TRUCKS.

       (a) In General.--Section 6427 (relating to fuels not used 
     for taxable purposes) is amended by striking subsection (g).
       (b) Conforming Amendments.--
       (1) Paragraph (3) of section 34(a) is amended to read as 
     follows:
       ``(3) under section 6427 with respect to fuels used for 
     nontaxable purposes or resold during the taxable year 
     (determined without regard to section 6427(k)).''.
       (2) Paragraphs (1) and (2)(A) of section 6427(i) are each 
     amended--
       (A) by striking ``(g),'', and
       (B) by striking ``(or a qualified diesel powered highway 
     vehicle purchased)'' each place it appears.
       (c) Effective Date.--The amendments made by this section 
     shall apply to vehicles purchased after the date of the 
     enactment of this Act.

     SEC. 1607. EXTENSION AND PHASEDOWN OF LUXURY PASSENGER 
                   AUTOMOBILE TAX.

       (a) Extension.--Subsection (f) of section 4001 is amended 
     by striking ``1999'' and inserting ``2002''.
       (b) Phasedown.--Section 4001 is amended by redesignating 
     subsection (f) (as amended by subsection (a) of this section) 
     as subsection (g) and by inserting after subsection (e) the 
     following new subsection:
       ``(f) Phasedown.--For sales occurring in calendar years 
     after 1995 and before 2003, subsection (a) shall be applied 
     by substituting for `10 percent' the percentage determined in 
     accordance with the following table:

``If the calendar year is:                           The percentage is:
  1996.....................................................9 percent   
  1997.....................................................8 percent   
  1998.....................................................7 percent   
  1999.....................................................6 percent   
  2000.....................................................5 percent   
  2001.....................................................4 percent   
  2002..................................................3 percent.''.  

       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to sales occurring after the date 
     which is 7 days after the date of the enactment of this Act.

     SEC. 1608. TERMINATION OF FUTURE TAX-EXEMPT BOND FINANCING 
                   FOR LOCAL FURNISHERS OF ELECTRICITY AND GAS.

       (a) In General.--Section 142(f) (relating to local 
     furnishing of electric energy or gas) is amended by adding at 
     the end the following new paragraphs:
       ``(3) Termination of future financing.--For purposes of 
     this section, no bond may be issued as part of an issue 
     described in subsection (a)(8) with respect to a facility for 
     the local furnishing of electric energy or gas on or after 
     the date of the enactment of this paragraph unless--
       ``(A) the facility will--
       ``(i) be used by a person who is engaged in the local 
     furnishing of that energy source on January 1, 1997, and
       ``(ii) be used to provide service within the area served by 
     such person on January 1, 1997, (or within a county or city 
     any portion of which is within such area), or
       ``(B) the facility will be used by a successor in interest 
     to such person for the same use and within the same service 
     area as described in subparagraph (A).
       ``(4) Election to terminate tax-exempt bond financing by 
     certain furnishers.--
       ``(A) In general.--In the case of a facility financed with 
     bonds issued before the date of the enactment of this 
     paragraph which would cease to be tax-exempt by reason of the 
     failure to meet the local furnishing requirement of 
     subsection (a)(8) as a result of a service area expansion, 
     such bonds shall not cease to be tax-exempt bonds (and 
     section 150(b)(4) shall not apply) if the person engaged in 
     such local furnishing by such facility makes an election 
     described in subparagraph (B).
       ``(B) Election.--An election is described in this 
     subparagraph if it is an election made in such manner as the 
     Secretary prescribes, and such person (or its predecessor in 
     interest) agrees that--
       ``(i) such election is made with respect to all facilities 
     for the local furnishing of electric energy or gas, or both, 
     by such person,
       ``(ii) no bond exempt from tax under section 103 and 
     described in subsection (a)(8) may be issued on or after the 
     date of the enactment of this paragraph with respect to all 
     such facilities of such person,
       ``(iii) any expansion of the service area--

       ``(I) is not financed with the proceeds of any exempt 
     facility bond described in subsection (a)(8), and
       ``(II) is not treated as a nonqualifying use under the 
     rules of paragraph (2), and

       ``(iv) all outstanding bonds used to finance the facilities 
     for such person are redeemed not later than 6 months after 
     the later of--

       ``(I) the earliest date on which such bonds may be 
     redeemed, or
       ``(II) the date of the election.

       ``(C) Related persons.--For purposes of this paragraph, the 
     term `person' includes a group of related persons (within the 
     meaning of section 144(a)(3)) which includes such person.''.
       (b) No Inference With Respect To Outstanding Bonds.--The 
     use of the term ``person'' in section 142(f)(3) of the 
     Internal Revenue Code of 1986, as added by subsection (a), 
     shall not be construed to affect the tax-exempt status of 
     interest on any bonds issued before the date of the enactment 
     of this Act.

     SEC. 1609. EXTENSION OF AIRPORT AND AIRWAY TRUST FUND EXCISE 
                   TAXES.

       (a) Fuel Tax.--
       (1) Subparagraph (A) of section 4091(b)(3) is amended to 
     read as follows:
       ``(A) The rate of tax specified in paragraph (1) shall be 
     4.3 cents per gallon--
       ``(i) after December 31, 1995, and before the date which is 
     7 calendar days after the date of

[[Page H9591]]

     the enactment of the Small Business Job Protection Act of 
     1996, and
       ``(ii) after December 31, 1996.''.
       (2) Section 4081(d) is amended--
       (A) by adding at the end the following new paragraph:
       ``(3) Aviation gasoline.--After December 31, 1996, the rate 
     of tax specified in subsection (a)(2)(A)(i) on aviation 
     gasoline shall be 4.3 cents per gallon.'', and
       (B) by inserting ``(other than the tax on aviation 
     gasoline)'' after ``subsection (a)(2)(A)''.
       (3) Section 4041(c)(5) is amended by inserting ``, and 
     during the period beginning on the date which is 7 calendar 
     days after the date of the enactment of the Small Business 
     Job Protection Act of 1996 and ending on December 31, 1996'' 
     after ``December 31, 1995''.
       (b) Ticket Taxes.--Sections 4261(g) and 4271(d) are each 
     amended by striking ``January 1, 1996'' and inserting 
     ``January 1, 1996, and to transportation beginning on or 
     after the date which is 7 calendar days after the date of the 
     enactment of the Small Business Job Protection Act of 1996 
     and before January 1, 1997''.
       (c) Transfers to Airport and Airway Trust Fund.--
       (1) Subsection (b) of section 9502 is amended by striking 
     ``January 1, 1996'' each place it appears and inserting 
     ``January 1, 1997''.
       (2) Paragraph (3) of section 9502(f) is amended to read as 
     follows:
       ``(3) Termination.--Notwithstanding the preceding 
     provisions of this subsection, the Airport and Airway Trust 
     Fund financing rate shall be zero with respect to--
       ``(A) taxes imposed after December 31, 1995, and before the 
     date which is 7 calendar days after the date of the enactment 
     of the Small Business Job Protection Act of 1996, and
       ``(B) taxes imposed after December 31, 1996.''.
       (3) Subsection (d) of section 9502 is amended by adding at 
     the end the following new paragraph:
       ``(5) Transfers from airport and airway trust fund on 
     account of refunds of taxes on transportation by air.--The 
     Secretary of the Treasury shall pay from time to time from 
     the Airport and Airway Trust Fund into the general fund of 
     the Treasury amounts equivalent to the amounts paid after 
     December 31, 1995, under section 6402 (relating to authority 
     to make credits or refunds) or section 6415 (relating to 
     credits or refunds to persons who collected certain taxes) in 
     respect of taxes under sections 4261 and 4271.''.
       (d) Excise Tax Exemption for Certain Emergency Medical 
     Transportation by Air Ambulance.--Subsection (f) of section 
     4261 (relating to imposition of tax on transportation by air) 
     is amended to read as follows:
       ``(f) Exemption for Air Ambulances Providing Certain 
     Emergency Medical Transportation.--No tax shall be imposed 
     under this section or section 4271 on any air transportation 
     for the purpose of providing emergency medical services--
       ``(1) by helicopter, or
       ``(2) by a fixed-wing aircraft equipped for and exclusively 
     dedicated to acute care emergency medical services.''.
       (e) Exemption for Certain Helicopter Uses.--Subsection (e) 
     of section 4261 is amended by adding at the end the following 
     new sentence: ``In the case of helicopter transportation 
     described in paragraph (1), this subsection shall be applied 
     by treating each flight segment as a distinct flight.''.
       (f) Flight-By-Flight Determination of Availability for Hire 
     for Affiliated Groups.--Section 4282 is amended by 
     redesignating subsection (b) as subsection (c) and by 
     inserting after subsection (a) the following new subsection:
       ``(b) Availability for Hire.--For purposes of subsection 
     (a), the determination of whether an aircraft is available 
     for hire by persons who are not members of an affiliated 
     group shall be made on a flight-by-flight basis.''
       (g) Consolidation of Taxes on Aviation Gasoline.--
       (1) In General.--Subparagraph (A) of section 4081(a)(2) 
     (relating to imposition of tax on gasoline and diesel fuel) 
     is amended by redesignating clause (ii) as clause (iii) and 
     by striking clause (i) and inserting the following:
       ``(i) in the case of gasoline other than aviation gasoline, 
     18.3 cents per gallon,
       ``(ii) in the case of aviation gasoline, 19.3 cents per 
     gallon, and''.
       (2) Termination.--Subsection (d) of section 4081 is amended 
     by redesignating paragraph (2) as paragraph (3) and by 
     inserting after paragraph (1) the following new paragraph:
       ``(2) Aviation gasoline.--On and after January 1, 1997, the 
     rate specified in subsection (a)(2)(A)(ii) shall be 4.3 cents 
     per gallon.''
       (3) Repeal of Retail Level Tax.--
       (A) Subsection (c) of section 4041 is amended by striking 
     paragraphs (2) and (3) and by redesignating paragraphs (4) 
     and (5) as paragraphs (2) and (3), respectively.
       (B) Paragraph (3) of section 4041(c), as redesignated by 
     paragraph (1), is amended by striking ``paragraphs (1) and 
     (2)'' and inserting ``paragraph (1)''.
       (4) Conforming Amendments.--
       (A) Paragraph (1) of section 4041(k) is amended by adding 
     ``and'' at the end of subparagraph (A), by striking ``, and'' 
     at the end of subparagraph (B) and inserting a period, and by 
     striking subparagraph (C).
       (B) Paragraph (1) of section 4081(d) is amended by striking 
     ``each rate of tax specified in subsection (a)(2)(A)'' and 
     inserting ``the rates of tax specified in clauses (i) and 
     (iii) of subsection (a)(2)(A)''.
       (C) Sections 6421(f)(2)(A) and 9502(f)(1)(A) are each 
     amended by striking ``section 4041(c)(4)'' and inserting 
     ``section 4041(c)(2)''.
       (D) Paragraph (2) of section 9502(b) is amended by striking 
     ``14 cents'' and inserting ``15 cents''.
       (h) Floor Stocks Taxes on Aviation Fuel.--
       (1) Imposition of tax.--In the case of aviation fuel on 
     which tax was imposed under section 4091 of the Internal 
     Revenue Code of 1986 before the tax-increase date described 
     in paragraph (3)(A)(i) and which is held on such date by any 
     person, there is hereby imposed a floor stocks tax of 17.5 
     cents per gallon.
       (2) Liability for tax and method of payment.--
       (A) Liability for tax.--A person holding aviation fuel on a 
     tax-increase date to which the tax imposed by paragraph (1) 
     applies shall be liable for such tax.
       (B) Method of payment.--The tax imposed by paragraph (1) 
     shall be paid in such manner as the Secretary shall 
     prescribe.
       (C) Time for payment.--The tax imposed by paragraph (1) 
     with respect to any tax-increase date shall be paid on or 
     before the first day of the 7th month beginning after such 
     tax-increase date.
       (3) Definitions.--For purposes of this subsection--
       (A) Tax increase date.--The term ``tax-increase date'' 
     means the date which is 7 calendar days after the date of the 
     enactment of this Act.
       (B) Aviation fuel.--The term ``aviation fuel'' has the 
     meaning given such term by section 4093 of such Code.
       (C) Held by a person.--Aviation fuel shall be considered as 
     ``held by a person'' if title thereto has passed to such 
     person (whether or not delivery to the person has been made).
       (D) Secretary.--The term ``Secretary'' means the Secretary 
     of the Treasury or his delegate.
       (4) Exception for exempt uses.--The tax imposed by 
     paragraph (1) shall not apply to aviation fuel held by any 
     person on any tax-increase date exclusively for any use for 
     which a credit or refund of the entire tax imposed by section 
     4091 of such Code is allowable for aviation fuel purchased on 
     or after such tax-increase date for such use.
       (5) Exception for certain amounts of fuel.--
       (A) In general.--No tax shall be imposed by paragraph (1) 
     on aviation fuel held on any tax-increase date by any person 
     if the aggregate amount of aviation fuel held by such person 
     on such date does not exceed 2,000 gallons. The preceding 
     sentence shall apply only if such person submits to the 
     Secretary (at the time and in the manner required by the 
     Secretary) such information as the Secretary shall require 
     for purposes of this paragraph.
       (B) Exempt fuel.--For purposes of subparagraph (A), there 
     shall not be taken into account fuel held by any person which 
     is exempt from the tax imposed by paragraph (1) by reason of 
     paragraph (4).
       (C) Controlled groups.--For purposes of this paragraph--
       (i) Corporations.--

       (I) In general.--All persons treated as a controlled group 
     shall be treated as 1 person.
       (II) Controlled group.--The term ``controlled group'' has 
     the meaning given to such term by subsection (a) of section 
     1563 of such Code; except that for such purposes the phrase 
     ``more than 50 percent'' shall be substituted for the phrase 
     ``at least 80 percent'' each place it appears in such 
     subsection.

       (ii) Nonincorporated persons under common control.--Under 
     regulations prescribed by the Secretary, principles similar 
     to the principles of clause (i) shall apply to a group of 
     persons under common control where 1 or more of such persons 
     is not a corporation.
       (6) Other law applicable.--All provisions of law, including 
     penalties, applicable with respect to the taxes imposed by 
     section 4091 of such Code shall, insofar as applicable and 
     not inconsistent with the provisions of this subsection, 
     apply with respect to the floor stock taxes imposed by 
     paragraph (1) to the same extent as if such taxes were 
     imposed by such section 4091.
       (i) Effective Date.--The amendments made by this section 
     shall take effect on the 7th calendar day after the date of 
     the enactment of this Act, except that the amendments made by 
     subsection (b) shall not apply to any amount paid before such 
     date.

     SEC. 1610. BASIS ADJUSTMENT TO PROPERTY HELD BY CORPORATION 
                   WHERE STOCK IN CORPORATION IS REPLACEMENT 
                   PROPERTY UNDER INVOLUNTARY CONVERSION RULES.

       (a) In General.--Subsection (b) of section 1033 is amended 
     to read as follows:
       ``(b) Basis of Property Acquired Through Involuntary 
     Conversion.--
       ``(1) Conversions described in subsection (a)(1).--If the 
     property was acquired as the result of a compulsory or 
     involuntary conversion described in subsection (a)(1), the 
     basis shall be the same as in the case of the property so 
     converted--
       ``(A) decreased in the amount of any money received by the 
     taxpayer which was not expended in accordance with the 
     provisions of law (applicable to the year in which such 
     conversion was made) determining the taxable status of the 
     gain or loss upon such conversion, and
       ``(B) increased in the amount of gain or decreased in the 
     amount of loss to the taxpayer recognized upon such 
     conversion under the law applicable to the year in which such 
     conversion was made.
       ``(2) Conversions described in subsection (a)(2).--In the 
     case of property purchased by the taxpayer in a transaction 
     described in subsection (a)(2) which resulted in the 
     nonrecognition of any part of the gain realized as the result 
     of a compulsory or involuntary conversion, the basis shall be 
     the cost of such property decreased in the amount of the gain 
     not so recognized; and if the property purchased consists of 
     more than 1 piece of property, the basis determined under 
     this sentence shall be allocated to the purchased properties 
     in proportion to their respective costs.

[[Page H9592]]

       ``(3) Property held by corporation the stock of which is 
     replacement property.--
       ``(A) In general.--If the basis of stock in a corporation 
     is decreased under paragraph (2), an amount equal to such 
     decrease shall also be applied to reduce the basis of 
     property held by the corporation at the time the taxpayer 
     acquired control (as defined in subsection (a)(2)(E)) of such 
     corporation.
       ``(B) Limitation.--Subparagraph (A) shall not apply to the 
     extent that it would (but for this subparagraph) require a 
     reduction in the aggregate adjusted bases of the property of 
     the corporation below the taxpayer's adjusted basis of the 
     stock in the corporation (determined immediately after such 
     basis is decreased under paragraph (2)).
       ``(C) Allocation of basis reduction.--The decrease required 
     under subparagraph (A) shall be allocated--
       ``(i) first to property which is similar or related in 
     service or use to the converted property,
       ``(ii) second to depreciable property (as defined in 
     section 1017(b)(3)(B)) not described in clause (i), and
       ``(iii) then to other property.
       ``(D) Special rules.--
       ``(i) Reduction not to exceed adjusted basis of property.--
     No reduction in the basis of any property under this 
     paragraph shall exceed the adjusted basis of such property 
     (determined without regard to such reduction).
       ``(ii) Allocation of reduction among properties.--If more 
     than 1 property is described in a clause of subparagraph (C), 
     the reduction under this paragraph shall be allocated among 
     such property in proportion to the adjusted bases of such 
     property (as so determined).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to involuntary conversions occurring after the 
     date of the enactment of this Act.

     SEC. 1611. TREATMENT OF CERTAIN INSURANCE CONTRACTS ON 
                   RETIRED LIVES.

       (a) General Rule.--
       (1) Paragraph (2) of section 817(d) (defining variable 
     contract) is amended by striking ``or'' at the end of 
     subparagraph (A), by striking ``and'' at the end of 
     subparagraph (B) and inserting ``or'', and by inserting after 
     subparagraph (B) the following new subparagraph:
       ``(C) provides for funding of insurance on retired lives as 
     described in section 807(c)(6), and''.
       (2) Paragraph (3) of section 817(d) is amended by striking 
     ``or'' at the end of subparagraph (A), by striking the period 
     at the end of subparagraph (B) and inserting ``, or'', and by 
     inserting after subparagraph (B) the following new 
     subparagraph:
       ``(C) in the case of funds held under a contract described 
     in paragraph (2)(C), the amounts paid in, or the amounts paid 
     out, reflect the investment return and the market value of 
     the segregated asset account.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1995.

     SEC. 1612. TREATMENT OF MODIFIED GUARANTEED CONTRACTS.

       (a) General Rule.--Subpart E of part I of subchapter L of 
     chapter 1 (relating to definitions and special rules) is 
     amended by inserting after section 817 the following new 
     section:

     ``SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED CONTRACTS.

       ``(a) Computation of Reserves.--In the case of a modified 
     guaranteed contract, clause (ii) of section 807(e)(1)(A) 
     shall not apply.
       ``(b) Segregated Assets Under Modified Guaranteed Contracts 
     Marked to Market.--
       ``(1) In general.--In the case of any life insurance 
     company, for purposes of this subtitle--
       ``(A) Any gain or loss with respect to a segregated asset 
     shall be treated as ordinary income or loss, as the case may 
     be.
       ``(B) If any segregated asset is held by such company as of 
     the close of any taxable year--
       ``(i) such company shall recognize gain or loss as if such 
     asset were sold for its fair market value on the last 
     business day of such taxable year, and
       ``(ii) any such gain or loss shall be taken into account 
     for such taxable year.
     Proper adjustment shall be made in the amount of any gain or 
     loss subsequently realized for gain or loss taken into 
     account under the preceding sentence. The Secretary may 
     provide by regulations for the application of this 
     subparagraph at times other than the times provided in this 
     subparagraph.
       ``(2) Segregated asset.--For purposes of paragraph (1), the 
     term `segregated asset' means any asset held as part of a 
     segregated account referred to in subsection (d)(1) under a 
     modified guaranteed contract.
       ``(c) Special Rule in Computing Life Insurance Reserves.--
     For purposes of applying section 816(b)(1)(A) to any modified 
     guaranteed contract, an assumed rate of interest shall 
     include a rate of interest determined, from time to time, 
     with reference to a market rate of interest.
       ``(d) Modified Guaranteed Contract Defined.--For purposes 
     of this section, the term `modified guaranteed contract' 
     means a contract not described in section 817--
       ``(1) all or part of the amounts received under which are 
     allocated to an account which, pursuant to State law or 
     regulation, is segregated from the general asset accounts of 
     the company and is valued from time to time with reference to 
     market values,
       ``(2) which--
       ``(A) provides for the payment of annuities,
       ``(B) is a life insurance contract, or
       ``(C) is a pension plan contract which is not a life, 
     accident, or health, property, casualty, or liability 
     contract,
       ``(3) for which reserves are valued at market for annual 
     statement purposes, and
       ``(4) which provides for a net surrender value or a 
     policyholder's fund (as defined in section 807(e)(1)).
     If only a portion of a contract is not described in section 
     817, such portion shall be treated for purposes of this 
     section as a separate contract.
       ``(e) Regulations.--The Secretary may prescribe 
     regulations--
       ``(1) to provide for the treatment of market value 
     adjustments under sections 72, 7702, 7702A, and 807(e)(1)(B),
       ``(2) to determine the interest rates applicable under 
     sections 807(c)(3), 807(d)(2)(B), and 812 with respect to a 
     modified guaranteed contract annually, in a manner 
     appropriate for modified guaranteed contracts and, to the 
     extent appropriate for such a contract, to modify or waive 
     the applicability of section 811(d),
       ``(3) to provide rules to limit ordinary gain or loss 
     treatment to assets constituting reserves for modified 
     guaranteed contracts (and not other assets) of the company,
       ``(4) to provide appropriate treatment of transfers of 
     assets to and from the segregated account, and
       ``(5) as may be necessary or appropriate to carry out the 
     purposes of this section.''.
       (b) Clerical Amendment.--The table of sections for subpart 
     E of part I of subchapter L of chapter 1 is amended by 
     inserting after the item relating to section 817 the 
     following new item:

``Sec. 817A. Special rules for modified guaranteed contracts.''.

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 1995.
       (2) Treatment of net adjustments.--Except as provided in 
     paragraph (3), in the case of any taxpayer required by the 
     amendments made by this section to change its calculation of 
     reserves to take into account market value adjustments and to 
     mark segregated assets to market for any taxable year--
       (A) such changes shall be treated as a change in method of 
     accounting initiated by the taxpayer,
       (B) such changes shall be treated as made with the consent 
     of the Secretary, and
       (C) the adjustments required by reason of section 481 of 
     the Internal Revenue Code of 1986, shall be taken into 
     account as ordinary income by the taxpayer for the taxpayer's 
     first taxable year beginning after December 31, 1995.
       (3) Limitation on loss recognition and on deduction for 
     reserve increases.--
       (A) Limitation on loss recognition.--
       (i) In general.--The aggregate loss recognized by reason of 
     the application of section 481 of the Internal Revenue Code 
     of 1986 with respect to section 817A(b) of such Code (as 
     added by this section) for the first taxable year of the 
     taxpayer beginning after December 31, 1995, shall not exceed 
     the amount included in the taxpayer's gross income for such 
     year by reason of the excess (if any) of--

       (I) the amount of life insurance reserves as of the close 
     of the prior taxable year, over
       (II) the amount of such reserves as of the beginning of 
     such first taxable year,

     to the extent such excess is attributable to subsection (a) 
     of such section 817A. Notwithstanding the preceding sentence, 
     the adjusted basis of each segregated asset shall be 
     determined as if all such losses were recognized.
       (ii) Disallowed loss allowed over period.--The amount of 
     the loss which is not allowed under clause (i) shall be 
     allowed ratably over the period of 7 taxable years beginning 
     with the taxpayer's first taxable year beginning after 
     December 31, 1995.
       (B) Limitation on deduction for increase in reserves.--
       (i) In general.--The deduction allowed for the first 
     taxable year of the taxpayer beginning after December 31, 
     1995, by reason of the application of section 481 of such 
     Code with respect to section 817A(a) of such Code (as added 
     by this section) shall not exceed the aggregate built-in gain 
     recognized by reason of the application of such section 481 
     with respect to section 817A(b) of such Code (as added by 
     this section) for such first taxable year.
       (ii) Disallowed deduction allowed over period.--The amount 
     of the deduction which is disallowed under clause (i) shall 
     be allowed ratably over the period of 7 taxable years 
     beginning with the taxpayer's first taxable year beginning 
     after December 31, 1995.
       (iii) Built-in gain.--For purposes of this subparagraph, 
     the built-in gain on an asset is the amount equal to the 
     excess of--

       (I) the fair market value of the asset as of the beginning 
     of the first taxable year of the taxpayer beginning after 
     December 31, 1995, over
       (II) the adjusted basis of such asset as of such time.

     SEC. 1613. TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION.

       (a) Treatment of Contributions in Aid of Construction.--
       (1) In general.--Section 118 (relating to contributions to 
     the capital of a corporation) is amended--
       (A) by redesignating subsection (c) as subsection (e), and
       (B) by inserting after subsection (b) the following new 
     subsections:
       ``(c) Special Rules for Water and Sewerage Disposal 
     Utilities.--
       ``(1) General rule.--For purposes of this section, the term 
     `contribution to the capital of the taxpayer' includes any 
     amount of money or other property received from any person 
     (whether or not a shareholder) by a regulated public utility 
     which provides water or sewerage disposal services if--
       ``(A) such amount is a contribution in aid of construction,
       ``(B) in the case of contribution of property other than 
     water or sewerage disposal facilities, such amount meets the 
     requirements of the expenditure rule of paragraph (2), and

[[Page H9593]]

       ``(C) such amount (or any property acquired or constructed 
     with such amount) is not included in the taxpayer's rate base 
     for ratemaking purposes.
       ``(2) Expenditure rule.--An amount meets the requirements 
     of this paragraph if--
       ``(A) an amount equal to such amount is expended for the 
     acquisition or construction of tangible property described in 
     section 1231(b)--
       ``(i) which is the property for which the contribution was 
     made or is of the same type as such property, and
       ``(ii) which is used predominantly in the trade or business 
     of furnishing water or sewerage disposal services,
       ``(B) the expenditure referred to in subparagraph (A) 
     occurs before the end of the second taxable year after the 
     year in which such amount was received, and
       ``(C) accurate records are kept of the amounts contributed 
     and expenditures made, the expenditures to which 
     contributions are allocated, and the year in which the 
     contributions and expenditures are received and made.
       ``(3) Definitions.--For purposes of this subsection--
       ``(A) Contribution in aid of construction.--The term 
     `contribution in aid of construction' shall be defined by 
     regulations prescribed by the Secretary, except that such 
     term shall not include amounts paid as service charges for 
     starting or stopping services.
       ``(B) Predominantly.--The term `predominantly' means 80 
     percent or more.
       ``(C) Regulated public utility.--The term `regulated public 
     utility' has the meaning given such term by section 
     7701(a)(33), except that such term shall not include any 
     utility which is not required to provide water or sewerage 
     disposal services to members of the general public in its 
     service area.
       ``(4) Disallowance of deductions and credits; adjusted 
     basis.--Notwithstanding any other provision of this subtitle, 
     no deduction or credit shall be allowed for, or by reason of, 
     any expenditure which constitutes a contribution in aid of 
     construction to which this subsection applies. The adjusted 
     basis of any property acquired with contributions in aid of 
     construction to which this subsection applies shall be zero.
       ``(d) Statute of Limitations.--If the taxpayer for any 
     taxable year treats an amount as a contribution to the 
     capital of the taxpayer described in subsection (c), then--
       ``(1) the statutory period for the assessment of any 
     deficiency attributable to any part of such amount shall not 
     expire before the expiration of 3 years from the date the 
     Secretary is notified by the taxpayer (in such manner as the 
     Secretary may prescribe) of--
       ``(A) the amount of the expenditure referred to in 
     subparagraph (A) of subsection (c)(2),
       ``(B) the taxpayer's intention not to make the expenditures 
     referred to in such subparagraph, or
       ``(C) a failure to make such expenditure within the period 
     described in subparagraph (B) of subsection (c)(2), and
       ``(2) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of any 
     other law or rule of law which would otherwise prevent such 
     assessment.''.
       (2) Conforming amendment.--Section 118(b) is amended by 
     inserting ``except as provided in subsection (c),'' before 
     ``the term''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts received after June 12, 1996.
       (b) Recovery Method and Period for Water Utility 
     Property.--
       (1) Requirement to use straight line method.--Section 
     168(b)(3) is amended by adding at the end the following new 
     subparagraph:
       ``(F) Water utility property described in subsection 
     (e)(5).''.
       (2) 25-year recovery period.--The table contained in 
     section 168(c)(1) is amended by inserting the following item 
     after the item relating to 20-year property:

``Water utility property................................25 years''.....

       (3) Water utility property.--
       (A) In general.--Section 168(e) is amended by adding at the 
     end the following new paragraph:
       ``(5) Water utility property.--The term `water utility 
     property' means property--
       ``(A) which is an integral part of the gathering, 
     treatment, or commercial distribution of water, and which, 
     without regard to this paragraph, would be 20-year property, 
     and
       ``(B) any municipal sewer.''.
       (B) Conforming amendments.--Section 168 is amended--
       (i) by striking subparagraph (F) of subsection (e)(3), and
       (ii) by striking the item relating to subparagraph (F) in 
     the table in subsection (g)(3).
       (4) Alternative system.--Clause (iv) of section 
     168(g)(2)(C) is amended by inserting ``or water utility 
     property'' after ``tunnel bore''.
       (5) Effective date.--The amendments made by this subsection 
     shall apply to property placed in service after June 12, 
     1996, other than property placed in service pursuant to a 
     binding contract in effect before June 10, 1996, and at all 
     times thereafter before the property is placed in service.

     SEC. 1614. ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP 
                   FUNDING CORPORATION.

       (a) In General.--Subsection (d) of section 150 (relating to 
     definitions and special rules) is amended by adding at the 
     end the following new paragraph:
       ``(3) Election to cease status as qualified scholarship 
     funding corporation.--
       ``(A) In general.--Any qualified scholarship funding bond, 
     and qualified student loan bond, outstanding on the date of 
     the issuer's election under this paragraph (and any bond (or 
     series of bonds) issued to refund such a bond) shall not fail 
     to be a tax-exempt bond solely because the issuer ceases to 
     be described in subparagraphs (A) and (B) of paragraph (2) if 
     the issuer meets the requirements of subparagraphs (B) and 
     (C) of this paragraph.
       ``(B) Assets and liabilities of issuer transferred to 
     taxable subsidiary.--The requirements of this subparagraph 
     are met by an issuer if--
       ``(i) all of the student loan notes of the issuer and other 
     assets pledged to secure the repayment of qualified 
     scholarship funding bond indebtedness of the issuer are 
     transferred to another corporation within a reasonable period 
     after the election is made under this paragraph;
       ``(ii) such transferee corporation assumes or otherwise 
     provides for the payment of all of the qualified scholarship 
     funding bond indebtedness of the issuer within a reasonable 
     period after the election is made under this paragraph;
       ``(iii) to the extent permitted by law, such transferee 
     corporation assumes all of the responsibilities, and succeeds 
     to all of the rights, of the issuer under the issuer's 
     agreements with the Secretary of Education in respect of 
     student loans;
       ``(iv) immediately after such transfer, the issuer, 
     together with any other issuer which has made an election 
     under this paragraph in respect of such transferee, hold all 
     of the senior stock in such transferee corporation; and
       ``(v) such transferee corporation is not exempt from tax 
     under this chapter.
       ``(C) Issuer to operate as independent organization 
     described in section 501(c)(3).--The requirements of this 
     subparagraph are met by an issuer if, within a reasonable 
     period after the transfer referred to in subparagraph (B)--
       ``(i) the issuer is described in section 501(c)(3) and 
     exempt from tax under section 501(a);
       ``(ii) the issuer no longer is described in subparagraphs 
     (A) and (B) of paragraph (2); and
       ``(iii) at least 80 percent of the members of the board of 
     directors of the issuer are independent members.
       ``(D) Senior stock.--For purposes of this paragraph, the 
     term `senior stock' means stock--
       ``(i) which participates pro rata and fully in the equity 
     value of the corporation with all other common stock of the 
     corporation but which has the right to payment of liquidation 
     proceeds prior to payment of liquidation proceeds in respect 
     of other common stock of the corporation;
       ``(ii) which has a fixed right upon liquidation and upon 
     redemption to an amount equal to the greater of--

       ``(I) the fair market value of such stock on the date of 
     liquidation or redemption (whichever is applicable); or
       ``(II) the fair market value of all assets transferred in 
     exchange for such stock and reduced by the amount of all 
     liabilities of the corporation which has made an election 
     under this paragraph assumed by the transferee corporation in 
     such transfer;

       ``(iii) the holder of which has the right to require the 
     transferee corporation to redeem on a date that is not later 
     than 10 years after the date on which an election under this 
     paragraph was made and pursuant to such election such stock 
     was issued; and
       ``(iv) in respect of which, during the time such stock is 
     outstanding, there is not outstanding any equity interest in 
     the corporation having any liquidation, redemption or 
     dividend rights in the corporation which are superior to 
     those of such stock.
       ``(E) Independent member.--The term `independent member' 
     means a member of the board of directors of the issuer who 
     (except for services as a member of such board) receives no 
     compensation directly or indirectly--
       ``(i) for services performed in connection with such 
     transferee corporation, or
       ``(ii) for services as a member of the board of directors 
     or as an officer of such transferee corporation.

     For purposes of clause (ii), the term `officer' includes any 
     individual having powers or responsibilities similar to those 
     of officers.
       ``(F) Coordination with certain private foundation taxes.--
     For purposes of sections 4942 (relating to the excise tax on 
     a failure to distribute income) and 4943 (relating to the 
     excise tax on excess business holdings), the transferee 
     corporation referred to in subparagraph (B) shall be treated 
     as a functionally related business (within the meaning of 
     section 4942(j)(4)) with respect to the issuer during the 
     period commencing with the date on which an election is made 
     under this paragraph and ending on the date that is the 
     earlier of--
       ``(i) the last day of the last taxable year for which more 
     than 50 percent of the gross income of such transferee 
     corporation is derived from, or more than 50 percent of the 
     assets (by value) of such transferee corporation consists of, 
     student loan notes incurred under the Higher Education Act of 
     1965; or
       ``(ii) the last day of the taxable year of the issuer 
     during which occurs the date which is 10 years after the date 
     on which the election under this paragraph is made.
       ``(G) Election.--An election under this paragraph may be 
     revoked only with the consent of the Secretary.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1615. CERTAIN TAX BENEFITS DENIED TO INDIVIDUALS FAILING 
                   TO PROVIDE TAXPAYER IDENTIFICATION NUMBERS.

       (a) Personal Exemption.--
       (1) In general.--Section 151 (relating to allowance of 
     deductions for personal exemptions) is amended by adding at 
     the end the following new subsection:
       ``(e) Identifying Information Required.--No exemption shall 
     be allowed under this section with respect to any individual 
     unless the TIN of such individual is included on the return 
     claiming the exemption.''.

[[Page H9594]]

       (2) Conforming amendments.--
       (A) Subsection (e) of section 6109 is repealed.
       (B) Section 6724(d)(3) is amended by adding ``and'' at the 
     end of subparagraph (C), by striking subparagraph (D), and by 
     redesignating subparagraph (E) as subparagraph (D).
       (b) Dependent Care Credit.--Subsection (e) of section 21 
     (relating to expenses for household and dependent care 
     services necessary for gainful employment) is amended by 
     adding at the end the following new paragraph:
       ``(10) Identifying information required with respect to 
     qualifying individuals.--No credit shall be allowed under 
     this section with respect to any qualifying individual unless 
     the TIN of such individual is included on the return claiming 
     the credit.''.
       (c) Extension of Procedures Applicable to Mathematical or 
     Clerical Errors.--Section 6213(g)(2) (relating to the 
     definition of mathematical or clerical errors), as amended by 
     the Personal Responsibility and Work Opportunity 
     Reconciliation Act of 1996, is amended by striking ``and' at 
     the end of subparagraph (F), by striking the period at the 
     end of subparagraph (G) and inserting ``, and'', and by 
     inserting at the end the following new subparagraph:
       ``(H) an omission of a correct TIN required under section 
     21 (relating to expenses for household and dependent care 
     services necessary for gainful employment) or section 151 
     (relating to allowance of deductions for personal 
     exemptions).''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply with respect to returns the due date for which (without 
     regard to extensions) is on or after the 30th day after the 
     date of the enactment of this Act.
       (2) Special rule for 1995 and 1996.--In the case of returns 
     for taxable years beginning in 1995 or 1996, a taxpayer shall 
     not be required by the amendments made by this section to 
     provide a taxpayer identification number for a child who is 
     born after October 31, 1995, in the case of a taxable year 
     beginning in 1995 or November 30, 1996, in the case of a 
     taxable year beginning in 1996.

     SEC. 1616. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT 
                   SAVINGS ASSOCIATIONS.

       (a) In General.--Section 593 (relating to reserves for 
     losses on loans) is amended by adding at the end the 
     following new subsections:
       ``(f) Termination of Reserve Method.--Subsections (a), (b), 
     (c), and (d) shall not apply to any taxable year beginning 
     after December 31, 1995.
       ``(g) 6-Year Spread of Adjustments.--
       ``(1) In general.--In the case of any taxpayer who is 
     required by reason of subsection (f) to change its method of 
     computing reserves for bad debts--
       ``(A) such change shall be treated as a change in a method 
     of accounting,
       ``(B) such change shall be treated as initiated by the 
     taxpayer and as having been made with the consent of the 
     Secretary, and
       ``(C) the net amount of the adjustments required to be 
     taken into account by the taxpayer under section 481(a)--
       ``(i) shall be determined by taking into account only 
     applicable excess reserves, and
       ``(ii) as so determined, shall be taken into account 
     ratably over the 6-taxable year period beginning with the 
     first taxable year beginning after December 31, 1995.
       ``(2) Applicable excess reserves.--
       ``(A) In general.--For purposes of paragraph (1), the term 
     `applicable excess reserves' means the excess (if any) of--
       ``(i) the balance of the reserves described in subsection 
     (c)(1) (other than the supplemental reserve) as of the close 
     of the taxpayer's last taxable year beginning before January 
     1, 1996, over
       ``(ii) the lesser of--

       ``(I) the balance of such reserves as of the close of the 
     taxpayer's last taxable year beginning before January 1, 
     1988, or
       ``(II) the balance of the reserves described in subclause 
     (I), reduced in the same manner as under section 
     585(b)(2)(B)(ii) on the basis of the taxable years described 
     in clause (i) and this clause.

       ``(B) Special rule for thrifts which become small banks.--
     In the case of a bank (as defined in section 581) which was 
     not a large bank (as defined in section 585(c)(2)) for its 
     first taxable year beginning after December 31, 1995--
       ``(i) the balance taken into account under subparagraph 
     (A)(ii) shall not be less than the amount which would be the 
     balance of such reserves as of the close of its last taxable 
     year beginning before such date if the additions to such 
     reserves for all taxable years had been determined under 
     section 585(b)(2)(A), and
       ``(ii) the opening balance of the reserve for bad debts as 
     of the beginning of such first taxable year shall be the 
     balance taken into account under subparagraph (A)(ii) 
     (determined after the application of clause (i) of this 
     subparagraph).

     The preceding sentence shall not apply for purposes of 
     paragraphs (5) and (6) or subsection (e)(1).
       ``(3) Recapture of pre-1988 reserves where taxpayer ceases 
     to be bank.--If, during any taxable year beginning after 
     December 31, 1995, a taxpayer to which paragraph (1) applied 
     is not a bank (as defined in section 581), paragraph (1) 
     shall apply to the reserves described in paragraph (2)(A)(ii) 
     and the supplemental reserve; except that such reserves shall 
     be taken into account ratably over the 6-taxable year period 
     beginning with such taxable year.
       ``(4) Suspension of recapture if residential loan 
     requirement met.--
       ``(A) In general.--In the case of a bank which meets the 
     residential loan requirement of subparagraph (B) for the 
     first taxable year beginning after December 31, 1995, or for 
     the following taxable year--
       ``(i) no adjustment shall be taken into account under 
     paragraph (1) for such taxable year, and
       ``(ii) such taxable year shall be disregarded in 
     determining--

       ``(I) whether any other taxable year is a taxable year for 
     which an adjustment is required to be taken into account 
     under paragraph (1), and
       ``(II) the amount of such adjustment.

       ``(B) Residential loan requirement.--A taxpayer meets the 
     residential loan requirement of this subparagraph for any 
     taxable year if the principal amount of the residential loans 
     made by the taxpayer during such year is not less than the 
     base amount for such year.
       ``(C) Residential loan.--For purposes of this paragraph, 
     the term `residential loan' means any loan described in 
     clause (v) of section 7701(a)(19)(C) but only if such loan is 
     incurred in acquiring, constructing, or improving the 
     property described in such clause.
       ``(D) Base amount.--For purposes of subparagraph (B), the 
     base amount is the average of the principal amounts of the 
     residential loans made by the taxpayer during the 6 most 
     recent taxable years beginning on or before December 31, 
     1995. At the election of the taxpayer who made such loans 
     during each of such 6 taxable years, the preceding sentence 
     shall be applied without regard to the taxable year in which 
     such principal amount was the highest and the taxable year in 
     such principal amount was the lowest. Such an election may be 
     made only for the first taxable year beginning after such 
     date, and, if made for such taxable year, shall apply to the 
     succeeding taxable year unless revoked with the consent of 
     the Secretary.
       ``(E) Controlled groups.--In the case of a taxpayer which 
     is a member of any controlled group of corporations described 
     in section 1563(a)(1), subparagraph (B) shall be applied with 
     respect to such group.
       ``(5) Continued application of fresh start under section 
     585 transitional rules.--In the case of a taxpayer to which 
     paragraph (1) applied and which was not a large bank (as 
     defined in section 585(c)(2)) for its first taxable year 
     beginning after December 31, 1995:
       ``(A) In general.--For purposes of determining the net 
     amount of adjustments referred to in section 
     585(c)(3)(A)(iii), there shall be taken into account only the 
     excess (if any) of the reserve for bad debts as of the close 
     of the last taxable year before the disqualification year 
     over the balance taken into account by such taxpayer under 
     paragraph (2)(A)(ii) of this subsection.
       ``(B) Treatment under elective cut-off method.--For 
     purposes of applying section 585(c)(4)--
       ``(i) the balance of the reserve taken into account under 
     subparagraph (B) thereof shall be reduced by the balance 
     taken into account by such taxpayer under paragraph 
     (2)(A)(ii) of this subsection, and
       ``(ii) no amount shall be includible in gross income by 
     reason of such reduction.
       ``(6) Suspended reserve included as section 381(c) items.--
     The balance taken into account by a taxpayer under paragraph 
     (2)(A)(ii) of this subsection and the supplemental reserve 
     shall be treated as items described in section 381(c).
       ``(7) Conversions to credit unions.--In the case of a 
     taxpayer to which paragraph (1) applied which becomes a 
     credit union described in section 501(c) and exempt from 
     taxation under section 501(a)--
       ``(A) any amount required to be included in the gross 
     income of the credit union by reason of this subsection shall 
     be treated as derived from an unrelated trade or business (as 
     defined in section 513), and
       ``(B) for purposes of paragraph (3), the credit union shall 
     not be treated as if it were a bank.
       ``(8) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out this subsection 
     and subsection (e), including regulations providing for the 
     application of such subsections in the case of acquisitions, 
     mergers, spin-offs, and other reorganizations.''
       (b) Conforming Amendments.--
       (1) Subsection (d) of section 50 is amended by adding at 
     the end the following new sentence:
     ``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) 
     referred to in paragraph (1) of this subsection shall not 
     apply to any taxable year beginning after December 31, 
     1995.''
       (2) Subsection (e) of section 52 is amended by striking 
     paragraph (1) and by redesignating paragraphs (2) and (3) as 
     paragraphs (1) and (2), respectively.
       (3) Subsection (a) of section 57 is amended by striking 
     paragraph (4).
       (4) Section 246 is amended by striking subsection (f).
       (5) Clause (i) of section 291(e)(1)(B) is amended by 
     striking ``or to which section 593 applies''.
       (6) Subparagraph (A) of section 585(a)(2) is amended by 
     striking ``other than an organization to which section 593 
     applies''.
       (7)(A) The material preceding subparagraph (A) of section 
     593(e)(1) is amended by striking ``by a domestic building and 
     loan association or an institution that is treated as a 
     mutual savings bank under section 591(b)'' and inserting ``by 
     a taxpayer having a balance described in subsection 
     (g)(2)(A)(ii)''.
       (B) Subparagraph (B) of section 593(e)(1) is amended to 
     read as follows:
       ``(B) then out of the balance taken into account under 
     subsection (g)(2)(A)(ii) (properly adjusted for amounts 
     charged against such reserves for taxable years beginning 
     after December 31, 1987),''.
       (C) The second sentence of section 593(e)(1) is amended by 
     striking ``the association or an institution that is treated 
     as a mutual savings bank under section 591(b)'' and inserting 
     ``a taxpayer having a balance described in subsection 
     (g)(2)(A)(ii)''.
       (D) The third sentence of section 593(e)(1) is amended by 
     striking ``an association'' and inserting ``a taxpayer having 
     a balance described in subsection (g)(2)(A)(ii)''.

[[Page H9595]]

       (E) Paragraph (1) of section 593(e) is amended by adding at 
     the end the following new sentence: ``This paragraph shall 
     not apply to any distribution of all of the stock of a bank 
     (as defined in section 581) to another corporation if, 
     immediately after the distribution, such bank and such other 
     corporation are members of the same affiliated group (as 
     defined in section 1504) and the provisions of section 5(e) 
     of the Federal Deposit Insurance Act (as in effect on 
     December 31, 1995) or similar provisions are in effect.''
       (8) Section 595 is hereby repealed.
       (9) Section 596 is hereby repealed.
       (10) Subsection (a) of section 860E is amended--
       (A) by striking ``Except as provided in paragraph (2), 
     the'' in paragraph (1) and inserting ``The'',
       (B) by striking paragraphs (2) and (4) and redesignating 
     paragraphs (3), (5), and (6) as paragraphs (2), (3), and (4), 
     respectively,
       (C) by striking in paragraph (2) (as so redesignated) all 
     that follows ``subsection'' and inserting a period, and
       (D) by striking the last sentence of paragraph (4) (as so 
     redesignated).
       (11) Paragraph (3) of section 992(d) is amended by striking 
     ``or 593''.
       (12) Section 1038 is amended by striking subsection (f).
       (13) Clause (ii) of section 1042(c)(4)(B) is amended by 
     striking ``or 593''.
       (14) Subsection (c) of section 1277 is amended by striking 
     ``or to which section 593 applies''.
       (15) Subparagraph (B) of section 1361(b)(2) is amended by 
     striking ``or to which section 593 applies''.
       (16) The table of sections for part II of subchapter H of 
     chapter 1 is amended by striking the items relating to 
     sections 595 and 596.
       (c) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years beginning after December 31, 1995.
       (2) Subsection (b)(7)(B).--The amendments made by 
     subsection (b)(7)(B) shall not apply to any distribution with 
     respect to preferred stock if--
       (A) such stock is outstanding at all times after October 
     31, 1995, and before the distribution, and
       (B) such distribution is made before the date which is 1 
     year after the date of the enactment of this Act (or, in the 
     case of stock which may be redeemed, if later, the date which 
     is 30 days after the earliest date that such stock may be 
     redeemed).
       (3) Subsection (b)(8).--The amendment made by subsection 
     (b)(8) shall apply to property acquired in taxable years 
     beginning after December 31, 1995.
       (4) Subsection (b)(10).--The amendments made by subsection 
     (b)(10) shall not apply to any residual interest held by a 
     taxpayer if such interest has been held by such taxpayer at 
     all times after October 31, 1995.

     SEC. 1617. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES 
                   LIMITED TO SUBSIDIES WITH RESPECT TO DWELLING 
                   UNITS.

       (a) In General.--Paragraph (1) of section 136(c) (defining 
     energy conservation measure) is amended by striking ``energy 
     demand--'' and all that follows and inserting ``energy demand 
     with respect to a dwelling unit.''
       (b) Conforming Amendments.--
       (1) Subsection (a) of section 136 is amended to read as 
     follows:
       ``(a) Exclusion.--Gross income shall not include the value 
     of any subsidy provided (directly or indirectly) by a public 
     utility to a customer for the purchase or installation of any 
     energy conservation measure.''
       (2) Paragraph (2) of section 136(c) is amended--
       (A) by striking subparagraph (A) and by redesignating 
     subparagraphs (B) and (C) as subparagraphs (A) and (B), 
     respectively, and
       (B) by striking ``and special rules'' in the paragraph 
     heading.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts received after December 31, 1996, 
     unless received pursuant to a written binding contract in 
     effect on September 13, 1995, and at all times thereafter.

          PART II--FINANCIAL ASSET SECURITIZATION INVESTMENTS

     SEC. 1621. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS.

       (a) In General.--Subchapter M of chapter 1 is amended by 
     adding at the end the following new part:

       ``PART V--FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS

``Sec. 860H. Taxation of a FASIT; other general rules.
``Sec. 860I. Gain recognition on contributions to a FASIT and in other 
              cases.
``Sec. 860J. Non-FASIT losses not to offset certain FASIT inclusions.
``Sec. 860K. Treatment of transfers of high-yield interests to 
              disqualified holders.
``Sec. 860L. Definitions and other special rules.

     ``SEC. 860H. TAXATION OF A FASIT; OTHER GENERAL RULES.

       ``(a) Taxation of FASIT.--A FASIT as such shall not be 
     subject to taxation under this subtitle (and shall not be 
     treated as a trust, partnership, corporation, or taxable 
     mortgage pool).
       ``(b) Taxation of Holder of Ownership Interest.--In 
     determining the taxable income of the holder of the ownership 
     interest in a FASIT--
       ``(1) all assets, liabilities, and items of income, gain, 
     deduction, loss, and credit of a FASIT shall be treated as 
     assets, liabilities, and such items (as the case may be) of 
     such holder,
       ``(2) the constant yield method (including the rules of 
     section 1272(a)(6)) shall be applied under an accrual method 
     of accounting in determining all interest, acquisition 
     discount, original issue discount, and market discount and 
     all premium deductions or adjustments with respect to each 
     debt instrument of the FASIT,
       ``(3) there shall not be taken into account any item of 
     income, gain, or deduction allocable to a prohibited 
     transaction, and
       ``(4) interest accrued by the FASIT which is exempt from 
     tax imposed by this subtitle shall, when taken into account 
     by such holder, be treated as ordinary income.
       ``(c) Treatment of Regular Interests.--For purposes of this 
     title--
       ``(1) a regular interest in a FASIT, if not otherwise a 
     debt instrument, shall be treated as a debt instrument,
       ``(2) section 163(e)(5) shall not apply to such an 
     interest, and
       ``(3) amounts includible in gross income with respect to 
     such an interest shall be determined under an accrual method 
     of accounting.

     ``SEC. 860I. GAIN RECOGNITION ON CONTRIBUTIONS TO A FASIT AND 
                   IN OTHER CASES.

       ``(a) Treatment of Property Acquired by FASIT.--
       ``(1) Property acquired from holder of ownership interest 
     or related person.--If property is sold or contributed to a 
     FASIT by the holder of the ownership interest in such FASIT 
     (or by a related person) gain (if any) shall be recognized to 
     such holder (or person) in an amount equal to the excess (if 
     any) of such property's value under subsection (d) on the 
     date of such sale or contribution over its adjusted basis on 
     such date.
       ``(2) Property acquired other than from holder of ownership 
     interest or related person.--Property which is acquired by a 
     FASIT other than in a transaction to which paragraph (1) 
     applies shall be treated--
       ``(A) as having been acquired by the holder of the 
     ownership interest in the FASIT for an amount equal to the 
     FASIT's cost of acquiring such property, and
       ``(B) as having been sold by such holder to the FASIT at 
     its value under subsection (d) on such date.
       ``(b) Gain Recognition on Property Outside FASIT Which 
     Supports Regular Interests.--If property held by the holder 
     of the ownership interest in a FASIT (or by any person 
     related to such holder) supports any regular interest in such 
     FASIT--
       ``(1) gain shall be recognized to such holder (or person) 
     in the same manner as if such holder (or person) had sold 
     such property at its value under subsection (d) on the 
     earliest date such property supports such an interest, and
       ``(2) such property shall be treated as held by such FASIT 
     for purposes of this part.
       ``(c) Deferral of Gain Recognition.--The Secretary may 
     prescribe regulations which--
       ``(1) provide that gain otherwise recognized under 
     subsection (a) or (b) shall not be recognized before the 
     earliest date on which such property supports any regular 
     interest in such FASIT or any indebtedness of the holder of 
     the ownership interest (or of any person related to such 
     holder), and
       ``(2) provide such adjustments to the other provisions of 
     this part to the extent appropriate in the context of the 
     treatment provided under paragraph (1).
       ``(d) Valuation.--For purposes of this section--
       ``(1) In general.--The value of any property under this 
     subsection shall be--
       ``(A) in the case of a debt instrument which is not traded 
     on an established securities market, the sum of the present 
     values of the reasonably expected payments under such 
     instrument determined (in the manner provided by regulations 
     prescribed by the Secretary)--
       ``(i) as of the date of the event resulting in the gain 
     recognition under this section, and
       ``(ii) by using a discount rate equal to 120 percent of the 
     applicable Federal rate (as defined in section 1274(d)), or 
     such other discount rate specified in such regulations, 
     compounded semiannually, and
       ``(B) in the case of any other property, its fair market 
     value.
       ``(2) Special rule for revolving loan accounts.--For 
     purposes of paragraph (1)--
       ``(A) each extension of credit (other than the accrual of 
     interest) on a revolving loan account shall be treated as a 
     separate debt instrument, and
       ``(B) payments on such extensions of credit having 
     substantially the same terms shall be applied to such 
     extensions beginning with the earliest such extension.
       ``(e) Special Rules.--
       ``(1) Nonrecognition rules not to apply.--Gain required to 
     be recognized under this section shall be recognized 
     notwithstanding any other provision of this subtitle.
       ``(2) Basis adjustments.--The basis of any property on 
     which gain is recognized under this section shall be 
     increased by the amount of gain so recognized.

     ``SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT 
                   INCLUSIONS.

       ``(a) In General.--The taxable income of the holder of the 
     ownership interest or any high-yield interest in a FASIT for 
     any taxable year shall in no event be less than the sum of--
       ``(1) such holder's taxable income determined solely with 
     respect to such interests (including gains and losses from 
     sales and exchanges of such interests), and
       ``(2) the excess inclusion (if any) under section 
     860E(a)(1) for such taxable year.
       ``(b) Coordination With Section 172.--Any increase in the 
     taxable income of any holder of the ownership interest or a 
     high-yield interest in a FASIT for any taxable year by reason 
     of subsection (a) shall be disregarded--
       ``(1) in determining under section 172 the amount of any 
     net operating loss for such taxable year, and
       ``(2) in determining taxable income for such taxable year 
     for purposes of the 2nd sentence of section 172(b)(2).

[[Page H9596]]

       ``(c) Coordination With Minimum Tax.--For purposes of part 
     VI of subchapter A of this chapter--
       ``(1) the reference in section 55(b)(2) to taxable income 
     shall be treated as a reference to taxable income determined 
     without regard to this section,
       ``(2) the alternative minimum taxable income of any holder 
     of the ownership interest or a high-yield interest in a FASIT 
     for any taxable year shall in no event be less than such 
     holder's taxable income determined solely with respect to 
     such interests, and
       ``(3) any increase in taxable income under this section 
     shall be disregarded for purposes of computing the 
     alternative tax net operating loss deduction.
       ``(d) Affiliated Groups.--All members of an affiliated 
     group filing a consolidated return shall be treated as 1 
     taxpayer for purposes of this section.

     ``SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS 
                   TO DISQUALIFIED HOLDERS.

       ``(a) General Rule.--In the case of any high-yield interest 
     which is held by a disqualified holder--
       ``(1) the gross income of such holder shall not include any 
     income (other than gain) attributable to such interest, and
       ``(2) amounts not includible in the gross income of such 
     holder by reason of paragraph (1) shall be included (at the 
     time otherwise includible under paragraph (1)) in the gross 
     income of the most recent holder of such interest which is 
     not a disqualified holder.
       ``(b) Exceptions.--Rules similar to the rules of paragraphs 
     (4) and (7) of section 860E(e) shall apply to the tax imposed 
     by reason of the inclusion in gross income under subsection 
     (a).
       ``(c) Disqualified Holder.--For purposes of this section, 
     the term `disqualified holder' means any holder other than--
       ``(1) an eligible corporation (as defined in section 
     860L(a)(2)), or
       ``(2) a FASIT.
       ``(d) Treatment of Interests Held By Securities Dealers.--
       ``(1) In general.--Subsection (a) shall not apply to any 
     high-yield interest held by a disqualified holder if such 
     holder is a dealer in securities who acquired such interest 
     exclusively for sale to customers in the ordinary course of 
     business (and not for investment).
       ``(2) Change in dealer status.--
       ``(A) In general.--In the case of a dealer in securities 
     which is not an eligible corporation (as defined in section 
     860L(a)(2)), if--
       ``(i) such dealer ceases to be a dealer in securities, or
       ``(ii) such dealer commences holding the high-yield 
     interest for investment,

     there is hereby imposed (in addition to other taxes) an 
     excise tax equal to the product of the highest rate of tax 
     specified in section 11(b)(1) and the income of such dealer 
     attributable to such interest for periods after the date of 
     such cessation or commencement.
       ``(B) Holding for 31 days or less.--For purposes of 
     subparagraph (A)(ii), a dealer shall not be treated as 
     holding an interest for investment before the 32d day after 
     the date such dealer acquired such interest unless such 
     interest is so held as part of a plan to avoid the purposes 
     of this paragraph.
       ``(C) Administrative provisions.--The deficiency procedures 
     of subtitle F shall apply to the tax imposed by this 
     paragraph.
       ``(e) Treatment of High-Yield Interests in Pass-Thru 
     Entities.--
       ``(1) In general.--If a pass-thru entity (as defined in 
     section 860E(e)(6)) issues a debt or equity interest--
       ``(A) which is supported by any regular interest in a 
     FASIT, and
       ``(B) which has an original yield to maturity which is 
     greater than each of--
       ``(i) the sum determined under clauses (i) and (ii) of 
     section 163(i)(1)(B) with respect to such debt or equity 
     interest, and
       ``(ii) the yield to maturity to such entity on such regular 
     interest (determined as of the date such entity acquired such 
     interest),

     there is hereby imposed on the pass-thru entity a tax (in 
     addition to other taxes) equal to the product of the highest 
     rate of tax specified in section 11(b)(1) and the income of 
     the holder of such debt or equity interest which is properly 
     attributable to such regular interest. For purposes of the 
     preceding sentence, the yield to maturity of any equity 
     interest shall be determined under regulations prescribed by 
     the Secretary.
       ``(2) Exception.--Paragraph (1) shall not apply to 
     arrangements not having as a principal purpose the avoidance 
     of the purposes of this subsection.

     ``SEC. 860L. DEFINITIONS AND OTHER SPECIAL RULES.

       ``(a) FASIT.--
       ``(1) In general.--For purposes of this title, the terms 
     `financial asset securitization investment trust' and `FASIT' 
     mean any entity--
       ``(A) for which an election to be treated as a FASIT 
     applies for the taxable year,
       ``(B) all of the interests in which are regular interests 
     or the ownership interest,
       ``(C) which has only 1 ownership interest and such 
     ownership interest is held directly by an eligible 
     corporation,
       ``(D) as of the close of the 3rd month beginning after the 
     day of its formation and at all times thereafter, 
     substantially all of the assets of which (including assets 
     treated as held by the entity under section 860I(b)(2)) 
     consist of permitted assets, and
       ``(E) which is not described in section 851(a).

     A rule similar to the rule of the last sentence of section 
     860D(a) shall apply for purposes of this paragraph.
       ``(2) Eligible corporation.--For purposes of paragraph 
     (1)(C), the term `eligible corporation' means any domestic C 
     corporation other than--
       ``(A) a corporation which is exempt from, or is not subject 
     to, tax under this chapter,
       ``(B) an entity described in section 851(a) or 856(a),
       ``(C) a REMIC, and
       ``(D) an organization to which part I of subchapter T 
     applies.
       ``(3) Election.--An entity (otherwise meeting the 
     requirements of paragraph (1)) may elect to be treated as a 
     FASIT. Except as provided in paragraph (5), such an election 
     shall apply to the taxable year for which made and all 
     subsequent taxable years unless revoked with the consent of 
     the Secretary.
       ``(4) Termination.--If any entity ceases to be a FASIT at 
     any time during the taxable year, such entity shall not be 
     treated as a FASIT after the date of such ceasation.
       ``(5) Inadvertent terminations, etc.--Rules similar to the 
     rules of section 860D(b)(2)(B) shall apply to inadvertent 
     failures to qualify or remain qualified as a FASIT.
       ``(6) Permitted assets not treated as interest in fasit.--
     Except as provided in regulations prescribed by the 
     Secretary, any asset which is a permitted asset at the time 
     acquired by a FASIT shall not be treated at any time as an 
     interest in such FASIT.
       ``(b) Interests in FASIT.--For purposes of this part--
       ``(1) Regular interest.--
       ``(A) In general.--The term `regular interest' means any 
     interest which is issued by a FASIT after the startup date 
     with fixed terms and which is designated as a regular 
     interest if--
       ``(i) such interest unconditionally entitles the holder to 
     receive a specified principal amount (or other similar 
     amount),
       ``(ii) interest payments (or other similar amounts), if 
     any, with respect to such interest are determined based on a 
     fixed rate, or, except as otherwise provided by the 
     Secretary, at a variable rate permitted under section 
     860G(a)(1)(B)(i),
       ``(iii) such interest does not have a stated maturity 
     (including options to renew) greater than 30 years (or such 
     longer period as may be permitted by regulations),
       ``(iv) the issue price of such interest does not exceed 125 
     percent of its stated principal amount, and
       ``(v) the yield to maturity on such interest is less than 
     the sum determined under section 163(i)(1)(B) with respect to 
     such interest.
     An interest shall not fail to meet the requirements of clause 
     (i) merely because the timing (but not the amount) of the 
     principal payments (or other similar amounts) may be 
     contingent on the extent that payments on debt instruments 
     held by the FASIT are made in advance of anticipated payments 
     and on the amount of income from permitted assets.
       ``(B) High-yield interests.--
       ``(i) In general.--The term `regular interest' includes any 
     high-yield interest.
       ``(ii) High-yield interest.--The term `high-yield interest' 
     means any interest which would be described in subparagraph 
     (A) but for--

       ``(I) failing to meet the requirements of one or more of 
     clauses (i), (iv), or (v) thereof, or
       ``(II) failing to meet the requirement of clause (ii) 
     thereof but only if interest payments (or other similar 
     amounts), if any, with respect to such interest consist of a 
     specified portion of the interest payments on permitted 
     assets and such portion does not vary during the period such 
     interest is outstanding.

       ``(2) Ownership interest.--The term `ownership interest' 
     means the interest issued by a FASIT after the startup day 
     which is designated as an ownership interest and which is not 
     a regular interest.
       ``(c) Permitted Assets.--For purposes of this part--
       ``(1) In general.--The term `permitted asset' means--
       ``(A) cash or cash equivalents,
       ``(B) any debt instrument (as defined in section 
     1275(a)(1)) under which interest payments (or other similar 
     amounts), if any, at or before maturity meet the requirements 
     applicable under clause (i) or (ii) of section 860G(a)(1)(B),
       ``(C) foreclosure property,
       ``(D) any asset--
       ``(i) which is an interest rate or foreign currency 
     notional principal contract, letter of credit, insurance, 
     guarantee against payment defaults, or other similar 
     instrument permitted by the Secretary, and
       ``(ii) which is reasonably required to guarantee or hedge 
     against the FASIT's risks associated with being the obligor 
     on interests issued by the FASIT,
       ``(E) contract rights to acquire debt instruments described 
     in subparagraph (B) or assets described in subparagraph (D),
       ``(F) any regular interest in another FASIT, and
       ``(G) any regular interest in a REMIC.
       ``(2) Debt issued by holder of ownership interest not 
     permitted asset.--The term `permitted asset' shall not 
     include any debt instrument issued by the holder of the 
     ownership interest in the FASIT or by any person related to 
     such holder or any direct or indirect interest in such a debt 
     instrument. The preceding sentence shall not apply to cash 
     equivalents and to any other investment specified in 
     regulations prescribed by the Secretary.
       ``(3) Foreclosure property.--
       ``(A) In general.--The term `foreclosure property' means 
     property--
       ``(i) which would be foreclosure property under section 
     856(e) (determined without regard to paragraph (5) thereof) 
     if such property were real property acquired by a real estate 
     investment trust, and
       ``(ii) which is acquired in connection with the default or 
     imminent default of a debt instrument held by the FASIT 
     unless the security interest in

[[Page H9597]]

     such property was created for the principal purpose of 
     permitting the FASIT to invest in such property.

     Solely for purposes of subsection (a)(1), the determination 
     of whether any property is foreclosure property shall be made 
     without regard to section 856(e)(4).
       ``(B) Authority to reduce grace period.--In the case of 
     property other than real property and other than personal 
     property incident to real property, the Secretary may by 
     regulation reduce for purposes of subparagraph (A) the 
     periods otherwise applicable under paragraphs (2) and (3) of 
     section 856(e).
       ``(d) Startup Day.--For purposes of this part--
       ``(1) In general.--The term `startup day' means the date 
     designated in the election under subsection (a)(3) as the 
     startup day of the FASIT. Such day shall be the beginning of 
     the first taxable year of the FASIT.
       ``(2) Treatment of property held on startup day.--All 
     property held (or treated as held under section 860I(c)(2)) 
     by an entity as of the startup day shall be treated as 
     contributed to such entity on such day by the holder of the 
     ownership interest in such entity.
       ``(e) Tax on Prohibited Transactions.--
       ``(1) In general.--There is hereby imposed for each taxable 
     year of a FASIT a tax equal to 100 percent of the net income 
     derived from prohibited transactions. Such tax shall be paid 
     by the holder of the ownership interest in the FASIT.
       ``(2) Prohibited transactions.--For purposes of this part, 
     the term `prohibited transaction' means--
       ``(A) the receipt of any income derived from any asset that 
     is not a permitted asset,
       ``(B) except as provided in paragraph (3), the disposition 
     of any permitted asset,
       ``(C) the receipt of any income derived from any loan 
     originated by the FASIT, and
       ``(D) the receipt of any income representing a fee or other 
     compensation for services (other than any fee received as 
     compensation for a waiver, amendment, or consent under 
     permitted assets (other than foreclosure property) held by 
     the FASIT).
       ``(3) Exception for income from certain dispositions.--
       ``(A) In general.--Paragraph (2)(B) shall not apply to a 
     disposition which would not be a prohibited transaction (as 
     defined in section 860F(a)(2)) by reason of--
       ``(i) clause (ii), (iii), or (iv) of section 860F(a)(2)(A), 
     or
       ``(ii) section 860F(a)(5),

     if the FASIT were treated as a REMIC and debt instruments 
     described in subsection (c)(1)(B) were treated as qualified 
     mortgages.
       ``(B) Substitution of debt instruments; reduction of over-
     collateralization.--Paragraph (2)(B) shall not apply to--
       ``(i) the substitution of a debt instrument described in 
     subsection (c)(1)(B) for another debt instrument which is a 
     permitted asset, or
       ``(ii) the distribution of a debt instrument contributed by 
     the holder of the ownership interest to such holder in order 
     to reduce over-collateralization of the FASIT,

     but only if a principal purpose of acquiring the debt 
     instrument which is disposed of was not the recognition of 
     gain (or the reduction of a loss) as a result of an increase 
     in the market value of the debt instrument after its 
     acquisition by the FASIT.
       ``(C) Liquidation of class of regular interests.--Paragraph 
     (2)(B) shall not apply to the complete liquidation of any 
     class of regular interests.
       ``(4) Net income.--For purposes of this subsection, net 
     income shall be determined in accordance with section 
     860F(a)(3).
       ``(f) Coordination With Other Provisions.--
       ``(1) Wash sales rules.--Rules similar to the rules of 
     section 860F(d) shall apply to the ownership interest in a 
     FASIT.
       ``(2) Section 475.--Except as provided by the Secretary by 
     regulations, if any security which is sold or contributed to 
     a FASIT by the holder of the ownership interest in such FASIT 
     was required to be marked-to-market under section 475 by such 
     holder, section 475 shall continue to apply to such security; 
     except that in applying section 475 while such security is 
     held by the FASIT, the fair market value of such security for 
     purposes of section 475 shall not be less than its value 
     under section 860I(d).
       ``(g) Related Person.--For purposes of this part, a person 
     (hereinafter in this subsection referred to as the `related 
     person') is related to any person if--
       ``(1) the related person bears a relationship to such 
     person specified in section 267(b) or section 707(b)(1), or
       ``(2) the related person and such person are engaged in 
     trades or businesses under common control (within the meaning 
     of subsections (a) and (b) of section 52).

     For purposes of paragraph (1), in applying section 267(b) or 
     707(b)(1), `20 percent' shall be substituted for `50 
     percent'.
       ``(h) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this part, including regulations to prevent 
     the abuse of the purposes of this part through transactions 
     which are not primarily related to securitization of debt 
     instruments by a FASIT.''.
       (b) Technical Amendments.--
       (1) Paragraph (2) of section 26(b) is amended by striking 
     ``and'' at the end of subparagraph (M), by striking the 
     period at the end of subparagraph (N) and inserting ``, 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(O) section 860K (relating to treatment of transfers of 
     high-yield interests to disqualified holders).''.
       (2) Paragraph (6) of section 56(g) is amended by striking 
     ``or REMIC'' and inserting ``REMIC, or FASIT''.
       (3) Clause (ii) of section 382(l)(4)(B) is amended by 
     striking ``or a REMIC to which part IV of subchapter M 
     applies'' and inserting ``a REMIC to which part IV of 
     subchapter M applies, or a FASIT to which part V of 
     subchapter M applies''.
       (4) Paragraph (1) of section 582(c) is amended by inserting 
     ``, and any regular interest in a FASIT,'' after ``REMIC''.
       (5) Subparagraph (E) of section 856(c)(6) is amended by 
     adding at the end the following new sentence: ``The 
     principles of the preceding provisions of this subparagraph 
     shall apply to regular interests in a FASIT.''.
       (6) Paragraph (3) of section 860G(a) is amended by striking 
     ``and'' at the end of subparagraph (B), by striking the 
     period at the end of subparagraph (C) and inserting ``, 
     and'', and by inserting after subparagraph (C) the following 
     new subparagraph:
       ``(D) any regular interest in a FASIT which is transferred 
     to, or purchased by, the REMIC as described in clauses (i) 
     and (ii) of subparagraph (A) but only if 95 percent or more 
     of the value of the assets of such FASIT is at all times 
     attributable to obligations described in subparagraph (A) 
     (without regard to such clauses).''.
       (7) Subparagraph (C) of section 1202(e)(4) is amended by 
     striking ``or REMIC'' and inserting ``REMIC, or FASIT''.
       (8) Clause (xi) of section 7701(a)(19)(C) is amended to 
     read as follows:
       ``(xi) any regular or residual interest in a REMIC, and any 
     regular interest in a FASIT, but only in the proportion which 
     the assets of such REMIC or FASIT consist of property 
     described in any of the preceding clauses of this 
     subparagraph; except that if 95 percent or more of the assets 
     of such REMIC or FASIT are assets described in clauses (i) 
     through (x), the entire interest in the REMIC or FASIT shall 
     qualify.''.
       (9) Subparagraph (A) of section 7701(i)(2) is amended by 
     inserting ``or a FASIT'' after ``a REMIC''.
       (c) Clerical Amendment.--The table of parts for subchapter 
     M of chapter 1 is amended by adding at the end the following 
     new item:

``Part V. Financial asset securitization investment trusts.''.

       (d) Effective Date.--The amendments made by this section 
     shall take effect on September 1, 1997.
       (e) Treatment of Existing Securitization Entities.--
       (1) In general.--In the case of the holder of the ownership 
     interest in a pre-effective date FASIT--
       (A) gain shall not be recognized under section 860L(d)(2) 
     of the Internal Revenue Code of 1986 on property deemed 
     contributed to the FASIT, and
       (B) gain shall not be recognized under section 860I of such 
     Code on property contributed to such FASIT,

     until such property (or portion thereof) ceases to be 
     properly allocable to a pre-FASIT interest.
       (2) Allocation of property to pre-fasit interest.--For 
     purposes of paragraph (1), property shall be allocated to a 
     pre-FASIT interest in such manner as the Secretary of the 
     Treasury may prescribe, except that all property in a FASIT 
     shall be treated as properly allocable to pre-FASIT interests 
     if the fair market value of all such property does not exceed 
     107 percent of the aggregate principal amount of all 
     outstanding pre-FASIT interests.
       (3) Definitions.--For purposes of this subsection--
       (A) Pre-effective date fasit.--The term ``pre-effective 
     date FASIT'' means any FASIT if the entity (with respect to 
     which the election under section 860L(a)(3) of such Code was 
     made) is in existence on August 31, 1997.
       (B) Pre-fasit interest.--The term ``pre-FASIT interest'' 
     means any interest in the entity referred to in subparagraph 
     (A) which was issued before the startup day (other than any 
     interest held by the holder of the ownership interest in the 
     FASIT).
                   Subtitle G--Technical Corrections

     SEC. 1701. COORDINATION WITH OTHER SUBTITLES.

       For purposes of applying the amendments made by any 
     subtitle of this title other than this subtitle, the 
     provisions of this subtitle shall be treated as having been 
     enacted immediately before the provisions of such other 
     subtitles.

     SEC. 1702. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT 
                   OF 1990.

       (a) Amendments Related to Subtitle A.--
       (1) Subparagraph (B) of section 59(j)(3) is amended by 
     striking ``section 1(i)(3)(B)'' and inserting ``section 
     1(g)(3)(B)''.
       (2) Clause (i) of section 151(d)(3)(C) is amended by 
     striking ``joint of a return'' and inserting ``joint 
     return''.
       (b) Amendments Related to Subtitle B.--
       (1) Paragraph (1) of section 11212(e) of the Revenue 
     Reconciliation Act of 1990 is amended by striking ``Paragraph 
     (1) of section 6724(d)'' and inserting ``Subparagraph (B) of 
     section 6724(d)(1)''.
       (2)(A) Subparagraph (B) of section 4093(c)(2), as in effect 
     before the amendments made by the Revenue Reconciliation Act 
     of 1993, is amended by inserting before the period ``unless 
     such fuel is sold for exclusive use by a State or any 
     political subdivision thereof''.
       (B) Paragraph (4) of section 6427(l), as in effect before 
     the amendments made by the Revenue Reconciliation Act of 
     1993, is amended by inserting before the period ``unless such 
     fuel was used by a State or any political subdivision 
     thereof''.
       (3) Paragraph (1) of section 6416(b) is amended by striking 
     ``chapter 32 or by section 4051'' and inserting ``chapter 31 
     or 32''.
       (4) Section 7012 is amended--
       (A) by striking ``production or importation of gasoline'' 
     in paragraph (3) and inserting ``taxes on gasoline and diesel 
     fuel'', and

[[Page H9598]]

       (B) by striking paragraph (4) and redesignating paragraphs 
     (5) and (6) as paragraphs (4) and (5), respectively.
       (5) Subsection (c) of section 5041 is amended by striking 
     paragraph (6) and by inserting the following new paragraphs:
       ``(6) Credit for transferee in bond.--If--
       ``(A) wine produced by any person would be eligible for any 
     credit under paragraph (1) if removed by such person during 
     the calendar year,
       ``(B) wine produced by such person is removed during such 
     calendar year by any other person (hereafter in this 
     paragraph referred to as the `transferee') to whom such wine 
     was transferred in bond and who is liable for the tax imposed 
     by this section with respect to such wine, and
       ``(C) such producer holds title to such wine at the time of 
     its removal and provides to the transferee such information 
     as is necessary to properly determine the transferee's credit 
     under this paragraph,

     then, the transferee (and not the producer) shall be allowed 
     the credit under paragraph (1) which would be allowed to the 
     producer if the wine removed by the transferee had been 
     removed by the producer on that date.
       ``(7) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations--
       ``(A) to prevent the credit provided in this subsection 
     from benefiting any person who produces more than 250,000 
     wine gallons of wine during a calendar year, and
       ``(B) to assure proper reduction of such credit for persons 
     producing more than 150,000 wine gallons of wine during a 
     calendar year.''.
       (6) Paragraph (3) of section 5061(b) is amended to read as 
     follows:
       ``(3) section 5041(f),''.
       (7) Section 5354 is amended by inserting ``(taking into 
     account the appropriate amount of credit with respect to such 
     wine under section 5041(c))'' after ``any one time''.
       (c) Amendments Related to Subtitle C.--
       (1) Paragraph (4) of section 56(g) is amended by 
     redesignating subparagraphs (I) and (J) as subparagraphs (H) 
     and (I), respectively.
       (2) Subparagraph (B) of section 6724(d)(1) is amended--
       (A) by striking ``or'' at the end of clause (xii), and
       (B) by striking the period at the end of clause (xiii) and 
     inserting ``, or''.
       (3) Subsection (g) of section 6302 is amended by inserting 
     ``, 22,'' after ``chapters 21''.
       (4) The earnings and profits of any insurance company to 
     which section 11305(c)(3) of the Revenue Reconciliation Act 
     of 1990 applies shall be determined without regard to any 
     deduction allowed under such section; except that, for 
     purposes of applying sections 56 and 902, and subpart F of 
     part III of subchapter N of chapter 1 of the Internal Revenue 
     Code of 1986, such deduction shall be taken into account.
       (5) Subparagraph (D) of section 6038A(e)(4) is amended--
       (A) by striking ``any transaction to which the summons 
     relates'' and inserting ``any affected taxable year'', and
       (B) by adding at the end thereof the following new 
     sentence: ``For purposes of this subparagraph, the term 
     `affected taxable year' means any taxable year if the 
     determination of the amount of tax imposed for such taxable 
     year is affected by the treatment of the transaction to which 
     the summons relates.''.
       (6) Subparagraph (A) of section 6621(c)(2) is amended by 
     adding at the end thereof the following new flush sentence:

     ``The preceding sentence shall be applied without regard to 
     any such letter or notice which is withdrawn by the 
     Secretary.''.
       (7) Clause (i) of section 6621(c)(2)(B) is amended by 
     striking ``this subtitle'' and inserting ``this title''.
       (d) Amendments Related to Subtitle D.--
       (1) Notwithstanding section 11402(c) of the Revenue 
     Reconciliation Act of 1990, the amendment made by section 
     11402(b)(1) of such Act shall apply to taxable years ending 
     after December 31, 1989.
       (2) Clause (ii) of section 143(m)(4)(C) is amended--
       (A) by striking ``any month of the 10-year period'' and 
     inserting ``any year of the 4-year period'',
       (B) by striking ``succeeding months'' and inserting 
     ``succeeding years'', and
       (C) by striking ``over the remainder of such period (or, if 
     lesser, 5 years)'' and inserting ``to zero over the 
     succeeding 5 years''.
       (e) Amendments Related to Subtitle E.--
       (1)(A) Clause (ii) of section 56(d)(1)(B) is amended to 
     read as follows:
       ``(ii) appropriate adjustments in the application of 
     section 172(b)(2) shall be made to take into account the 
     limitation of subparagraph (A).''.
       (B) For purposes of applying sections 56(g)(1) and 56(g)(3) 
     of the Internal Revenue Code of 1986 with respect to taxable 
     years beginning in 1991 and 1992, the reference in such 
     sections to the alternative tax net operating loss deduction 
     shall be treated as including a reference to the deduction 
     under section 56(h) of such Code as in effect before the 
     amendments made by section 1915 of the Energy Policy Act of 
     1992.
       (2) Clause (i) of section 613A(c)(3)(A) is amended by 
     striking ``the table contained in''.
       (3) Section 6501 is amended--
       (A) by striking subsection (m) (relating to deficiency 
     attributable to election under section 44B) and by 
     redesignating subsections (n) and (o) as subsections (m) and 
     (n), respectively, and
       (B) by striking ``section 40(f) or 51(j)'' in subsection 
     (m) (as redesignated by subparagraph (A)) and inserting 
     ``section 40(f), 43, or 51(j)''.
       (4) Subparagraph (C) of section 38(c)(2) (as in effect on 
     the day before the date of the enactment of the Revenue 
     Reconciliation Act of 1990) is amended by inserting before 
     the period at the end of the first sentence the following: 
     ``and without regard to the deduction under section 56(h)''.
       (5) The amendment made by section 1913(b)(2)(C)(i) of the 
     Energy Policy Act of 1992 shall apply to taxable years 
     beginning after December 31, 1990.
       (f) Amendments Related to Subtitle F.--
       (1)(A) Section 2701(a)(3) is amended by adding at the end 
     thereof the following new subparagraph:
       ``(C) Valuation of qualified payments where no liquidation, 
     etc. rights.--In the case of an applicable retained interest 
     which is described in subparagraph (B)(i) but not 
     subparagraph (B)(ii), the value of the distribution right 
     shall be determined without regard to this section.''.
       (B) Section 2701(a)(3)(B) is amended by inserting 
     ``certain'' before ``qualified'' in the heading thereof.
       (C) Sections 2701 (d)(1) and (d)(4) are each amended by 
     striking ``subsection (a)(3)(B)'' and inserting ``subsection 
     (a)(3) (B) or (C)''.
       (2) Clause (i) of section 2701(a)(4)(B) is amended by 
     inserting ``(or, to the extent provided in regulations, the 
     rights as to either income or capital)'' after ``income and 
     capital''.
       (3)(A) Section 2701(b)(2) is amended by adding at the end 
     thereof the following new subparagraph:
       ``(C) Applicable family member.--For purposes of this 
     subsection, the term `applicable family member' includes any 
     lineal descendant of any parent of the transferor or the 
     transferor's spouse.''.
       (B) Section 2701(e)(3) is amended--
       (i) by striking subparagraph (B), and
       (ii) by striking so much of paragraph (3) as precedes 
     ``shall be treated as holding'' and inserting:
       ``(3) Attribution of indirect holdings and transfers.--An 
     individual''.
       (C) Section 2704(c)(3) is amended by striking ``section 
     2701(e)(3)(A)'' and inserting ``section 2701(e)(3)''.
       (4) Clause (i) of section 2701(c)(1)(B) is amended to read 
     as follows:
       ``(i) a right to distributions with respect to any interest 
     which is junior to the rights of the transferred interest,''.
       (5)(A) Clause (i) of section 2701(c)(3)(C) is amended to 
     read as follows:
       ``(i) In general.--Payments under any interest held by a 
     transferor which (without regard to this subparagraph) are 
     qualified payments shall be treated as qualified payments 
     unless the transferor elects not to treat such payments as 
     qualified payments. Payments described in the preceding 
     sentence which are held by an applicable family member shall 
     be treated as qualified payments only if such member elects 
     to treat such payments as qualified payments.''.
       (B) The first sentence of section 2701(c)(3)(C)(ii) is 
     amended to read as follows: ``A transferor or applicable 
     family member holding any distribution right which (without 
     regard to this subparagraph) is not a qualified payment may 
     elect to treat such right as a qualified payment, to be paid 
     in the amounts and at the times specified in such 
     election.''.
       (C) The time for making an election under the second 
     sentence of section 2701(c)(3)(C)(i) of the Internal Revenue 
     Code of 1986 (as amended by subparagraph (A)) shall not 
     expire before the due date (including extensions) for filing 
     the transferor's return of the tax imposed by section 2501 of 
     such Code for the first calendar year ending after the date 
     of enactment.
       (6) Section 2701(d)(3)(A)(iii) is amended by striking ``the 
     period ending on the date of''.
       (7) Subclause (I) of section 2701(d)(3)(B)(ii) is amended 
     by inserting ``or the exclusion under section 2503(b),'' 
     after ``section 2523,''.
       (8) Section 2701(e)(5) is amended--
       (A) by striking ``such contribution to capital or such 
     redemption, recapitalization, or other change'' in 
     subparagraph (A) and inserting ``such transaction'', and
       (B) by striking ``the transfer'' in subparagraph (B) and 
     inserting ``such transaction''.
       (9) Section 2701(d)(4) is amended by adding at the end 
     thereof the following new subparagraph:
       ``(C) Transfer to transferors.--In the case of a taxable 
     event described in paragraph (3)(A)(ii) involving a transfer 
     of an applicable retained interest from an applicable family 
     member to a transferor, this subsection shall continue to 
     apply to the transferor during any period the transferor 
     holds such interest.''.
       (10) Section 2701(e)(6) is amended by inserting ``or to 
     reflect the application of subsection (d)'' before the period 
     at the end thereof.
       (11)(A) Section 2702(a)(3)(A) is amended--
       (i) by striking ``to the extent'' and inserting ``if'' in 
     clause (i),
       (ii) by striking ``or'' at the end of clause (i),
       (iii) by striking the period at the end of clause (ii) and 
     inserting ``, or'', and
       (iv) by adding at the end thereof the following new clause:
       ``(iii) to the extent that regulations provide that such 
     transfer is not inconsistent with the purposes of this 
     section.''.
       (B)(i) Section 2702(a)(3) is amended by striking 
     ``incomplete transfer'' each place it appears and inserting 
     ``incomplete gift''.
       (ii) The heading for section 2702(a)(3)(B) is amended by 
     striking ``Incomplete transfer'' and inserting ``Incomplete 
     gift''.
       (g) Amendments Related to Subtitle G.--
       (1)(A) Subsection (a) of section 1248 is amended--
       (i) by striking ``, or if a United States person receives a 
     distribution from a foreign corporation which, under section 
     302 or 331, is treated as an exchange of stock'' in paragraph 
     (1), and
       (ii) by adding at the end thereof the following new 
     sentence: ``For purposes of this section, a United States 
     person shall be treated as having

[[Page H9599]]

     sold or exchanged any stock if, under any provision of this 
     subtitle, such person is treated as realizing gain from the 
     sale or exchange of such stock.''.
       (B) Paragraph (1) of section 1248(e) is amended by striking 
     ``, or receives a distribution from a domestic corporation 
     which, under section 302 or 331, is treated as an exchange of 
     stock''.
       (C) Subparagraph (B) of section 1248(f)(1) is amended by 
     striking ``or 361(c)(1)'' and inserting ``355(c)(1), or 
     361(c)(1)''.
       (D) Paragraph (1) of section 1248(i) is amended to read as 
     follows:
       ``(1) In general.--If any shareholder of a 10-percent 
     corporate shareholder of a foreign corporation exchanges 
     stock of the 10-percent corporate shareholder for stock of 
     the foreign corporation, such 10-percent corporate 
     shareholder shall recognize gain in the same manner as if the 
     stock of the foreign corporation received in such exchange 
     had been--
       ``(A) issued to the 10-percent corporate shareholder, and
       ``(B) then distributed by the 10-percent corporate 
     shareholder to such shareholder in redemption or liquidation 
     (whichever is appropriate).

     The amount of gain recognized by such 10-percent corporate 
     shareholder under the preceding sentence shall not exceed the 
     amount treated as a dividend under this section.''.
       (2) Section 897 is amended by striking subsection (f).
       (3) Paragraph (13) of section 4975(d) is amended by 
     striking ``section 408(b)'' and inserting ``section 
     408(b)(12)''.
       (4) Clause (iii) of section 56(g)(4)(D) is amended by 
     inserting ``, but only with respect to taxable years 
     beginning after December 31, 1989'' before the period at the 
     end thereof.
       (5)(A) Paragraph (11) of section 11701(a) of the Revenue 
     Reconciliation Act of 1990 (and the amendment made by such 
     paragraph) are hereby repealed, and section 7108(r)(2) of the 
     Revenue Reconciliation Act of 1989 shall be applied as if 
     such paragraph (and amendment) had never been enacted.
       (B) Subparagraph (A) shall not apply to any building if the 
     owner of such building establishes to the satisfaction of the 
     Secretary of the Treasury or his delegate that such owner 
     reasonably relied on the amendment made by such paragraph 
     (11).
       (h) Amendments Related to Subtitle H.--
       (1)(A) Clause (vi) of section 168(e)(3)(B) is amended by 
     striking ``or'' at the end of subclause (I), by striking the 
     period at the end of subclause (II) and inserting ``, or'', 
     and by adding at the end thereof the following new subclause:

       ``(III) is described in section 48(l)(3)(A)(ix) (as in 
     effect on the day before the date of the enactment of the 
     Revenue Reconciliation Act of 1990).''.

       (B) Subparagraph (B) of section 168(e)(3) (relating to 5-
     year property) is amended by adding at the end the following 
     flush sentence:

     ``Nothing in any provision of law shall be construed to treat 
     property as not being described in clause (vi)(I) (or the 
     corresponding provisions of prior law) by reason of being 
     public utility property (within the meaning of section 
     48(a)(3)).''.
       (C) Subparagraph (K) of section 168(g)(4) is amended by 
     striking ``section 48(a)(3)(A)(iii)'' and inserting ``section 
     48(l)(3)(A)(ix) (as in effect on the day before the date of 
     the enactment of the Revenue Reconciliation Act of 1990)''.
       (2) Clause (ii) of section 172(b)(1)(E) is amended by 
     striking ``subsection (m)'' and inserting ``subsection (h)''.
       (3) Sections 805(a)(4)(E), 832(b)(5)(C)(ii)(II), and 
     832(b)(5)(D)(ii)(II) are each amended by striking 
     ``243(b)(5)'' and inserting ``243(b)(2)''.
       (4) Subparagraph (A) of section 243(b)(3) is amended by 
     inserting ``of'' after ``In the case''.
       (5) The subsection heading for subsection (a) of section 
     280F is amended by striking ``Investment Tax Credit and''.
       (6) Clause (i) of section 1504(c)(2)(B) is amended by 
     inserting ``section'' before ``243(b)(2)''.
       (7) Paragraph (3) of section 341(f) is amended by striking 
     ``351, 361, 371(a), or 374(a)'' and inserting ``351, or 
     361''.
       (8) Paragraph (2) of section 243(b) is amended to read as 
     follows:
       ``(2) Affiliated group.--For purposes of this subsection:
       ``(A) In general.--The term `affiliated group' has the 
     meaning given such term by section 1504(a), except that for 
     such purposes sections 1504(b)(2), 1504(b)(4), and 1504(c) 
     shall not apply.
       ``(B) Group must be consistent in foreign tax treatment.--
     The requirements of paragraph (1)(A) shall not be treated as 
     being met with respect to any dividend received by a 
     corporation if, for any taxable year which includes the day 
     on which such dividend is received--
       ``(i) 1 or more members of the affiliated group referred to 
     in paragraph (1)(A) choose to any extent to take the benefits 
     of section 901, and
       ``(ii) 1 or more other members of such group claim to any 
     extent a deduction for taxes otherwise creditable under 
     section 901.''.
       (9) The amendment made by section 11813(b)(17) of the 
     Revenue Reconciliation Act of 1990 shall be applied as if the 
     material stricken by such amendment included the closing 
     parenthesis after ``section 48(a)(5)''.
       (10) Paragraph (1) of section 179(d) is amended by striking 
     ``in a trade or business'' and inserting ``a trade or 
     business''.
       (11) Subparagraph (E) of section 50(a)(2) is amended by 
     striking ``section 48(a)(5)(A)'' and inserting ``section 
     48(a)(5)''.
       (12) The amendment made by section 11801(c)(9)(G)(ii) of 
     the Revenue Reconciliation Act of 1990 shall be applied as if 
     it struck ``Section 422A(c)(2)'' and inserted ``Section 
     422(c)(2)''.
       (13) Subparagraph (B) of section 424(c)(3) is amended by 
     striking ``a qualified stock option, an incentive stock 
     option, an option granted under an employee stock purchase 
     plan, or a restricted stock option'' and inserting ``an 
     incentive stock option or an option granted under an employee 
     stock purchase plan''.
       (14) Subparagraph (E) of section 1367(a)(2) is amended by 
     striking ``section 613A(c)(13)(B)'' and inserting ``section 
     613A(c)(11)(B)''.
       (15) Subparagraph (B) of section 460(e)(6) is amended by 
     striking ``section 167(k)'' and inserting ``section 
     168(e)(2)(A)(ii)''.
       (16) Subparagraph (C) of section 172(h)(4) is amended by 
     striking ``subsection (b)(1)(M)'' and inserting ``subsection 
     (b)(1)(E)''.
       (17) Section 6503 is amended--
       (A) by redesignating the subsection relating to extension 
     in case of certain summonses as subsection (j), and
       (B) by redesignating the subsection relating to cross 
     references as subsection (k).
       (18) Paragraph (4) of section 1250(e) is hereby repealed.
       (19) Paragraph (1) of section 179(d) is amended by adding 
     at the end the following new sentence: ``Such term shall not 
     include any property described in section 50(b) and shall not 
     include air conditioning or heating units.''.
       ``(i) Effective Date.--Except as otherwise expressly 
     provided, any amendment made by this section shall take 
     effect as if included in the provision of the Revenue 
     Reconciliation Act of 1990 to which such amendment 
     relates.''.

     SEC. 1703. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT 
                   OF 1993.

       (a) Amendment Related to Section 13114.--Paragraph (2) of 
     section 1044(c) is amended to read as follows:
       ``(2) Purchase.--The taxpayer shall be considered to have 
     purchased any property if, but for subsection (d), the 
     unadjusted basis of such property would be its cost within 
     the meaning of section 1012.''.
       (b) Amendments Related to Section 13142.--
       (1) Subparagraph (B) of section 13142(b)(6) of the Revenue 
     Reconciliation Act of 1993 is amended to read as follows:
       ``(B) Full-time students, waiver authority, and prohibited 
     discrimination.--The amendments made by paragraphs (2), (3), 
     and (4) shall take effect on the date of the enactment of 
     this Act.''.
       (2) Subparagraph (C) of section 13142(b)(6) of such Act is 
     amended by striking ``paragraph (2)'' and inserting 
     ``paragraph (5)''.
       (c) Amendment Related to Section 13161.--
       (1) In general.--Subsection (e) of section 4001 (relating 
     to inflation adjustment) is amended to read as follows:
       ``(e) Inflation Adjustment.--
       ``(1) In general.--The $30,000 amount in subsection (a) and 
     section 4003(a) shall be increased by an amount equal to--
       ``(A) $30,000, multiplied by
       ``(B) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the vehicle is sold, 
     determined by substituting `calendar year 1990' for `calendar 
     year 1992' in subparagraph (B) thereof.
       ``(2) Rounding.--If any amount as adjusted under paragraph 
     (1) is not a multiple of $2,000, such amount shall be rounded 
     to the next lowest multiple of $2,000.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect on the date of the enactment of this Act.
       (d) Amendment Related to Section 13201.--Clause (ii) of 
     section 135(b)(2)(B) is amended by inserting before the 
     period at the end thereof the following: ``, determined by 
     substituting `calendar year 1989' for `calendar year 1992' in 
     subparagraph (B) thereof''.
       (e) Amendments Related to Section 13203.--Subsection (a) of 
     section 59 is amended--
       (1) by striking ``the amount determined under section 
     55(b)(1)(A)'' in paragraph (1)(A) and (2)(A)(i) and inserting 
     ``the pre-credit tentative minimum tax'',
       (2) by striking ``specified in section 55(b)(1)(A)'' in 
     paragraph (1)(C) and inserting ``specified in subparagraph 
     (A)(i) or (B)(i) of section 55(b)(1) (whichever applies)'',
       (3) by striking ``which would be determined under section 
     55(b)(1)(A)'' in paragraph (2)(A)(ii) and inserting ``which 
     would be the pre-credit tentative minimum tax'', and
       (4) by adding at the end thereof the following new 
     paragraph:
       ``(3) Pre-credit tentative minimum tax.--For purposes of 
     this subsection, the term `pre-credit tentative minimum tax' 
     means--
       ``(A) in the case of a taxpayer other than a corporation, 
     the amount determined under the first sentence of section 
     55(b)(1)(A)(i), or
       ``(B) in the case of a corporation, the amount determined 
     under section 55(b)(1)(B)(i).''.
       (f) Amendment Related to Section 13221.--Sections 1201(a) 
     and 1561(a) are each amended by striking ``last sentence'' 
     each place it appears and inserting ``last 2 sentences''.
       (g) Amendments Related to Section 13222.--
       (1) Subparagraph (B) of section 6033(e)(1) is amended by 
     adding at the end thereof the following new clause:
       ``(iii) Coordination with section 527(f).--This subsection 
     shall not apply to any amount on which tax is imposed by 
     reason of section 527(f).''.
       (2) Clause (i) of section 6033(e)(1)(B) is amended by 
     striking ``this subtitle'' and inserting ``section 501''.
       (h) Amendment Related to Section 13225.--Paragraph (3) of 
     section 6655(g) is amended by striking all that follows `` 
     `3rd month' '' in the sentence following subparagraph (C) and 
     inserting ``, subsection (e)(2)(A) shall be applied by 
     substituting `2 months' for `3 months' in clause (i)(I), the 
     election under clause (i) of subsection (e)(2)(C) may be made 
     separately for each installment, and clause (ii) of 
     subsection (e)(2)(C) shall not apply.''.

[[Page H9600]]

       (i) Amendments Related to Section 13231.--
       (1) Subparagraph (G) of section 904(d)(3) is amended by 
     striking ``section 951(a)(1)(B)'' and inserting 
     ``subparagraph (B) or (C) of section 951(a)(1)''.
       (2) Paragraph (1) of section 956A(b) is amended to read as 
     follows:
       ``(1) the amount (not including a deficit) referred to in 
     section 316(a)(1) to the extent such amount was accumulated 
     in prior taxable years beginning after September 30, 1993, 
     and''.
       (3) Subsection (f) of section 956A is amended by inserting 
     before the period at the end thereof: ``and regulations 
     coordinating the provisions of subsections (c)(3)(A) and 
     (d)''.
       (4) Subsection (b) of section 958 is amended by striking 
     ``956(b)(2)'' each place it appears and inserting 
     ``956(c)(2)''.
       (5)(A) Subparagraph (A) of section 1297(d)(2) is amended by 
     striking ``The adjusted basis of any asset'' and inserting 
     ``The amount taken into account under section 1296(a)(2) with 
     respect to any asset''.
       (B) The paragraph heading of paragraph (2) of section 
     1297(d) is amended to read as follows:
       ``(2) Amount taken into account.--''.
       (6) Subsection (e) of section 1297 is amended by inserting 
     ``For purposes of this part--'' after the subsection heading.
       (j) Amendment Related to Section 13241.--Subparagraph (B) 
     of section 40(e)(1) is amended to read as follows:
       ``(B) for any period before January 1, 2001, during which 
     the rates of tax under section 4081(a)(2)(A) are 4.3 cents 
     per gallon.''.
       (k) Amendment Related to Section 13242.--Paragraph (4) of 
     section 6427(f) is amended by striking ``1995'' and inserting 
     ``1999''.
       (l) Amendment Related to Section 13261.--Clause (iii) of 
     section 13261(g)(2)(A) of the Revenue Reconciliation Act of 
     1993 is amended by striking ``by the taxpayer'' and inserting 
     ``by the taxpayer or a related person''.
       (m) Amendment Related to Section 13301.--Subparagraph (B) 
     of section 1397B(d)(5) is amended by striking ``preceding''.
       (n) Clerical Amendments.--
       (1) Subsection (d) of section 39 is amended--
       (A) by striking ``45'' in the heading of paragraph (5) and 
     inserting ``45A'', and
       (B) by striking ``45'' in the heading of paragraph (6) and 
     inserting ``45B''.
       (2) Subparagraph (A) of section 108(d)(9) is amended by 
     striking ``paragraph (3)(B)'' and inserting ``paragraph 
     (3)(C)''.
       (3) Subparagraph (C) of section 143(d)(2) is amended by 
     striking the period at the end thereof and inserting a comma.
       (4) Clause (ii) of section 163(j)(6)(E) is amended by 
     striking ``which is a'' and inserting ``which is''.
       (5) Subparagraph (A) of section 1017(b)(4) is amended by 
     striking ``subsection (b)(2)(D)'' and inserting ``subsection 
     (b)(2)(E)''.
       (6) So much of section 1245(a)(3) as precedes subparagraph 
     (A) thereof is amended to read as follows:
       ``(3) Section 1245 property.--For purposes of this section, 
     the term `section 1245 property' means any property which is 
     or has been property of a character subject to the allowance 
     for depreciation provided in section 167 and is either--''.
       (7) Paragraph (2) of section 1394(e) is amended--
       (A) by striking ``(i)'' and inserting ``(A)'', and
       (B) by striking ``(ii)'' and inserting ``(B)''.
       (8) Subsection (m) of section 6501 (as redesignated by 
     section 1602) is amended by striking ``or 51(j)'' and 
     inserting ``45B, or 51(j)''.
       (9)(A) The section 6714 added by section 13242(b)(1) of the 
     Revenue Reconciliation Act of 1993 is hereby redesignated as 
     section 6715.
       (B) The table of sections for part I of subchapter B of 
     chapter 68 is amended by striking ``6714'' in the item added 
     by such section 13242(b)(2) of such Act and inserting 
     ``6715''.
       (10) Paragraph (2) of section 9502(b) is amended by 
     inserting ``and before'' after ``1982,''.
       (11) Subsection (a)(3) of section 13206 of the Revenue 
     Reconciliation Act of 1993 is amended by striking ``this 
     section'' and inserting ``this subsection''.
       (12) Paragraph (1) of section 13215(c) of the Revenue 
     Reconciliation Act of 1993 is amended by striking ``Public 
     Law 92-21'' and inserting ``Public Law 98-21''.
       (13) Paragraph (2) of section 13311(e) of the Revenue 
     Reconciliation Act of 1993 is amended by striking ``section 
     1393(a)(3)'' and inserting ``section 1393(a)(2)''.
       (14) Subparagraph (B) of section 117(d)(2) is amended by 
     striking ``section 132(f)'' and inserting ``section 132(h)''.
       (o) Effective Date.--Any amendment made by this section 
     shall take effect as if included in the provision of the 
     Revenue Reconciliation Act of 1993 to which such amendment 
     relates.

     SEC. 1704. MISCELLANEOUS PROVISIONS.

       (a) Application of Amendments Made by Title XII of Omnibus 
     Budget Reconciliation Act of 1990.--Except as otherwise 
     expressly provided, whenever in title XII of the Omnibus 
     Budget Reconciliation Act of 1990 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.
       (b) Treatment of Certain Amounts Under Hedge Bond Rules.--
       (1) In general.--Clause (iii) of section 149(g)(3)(B) is 
     amended to read as follows:
       ``(iii) Amounts held pending reinvestment or redemption.--
     Amounts held for not more than 30 days pending reinvestment 
     or bond redemption shall be treated as invested in bonds 
     described in clause (i).''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 7651 of the Omnibus Budget Reconciliation Act of 
     1989.
       (c) Treatment of Certain Distributions Under Section 
     1445.--
       (1) In general.--Paragraph (3) of section 1445(e) is 
     amended by adding at the end thereof the following new 
     sentence: ``Rules similar to the rules of the preceding 
     provisions of this paragraph shall apply in the case of any 
     distribution to which section 301 applies and which is not 
     made out of the earnings and profits of such a domestic 
     corporation.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to distributions after the date of the enactment 
     of this Act.
       (d) Treatment of Certain Credits Under Section 469.--
       (1) In general.--Subparagraph (B) of section 469(c)(3) is 
     amended by adding at the end thereof the following new 
     sentence: ``If the preceding sentence applies to the net 
     income from any property for any taxable year, any credits 
     allowable under subpart B (other than section 27(a)) or D of 
     part IV of subchapter A for such taxable year which are 
     attributable to such property shall be treated as credits not 
     from a passive activity to the extent the amount of such 
     credits does not exceed the regular tax liability of the 
     taxpayer for the taxable year which is allocable to such net 
     income.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to taxable years beginning after December 31, 
     1986.
       (e) Treatment of Dispositions Under Passive Loss Rules.--
       (1) In general.--Subparagraph (A) of section 469(g)(1) is 
     amended to read as follows:
       ``(A) In general.--If all gain or loss realized on such 
     disposition is recognized, the excess of--
       ``(i) any loss from such activity for such taxable year 
     (determined after the application of subsection (b)), over
       ``(ii) any net income or gain for such taxable year from 
     all other passive activities (determined after the 
     application of subsection (b)),

     shall be treated as a loss which is not from a passive 
     activity.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to taxable years beginning after December 31, 
     1986.
       (f) Miscellaneous Amendments to Foreign Provisions.--
       (1) Coordination of unified estate tax credit with 
     treaties.--Subparagraph (A) of section 2102(c)(3) is amended 
     by adding at the end thereof the following new sentence: 
     ``For purposes of the preceding sentence, property shall not 
     be treated as situated in the United States if such property 
     is exempt from the tax imposed by this subchapter under any 
     treaty obligation of the United States.''.
       (2) Treatment of certain interest paid to related person.--
       (A) Subparagraph (B) of section 163(j)(1) is amended by 
     inserting before the period at the end thereof the following: 
     ``(and clause (ii) of paragraph (2)(A) shall not apply for 
     purposes of applying this subsection to the amount so 
     treated)''.
       (B) Subsection (j) of section 163 is amended by 
     redesignating paragraph (7) as paragraph (8) and by inserting 
     after paragraph (6) the following new paragraph:
       ``(7) Coordination with passive loss rules, etc.--This 
     subsection shall be applied before sections 465 and 469.''.
       (C) The amendments made by this paragraph shall apply as if 
     included in the amendments made by section 7210(a) of the 
     Revenue Reconciliation Act of 1989.
       (3) Treatment of interest allocable to effectively 
     connected income.--
       (A) In general.--
       (i) Subparagraph (B) of section 884(f)(1) is amended by 
     striking ``to the extent'' and all that follows down through 
     ``subparagraph (A)'' and inserting ``to the extent that the 
     allocable interest exceeds the interest described in 
     subparagraph (A)''.
       (ii) The second sentence of section 884(f)(1) is amended by 
     striking ``reasonably expected'' and all that follows down 
     through the period at the end thereof and inserting 
     ``reasonably expected to be allocable interest.''.
       (iii) Paragraph (2) of section 884(f) is amended to read as 
     follows:
       ``(2) Allocable interest.--For purposes of this subsection, 
     the term `allocable interest' means any interest which is 
     allocable to income which is effectively connected (or 
     treated as effectively connected) with the conduct of a trade 
     or business in the United States.''.
       (B) Effective date.--The amendments made by subparagraph 
     (A) shall take effect as if included in the amendments made 
     by section 1241(a) of the Tax Reform Act of 1986.
       (4) Clarification of source rule.--
       (A) In general.--Paragraph (2) of section 865(b) is amended 
     by striking ``863(b)'' and inserting ``863''.
       (B) Effective date.--The amendment made by subparagraph (A) 
     shall take effect as if included in the amendments made by 
     section 1211 of the Tax Reform Act of 1986.
       (5) Repeal of obsolete provisions.--
       (A) Paragraph (1) of section 6038(a) is amended by striking 
     ``, and'' at the end of subparagraph (E) and inserting a 
     period, and by striking subparagraph (F).
       (B) Subsection (b) of section 6038A is amended by adding 
     ``and'' at the end of paragraph (2), by striking ``, and'' at 
     the end of paragraph (3) and inserting a period, and by 
     striking paragraph (4).
       (g) Clarification of Treatment of Medicare Entitlement 
     Under COBRA Provisions.--
       (1) In general.--
       (A) Subclause (V) of section 4980B(f)(2)(B)(i) is amended 
     to read as follows:

       ``(V) Medicare entitlement followed by qualifying event.--
     In the case of a qualifying event described in paragraph 
     (3)(B) that occurs less than 18 months after the date the 
     covered employee became entitled to benefits under title

[[Page H9601]]

     XVIII of the Social Security Act, the period of coverage for 
     qualified beneficiaries other than the covered employee shall 
     not terminate under this clause before the close of the 36-
     month period beginning on the date the covered employee 
     became so entitled.''.

       (B) Clause (v) of section 602(2)(A) of the Employee 
     Retirement Income Security Act of 1974 is amended to read as 
     follows:
       ``(v) Medicare entitlement followed by qualifying event.--
     In the case of a qualifying event described in section 603(2) 
     that occurs less than 18 months after the date the covered 
     employee became entitled to benefits under title XVIII of the 
     Social Security Act, the period of coverage for qualified 
     beneficiaries other than the covered employee shall not 
     terminate under this subparagraph before the close of the 36-
     month period beginning on the date the covered employee 
     became so entitled.''.
       (C) Clause (iv) of section 2202(2)(A) of the Public Health 
     Service Act is amended to read as follows:
       ``(iv) Medicare entitlement followed by qualifying event.--
     In the case of a qualifying event described in section 
     2203(2) that occurs less than 18 months after the date the 
     covered employee became entitled to benefits under title 
     XVIII of the Social Security Act, the period of coverage for 
     qualified beneficiaries other than the covered employee shall 
     not terminate under this subparagraph before the close of the 
     36-month period beginning on the date the covered employee 
     became so entitled.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to plan years beginning after December 31, 1989.
       (h) Treatment of Certain REMIC Inclusions.--
       (1) In general.--Subsection (a) of section 860E is amended 
     by adding at the end thereof the following new paragraph:
       ``(6) Coordination with minimum tax.--For purposes of part 
     VI of subchapter A of this chapter--
       ``(A) the reference in section 55(b)(2) to taxable income 
     shall be treated as a reference to taxable income determined 
     without regard to this subsection,
       ``(B) the alternative minimum taxable income of any holder 
     of a residual interest in a REMIC for any taxable year shall 
     in no event be less than the excess inclusion for such 
     taxable year, and
       ``(C) any excess inclusion shall be disregarded for 
     purposes of computing the alternative tax net operating loss 
     deduction.

     The preceding sentence shall not apply to any organization to 
     which section 593 applies, except to the extent provided in 
     regulations prescribed by the Secretary under paragraph 
     (2).''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 671 of the Tax Reform Act of 1986 unless the taxpayer 
     elects to apply such amendment only to taxable years 
     beginning after the date of the enactment of this Act.
       (i) Exemption From Harbor Maintenance Tax for Certain 
     Passengers.--
       (1) In general.--Subparagraph (D) of section 4462(b)(1) 
     (relating to special rule for Alaska, Hawaii, and 
     possessions) is amended by inserting before the period the 
     following: ``, or passengers transported on United States 
     flag vessels operating solely within the State waters of 
     Alaska or Hawaii and adjacent international waters''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 1402(a) of the Harbor Maintenance Revenue Act of 
     1986.
       (j) Amendments Related to Revenue Provisions of Energy 
     Policy Act of 1992.--
       (1) Effective with respect to taxable years beginning after 
     December 31, 1990, subclause (II) of section 53(d)(1)(B)(iv) 
     is amended to read as follows:

       ``(II) the adjusted net minimum tax for any taxable year is 
     the amount of the net minimum tax for such year increased in 
     the manner provided in clause (iii).''.

       (2) Subsection (g) of section 179A is redesignated as 
     subsection (f).
       (3) Subparagraph (E) of section 6724(d)(3) is amended by 
     striking ``section 6109(f)'' and inserting ``section 
     6109(h)''.
       (4)(A) Subsection (d) of section 30 is amended--
       (i) by inserting ``(determined without regard to subsection 
     (b)(3))'' before the period at the end of paragraph (1) 
     thereof, and
       (ii) by adding at the end thereof the following new 
     paragraph:
       ``(4) Election to not take credit.--No credit shall be 
     allowed under subsection (a) for any vehicle if the taxpayer 
     elects to not have this section apply to such vehicle.''.
       (B) Subsection (m) of section 6501 (as redesignated by 
     section 1602) is amended by striking ``section 40(f)'' and 
     inserting ``section 30(d)(4), 40(f)''.
       (5) Subclause (III) of section 501(c)(21)(D)(ii) is amended 
     by striking ``section 101(6)'' and inserting ``section 
     101(7)'' and by striking ``1752(6)'' and inserting 
     ``1752(7)''.
       (6) Paragraph (1) of section 1917(b) of the Energy Policy 
     Act of 1992 shall be applied as if ``at a rate'' appeared 
     instead of ``at the rate'' in the material proposed to be 
     stricken.
       (7) Paragraph (2) of section 1921(b) of the Energy Policy 
     Act of 1992 shall be applied as if a comma appeared after 
     ``(2)'' in the material proposed to be stricken.
       (8) Subsection (a) of section 1937 of the Energy Policy Act 
     of 1992 shall be applied as if ``Subpart B'' appeared instead 
     of ``Subpart C''.
       (k) Treatment of Qualified Football Coaches Plan.--
       (1) In general.--For purposes of the Internal Revenue Code 
     of 1986, a qualified football coaches plan--
       (A) shall be treated as a multiemployer collectively 
     bargained plan, and
       (B) notwithstanding section 401(k)(4)(B) of such Code, may 
     include a qualified cash and deferred arrangement under 
     section 401(k) of such Code.
       (2) Qualified football coaches plan.--For purposes of this 
     subsection, the term ``qualified football coaches plan'' 
     means any defined contribution plan which is established and 
     maintained by an organization--
       (A) which is described in section 501(c) of such Code,
       (B) the membership of which consists entirely of 
     individuals who primarily coach football as full-time 
     employees of 4-year colleges or universities described in 
     section 170(b)(1)(A)(ii) of such Code, and
       (C) which was in existence on September 18, 1986.
       (3) Effective date.--This subsection shall apply to years 
     beginning after December 22, 1987.
       (l) Determination of Unrecovered Investment in Annuity 
     Contract.--
       (1) In general.--Subparagraph (A) of section 72(b)(4) is 
     amended by inserting ``(determined without regard to 
     subsection (c)(2))'' after ``contract''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 1122(c) of the Tax Reform Act of 1986.
       (m) Modifications to Election To Include Child's Income on 
     Parent's Return.--
       (1) Eligibility for election.--Clause (ii) of section 
     1(g)(7)(A) (relating to election to include certain unearned 
     income of child on parent's return) is amended to read as 
     follows:
       ``(ii) such gross income is more than the amount described 
     in paragraph (4)(A)(ii)(I) and less than 10 times the amount 
     so described,''.
       (2) Computation of tax.--Subparagraph (B) of section 
     1(g)(7) (relating to income included on parent's return) is 
     amended--
       (A) by striking ``$1,000'' in clause (i) and inserting 
     ``twice the amount described in paragraph (4)(A)(ii)(I)'', 
     and
       (B) by amending subclause (II) of clause (ii) to read as 
     follows:

       ``(II) for each such child, 15 percent of the lesser of the 
     amount described in paragraph (4)(A)(ii)(I) or the excess of 
     the gross income of such child over the amount so described, 
     and''.

       (3) Minimum tax.--Subparagraph (B) of section 59(j)(1) is 
     amended by striking ``$1,000'' and inserting ``twice the 
     amount in effect for the taxable year under section 
     63(c)(5)(A)''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after December 31, 
     1995.
       (n) Treatment of Certain Veterans' Reemployment Rights.--
       (1) In general.--Section 414 is amended by adding at the 
     end the following new subsection:
       ``(u) Special Rules Relating to Veterans' Reemployment 
     Rights Under USERRA.--
       ``(1) Treatment of certain contributions made pursuant to 
     veterans' reemployment rights.--If any contribution is made 
     by an employer or an employee under an individual account 
     plan with respect to an employee, or by an employee to a 
     defined benefit plan that provides for employee 
     contributions, and such contribution is required by reason of 
     such employee's rights under chapter 43 of title 38, United 
     States Code, resulting from qualified military service, 
     then--
       ``(A) such contribution shall not be subject to any 
     otherwise applicable limitation contained in section 402(g), 
     402(h), 403(b), 404(a), 404(h), 408, 415, or 457, and shall 
     not be taken into account in applying such limitations to 
     other contributions or benefits under such plan or any other 
     plan, with respect to the year in which the contribution is 
     made,
       ``(B) such contribution shall be subject to the limitations 
     referred to in subparagraph (A) with respect to the year to 
     which the contribution relates (in accordance with rules 
     prescribed by the Secretary), and
       ``(C) 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), 401(m), 403(b)(12), 408(k)(3), 
     408(k)(6), 408(p), 410(b), or 416 by reason of the making of 
     (or the right to make) such contribution.

     For purposes of the preceding sentence, any elective deferral 
     or employee contribution made under paragraph (2) shall be 
     treated as required by reason of the employee's rights under 
     such chapter 43.
       ``(2) Reemployment rights under userra with respect to 
     elective deferrals.--
       ``(A) In general.--For purposes of this subchapter and 
     section 457, if an employee is entitled to the benefits of 
     chapter 43 of title 38, United States Code, with respect to 
     any plan which provides for elective deferrals, the employer 
     sponsoring the plan shall be treated as meeting the 
     requirements of such chapter 43 with respect to such elective 
     deferrals only if such employer--
       ``(i) permits such employee to make additional elective 
     deferrals under such plan (in the amount determined under 
     subparagraph (B) or such lesser amount as is elected by the 
     employee) during the period which begins on the date of the 
     reemployment of such employee with such employer and has the 
     same length as the lesser of--

       ``(I) the product of 3 and the period of qualified military 
     service which resulted in such rights, and
       ``(II) 5 years, and

       ``(ii) makes a matching contribution with respect to any 
     additional elective deferral made pursuant to clause (i) 
     which would have been required had such deferral actually 
     been made during the period of such qualified military 
     service.
       ``(B) Amount of makeup required.--The amount determined 
     under this subparagraph

[[Page H9602]]

     with respect to any plan is the maximum amount of the 
     elective deferrals that the individual would have been 
     permitted to make under the plan in accordance with the 
     limitations referred to in paragraph (1)(A) during the period 
     of qualified military service if the individual had continued 
     to be employed by the employer during such period and 
     received compensation as determined under paragraph (7). 
     Proper adjustment shall be made to the amount determined 
     under the preceding sentence for any elective deferrals 
     actually made during the period of such qualified military 
     service.
       ``(C) Elective deferral.--For purposes of this paragraph, 
     the term `elective deferral' has the meaning given such term 
     by section 402(g)(3); except that such term shall include any 
     deferral of compensation under an eligible deferred 
     compensation plan (as defined in section 457(b)).
       ``(D) After-tax employee contributions.--References in 
     subparagraphs (A) and (B) to elective deferrals shall be 
     treated as including references to employee contributions.
       ``(3) Certain retroactive adjustments not required.--For 
     purposes of this subchapter and subchapter E, no provision of 
     chapter 43 of title 38, United States Code, shall be 
     construed as requiring--
       ``(A) any crediting of earnings to an employee with respect 
     to any contribution before such contribution is actually 
     made, or
       ``(B) any allocation of any forfeiture with respect to the 
     period of qualified military service.
       ``(4) Loan repayment suspensions permitted.--If any plan 
     suspends the obligation to repay any loan made to an employee 
     from such plan for any part of any period during which such 
     employee is performing service in the uniformed services (as 
     defined in chapter 43 of title 38, United States Code), 
     whether or not qualified military service, such suspension 
     shall not be taken into account for purposes of section 
     72(p), 401(a), or 4975(d)(1).
       ``(5) Qualified military service.--For purposes of this 
     subsection, the term `qualified military service' means any 
     service in the uniformed services (as defined in chapter 43 
     of title 38, United States Code) by any individual if such 
     individual is entitled to reemployment rights under such 
     chapter with respect to such service.
       ``(6) Individual account plan.--For purposes of this 
     subsection, the term `individual account plan' means any 
     defined contribution plan (including any tax-sheltered 
     annuity plan under section 403(b), any simplified employee 
     pension under section 408(k), any qualified salary reduction 
     arrangement under section 408(p), and any eligible deferred 
     compensation plan (as defined in section 457(b)).
       ``(7) Compensation.--For purposes of sections 403(b)(3), 
     415(c)(3), and 457(e)(5), an employee who is in qualified 
     military service shall be treated as receiving compensation 
     from the employer during such period of qualified military 
     service equal to--
       ``(A) the compensation the employee would have received 
     during such period if the employee were not in qualified 
     military service, determined based on the rate of pay the 
     employee would have received from the employer but for 
     absence during the period of qualified military service, or
       ``(B) if the compensation the employee would have received 
     during such period was not reasonably certain, the employee's 
     average compensation from the employer during the 12-month 
     period immediately preceding the qualified military service 
     (or, if shorter, the period of employment immediately 
     preceding the qualified military service).
       ``(8) USERRA requirements for qualified retirement plans.--
     For purposes of this subchapter and section 457, an employer 
     sponsoring a retirement plan shall be treated as meeting the 
     requirements of chapter 43 of title 38, United States Code, 
     only if each of the following requirements is met:
       ``(A) An individual reemployed under such chapter is 
     treated with respect to such plan as not having incurred a 
     break in service with the employer maintaining the plan by 
     reason of such individual's period of qualified military 
     service.
       ``(B) Each period of qualified military service served by 
     an individual is, upon reemployment under such chapter, 
     deemed with respect to such plan to constitute service with 
     the employer maintaining the plan for the purpose of 
     determining the nonforfeitability of the individual's accrued 
     benefits under such plan and for the purpose of determining 
     the accrual of benefits under such plan.
       ``(C) An individual reemployed under such chapter is 
     entitled to accrued benefits that are contingent on the 
     making of, or derived from, employee contributions or 
     elective deferrals only to the extent the individual makes 
     payment to the plan with respect to such contributions or 
     deferrals. No such payment may exceed the amount the 
     individual would have been permitted or required to 
     contribute had the individual remained continuously employed 
     by the employer throughout the period of qualified military 
     service. Any payment to such plan shall be made during the 
     period beginning with the date of reemployment and whose 
     duration is 3 times the period of the qualified military 
     service (but not greater than 5 years).
       ``(9) Plans not subject to title 38.--This subsection shall 
     not apply to any retirement plan to which chapter 43 of title 
     38, United States Code, does not apply.
       ``(10) References.--For purposes of this section, any 
     reference to chapter 43 of title 38, United States Code, 
     shall be treated as a reference to such chapter as in effect 
     on December 12, 1994 (without regard to any subsequent 
     amendment).''.
       (2) Amendment to erisa.--Section 408(b)(1) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1148(b)) is 
     amended by adding at the end the following new sentence: ``A 
     loan made by a plan shall not fail to meet the requirements 
     of the preceding sentence by reason of a loan repayment 
     suspension described under section 414(u)(4) of the Internal 
     Revenue Code of 1986.''
       (3) Effective date.--The amendments made by this subsection 
     shall be effective as of December 12, 1994.
       (o) Reporting of Real Estate Transactions.--
       (1) In general.--Paragraph (3) of section 6045(e) (relating 
     to prohibition of separate charge for filing return) is 
     amended by adding at the end the following new sentence: 
     ``Nothing in this paragraph shall be construed to prohibit 
     the real estate reporting person from taking into account its 
     cost of complying with such requirement in establishing its 
     charge (other than a separate charge for complying with such 
     requirement) to any customer for performing services in the 
     case of a real estate transaction.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in section 1015(e)(2)(A) of 
     the Technical and Miscellaneous Revenue Act of 1988.
       (p) Clarification of Denial of Deduction for Stock 
     Redemption Expenses.
       (1) In general.--Paragraph (1) of section 162(k) is amended 
     by striking ``the redemption of its stock'' and inserting 
     ``the reacquisition of its stock or of the stock of any 
     related person (as defined in section 465(b)(3)(C))''.
       (2) Certain deductions permitted.--Subparagraph (A) of 
     section 162(k)(2) is amended by striking ``or'' at the end of 
     clause (i), by redesignating clause (ii) as clause (iii), and 
     by inserting after clause (i) the following new clause:
       ``(ii) deduction for amounts which are properly allocable 
     to indebtedness and amortized over the term of such 
     indebtedness, or''.
       (3) Clerical amendment.--The subsection heading for 
     subsection (k) of section 162 is amended by striking 
     ``Redemption'' and inserting ``Reacquisition''.
       (4) Effective date.--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendments made by this subsection shall apply to amounts 
     paid or incurred after September 13, 1995, in taxable years 
     ending after such date.
       (B) Paragraph (2).--The amendment made by paragraph (2) 
     shall take effect as if included in the amendment made by 
     section 613 of the Tax Reform Act of 1986.
       (q) Clerical Amendment to Section 404.--
       (1) In general.--Paragraph (1) of section 404(j) is amended 
     by striking ``(10)'' and inserting ``(9)''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 713(d)(4)(A) of the Deficit Reduction Act of 1984.
       (r) Passive Income Not To Include FSC Income, Etc.--
       (1) In general.--Paragraph (2) of section 1296(b) is 
     amended by striking ``or'' at the end of subparagraph (B), by 
     striking the period at the end of subparagraph (C) and 
     inserting ``, or'', and by inserting after subparagraph (C) 
     the following new subparagraph:
       ``(D) which is foreign trade income of a FSC or export 
     trade income of an export trade corporation (as defined in 
     section 971).''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in the amendments made by 
     section 1235 of the Tax Reform Act of 1986.
       (s) Technical Correction of Intermediate Sanctions 
     Provisions.--
       (1) Subparagraph (C) of section 6652(c)(1) is amended by 
     striking ``$10'' and inserting ``$20'', and by striking 
     ``$5,000'' and inserting ``$10,000''.
       (2) Subparagraph (D) of section 6652(c)(1) is amended by 
     striking ``$10'' and inserting ``$20''.
       (t) Miscellaneous Clerical Amendments.--
       (1) Subclause (II) of section 56(g)(4)(C)(ii) is amended by 
     striking ``of the subclause'' and inserting ``of subclause''.
       (2) Paragraph (2) of section 72(m) is amended by inserting 
     ``and'' at the end of subparagraph (A), by striking 
     subparagraph (B), and by redesignating subparagraph (C) as 
     subparagraph (B).
       (3) Paragraph (2) of section 86(b) is amended by striking 
     ``adusted'' and inserting ``adjusted''.
       (4)(A) The heading for section 112 is amended by striking 
     ``COMBAT PAY'' and inserting ``COMBAT ZONE COMPENSATION''.
       (B) The item relating to section 112 in the table of 
     sections for part III of subchapter B of chapter 1 is amended 
     by striking ``combat pay'' and inserting ``combat zone 
     compensation''.
       (C) Paragraph (1) of section 3401(a) is amended by striking 
     ``combat pay'' and inserting ``combat zone compensation''.
       (5) Clause (i) of section 172(h)(3)(B) is amended by 
     striking the comma at the end thereof and inserting a period.
       (6) Clause (ii) of section 543(a)(2)(B) is amended by 
     striking ``section 563(c)'' and inserting ``section 563(d)''.
       (7) Paragraph (1) of section 958(a) is amended by striking 
     ``sections 955(b)(1) (A) and (B), 955(c)(2)(A)(ii), and 
     960(a)(1)'' and inserting ``section 960(a)(1)''.
       (8) Subsection (g) of section 642 is amended by striking 
     ``under 2621(a)(2)'' and inserting ``under section 
     2621(a)(2)''.
       (9) Section 1463 is amended by striking ``this subsection'' 
     and inserting ``this section''.
       (10) Subsection (k) of section 3306 is amended by inserting 
     a period at the end thereof.
       (11) The item relating to section 4472 in the table of 
     sections for subchapter B of chapter 36 is amended by 
     striking ``and special rules''.
       (12) Paragraph (3) of section 5134(c) is amended by 
     striking ``section 6662(a)'' and inserting ``section 
     6665(a)''.
       (13) Paragraph (2) of section 5206(f) is amended by 
     striking ``section 5(e)'' and inserting ``section 105(e)''.

[[Page H9603]]

       (14) Paragraph (1) of section 6050B(c) is amended by 
     striking ``section 85(c)'' and inserting ``section 85(b)''.
       (15) Subsection (k) of section 6166 is amended by striking 
     paragraph (6).
       (16) Subsection (e) of section 6214 is amended to read as 
     follows:
       ``(e) Cross Reference.--
  ``For provision giving Tax Court jurisdiction to order a refund of an 
overpayment and to award sanctions, see section 6512(b)(2).''.

       (17) The section heading for section 6043 is amended by 
     striking the semicolon and inserting a comma.
       (18) The item relating to section 6043 in the table of 
     sections for subpart B of part III of subchapter A of chapter 
     61 is amended by striking the semicolon and inserting a 
     comma.
       (19) The table of sections for part I of subchapter A of 
     chapter 68 is amended by striking the item relating to 
     section 6662.
       (20)(A) Section 7232 is amended--
       (i) by striking ``LUBRICATING OIL,'' in the heading, and
       (ii) by striking ``lubricating oil,'' in the text.
       (B) The table of sections for part II of subchapter A of 
     chapter 75 is amended by striking ``lubricating oil,'' in the 
     item relating to section 7232.
       (21) Paragraph (1) of section 6701(a) of the Omnibus Budget 
     Reconciliation Act of 1989 is amended by striking ``subclause 
     (IV)'' and inserting ``subclause (V)''.
       (22) Clause (ii) of section 7304(a)(2)(D) of such Act is 
     amended by striking ``subsection (c)(2)'' and inserting 
     ``subsection (c)''.
       (23) Paragraph (1) of section 7646(b) of such Act is 
     amended by striking ``section 6050H(b)(1)'' and inserting 
     ``section 6050H(b)(2)''.
       (24) Paragraph (10) of section 7721(c) of such Act is 
     amended by striking ``section 6662(b)(2)(C)(ii)'' and 
     inserting ``section 6661(b)(2)(C)(ii)''.
       (25) Subparagraph (A) of section 7811(i)(3) of such Act is 
     amended by inserting ``the first place it appears'' before 
     ``in clause (i)''.
       (26) Paragraph (10) of section 7841(d) of such Act is 
     amended by striking ``section 381(a)'' and inserting 
     ``section 381(c)''.
       (27) Paragraph (2) of section 7861(c) of such Act is 
     amended by inserting ``the second place it appears'' before 
     ``and inserting''.
       (28) Paragraph (1) of section 460(b) is amended by striking 
     ``the look-back method of paragraph (3)'' and inserting ``the 
     look-back method of paragraph (2)''.
       (29) Subparagraph (C) of section 50(a)(2) is amended by 
     striking ``subsection (c)(4)'' and inserting ``subsection 
     (d)(5)''.
       (30) Subparagraph (B) of section 172(h)(4) is amended by 
     striking the material following the heading and preceding 
     clause (i) and inserting ``For purposes of subsection 
     (b)(2)--''.
       (31) Subparagraph (A) of section 355(d)(7) is amended by 
     inserting ``section'' before ``267(b)''.
       (32) Subparagraph (C) of section 420(e)(1) is amended by 
     striking ``mean'' and inserting ``means''.
       (33) Paragraph (4) of section 537(b) is amended by striking 
     ``section 172(i)'' and inserting ``section 172(f)''.
       (34) Subparagraph (B) of section 613(e)(1) is amended by 
     striking the comma at the end thereof and inserting a period.
       (35) Paragraph (4) of section 856(a) is amended by striking 
     ``section 582(c)(5)'' and inserting ``section 582(c)(2)''.
       (36) Sections 904(f)(2)(B)(i) and 907(c)(4)(B)(iii) are 
     each amended by inserting ``(as in effect on the day before 
     the date of the enactment of the Revenue Reconciliation Act 
     of 1990)'' after ``section 172(h)''.
       (37) Subsection (b) of section 936 is amended by striking 
     ``subparagraphs (D)(ii)(I)'' and inserting ``subparagraphs 
     (D)(ii)''.
       (38) Subsection (c) of section 2104 is amended by striking 
     ``subparagraph (A), (C), or (D) of section 861(a)(1)'' and 
     inserting ``section 861(a)(1)(A)''.
       (39) Subparagraph (A) of section 280A(c)(1) is amended to 
     read as follows:
       ``(A) as the principal place of business for any trade or 
     business of the taxpayer,''.
       (40) Section 6038 is amended by redesignating the 
     subsection relating to cross references as subsection (f).
       (41) Clause (iv) of section 6103(e)(1)(A) is amended by 
     striking all that follows ``provisions of'' and inserting 
     ``section 1(g) or 59(j);''.
       (42) The subsection (f) of section 6109 of the Internal 
     Revenue Code of 1986 which was added by section 2201(d) of 
     Public Law 101-624 is redesignated as subsection (g).
       (43) Subsection (b) of section 7454 is amended by striking 
     ``section 4955(e)(2)'' and inserting ``section 4955(f)(2)''.
       (44) Subsection (d) of section 11231 of the Revenue 
     Reconciliation Act of 1990 shall be applied as if ``comma'' 
     appeared instead of ``period'' and as if the paragraph (9) 
     proposed to be added ended with a comma.
       (45) Paragraph (1) of section 11303(b) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if 
     ``paragraph'' appeared instead of ``subparagraph'' in the 
     material proposed to be stricken.
       (46) Subsection (f) of section 11701 of the Revenue 
     Reconciliation Act of 1990 is amended by inserting 
     ``(relating to definitions)'' after ``section 6038(e)''.
       (47) Subsection (i) of section 11701 of the Revenue 
     Reconciliation Act of 1990 shall be applied as if 
     ``subsection'' appeared instead of ``section'' in the 
     material proposed to be stricken.
       (48) Subparagraph (B) of section 11801(c)(2) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if ``section 
     56(g)'' appeared instead of ``section 59(g)''.
       (49) Subparagraph (C) of section 11801(c)(8) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if 
     ``reorganizations'' appeared instead of ``reorganization'' in 
     the material proposed to be stricken.
       (50) Subparagraph (H) of section 11801(c)(9) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if ``section 
     1042(c)(1)(B)'' appeared instead of ``section 
     1042(c)(2)(B)''.
       (51) Subparagraph (F) of section 11801(c)(12) of the 
     Revenue Reconciliation Act of 1990 shall be applied as if 
     ``and (3)'' appeared instead of ``and (E)''.
       (52) Subparagraph (A) of section 11801(c)(22) of the 
     Revenue Reconciliation Act of 1990 shall be applied as if 
     ``chapters 21'' appeared instead of ``chapter 21'' in the 
     material proposed to be stricken.
       (53) Paragraph (3) of section 11812(b) of the Revenue 
     Reconciliation Act of 1990 shall be applied by not executing 
     the amendment therein to the heading of section 42(d)(5)(B).
       (54) Clause (i) of section 11813(b)(9)(A) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if a comma 
     appeared after ``(3)(A)(ix)'' in the material proposed to be 
     stricken.
       (55) Subparagraph (F) of section 11813(b)(13) of the 
     Revenue Reconciliation Act of 1990 shall be applied as if 
     ``tax'' appeared after ``investment'' in the material 
     proposed to be stricken.
       (56) Paragraph (19) of section 11813(b) of the Revenue 
     Reconciliation Act of 1990 shall be applied as if ``Paragraph 
     (20) of section 1016(a), as redesignated by section 11801,'' 
     appeared instead of ``Paragraph (21) of section 1016(a)''.
       (57) Paragraph (5) section 8002(a) of the Surface 
     Transportation Revenue Act of 1991 shall be applied as if 
     ``4481(e)'' appeared instead of ``4481(c)''.
       (58) Section 7872 is amended--
       (A) by striking ``foregone'' each place it appears in 
     subsections (a) and (e)(2) and inserting ``forgone'', and
       (B) by striking ``Foregone'' in the heading for subsection 
     (e) and the heading for paragraph (2) of subsection (e) and 
     inserting ``Forgone''.
       (59) Paragraph (7) of section 7611(h) is amended by 
     striking ``approporiate'' and inserting ``appropriate''.
       (60) The heading of paragraph (3) of section 419A(c) is 
     amended by striking ``severence'' and inserting 
     ``severance''.
       (61) Clause (ii) of section 807(d)(3)(B) is amended by 
     striking ``Commissoners' '' and inserting ``Commissioners' 
     ''.
       (62) Subparagraph (B) of section 1274A(c)(1) is amended by 
     striking ``instument'' and inserting ``instrument''.
       (63) Subparagraph (B) of section 724(d)(3) by striking 
     ``Subparagaph'' and inserting ``Subparagraph''.
       (64) The last sentence of paragraph (2) of section 42(c) is 
     amended by striking ``of 1988''.
       (65) Paragraph (1) of section 9707(d) is amended by 
     striking ``diligence,'' and inserting ``diligence''.
       (66) Subsection (c) of section 4977 is amended by striking 
     ``section 132(i)(2)'' and inserting ``section 132(h)''.
       (67) The last sentence of section 401(a)(20) is amended by 
     striking ``section 211'' and inserting ``section 521''.
       (68) Subparagraph (A) of section 402(g)(3) is amended by 
     striking ``subsection (a)(8)'' and inserting ``subsection 
     (e)(3)''.
       (69) The last sentence of section 403(b)(10) is amended by 
     striking ``an direct'' and inserting ``a direct''.
       (70) Subparagraph (A) of section 4973(b)(1) is amended by 
     striking ``sections 402(c)'' and inserting ``section 
     402(c)''.
       (71) Paragraph (12) of section 3405(e) is amended by 
     striking ``(b)(3)'' and inserting ``(b)(2)''.
       (72) Paragraph (41) of section 521(b) of the Unemployment 
     Compensation Amendments of 1992 shall be applied as if 
     ``section'' appeared instead of ``sections'' in the material 
     proposed to be stricken.
       (73) Paragraph (27) of section 521(b) of the Unemployment 
     Compensation Amendments of 1992 shall be applied as if 
     ``Section 691(c)(5)'' appeared instead of ``Section 691(c)''.
       (74) Paragraph (5) of section 860F(a) is amended by 
     striking ``paragraph (1)'' and inserting ``paragraph (2)''.
       (75) Paragraph (1) of section 415(k) is amended by adding 
     ``or'' at the end of subparagraph (C), by striking 
     subparagraphs (D) and (E), and by redesignating subparagraph 
     (F) as subparagraph (D).
       (76) Paragraph (2) of section 404(a) is amended by striking 
     ``(18),''.
       (77) Clause (ii) of section 72(p)(4)(A) is amended to read 
     as follows:
       ``(ii) Special rule.--The term `qualified employer plan' 
     shall include any plan which was (or was determined to be) a 
     qualified employer plan or a government plan.''.
       (78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each 
     amended by striking ``section 6662(d)(2)(C)(ii)'' and 
     inserting ``section 6662(d)(2)(C)(iii)''.
       (79) Subsection (a) of section 164 is amended by striking 
     the paragraphs relating to the generation-skipping tax and 
     the environmental tax imposed by section 59A and by inserting 
     after paragraph (3) the following new paragraphs:
       ``(4) The GST tax imposed on income distributions.
       ``(5) The environmental tax imposed by section 59A.''.
       (80) Subclause (I) of section 936(a)(4)(A)(ii) is amended 
     by striking ``deprecation'' and inserting ``depreciation''.

                      Subtitle H--Other Provisions

     SEC. 1801. EXEMPTION FROM DIESEL FUEL DYEING REQUIREMENTS 
                   WITH RESPECT TO CERTAIN STATES.

       (a) In General.--Section 4082 (relating to exemptions for 
     diesel fuel) is amended by redesignating subsections (c) and 
     (d) as subsections (d) and (e), respectively, and by 
     inserting after subsection (b) the following new subsection:

[[Page H9604]]

       ``(c) Exception to Dyeing Requirements.--Paragraph (2) of 
     subsection (a) shall not apply with respect to any diesel 
     fuel--
       ``(1) removed, entered, or sold in a State for ultimate 
     sale or use in an area of such State during the period such 
     area is exempted from the fuel dyeing requirements under 
     subsection (i) of section 211 of the Clean Air Act (as in 
     effect on the date of the enactment of this subsection) by 
     the Administrator of the Environmental Protection Agency 
     under paragraph (4) of such subsection (i) (as so in effect), 
     and
       ``(2) the use of which is certified pursuant to regulations 
     issued by the Secretary.''
       (b) Effective Date.--The amendments made by this section 
     shall apply with respect to fuel removed, entered, or sold on 
     or after the first day of the first calendar quarter 
     beginning after the date of the enactment of this Act.

     SEC. 1802. TREATMENT OF CERTAIN UNIVERSITY ACCOUNTS.

       (a) In General.--For purposes of subsection (s) of section 
     3121 of the Internal Revenue Code of 1986 (relating to 
     concurrent employment by 2 or more employers)--
       (1) the following entities shall be deemed to be related 
     corporations that concurrently employ the same individual:
       (A) a State university which employs health professionals 
     as faculty members at a medical school, and
       (B) an agency account of a State university which is 
     described in subparagraph (A) and from which there is 
     distributed to such faculty members payments forming a part 
     of the compensation that the State, or such State university, 
     as the case may be, agrees to pay to such faculty members, 
     but only if--
       (i) such agency account is authorized by State law and 
     receives the funds for such payments from a faculty practice 
     plan described in section 501(c)(3) of such Code and exempt 
     from tax under section 501(a) of such Code,
       (ii) such payments are distributed by such agency account 
     to such faculty members who render patient care at such 
     medical school, and
       (iii) such faculty members comprise at least 30 percent of 
     the membership of such faculty practice plan, and
       (2) remuneration which is disbursed by such agency account 
     to any such faculty member of the medical school described in 
     paragraph (1)(A) shall be deemed to have been actually 
     disbursed by the State, or such State university, as the case 
     may be, as a common paymaster and not to have been actually 
     disbursed by such agency account.
       (b) Effective Date.--The provisions of subsection (a) shall 
     apply to remuneration paid after December 31, 1996.

     SEC. 1803. MODIFICATIONS TO EXCISE TAX ON OZONE-DEPLETING 
                   CHEMICALS.

       (a) Recycled Halon.--
       (1) In general.--Section 4682(d)(1) (relating to recycling) 
     is amended by inserting ``, or on any recycled halon imported 
     from any country which is a signatory to the Montreal 
     Protocol on Substances that Deplete the Ozone Layer'' before 
     the period at the end.
       (2) Certification system.--The Secretary of the Treasury, 
     after consultation with the Administrator of the 
     Environmental Protection Agency, shall develop a 
     certification system to ensure compliance with the recycling 
     requirement for imported halon under section 4682(d)(1) of 
     the Internal Revenue Code of 1986, as amended by paragraph 
     (1).
       (b) Chemicals Used as Propellants in Metered-Dose Inhalers 
     Tax-Exempt.--Paragraph (4) of section 4682(g) (relating to 
     phase-in of tax on certain substances) is amended to read as 
     follows:
       ``(4) Chemicals used as propellants in metered-dose 
     inhalers.--
       ``(A) Tax-exempt.--
       ``(i) In general.--No tax shall be imposed by section 4681 
     on--

       ``(I) any use of any substance as a propellant in metered-
     dose inhalers, or
       ``(II) any qualified sale by the manufacturer, producer, or 
     importer of any substance.

       ``(ii) Qualified sale.--For purposes of clause (i), the 
     term `qualified sale' means any sale by the manufacturer, 
     producer, or importer of any substance--

       ``(I) for use by the purchaser as a propellant in metered-
     dose inhalers, or
       ``(II) for resale by the purchaser to a 2d purchaser for 
     such use by the 2d purchaser.

     The preceding sentence shall apply only if the manufacturer, 
     producer, and importer, and the 1st and 2d purchasers (if 
     any) meet such registration requirements as may be prescribed 
     by the Secretary.
       ``(B) Overpayments.--If any substance on which tax was paid 
     under this subchapter is used by any person as a propellant 
     in metered-dose inhalers, credit or refund without interest 
     shall be allowed to such person in an amount equal to the tax 
     so paid. Amounts payable under the preceding sentence with 
     respect to uses during the taxable year shall be treated as 
     described in section 34(a) for such year unless claim thereof 
     has been timely filed under this subparagraph.''
       (c) Effective Dates.--
       (1) Recycled halon.--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendment made by subsection (a)(1) shall take effect on 
     January 1, 1997.
       (B) Halon-1211.--In the case of Halon-1211, the amendment 
     made by subsection (a)(1) shall take effect on January 1, 
     1998.
       (2) Metered-dose inhalers.--The amendment made by 
     subsection (b) shall take effect on the 7th day after the 
     date of the enactment of this Act.

     SEC. 1804. TAX-EXEMPT BONDS FOR SALE OF ALASKA POWER 
                   ADMINISTRATION FACILITY.

       Sections 142(f)(3) (as added by section 1608) and 147(d) of 
     the Internal Revenue Code of 1986 shall not apply in 
     determining whether any private activity bond issued after 
     the date of the enactment of this Act and used to finance the 
     acquisition of the Snettisham hydroelectric project from the 
     Alaska Power Administration is a qualified bond for purposes 
     of such Code.

     SEC. 1805. NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS BY 
                   COMMON TRUST FUNDS TO REGULATED INVESTMENT 
                   COMPANIES.

       (a) General Rule.--Section 584 (relating to common trust 
     funds) is amended by redesignating subsection (h) as 
     subsection (i) and by inserting after subsection (g) the 
     following new subsection:
       ``(h) Nonrecognition Treatment for Certain Transfers to 
     Regulated Investment Companies.--
       ``(1) In general.--If--
       ``(A) a common trust fund transfers substantially all of 
     its assets to one or more regulated investment companies in 
     exchange solely for stock in the company or companies to 
     which such assets are so transferred, and
       ``(B) such stock is distributed by such common trust fund 
     to participants in such common trust fund in exchange solely 
     for their interests in such common trust fund,
     no gain or loss shall be recognized by such common trust fund 
     by reason of such transfer or distribution, and no gain or 
     loss shall be recognized by any participant in such common 
     trust fund by reason of such exchange.
       ``(2) Basis rules.--
       ``(A) Regulated investment company.--The basis of any asset 
     received by a regulated investment company in a transfer 
     referred to in paragraph (1)(A) shall be the same as it would 
     be in the hands of the common trust fund.
       ``(B) Participants.--The basis of the stock which is 
     received in an exchange referred to in paragraph (1)(B) shall 
     be the same as that of the property exchanged. If stock in 
     more than one regulated investment company is received in 
     such exchange, the basis determined under the preceding 
     sentence shall be allocated among the stock in each such 
     company on the basis of respective fair market values.
       ``(3) Treatment of assumptions of liability.--
       ``(A) In general.--In determining whether the transfer 
     referred to in paragraph (1)(A) is in exchange solely for 
     stock in one or more regulated investment companies, the 
     assumption by any such company of a liability of the common 
     trust fund, and the fact that any property transferred by the 
     common trust fund is subject to a liability, shall be 
     disregarded.
       ``(B) Special rule where assumed liabilities exceed 
     basis.--
       ``(i) In general.--If, in any transfer referred to in 
     paragraph (1)(A), the assumed liabilities exceed the 
     aggregate adjusted bases (in the hands of the common trust 
     fund) of the assets transferred to the regulated investment 
     company or companies--

       ``(I) notwithstanding paragraph (1), gain shall be 
     recognized to the common trust fund on such transfer in an 
     amount equal to such excess,
       ``(II) the basis of the assets received by the regulated 
     investment company or companies in such transfer shall be 
     increased by the amount so recognized, and
       ``(III) any adjustment to the basis of a participant's 
     interest in the common trust fund as a result of the gain so 
     recognized shall be treated as occurring immediately before 
     the exchange referred to in paragraph (1)(B).

     If the transfer referred to in paragraph (1)(A) is to two or 
     more regulated investment companies, the basis increase under 
     subclause (II) shall be allocated among such companies on the 
     basis of the respective fair market values of the assets 
     received by each of such companies.
       ``(ii) Assumed liabilities.--For purposes of clause (i), 
     the term `assumed liabilities' means the aggregate of--

       ``(I) any liability of the common trust fund assumed by any 
     regulated investment company in connection with the transfer 
     referred to in paragraph (1)(A), and
       ``(II) any liability to which property so transferred is 
     subject.

       ``(4) Common trust fund must meet diversification rules.--
     This subsection shall not apply to any common trust fund 
     which would not meet the requirements of section 
     368(a)(2)(F)(ii) if it were a corporation. For purposes of 
     the preceding sentence, Government securities shall not be 
     treated as securities of an issuer in applying the 25-percent 
     and 50-percent test and such securities shall not be excluded 
     for purposes of determining total assets under clause (iv) of 
     section 368(a)(2)(F).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to transfers after December 31, 1995.

     SEC. 1806. QUALIFIED STATE TUITION PROGRAMS.

       (a) In General.--Subchapter F of chapter 1 (relating to 
     exempt organizations) is amended by adding at the end the 
     following new part:

             ``PART VIII--QUALIFIED STATE TUITION PROGRAMS

``Sec. 529. Qualified State tuition programs.

     ``SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

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

[[Page H9605]]

     and maintained by a State or agency or instrumentality 
     thereof--
       ``(A) under which a person--
       ``(i) may purchase tuition credits or certificates on 
     behalf of a designated beneficiary which entitle the 
     beneficiary to the waiver or payment of qualified higher 
     education expenses of the beneficiary, or
       ``(ii) may make contributions to an account which is 
     established for the purpose of meeting the qualified higher 
     education expenses of the designated beneficiary of the 
     account, and
       ``(B) which meets the other requirements of this 
     subsection.
       ``(2) Cash contributions.--A program shall not be treated 
     as a qualified State tuition program unless it provides that 
     purchases or contributions may only be made in cash.
       ``(3) Refunds.--A program shall not be treated as a 
     qualified State tuition program unless it imposes a more than 
     de minimis penalty on any refund of earnings from the account 
     which are not--
       ``(A) used for qualified higher education expenses of the 
     designated beneficiary,
       ``(B) made on account of the death or disability of the 
     designated beneficiary, or
       ``(C) made on account of a scholarship (or allowance or 
     payment described in section 135(d)(1) (B) or (C)) received 
     by the designated beneficiary to the extent the amount of the 
     refund does not exceed the amount of the scholarship, 
     allowance, or payment.
       ``(4) Separate accounting.--A program shall not be treated 
     as a qualified State tuition program unless it provides 
     separate accounting for each designated beneficiary.
       ``(5) No investment direction.--A program shall not be 
     treated as a qualified State tuition program unless it 
     provides that any contributor to, or designated beneficiary 
     under, such program may not direct the investment of any 
     contributions to the program (or any earnings thereon).
       ``(6) No pledging of interest as security.--A program shall 
     not be treated as a qualified State tuition program if it 
     allows any interest in the program or any portion thereof to 
     be used as security for a loan.
       ``(7) Prohibition on excess contributions.--A program shall 
     not be treated as a qualified State tuition program unless it 
     provides adequate safeguards to prevent contributions on 
     behalf of a designated beneficiary in excess of those 
     necessary to provide for the qualified higher education 
     expenses of the beneficiary.
       ``(c) Tax Treatment of Designated Beneficiaries and 
     Contributors.--
       ``(1) In general.--Except as otherwise provided in this 
     subsection, no amount shall be includible in gross income 
     of--
       ``(A) a designated beneficiary under a qualified State 
     tuition program, or
       ``(B) a contributor to such program on behalf of a 
     designated beneficiary,
     with respect to any distribution or earnings under such 
     program.
       ``(2) Contributions.--In no event shall a contribution to a 
     qualified State tuition program on behalf of a designated 
     beneficiary be treated as a taxable gift for purposes of 
     chapter 12.
       ``(3) Distributions.--
       ``(A) In general.--Any distribution under a qualified State 
     tuition program shall be includible in the gross income of 
     the distributee in the manner as provided under section 72 to 
     the extent not excluded from gross income under any other 
     provision of this chapter.
       ``(B) In-kind distributions.--Any benefit furnished to a 
     designated beneficiary under a qualified State tuition 
     program shall be treated as a distribution to the 
     beneficiary.
       ``(C) Change in beneficiaries.--
       ``(i) Rollovers.--Subparagraph (A) shall not apply to that 
     portion of any distribution which, within 60 days of such 
     distribution, is transferred to the credit of another 
     designated beneficiary under a qualified State tuition 
     program who is a member of the family of the designated 
     beneficiary with respect to which the distribution was made.
       ``(ii) Change in designated beneficiaries.--Any change in 
     the designated beneficiary of an interest in a qualified 
     State tuition program shall not be treated as a distribution 
     for purposes of subparagraph (A) if the new beneficiary is a 
     member of the family of the old beneficiary.
       ``(D) Operating rules.--For purposes of applying section 
     72--
       ``(i) to the extent provided by the Secretary, all 
     qualified State tuition programs of which an individual is a 
     designated beneficiary shall be treated as one program,
       ``(ii) all distributions during a taxable year shall be 
     treated as one distribution, and
       ``(iii) the value of the contract, income on the contract, 
     and investment in the contract shall be computed as of the 
     close of the calendar year in which the taxable year begins.
       ``(4) Estate tax inclusion.--The value of any interest in 
     any qualified State tuition program which is attributable to 
     contributions made by an individual to such program on behalf 
     of any designated beneficiary shall be includible in the 
     gross estate of the contributor for purposes of chapter 11.
       ``(5) Special rule for applying section 2503(e).--For 
     purposes of section 2503(e), the waiver (or payment to an 
     educational institution) of qualified higher education 
     expenses of a designated beneficiary under a qualified State 
     tuition program shall be treated as a qualified transfer.
       ``(d) Reporting Requirements.--
       ``(1) In general.--If there is a distribution to any 
     individual with respect to an interest in a qualified State 
     tuition program during any calendar year, each officer or 
     employee having control of the qualified State tuition 
     program or their designee shall make such reports as the 
     Secretary may require regarding such distribution to the 
     Secretary and to the designated beneficiary or the individual 
     to whom the distribution was made. Any such report shall 
     include such information as the Secretary may prescribe.
       ``(2) Timing of reports.--Any report required by this 
     subsection--
       ``(A) shall be filed at such time and in such matter as the 
     Secretary prescribes, and
       ``(B) shall be furnished to individuals not later than 
     January 31 of the calendar year following the calendar year 
     to which such report relates.
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Designated beneficiary.--The term `designated 
     beneficiary' means--
       ``(A) the individual designated at the commencement of 
     participation in the qualified State tuition program as the 
     beneficiary of amounts paid (or to be paid) to the program,
       ``(B) in the case of a change in beneficiaries described in 
     subsection (c)(2)(C), the individual who is the new 
     beneficiary, and
       ``(C) in the case of an interest in a qualified State 
     tuition program purchased by a State or local government or 
     an organization described in section 501(c)(3) and exempt 
     from taxation under section 501(a) as part of a scholarship 
     program operated by such government or organization, the 
     individual receiving such interest as a scholarship.
       ``(2) Member of family.--The term `member of the family' 
     has the same meaning given such term as section 2032A(e)(2).
       ``(3) Qualified higher education expenses.--The term 
     `qualified higher education expenses' means tuition, fees, 
     books, supplies, and equipment required for the enrollment or 
     attendance of a designated beneficiary at an eligible 
     educational institution (as defined in section 135(c)(3)).
       ``(4) Application of section 514.--An interest in a 
     qualified State tuition program shall not be treated as debt 
     for purposes of section 514.''.
       (b) Conforming Amendments.--
       (1) Section 135(d)(1) is amended by striking ``or'' at the 
     end of subparagraph (B), by striking the period at the end of 
     subparagraph (C) and inserting ``, or'', and by adding at the 
     end the following new subparagraph:
       ``(D) a payment, waiver, or reimbursement of qualified 
     higher education expenses under a qualified State tuition 
     program (within the meaning of section 529(b)).''
       (2) The table of parts for subchapter F of chapter 1 is 
     amended by adding at the end the following new item:

``Part VIII. Qualified State tuition programs.''

         (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years ending after the date of the enactment 
     of this Act.
       (2) Transition rule.--If--
       (A) a State or agency or instrumentality thereof maintains, 
     on the date of the enactment of this Act, a program under 
     which persons may purchase tuition credits or certificates on 
     behalf of, or make contributions for education expenses of, a 
     designated beneficiary, and
       (B) such program meets the requirements of a qualified 
     State tuition program before the later of--
       (i) the date which is 1 year after such date of enactment, 
     or
       (ii) the first day of the first calendar quarter after the 
     close of the first regular session of the State legislature 
     that begins after such date of enactment,
     the amendments made by this section shall apply to 
     contributions (and earnings allocable thereto) made before 
     the date such program meets the requirements of such 
     amendments without regard to whether any requirements of such 
     amendments are met with respect to such contributions and 
     earnings.
     For purposes of subparagraph (B)(ii), if a State has a 2-year 
     legislative session, each year of such session shall be 
     deemed to be a separate regular session of the State 
     legislature.

     SEC. 1807. ADOPTION ASSISTANCE.

       (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 22 the following new 
     section:

     ``SEC. 23. ADOPTION EXPENSES.

       ``(a) Allowance of Credit.--
       ``(1) In general.--In the case of an individual, there 
     shall be allowed as a credit against the tax imposed by this 
     chapter the amount of the qualified adoption expenses paid or 
     incurred by the taxpayer.
       ``(2) Year credit allowed.--The credit under paragraph (1) 
     with respect to any expense shall be allowed--
       ``(A) for the taxable year following the taxable year 
     during which such expense is paid or incurred, or
       ``(B) in the case of an expense which is paid or incurred 
     during the taxable year in which the adoption becomes final, 
     for such taxable year.
       ``(b) Limitations.--
       ``(1) Dollar limitation.--The aggregate amount of qualified 
     adoption expenses which may be taken into account under 
     subsection (a) for all taxable years with respect to the 
     adoption of a child by the taxpayer shall not exceed $5,000 
     ($6,000, in the case of a child with special needs).
       ``(2) Income limitation.--
       ``(A) In general.--The amount allowable as a credit under 
     subsection (a) for any taxable year shall be reduced (but not 
     below zero) by an amount which bears the same ratio to the 
     amount so allowable (determined without regard to this 
     paragraph but with regard to paragraph (1)) as--
       ``(i) the amount (if any) by which the taxpayer's adjusted 
     gross income exceeds $75,000, bears to
       ``(ii) $40,000.
       ``(B) Determination of adjusted gross income.--For purposes 
     of subparagraph (A), adjusted gross income shall be 
     determined--

[[Page H9606]]

       ``(i) without regard to sections 911, 931, and 933, and
       ``(ii) after the application of sections 86, 135, 137, 219, 
     and 469.
       ``(3) Denial of double benefit.--
       ``(A) In general.--No credit shall be allowed under 
     subsection (a) for any expense for which a deduction or 
     credit is allowed under any other provision of this chapter.
       ``(B) Grants.--No credit shall be allowed under subsection 
     (a) for any expense to the extent that funds for such expense 
     are received under any Federal, State, or local program.
       ``(c) Carryforwards of Unused Credit.--If the credit 
     allowable under subsection (a) for any taxable year exceeds 
     the limitation imposed by section 26(a) for such taxable year 
     reduced by the sum of the credits allowable under this 
     subpart (other than this section), such excess shall be 
     carried to the succeeding taxable year and added to the 
     credit allowable under subsection (a) for such taxable year. 
     No credit may be carried forward under this subsection to any 
     taxable year following the fifth taxable year after the 
     taxable year in which the credit arose. For purposes of the 
     preceding sentence, credits shall be treated as used on a 
     first-in first-out basis.
       ``(d) Definitions.--For purposes of this section--
       ``(1) Qualified adoption expenses.--The term `qualified 
     adoption expenses' means reasonable and necessary adoption 
     fees, court costs, attorney fees, and other expenses--
       ``(A) which are directly related to, and the principal 
     purpose of which is for, the legal adoption of an eligible 
     child by the taxpayer,
       ``(B) which are not incurred in violation of State or 
     Federal law or in carrying out any surrogate parenting 
     arrangement,
       ``(C) which are not expenses in connection with the 
     adoption by an individual of a child who is the child of such 
     individual's spouse, and
       ``(D) which are not reimbursed under an employer program or 
     otherwise.
       ``(2) Eligible child.--The term `eligible child' means any 
     individual--
       ``(A) who--
       ``(i) has not attained age 18, or
       ``(ii) is physically or mentally incapable of caring for 
     himself, and
       ``(B) in the case of qualified adoption expenses paid or 
     incurred after December 31, 2001, who is a child with special 
     needs.
       ``(3) Child with special needs.--The term `child with 
     special needs' means any child if--
       ``(A) a State has determined that the child cannot or 
     should not be returned to the home of his parents,
       ``(B) such State has determined that there exists with 
     respect to the child a specific factor or condition (such as 
     his ethnic background, age, or membership in a minority or 
     sibling group, or the presence of factors such as medical 
     conditions or physical, mental, or emotional handicaps) 
     because of which it is reasonable to conclude that such child 
     cannot be placed with adoptive parents without providing 
     adoption assistance, and
       ``(C) such child is a citizen or resident of the United 
     States (as defined in section 217(h)(3)).
         ``(e) Special Rules for Foreign Adoptions.--In the case 
     of an adoption of a child who is not a citizen or resident of 
     the United States (as defined in section 217(h)(3))--
       ``(1) subsection (a) shall not apply to any qualified 
     adoption expense with respect to such adoption unless such 
     adoption becomes final, and
       ``(2) any such expense which is paid or incurred before the 
     taxable year in which such adoption becomes final shall be 
     taken into account under this section as if such expense were 
     paid or incurred during such year.
       ``(f) Filing Requirements.--
       ``(1) Married couples must file joint returns.--Rules 
     similar to the rules of paragraphs (2), (3), and (4) of 
     section 21(e) shall apply for purposes of this section.
       ``(2) Taxpayer must include tin.--
       ``(A) In general.--No credit shall be allowed under this 
     section with respect to any eligible child unless the 
     taxpayer includes (if known) the name, age, and TIN of such 
     child on the return of tax for the taxable year.
       ``(B) Other methods.--The Secretary may, in lieu of the 
     information referred to in subparagraph (A), require other 
     information meeting the purposes of subparagraph (A), 
     including identification of an agent assisting with the 
     adoption.
       ``(g) Basis Adjustments.--For purposes of this subtitle, if 
     a credit is allowed under this section for any expenditure 
     with respect to any property, the increase in the basis of 
     such property which would (but for this subsection) result 
     from such expenditure shall be reduced by the amount of the 
     credit so allowed.
       ``(h) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this section 
     and section 137, including regulations which treat unmarried 
     individuals who pay or incur qualified adoption expenses with 
     respect to the same child as 1 taxpayer for purposes of 
     applying the dollar limitation in subsection (b)(1) of 
     this section and in section 137(b)(1).''
       (b) Exclusion of Amounts Received Under Employer's Adoption 
     Assistance Programs.--Part III of subchapter B of chapter 1 
     (relating to items specifically excluded from gross income) 
     is amended by redesignating section 137 as section 138 and by 
     inserting after section 136 the following new section:

     ``SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

       ``(a) In General.--Gross income of an employee does not 
     include amounts paid or expenses incurred by the employer for 
     qualified adoption expenses in connection with the adoption 
     of a child by an employee if such amounts are furnished 
     pursuant to an adoption assistance program.
       ``(b) Limitations.--
       ``(1) Dollar limitation.--The aggregate amount excludable 
     from gross income under subsection (a) for all taxable years 
     with respect to the adoption of a child by the taxpayer shall 
     not exceed $5,000 ($6,000, in the case of a child with 
     special needs).
       ``(2) Income limitation.--The amount excludable from gross 
     income under subsection (a) for any taxable year shall be 
     reduced (but not below zero) by an amount which bears the 
     same ratio to the amount so excludable (determined without 
     regard to this paragraph but with regard to paragraph (1)) 
     as--
         ``(A) the amount (if any) by which the taxpayer's 
     adjusted gross income exceeds $75,000, bears to
       ``(B) $40,000.
       ``(3) Determination of adjusted gross income.--For purposes 
     of paragraph (2), adjusted gross income shall be determined--
       ``(A) without regard to this section and sections 911, 931, 
     and 933, and
       ``(B) after the application of sections 86, 135, 219, and 
     469.
       ``(c) Adoption Assistance Program.--For purposes of this 
     section, an adoption assistance program is a separate written 
     plan of an employer for the exclusive benefit of such 
     employer's employees--
       ``(1) under which the employer provides such employees with 
     adoption assistance, and
       ``(2) which meets requirements similar to the requirements 
     of paragraphs (2), (3), (5), and (6) of section 127(b).

     An adoption reimbursement program operated under section 1052 
     of title 10, United States Code (relating to armed forces) or 
     section 514 of title 14, United States Code (relating to 
     members of the Coast Guard) shall be treated as an adoption 
     assistance program for purposes of this section.
       ``(d) Qualified Adoption Expenses.--For purposes of this 
     section, the term `qualified adoption expenses' has the 
     meaning given such term by section 23(d) (determined without 
     regard to reimbursements under this section).
       ``(e) Certain Rules To Apply.--Rules similar to the rules 
     of subsections (e), (f), and (g) of section 23 shall apply 
     for purposes of this section.
       ``(f) Termination.--This section shall not apply to amounts 
     paid or expenses incurred after December 31, 2001.''
       (c) Conforming Amendments.--
       (1) Subparagraph (C) of section 25(e)(1) is amended by 
     inserting ``and section 23'' after ``this section''.
       (2) Sections 86(b)(2)(A) and 135(c)(4)(A) are each amended 
     by inserting ``137,'' before ``911''.
       (3) Clause (i) of section 219(g)(3)(A) is amended by 
     inserting ``, 137,'' before ``and 911''.
       (4) Clause (ii) of section 469(i)(3)(E) is amended to read 
     as follows:
       ``(ii) the amounts excludable from gross income under 
     sections 135 and 137,''.
       (5) Subsection (a) of section 1016 is amended by striking 
     ``and'' at the end of paragraph (24), by striking the period 
     at the end of paragraph (25) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(26) to the extent provided in sections 23(g) and 
     137(e).''
       (6) The table of sections for subpart A of part IV of 
     subchapter A of chapter 1 is amended by inserting after the 
     item relating to section 22 the following new item:

``Sec. 23. Adoption expenses.''

         (7) The table of sections for part III of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     137 and inserting the following:

``Sec. 137. Adoption assistance programs.

``Sec. 138. Cross reference to other Acts.''
         (d) Study and Report.--The Secretary of the Treasury 
     shall study the effect on adoptions of the tax credit and 
     gross income exclusion established by the amendments made by 
     this section and shall submit a report regarding the study to 
     the Committee on Finance of the Senate and the Committee on 
     Ways and Means of the House of Representatives not later than 
     January 1, 2000.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 1808. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

       (a) State Plan Requirements.--Section 471(a) of the Social 
     Security Act (42 U.S.C 671(a)) is amended--
       (1) by striking ``and'' at the end of paragraph (16);
       (2) by striking the period at the end of paragraph (17) and 
     inserting ``; and''; and
       (3) by adding at the end the following:
       ``(18) not later than January 1, 1997, provides that 
     neither the State nor any other entity in the State that 
     receives funds from the Federal Government and is involved in 
     adoption or foster care placements may--
       ``(A) deny to any person the opportunity to become an 
     adoptive or a foster parent, on the basis of the race, color, 
     or national origin of the person, or of the child, involved; 
     or
       ``(B) delay or deny the placement of a child for adoption 
     or into foster care, on the basis of the race, color, or 
     national origin of the adoptive or foster parent, or the 
     child, involved.''.
       (b) Enforcement.--Section 474 of such Act (42 U.S.C. 674) 
     is amended by adding at the end the following:
       ``(d)(1) If, during any quarter of a fiscal year, a State's 
     program operated under this part is found, as a result of a 
     review conducted under section 1123A, or otherwise, to have 
     violated section 471(a)(18) with respect to a person or to 
     have failed to implement a corrective action plan within a 
     period of time not to exceed 6 months with respect to such 
     violation, then, notwithstanding subsection (a) of this 
     section

[[Page H9607]]

     and any regulations promulgated under section 1123A(b)(3), 
     the Secretary shall reduce the amount otherwise payable to 
     the State under this part, for that fiscal year quarter and 
     for any subsequent quarter of such fiscal year, until the 
     State program is found, as a result of a subsequent review 
     under section 1123A, to have implemented a corrective action 
     plan with respect to such violation, by--
       ``(A) 2 percent of such otherwise payable amount, in the 
     case of the 1st such finding for the fiscal year with respect 
     to the State;
       ``(B) 3 percent of such otherwise payable amount, in the 
     case of the 2nd such finding for the fiscal year with respect 
     to the State; or
       ``(C) 5 percent of such otherwise payable amount, in the 
     case of the 3rd or subsequent such finding for the fiscal 
     year with respect to the State.

     In imposing the penalties described in this paragraph, the 
     Secretary shall not reduce any fiscal year payment to a State 
     by more than 5 percent.
       ``(2) Any other entity which is in a State that receives 
     funds under this part and which violates section 471(a)(18) 
     during a fiscal year quarter with respect to any person shall 
     remit to the Secretary all funds that were paid by the State 
     to the entity during the quarter from such funds.
       ``(3)(A) Any individual who is aggrieved by a violation of 
     section 471(a)(18) by a State or other entity may bring an 
     action seeking relief from the State or other entity in any 
     United States district court.
       ``(B) An action under this paragraph may not be brought 
     more than 2 years after the date the alleged violation 
     occurred.
       ``(4) This subsection shall not be construed to affect the 
     application of the Indian Child Welfare Act of 1978.''.
       (c) Civil Rights.--
       (1) Prohibited conduct.--A person or government that is 
     involved in adoption or foster care placements may not--
       (A) deny to any individual the opportunity to become an 
     adoptive or a foster parent, on the basis of the race, color, 
     or national origin of the individual, or of the child, 
     involved; or
       (B) delay or deny the placement of a child for adoption or 
     into foster care, on the basis of the race, color, or 
     national origin of the adoptive or foster parent, or the 
     child, involved.
       (2) Enforcement.--Noncompliance with paragraph (1) is 
     deemed a violation of title VI of the Civil Rights Act of 
     1964.
       (3) No effect on the indian child welfare act of 1978.--
     This subsection shall not be construed to affect the 
     application of the Indian Child Welfare Act of 1978.
       (d) Conforming Amendment.--Section 553 of the Howard M. 
     Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 
     5115a) is repealed.

     SEC. 1809. 6-MONTH DELAY OF ELECTRONIC FUND TRANSFER 
                   REQUIREMENT.

       Notwithstanding any other provision of law, the increase in 
     the applicable required percentages for fiscal year 1997 in 
     clauses (i)(IV) and (ii)(IV) of section 6302(h)(2)(C) of the 
     Internal Revenue Code of 1986 shall not take effect before 
     July 1, 1997.
                Subtitle I--Foreign Trust Tax Compliance

     SEC. 1901. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

       (a) In General.--Section 6048 (relating to returns as to 
     certain foreign trusts) is amended to read as follows:

     ``SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN 
                   TRUSTS.

       ``(a) Notice of Certain Events.--
       ``(1) General rule.--On or before the 90th day (or such 
     later day as the Secretary may prescribe) after any 
     reportable event, the responsible party shall provide written 
     notice of such event to the Secretary in accordance with 
     paragraph (2).
       ``(2) Contents of notice.--The notice required by paragraph 
     (1) shall contain such information as the Secretary may 
     prescribe, including--
       ``(A) the amount of money or other property (if any) 
     transferred to the trust in connection with the reportable 
     event, and
       ``(B) the identity of the trust and of each trustee and 
     beneficiary (or class of beneficiaries) of the trust.
       ``(3) Reportable event.--For purposes of this subsection--
       ``(A) In general.--The term `reportable event' means--
       ``(i) the creation of any foreign trust by a United States 
     person,
       ``(ii) the transfer of any money or property (directly or 
     indirectly) to a foreign trust by a United States person, 
     including a transfer by reason of death, and
       ``(iii) the death of a citizen or resident of the United 
     States if--

       ``(I) the decedent was treated as the owner of any portion 
     of a foreign trust under the rules of subpart E of part I of 
     subchapter J of chapter 1, or
       ``(II) any portion of a foreign trust was included in the 
     gross estate of the decedent.

       ``(B) Exceptions.--
       ``(i) Fair market value sales.--Subparagraph (A)(ii) shall 
     not apply to any transfer of property to a trust in exchange 
     for consideration of at least the fair market value of the 
     transferred property. For purposes of the preceding sentence, 
     consideration other than cash shall be taken into account at 
     its fair market value and the rules of section 679(a)(3) 
     shall apply.
       ``(ii) Deferred compensation and charitable trusts.--
     Subparagraph (A) shall not apply with respect to a trust 
     which is--

       ``(I) described in section 402(b), 404(a)(4), or 404A, or
       ``(II) determined by the Secretary to be described in 
     section 501(c)(3).

       ``(4) Responsible party.--For purposes of this subsection, 
     the term `responsible party' means--
       ``(A) the grantor in the case of the creation of an inter 
     vivos trust,
       ``(B) the transferor in the case of a reportable event 
     described in paragraph (3)(A)(ii) other than a transfer by 
     reason of death, and
       ``(C) the executor of the decedent's estate in any other 
     case.
       ``(b) United States Grantor of Foreign Trust.--
       ``(1) In general.--If, at any time during any taxable year 
     of a United States person, such person is treated as the 
     owner of any portion of a foreign trust under the rules of 
     subpart E of part I of subchapter J of chapter 1, such person 
     shall be responsible to ensure that--
       ``(A) such trust makes a return for such year which sets 
     forth a full and complete accounting of all trust activities 
     and operations for the year, the name of the United States 
     agent for such trust, and such other information as the 
     Secretary may prescribe, and
       ``(B) such trust furnishes such information as the 
     Secretary may prescribe to each United States person (i) who 
     is treated as the owner of any portion of such trust or (ii) 
     who receives (directly or indirectly) any distribution from 
     the trust.
       ``(2) Trusts not having united states agent.--
       ``(A) In general.--If the rules of this paragraph apply to 
     any foreign trust, the determination of amounts required to 
     be taken into account with respect to such trust by a United 
     States person under the rules of subpart E of part I of 
     subchapter J of chapter 1 shall be determined by the 
     Secretary.
       ``(B) United states agent required.--The rules of this 
     paragraph shall apply to any foreign trust to which paragraph 
     (1) applies unless such trust agrees (in such manner, subject 
     to such conditions, and at such time as the Secretary shall 
     prescribe) to authorize a United States person to act as such 
     trust's limited agent solely for purposes of applying 
     sections 7602, 7603, and 7604 with respect to--
       ``(i) any request by the Secretary to examine records or 
     produce testimony related to the proper treatment of amounts 
     required to be taken into account under the rules referred to 
     in subparagraph (A), or
       ``(ii) any summons by the Secretary for such records or 
     testimony.
     The appearance of persons or production of records by reason 
     of a United States person being such an agent shall not 
     subject such persons or records to legal process for any 
     purpose other than determining the correct treatment under 
     this title of the amounts required to be taken into account 
     under the rules referred to in subparagraph (A). A foreign 
     trust which appoints an described in this subparagraph shall 
     not be considered to have an office or a permanent 
     establishment in the United States, or to be engaged in a 
     trade or business in the United States, solely because of the 
     activities of such agent pursuant to this subsection.
       ``(C) Other rules to apply.--Rules similar to the rules of 
     paragraphs (2) and (4) of section 6038A(e) shall apply for 
     purposes of this paragraph.
       ``(c) Reporting by United States Beneficiaries of Foreign 
     Trusts.--
       ``(1) In general.--If any United States person receives 
     (directly or indirectly) during any taxable year of such 
     person any distribution from a foreign trust, such person 
     shall make a return with respect to such trust for such 
     year which includes--
       ``(A) the name of such trust,
       ``(B) the aggregate amount of the distributions so received 
     from such trust during such taxable year, and
       ``(C) such other information as the Secretary may 
     prescribe.
       ``(2) Inclusion in income if records not provided.--
       ``(A) In general.--If adequate records are not provided to 
     the Secretary to determine the proper treatment of any 
     distribution from a foreign trust, such distribution shall be 
     treated as an accumulation distribution includible in the 
     gross income of the distributee under chapter 1. To the 
     extent provided in regulations, the preceding sentence shall 
     not apply if the foreign trust elects to be subject to rules 
     similar to the rules of subsection (b)(2)(B).
       ``(B) Application of accumulation distribution rules.--For 
     purposes of applying section 668 in a case to which 
     subparagraph (A) applies, the applicable number of years for 
     purposes of section 668(a) shall be \1/2\ of the number of 
     years the trust has been in existence.
       ``(d) Special Rules.--
       ``(1) Determination of whether united states person makes 
     transfer or receives distribution.--For purposes of this 
     section, in determining whether a United States person makes 
     a transfer to, or receives a distribution from, a foreign 
     trust, the fact that a portion of such trust is treated as 
     owned by another person under the rules of subpart E of part 
     I of subchapter J of chapter 1 shall be disregarded.
       ``(2) Domestic trusts with foreign activities.--To the 
     extent provided in regulations, a trust which is a United 
     States person shall be treated as a foreign trust for 
     purposes of this section and section 6677 if such trust has 
     substantial activities, or holds substantial property, 
     outside the United States.
       ``(3) Time and manner of filing information.--Any notice or 
     return required under this section shall be made at such time 
     and in such manner as the Secretary shall prescribe.
       ``(4) Modification of return requirements.--The Secretary 
     is authorized to suspend or modify any requirement of this 
     section if the Secretary determines that the United States 
     has no significant tax interest in obtaining the required 
     information.''.
       (b) Increased Penalties.--Section 6677 (relating to failure 
     to file information returns with

[[Page H9608]]

     respect to certain foreign trusts) is amended to read as 
     follows:

     ``SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO 
                   CERTAIN FOREIGN TRUSTS.

       ``(a) Civil Penalty.--In addition to any criminal penalty 
     provided by law, if any notice or return required to be filed 
     by section 6048--
       ``(1) is not filed on or before the time provided in such 
     section, or
       ``(2) does not include all the information required 
     pursuant to such section or includes incorrect information,
     the person required to file such notice or return shall pay a 
     penalty equal to 35 percent of the gross reportable amount. 
     If any failure described in the preceding sentence continues 
     for more than 90 days after the day on which the Secretary 
     mails notice of such failure to the person required to pay 
     such penalty, such person shall pay a penalty (in addition to 
     the amount determined under the preceding sentence) of 
     $10,000 for each 30-day period (or fraction thereof) during 
     which such failure continues after the expiration of such 90-
     day period. In no event shall the penalty under this 
     subsection with respect to any failure exceed the gross 
     reportable amount.
       ``(b) Special Rules for Returns Under Section 6048(b).--In 
     the case of a return required under section 6048(b)--
       ``(1) the United States person referred to in such section 
     shall be liable for the penalty imposed by subsection (a), 
     and
       ``(2) subsection (a) shall be applied by substituting `5 
     percent' for `35 percent'.
       ``(c) Gross Reportable Amount.--For purposes of subsection 
     (a), the term `gross reportable amount' means--
       ``(1) the gross value of the property involved in the event 
     (determined as of the date of the event) in the case of a 
     failure relating to section 6048(a),
       ``(2) the gross value of the portion of the trust's assets 
     at the close of the year treated as owned by the United 
     States person in the case of a failure relating to section 
     6048(b)(1), and
       ``(3) the gross amount of the distributions in the case of 
     a failure relating to section 6048(c).
       ``(d) Reasonable Cause Exception.--No penalty shall be 
     imposed by this section on any failure which is shown to be 
     due to reasonable cause and not due to willful neglect. The 
     fact that a foreign jurisdiction would impose a civil or 
     criminal penalty on the taxpayer (or any other person) for 
     disclosing the required information is not reasonable 
     cause.
       ``(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 subsection (a).''.
       (c) Conforming Amendments.--
       (1) Paragraph (2) of section 6724(d) is amended by striking 
     ``or'' at the end of subparagraph (S), by striking the period 
     at the end of subparagraph (T) and inserting ``, or'', and by 
     inserting after subparagraph (T) the following new 
     subparagraph:
       ``(U) section 6048(b)(1)(B) (relating to foreign trust 
     reporting requirements).''.
       (2) The table of sections for subpart B of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6048 and inserting the following new 
     item:

``Sec. 6048. Information with respect to certain foreign trusts.''.
       (3) The table of sections for part I of subchapter B of 
     chapter 68 is amended by striking the item relating to 
     section 6677 and inserting the following new item:

``Sec. 6677. Failure to file information with respect to certain 
              foreign trusts.''.
       (d) Effective Dates.--
       (1) Reportable events.--To the extent related to subsection 
     (a) of section 6048 of the Internal Revenue Code of 1986, as 
     amended by this section, the amendments made by this section 
     shall apply to reportable events (as defined in such section 
     6048) occurring after the date of the enactment of this Act.
       (2) Grantor trust reporting.--To the extent related to 
     subsection (b) of such section 6048, the amendments made by 
     this section shall apply to taxable years of United States 
     persons beginning after December 31, 1995.
       (3) Reporting by united states beneficiaries.--To the 
     extent related to subsection (c) of such section 6048, the 
     amendments made by this section shall apply to distributions 
     received after the date of the enactment of this Act.

     SEC. 1902. COMPARABLE PENALTIES FOR FAILURE TO FILE RETURN 
                   RELATING TO TRANSFERS TO FOREIGN ENTITIES.

       (a) In General.--Section 1494 is amended by adding at the 
     end the following new subsection:
       ``(c) Penalty.--In the case of any failure to file a return 
     required by the Secretary with respect to any transfer 
     described in section 1491, the person required to file such 
     return shall be liable for the penalties provided in section 
     6677 in the same manner as if such failure were a failure to 
     file a notice under section 6048(a).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to transfers after the date of the enactment of 
     this Act.

     SEC. 1903. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS 
                   HAVING ONE OR MORE UNITED STATES BENEFICIARIES.

       (a) Treatment of Trust Obligations, Etc.--
       (1) Paragraph (2) of section 679(a) is amended by striking 
     subparagraph (B) and inserting the following:
       ``(B) Transfers at fair market value.--To any transfer of 
     property to a trust in exchange for consideration of at least 
     the fair market value of the transferred property. For 
     purposes of the preceding sentence, consideration other than 
     cash shall be taken into account at its fair market value.''.
       (2) Subsection (a) of section 679 (relating to foreign 
     trusts having one or more United States beneficiaries) is 
     amended by adding at the end the following new paragraph:
       ``(3) Certain obligations not taken into account under fair 
     market value exception.--
       ``(A) In general.--In determining whether paragraph (2)(B) 
     applies to any transfer by a person described in clause (ii) 
     or (iii) of subparagraph (C), there shall not be taken into 
     account--
       ``(i) except as provided in regulations, any obligation of 
     a person described in subparagraph (C), and
       ``(ii) to the extent provided in regulations, any 
     obligation which is guaranteed by a person described in 
     subparagraph (C).
       ``(B) Treatment of principal payments on obligation.--
     Principal payments by the trust on any obligation referred to 
     in subparagraph (A) shall be taken into account on and after 
     the date of the payment in determining the portion of the 
     trust attributable to the property transferred.
       ``(C) Persons described.--The persons described in this 
     subparagraph are--
       ``(i) the trust,
       ``(ii) any grantor or beneficiary of the trust, and
       ``(iii) any person who is related (within the meaning of 
     section 643(i)(2)(B)) to any grantor or beneficiary of the 
     trust.''.
       (b) Exemption of Transfers to Charitable Trusts.--
     Subsection (a) of section 679 is amended by striking 
     ``section 404(a)(4) or 404A'' and inserting ``section 
     6048(a)(3)(B)(ii)''.
       (c) Other Modifications.--Subsection (a) of section 679 is 
     amended by adding at the end the following new paragraphs:
       ``(4) Special rules applicable to foreign grantor who later 
     becomes a united states person.--
       ``(A) In general.--If a nonresident alien individual has a 
     residency starting date within 5 years after directly or 
     indirectly transferring property to a foreign trust, this 
     section and section 6048 shall be applied as if such 
     individual transferred to such trust on the residency 
     starting date an amount equal to the portion of such trust 
     attributable to the property transferred by such individual 
     to such trust in such transfer.
       ``(B) Treatment of undistributed income.--For purposes of 
     this section, undistributed net income for periods before 
     such individual's residency starting date shall be taken into 
     account in determining the portion of the trust which is 
     attributable to property transferred by such individual to 
     such trust but shall not otherwise be taken into account.
       ``(C) Residency starting date.--For purposes of this 
     paragraph, an individual's residency starting date is the 
     residency starting date determined under section 
     7701(b)(2)(A).
       ``(5) Outbound trust migrations.--If--
       ``(A) an individual who is a citizen or resident of the 
     United States transferred property to a trust which was not a 
     foreign trust, and
       ``(B) such trust becomes a foreign trust while such 
     individual is alive,
     then this section and section 6048 shall be applied as if 
     such individual transferred to such trust on the date such 
     trust becomes a foreign trust an amount equal to the portion 
     of such trust attributable to the property previously 
     transferred by such individual to such trust. A rule similar 
     to the rule of paragraph (4)(B) shall apply for purposes of 
     this paragraph.''.
       (d) Modifications Relating to Whether Trust Has United 
     States Beneficiaries.--Subsection (c) of section 679 is 
     amended by adding at the end the following new paragraph:
       ``(3) Certain united states beneficiaries disregarded.--A 
     beneficiary shall not be treated as a United States person in 
     applying this section with respect to any transfer of 
     property to foreign trust if such beneficiary first became a 
     United States person more than 5 years after the date of such 
     transfer.''.
       (e) Technical Amendment.--Subparagraph (A) of section 
     679(c)(2) is amended to read as follows:
       ``(A) in the case of a foreign corporation, such 
     corporation is a controlled foreign corporation (as defined 
     in section 957(a)),''.
       (f) Regulations.--Section 679 is amended by adding at the 
     end the following new subsection:
       ``(d) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (g) Effective Date.--The amendments made by this section 
     shall apply to transfers of property after February 6, 1995.

     SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER 
                   GRANTOR TRUST RULES.

       (a) General Rule.--
       (1) Subsection (f) of section 672 (relating to special rule 
     where grantor is foreign person) is amended to read as 
     follows:
       ``(f) Subpart Not To Result in Foreign Ownership.--
       ``(1) In general.--Notwithstanding any other provision of 
     this subpart, this subpart shall apply only to the extent 
     such application results in an amount (if any) being 
     currently taken into account (directly or through 1 or more 
     entities) under this chapter in computing the income of a 
     citizen or resident of the United States or a domestic 
     corporation.
       ``(2) Exceptions.--
       ``(A) Certain revocable and irrevocable trusts.--Paragraph 
     (1) shall not apply to any portion of a trust if--
       ``(i) the power to revest absolutely in the grantor title 
     to the trust property to which such portion is attributable 
     is exercisable solely by the grantor without the approval or 
     consent of any other person or with the consent of a related 
     or subordinate party who is subservient to the grantor, or

[[Page H9609]]

       ``(ii) the only amounts distributable from such portion 
     (whether income or corpus) during the lifetime of the grantor 
     are amounts distributable to the grantor or the spouse of the 
     grantor.
       ``(B) Compensatory trusts.--Except as provided in 
     regulations, paragraph (1) shall not apply to any portion of 
     a trust distributions from which are taxable as compensation 
     for services rendered.
       ``(3) Special rules.--Except as otherwise provided in 
     regulations prescribed by the Secretary--
       ``(A) a controlled foreign corporation (as defined in 
     section 957) shall be treated as a domestic corporation for 
     purposes of paragraph (1), and
       ``(B) paragraph (1) shall not apply for purposes of 
     applying section 1296.
       ``(4) Recharacterization of purported gifts.--In the case 
     of any transfer directly or indirectly from a partnership or 
     foreign corporation which the transferee treats as a gift or 
     bequest, the Secretary may recharacterize such transfer in 
     such circumstances as the Secretary determines to be 
     appropriate to prevent the avoidance of the purposes of this 
     subsection.
       ``(5) Special rule where grantor is foreign person.--If--
       ``(A) but for this subsection, a foreign person would be 
     treated as the owner of any portion of a trust, and
       ``(B) such trust has a beneficiary who is a United States 
     person,
     such beneficiary shall be treated as the grantor of such 
     portion to the extent such beneficiary has made (directly or 
     indirectly) transfers of property (other than in a sale for 
     full and adequate consideration) to such foreign person. For 
     purposes of the preceding sentence, any gift shall not be 
     taken into account to the extent such gift would be excluded 
     from taxable gifts under section 2503(b).
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection, including regulations 
     providing that paragraph (1) shall not apply in appropriate 
     cases.''.
       (2) The last sentence of subsection (c) of section 672 is 
     amended by inserting ``subsection (f) and'' before ``sections 
     674''.
       (b) Credit for Certain Taxes.--
       (1) Paragraph (2) of section 665(d) is amended by adding at 
     the end the following new sentence: ``Under rules or 
     regulations prescribed by the Secretary, in the case of any 
     foreign trust of which the settlor or another person would be 
     treated as owner of any portion of the trust under subpart E 
     but for section 672(f), the term `taxes imposed on the trust' 
     includes the allocable amount of any income, war profits, and 
     excess profits taxes imposed by any foreign country or 
     possession of the United States on the settlor or such other 
     person in respect of trust income.''.
       (2) Paragraph (5) of section 901(b) is amended by adding at 
     the end the following new sentence: ``Under rules or 
     regulations prescribed by the Secretary, in the case of any 
     foreign trust of which the settlor or another person would be 
     treated as owner of any portion of the trust under subpart E 
     but for section 672(f), the allocable amount of any income, 
     war profits, and excess profits taxes imposed by any foreign 
     country or possession of the United States on the settlor or 
     such other person in respect of trust income.''.
       (c) Distributions by Certain Foreign Trusts Through 
     Nominees.--
       (1) Section 643 is amended by adding at the end the 
     following new subsection:
       ``(h) Distributions by Certain Foreign Trusts Through 
     Nominees.--For purposes of this part, any amount paid to a 
     United States person which is derived directly or indirectly 
     from a foreign trust of which the payor is not the grantor 
     shall be deemed in the year of payment to have been directly 
     paid by the foreign trust to such United States person.''.
       (2) Section 665 is amended by striking subsection (c).
       (d) Effective Date.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall take effect on the date 
     of the enactment of this Act.
       (2) Exception for certain trusts.--The amendments made by 
     this section shall not apply to any trust--
       (A) which is treated as owned by the grantor under section 
     676 or 677 (other than subsection (a)(3) thereof) of the 
     Internal Revenue Code of 1986, and
       (B) which is in existence on September 19, 1995.

     The preceding sentence shall not apply to the portion of any 
     such trust attributable to any transfer to such trust after 
     September 19, 1995.
       (e) Transitional Rule.--If--
       (1) by reason of the amendments made by this section, any 
     person other than a United States person ceases to be treated 
     as the owner of a portion of a domestic trust, and
       (2) before January 1, 1997, such trust becomes a foreign 
     trust, or the assets of such trust are transferred to a 
     foreign trust,

     no tax shall be imposed by section 1491 of the Internal 
     Revenue Code of 1986 by reason of such trust becoming a 
     foreign trust or the assets of such trust being transferred 
     to a foreign trust.

     SEC. 1905. INFORMATION REPORTING REGARDING FOREIGN GIFTS.

       (a) In General.--Subpart A of part III of subchapter A of 
     chapter 61 is amended by inserting after section 6039E the 
     following new section:

     ``SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN 
                   PERSONS.

       ``(a) In General.--If the value of the aggregate foreign 
     gifts received by a United States person (other than an 
     organization described in section 501(c) and exempt from tax 
     under section 501(a)) during any taxable year exceeds 
     $10,000, such United States person shall furnish (at such 
     time and in such manner as the Secretary shall prescribe) 
     such information as the Secretary may prescribe regarding 
     each foreign gift received during such year.
       ``(b) Foreign Gift.--For purposes of this section, the term 
     `foreign gift' means any amount received from a person other 
     than a United States person which the recipient treats as a 
     gift or bequest. Such term shall not include any qualified 
     transfer (within the meaning of section 2503(e)(2)) or any 
     distribution properly disclosed in a return under section 
     6048(c).
       ``(c) Penalty for Failure To File Information.--
       ``(1) In general.--If a United States person fails to 
     furnish the information required by subsection (a) with 
     respect to any foreign gift within the time prescribed 
     therefor (including extensions)--
       ``(A) the tax consequences of the receipt of such gift 
     shall be determined by the Secretary, and
       ``(B) such United States person shall pay (upon notice and 
     demand by the Secretary and in the same manner as tax) an 
     amount equal to 5 percent of the amount of such foreign gift 
     for each month for which the failure continues (not to exceed 
     25 percent of such amount in the aggregate).
       ``(2) Reasonable cause exception.--Paragraph (1) shall not 
     apply to any failure to report a foreign gift if the United 
     States person shows that the failure is due to reasonable 
     cause and not due to willful neglect.
       ``(d) Cost-of-Living Adjustment.--In the case of any 
     taxable year beginning after December 31, 1996, the $10,000 
     amount under subsection (a) shall be increased by an amount 
     equal to the product of such amount and the cost-of-living 
     adjustment for such taxable year under section 1(f)(3), 
     except that subparagraph (B) thereof shall be applied by 
     substituting `1995' for `1992'.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Clerical Amendment.--The table of sections for such 
     subpart is amended by inserting after the item relating to 
     section 6039E the following new item:

``Sec. 6039F. Notice of large gifts received from foreign persons.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts received after the date of the 
     enactment of this Act in taxable years ending after such 
     date.

     SEC. 1906. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS 
                   WHICH ARE NOT GRANTOR TRUSTS.

       (a) Modification of Interest Charge on Accumulation 
     Distributions.--Subsection (a) of section 668 (relating to 
     interest charge on accumulation distributions from foreign 
     trusts) is amended to read as follows:
       ``(a) General Rule.--For purposes of the tax determined 
     under section 667(a)--
       ``(1) Interest determined using underpayment rates.--The 
     interest charge determined under this section with respect to 
     any distribution is the amount of interest which would be 
     determined on the partial tax computed under section 667(b) 
     for the period described in paragraph (2) using the rates and 
     the method under section 6621 applicable to underpayments of 
     tax.
       ``(2) Period.--For purposes of paragraph (1), the period 
     described in this paragraph is the period which begins on the 
     date which is the applicable number of years before the date 
     of the distribution and which ends on the date of the 
     distribution.
       ``(3) Applicable number of years.--For purposes of 
     paragraph (2)--
       ``(A) In general.--The applicable number of years with 
     respect to a distribution is the number determined by 
     dividing--
       ``(i) the sum of the products described in subparagraph (B) 
     with respect to each undistributed income year, by
       ``(ii) the aggregate undistributed net income.

     The quotient determined under the preceding sentence shall be 
     rounded under procedures prescribed by the Secretary.
       ``(B) Product described.--For purposes of subparagraph (A), 
     the product described in this subparagraph with respect to 
     any undistributed income year is the product of--
       ``(i) the undistributed net income for such year, and
       ``(ii) the sum of the number of taxable years between such 
     year and the taxable year of the distribution (counting in 
     each case the undistributed income year but not counting the 
     taxable year of the distribution).
       ``(4) Undistributed income year.--For purposes of this 
     subsection, the term `undistributed income year' means any 
     prior taxable year of the trust for which there is 
     undistributed net income, other than a taxable year during 
     all of which the beneficiary receiving the distribution was 
     not a citizen or resident of the United States.
       ``(5) Determination of undistributed net income.--
     Notwithstanding section 666, for purposes of this subsection, 
     an accumulation distribution from the trust shall be treated 
     as reducing proportionately the undistributed net income for 
     undistributed income years.
       ``(6) Periods before 1996.--Interest for the portion of the 
     period described in paragraph (2) which occurs before January 
     1, 1996, shall be determined--
       ``(A) by using an interest rate of 6 percent, and
       ``(B) without compounding until January 1, 1996.''.
       (b) Abusive Transactions.--Section 643(a) is amended by 
     inserting after paragraph (6) the following new paragraph:
       ``(7) Abusive transactions.--The Secretary shall prescribe 
     such regulations as may be necessary or appropriate to carry 
     out the purposes

[[Page H9610]]

     of this part, including regulations to prevent avoidance of 
     such purposes.''.
       (c) Treatment of Loans From Trusts.--
       (1) In general.--Section 643 (relating to definitions 
     applicable to subparts A, B, C, and D) is amended by adding 
     at the end the following new subsection:
       ``(i) Loans From Foreign Trusts.--For purposes of subparts 
     B, C, and D--
       ``(1) General rule.--Except as provided in regulations, if 
     a foreign trust makes a loan of cash or marketable securities 
     directly or indirectly to--
       ``(A) any grantor or beneficiary of such trust who is a 
     United States person, or
       ``(B) any United States person not described in 
     subparagraph (A) who is related to such grantor or 
     beneficiary,

     the amount of such loan shall be treated as a distribution by 
     such trust to such grantor or beneficiary (as the case may 
     be).
       ``(2) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Cash.--The term `cash' includes foreign currencies 
     and cash equivalents.
       ``(B) Related person.--
       ``(i) In general.--A person is related to another person if 
     the relationship between such persons would result in a 
     disallowance of losses under section 267 or 707(b). In 
     applying section 267 for purposes of the preceding sentence, 
     section 267(c)(4) shall be applied as if the family of an 
     individual includes the spouses of the members of the family.
       ``(ii) Allocation.--If any person described in paragraph 
     (1)(B) is related to more than one person, the grantor or 
     beneficiary to whom the treatment under this subsection 
     applies shall be determined under regulations prescribed by 
     the Secretary.
       ``(C) Exclusion of tax-exempts.--The term `United States 
     person' does not include any entity exempt from tax under 
     this chapter.
       ``(D) Trust not treated as simple trust.--Any trust which 
     is treated under this subsection as making a distribution 
     shall be treated as not described in section 651.
       ``(3) Subsequent transactions regarding loan principal.--If 
     any loan is taken into account under paragraph (1), any 
     subsequent transaction between the trust and the original 
     borrower regarding the principal of the loan (by way of 
     complete or partial repayment, satisfaction, cancellation, 
     discharge, or otherwise) shall be disregarded for purposes of 
     this title.''.
       (2) Technical amendment.--Paragraph (8) of section 7872(f) 
     is amended by inserting ``, 643(i),'' before ``or 1274'' each 
     place it appears.
       (d) Effective Dates.--
       (1) Interest charge.--The amendment made by subsection (a) 
     shall apply to distributions after the date of the enactment 
     of this Act.
       (2) Abusive transactions.--The amendment made by subsection 
     (b) shall take effect on the date of the enactment of this 
     Act.
       (3) Loans from trusts.--The amendment made by subsection 
     (c) shall apply to loans of cash or marketable securities 
     made after September 19, 1995.

     SEC. 1907. RESIDENCE OF TRUSTS, ETC.

       (a) Treatment as United States Person.--
       (1) In general.--Paragraph (30) of section 7701(a) is 
     amended by striking ``and'' at the end of subparagraph (C) 
     and by striking subparagraph (D) and by inserting the 
     following new subparagraphs:
       ``(D) any estate (other than a foreign estate, within the 
     meaning of paragraph (31)), and
       ``(E) any trust if--
       ``(i) a court within the United States is able to exercise 
     primary supervision over the administration of the trust, and
       ``(ii) one or more United States fiduciaries have the 
     authority to control all substantial decisions of the 
     trust.''.
       (2) Conforming amendment.--Paragraph (31) of section 
     7701(a) is amended to read as follows:
       ``(31) Foreign estate or trust.--
       ``(A) Foreign estate.--The term `foreign estate' means an 
     estate the income of which, from sources without the United 
     States which is not effectively connected with the conduct of 
     a trade or business within the United States, is not 
     includible in gross income under subtitle A.
       ``(B) Foreign trust.--The term `foreign trust' means any 
     trust other than a trust described in subparagraph (E) of 
     paragraph (30).''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply--
       (A) to taxable years beginning after December 31, 1996, or
       (B) at the election of the trustee of a trust, to taxable 
     years ending after the date of the enactment of this Act.

     Such an election, once made, shall be irrevocable.
       (b) Domestic Trusts Which Become Foreign Trusts.--
       (1) In general.--Section 1491 (relating to imposition of 
     tax on transfers to avoid income tax) is amended by adding at 
     the end the following new flush sentence:

     ``If a trust which is not a foreign trust becomes a foreign 
     trust, such trust shall be treated for purposes of this 
     section as having transferred, immediately before becoming a 
     foreign trust, all of its assets to a foreign trust.''.
       (2) Effective date.--The amendment made by this subsection 
     shall take effect on the date of the enactment of this Act.
             Subtitle J--Generalized System of Preferences

     SEC. 1951. SHORT TITLE.

       This subtitle may be cited as the ``GSP Renewal Act of 
     1996''.

     SEC. 1952. GENERALIZED SYSTEM OF PREFERENCES.

       (a) In General.--Title V of the Trade Act of 1974 is 
     amended to read as follows:
              ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

     ``SEC. 501. AUTHORITY TO EXTEND PREFERENCES.

       ``The President may provide duty-free treatment for any 
     eligible article from any beneficiary developing country in 
     accordance with the provisions of this title. In taking any 
     such action, the President shall have due regard for--
       ``(1) the effect such action will have on furthering the 
     economic development of developing countries through the 
     expansion of their exports;
       ``(2) the extent to which other major developed countries 
     are undertaking a comparable effort to assist developing 
     countries by granting generalized preferences with respect to 
     imports of products of such countries;
       ``(3) the anticipated impact of such action on United 
     States producers of like or directly competitive products; 
     and
       ``(4) the extent of the beneficiary developing country's 
     competitiveness with respect to eligible articles.

     ``SEC. 502. DESIGNATION OF BENEFICIARY DEVELOPING COUNTRIES.

       ``(a) Authority To Designate Countries.--
       ``(1) Beneficiary developing countries.--The President is 
     authorized to designate countries as beneficiary developing 
     countries for purposes of this title.
       ``(2) Least-developed beneficiary developing countries.--
     The President is authorized to designate any beneficiary 
     developing country as a least-developed beneficiary 
     developing country for purposes of this title, based on the 
     considerations in section 501 and subsection (c) of this 
     section.
       ``(b) Countries Ineligible for Designation.--
       ``(1) Specific countries.--The following countries may not 
     be designated as beneficiary developing countries for 
     purposes of this title:
       ``(A) Australia.
       ``(B) Canada.
       ``(C) European Union member states.
       ``(D) Iceland.
       ``(E) Japan.
       ``(F) Monaco.
       ``(G) New Zealand.
       ``(H) Norway.
       ``(I) Switzerland.
       ``(2) Other bases for ineligibility.--The President shall 
     not designate any country a beneficiary developing country 
     under this title if any of the following applies:
       ``(A) Such country is a Communist country, unless--
       ``(i) the products of such country receive 
     nondiscriminatory treatment,
       ``(ii) such country is a WTO Member (as such term is 
     defined in section 2(10) of the Uruguay Round Agreements Act) 
     (19 U.S.C. 3501(10)) and a member of the International 
     Monetary Fund, and
       ``(iii) such country is not dominated or controlled by 
     international communism.
       ``(B) Such country is a party to an arrangement of 
     countries and participates in any action pursuant to such 
     arrangement, the effect of which is--
       ``(i) to withhold supplies of vital commodity resources 
     from international trade or to raise the price of such 
     commodities to an unreasonable level, and
       ``(ii) to cause serious disruption of the world economy.
       ``(C) Such country affords preferential treatment to the 
     products of a developed country, other than the United 
     States, which has, or is likely to have, a significant 
     adverse effect on United States commerce.
       ``(D)(i) Such country--
       ``(I) has nationalized, expropriated, or otherwise seized 
     ownership or control of property, including patents, 
     trademarks, or copyrights, owned by a United States citizen 
     or by a corporation, partnership, or association which is 50 
     percent or more beneficially owned by United States citizens,
       ``(II) has taken steps to repudiate or nullify an existing 
     contract or agreement with a United States citizen or a 
     corporation, partnership, or association which is 50 percent 
     or more beneficially owned by United States citizens, the 
     effect of which is to nationalize, expropriate, or otherwise 
     seize ownership or control of property, including patents, 
     trademarks, or copyrights, so owned, or
       ``(III) has imposed or enforced taxes or other exactions, 
     restrictive maintenance or operational conditions, or other 
     measures with respect to property, including patents, 
     trademarks, or copyrights, so owned, the effect of which is 
     to nationalize, expropriate, or otherwise seize ownership or 
     control of such property,

     unless clause (ii) applies.
       ``(ii) This clause applies if the President determines 
     that--
       ``(I) prompt, adequate, and effective compensation has been 
     or is being made to the citizen, corporation, partnership, or 
     association referred to in clause (i),
       ``(II) good faith negotiations to provide prompt, adequate, 
     and effective compensation under the applicable provisions of 
     international law are in progress, or the country described 
     in clause (i) is otherwise taking steps to discharge its 
     obligations under international law with respect to such 
     citizen, corporation, partnership, or association, or
       ``(III) a dispute involving such citizen, corporation, 
     partnership, or association over compensation for such a 
     seizure has been submitted to arbitration under the 
     provisions of the Convention for the Settlement of Investment 
     Disputes, or in another mutually agreed upon forum,

     and the President promptly furnishes a copy of such 
     determination to the Senate and House of Representatives.

[[Page H9611]]

       ``(E) Such country fails to act in good faith in 
     recognizing as binding or in enforcing arbitral awards in 
     favor of United States citizens or a corporation, 
     partnership, or association which is 50 percent or more 
     beneficially owned by United States citizens, which have been 
     made by arbitrators appointed for each case or by permanent 
     arbitral bodies to which the parties involved have submitted 
     their dispute.
       ``(F) Such country aids or abets, by granting sanctuary 
     from prosecution to, any individual or group which has 
     committed an act of international terrorism.
       ``(G) Such country has not taken or is not taking steps to 
     afford internationally recognized worker rights to workers in 
     the country (including any designated zone in that country).

     Subparagraphs (D), (E), (F), and (G) shall not prevent the 
     designation of any country as a beneficiary developing 
     country under this title if the President determines that 
     such designation will be in the national economic interest of 
     the United States and reports such determination to the 
     Congress with the reasons therefor.
       ``(c) Factors Affecting Country Designation.--In 
     determining whether to designate any country as a beneficiary 
     developing country under this title, the President shall take 
     into account--
       ``(1) an expression by such country of its desire to be so 
     designated;
       ``(2) the level of economic development of such country, 
     including its per capita gross national product, the living 
     standards of its inhabitants, and any other economic factors 
     which the President deems appropriate;
       ``(3) whether or not other major developed countries are 
     extending generalized preferential tariff treatment to such 
     country;
       ``(4) the extent to which such country has assured the 
     United States that it will provide equitable and reasonable 
     access to the markets and basic commodity resources of such 
     country and the extent to which such country has assured the 
     United States that it will refrain from engaging in 
     unreasonable export practices;
       ``(5) the extent to which such country is providing 
     adequate and effective protection of intellectual property 
     rights;
       ``(6) the extent to which such country has taken action 
     to--
       ``(A) reduce trade distorting investment practices and 
     policies (including export performance requirements); and
       ``(B) reduce or eliminate barriers to trade in services; 
     and
       ``(7) whether or not such country has taken or is taking 
     steps to afford to workers in that country (including any 
     designated zone in that country) internationally recognized 
     worker rights.
       ``(d) Withdrawal, Suspension, or Limitation of Country 
     Designation.--
       ``(1) In general.--The President may withdraw, suspend, or 
     limit the application of the duty-free treatment accorded 
     under this title with respect to any country. In taking any 
     action under this subsection, the President shall consider 
     the factors set forth in section 501 and subsection (c) of 
     this section.
       ``(2) Changed circumstances.--The President shall, after 
     complying with the requirements of subsection (f)(2), 
     withdraw or suspend the designation of any country as a 
     beneficiary developing country if, after such designation, 
     the President determines that as the result of changed 
     circumstances such country would be barred from designation 
     as a beneficiary developing country under subsection (b)(2). 
     Such country shall cease to be a beneficiary developing 
     country on the day on which the President issues an Executive 
     order or Presidential proclamation revoking the designation 
     of such country under this title.
       ``(3) Advice to congress.--The President shall, as 
     necessary, advise the Congress on the application of section 
     501 and subsection (c) of this section, and the actions the 
     President has taken to withdraw, to suspend, or to limit the 
     application of duty-free treatment with respect to any 
     country which has failed to adequately take the actions 
     described in subsection (c).
       ``(e) Mandatory Graduation of Beneficiary Developing 
     Countries.--If the President determines that a beneficiary 
     developing country has become a `high income' country, as 
     defined by the official statistics of the International Bank 
     for Reconstruction and Development, then the President shall 
     terminate the designation of such country as a beneficiary 
     developing country for purposes of this title, effective on 
     January 1 of the second year following the year in which such 
     determination is made.
       ``(f) Congressional Notification.--
       ``(1) Notification of designation.--
       ``(A) In general.--Before the President designates any 
     country as a beneficiary developing country under this title, 
     the President shall notify the Congress of the President's 
     intention to make such designation, together with the 
     considerations entering into such decision.
       ``(B) Designation as least-developed beneficiary developing 
     country.--At least 60 days before the President designates 
     any country as a least-developed beneficiary developing 
     country, the President shall notify the Congress of the 
     President's intention to make such designation.
       ``(2) Notification of termination.--If the President has 
     designated any country as a beneficiary developing country 
     under this title, the President shall not terminate such 
     designation unless, at least 60 days before such termination, 
     the President has notified the Congress and has notified such 
     country of the President's intention to terminate such 
     designation, together with the considerations entering into 
     such decision.

     ``SEC. 503. DESIGNATION OF ELIGIBLE ARTICLES.

       ``(a) Eligible Articles.--
       ``(1) Designation.--
       ``(A) In general.--Except as provided in subsection (b), 
     the President is authorized to designate articles as eligible 
     articles from all beneficiary developing countries for 
     purposes of this title by Executive order or Presidential 
     proclamation after receiving the advice of the International 
     Trade Commission in accordance with subsection (e).
       ``(B) Least-developed beneficiary developing countries.--
     Except for articles described in subparagraphs (A), (B), and 
     (E) of subsection (b)(1) and articles described in paragraphs 
     (2) and (3) of subsection (b), the President may, in carrying 
     out section 502(d)(1) and subsection (c)(1) of this section, 
     designate articles as eligible articles only for countries 
     designated as least-developed beneficiary developing 
     countries under section 502(a)(2) if, after receiving the 
     advice of the International Trade Commission in accordance 
     with subsection (e) of this section, the President determines 
     that such articles are not import-sensitive in the context of 
     imports from least-developed beneficiary developing 
     countries.
       ``(C) Three-year rule.--If, after receiving the advice of 
     the International Trade Commission under subsection (e), an 
     article has been formally considered for designation as an 
     eligible article under this title and denied such 
     designation, such article may not be reconsidered for such 
     designation for a period of 3 years after such denial.
       ``(2) Rule of origin.--
       ``(A) General rule.--The duty-free treatment provided under 
     this title shall apply to any eligible article which is the 
     growth, product, or manufacture of a beneficiary developing 
     country if--
       ``(i) that article is imported directly from a beneficiary 
     developing country into the customs territory of the United 
     States; and
       ``(ii) the sum of--

       ``(I) the cost or value of the materials produced in the 
     beneficiary developing country or any two or more such 
     countries that are members of the same association of 
     countries and are treated as one country under section 
     507(2), plus
       ``(II) the direct costs of processing operations performed 
     in such beneficiary developing country or such member 
     countries,

     is not less than 35 percent of the appraised value of such 
     article at the time it is entered.
       ``(B) Exclusions.--An article shall not be treated as the 
     growth, product, or manufacture of a beneficiary developing 
     country by virtue of having merely undergone--
       ``(i) simple combining or packaging operations, or
       ``(ii) mere dilution with water or mere dilution with 
     another substance that does not materially alter the 
     characteristics of the article.
       ``(3) Regulations.--The Secretary of the Treasury, after 
     consulting with the United States Trade Representative, shall 
     prescribe such regulations as may be necessary to carry out 
     paragraph (2), including, but not limited to, regulations 
     providing that, in order to be eligible for duty-free 
     treatment under this title, an article--
       ``(A) must be wholly the growth, product, or manufacture of 
     a beneficiary developing country, or
       ``(B) must be a new or different article of commerce which 
     has been grown, produced, or manufactured in the beneficiary 
     developing country.
       ``(b) Articles That May Not Be Designated As Eligible 
     Articles.--
       ``(1) Import sensitive articles.--The President may not 
     designate any article as an eligible article under subsection 
     (a) if such article is within one of the following categories 
     of import-sensitive articles:
       ``(A) Textile and apparel articles which were not eligible 
     articles for purposes of this title on January 1, 1994, as 
     this title was in effect on such date.
       ``(B) Watches, except those watches entered after June 30, 
     1989, that the President specifically determines, after 
     public notice and comment, will not cause material injury to 
     watch or watch band, strap, or bracelet manufacturing and 
     assembly operations in the United States or the United States 
     insular possessions.
       ``(C) Import-sensitive electronic articles.
       ``(D) Import-sensitive steel articles.
       ``(E) Footwear, handbags, luggage, flat goods, work gloves, 
     and leather wearing apparel which were not eligible articles 
     for purposes of this title on January 1, 1995, as this title 
     was in effect on such date.
       ``(F) Import-sensitive semimanufactured and manufactured 
     glass products.
       ``(G) Any other articles which the President determines to 
     be import-sensitive in the context of the Generalized System 
     of Preferences.
       ``(2) Articles against which other actions taken.--An 
     article shall not be an eligible article for purposes of this 
     title for any period during which such article is the subject 
     of any action proclaimed pursuant to section 203 of this Act 
     (19 U.S.C. 2253) or section 232 or 351 of the Trade Expansion 
     Act of 1962 (19 U.S.C. 1862, 1981).
       ``(3) Agricultural products.--No quantity of an 
     agricultural product subject to a tariff-rate quota that 
     exceeds the in-quota quantity shall be eligible for duty-free 
     treatment under this title.
       ``(c) Withdrawal, Suspension, or Limitation of Duty-Free 
     Treatment; Competitive Need Limitation.--
       ``(1) In general.--The President may withdraw, suspend, or 
     limit the application of the duty-free treatment accorded 
     under this title with respect to any article, except that no 
     rate of duty may be established with respect to any article 
     pursuant to this subsection other than the rate which would 
     apply but for this title. In taking any action under this 
     subsection, the President shall consider the factors set 
     forth in sections 501 and 502(c).
       ``(2) Competitive need limitation.--

[[Page H9612]]

       ``(A) Basis for withdrawal of duty-free treatment.--
       ``(i) In general.--Except as provided in clause (ii) and 
     subject to subsection (d), whenever the President determines 
     that a beneficiary developing country has exported (directly 
     or indirectly) to the United States during any calendar year 
     beginning after December 31, 1995--

       ``(I) a quantity of an eligible article having an appraised 
     value in excess of the applicable amount for the calendar 
     year, or
       ``(II) a quantity of an eligible article equal to or 
     exceeding 50 percent of the appraised value of the total 
     imports of that article into the United States during any 
     calendar year,

     the President shall, not later than July 1 of the next 
     calendar year, terminate the duty-free treatment for that 
     article from that beneficiary developing country.
       ``(ii) Annual adjustment of applicable amount.--For 
     purposes of applying clause (i), the applicable amount is--

       ``(I) for 1996, $75,000,000, and
       ``(II) for each calendar year thereafter, an amount equal 
     to the applicable amount in effect for the preceding calendar 
     year plus $5,000,000.

       ``(B) Country defined.--For purposes of this paragraph, the 
     term `country' does not include an association of countries 
     which is treated as one country under section 507(2), but 
     does include a country which is a member of any such 
     association.
       ``(C) Redesignations.--A country which is no longer treated 
     as a beneficiary developing country with respect to an 
     eligible article by reason of subparagraph (A) may, subject 
     to the considerations set forth in sections 501 and 502, be 
     redesignated a beneficiary developing country with respect to 
     such article if imports of such article from such country did 
     not exceed the limitations in subparagraph (A) during the 
     preceding calendar year.
       ``(D) Least-developed beneficiary developing countries.--
     Subparagraph (A) shall not apply to any least-developed 
     beneficiary developing country.
       ``(E) Articles not produced in the united states 
     excluded.--Subparagraph (A)(i)(II) shall not apply with 
     respect to any eligible article if a like or directly 
     competitive article was not produced in the United States on 
     January 1, 1995.
       ``(F) De minimis waivers.--
       ``(i) In general.--The President may disregard subparagraph 
     (A)(i)(II) with respect to any eligible article from any 
     beneficiary developing country if the aggregate appraised 
     value of the imports of such article into the United States 
     during the preceding calendar year does not exceed the 
     applicable amount for such preceding calendar year.
       ``(ii) Applicable amount.--For purposes of applying clause 
     (i), the applicable amount is--

       ``(I) for calendar year 1996, $13,000,000, and
       ``(II) for each calendar year thereafter, an amount equal 
     to the applicable amount in effect for the preceding calendar 
     year plus $500,000.

       ``(d) Waiver of Competitive Need Limitation.--
       ``(1) In general.--The President may waive the application 
     of subsection (c)(2) with respect to any eligible article of 
     any beneficiary developing country if, before July 1 of the 
     calendar year beginning after the calendar year for which a 
     determination described in subsection (c)(2)(A) was made with 
     respect to such eligible article, the President--
       ``(A) receives the advice of the International Trade 
     Commission under section 332 of the Tariff Act of 1930 on 
     whether any industry in the United States is likely to be 
     adversely affected by such waiver,
       ``(B) determines, based on the considerations described in 
     sections 501 and 502(c) and the advice described in 
     subparagraph (A), that such waiver is in the national 
     economic interest of the United States, and
       ``(C) publishes the determination described in subparagraph 
     (B) in the Federal Register.
       ``(2) Considerations by the president.--In making any 
     determination under paragraph (1), the President shall give 
     great weight to--
       ``(A) the extent to which the beneficiary developing 
     country has assured the United States that such country will 
     provide equitable and reasonable access to the markets and 
     basic commodity resources of such country, and
       ``(B) the extent to which such country provides adequate 
     and effective protection of intellectual property rights.
       ``(3) Other bases for waiver.--The President may waive the 
     application of subsection (c)(2) if, before July 1 of the 
     calendar year beginning after the calendar year for which a 
     determination described in subsection (c)(2) was made with 
     respect to a beneficiary developing country, the President 
     determines that--
       ``(A) there has been a historical preferential trade 
     relationship between the United States and such country,
       ``(B) there is a treaty or trade agreement in force 
     covering economic relations between such country and the 
     United States, and
       ``(C) such country does not discriminate against, or impose 
     unjustifiable or unreasonable barriers to, United States 
     commerce,

     and the President publishes that determination in the Federal 
     Register.
       ``(4) Limitations on waivers.--
       ``(A) In general.--The President may not exercise the 
     waiver authority under this subsection with respect to a 
     quantity of an eligible article entered during any calendar 
     year beginning after 1995, the aggregate appraised value of 
     which equals or exceeds 30 percent of the aggregate appraised 
     value of all articles that entered duty-free under this title 
     during the preceding calendar year.
       ``(B) Other waiver limits.--The President may not exercise 
     the waiver authority provided under this subsection with 
     respect to a quantity of an eligible article entered during 
     any calendar year beginning after 1995, the aggregate 
     appraised value of which exceeds 15 percent of the aggregate 
     appraised value of all articles that have entered duty-free 
     under this title during the preceding calendar year from 
     those beneficiary developing countries which for the 
     preceding calendar year--
       ``(i) had a per capita gross national product (calculated 
     on the basis of the best available information, including 
     that of the International Bank for Reconstruction and 
     Development) of $5,000 or more; or
       ``(ii) had exported (either directly or indirectly) to the 
     United States a quantity of articles that was duty-free under 
     this title that had an aggregate appraised value of more than 
     10 percent of the aggregate appraised value of all articles 
     that entered duty-free under this title during that year.
       ``(C) Calculation of limitations.--There shall be counted 
     against the limitations imposed under subparagraphs (A) and 
     (B) for any calendar year only that value of any eligible 
     article of any country that--
       ``(i) entered duty-free under this title during such 
     calendar year; and
       ``(ii) is in excess of the value of that article that would 
     have been so entered during such calendar year if the 
     limitations under subsection (c)(2)(A) applied.
       ``(5) Effective period of waiver.--Any waiver granted under 
     this subsection shall remain in effect until the President 
     determines that such waiver is no longer warranted due to 
     changed circumstances.
       ``(e) International Trade Commission Advice.--Before 
     designating articles as eligible articles under subsection 
     (a)(1), the President shall publish and furnish the 
     International Trade Commission with lists of articles which 
     may be considered for designation as eligible articles for 
     purposes of this title. The provisions of sections 131, 132, 
     133, and 134 shall be complied with as though action under 
     section 501 and this section were action under section 123 to 
     carry out a trade agreement entered into under section 123.
       ``(f) Special Rule Concerning Puerto Rico.--No action under 
     this title may affect any tariff duty imposed by the 
     Legislature of Puerto Rico pursuant to section 319 of the 
     Tariff Act of 1930 on coffee imported into Puerto Rico.

     ``SEC. 504. REVIEW AND REPORT TO CONGRESS.

       The President shall submit an annual report to the Congress 
     on the status of internationally recognized worker rights 
     within each beneficiary developing country.

     ``SEC. 505. DATE OF TERMINATION.

       ``No duty-free treatment provided under this title shall 
     remain in effect after May 31, 1997.

     ``SEC. 506. AGRICULTURAL EXPORTS OF BENEFICIARY DEVELOPING 
                   COUNTRIES.

       ``The appropriate agencies of the United States shall 
     assist beneficiary developing countries to develop and 
     implement measures designed to assure that the agricultural 
     sectors of their economies are not directed to export markets 
     to the detriment of the production of foodstuffs for their 
     citizenry.

     ``SEC. 507. DEFINITIONS.

       ``For purposes of this title:
       ``(1) Beneficiary developing country.--The term 
     `beneficiary developing country' means any country with 
     respect to which there is in effect an Executive order or 
     Presidential proclamation by the President designating such 
     country as a beneficiary developing country for purposes of 
     this title.
       ``(2) Country.--The term `country' means any foreign 
     country or territory, including any overseas dependent 
     territory or possession of a foreign country, or the Trust 
     Territory of the Pacific Islands. In the case of an 
     association of countries which is a free trade area or 
     customs union, or which is contributing to comprehensive 
     regional economic integration among its members through 
     appropriate means, including, but not limited to, the 
     reduction of duties, the President may by Executive order or 
     Presidential proclamation provide that all members of such 
     association other than members which are barred from 
     designation under section 502(b) shall be treated as one 
     country for purposes of this title.
       ``(3) Entered.--The term `entered' means entered, or 
     withdrawn from warehouse for consumption, in the customs 
     territory of the United States.
       ``(4) Internationally recognized worker rights.--The term 
     `internationally recognized worker rights' includes--
       ``(A) the right of association;
       ``(B) the right to organize and bargain collectively;
       ``(C) a prohibition on the use of any form of forced or 
     compulsory labor;
       ``(D) a minimum age for the employment of children; and
       ``(E) acceptable conditions of work with respect to minimum 
     wages, hours of work, and occupational safety and health.
       ``(5) Least-developed beneficiary developing country.--The 
     term `least-developed beneficiary developing country' means a 
     beneficiary developing country that is designated as a least-
     developed beneficiary developing country under section 
     502(a)(2).''.
       (b) Table of Contents.--The items relating to title V in 
     the table of contents of the Trade Act of 1974 are amended to 
     read as follows:

              ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

``Sec. 501. Authority to extend preferences.
``Sec. 502. Designation of beneficiary developing countries.
``Sec. 503. Designation of eligible articles.
``Sec. 504. Review and reports to Congress.
``Sec. 505. Date of termination.

[[Page H9613]]

``Sec. 506. Agricultural exports of beneficiary developing countries.
``Sec. 507. Definitions.''.

     SEC. 1953. EFFECTIVE DATE.

       (a) In General.--The amendments made by this subtitle apply 
     to articles entered on or after October 1, 1996.
       (b) Retroactive Application.--
       (1) General rule.--Notwithstanding section 514 of the 
     Tariff Act of 1930 or any other provision of law and subject 
     to subsection (c)--
       (A) any article that was entered--
       (i) after July 31, 1995, and
       (ii) before January 1, 1996, and

     to which duty-free treatment under title V of the Trade Act 
     of 1974 would have applied if the entry had been made on July 
     31, 1995, shall be liquidated or reliquidated as free of 
     duty, and the Secretary of the Treasury shall refund any duty 
     paid with respect to such entry, and
       (B) any article that was entered--
       (i) after December 31, 1995, and
       (ii) before October 1, 1996, and

     to which duty-free treatment under title V of the Trade Act 
     of 1974 (as amended by this subtitle) would have applied if 
     the entry had been made on or after October 1, 1996, shall be 
     liquidated or reliquidated as free of duty, and the Secretary 
     of the Treasury shall refund any duty paid with respect to 
     such entry.
       (2) Limitation on refunds.--No refund shall be made 
     pursuant to this subsection before October 1, 1996.
       (3) Entry.--As used in this subsection, the term ``entry'' 
     includes a withdrawal from warehouse for consumption.
       (c) Requests.--Liquidation or reliquidation may be made 
     under subsection (b) with respect to an entry only if a 
     request therefor is filed with the Customs Service, within 
     180 days after the date of the enactment of this Act, that 
     contains sufficient information to enable the Customs 
     Service--
       (1) to locate the entry; or
       (2) to reconstruct the entry if it cannot be located.

     SEC. 1954. CONFORMING AMENDMENTS.

       (a) Trade Laws.--
       (1) Section 1211(b) of the Omnibus Trade and 
     Competitiveness Act of 1988 (19 U.S.C. 3011(b)) is amended--
       (A) in paragraph (1), by striking ``(19 U.S.C. 2463(a), 
     2464(c)(3))'' and inserting ``(as in effect on July 31, 
     1995)''; and
       (B) in paragraph (2), by striking ``(19 U.S.C. 
     2464(c)(1))'' and inserting the following: ``(as in effect on 
     July 31, 1995)''.
       (2) Section 203(c)(7) of the Andean Trade Preference Act 
     (19 U.S.C. 3202(c)(7)) is amended by striking ``502(a)(4)'' 
     and inserting ``507(4)''.
       (3) Section 212(b)(7) of the Caribbean Basin Economic 
     Recovery Act (19 U.S.C. 2702(b)(7)) is amended by striking 
     ``502(a)(4)'' and inserting ``507(4)''.
       (4) General note 3(a)(iv)(C) of the Harmonized Tariff 
     Schedule of the United States is amended by striking 
     ``sections 503(b) and 504(c)'' and inserting ``subsections 
     (a), (c), and (d) of section 503''.
       (5) Section 201(a)(2) of the North American Free Trade 
     Agreement Implementation Act (19 U.S.C. 3331(a)(2)) is 
     amended by striking ``502(a)(2) of the Trade Act of 1974 (19 
     U.S.C. 2462(a)(2))'' and inserting ``502(f)(2) of the Trade 
     Act of 1974''.
       (6) Section 131 of the Uruguay Round Agreements Act (19 
     U.S.C. 3551) is amended in subsections (a) and (b)(1) by 
     striking ``502(a)(4)'' and inserting ``507(4)''.
       (b) Other Laws.--
       (1) Section 871(f)(2)(B) of the Internal Revenue Code of 
     1986 is amended by striking ``within the meaning of section 
     502'' and inserting ``under title V''.
       (2) Section 2202(8) of the Export Enhancement Act of 1988 
     (15 U.S.C. 4711(8)) is amended by striking ``502(a)(4)'' and 
     inserting ``507(4)''.
       (3) Section 231A(a) of the Foreign Assistance Act of 1961 
     (22 U.S.C. 2191a(a)) is amended--
       (A) in paragraph (1) by striking ``502(a)(4) of the Trade 
     Act of 1974 (19 U.S.C. 2462(a)(4))'' and inserting ``507(4) 
     of the Trade Act of 1974'';
       (B) in paragraph (2) by striking ``505(c) of the Trade Act 
     of 1974 (19 U.S.C. 2465(c))'' and inserting ``504 of the 
     Trade Act of 1974''; and
       (C) in paragraph (4) by striking ``502(a)(4)'' and 
     inserting ``507(4)''.
       (4) Section 1621(a)(1) of the International Financial 
     Institutions Act (22 U.S.C. 262p-4p(a)(1)) is amended by 
     striking ``502(a)(4)'' and inserting ``507(4)''.
       (5) Section 103B of the Agricultural Act of 1949 (7 U.S.C. 
     1444-2) is amended in subsections (a)(5)(F)(v) and (n)(1)(C) 
     by striking ``503(d) of the Trade Act of 1974 (19 U.S.C. 
     2463(d))'' and inserting ``503(b)(3) of the Trade Act of 
     1974''.
       And the Senate agree to the same.

                                TITLE II

       That the House recede from its disagreement to the 
     amendments of the Senate numbered 2 and 3 and agree to the 
     same.
       That the House recede from its disagreement to the 
     amendment of the Senate numbered 4 and agree to the same with 
     an amendment as follows:
       On page 236, line 12 of the House engrossed bill, strike 
     ``Act'' and insert ``This section and sections 2102 and 
     2103''; and on page 237, line 4 of the House engrossed bill, 
     strike ``section 1'' and insert ``section 2102''; and the 
     Senate agree to the same.
       That the House recede from its disagreement to the 
     amendment of the Senate numbered 5 and agree to the same with 
     an amendment as follows:
       On page 237, line 18 of the House engrossed bill, strike 
     ``June 30, 1996'' and insert ``September 30, 1996''; on line 
     19, strike ``July 1, 1996'' and insert ``October 1, 1996''; 
     beginning in line 20 strike ``after the expiration of such 
     year'' and insert ``beginning September 1, 1997''; and after 
     line 21, insert the following:
       (c) Conforming Amendment.--Section 6 of such Act (29 U.S.C. 
     206) is amended by striking subsection (c).
       And the Senate agree to the same.
       That the House recede from its disagreement to the 
     amendment of the Senate numbered 6 and agree to the same with 
     an amendment as follows:
       On page 239, line 1 of the House engrossed bill, strike 
     ``next to''; in line 3 of such page strike ``to read as 
     follows'' and insert ``by striking `previous sentence' and 
     inserting `preceding 2 sentences' and by striking `(1)' and 
     `(2)' and such section is amended by striking the next to 
     last sentence and inserting the following''; and in line 15 
     of such page strike ``cash''; and the Senate agree to the 
     same.
     From the Committee on Ways and Means, for consideration of 
     the House bill (except for title II) and the Senate amendment 
     numbered 1, and modifications committed to conference:
     Bill Archer,
     Phil Crane,
     Bill Thomas,
     Sam Gibbons,
     Charles B. Rangel,
     As additional conferees from the Committee on Economic and 
     Educational Opportunities, for consideration of secs. 
     1704(h)(1)(B) and 1704(l) of the House bill and secs. 
     1421(d), 1442(b), 1442(c), 1451, 1457, 1460(b), 1460(c), 
     1461, 1465, and 1704(h)(1)(B) of the Senate amendment 
     numbered 1, and modifications committed to conference:
     William F. Goodling,
     Cass Ballenger,
     As additional conferees from the Committee on Economic and 
     Educational Opportunities, for consideration of title II of 
     the House bill and the Senate amendments numbered 2-6, and 
     modifications committed to conference:
     William F. Goodling,
     H.W. Fawell,
     Frank Riggs,
     William L. Clay,
     Major R. Owens,
     Maurice Hinchey,
                                Managers on the Part of the House.

     From the Committee on Labor and Human Resources:
     Nancy Landon Kassebaum,
     Edward M. Kennedy,
     Jim Jeffords,
     From the Committee on Finance:
     Bill Roth,
     John H. Chafee,
     Chuck Grassley,
     Orin G. Hatch,
     Al Simpson,
     Larry Pressler,
     Daniel P. Moynihan,
     Max Baucus,
     David Pryor,
     John D. Rockefeller IV,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendments of the Senate to the bill (H.R. 3448) to provide 
     tax relief for small businesses, to protect jobs, to create 
     opportunities, to increase the take home pay of workers, to 
     amend the Portal-to-Portal Act of 1947 relating to the 
     payment of wages to employees who use employer owned 
     vehicles, and to amend the Fair Labor Standards Act of 1938 
     to increase the minimum wage rate and to prevent job loss by 
     providing flexibility to employers in complying with minimum 
     wage and overtime requirements under that Act, submit the 
     following joint statement to the House and the Senate in 
     explanation of the effect of the action agreed upon by the 
     managers and recommended in the accompanying conference 
     report:

               I. SMALL BUSINESS AND OTHER TAX PROVISIONS

                      A. Small Business Provisions


             1. increase in expensing for small businesses

       (Sec. 1111 of the House bill and the Senate amendment.)
     Present law
       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment may elect to deduct up to 
     $17,500 of the cost of qualifying property placed in service 
     for the taxable year (sec. 179).\1\ In general, qualifying 
     property is defined as depreciable tangible personal property 
     that is purchased for use in the active conduct of a trade or 
     business. The $17,500 amount is reduced (but not below zero) 
     by the amount by which the cost of qualifying property placed 
     in service during the taxable year exceeds $200,000. In 
     addition, the amount eligible to be expensed for a taxable 
     year may not exceed the taxable income of the taxpayer for 
     the year that is derived from the active conduct of a trade 
     or business (determined without regard to this provision). 
     Any amount that is not allowed as a deduction because of the 
     taxable income limitation may be carried forward to 
     succeeding taxable years (subject to similar limitations).
---------------------------------------------------------------------------
     \1\ The amount permitted to be expensed under Code section 
     179 is increased by up to an additional $20,000 for certain 
     property placed in service by a business located in an 
     empowerment zone (sec. 1397A).
---------------------------------------------------------------------------
     House bill
       The House bill increases the $17,500 amount allowed to be 
     expensed under Code section

[[Page H9614]]

     179 to $25,000. The increase is phased in as follows:

Taxable year beginning in--                           Maximum expensing
1996............................................................$18,500
1997.............................................................19,000
1998.............................................................20,000
1999.............................................................21,000
2000.............................................................22,000
2001.............................................................23,000
2002.............................................................23,500
2003 and thereafter..............................................25,000

       Effective date.--The provision is effective for property 
     placed in service in taxable years beginning after December 
     31, 1995, subject to the phase-in schedule set forth above.
     Senate amendment \2\
       The Senate amendment increases the $17,500 amount allowed 
     to be expensed under Code section 179 to $25,000. The 
     increase is phased in as follows:
---------------------------------------------------------------------------
     \2\ See discussion in Part VII (Tax Technical Corrections 
     Provisions) below, regarding the Senate amendment 
     clarification of the present-law provision that horses are 
     qualified property for purposes of section 179.

Taxable year beginning in--                           Maximum expensing
1997............................................................$18,000
1998.............................................................18,500
1999.............................................................19,000
2000.............................................................20,000
2001.............................................................24,000
2002.............................................................24,000
2003 and thereafter..............................................25,000

       Effective date.--The provision is effective for property 
     placed in service in taxable years beginning after December 
     31, 1996, subject to the phase-in schedule set forth above.
     Conference agreement
       The conference agreement follows the Senate amendment.


 2. tax credit for social security taxes paid with respect to employee 
                               cash tips

       (Sec. 1112 of the House bill and the Senate amendment.)
     Present law
       Employee tip income is treated as employer-provided wages 
     for purposes of the Federal Insurance Contributions Act 
     (``FICA''). Employees are required to report to the employer 
     the amount of tips received. The Omnibus Budget 
     Reconciliation Act of 1993 (``OBRA 1993'') provided a 
     business tax credit with respect to certain employer FICA 
     taxes paid with respect to tips treated as paid by the 
     employer. The credit applies to tips received from customers 
     in connection with the provision of food or beverages for 
     consumption on the premises of an establishment with respect 
     to which the tipping of employees is customary. OBRA 1993 
     provided that the FICA tip credit is effective for taxes paid 
     after December 31, 1993. Temporary Treasury regulations 
     provide that the tax credit is available only with respect to 
     tips reported by the employee. The temporary regulations also 
     provide that the credit is effective for FICA taxes paid by 
     an employer after December 31, 1993, with respect to tips 
     received for services performed after December 31, 1993.
     House bill
       The provision clarifies the credit with respect to employer 
     FICA taxes paid on tips by providing that the credit is (1) 
     available whether or not the employee reported the tips on 
     which the employer FICA taxes were paid pursuant to section 
     6053(a), and (2) effective with respect to taxes paid after 
     December 31, 1993, regardless of when the services with 
     respect to which the tips are received were performed.
       The provision also modifies the credit so that it applies 
     with respect to tips received from customers in connection 
     with the delivery or serving of food or beverages, regardless 
     of whether the food or beverages are for consumption on the 
     premises of the establishment.
       Effective date.--The clarifications relating to the 
     effective date and nonreported tips are effective as if 
     included in OBRA 1993. The provision expanding the tip credit 
     to the provision of food or beverages not for consumption on 
     the premises of the establishment is effective with respect 
     to FICA taxes paid on tips received with respect to services 
     performed after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


   3. Home office deduction: treatment of storage of product samples

       (Sec. 1113 of the House bill.)
     Present law
       A taxpayer's business use of his or her home may give rise 
     to a deduction for the business portion of expenses related 
     to operating the home (e.g., a portion of rent or 
     depreciation and repairs). Code section 280A(c)(1) provides, 
     however, that business deductions generally are allowed only 
     with respect to a portion of a home that is used exclusively 
     and regularly in one of the following ways: (1) as the 
     principal place of business for a trade or business; (2) as a 
     place of business used to meet with patients, clients, or 
     customers in the normal course of the taxpayer's trade or 
     business; or (3) in connection with the taxpayer's trade or 
     business, if the portion so used constitutes a separate 
     structure not attached to the dwelling unit. In the case of 
     an employee, the Code further requires that the business use 
     of the home must be for the convenience of the employer (sec. 
     280A(c)(1)). These rules apply to houses, apartments, 
     condominiums, mobile homes, boats, and other similar property 
     used as the taxpayer's home (sec. 280A(f)(1)).
       Section 280A(c)(2) contains a special rule that allows a 
     home office deduction for business expenses related to a 
     space within a home that is used on a regular (even if not 
     exclusive) basis as a storage unit for the inventory of the 
     taxpayer's trade or business of selling products at retail or 
     wholesale, but only if the home is the sole fixed location of 
     such trade or business.
       Home office deductions may not be claimed if they create 
     (or increase) a net loss from a business activity, although 
     such deductions may be carried over to subsequent taxable 
     years (sec. 280A(c)(5)).
     House bill
       The House bill clarifies that the special rule contained in 
     present-law section 280A(c)(2) permits deductions for 
     expenses related to a storage unit in a taxpayer's home 
     regularly used for inventory or product samples (or both) of 
     the taxpayer's trade or business of selling products at 
     retail or wholesale, provided that the home is the sole fixed 
     location of such trade or business.
       Effective date--The provision applies to taxable years 
     beginning after December 31, 1995.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.


             4. Treatment of certain charitable risk pools

       (Sec. 1114 of the House bill.)
     Present law
       Organizations described in section 501(c)(3) (which are 
     referred to as ``charities'') generally are exempt from 
     Federal income tax and are eligible to receive tax-deductible 
     contributions and to use the proceeds of tax-exempt 
     financing. Section 501(c)(3) requires that an organization be 
     organized and operated exclusively for a charitable or other 
     specifically enumerated exempt purpose in order to qualify 
     for tax-exempt status under that section.
       Section 501(c)(3) requires that an organization that is 
     organized and operated exclusively for charitable purposes is 
     entitled to tax-exempt status under that section only if the 
     organization satisfies the additional requirements that no 
     part of its net earnings inures to the benefit of any private 
     individual or shareholder (referred to as the ``private 
     inurement test'') and only if the organization does not 
     engage in political campaign activity on behalf of (or in 
     opposition to) any candidate for public office and does not 
     engage in substantial lobbying activities.
       Section 501(m) provides that an organization described in 
     section 501(c)(3) or 501(c)(4) of the Code is exempt from tax 
     only if no substantial part of its activities consists of 
     providing commercial-type insurance. For purposes of this 
     rule, commercial-type insurance does not include insurance 
     provided at substantially below cost to a class of charitable 
     recipients.
       Present law does not specifically accord tax-exempt status 
     to an organization that pools insurable risks of a group of 
     tax-exempt organizations described in section 501(c)(3).
     House bill
       Under the House bill, a qualified charitable risk pool is 
     treated as organized and operated exclusively for charitable 
     purposes. The provision make inapplicable to a qualified 
     charitable risk pool the present-law rule under section 
     501(m) that a charitable organization described in section 
     501(c)(3) is exempt from tax only if no substantial part of 
     its activities consists of providing commercial-type 
     insurance.
       The House bill defines a qualified charitable risk pool as 
     an organization organized and operated solely to pool 
     insurable risks of its members (other than medical 
     malpractice risks) and to provide information to its members 
     with respect to loss control and risk management. Because a 
     qualified charitable risk pool must be organized and operated 
     solely to pool insurable risks of its members and to provide 
     information to members with respect to loss control and risk 
     management, no profit may be accorded to any member of the 
     organization other than through providing members with 
     insurance coverage below the cost of comparable commercial 
     coverage and through providing members with loss control and 
     risk management information. Only charitable tax-exempt 
     organizations described in section 501(c)(3) may be members 
     of a qualified charitable risk pool.
       The House bill further requires that a qualified risk pool 
     is required to (1) be organized as a nonprofit organization 
     under State law authorizing risk pooling for charitable 
     organizations; (2) be exempt from State income tax; (3) 
     obtain at least $1 million in startup capital from nonmember 
     charitable organizations; (4) be controlled by a board of 
     directors elected by its members; and (5) provide in its 
     organizational documents that members must be tax-exempt 
     charitable organizations at all times, and if a member loses 
     that status it must immediately notify the organization, and 
     that no insurance coverage applies to a member after the date 
     of any final determination that the member no longer 
     qualifies as a tax-exempt charitable organization.
       To be entitled to tax-exempt status under section 
     501(c)(3), a qualified charitable risk

[[Page H9615]]

     pool described in the provision also must satisfy the other 
     requirements of that section (i.e., the private inurement 
     test and the prohibition of political campaign activities and 
     substantial lobbying).
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.


      5. treatment of dues paid to agricultural or horticultural 
                             organizations

       (Sec. 1115 of the House bill and sec. 1113 of the Senate 
     amendments.)
     Present law
       Tax-exempt organizations generally are subject to the 
     unrelated business income tax (``UBIT'') on income derived 
     from a trade or business regularly carried on that is not 
     substantially related to the performance of the 
     organization's tax-exempt functions (secs. 511-514). Dues 
     payments made to a membership organization generally are not 
     subject to the UBIT. However, several courts have held that, 
     with respect to postal labor organizations, dues payments 
     were subject to the UBIT when received from individuals who 
     were not postal workers, but who became ``associate'' members 
     for the purpose of obtaining health insurance available to 
     members of the organization. See National League of 
     Postmasters of the United States v. Commissioner, No. 95-2646 
     (4th Cir. 1996), American Postal Workers Union, AFL-CIO v. 
     United States, 925 F.2d 480 (D.C. Cir. 1991), National 
     Association of Postal Supervisors v. United States, 944 F.2d 
     859 (Fed. Cir. 1991).
       In Rev. Proc. 95-21 (issued March 23, 1995), the IRS set 
     forth its position regarding when associate member dues 
     payments received by an organization described in section 
     501(c)(5) will be treated as subject to the UBIT. The IRS 
     stated that dues payments from associate members will not be 
     treated as subject to UBIT unless, for the relevant period, 
     ``the associate member category has been formed or availed of 
     for the principal purpose of producing unrelated business 
     income.'' Thus, under Rev. Proc. 95-21, the focus of the 
     inquiry is upon the organization's purposes in forming the 
     associate member category (and whether the purposes of that 
     category of membership are substantially related to the 
     organization's exempt purposes other than through the 
     production of income) rather than upon the motive of the 
     individuals who join as associate members.
     House bill
       Under the House bill, if an agricultural or horticultural 
     organization described in section 501(c)(5) requires annual 
     dues not exceeding $100 to be paid in order to be a member of 
     such organization, then in no event will any portion of such 
     dues be subject to the UBIT by reason of any benefits or 
     privileges to which members of such organization are 
     entitled. For taxable years beginning after 1995, the $100 
     amount will be indexed for inflation. The term ``dues'' is 
     defined as ``any payment required to be made in order to be 
     recognized by the organization as a member of the 
     organization.'' Thus, if a person is recognized as a member 
     of an organization by virtue of having paid annual dues for 
     his or her membership, then any subsequent payments made by 
     that person during the year to purchase another membership in 
     the same organization (covering the same period) would not be 
     within the scope of the provision.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1994.
     Senate amendment
       Same as the House bill, except that the Senate amendment 
     applies to taxable years beginning after December 31, 1986. 
     The Senate amendment also provides transitional relief to 
     agricultural or horticultural organizations that had a 
     reasonable basis for not treating membership dues received 
     prior to January 1, 1987, as unrelated business income. In 
     such cases, no portion of such dues will be treated as 
     derived from an unrelated trade or business.
     Conference agreement
       The conference agreement follows the Senate amendment. The 
     conferees intend that, if a person makes a single payment 
     that entitles the person to be recognized as a member of the 
     organization for more than twelve months, then such payment 
     may be prorated to determine whether annual dues exceed the 
     $100 cap (as adjusted for inflation).


         6. clarify employment tax status of certain fishermen

       (Sec. 1116(a) of the House bill and sec. 1114 of the Senate 
     amendment.)
     Present law
       Under present law, service as a crew member on a fishing 
     vessel is generally excluded from the definition of 
     employment for purposes of income tax withholding on wages 
     and for purposes of the Federal Insurance Contributions Act 
     (FICA) and the Federal Unemployment Tax Act (FUTA) taxes if 
     the operating crew of the boat normally consists of fewer 
     than 10 individuals, the individual receives a share of the 
     catch based on the total catch, and the individual does not 
     receive cash remuneration other than proceeds from the sale 
     of the individual's share of the catch. If a crew member 
     receives any other cash, e.g., payment for services as an 
     engineer, the exemption from FICA and FUTA taxes does not 
     apply. Crew members to which the exemption applies are 
     subject to self-employment taxes. Special reporting 
     requirements apply to the operators of boats on which exempt 
     crew members serve.
     House bill
       The operating crew of a boat is treated as normally made up 
     of fewer than 10 individuals if the average size of the 
     operating crew on trips made during the preceding 4 calendar 
     quarters consisted of fewer than 10 individuals. In addition, 
     the exemption applies if the crew member receives certain 
     cash payments. The cash payments cannot exceed $100 per trip, 
     is contingent on a minimum catch, and is paid solely for 
     additional duties (e.g., as mate, engineer, or cook) for 
     which additional cash remuneration is customary.
       Effective date.--The provision applies to remuneration paid 
     after December 31, 1996. In addition, the provision applies 
     to remuneration paid after December 31, 1996. In addition, 
     the provision applies to remuneration paid after December 31, 
     1984, and before January 1, 1997, unless the payor treated 
     such remuneration when paid as subject to FICA taxes.
     Senate amendment
       The Senate amendment is the same as the House bill.
       Effective date.--The provision applies to remuneration paid 
     after December 31, 1994. In addition, the provision applies 
     to remuneration paid after December 31, 1984, and before 
     January 1, 1995, unless the payer treated such remuneration 
     when paid as subject to FICA taxes.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.
       Effective date.--The conference agreement follows the 
     Senate amendment.


            7. Reporting requirements for purchasers of fish

       (Sec. 1116(b) of the House bill.)
     Present law
       Under present law, a person engaged in a trade or business 
     who make payments during the calendar year of $600 or more to 
     a person for ``rent, salaries, wages, premiums, annuities, 
     compensations, remunerations, emoluments, or other fixed or 
     determinable gains, profits, or other income'' must file an 
     information return with the Internal Revenue Service 
     reporting the amount of such payments, as well as the name, 
     address, and taxpayer identification number of the person to 
     whom such payments were made (Code sec. 6041). A similar 
     statement must also be furnished to the person to whom such 
     payments were made. Treasury regulations provide that 
     payments for ``merchandise'' are not required to be reported 
     under this provision (Treas. reg. sec. 1.6041-3(d)). 
     Consequently, information reporting is generally not required 
     with respect to purchases of fish or other forms of aquatic 
     life. Information reporting is required by a person engaged 
     in a trade or business who, in the course of that trade or 
     business, receives more than $10,000 in cash in one 
     transaction (or several related transactions) (Code sec. 
     6050I).
     House bill
       The provision requires persons engaged in the trade or 
     business of purchasing fish for resale who pay more than $600 
     in cash in a calendar year for fish or other forms of aquatic 
     life from any seller engaged in the trade or business of 
     catching fish to file information reports with the Secretary 
     regarding such purchases. A copy of the report must be 
     provided to the seller.
       Effective date.--The provision is effective for purchases 
     made after December 31, 1996.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.
       Effective date.--The provision is effective for purchases 
     made after December 31, 1997.


 8. Modify rules governing issuance of tax-exempt bonds for first-time 
                                farmers

       (Sec. 1115 of the Senate amendment.)
     Present law
       Interest on bonds issued by State and local governments to 
     provide financing to private persons is taxable unless an 
     exception is provided in the Internal Revenue Code. One such 
     exception allows State and local governments to issue bonds 
     to finance loans to first-time farmers for the acquisition of 
     land (and limited amounts of related depreciable farm 
     property) if the purchasers will be the principal user of the 
     property and will materially participate in the farming 
     operation in which the property is to be used.
       A first-time farmer is defined as an individual who has at 
     no time owned farm land in excess of 15 percent of the median 
     size of the farm in the county in which such land is located, 
     and the fair market value of the land has not at any time 
     when held by the individual exceeded $125,000.
       Under general rules governing issuance of tax-exempt bonds, 
     working capital financing (including purchases from related 
     parties) is precluded.
     House bill
       No provision.
     Senate amendment
       The Senate amendment makes two modifications to the rules 
     governing issuance of tax-exempt bonds for first-time 
     farmers. First, the definition of first-time farmer is

[[Page H9616]]

     broadened to include an individual who has at no time owned 
     farm land in excess of 30 percent of the median size farm in 
     the county. Second, these bonds may be used to finance 
     purchases between related parties provide that: (1) the price 
     paid reflects the fair market value of the property and, (2) 
     the seller has no financial interest in the farming operation 
     conducted on the land after the bond-financed sale occurs.
       Effective date.--For financing provided with bonds issued 
     after the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     a clarification relating to the circumstances in which a 
     related seller is treated as having a continuing financial 
     interest in bond-financed farmland. In general, the conferees 
     intend that such a seller will not be treated as have a 
     financial interest if the seller.
       (a) has no more than a ten-percent interest in the capital 
     or profits in a partnership comprising the farm;
       (b) has no more than a ten-percent stock interest in a 
     corporation comprising the farm;
       (c) has no more ten-percent of the beneficial interest in a 
     trust comprising the farm;
       (d) is not a principal user of the farm; or
       (e) has no other direct or indirect ownership or use of the 
     farm which has as a principal purposes, the avoidance of this 
     provision.
       The conferees further intend that issuers making loans to 
     finance related party sales provide appropriate notice to 
     borrowers of these restrictions and of the fact that bond-
     proceeds may not be re-transferred from sellers to purchasers 
     as part of efforts (e.g., step-transactions) to transfer both 
     property financed with the bond proceeds and the bond 
     proceeds received by the seller.


 9. Clarify treatment of newspaper distributors and carriers as direct 
                                sellers

       (Sec. 1116 of the Senate amendment.)
     Present law
       For Federal tax purposes, there are two classifications of 
     workers: a worker is either an employee of the service 
     recipient or an independent contractor. Significant tax 
     consequences result from the classification of a worker as an 
     employee or independent contractor. These differences relate 
     to withhold an employment tax requirements, as well as the 
     ability to exclude certain types of compensation from income 
     or take tax deductions for certain expenses. Some of these 
     consequences favor employee status, while others favor 
     independent contractor status. For example, an employee may 
     exclude from gross income employer-provided benefits such as 
     pension, health, and group-term life insurance benefits. On 
     the other hand, an independent contractor can establish his 
     or her own pension plan and deduct contributions to the plan. 
     An independent contractor also has greater ability to deduct 
     work-related expenses.
       Under present law, the determination of whether a worker is 
     an employee or an independent contractor is generally made 
     under a common-law facts and circumstances test that seeks to 
     determine whether the service provider is subject to the 
     control of the service recipient, not only as to the nature 
     of the work performed, but the circumstances under which it 
     is performed. Under a special safe harbor rule (sec. 530 of 
     the Revenue Act of 1978), a service recipient may treat a 
     worker as an independent contractor for employment tax 
     purposes even though the worker is an employee under the 
     common-law test if the service recipient has a reasonable 
     basis for treating the worker as an independent contractor 
     and certain other requirements are met.
       In addition to the common-law test, there are also some 
     persons who are treated by statute as either employees or 
     independent contractors. For example, ``direct sellers'' are 
     deemed to be independent contractors. A direct seller is a 
     person engaged in the trade or business of selling consumer 
     products in the home or otherwise than in a permanent retail 
     establishment, if substantially all the remuneration for the 
     performance of the services is directly related to sales or 
     other output rather than to the number of hours worked, and 
     the services performed by the person are performed pursuant 
     to a written contract between such person and the service 
     recipient and such contract provides that the person will not 
     be treated as an employee for Federal tax purposes.
       The newspaper industry has generally taken the position 
     that newspaper distributors and carriers should be treated as 
     direct sellers for income and employment tax purposes. The 
     Internal Revenue Service has generally taken the position 
     that the direct seller rules do not apply to newspaper 
     distributors and carriers operating under an agency 
     distribution system (i.e., where the publisher retains title 
     to the newspapers).
     House bill
       No provision.
     Senate amendment
       The Senate amendment clarifies the treatment of qualifying 
     newspaper distributors and carriers as direct sellers. Under 
     the Senate amendment, a person engaged in the trade or 
     business of the delivery or distribution of newspapers or 
     shopping news (including any services that are directly 
     related to such trade or business such as solicitation of 
     customers of collection of receipts) qualifies as a direct 
     seller, provided substantially all the remuneration for the 
     performance of the services is directly related to sales or 
     other output rather than to the number of hours worked, and 
     the services performed by the person are performed pursuant 
     to a written contract between such person and the service 
     recipient and such contract provides that the person will not 
     be treated as an employee for Federal tax purposes. The 
     Senate amendment is intended to apply to newspaper 
     distributors and carriers whether or not they hire others to 
     assist in the delivery of newspapers. The Senate amendment 
     also applies to newspaper distributors and carriers operating 
     under either a buy-sell distribution system (i.e., where the 
     newspaper distributors or carriers purchase the newspapers 
     from the publisher) or an agency distribution system. For 
     example, newspaper distributors and carriers operating under 
     an agency distribution system who are paid based on the 
     number of papers delivered and have an appropriate written 
     agreement qualify as direct sellers. The status of newspaper 
     distributors and carriers who do not qualify as direct 
     sellers under the Senate amendment continue to be determined 
     under present-law rules. No inference is intended with 
     respect to the employment status of newspaper distributors 
     and carriers prior to the effective date of the Senate 
     amendment. Further, the provision is intended to clarify the 
     worker classification issue for income and employment taxes 
     only. The provision is not intended to have any impact 
     whatsoever on the interpretation or applicability of Federal, 
     State, or local labor laws.
       Effective date--The provision is effective with respect to 
     services performed after December 31, 1995.
     Conference agreement
       The conference agreement follows the Senate amendment.


10. Application of involuntary conversion rules to property damaged as 
             a result of Presidentially declared disasters

       (Sec. 1117 of the Senate amendment.)
     Present law
       A taxpayer may elect not to recognize gain with respect to 
     property that is involuntarily converted if the taxpayer 
     acquires within an applicable period property similar or 
     related in service or use. If the taxpayer does not replace 
     the converted property with property similar or related in 
     service or use, then gain generally is recognized.
     House bill
       No provision.
     Senate amendment
       Any tangible property acquired and held for productive use 
     in a business is treated as similar or related in service or 
     use to property that (1) was held for investment or for 
     productive use in a business and (2) was involuntarily 
     converted as a result of a Presidentially declared disaster.
       Effective date.--The Senate amendment is effective for 
     disasters for which a Presidential declaration is made after 
     December 31, 1994, in taxable years ending after that date.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     the modification that the boundaries of the enterprise 
     community for Oklahoma City designated by the Secretary of 
     Housing and Urban Development on December 21, 1994, may be 
     extended with respect to the census tracts located in the 
     area damaged by the bombing of the Alfred P. Murrah Federal 
     Building in Oklahoma City on April 19, 1995. The modification 
     is effective on the date of enactment.


  11. Establish 15-year recovery period for retail motor fuels outlet 
                                 stores

       (Sec. 1118 of the Senate amendment.)
     Present law
       Under present law, depreciation for property used in the 
     retail gasoline trade is calculated under section 168 using a 
     15-year recovery period and the 150-percent declining balance 
     method. Nonresidential real property is depreciated using a 
     39-year recovery period and the straight-line method. It is 
     understood that taxpayers generally have taken the position 
     that convenience stores and other buildings installed at 
     retail motor fuels outlets have a 15-year recovery period. 
     The IRS, in a position described in a recent Coordinated 
     Issues Paper, generally limits the application of the 15-year 
     recovery period to instances where the structure: (1) is 
     1,400 square feet or less or (2) meets a 50-percent test. The 
     50-percent test is met if: (1) 50 percent or more of the 
     gross revenues that are generated from the building are 
     derived from petroleum sales and (2) 50 percent or more of 
     the floor space in the building is devoted to petroleum 
     marketing sales.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides that 15-year property 
     includes any section 1250 property (generally, depreciable 
     real property) that is a retail motor fuels outlet (whether 
     or not food or other convenience items are sold at the 
     outlet). A retail motor fuels outlet does not include any 
     facility related to petroleum or natural gas trunk pipelines 
     or to any section 1250 property used only to an insubstantial 
     extent in the retail marketing of petroleum or petroleum 
     products.
       Effective date.--The provision is effective for property 
     placed in service on or after the date of enactment and to 
     which the amendments made by section 201 of the Tax Reform

[[Page H9617]]

     Act of 1986 apply (i.e., property subject to the modified 
     Accelerated Cost Recovery System of sec. 168). The taxpayer 
     may elect the application of the provision for property 
     placed in service prior to the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.
       A taxpayer may elect the application of the provision for 
     qualified property placed in service prior to the date of 
     enactment. The conferees clarify that if a taxpayer has 
     already treated qualified property that was placed in service 
     before the date of enactment as 15-year property, the 
     taxpayer will be deemed to have made the election with 
     respect to such property.


                12. Treatment of leasehold improvements

       (Sec. 1119 of the Senate amendment.)
     Present law
       A taxpayer generally recovers the adjusted basis of 
     property for purposes of determining gain or loss upon the 
     disposition of the property. Upon the termination of a lease, 
     the adjusted basis of leasehold improvements that were made, 
     but are not retained, by a lessee are taken into account to 
     compute gain or loss by the lessee. The proper treatment of 
     the adjusted basis of improvements made by a lessor upon 
     termination of a lease is less clear. It appears that it is 
     the position of the Internal Revenue Service that leasehold 
     improvements made by a lessor that constitute structural 
     components of a building must be continued to be depreciated 
     in the same manner as the underlying real property, even if 
     such improvements are retired at the end of the lease term. 
     Some lessors, on the other hand, may be taking the position 
     that a leasehold improvement is a property separate and 
     distinct from the underlying building and that an abandonment 
     loss under section 165 is allowable at the end of the lease 
     term for the adjusted basis of the property.
     House bill
       No provision.
     Senate amendment
       A lessor of leased property that disposes of a leasehold 
     improvement which was made by the lessor for the lessee of 
     the property may take the adjusted basis of the improvement 
     into account for purposes of determining gain or loss, if the 
     improvement is irrevocably disposed of or abandoned by the 
     lessee at the termination of the lease.
       Effective date.--The provision is effective for leasehold 
     improvements disposed of after June 12, 1996. No inference is 
     intended as to the proper treatment of such dispositions 
     before June 13, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment. The 
     conferees wish to clarify that the provision does not apply 
     to the extent section 280B of present law applies to the 
     demolition of a structure, a portion of which may include 
     leasehold improvements.


13. Increase deductibility of business meal expenses of certain seafood 
                         processing facilities

       (Sec. 1120 of the Senate amendment.)
     Present law
       In general, 50 percent of meal and entertainment expenses 
     incurred in connection with a trade or business that are 
     ordinary and necessary (and not lavish or extravagant) are 
     deductive (sec. 274). Food or beverage expenses are fully 
     deductible provided that they are (1) required by Federal law 
     to be provided to crew members of a commercial vessel, (2) 
     provided to crew members of similar commercial vessels not 
     operated on the oceans, or (3) provided on certain oil or gas 
     platforms or drilling rigs.
     House bill
       No provision.
     Senate amendment
       The Senate amendment adds remote seafood processing 
     facilities located in the United States north of 53 degrees 
     north latitude to the present-law of entities not subject to 
     the 50 percent limitation on the deductibility of business 
     meals. Consequently, these expenses are fully deductible. A 
     seafood processing facility is remote when there are 
     insufficient eating facilities in the vicinity of the 
     employer's premises.\3\
---------------------------------------------------------------------------
     \3\ See Treas. Reg. sec. 1.119-1(a)(2)(ii)(c) and 1.119-
     1(f)(Example 7).
---------------------------------------------------------------------------
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


         14. Provide a lower rate of tax on certain hard ciders

       (Sec. 1121 of the Senate amendment.)
     Present law
       Distilled spirits are taxed at a rate of $13.50 per proof 
     gallon; beer is taxed at a rate of $18 per barrel 
     (approximately 58 cents per gallon); and still wines of 14 
     percent alcohol or less are taxed at a rate of $1.07 per wine 
     gallon. Higher rates of tax are applied to wines with great 
     alcohol content and sparking wines.
       Certain small wineries may claim a credit against the 
     excise tax on wine of 90 cents per wine gallon on the first 
     100,000 gallons on wine produced annually. Certain small 
     breweries pay a reduced tax of $7.00 per barrel 
     (approximately 22.6 cents per gallon) on the first 60,000 
     barrels of beer produced annually.
       Apple cider containing alcohol is classified and taxed as 
     wine.
     House Bill
       No provision.
     Senate amendment
       The Senate amendment adjusts the tax rate on apple cider 
     having an alcohol content of no more than seven percent to 
     22.6 cents per gallon.
       Effective date.--The provision is effective for apple cider 
     removed after December 31, 1996.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment.


      15. modifications to section 530 of the revenue act of 1978

       (Sec. 1122 of the Senate amendment.)
     Present law
       In general
       For Federal tax purposes, there are two classifications of 
     workers: a worker is either an employee of the service 
     recipient or an independent contractor. In general, the 
     determination of whether an employer-employee relationship 
     exists for Federal tax purposes is made under a common-law 
     test. Treasury regulations provide that an employer-employee 
     relationship generally exists if the person contracting for 
     services has the right to control not only the result of the 
     services, but also the means by which that result is 
     accomplished.\4\
---------------------------------------------------------------------------
     \4\ The Internal Revenue Service (``IRS'') has developed a 
     list of 20 factors that may be examined in determining 
     whether an employer-employee relationship exists. Rev. Rul. 
     87-41, 1987-1, C.B. 296.
---------------------------------------------------------------------------
       Section 530
       With increased enforcement of the employment tax laws 
     beginning in the late 1960s, controversies developed between 
     the IRS and taxpayers as to whether businesses had correctly 
     classified certain workers as self employed rather than as 
     employees. In response to this problem, the Congress enacted 
     section 530 of the Revenue Act of 1978 (``section 530''). 
     That provision generally allows a taxpayer to treat a worker 
     as not being an employee for employment tax purposes (but not 
     income tax purposes), regardless of the individual's actual 
     status under the common-law test, unless the taxpayer has no 
     reasonable basis for such treatment.
       It is the position of the IRS, based on legislative 
     history, that section 530 can only apply after a 
     determination has been made that a worker is an employee 
     under the common-law test.\5\ The IRS does not require the 
     taxpayer to concede or agree to a determination that the 
     worker is an employee.\6\ However, several courts that have 
     explicitly considered the question have held that section 530 
     relief is available irrespective of whether there has been an 
     initial determination of worker classification under the 
     common law.\7\
---------------------------------------------------------------------------
     \5\ Employee or Independent Contractor?, at 3-4 (July 15, 
     1996)(hereinafter the ``IRS Training Guide'').
     \6\ IRS Training Guide, at 3-6; TAM 9443002 (December 3, 
     1993).
     \7\ See e.g., Lambert's Nursery and Landscaping, Inc. v. 
     U.S., 894 F.2d 154 (5th Cir. 1990) (``It is not necessary to 
     determine whether [taxpayer's] workers were independent 
     contractors or employees for employment tax purposes.'') J & 
     J Cab Service, Inc. v. U.S., 75 AFTR2d No. 95-618 (W.D. N.C. 
     1995) (``Section 530 relief may be granted irrespective of 
     whether individuals were incorrectly treated as other than 
     employees''); Queensgate Dental Family Practice, Inc. v. 
     U.S., 91-2 USTC No. 50,536 (M.D. Pa. 1991) (disagreeing with 
     the IRS' contention that the court must first determine 
     worker classification before applying section 530).
---------------------------------------------------------------------------
       Under section 530, a reasonable basis for treating a worker 
     as an independent contractor is considered to exist if the 
     taxpayer (1) reasonably relied on published rulings or 
     judicial precedent, (2) reasonably relied on past IRS audit 
     practice with respect to the taxpayer, (3) reasonably relief 
     on long-standing recognized practice of a significant segment 
     of the (industry of which the taxpayer is a member, or (4) 
     has any other reasonable basis for treating a worker as an 
     independent contractor. The legislative history states that 
     section 530 is to be ``construed liberally in favor of 
     taxpayers.'' \8\
---------------------------------------------------------------------------
     \8\ H. Rept. No. 1748 (95th Cong., 2d Sess., 5 (1978)). The 
     conference agreement to the Revenue Act of 1978 adopted the 
     provisions of the House bill and therefore incorporates this 
     legislative history.
---------------------------------------------------------------------------
       Under section 530, reliance on judicial precedent, 
     published rulings, technical advice with respect to the 
     taxpayer, or a letter ruling to the taxpayer is deemed a 
     reasonable basis for treating a worker as an independent 
     contractor. If a taxpayer relies on this safe harbor, the IRS 
     will look to see whether the facts of the judicial precedent 
     or published ruling are sufficiently similar to the 
     taxpayer's facts.\9\
---------------------------------------------------------------------------
     \9\ See e.g., TAM 9443002 (December 3, 1993); TAM 9330007 
     (April 28, 1993).
---------------------------------------------------------------------------
       Under the prior-audit safe harbor, reasonable reliance is 
     generally found to exist if the IRS failed to raise an 
     employment tax issue on audit, even though the audit was not 
     related to employment tax matters. A taxpayer can also rely 
     on a prior audit in which an employment tax issue was raised, 
     but was resolved in favor of the taxpayer. According to the 
     IRS, an ``audit'' must involve an examination of the 
     taxpayer's books and records; mere inquiries from an IRS 
     service center or a ``compliance check'' to determine whether 
     a taxpayer has filed all returns will not suffice.\10\ In 
     order to rely on a prior audit, the IRS requires that the 
     taxpayer must have treated the workers at issue

[[Page H9618]]

     as independent contractors during the period covered by the 
     prior audit.\11\
---------------------------------------------------------------------------
     \10\ IRS Training Guide, at 3-19.
     \11\ IRS Training Guide, at 3-20.
---------------------------------------------------------------------------
       A taxpayer is also treated as having a reasonable basis for 
     treating a worker as an independent contractor under section 
     530 if the taxpayer reasonably relied on long-standing 
     recognized practice of a significant segment of the industry 
     in which the taxpayer is engaged.
       Section 530 does not specify a period of time in order for 
     a practice to be long standing. The IRS Training Guide 
     provides that a practice is presumed to be long standing if 
     it existed for 10 years or more.\12\ the IRS Training Guide 
     recognizes that a taxpayer may use the industry practice safe 
     harbor even if it began business after 1978 or the industry 
     came into existence after 1978.\13\ However, the IRS Training 
     Guide provides that if the industry practice changed by the 
     time the taxpayer joined the industry, the taxpayer cannot 
     rely on the former practice.
---------------------------------------------------------------------------
     \12\ IRS Training Guide, at 3-24.
     \13\ IRS Training Guide, at 3-24.
---------------------------------------------------------------------------
       Neither section 530, nor the legislative history, provides 
     a clear standard as to what constitutes a significant segment 
     of a taxpayer's industry. The IRS Training Guide provides 
     that the determination will be based on the facts and 
     circumstances.\14\ A few courts have addressed this issue. In 
     one case, the IRS argued that a significant segment of the 
     industry means more than 50 percent of the industry.\15\ 
     However, that court held that a significant segment is less 
     than a majority of the firms in an industry. Another court 
     held that 15 out of 84 industry respondents (18 percent) 
     treating workers as independent contractors would constitute 
     a significant segment of an industry.\16\
---------------------------------------------------------------------------
     \14\ IRS Training Guide, at 3-25.
     \15\ In re Bentley, 73 AFTR2d No. 94-667 (Bkrtcy. E.D. Tenn. 
     1994).
     \16\ REAG, Inc. v. U.S., 801 F.Supp. 494 (W.D. Okla. 1992).
---------------------------------------------------------------------------
       Even if a taxpayer is unable to rely on one of the three 
     safe harbors described above, a taxpayer may still be 
     entitled to relief under section 530 if the taxpayer has any 
     other reasonable basis for treating a worker as an 
     independent contractor.
       The relief under section 530 is available with respect to 
     an individual only if certain additional requirements are 
     satisfied. The taxpayer must not have treated the individual 
     as an employee for any period, and for periods since 1978 all 
     Federal tax returns, including information returns, must have 
     been filed on a basis consistent with treating such 
     individual as an independent contractor. Further, the 
     taxpayer (or a predecessor) must not have treated any 
     individual holding a substantially similar position as an 
     employee for purposes of employment taxes for any period 
     beginning after 1977.
       Whether workers are similarly situated is dependent on the 
     facts and circumstances. The IRS Training Guide states that a 
     ``substantially similar position exists if the job functions, 
     duties, and responsibilities are substantially similar and 
     the control and supervision of those duties and 
     responsibilities is substantially similar.''\17\
---------------------------------------------------------------------------
     \17\ IRS Training Guide, at 3-11.
---------------------------------------------------------------------------
       There have been a few court decisions addressing this 
     issue. For example, in REAG, Inc. v. U.S.,\18\ the court held 
     that the position of appraisers who were owner-officers of 
     the business was not substantially similar to appraisers who 
     were not owners since the owner-officers had managerial 
     responsibilities. By contrast, in Lowen Corp. v. U.S.,\19\ 
     the court found that all workers engaged in the business of 
     selling real estate signs had substantially similar positions 
     even though some were salaried and had to file daily reports 
     while others were paid by commission and did not have to file 
     such reports.
---------------------------------------------------------------------------
     \18\ 801 F.Supp. 494 (W.D. Okla. 1992).
     \19\ 785 F.Supp. 913 (D. Kan. 1992).
---------------------------------------------------------------------------
       The IRS Training Guide states that the burden of proof is 
     on the taxpayer to demonstrate that it had a reasonable basis 
     for treating a worker as an independent contractor.\20\ 
     However, in light of the Congressional instruction in the 
     legislative history to construe section 530 liberally,\21\ 
     courts appear to be split as to how stringent a burden to 
     apply.
---------------------------------------------------------------------------
     \20\ IRS Training Guide, at 3-6.
     \21\ H. Rept. No. 1748 (95th Cong., 2d Sess., 5 (1978)). The 
     conference agreement to the Revenue Act of 1978 adopted the 
     provisions of the House bill and therefore incorporates this 
     legislative history.
---------------------------------------------------------------------------
       In McClellan v. U.S.,\22\ the court held that section 530 
     requires the ``taxpayer to come forward with an explanation 
     and enough evidence to establish prima facie grounds for a 
     finding of reasonableness. . . . [T]his threshold burden is 
     relatively low, and can be met with any reasonableness 
     showing. Once the taxpayer has made this prima facie showing, 
     the burden then shifts to the IRS to verify or refute the 
     taxpayer's explanation.'' By contrast, in Boles Trucking, 
     Inc., v. U.S.,\23\ the court held that the burden is on the 
     taxpayer to show, based on a preponderance of the evidence, 
     that it had a reasonable basis for treating workers as 
     independent contractors.
---------------------------------------------------------------------------
     \22\ 900 F.Supp. 101 (E.D. Mich. 1995). See also REAG. Inc. 
     v. U.S., 801 F.Supp. 494 (W.D. Okla. 1992) (a taxpayer need 
     only show a substantial rational basis for its decision to 
     treat the workers as independent contractors).
     \23\ 77 F.3d 236 (8th Cir. 1996) See also Springfield v. 
     U.S., 1996 U.S. App. LEXIS 15879 (9th Cir. 1996) (taxpayer 
     has the burden to show it satisfies the requirements of 
     section 530 by a preponderance of the evidence).
---------------------------------------------------------------------------
       Under section 1706 of the Tax Reform Act of 1986, section 
     530 does not apply in the case of an individual who, pursuant 
     to an arrangement between the taxpayer and another person, 
     provides services for such other person as an engineer; 
     designer, drafter, computer programmer, systems analyst, or 
     other similarly skilled worker engaged in a similar line of 
     work. Thus, the determination of whether such individuals are 
     employees or self employed is made in accordance with the 
     common-law test.
     House bill
       No provision.
     Senate amendment
       The Senate amendment makes several clarifications of and 
     modifications to section 530.
       First, under the Senate amendment, a worker does not have 
     to otherwise be an employee of the taxpayer in order for 
     section 530 to apply. The provision is intended to reverse 
     the IRS position, as stated in the IRS Training Guide, that 
     there first must be a determination that the worker is an 
     employee under the common law standards before application of 
     section 530.
       The Senate amendment modifies the prior audit safe harbor 
     so that taxpayers may not rely on an audit commencing after 
     December 31, 1996, unless such audit included an examination 
     for employment tax purposes of whether the worker involved 
     (or any worker holding a position substantially similar to 
     the position held by the worker involved) should be treated 
     as an employee of the taxpayer. The provision does not affect 
     the ability of taxpayers to rely on prior audits that 
     commenced before January 1, 1997, even though the audit was 
     not related to employment tax matters, as under present law.
       Under the Senate amendment, section 530 does not apply with 
     respect to a worker unless the taxpayer and the worker sign a 
     statement (at such time and in such manner as the Secretary 
     may prescribe) which provides that the worker will not be 
     treated as an employee for employment tax purposes. Also, the 
     Senate amendment provides that an officer or employee of the 
     IRS must, at (or before) the commencement of an audit 
     involving worker classification issues, provide the taxpayer 
     with written notice of the provisions of section 530.
       The Senate amendment makes a number of changes to the 
     industry practice safe harbor. First, the Senate amendment 
     provides that a significant segment of the taxpayer's 
     industry under the industry practice safe harbor does not 
     require a reasonable showing of the practice of more than 25 
     percent of an industry (determined without taking into 
     account the taxpayer). The provision is intended to be a safe 
     harbor; a lower percentage may constitute a significant 
     segment of the taxpayer's industry based on the particular 
     facts and circumstances.
       The Senate amendment also provides that an industry 
     practice need not have continued for more than 10 years in 
     order for the industry practice to be considered long 
     standing. As with the significant segment safe harbor, this 
     provision is intended to be a safe harbor; an industry 
     practice in existence for a shorter period of time may be 
     considered long standing based on the particular facts and 
     circumstances. In addition, the Senate amendment clarifies 
     that an industry practice will not fail to be treated as long 
     standing merely because such practice began after 1978. 
     Consequently, the provision clarifies that new industries can 
     take advantage of section 530.
       The Senate amendment modifies the burden of proof in 
     section 530 cases by providing that if a taxpayer establishes 
     a prima facie case that it was reasonable not to treat a 
     worker as an employee for purposes of section 530,\24\ the 
     burden of proof shifts to the IRS with respect to such 
     treatment.\25\ In order for the shift in burden of proof to 
     occur, the taxpayer must fully cooperate with reasonable 
     requests by the IRS for information relevant to the 
     taxpayer's treatment of the worker as an independent 
     contractor under section 530. It is intended that a request 
     by the IRS will not be treated as reasonable if complying 
     with the request would be impracticable given the particular 
     circumstances and the relative costs involved. The shift in 
     the burden of proof does not apply for purposes of 
     determining whether the taxpayer had any other reasonable 
     basis for treating the worker as an independent contractor, 
     but does apply to all other aspects of section 530. So, for 
     example, provided the taxpayer establishes its prima facie 
     case and fully cooperates with the IRS' reasonable requests, 
     the burden of proof shifts to the IRS with respect to all 
     other aspects of section 530, including whether the taxpayer 
     had a reasonable basis for treating the worker as an 
     independent contractor under the judicial or administrative 
     precedent, prior audit, or long-standing industry practice 
     safe harbors, whether the taxpayer filed all Federal tax 
     returns on a basis consistent with treating the worker as an 
     independent contractor, and whether the taxpayer treated any 
     worker holding a substantially similar position as an 
     employee. No inference is intended with respect to the 
     application of the burden of proof in section 530

[[Page H9619]]

     cases prior to the effective date of this provision.
---------------------------------------------------------------------------
     \24\ For example, the taxpayer must establish a prima facie 
     case that it reasonably satisfies the requirements of section 
     530 for not treating the worker as an employee, including the 
     reporting consistency and consistency among workers with 
     substantially similar positions requirements, and the 
     requirement that the taxpayer have a reasonable basis for not 
     treating the worker as an employee.
     \25\ The provision is generally intended to codify the 
     holding in McClellan v. U.S., discussed above, with respect 
     to the burden of proof in section 530 cases.
---------------------------------------------------------------------------
       The Senate amendment also provides that if a taxpayer 
     prospectively changes its treatment of workers from 
     independent contractors to employees for employment tax 
     purposes, such a change will not affect the applicability of 
     section 530 with respect to such workers for prior periods.
       Finally, the Senate amendment provides that, in determining 
     whether a worker holds a substantially similar position to 
     another worker, the relationship of the parties must be one 
     of the factors taken into account.
       Effective date.--The provisions generally apply to periods 
     after December 31, 1996. The provision regarding the burden 
     of proof applies to disputes with respect to periods after 
     December 31, 1996. In the case of workers engaged to perform 
     services for a taxpayer before January 1, 1997, the provision 
     requiring a written statement that such workers are not 
     employees for employment tax purposes is effective for 
     periods after December 31, 1997 (unless the taxpayer elects 
     to apply the provision earlier). The provision requiring the 
     IRS to notify taxpayers of the provisions of section 530 
     applies to audits commencing after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     the following modifications:
       The conference agreement deletes the written statement 
     requirement in the Senate amendment.
       The conferees wish to clarify the notice that the IRS must 
     provide to taxpayers at (or before) the commencement of an 
     audit inquiry involving worker classification issues. The 
     conferees recognize that, in many cases, the portion of an 
     audit involving worker classification issues will not arise 
     until after the examination of the taxpayer begins. In that 
     case, the notice need only be given at the time the worker 
     classification issue is first raised with the taxpayer.
       With respect to the burden of proof in section 530 cases, 
     the conferees intend that a request for information by the 
     IRS will not be treated as reasonable if (1) it does not 
     relate to the particular basis on which the taxpayer relied 
     for establishing its reasonable basis, or (2) complying with 
     the request would be impracticable given the particular 
     circumstances and the relative costs involved.
       With respect to the substantially similar position 
     provision, the conferees clarify that consideration of the 
     relationship between a taxpayer and a worker includes 
     consideration of the degree of supervision and control of the 
     worker by the taxpayer.


     16. employee housing for certain medical research institutions

       (Sec. 1123 of the Senate amendment.)
     Present law
       Under Code section 119(d), employees of an educational 
     institution described in Code section 170(b)(1)(A)(ii) do not 
     have to include in income the fair market value of campus 
     housing as long as the rent is at least five percent of the 
     appraised value of the housing. If the rent is less than the 
     five-percent safe harbor, there is inclusion into income to 
     the extent that the rent that was charged falls short of the 
     lesser of five percent of the appraised value or the average 
     of rents paid by individuals (other than employees or 
     students of the educational institution) for similar lodging 
     provided by the institution.
     House bill
       No provision.
     Senate amendment
       The Senate amendment treats as ``educational institutions'' 
     for purposes of Code section 119(d) certain medical research 
     institutions (``academic health centers'') that engage in 
     basic and clinical research, have a regular faculty and teach 
     a curriculum in basic and clinical research to students in 
     attendance at the institution.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1995.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     a further modification that treats as ``educational 
     institutions'' for purposes of Code section 119(d) certain 
     entities (``university systems'') organized under State law 
     composed of public institutions described in Code section 
     170(b)(1)(A)(ii). The conferees intend that, for purposes of 
     the present-law requirement of Code section 119(d)(3)(A) that 
     the employee housing be provided on (or in the proximity of) 
     a campus of the employer, a campus of one of the component 
     educational institutions of a university system should be 
     considered to be a campus of the university system.

              B. Extension of Certain Expiring Provisions


                     1. Work opportunity tax credit

       (Sec. 1201 of House bill and the Senate amendment.)
     Present law
       Prior to January 1, 1995, the targeted jobs tax credit was 
     available on an elective basis for employers hiring 
     individuals from one or more of nine targeted groups. The 
     credit generally was equal to 40 percent of qualified first-
     year wages (up to $6,000) for maximum credit of $2,400.
     House bill
       General rules.--The House bill replaces the targeted jobs 
     tax credit with the ``work opportunity tax credit''. The new 
     credit is available on an elective basis for employers hiring 
     individuals from one or more of seven targeted groups. The 
     credit generally is equal to 35 percent of qualified first-
     year wages.
       Minimum employment period.--Under the House bill, no credit 
     is allowed for wages paid unless the eligible individual is 
     employed by the employer for at least 180 days (20 days in 
     the case of a qualified summer youth employee) or 500 hours 
     (120 hours in the case of a qualified summer youth employee).
       Certification of members of targeted groups.--In general, 
     under the House bill, an individual is not treated as a 
     member of a targeted group unless: (1) on or before the day 
     the individual begins work for the employer, the employer, 
     the employer received in writing a certification from the 
     designated local agency that the individual is a member of a 
     specific targeted group, or (2) on or before the day the 
     individual is offered work with the employer, a pre-screening 
     notice is completed with respect to that individual by the 
     employer and within 14 days after the individual begins work 
     for the employer, the employer submits such notice, signed by 
     the employer and the individual under penalties of perjury, 
     to the designated local agency as part of a written request 
     for certification. The pre-screening notice will contain the 
     information provided to the employer by the individual that 
     forms the basis of the employer's belief that the individual 
     is a member of a targeted group.
       Effective date.--Wages paid or incurred to a qualified 
     individual who begins work for an employer after June 30, 
     1996, and before July 1, 1997.
     Senate amendment
       General rules.--Same as the House bill with the addition of 
     an eighth targeted group, individuals 18 to 24 who are in 
     families that have been receiving food stamps for at least a 
     three-month period ending on the date of hire.
       Minimum employment period.--Under the Senate amendment, no 
     credit is allowed for wages paid unless the eligible 
     individual is employed by the employer for at least 180 days 
     (20 in the case of a qualified summer youth employee) or 375 
     hours (120 hours in the case of a qualified summer youth 
     employee).
       Certification of members of targeted groups.--Same as House 
     bill except that it replaces the 14-day rule with a 21-day 
     rule for submission of pre-screening notice.
       Effective date.--Wages paid or incurred to a qualified 
     individual who begins work for an employer after September 
     30, 1996, and before October 1, 1997.
     Conference agreement
       General rules.--The conference agreement generally follows 
     the Senate amendment with one modification to the food stamps 
     category. Under the modification, members of the eighth 
     targeted group are individuals aged 18-24 who are in families 
     that have been receiving food stamps for at least a six-month 
     (rather than a three-month) period ending on the date of 
     hire. In the case of families that cease to be eligible for 
     food stamps under section 6(o) of the Food Stamp Act of 1977, 
     the six-month requirement is replaced with a requirement that 
     the family has been receiving food stamps for at least three 
     of the five months ending on the date of hire.
       Minimum employment period.--Under the conference agreement, 
     no credit is allowed for wages paid unless the eligible 
     individual is employed by the employer for at least 180 days 
     (20 in the case of a qualified summer youth employee) or 400 
     hours (120 hours in the case of a qualified summer youth 
     employee).
       Certification of members of targeted groups.--The 
     conference agreement follows the Senate amendment.
       Effective date.--The conference agreement follows the 
     Senate amendment.


              2. Employer-provided educational assistance

       (Sec. 1202 of the House bill and the Senate amendment.)
     Present and prior law
       For taxable years beginning before January 1, 1995, an 
     employee's gross income and wages did not include amounts 
     paid or incurred by the employer for educational assistance 
     provided to the employee if such amounts were paid or 
     incurred pursuant to an educational assistance program that 
     met certain requirements. This exclusion, which expired for 
     taxable years beginning after December 31, 1994, was limited 
     to $5,250 of educational assistance with respect to an 
     individual during a calendar year. The exclusion applied 
     whether or not the education was job related. In the absence 
     of this exclusion, educational assistance is excludable from 
     income only if it is related to the employee's current job.
       The provision extends the exclusion for employer-provided 
     educational assistance for taxable years beginning after 
     December 31, 1994, and before January 1, 1997. After December 
     31, 1995, the exclusion would not apply with respect to 
     graduate education.
       To the extent employers have previously filed Forms W-2 
     reporting the amount of educational assistance provided as 
     taxable wages, present Treasury regulations require the 
     employer to file Forms W-2c (i.e., corrected Forms W-2) with 
     the Internal Revenue Service.\26\ It is intended that 
     employers

[[Page H9620]]

     also be required to provide copies of Form W-2c to affected 
     employees.
---------------------------------------------------------------------------
     \26\ Treasury regulation section 31.6051-1(c).
---------------------------------------------------------------------------
       The Secretary is directed to establish expedited procedures 
     for the refund of any overpayment of taxes paid on excludable 
     educational assistance provided in 1995 and 1996, including 
     procedures for waiving the requirement that an employer 
     obtain an employee's signature if the employer demonstrates 
     to the satisfaction of the Secretary that any refund 
     collected by the employer on behalf of the employee will be 
     paid to the employee.
       Because the exclusion is extended, no interest and 
     penalties should be imposed if an employer failed to withhold 
     income and employment taxes on excludable educational 
     assistance or failed to report such educational assistance. 
     Further, it is intended that the Secretary establish 
     expedited procedures for refunding any interest and penalties 
     relating to educational assistance previously paid.
       Effective date.--The provision is effective with respect to 
     taxable years beginning after December 31, 1994, and before 
     January 1, 1997.
     Senate amendment
       The provision is the same as the House bill, except that 
     the exclusion is extended for an additional year, through 
     December 31, 1997, and the Senate amendment does not preclude 
     application of the exclusion to graduate courses.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1994, and before January 
     1, 1998.
     Conference agreement
       The conference agreement follows the House bill, with the 
     following modifications. The exclusion expires with respect 
     to courses beginning after May 31, 1997. The exclusion for 
     graduate courses applies in 1995. In 1996, the exclusion for 
     graduate courses does not apply to courses beginning after 
     June 30, 1996.


3. permanent extension of futa exemption for alien agricultural workers

       (Sec. 1203 of the House bill.)
     Present law
       Generally, the Federal unemployment tax (``FUTA'') is 
     imposed on farm operators who (1) employ 10 or more 
     agricultural workers for some portion of 20 different days, 
     each beginning in a different calendar week or (2) have a 
     quarterly payroll for agricultural services of at least 
     $20,000. An exclusion from FUTA was provided, however, for 
     labor performed by an alien admitted to the United States to 
     perform agricultural labor under section 214(c) and 
     101(a)(15)(H) of the Immigration and Nationality Act. This 
     exclusion was effective for labor performed before January 1, 
     1995.
     House bill
       The House bill permanently extends the FUTA exemption for 
     alien agricultural workers.
       Effective date.--Labor performed on or after January 1, 
     1995.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House bill provision.


                4. research and experimental tax credit

       (Sec. 1203 of the Senate amendment.)
     Present and prior law
       General rule
       Prior to July 1, 1995, section 41 of the Internal Revenue 
     Code provided for a research tax credit equal to 20 percent 
     of the amount by which a taxpayer's qualified research 
     expenditures for a taxable year exceeded its base amount for 
     that year. The research tax credit expired and does not apply 
     to amounts paid or incurred after June 30, 1995.
       A 20-percent research tax credit also applied to the excess 
     of (1) 100 percent of corporate cash expenditures (including 
     grants or contributions) paid for basic research conducted by 
     universities (and certain nonprofit scientific research 
     organizations) over (2) the sum of (a) the greater of two 
     minimum basic research floors plus (b) an amount reflecting 
     any decrease in nonresearch giving to universities by the 
     corporation as compared to such giving during a fixed-base 
     period, as adjusted for inflation. This separate credit 
     computation is commonly referred to as the ``university basic 
     research credit'' (see sec. 41(e)).
       Computation of allowable credit
       Except for certain university basic research payments made 
     by corporations, the research tax credit applies only to the 
     extent that the taxpayers' qualified research expenditures 
     for the current taxable year exceed its base amount. The base 
     amount for the current year generally is computed by 
     multiplying the taxpayer's ``fixed-base percentage'' by the 
     average amount of the taxpayer's gross receipts for the four 
     preceding years. If a taxpayer both incurred qualified 
     research expenditures and had gross receipts during each of 
     at least three years from 1984 through 1988, then its 
     ``fixed-base percentage'' is the ratio that its total 
     qualified research expenditures for the 1984-1988 period 
     bears to its total gross receipts for that period (subject to 
     a maximum ratio of .16). All other taxpayers (so-called 
     ``start-up firms'') are assigned a fixed-base percentage of 3 
     percent.\27\
---------------------------------------------------------------------------
     \27\ The Omnibus Budget Reconciliation Act of 1993 included a 
     special rule designed to gradually recompute a start-up 
     firm's fixed-base percentage based on its actual research 
     experience. Under this special rule, a start-up firm (i.e., 
     any taxpayer that did not have gross receipts in at least 
     three years during the 1984-1988 period) will be assigned a 
     fixed-base percentage of 3 percent for each of its first five 
     taxable years after 1993 in which it incurs qualified 
     research expenditures. In the event that the research credit 
     is extended beyond the scheduled June 30, 1995 expiration 
     date, a start-up firm's fixed-base percentage for its sixth 
     through tenth taxable years after 1993 in which it incurs 
     qualified research expenditures will be a phased-in ratio 
     based on its actual research experience. For all subsequent 
     taxable years, the taxpayer's fixed-base percentage will be 
     its actual ratio of qualified research expenditures to gross 
     receipts for any five years selected by the taxpayer from its 
     fifth through tenth taxable years after 1993 (sec. 
     41(c)(3)(B)).
---------------------------------------------------------------------------
       In computing the credit, a taxpayer's base amount may not 
     be less than 50 percent of its current-year qualified 
     research expenditures.
       To prevent artificial increases in research expenditures 
     among commonly controlled or otherwise related entities, 
     research expenditures and gross receipts of the taxpayer are 
     aggregated with research expenditures and gross receipts of 
     certain related persons for purposes of computing any 
     allowable credit (sec. 41(f)(l)). Special rules apply for 
     computing the credit when a major portion of a business 
     changes hands, under which qualified research expenditures 
     and gross receipts for periods prior to the change or 
     ownership of a trade or business are treated as transferred 
     with the trade or business that gave rise to those 
     expenditures and receipts for purposes of recomputing a 
     taxpayer's fixed-base percentage (sec. 41(f)(3)).
       Eligible expenditures
       Qualified research expenditures eligible for the research 
     tax credit consist of (1) ``in-house'' expenses of the 
     taxpayer for wages and supplies attributable to qualified 
     research; (2) certain time-sharing costs for computer use in 
     qualified research; and (3) 65 percent of amounts paid by the 
     taxpayer for qualified research conducted on the taxpayer's 
     behalf (so-called ``contract research expenses'').
       To be eligible for the credit, the research must not only 
     satisfy the requirements of present-law section 174 but must 
     be undertaken for the purpose of discovering information that 
     is technological in nature, the application of which is 
     intended to be useful in the development of a new or improved 
     business component of the taxpayer, and must pertain to 
     functional aspects, performance, reliability, or quality of a 
     business component. Research does not qualify for the credit 
     if substantially all of the activities relate to style, 
     taste, cosmetic, or seasonal design factors (sec. 41(d)(3)). 
     In addition, research does not qualify for the credit if 
     conducted after the beginning of commercial production of the 
     business component, if related to the adaptation of an 
     existing business component to a particular customer's 
     requirements, if related to the duplication of an existing 
     business component from a physical examination of the 
     component itself or certain other information, or if related 
     to certain efficiency surveys, market research or 
     development, or routine quality control (sec. 41(d)(4)).
       Expenditures attributable to research that is conducted 
     outside the United States do not enter into the credit 
     computation. In addition, the credit is not available for 
     research in the social sciences, arts, or humanities, nor is 
     it available for research to the extent funded by any grant, 
     contract, or otherwise by another person (or governmental 
     entity).
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the research tax credit for 18 
     months--i.e., for the period July 1, 1996, through December 
     31, 1997 (with a special rule for taxpayers who elect the 
     alternative incremental research credit regime, as described 
     below).
       The Senate amendment also expand the definition of ``start-
     up firms'' under section 41(c)(3)(B)(I) to include any firm 
     if the first taxable year in which such firm had both gross 
     receipts and qualified research expenses began after 
     1983.\28\
---------------------------------------------------------------------------
     \28\ In applying the start-up firm rules, the test is whether 
     a taxpayer, in fact, both incurred research expenses (which 
     under the present-law rules would be qualified research 
     expenses) and had gross receipts in a particular year, not 
     whether the taxpayer claimed a research tax credit for that 
     year.
---------------------------------------------------------------------------
       In addition, the Senate amendment allow taxpayers to elect 
     an alternative incremental research credit regime. If a 
     taxpayer elects to be subject to this alternative regime, the 
     taxpayer is assigned a three-tiered fixed-base percentage 
     (that is lower than the fixed-base percentage otherwise 
     applicable under present law) and the credit rate likewise is 
     reduced. Under the alternative credit regime, a credit rate 
     of 1.65 percent applies to the extent that a taxpayer's 
     current-year research expenses exceed a base amount computed 
     by using a fixed-base percentage of 1 percent (i.e., the base 
     amount equals 1 percent of the taxpayer's average gross 
     receipts for the four preceding years) but do not exceed a 
     base amount computed by using a fixed-base percentage of 1.5 
     percent. A credit rate of 2.2 percent applies to the extent 
     that a taxpayer's current-year research expenses exceed a 
     base amount computed by using a fix-base percentage of 1.5 
     percent but do not exceed a base amount computed by using a 
     fixed-base percentage of 2 percent. A credit rate of 2.75 
     percent applies to the extent that

[[Page H9621]]

     a taxpayer's current-year research expenses exceed a base 
     amount computed by using a fixed-base percentage of 2 
     percent. An election to be subject to this alternative 
     incremental credit regime may be made only for a taxpayer's 
     first taxable year beginning after June 30, 1996, and such an 
     election applies to that taxable year and all subsequent 
     years unless revoked with the consent of the Secretary of the 
     Treasury. Under the amendment, if a taxpayer elects the 
     alternative incremental credit regime for its first taxable 
     year beginning after June 30, 1996, and before July 1, 1997, 
     then all qualified research expenses paid or incurred during 
     such taxable year and the first six months of the following 
     taxable year are treated as qualified research expenses for 
     purposes of computing the taxpayer's credit under the 
     alternative incremental credit regime.
       The Senate amendment also provide for a special rule for 
     payments made to certain nonprofit research consortia. Under 
     this special rule, 75 percent of amounts paid to a research 
     consortium for qualified research is treated as qualified 
     research expenses eligible for the research credit (rather 
     than 65 percent under the present-law section 41(b)(3) rule 
     governing contract research expenses) if (1) such research 
     consortium is a tax-exempt organization that is described in 
     section 501(c)(3) (other than a private foundation) or 
     section 501(c)(6) and is organized and operated primarily to 
     conduct scientific research, and (2) such qualified research 
     is conducted by the consortium on behalf of the taxpayer and 
     one or more persons not related to the taxpayer.
       Effective date.--Under the Senate amendment, extension of 
     the research tax credit is effective for expenditures paid or 
     incurred during the period July 1, 1996, through December 31, 
     1997 (with a special rule for taxpayers who elect the 
     alternative incremental research credit regime). The 
     modification to the definition of ``start-up firms'' is 
     effective for taxable years ending after June 30, 1996. 
     Taxpayers may elect the alternative research credit regime 
     (with lower fixed-base percentages and lower credit rates) 
     for the first taxable year beginning after June 30, 1996, and 
     before July 1, 1997, and the credit is available with respect 
     to all qualified research expenses incurred during such 
     taxable year and during the first six months of the following 
     taxable year. The rule that treats 75 percent of qualified 
     research consortium payments as qualified research expenses 
     is effective for taxable years beginning after June 30, 1996.
     Conference agreement
       The conference agreement extends the research tax credit 
     for 11 months--i.e., for the period July 1, 1996, through May 
     31, 1997 (with a special rule for taxpayers who elect the 
     alternative incremental research credit regime, as described 
     below).
       The conference agreement includes the provision in the 
     Senate amendment to expand the definition of ``start-up 
     firms'' under section 41(c)(3)(B)(I).
       The conference agreement includes the provision in the 
     Senate amendment to allow taxpayers to elect an alternative 
     incremental research credit regime, with the modification 
     that, if a taxpayer elects the alternative incremental credit 
     regime for its first taxable year beginning after June 30, 
     1996, and before July 1, 1997, then all qualified research 
     expenses paid or incurred during the first 11 months of such 
     taxable year are treated as qualified research expenses for 
     purposes of computing the taxpayers's credit under the 
     alternative incremental credit regime.
       The conference agreement includes the special rule of the 
     Senate amendment that treats 75 percent (rather than 65 
     percent) of payments made to certain nonprofit research 
     consortia as qualified research expenses.
       In addition, the conference agreement provides that 
     research credit amounts earned under the conference agreement 
     may not be taken into account in computing estimated tax 
     payments required to be paid for taxable years beginning in 
     1997.
       Effective date.--Under the conference agreement, extension 
     of the research tax credit is effective for expenditures paid 
     or incurred during the period July 1, 1996, through May 31, 
     1997 with a special rule for taxpayers who elect the 
     alternative incremental research credit regime. The 
     modification to the definition of ``start-up firms'' is 
     effective for taxable years ending after June 30, 1996. 
     Taxpayers may elect the alternative research credit regime 
     (with lower fixed-base percentages and lower credit rates) 
     for the first taxable year beginning after June 30, 1996, and 
     before July 1, 1997, and the credit is available with respect 
     to all qualified research expenses incurred during the first 
     11 months of such taxable year. The rule that treats 75 
     percent of qualified research consortium payments as 
     qualified research expenses is effective for taxable years 
     beginning after June 30, 1996.


                       5. Orphan drug tax credit

       (Sec. 1204 of the Senate amendment.)
     Present and prior law
       Prior to January 1, 1995, a 50-percent nonrefundable tax 
     credit was allowed for qualified clinical testing expenses 
     incurred in testing of certain drugs for rare diseases or 
     conditions, generally referred to as ``orphan drugs.'' 
     Qualified testing expenses are costs incurred to test an 
     orphan drug after the drug has been approved for human 
     testing by the Food and Drug Administration (FDA) but before 
     the drug has been approved for sale by the FDA. A rare 
     disease or condition is defined as one that (1) affects less 
     than 200,000 persons in the United States, or (2) affects 
     more than 200,000 persons, but for which there is no 
     reasonable expectation that businesses could recoup the costs 
     of developing a drug for such disease or condition for U.S. 
     sales of the drug. These rare diseases and conditions include 
     Huntington's disease, myoclonus, ALS (Lou Gehrig's disease), 
     Tourette's syndrome, and Duchenne's dystrophy (a form of 
     muscular dystrophy).
       Under prior law, the orphan drug tax credit could be 
     claimed by a taxpayer only to the extent that its regular tax 
     liability for the year the credit was earned exceeded its 
     tentative minimum tax for the year, after regular tax was 
     reduced by nonrefundable personal credits and the foreign tax 
     credit.\29\ Unused credits could not be carried back or 
     carried forward to reduce taxes in other years.
---------------------------------------------------------------------------
     \29\ To the extent that the orphan drug tax credit could not 
     be used by reason of the minimum tax limitation, the 
     taxpayer's minimum tax credit was increased (sec. 
     53(d)(1)(B)(iii)).
---------------------------------------------------------------------------
       The orphan drug tax credit expired after December 31, 1994.
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the orphan drug tax credit for 
     18 months--i.e., for the period July 1, 1996, through 
     December 31, 1997.
       In addition, the Senate amendment allows taxpayers to carry 
     back unused credits to three years preceding the year the 
     credit is earned and to carry forward unused credits to 15 
     years following the year the credit is earned.
       Effective date.--The Senate amendment applies to qualified 
     clinical testing expenses paid or incurred during the period 
     July 1, 1996, through December 31, 1997. The provision 
     allowing for the carry back and carry forward of unused 
     credits is effective for taxable years ending after June 30, 
     1996. No portion of the unused business credit that is 
     attributable to the orphan drug credit could be carried back 
     under section 39 to a taxable year ending before July 1, 
     1996.
     Conference agreement
       The conference agreement extends the orphan drug tax credit 
     for 11 months--i.e., for the period July 1, 1996, through May 
     31, 1997.
       In addition, the conference agreement includes the 
     provision of the Senate amendment that allows taxpayers to 
     carry back unused credits to three years preceding the year 
     the credit is earned and to carry forward unused credits to 
     15 years following the year the credit is earned.
       Effective date.--The conference agreement applies to 
     qualified clinical testing expenses paid or incurred during 
     the period July 1, 1996, through May 31, 1997. The provision 
     allowing for the carry back and carry forward of unused 
     credits is effective for taxable years ending after June 30, 
     1996. No portion of the unused business credit that is 
     attributable to the orphan drug credit could be carried back 
     under section 39 to a taxable year ending before July 1, 
     1996.


            6. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS

       (Sec. 1205 of the Senate amendment.)
     Present and prior law
       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the fair market 
     value of property contributed to a charitable organization. 
     \30\ However, in the case of a charitable contribution of 
     short-term gain, inventory, or other ordinary income 
     property, the amount of the deduction generally is limited to 
     the taxpayer's basis in the property. In the case of a 
     charitable contribution of tangible personal property, the 
     deduction is limited to the taxpayer's basis in such property 
     if the use by the recipient charitable organization is 
     unrelated to the organization's tax-exempt purpose. \31\
---------------------------------------------------------------------------
     \30\ The amount of the deduction allowable for a taxable year 
     with respect to a charitable contribution may be reduced 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer (sec. 170(b) and 170(e)).
     \31\ As part of the Omnibus Budget Reconciliation Act of 
     1993, Congress eliminated the treatment of contributions of 
     appreciated property (real, personal, and intangible) as a 
     tax preference for alternative minimum tax (AMT) purposes. 
     Thus, if a taxpayer makes a gift to charity of property 
     (other than short-term gain, inventory, or other ordinary 
     income property, or gifts to private foundations) that is 
     real property, intangible property, or tangible personal 
     property the use of which is related to the donee's tax-
     exempt purpose, the taxpayer is allowed to claim the same 
     fair-market-value deduction for both regular tax and AMT 
     purposes (subject to present-law percentage limitations).
---------------------------------------------------------------------------
       In cases involving contributions to a private foundation 
     (other than certain private operating foundations), the 
     amount of the deduction is limited to the taxpayer's basis in 
     the property. However, under a special rule contained in 
     section 170(e)(5), taxpayers were allowed a deduction equal 
     to the fair market value of ``qualified appreciated stock'' 
     contributed to a private foundation prior to January 1, 1995. 
     Qualified appreciated stock was defined as publicly traded 
     stock which is capital gain property. The fair-market-value 
     deduction for qualified appreciated stock donations applied 
     only to the extent that total donations made by the donor to 
     private foundations of stock in a particular corporation did 
     not exceed 10 percent of the outstanding stock of that 
     corporation. For this purpose, an individual was

[[Page H9622]]

     treated as making all contributions that were made by any 
     member of the individual's family. This special rule 
     contained in section 170(e)(5) expired after December 31, 
     1994.
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the special rule contained in 
     section 170(e)(5) for 18 months--i.e., for contributions of 
     qualified appreciated stock made to private foundations 
     during the period July 1, 1996, through December 31, 1997.
       Effective date.--The provision is effective for 
     contributions of qualified appreciated stock to private 
     foundations made during the period July 1, 1996, through 
     December 31, 1997.
     Conference agreement
       The conference agreement extends the special rule contained 
     in section 170(e)(5) for 11 months--i.e., for contributions 
     of qualified appreciated stock made to private foundations 
     during the period July 1, 1996, through May 31, 1997. \32\
---------------------------------------------------------------------------
     \32\ If, during this period, a taxpayer contributes qualified 
     appreciated stock as defined in section 170(e)(5) and the 
     amount of such contribution exceeds the percentage limitation 
     under section 170(b)(1)(D), the excess may be carried over to 
     succeeding taxable years. See, e.g., LTR 9444029, LTR 
     9424020.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     contributions of qualified appreciated stock to private 
     foundations made during the period July 1, 1996, through May 
     31, 1997.


     7. TAX CREDIT FOR PRODUCING FUEL FROM A NONCONVENTIONAL SOURCE

       (Sec. 1206 of the Senate amendment.)
     Present law
       Certain fuels produced from ``nonconventional sources'' and 
     sold to unrelated parties are eligible for an income tax 
     credit equal to $3 (generally adjusted for inflation) per 
     barrel or BTU oil barrel equivalent (sec. 29). Qualified 
     fuels must be produced within the United States.
       Qualified fuels include: (1) oil produced from shale and 
     tar sands; (2) gas produced from geopressured brine, Devonian 
     shale, coal seams, tight formations (``tight sands''), or 
     biomass; and (3) liquid, gaseous, or solid synthetic fuels 
     produced from coal (including lignite).
       In general, the credit is available only with respect to 
     fuels produced from wells drilled or facilities placed in 
     service after December 31, 1979, and before January 1, 1993. 
     An exception extends the January 1, 1993 expiration date for 
     facilities producing gas from biomass and synthetic fuel from 
     coal if the facility producing the fuel is placed in service 
     before January 1, 1997, pursuant to a binding contract 
     entered into before January 1, 1996.
       The credit may be claimed for qualified fuels produced and 
     sold before January 1, 2003 (in the case of nonconventional 
     sources subject to the January 1, 1993 expiration date) or 
     January 1, 2008 (in the case of biomass gas and synthetic 
     fuel facilities eligible for the extension period).
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the binding contract date for 
     facilities producing synthetic fuels from coal and gas from 
     biomass until the date which is six months after the date of 
     the provision's enactment, and the placed in service date for 
     two years. The present sunset on producing qualifying for the 
     credit is not changed.
       Therefore, under the provision, synthetic fuels from coal 
     and gas from biomass produced from a facility placed in 
     service before January 1, 1999, pursuant to a binding 
     contract entered into before the date which is six months 
     after the date of the provision's enactment, will be eligible 
     for the tax credit if produced before January 1, 2008.
       Effective date.--The provision is effective on the date of 
     enactment.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     two modifications. First, the conference agreement extends 
     the binding contract date for facilities producing synthetic 
     fuels from coal and gas from biomass through December 31, 
     1996, rather than for six months after the date of enactment 
     as would have been provided in the Senate amendment. Second, 
     the conference agreement extends the placed in service date 
     for eighteen months, rather than for two years as would have 
     been provided in the Senate amendment. The conference 
     agreement does not change the present-law sunset on 
     production qualifying for the credit.
       Therefore, under the conference agreement, synthetic fuels 
     from coal and gas from biomass produced from a facility 
     placed in service before July 1, 1998, pursuant to a binding 
     contract entered into before January 1, 1997, will be 
     eligible for the tax credit if produced before January 1, 
     2008.
       Effective date.--The provision is effective on the date of 
     enactment.


  8. suspend imposition of diesel fuel tax on recreational motorboats

       (Sec. 1207 of the Senate amendment.)
     Present law
       Diesel fuel used in recreational motorboats is subject to a 
     24.4 cents-per-gallon excise tax through December 31, 1999. 
     This tax was enacted by the Omnibus Budget Reconciliation Act 
     of 1993 as a revenue offset for repeal of the excise tax on 
     certain luxury boats. Revenues from this tax are retained in 
     the General Fund.
       The diesel fuel tax is imposed on removal of the fuel from 
     a registered terminal facility (i.e., at the ``terminal 
     rack''). Present law provides that tax is imposed on all 
     diesel fuel removed from terminal facilities unless the fuel 
     is destined for a nontaxable use and is indelibly dyed 
     pursuant to Treasury Department regulations. If fuel on which 
     tax is paid at the terminal rack (i.e., undyed diesel fuel) 
     ultimately is used in a nontaxable use, a refund is allowed. 
     Depending on the aggregate amount of tax to be refunded, this 
     refund may be claimed either by a direct filing with the 
     Internal Revenue Service or as a credit against income tax.
       Dyed diesel fuel (fuel on which no tax is paid) may not be 
     used in a taxable use. Present law imposes a penalty equal to 
     the greater of $10 per gallon or $1,000 on persons found to 
     be violating this prohibition.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides that no tax will be imposed 
     on diesel fuel used in recreational motorboats during the 
     period beginning seven days after the date of enactment 
     through December 31, 1997.
       In addition, the Senate Finance Committee requested that 
     the Treasury Department study possible alternatives to the 
     current collection regime for motoboat diesel fuel that will 
     provide comparable compliance with the law, and report to the 
     House Committee on Ways and Means and the Senate Committee on 
     Finance no later than April 1, 1997.
       Effective date.--The provision is effective on the date of 
     enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.


      9. Extension of transition rule for certain publicly traded 
                              partnerships

       (Sec. 1208 of the Senate amendment.)
     Present law
       Present law provides that, in general, a publicly traded 
     partnership is treated as a corporation for Federal income 
     tax purposes. An exception is provided for certain 
     partnerships, 90 percent or more of whose gross income is 
     passive-type income (as defined for purposes of the 
     provision). A publicly traded partnership is any partnership 
     if (1) partnership interests are traded on an established 
     securities market, or (2) partnership interests are readily 
     tradable on a secondary market (or the substantial 
     equivalent). This provision was added by the Omnibus Budget 
     Reconciliation Act of 1987 (the ``1987 Act''), and applied 
     generally to taxable years beginning after December 31, 1987.
       The 1987 Act provided a 10-year grandfather rule for 
     certain existing partnerships. Thus, the provision becomes 
     effective for such existing partnerships for taxable years 
     beginning after December 31, 1997. The 1987 Act provides that 
     an existing partnership is one: (1) which was a publicly 
     traded partnership on December 17, 1987; (2) with respect to 
     which a registration statement indicating that such 
     partnership was to be a publicly traded partnership was filed 
     with the Securities and Exchange commission on or before 
     December 17, 1987, or (3) with respect to which an 
     application was filed with a State regulatory commission on 
     or before December 17, 1987 seeking permission to restructure 
     a portion of a corporation as a publicly traded partnership. 
     A partnership ceases to be treated as an existing partnership 
     if it adds a substantial new line of business after December 
     17,1987.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides a two-year extension of the 
     ten-year grandfather rule for existing partnerships. Thus, 
     under the Senate amendment, the present-law provision 
     treating publicly traded partnerships as corporations applies 
     to existing partnerships for taxable years beginning after 
     December 31, 1999.
       Effective date.--The provision takes effect as if included 
     in the 1987 Act.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.

               C. Provisions Relating to S. Corporations


          1. S corporations permitted to have 75 shareholders

       (Sec. 1301 of the House bill and the Senate amendment.)
     Present law
       The taxable income or loss of an S corporation is taken 
     into account by the corporation's shareholders, rather than 
     by the entity, whether or not such income is distributed. A 
     small business corporation may elect to be treated as an S 
     corporation. A ``small business corporation'' is defined as a 
     domestic corporation which is not an ineligible corporation 
     and which does not have (1) more than 35 shareholders, (2) as 
     a shareholder, a person (other than certain trusts or 
     estates) who is not an individual, (3) a nonresident alien as 
     a shareholder, and (4) more than one class of stock. For 
     purposes of the 35-shareholder limitation, a husband and wife 
     are treated as one shareholder.
     House bill
       The House bill increases maximum number of eligible 
     shareholders from 35 to 75.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.

[[Page H9623]]

     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


                   2. Electing small business trusts

       (Sec. 1302 of the House bill and the Senate amendment.)
     Present law
       Under present law, trusts other than grantor trusts, voting 
     trusts, certain testamentary trusts and ``qualified 
     subchapter S trusts'' may not be shareholders in an S 
     corporation. A ``qualified subchapter S trust'' is a trust 
     which, under its terms, (1) is required to have only one 
     current income beneficiary (for life), (2) any corpus 
     distributed during the life of the beneficiary must be 
     distributed to the beneficiary, (3) the beneficiary's income 
     interest must terminate at the earlier of the beneficiary's 
     death or the termination of the trust, and (4) if the trust 
     terminates during the beneficiary's life, the trust assets 
     must be distributed to the beneficiary. All the income (as 
     defined for local law purposes) must be currently distributed 
     to that beneficiary. The beneficiary is treated as the owner 
     of the portion of the trust consisting of the stock in the S 
     corporation.
     House bill
       In general
       The House bill allows stock in an S corporation to be held 
     by certain trusts (``electing small business trusts''). In 
     order to qualify for this treatment, all beneficiaries of the 
     trust must be individuals or estates eligible to be S 
     corporation shareholders, except that charitable 
     organizations may hold contingent remainder interests. No 
     interest in the trust may be acquired by purchase. For this 
     purpose, ``purchase'' means any acquisition of property with 
     a cost basis (determined under sec. 1012). Thus, interests in 
     the trust must be acquired by reason of gift, bequest, etc. A 
     trust must elect to be treated as an electing small business 
     trust.
       Each potential current beneficiary of the trust is counted 
     as a shareholder for purposes of the proposed 75 shareholder 
     limitation (or if there were no potential current 
     beneficiaries, the trust would be treated as the 
     shareholder). A potential current income beneficiary means 
     any person, with respect to the applicable period, who is 
     entitled to, or at the discretion of any person may receive, 
     a distribution from the principal or income of the trust.
       Treatment of items relating to S corporation stock
       The portion of the trust which consists of stock in one or 
     more S corporations is treated as a separate trust for 
     purposes of computing the income tax attributable to the S 
     corporation stock held by the trust. The trust is taxed at 
     the highest individual rate (currently, 39.6 percent on 
     ordinary income and 28 percent on net capital gain) on this 
     portion of the trust's income. The taxable income 
     attributable to this portion includes (1) the items of 
     income, loss, or deduction allocated to it as an S 
     corporation shareholder under the rules of subchapter S, (2) 
     gain or loss from the sale of the S corporation stock, and 
     (3) to the extent provided in regulations, any state or local 
     income taxes and administrative expenses of the trust 
     properly allocable to the S corporation stock. Otherwise 
     allowable capital losses are allowed only to the extent of 
     capital gains.
       In computing the trust's income tax on this portion of the 
     trust, no deduction is allowed for amounts distributed to 
     beneficiaries, and no deduction or credit is allowed for any 
     item other than the items described above. This income is not 
     included in the distributable net income of the trust, and 
     thus is not included in the beneficiaries' income. No item 
     relating to the S corporation stock could be apportioned to 
     any beneficiary.
       On the termination of all or any portion of an electing 
     small business trust the loss carryovers or excess deductions 
     referred to in section 642(h) is taken into account by the 
     entire trust, subject to the usual rules on termination of 
     the entire trust.
       Treatment of remainder of items held by trust
       In determining the tax liability with regard to the 
     remaining portion of the trust, the items taken into account 
     by the subchapter S portion of the trust are disregarded. 
     Although distributions from the trust are deductible in 
     computing the taxable income on this portion of the trust, 
     under the usual rules of subchapter J, the trust's 
     distributable net income does not include any income 
     attributable to the S corporation stock.
       Termination of trust and conforming amendment applicable to 
           all trusts
       Where the trust terminates before the end of the S 
     corporation's taxable year, the trust takes into account its 
     pro rata share of S corporation items for its final year. The 
     bill makes a conforming amendment applicable to all trusts 
     and estates clarifying that this is the present-law treatment 
     of trusts and estates that terminate before the end of the S 
     corporation's taxable year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


      3. Expansion of post-death qualification for certain trusts

       (Sec. 1303 of the House bill and the Senate amendment.)
     Present law
       Under present law, trusts other than grantor trusts, voting 
     trusts, certain testamentary trusts and ``qualified 
     subchapter S trusts'' may not be shareholders in a S 
     corporation. A grantor trust may remain an S corporation 
     shareholder for 60 days after the death of the grantor. The 
     60-day period is extended to two years if the entire corpus 
     of the trust is includable in the gross estate of the deemed 
     owner. In addition, a trust may be an S corporation 
     shareholder for 60 days after the transfer of S corporation 
     pursuant to a will.
     House bill
       The House bill expands the post-death holding period to two 
     years for all testamentary trusts.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


      4. financial institutions permitted to hold safe harbor debt

       (Sec. 1304 of the House bill and the Senate amendment.)
     Present law
       A small business corporation eligible to be an S 
     corporation may not have more than one class of stock. 
     Certain debt (``straight debt'') is not treated as a second 
     class of stock so long as such debt is an unconditional 
     promise to pay on demand or on a specified date a sum certain 
     in money if: (1) the interest rate (and interest payment 
     dates) are not contingent on profits, the borrower's 
     discretion, or similar factors; (2) there is no 
     convertibility (directly or indirectly) into stock, and (3) 
     the creditor is an individual (other than a nonresident 
     alien), an estate, or certain qualified trusts.
     House bill
       The definition of ``straight debt'' is expanded to include 
     debt held by creditors, other than individuals, that are 
     actively and regularly engaged in the business of lending 
     money.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


  5. Rules relating to inadvertent terminations and invalid elections

       (Sec. 1305 of the House bill and the Senate amendment.)
     Present law
       Under present law, if the Internal Revenue Service 
     (``IRS'') determines that a corporation's Subchapter S 
     election is inadvertently terminated, the IRS can waive the 
     effect of the terminating event for any period if the 
     corporation timely corrects the event and if the corporation 
     and shareholders agree to be treated as if the election had 
     been in effect for that period. Such waivers generally are 
     obtained through the issuance of a private letter ruling. 
     Present law does not grant the IRS the ability to waive the 
     effect of an inadvertent invalid Subchapter S election.
       In addition, under present law, a small business 
     corporation must elect to be an S corporation no later than 
     the 15th day of the third month of the taxable year for which 
     the election is effective. The IRS may not validate a late 
     election.
     House bill
       Under the House bill, the authority of the IRS to waive the 
     effect of an inadvertent termination is extended to allow the 
     Service to waive the effect of an invalid election caused by 
     an inadvertent failure to qualify as a small business 
     corporation or to obtain the required shareholder consents 
     (including elections regarding qualified subchapter S 
     trusts), or both. The House bill also allows the IRS to treat 
     a late Subchapter S election as timely where the Service 
     determines that there was reasonable cause for the failure to 
     make the election timely. It is intended that the IRS be 
     reasonable in exercising this authority and apply standards 
     that are similar to those applied under present law to 
     inadvertent subchapter S terminations and other late or 
     invalid elections.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1982.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment. The conferees wish to clarify that in 
     exercising the authority provided under the provision, the 
     IRS may consider relevant information provided by any 
     affected shareholder (including a person who became a 
     shareholder in a subsequent year) before determining the 
     validity of the S election for the taxable year in question.


                     6. Agreement to terminate year

       (Sec. 1306 of the House bill and the Senate amendment.)

[[Page H9624]]

     Present law
       In general, each item of S corporation income, deduction 
     and loss is allocated to shareholders on a per-share, per-day 
     basis. However, if any shareholder terminates his or her 
     interest in an S corporation during a taxable year, the S 
     corporation, with the consent of all its shareholders, may 
     elect to allocate S corporation items by closing its books as 
     of the date of such termination rather than apply the per-
     share, per-day rule.
     House bill
       The House bill provides that, under regulations to be 
     prescribed by the Secretary of the Treasury, the election to 
     close the books of the S corporation upon the termination of 
     a shareholder's interest is made by all affected shareholders 
     and the corporation, rather than by all shareholders. The 
     closing of the books applies only to the affected 
     shareholders. For this purpose, ``affected shareholders'' 
     means any shareholder whose interest is terminated and all 
     shareholders to whom such shareholder has transferred shares 
     during the year. If a shareholder transferred shares to the 
     corporation, ``affected shareholders'' includes all persons 
     who were shareholders during the year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


           7. Expansion of post-termination transition period

       (Sec. 1307 of the House bill and the Senate amendment.)
     Present law
       Distributions made by a former S corporation during its 
     post-termination period are treated in the same manner as if 
     the distributions were made by an S corporation (e.g., 
     treated by shareholders as nontaxable distributions to the 
     extent of the accumulated adjustment account). Distributions 
     made after the post-termination period are generally treated 
     as made by a C corporation (i.e., treated by shareholders as 
     taxable dividends to the extent of earnings and profits).
       The ``post-termination period'' is the period beginning on 
     the day after the last day of the last taxable year of the S 
     corporation and ending on the later of: (1) a date that is 
     one year later, or (2) the due date for filing the return for 
     the last taxable year and the 120-day period beginning on the 
     date of a determination that the corporation's S corporation 
     election had terminated for a previous taxable year.
       In addition, the audit procedures adopted by the Tax Equity 
     and Fiscal Responsibility Act of 1982 (``TEFRA'') with 
     respect to partnerships also apply to S corporations. Thus, 
     the tax treatment of items is determined at the corporate, 
     rather than individual level.
     House bill
       The present-law definition of post-termination period is 
     expanded to include the 120-day period beginning on the date 
     of any determination pursuant to an audit of the taxpayer 
     that follows the termination of the S corporation's election 
     and that adjusts a subchapter S item of income, loss or 
     deduction of the S corporation during the S period. In 
     addition, the definition of ``determination'' is expanded to 
     include a final disposition of the Secretary of the Treasury 
     of a claim for refund and, under regulations, certain 
     agreements between the Secretary and any person, relating to 
     the tax liability of the person.
       In addition, the House bill repeals the TEFRA audit 
     provisions applicable to S corporations and would provide 
     other rules to require consistency between the returns of the 
     S corporation and its shareholders.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


            8. s corporations permitted to hold subsidiaries

       (Sec. 1308 of the House bill and the Senate amendment.)
     Present law
       A small business corporation may not be a member of an 
     affiliated group of corporations (other than by reason of 
     ownership in certain inactive corporations). Thus, an S 
     corporation may not own 80 percent or more of the stock of 
     another corporation (whether an S corporation or a C 
     corporation).
       In addition, a small business corporation may not have as a 
     shareholder another corporation (whether an S corporation or 
     a C corporation).
     House bill
       An S corporation is allowed to own 80 percent or more of 
     the stock of a C corporation. The C corporation subsidiary 
     could elect to join in the filing of a consolidated return 
     with its affiliated C corporations. An S corporation is not 
     allowed to join in such election. Dividends received by an S 
     corporation from a C corporation in which the S corporation 
     has an 80 percent or greater ownership stake is not treated 
     as passive investment income for purposes of sections 1362 
     and 1375 to the extent the dividends are attributable to the 
     earnings and profits of the C corporation derived from the 
     active conduct of a trade or business.
       In addition, an S corporation is allowed to own a qualified 
     subchapter S subsidiary. The term ``qualified subchapter S 
     subsidiary'' means a domestic corporation that is not an 
     ineligible corporation (i.e., a corporation that would be 
     eligible to be an S corporation if the stock of the 
     corporation were held directly by the shareholders of its 
     parent S corporation) if (1) 100 percent of the stock of the 
     subsidiary were held by its S corporation parent and (2) for 
     which the parent elects to treat as a qualified subchapter S 
     subsidiary. Under the election, the qualified subchapter S 
     subsidiary is not treated as a separate corporation and all 
     the assets, liabilities, and items of income, deduction, and 
     credit of the subsidiary are treated as the assets, 
     liabilities, and items of income, deduction, and credit of 
     the parent S corporation.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


            9. treatment of distributions during loss years

       (Sec. 1309 of the House bill and the Senate amendment.)
     Present law
       Under present law, the amount of loss an S corporation 
     shareholder may take into account for a taxable year cannot 
     exceed the sum of the shareholder's adjusted basis in his or 
     her stock of the corporation and the adjusted basis in any 
     indebtedness of the corporation to the shareholder. Any 
     excess loss is carried forward.
       Any distribution to a shareholder by an S corporation 
     generally is tax-free to the shareholder to the extent of the 
     shareholder's adjusted basis of his or her stock. The 
     shareholder's adjusted basis is reduced by the tax-free 
     amount of the distribution. Any distribution in excess of the 
     shareholder's adjusted basis is treated as gain from the sale 
     or exchange of property.
       Under present law, income (whether or not taxable) and 
     expenses (whether or not deductible) serve, respectively, to 
     increase and decrease an S corporation shareholder's basis in 
     the stock of the corporation. These rules require that the 
     adjustments to basis for items of both income and loss for 
     any taxable year apply before the adjustment for 
     distributions applies.
       These rules limiting losses and allowing tax-free 
     distributions up to the amount of the shareholder's adjusted 
     basis are similar in certain respects to the rules governing 
     the treatment of losses and cash distributions by 
     partnerships. Under the partnership rules (unlike the S 
     corporation rules), for any taxable year, a partner's basis 
     is first increased by items of income, then decreased by 
     distributions, and finally is decreased by losses for that 
     year.
       In addition, if the S corporation has accumulated earnings 
     and profits, any distribution in excess of the amount in an 
     ``accumulated adjustments account'' will be treated as a 
     dividend (to the extent of the accumulated earnings and 
     profits). A dividend distribution does not reduce the 
     adjusted basis of the shareholder's stock. The ``accumulated 
     adjustments account'' generally is the amount of the 
     accumulated undistributed post-1982 gross income less 
     deductions.
     House bill
       The House bill provides that the adjustments for 
     distributions made by an S corporation during a taxable year 
     are taken into account before applying the loss limitation 
     for the year. Thus, distributions during a year reduce the 
     adjusted basis for purposes of determining the allowable loss 
     for the year, but the loss for a year does not reduce the 
     adjusted basis for purposes of determining the tax status of 
     the distributions made during that year.
       The House bill also provides that in determining the amount 
     in the accumulated adjustment account for purposes of 
     determining the tax treatment of distributions made during a 
     taxable year by an S corporation having accumulated earnings 
     and profits, net negative adjustments (i.e., the excess of 
     losses and deductions over income) for that taxable year are 
     disregarded.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


           10. treatment of s corporations under subchapter c

       (Sec. 1310 of the House bill and the Senate amendment.)
     Present law
       Present law contains several provisions relating to the 
     treatment of S corporations as corporations generally for 
     purpose of the Internal Revenue Code.
       First, under present law, the taxable income of an S 
     corporation is computed in the same manner as in the case of 
     an individual (sec. 1363(b)). Under this rule, the provisions 
     of the Code governing the computation of

[[Page H9625]]

     taxable income which are applicable only to corporations, 
     such as the dividends received deduction, do not apply to S 
     corporations.
       Second, except as otherwise provided by the Internal 
     Revenue Code and except to the extent inconsistent with 
     subchapter S, subchapter C (i.e., the rules relating to 
     corporate distributions and adjustments) applies to an S 
     corporation and its shareholders (sec. 1371(a)(1)). Under 
     this second rule, provisions such as the corporate 
     reorganization provisions apply to S corporations. Thus, a C 
     corporation may merge into an S corporation tax-free.
       Finally, an S corporation in its capacity as a shareholder 
     of another corporation is treated as an individual for 
     purposes of subchapter C (sec. 1371(a)(2)). In 1988, the 
     Internal Revenue Service took the position that this rule 
     prevents the tax-free liquidation of a C corporation into an 
     S corporation because a C corporation cannot liquidate tax-
     free when owned by an individual shareholder.\33\ In 1992, 
     the Internal Revenue Service reversed its position, stating 
     that the prior ruling was incorrect.\34\
---------------------------------------------------------------------------
     \33\ PLR 8818049, (Feb. 10, 1988).
     \34\ PLR 9245004, (July 28, 1992).
---------------------------------------------------------------------------
     House bill
       The House bill repeals the rule that treats an S 
     corporation in its capacity as a shareholder of another 
     corporation as an individual. Thus, the provision clarifies 
     that the liquidation of a C corporation into an S corporation 
     will be governed by the generally applicable subchapter C 
     rules, including the provisions of sections 332 and 337 
     allowing the tax-free liquidation of a corporation into its 
     parent corporation. Following a tax-free liquidation, the 
     built-in gains of the liquidating corporation may later be 
     subject to tax under section 1374 upon a subsequent 
     disposition. An S corporation also will be eligible to make a 
     section 338 election (assuming all the requirements are 
     otherwise met), resulting in immediate recognition of all the 
     acquired C corporation's gains and losses (and the resulting 
     imposition of a tax).
       The repeal of this rule does not change the general rule 
     governing the computation of income of an S corporation. For 
     example, it does not allow an S corporation, or its 
     shareholders, to claim a dividends received deduction with 
     respect to dividends received by the S corporation, or to 
     treat any item of income or deduction in a manner 
     inconsistent with the treatment accorded to individual 
     taxpayers.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


            11. elimination of certain earnings and profits

       (Sec. 1311 of the House bill and the Senate amendment.)
     Present law
       Under present law, the accumulated earnings and profits of 
     a corporation are not increased for any year in which an 
     election to be treated as an S corporation is in effect. 
     However, under the subchapter S rules in effect before 
     revision in 1982, a corporation electing subchapter S for a 
     taxable year increased its accumulated earnings and profits 
     if its earnings and profits for the year exceeded both its 
     taxable income for the year and its distributions out of that 
     year's earnings and profits. As a result of this rule, a 
     shareholder may later be required to include in his or her 
     income the accumulated earnings and profits when it is 
     distributed by the corporation. The 1982 revision to 
     subchapter S repealed this rule for earnings attributable to 
     taxable years beginning after 1982 but did not do so for 
     previously accumulated S corporation earnings and profits.
     House bill
       The House bill provides that if a corporation is an S 
     corporation for its first taxable year beginning after 
     December 31, 1995, the accumulated earnings and profits of 
     the corporation as of the beginning of that year is reduced 
     by the accumulated earnings and profits (if any) accumulated 
     in any taxable year beginning before January 1, 1983, for 
     which the corporation was an electing small business 
     corporation under subchapter S. Thus, such a corporation's 
     accumulated earnings and profits are solely attributable to 
     taxable years for which an S election was not in effect. This 
     rule is generally consistent with the change adopted in 1982 
     limiting the S shareholder's taxable income attributable to S 
     corporation earnings to his or her share of the taxable 
     income of the S corporation.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


  12. carryover of disallowed losses and deductions under the at-risk 
                                 rules

       (Sec. 1312 of the House bill and the Senate amendment.)
     Present law
       Under section 1366, the amount of loss an S corporation 
     shareholder may take into account cannot exceed the sum of 
     the shareholder's adjusted basis in his or her stock of the 
     corporation and the unadjusted basis in any indebtedness of 
     the corporation to the shareholder. Any disallowed loss is 
     carried forward to the next taxable year. Any loss that is 
     disallowed for the last taxable year of the S corporation may 
     be carried forward to the post-termination period. The 
     ``post-termination period'' is the period beginning on the 
     day after the last day of the last taxable year of the S 
     corporation and ending on the later of: (1) a date that is 
     one year later, or (2) the due date for filing the return for 
     the last taxable year and the 120-day period beginning on the 
     date of a determination that the corporation's S corporation 
     election had terminated for a previous taxable year.
       In addition, under section 465, a shareholder of an S 
     corporation may not deduct losses that are flowed through 
     from the corporation to the extent the shareholder is not 
     ``at-risk'' with respect to the loss. Any loss not deductible 
     in one taxable year because of the at-risk rules is carried 
     forward to the next taxable year.
     House bill
       Losses of an S corporation that are suspended under the at-
     risk rules of section 465 are carried forward to the S 
     corporation's post-termination period.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


13. adjustments to basis of inherited s stock to reflect certain items 
                               of income

       (Sec. 1313 of the house bill and the Senate amendment.)
     Present law
       Income in respect to a decedent (``IRD'') generally 
     consists of items of gross income that accrued during the 
     decedent's lifetime but were not includible in the decedent's 
     income before his or her death under his or her method of 
     accounting. IRD is includible in the income of the person 
     acquiring the right to receive such item. A deduction for the 
     estate tax attributable to an item of IRD is allowed to such 
     person (sec. 681(c)). The cost or basis of property acquired 
     from a decedent is its fair market value at the date of death 
     (or alternate valuation date if that date is elected for 
     estate tax purposes). This basis is often referred to as 
     ``stepped-up basis.'' Property that constitutes a right to 
     receive IRD does not receive a stepped-up basis.
       The basis of a partnership interest or corporate stock 
     acquired from a decedent generally is stepped-up at death. 
     Under Treasury regulations, the basis of a partnership 
     interest acquired from a decedent is reduced to the extent 
     that its value is attributable to items constituting IRD 
     (Treas. reg. sec. 1.742-1). This rule insures that the items 
     of IRD held by a partnership are not later offset by a loss 
     arising from a stepped-up basis. Although S corporation 
     income is taxed to its shareholders in a manner similar to 
     the taxation of a partnership and its partners, no comparable 
     regulation require a reduction in the basis of stock in an S 
     corporation acquired from a decedent where the S corporation 
     holds items of IRD.
     House bill
       The House bill provides that a person acquiring stock in an 
     S corporation from a decedent would treat as IRD his or her 
     pro rata share of any item of income of the corporation that 
     would have been IRD if that item had been acquired directly 
     from the decedent. Where an item is treated as IRD, a 
     deduction for the estate tax attributable to the item 
     generally will be allowed under the provisions of section 
     691(c). The stepped-up basis in the stock in an S corporation 
     acquired from a decedent is reduced by the extent to which 
     the value of the stock is attributable to items consisting of 
     IRD. This basis rule is comparable to the present-law 
     partnership rule.
       Effective date.--The provision applies with respect to 
     decedent dying after the date of enactment.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


   14. s corporation eligible for rules applicable to real property 
             subdivided for sale by noncorporate taxpayers

       (Sec. 1314 of the House bill and the Senate amendment.)
     Present law
       Under present-law section 1237, a lot or parcel of land 
     held by a taxpayer other than a corporation generally is not 
     treated as ordinary income property solely by reason of the 
     land being subdivided if: (1) such parcel had not previously 
     been held as ordinary income property and if in the year of 
     sale, the taxpayer did not hold other real property; (2) no 
     substantial improvement has been made on the land by the 
     taxpayer, a related party, a lessee, or a government; and (3) 
     the land has been held by the taxpayer for five years.
     House bill
       The House bill allows the present-law capital gains 
     presumption in the case of land held by an S corporation. It 
     is expected that rules similar to the attribution rules for 
     partnerships will apply to S corporation (Treas. reg. sec. 1. 
     1237-1(b)(3)).

[[Page H9626]]

       Effective date.--The provision is effective for sales in 
     taxable years beginning after December 31, 1996.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


      15. Certain financial institutions as eligible corporations

       (Sec. 1315 of the Senate amendment.)
     Present law
       A small business corporation may elect to be treated as an 
     S corporation. A ``small business corporation'' is defined as 
     a domestic corporation which is not an ineligible corporation 
     and which meets certain other requirements. An ``ineligible 
     corporation'' means any corporation which is a member of an 
     affiliated group, certain depository financial institutions 
     (i.e., banks, domestic savings and loan associations, mutual 
     savings banks, and certain cooperative banks), certain 
     insurance companies, a section 936 corporation, or a DISC or 
     former DISC.
     House bill
       No provision.
     Senate amendment
       A bank (as defined in sec. 581) is allowed to be an 
     eligible small business corporation unless such institution 
     uses a reserve method of accounting for bad debts.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment.


       16. certain tax-exempt entities allowed to be shareholders

       (Sec. 1316 of the Senate amendment.)
     Present law
       A tax-exempt organization described in section 401(a) 
     (relating to qualified retirement plan trusts) or section 
     501(c)(3) (relating to certain charitable organizations) 
     cannot be a shareholder in an S corporation.
     House bill
       No provision.
     Senate amendment
       Tax-exempt organizations described in Code sections 401(a) 
     and 501(c)(3) (``qualified tax-exempt shareholders'') are 
     allowed to be shareholders in S corporations. For purposes of 
     determining the number of shareholders of an S corporation, a 
     qualified tax-exempt shareholder will count as one 
     shareholder.
       Items of income or loss of an S corporation will flow-
     through to qualified tax-exempt shareholders as unrelated 
     business taxable income (``UBTI''), regardless of the source 
     or nature of such income (e.g., passive income of an S 
     corporation will flow through to the qualified tax-exempt 
     shareholders as UBTI.) In addition, gain or loss on the sale 
     or other disposition of stock of an S corporation by a 
     qualified tax-exempt shareholder will be treated as UBTI.
       In addition, certain special tax rules relating to employee 
     stock ownership plans (``ESOPs'') will not apply with respect 
     to S corporation stock held by the ESOP.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.
     Conference agreement
       The conference agreement generally follows the Senate 
     amendment. In addition, the conference agreement provides 
     that if a qualified tax-exempt shareholder acquired, by 
     purchase, stock in an S corporation (whether such stock was 
     acquired when the corporation was a C or an S corporation) 
     and receives a dividend distribution with respect to such S 
     corporation stock (i.e., a distribution of subchapter C 
     earnings and profits), except as provided in regulations the 
     shareholder must reduce its basis in the stock by the amount 
     of the dividend. Regulations may provide that the basis 
     reduction only would apply to the extent the dividend is 
     deemed to be allocable to subchapter C earnings and profits 
     that accrued on or before the date of acquisition.


                   17. reelecting subchapter s status

       (Sec. 1315(b) of the House bill and sec. 1317(b) of the 
     Senate amendment.)
     Present law
       A small business corporation that terminates its subchapter 
     S election (whether by revocation or otherwise) may not make 
     another election to be an S corporation for five taxable 
     years unless the Secretary of the Treasury consents to such 
     election.
     House bill
       For purposes of the five-year rule, any termination of 
     subchapter S status in effect immediately before the date of 
     enactment of the proposal is not be taken into account. Thus, 
     any small business corporation that had terminated its S 
     corporation election within the five-year period before the 
     date of enactment may re-elect subchapter S status upon 
     enactment of the bill without the consent of the Secretary of 
     the Treasury.
       Effective date.--The provision is effective for 
     terminations occurring in a taxable year beginning before 
     January 1, 1997.
     Senate amendment
       Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.

                 II. PENSION SIMPLIFICATION PROVISIONS

                    A. Simplified Distribution Rules

       (Secs. 1401-1404 of the House bill and the Senate 
     amendment.)
     Present law
       In general, a distribution of benefits from a tax-favored 
     retirement arrangement (i.e., a qualified plan, a qualified 
     annuity plan, and a tax-sheltered annuity contract (sec. 
     403(b) annuity)) generally is includable in gross income in 
     the year it is paid or distributed under the rules relating 
     to the taxation of annuities.
       Lump-sum distributions
       Lump-sum distributions from qualified plans and qualified 
     annuity plans are eligible for special 5-year forward 
     averaging. In general, a lump-sum distribution is a 
     distribution within one taxable year of the balance to the 
     credit of an employee that becomes payable to the recipient 
     first, on account of the death of the employee, second, after 
     the employee attains age 59\1/2\, third, on account of the 
     employee's separation from service, or fourth, in the case of 
     self-employed individuals, on account of disability. Lump-sum 
     treatment is not available for distributions from a tax-
     sheltered annuity.
       A taxpayer is permitted to make an election with respect to 
     a lump-sum distribution received on or after the employee 
     attains age 59\1/2\ to use 5-year forward income averaging 
     under the tax rates in effect for the taxable year in which 
     the distribution is made. In general, this election allows 
     the taxpayer to pay a separate tax on the lump-sum 
     distribution that approximates the tax that would be due if 
     the lump-sum distribution were received in 5 equal 
     installments. If the election is made, the taxpayer is 
     entitled to deduct the amount of the lump-sum distribution 
     from gross income. Only one such election on or after 59\1/2\ 
     may be made with respect to any employee.
       Under the Tax Reform Act of 1986 (the ``1986 Act''), 
     individuals who attained age 50 by January 1, 1986, can elect 
     to use 10-year averaging (under the rates in effect prior to 
     the 1986 Act) in lieu of 50 year averaging. In addition, such 
     individuals may elect to retain capital gains treatment with 
     respect to the pre-1974 portion of a lump sum distribution.
       Exclusion of $5,000 for employer-provided death benefits
       Under present law, the beneficiary or estate of a deceased 
     employee generally can exclude up to $5,000 in benefits paid 
     by or on behalf of an employer by reason of the employee's 
     death (sec. 101(b)).
       Recovery of basis
       Amounts received as an annuity under a qualified plan 
     generally are includable in income in the year received, 
     except to the extent they represent the return of the 
     recipient's investment in the contract (i.e., basis). Under 
     present law, a pro-rata basis recovery rule generally 
     applies, so that the portion of any annuity payment that 
     represents nontaxable return of basis is determined by 
     applying an exclusion ratio equal to the employee's total 
     investment in the contract divided by the total expected 
     payments over the term of the annuity.
       Under a simplified alternative method provided by the IRS, 
     the taxable portion of qualifying annuity payments is 
     determined under a simplified exclusion ratio method.
       In no event can the total amount excluded from income as 
     nontaxable return of basis be greater than the recipient's 
     total investment in the contract.
       Required distributions
       Present law provides uniform minimum distribution rules 
     generally applicable to all types of tax-favored retirement 
     vehicles, including qualified plans and annuities, IRAs, and 
     tax-sheltered annuities.
       Under present law, a qualified plan is required to provide 
     that the entire interest of each participant will be 
     distributed beginning no later than the participant's 
     required beginning date (sec. 401(a)(9)). The required 
     beginning date is generally April 1 of the calendar year 
     following the calendar year in which the plan participant or 
     IRA owner attains age 70\1/2\. In the case of a governmental 
     plan or a church plan, the required beginning date is the 
     later of first, such April 1, or second, the April 1 of the 
     year following the year in which the participant retires.
     House bill
       Lump-sum distributions
       The House bill repeals 5-year averaging for lump-sum 
     distributions from qualified plans. Thus, the House bill 
     repeals the separate tax paid on a lump-sum distribution and 
     also repeals the deduction from gross income for taxpayers 
     who elect to pay the separate tax on a lump-sum distribution.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1998. The House bill 
     preserves the ability of certain individuals to elect 10-year 
     averaging and capital gains treatment as provided under the 
     Tax Reform Act of 1986.
       Exclusion of $5,000 for employer-provided death benefits
       The House bill repeals the $5,000 exclusion for employer-
     provided death benefits.
       Effective date.--The provision applies with respect to 
     decedents dying after date of enactment.
       Recovery of basis
       The House bill provides that basis recovery on payments 
     from qualified plans generally

[[Page H9627]]

     is determined under a method similar to the present-law 
     simplified alternative method provided by the IRS. The 
     portion of each annuity payment that represents a return of 
     basis equals to the employee's total basis as of the annuity 
     starting date, divided by the number of anticipated payments 
     under the following table:

        Age                                         Number of payments:
Not more than 55....................................................360
56-60...............................................................310
61-65...............................................................260
66-70...............................................................210
More than 70........................................................160

       Effective date.--The provision is effective with respect to 
     annuity starting dates beginning 90 days after the date of 
     enactment.
       Required distributions
       The House bill modifies the rule that requires all 
     participants in qualified plans to commence distributions by 
     age 70\1/2\ without regard to whether the participant is 
     still employed by the employer and generally replaces it with 
     the rule in effect prior to the Tax Reform Act of 1986. Under 
     the House bill, distributions generally are required to begin 
     by April 1 of the calendar year following the later of first, 
     the calendar year in which the employee attains age 70\1/2\ 
     or second, the calendar year in which the employee retires. 
     However, in the case of a 5-percent owner of the employer, 
     distributions are required to begin no later than the April 1 
     of the calendar year following the year in which the 5-
     percent owner attains age 70\1/2\.
       In addition, in the case of an employee (other than a 5-
     percent owner) who retires in a calendar year after attaining 
     age 70\1/2\, the House bill generally requires the employee's 
     accrued benefit to be actuarially increased to take into 
     account the period after age 70\1/2\ in which the employee 
     was not receiving benefits under the plan. Thus, under the 
     House bill, the employee's accrued benefit is required to 
     reflect the value of benefits that the employee would have 
     received if the employee had retired at age 70\1/2\ and had 
     begun receiving benefits at that time.
       The actuarial adjustment rule and the rule requiring 5-
     percent owners to begin distributions after attainment of age 
     70\1/2\ does not apply, under the House bill, in the case of 
     a governmental plan or church plan.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996. If a participant is 
     currently receiving distributions, but does not have to under 
     the provision, it is intended that a plan (or annuity 
     contract) could (but would not be required to) permit the 
     participant, with his or her consent, with his or her consent 
     to stop receiving distributions until such distributions are 
     required under the provision.
     Senate amendment
       Lump-sum distributions
       The Senate amendment is the same as the House bill.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.
       Exclusion of $5,000 for employer-provided death benefits
       The Senate amendment is the same as the House bill.
       Recovery of basis
       The Senate amendment is the same as the House bill.
       Required distributions
       The Senate amendment is the same as the House bill.
     Conference agreement
       Lump-sum distributions
       The conference agreement follows the Senate amendment.
       Exclusion of $5,000 for employer-provided death benefits
       The conference agreement follows the Senate amendment.
       Recovery of basis
       The conference agreement follows the Senate amendment.
       Required distributions
       The conference agreement follows the House bill and the 
     Senate amendment. The conferees intend that the actuarial 
     adjustment rule does not apply in the case of a defined 
     contribution plan.

            B. Increased Access to Retirement Savings Plans


 1. establish simple retirement plans for employees of small employers

       (Secs. 1421-1422 of the House bill and the Senate 
     amendment.)
     Present law
       Present law does not contain rules relating to SIMPLE 
     retirement plans. However, present law does provide a number 
     of ways in which individuals can save for retirement on a 
     tax-favored basis. These include employer-sponsored 
     retirement plans that meet the requirements of the Internal 
     Revenue Code (a ``qualified plan'') and individual retirement 
     arrangements (``IRAs''). Employees can earn significant 
     retirement benefits under employer-sponsored retirement 
     plans. However, in order to receive tax-favored treatment, 
     such plans must comply with a variety of rules, including 
     complex nondiscrimination and administrative rules (including 
     top-heavy rules). Such plans are also subject to certain 
     requirements under the labor law provisions of the Employee 
     Retirement Income Security Act of 1974 (``ERISA'').
       Contributions to an IRA can also be made by an employer at 
     the election of an employee under a salary reduction 
     simplified employee pension (``SARSEP''). Under SARSEPs, 
     which are not qualified plans, employees can elect to have 
     contributions made to the SARSEP or to receive the 
     contributions in cash. The amount elects to have contributed 
     to the SARSEP is not currently includible in income.
     House bill
       In general
       The House bill creates a simplified retirement plan for 
     small business called the savings incentive match plan for 
     employees (``SIMPLE'') retirement plan. SIMPLE plans can be 
     adopted by employers who employ 100 or fewer employees on any 
     day during the year and who do not maintain another employer-
     sponsor retirement plan. A SIMPLE plan can be either an IRA 
     for each employee or part of a qualified cash or deferred 
     arrangement (``401(k) plan''). If established in IRA form, a 
     SIMPLE plan is not subject to the nondiscrimination rules 
     generally applicable to qualified plans (including the top-
     heavy rules) and simplified reporting requirements apply. 
     Within limits, contributions to a SIMPLE plan are not taxable 
     until withdrawn.
       A SIMPLE plan can also be adopted as part of a 401(k) plan. 
     In that case, the plan does not have to satisfy the special 
     nondiscrimination tests applicable to 401(k) plans and is not 
     subject to the top-heavy rules. The other qualified plan 
     rules continue to apply.
       SIMPLE retirement plans in IRA form.
       In general.--A SIMPLE retirement plan allows employees to 
     make elective contributions to an IRA. Employee contributions 
     have to be expressed as a percentage of the employee's 
     compensation, and cannot exceed $6,000 per year. The $6,000 
     dollar limit is indexed for inflation in $500 increments.
       Under the House bill, the employer is required to satisfy 
     one of two contribution formulas. Under the matching 
     contribution formula, the employer generally is required to 
     match employee elective contributions on a dollar-for-dollar 
     basis up to 3 percent of the employee's compensation. Under a 
     special rule, the employer can elect a lower percentage 
     matching contribution for all employees (but not less than 1 
     percent of each employee's compensation). A lower percentage 
     cannot be elected for more than 2 out of any 5 years.
       Alternatively, for any year, in lieu of making matching 
     contributions, an employer may elect to make a 2 percent of 
     compensation nonelective contribution on behalf of each 
     eligible employee with at least $5,000 in compensation for 
     such year. No contributions other than employee elective 
     contributions and required employer matching contributions 
     (or, alternatively, required employer nonelective 
     contributions) can be made to a SIMPLE account.
       Each employee of the employer who received at least $5,000 
     in compensation from the employer during any 2 prior years 
     and who is reasonably expected to receive at least $5,000 in 
     compensation during the year generally must be eligible to 
     participate in the SIMPLE plan. Self-employed individuals can 
     participate in a SIMPLE plan.
       All contributions to an employee's SIMPLE account have to 
     be fully vested.
       Tax treatment of SIMPLE accounts, contributions, and 
     distributions.--Contributions to a SIMPLE account generally 
     are deductible by the employer. In the case of matching 
     contributions, the employer is allowed a deduction for a year 
     only if the contributions are made by the due date (including 
     extensions) for the employer's tax return. Contributions to a 
     SIMPLE account are excludable from the employee's income. 
     SIMPLE accounts, like IRAs, are not subject to tax. 
     Distributions from a SIMPLE retirement account generally are 
     taxed under the rules applicable to IRAs. Thus, they are 
     includable in income when withdrawn. Tax-free rollovers can 
     be made from one SIMPLE account to another. A SIMPLE account 
     can be rolled over to an IRA on a tax-free basis after a two-
     year period has expired since the individual first 
     participated in the SIMPLE plan. To the extent an employee is 
     no longer participating in a SIMPLE plan (e.g., the employee 
     has terminated employment) and 2 years have expired since the 
     employee first participated in the SIMPLE plan, the 
     employee's SIMPLE account is treated as an IRA.
       Early withdrawals from a SIMPLE account generally are 
     subject to the 10-percent early withdrawal tax applicable to 
     IRAs. However, withdrawals of contributions during the 2-year 
     period beginning on the date the employee first participated 
     in the SIMPLE plan are subject to a 25-percent early 
     withdrawal tax (rather than 10 percent).
       Employer matching or nonelective contributions to a SIMPLE 
     account are not treated as wages for employment tax purposes.
       Administrative requirements.--Each eligible employee can 
     elect, with the 30-day period before the beginning of any 
     year (or the 30-day period before first becoming eligible to 
     participate), to participate in the SIMPLE plan (i.e., to 
     make elective deferrals), and to modify any previous 
     elections regarding the amount of contributions. An employer 
     is required to contribute employees' elective deferrals to 
     the employee's SIMPLE account within 30 days after the end of 
     the month to which the contributions relate. Employees must 
     be allowed to terminate participation in the SIMPLE plan at 
     any time during the year (i.e., to stop making 
     contributions). The

[[Page H9628]]

     plan can provide that an employee who terminates 
     participation cannot resume participation until the following 
     year. A plan can permit (but is not required to permit) an 
     individual to make other changes to his or her salary 
     reduction contribution election during the year (e.g., reduce 
     contributions). It is intended that an employer is permitted 
     to designate a SIMPLE account trustee to which contributions 
     on behalf of eligible employees are made.
       Definitions.--For purposes of the rules relating to SIMPLE 
     plans, compensation means compensation required to be 
     reported by the employer on Form W-2, plus any elective 
     deferrals of the employee. In the case of a self-employed 
     individual, compensation means net earnings from self-
     employment. The term employer includes the employer and 
     related employers. Related employers include trades or 
     businesses under common control (whether incorporated or 
     not), controlled groups of corporations, and affiliated 
     service groups. In addition, the leased employee rules apply.
       SIMPLE 401(k) plans
       In general, under the House bill, a cash or deferred 
     arrangement (i.e., 401(k) plan), is deemed to satisfy the 
     special nondiscrimination tests applicable to employee 
     elective deferrals and employer matching contributions if the 
     plan satisfies the contribution requirements applicable to 
     SIMPLE plans. In addition, the plan is not subject to the 
     top-heavy rules for any year for which this safe harbor is 
     satisfied. The plan is subject to the other qualified plan 
     rules.
       The safe harbor is satisfied if, for the year, the employer 
     does not maintain another qualified plan and (1) employees' 
     elective deferrals are limited to no more than $6,000, (2) 
     the employer matches employees' elective deferrals up to 3 
     percent of compensation (or, alternatively, makes a 2 percent 
     of compensation nonelective contribution on behalf of all 
     eligible employees with at least $5,000 in compensation), and 
     (3) no other contributions are made to the arrangement. 
     Contributions under the safe harbor have to be 100 percent 
     vested. The employer cannot reduce the matching percentage 
     below 3 percent of compensation.
       Repeal of SARSEPs
       Under the House bill, SARSEPs are repealed.
       Effective date
       The provision relating to SIMPLE plans are effective for 
     years beginning after December 31, 1996. The repeal of 
     SARSEPs applies to years beginning after December 31, 1996, 
     unless the SARSEP was established before January 1, 1997. 
     Consequently, an employer is not permitted to establish a 
     SARSEP after December 31, 1996. SARSEPs established before 
     January 1, 1997, can continue to receive contributions under 
     present-law rules, and new employees of the employer hired 
     after December 31, 1996, can participate in the SARSEP in 
     accordance with such rules.
     Senate amendment
       The Senate amendment is the same as the House bill, except 
     for the following modifications.
       Under the Senate amendment, a SIMPLE plan can be adopted by 
     employers who employed 100 employees or less with at least 
     $5,000 in compensation for the preceding year. Employers who 
     no longer qualify are given a 2-year grace period to continue 
     to maintain the plan.
       Under the Senate amendment, eligible employees are given 60 
     days before the beginning of any year (or the 60-day period 
     before first beginning eligible to participate in the plan) 
     to elect to participate in the SIMPLE plan.
       For purposes of the 2 percent of compensation nonelective 
     contribution formula, no more than $150,000 of compensation 
     can be taken into account in any year with respect to any 
     eligible employee.
       The Senate amendment clarifies that an employer is 
     permitted to designate a SIMPLE account trustee to which 
     contributions on behalf of eligible employees are made. The 
     Senate amendment also amends title I of ERISA to provide that 
     only simplified reporting requirements apply to SIMPLE plans 
     and so that the employer (and any other plan fiduciary) will 
     not be subject to fiduciary liability resulting from the 
     employee (or beneficiary) exercising control over the assets 
     in the SIMPLE account. For this purpose, an employee (or 
     beneficiary) is treated as exercising control over the assets 
     in his or her account upon the earlier of (1) an affirmative 
     election with respect to the initial investment of any 
     contributions, (2) a rollover contribution (including a 
     trustee-to-trustee transfer) to another SIMPLE account or 
     IRA, or (3) one year after the SIMPLE account is established.
     Conference agreement
       The conference agreement follows the Senate amendment.


       2. tax-exempt organizations eligible under section 401(k)

       (Sec. 1426 of the House bill and the Senate amendment.)
     Present law
       Under present law, tax-exempt and State and local 
     government organizations are generally prohibited from 
     establishing qualified cash or deferred arrangements (sec. 
     401(k) plans. Qualified cash or deferred arrangements (1) or 
     rural cooperatives, (2) adopted by State and local 
     governments before May 6, 1986, or (3) adopted by tax-exempt 
     organizations before July 2, 1986, are not subject to this 
     prohibition.
     House bill
       The House bill allows tax-exempt organizations (including, 
     for this purpose, Indian tribal governments, a subdivision of 
     an Indian tribal government, an agency or instrumentality of 
     an Indian tribal government or subdivision thereof, or a 
     corporation chartered under Federal, State, or tribal law 
     which is owned in whole or in part by any of such entities) 
     to maintain qualified cash or deferred arrangements. The 
     House bill retains the present-law prohibition against the 
     maintenance of cash or deferred arrangements by State and 
     local governments except to the extent it may apply to Indian 
     tribal governments.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill, except 
     that the legislative history to the Senate amendment provides 
     that no inference is intended with respect to whether Indian 
     tribal governments are permitted to maintain qualified cash 
     or deferred arrangements under present law.
     Conference agreement
       The conference agreement follows the Senate amendment. 
     Thus, under the conference agreement, no inference is 
     intended with respect to whether Indian tribal governments 
     are permitted to maintain qualified cash or deferred 
     arrangements under present law.


                            3. spousal iras

       (Sec. 1427 of the Senate amendment.)
     Present law
       Within limits, an individual is allowed a deduction for 
     contributions to an individual retirement account or an 
     individual retirement annuity (an ``IRA''). An individual 
     generally is not subject to income tax on amounts held on an 
     IRA, including earnings on contributions, until the amounts 
     are withdrawn from the IRA.
       Under present law, the maximum deductible contribution that 
     can be made to an IRA generally is the lesser $2,000 or 100 
     percent of an individual's compensation (earned income in the 
     case of a self-employed individual). In the case of a married 
     individual whose spouse has no compensation (or elects to be 
     treated as having no compensation), the $2,000 maximum limit 
     on IRA contributions is increased to $2,250.
     House bill
       No provision.
     Senate amendment.
       The Senate amendment permits deductible IRA contributions 
     of up to $2,000 to be made for each spouse (including, for 
     example, a homemaker who does not work outside the home) if 
     the combined compensation of both spouses is at least equal 
     to the contributed amount.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment.

                    C. Nondiscrimination Provisions


  1. Definition of highly compensated employees and repeal of family 
                           aggregation rules

       (Sec. 1431 of the House bill and the Senate amendment.)
     Present law
       Definition of highly compensated employee
       An employee, including a self-employed individual, is 
     treated as highly compensated if, at any time during the year 
     or the preceding year, the employee (1) was a 5-percent owner 
     of the employer, (2) received more than $100,000 (for 1996) 
     in annual compensation from the employer, (3) received more 
     than $66,000 (for 1996) in annual compensation from the 
     employer and was one of the top-paid 20 percent of employees 
     during the same year, or (4) was an officer of the employer 
     who received compensation in excess of $60,000 (for 1996). 
     If, for any year, no officer has compensation in excess of 
     the threshold, then the highest paid officer of the employer 
     is treated as a highly compensated employee.
       Family aggregation rules
       A special rule applies with respect to the treatment of 
     family members of certain highly compensated employees for 
     purposes of the nondiscrimination rules applicable to 
     qualified plans. Under the special rule, if an employee is a 
     family member of either a 5-percent owner or 1 of the top-10 
     highly compensated employees by compensation, then any 
     compensation paid to such family member and any contribution 
     or benefit under the plan on behalf of such family member is 
     aggregated with the compensation paid and contributions or 
     benefits on behalf of the 5-percent owner or the highly 
     compensated employee in the top-10 employees by compensation.
       Similar family aggregation rules apply with respect to the 
     $150,000 (for 1996) limit on compensation that may be taken 
     into account under a qualified plan (sec. 401(a)(17)) and for 
     deduction purposes (sec. 404(1)).
     House bill
       Definition of highly compensated employee
       Under the House bill, an employee is treated as highly 
     compensated if the employee (1) was a 5-percent owner of the 
     employer at any

[[Page H9629]]

     tie during the year or the preceding year or (2) had 
     compensation for the preceding year in excess of $80,000 
     (indexed for inflation) and the employee was in the top 20 
     percent employees by compensation for such year. The House 
     bill also repeals the rule requiring the highest paid officer 
     to be treated as a highly compensated employee.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
       Family aggregation rules
       The House bill repeals the family aggregation rules.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Senate amendment
       Definition of highly compensated employee
       The Senate amendment is the same as the House bill, except 
     an employee who had compensation for the preceding year in 
     excess of $80,000 is treated as highly compensated without 
     regard to whether the employee was in the top 20 percent of 
     employees by compensation.
       Family aggregation rules
       The Senate amendment is the same as the House bill.
     Conference agreement
       Definition of highly compensated employee
       The conference agreement follows the House bill and the 
     Senate amendment. Thus, under the conference agreement, a 
     plan may elect for a plan year to use either the definition 
     of highly compensated employee in the House bill or the 
     Senate amendment.
       Family aggregation rules
       The conference agreement follows the House bill and the 
     Senate amendment.


        2. modification of additional participation requirements

       (Sec. 1432 of the House bill and the Senate amendment.)
     Present law
       Under present law, a plan is not a qualified plan unless it 
     benefits no fewer than the lesser of (a) 50 employees of the 
     employer or (b) 40 percent of all employees of the employer 
     (sec. 401(a)(26)). This requirement may not be satisfied by 
     aggregating comparable plans, but may be applied separately 
     to different lines of business of the employer. A line of 
     business of the employer does not qualify as a separate line 
     of business unless it has at least 50 employees.
     House bill
       The House bill provides that the minimum participation rule 
     applies only to defined benefit pension plans. In addition, 
     the House bill provides that a defined benefit pension plan 
     does not satisfy the rule unless it benefits no fewer than 
     the lesser of (1) 50 employees or (2) the greater of (a) 40 
     percent of all employees of the employer or (b) 2 employees 
     (1 employee if there is only 1 employee).
       The House bill provides that the requirement that a line of 
     business has at least 50 employees does not apply in 
     determining whether a plan satisfies the minimum 
     participation rule on a separate line of business basis.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


3. nondiscrimination rules for qualified cash or deferred arrangements 
                       and matching contributions

       (Sec. 1433 of the House bill and the Senate amendment.)
     Present law
       Under present law, a special nondiscrimination test applies 
     to qualified cash or deferred arrangements (sec. 401(k) 
     plans). The special nondiscrimination test is satisfied if 
     the actual deferral percentage (``ADP'') for eligible highly 
     compensated employees for a plan year is equal to or less 
     than either (1) 125 percent of the ADP of all nonhighly 
     compensated employees eligible to defer under the arrangement 
     or (2) the lesser of 200 percent of the ADP of all eligible 
     nonhighly compensated employees or such ADP plus 2 percentage 
     points.
       Employer matching contributions and after-tax employee 
     contributions under qualified defined contribution plans are 
     subject to a special nondiscrimination test (the actual 
     contribution percentage (``ACP'') test) similar to the 
     special nondiscrimination test applicable to qualified cash 
     or deferred arrangements. Employer matching contributions 
     that satisfy certain requirements can be used to satisfy the 
     ADP test, but, to the extent so used, such contributions 
     cannot be considered when calculating the ACP test.
       A plan that would otherwise fail to meet the special 
     nondiscrimination test for qualified cash or deferred 
     arrangements is not treated as failing such test if excess 
     contributions (with allocable income) are distributed to the 
     employee or, in accordance with Treasury regulations, 
     recharacterized as after-tax employee contributions. For 
     purposes of this rule, in determining the amount of excess 
     contributions and the employees to whom they are allocated, 
     the elective deferrals of highly compensated employees are 
     reduced in the order of their actual deferral percentage 
     beginning with those highly compensated employees with the 
     highest actual deferral percentages. A similar rule applies 
     to employer matching contributions.
     House bill
       Prior-year data
       The House bill modifies the special nondiscrimination tests 
     applicable to elective deferrals and employer matching and 
     after-tax employee contributions to provide that the maximum 
     permitted actual deferral percentage (and actual contribution 
     percentage) for highly compensated employees for the year is 
     determined by reference to the actual deferral percentage 
     (and actual contribution percentage) for nonhighly 
     compensated employees for the preceding, rather than the 
     current, year. A special rule applies for the first plan 
     year.
       Alternatively, under the House bill, an employer is allowed 
     to elect to use the current year actual deferral percentage 
     (and actual contribution percentage). Such an election can be 
     revoked only as provided by the Secretary.
       Safe harbor for cash or deferred arrangements
       The House bill provides that a cash or deferred arrangement 
     satisfies the special nondiscrimination tests if the plan 
     satisfies one of two contribution requirements and satisfies 
     a notice requirement.
       A plan satisfies the contribution requirements under the 
     safe harbor rule for qualified cash or deferred arrangements 
     if the plan either first, satisfies a matching contribution 
     requirement or second, the employer makes a nonelective 
     contribution to a defined contribution plan of at least 3 
     percent of an employee's compensation on behalf of each 
     nonhighly compensated employee who is eligible to participate 
     in the arrangement without regard to whether the employee 
     makes elective contributions under the arrangement.
       A plan satisfies the matching contribution requirement if, 
     under the arrangement: first, the employer makes a matching 
     contribution on behalf of each nonhighly compensated employee 
     that is equal to (a) 100 percent of the employee's elective 
     contributions up to 3 percent of compensation and (b) 50 
     percent of the employee's elective contributions from 3 to 5 
     percent of compensation; and second, the rate of match with 
     respect to any elective contribution for highly compensated 
     employees is not greater than the rate of match for nonhighly 
     compensated employees.
       Alternatively, if the rate of matching contribution with 
     respect to any rate of elective contribution requirement is 
     not equal to the percentages described in the preceding 
     paragraph, the matching contribution requirement will be 
     deemed to be satisfied if first, the rate of an employer's 
     matching contribution does not increase as an employer's rate 
     of elective contribution increases and second, the aggregate 
     amount of matching contributions at such rate of elective 
     contribution at least equals the aggregate amount of matching 
     contributions that would be made if matching contributions 
     satisfied the above percentage requirements.
       Employer matching and nonelective contributions used to 
     satisfy the contribution requirements of the safe harbor 
     rules are required to be nonforfeitable and are subject to 
     the restrictions on withdrawals that apply to an employee's 
     elective deferrals under a qualified cash or deferred 
     arrangement (sec. 401(k)(2)(B) and (C)). It is intended that 
     employer matching and nonelective contributions used to 
     satisfy the contribution requirements of the safe harbor 
     rules can be used to satisfy other qualified retirement plan 
     nondiscrimination rules (except the special nondiscrimination 
     test applicable to employer matching contributions (the ACP 
     test)). So, for example, a cross-tested defined contribution 
     plan that includes a qualified cash or deferred arrangement 
     can consider such employer matching and nonelective 
     contributions in testing.
       The notice requirement is satisfied if each employee 
     eligible to participate in the arrangement is given written 
     notice, within a reasonable period before any year, of the 
     employee's rights and obligations under the arrangement.
       Alternative method of satisfying special nondiscrimination 
           test for matching contributions
       The House bill provides a safe harbor method of satisfying 
     the special nondiscrimination test applicable to employer 
     matching contributions (the ACP test). Under this safe 
     harbor, a plan is treated as meeting the special 
     nondiscrimination test if first, the plan meets the 
     contribution and notice requirements applicable under the 
     safe harbor method of satisfying the special 
     nondiscrimination requirement for qualified cash or deferred 
     arrangements, and second, the plan satisfies a special 
     limitation on matching contributions.
       The limitation on matching contributions is satisfied if: 
     first, the employer matching contributions on behalf of any 
     employee may not be made with respect to employee 
     contributions or elective deferrals in excess of 6 percent of 
     compensation; second, the rate of an employer's matching 
     contribution does not increase as the rate of an employee's 
     contributions or elective deferrals increases; and third, the 
     matching contribution with respect to any highly compensated 
     employee at any rate of employee contribution or elective 
     deferral is not greater than that with respect to an employee 
     who is not highly compensated.
       Any after-tax employee contributions made under the 
     qualified cash or deferred arrangement will continue to be 
     tested under

[[Page H9630]]

     the ACP test. Employer matching and nonelective contributions 
     used to satisfy the safe harbor rules for qualified cash or 
     deferred arrangements cannot be considered in calculating 
     such test. However, employer matching and nonelective 
     contributions in excess of the amount required to satisfy the 
     safe harbor rules for qualified cash or deferred arrangements 
     can be taken into account in calculating such test.
       Distribution of excess contributions and excess aggressive 
           contributions
       The House bill provides that the total amount of excess 
     contributions (and excess aggregate contributions) is 
     determined as under present law, but the distribution of 
     excess contributions (and excess aggregate contributions) are 
     required to be made on the basis of the amount of 
     contribution by, or on behalf of, each highly compensated 
     employee. Thus, excess contributions (and excess aggregate 
     contributions) are deemed attributable first to those highly 
     compensated employees who have the greatest dollar amount of 
     elective deferrals.
       Effective date
       The provisions relating to use of prior-year data and the 
     distribution of excess contributions and excess aggregate 
     contributions are effective for years beginning after 
     December 31, 1996. The provisions providing for a safe harbor 
     for qualified cash or deferred arrangements and the 
     alternative method of satisfying the special 
     nondiscrimination test for matching contributions are 
     effective for years beginning after December 31, 1988.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


      4. Definition of compensation for purposes of the limits on 
                       contributions and benefits

       (Sec. 1434 of the House bill and the Senate amendment.)
     Present law
       Present law imposes limits on contributions and benefits 
     under qualified plans based on the type of plan. For purposes 
     of these limits, present law provides that the definition of 
     compensation generally does not include elective employee 
     contributions to certain employee benefit plans.
     House bill
       The House bill provides that elective deferrals to section 
     401(k) plans and similar arrangements, elective contributions 
     to nonqualified deferred compensation plans of tax-exempt 
     employers and State and local governments (sec. 457 plans), 
     and salary reduction contributions to a cafeteria plan are 
     considered compensation for purposes of the limits on 
     contributions and benefits.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1997.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.

                D. Miscellaneous Pension Simplification


               1. plan covering self-employed individuals

       (Sec. 1441 of the House bill and the Senate amendment.)

                              Present law

       Under present law, certain special aggregation rules apply 
     to plans maintained by owner employees of unincorporated 
     businesses that do not apply to other qualified plans (sec. 
     401(d)(1) and (2)).
     House bill
       The House bill eliminates the special aggregation rules 
     that apply to plans maintained by self-employed individuals 
     that do not apply to other qualified plans.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


     2. elimination of special vesting rule for multiemployer plans

       (Sec. 1442 of the House bill and the Senate amendment.)
     Present law
       Under present law, except in the case of multiemployer 
     plans, a plan is not a qualified plan unless a participant's 
     employer-provided benefit vests at least as rapidly as under 
     one of two alternative minimum vesting schedules. A plan 
     satisfies the first schedule if a participant acquires a 
     nonforfeitable right to 100 percent of the participant's 
     accrued benefit derived from employer contributions upon the 
     participant's completion of 5 years of service. A plan 
     satisfies the second schedule if a participant has a 
     nonforfeitable right to at least 10 percent of the 
     participant's accrued benefit derived from employer 
     contributions after 3 years of service, 40 percent at the end 
     of 4 years of service, 60 percent at the end of 5 years of 
     service, 80 percent at the end of 6 years of service, and 100 
     percent at the end of 7 years of service.
       In the case of a multiemployer plan, a participant's 
     accrued benefit derived from employer contributions is 
     required to be 100-percent vested no later than upon the 
     participant's completion of 10 years of service. This special 
     rule applies only to employees covered by the plan pursuant 
     to a collective bargaining agreement.
     House bill
       The House bill conforms the vesting rules for multiemployer 
     plans to the rules applicable to other qualified plans.
       Effective date.--The provision is effective for plan years 
     beginning on or after the earlier of (1) the later of January 
     1, 1997, or the date on which the last of the collective 
     bargaining agreements pursuant to which the plan is 
     maintained terminates, or (2) January 1, 1999, with respect 
     to participants with an hour of service after the effective 
     date.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


             3. distributions under rural cooperative plans

       (Sec. 1443 of the House bill and the Senate amendment.)
     Present law
       A qualified cash or deferred arrangement can permit 
     withdrawals of employee elective deferrals only after the 
     earlier of (1) the participant's separation from service, 
     death, or disability, (2) termination of the arrangement, or 
     (3) in the case of a profit-sharing or stock bonus plan, the 
     attainment of age 59\1/2\ or the occurrence of a hardship of 
     the participant. In the case of a money purchase pension 
     plan, including a rural cooperative plan, withdrawals by 
     participants cannot occur upon attainment of age 59\1/2\ or 
     upon hardship.
     House bill
       The House bill provides that a rural cooperative plan that 
     includes a cash or deferred arrangement may permit 
     distributions to plan participants after the attainment of 
     age 59\1/2\ or on account of hardship. In addition, the 
     definition of a rural cooperative is expanded to include 
     certain public utility districts.
       Effective date.--The provision generally is effective for 
     distributions after the date of enactment. The modifications 
     to the definition of a rural cooperative apply to plan years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


          4. Treatment of governmental plans under section 415

       (Sec. 1444 of the House bill and the Senate amendment.)
     Present law
       Present law imposes limits on contributions and benefits 
     under qualified plans based on the type of plan (sec. 415). 
     Certain special rules apply to State and local governmental 
     plans under which such plans may provide benefits greater 
     than those permitted by the limits on benefits applicable to 
     plans maintained by private employers.
       In the case of defined benefit pension plans, the limit on 
     the annual retirement benefit is the lesser of (1) 100 
     percent of compensation or (2) $120,000 (indexed for 
     inflation). The dollar limit is reduced in the case of early 
     retirement or if the employee has less than 10 years of plan 
     participation.
     House bill
       The House bill makes the following modifications to the 
     limits on contributions and benefits as applied to 
     governmental plans: (1) the 100 percent of compensation 
     limitation on defined benefit pension plan benefits would not 
     apply; and (2) the early retirement reduction and the 10-year 
     phase-in of the defined benefit pension plan dollar limit 
     would not apply to certain disability and survivor benefits.
       The House bill also permits State and local government 
     employers to maintain excess benefit plans without regard to 
     the limits on unfunded deferred compensation arrangements of 
     State and local government employers (sec. 457).
       Effective date--The provision is effective for years 
     beginning after December 31, 1994. No inference is intended 
     with respect to whether a governmental plan complies with the 
     requirements of section 415 with respect to years beginning 
     before January 1, 1995. With respect to such years, the 
     Secretary is directed to enforce the requirements of section 
     415 consistent with the provision.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


                       5. Uniform retirement age

       (Sec. 1445 of the House bill and the Senate amendment.)
     Present law
       A qualified plan generally must provide that payment of 
     benefits under the plan must begin no later than 60 days 
     after the end of the plan year in which the participant 
     reaches age 65. Also, for purpose of the vesting and benefit 
     accrual rules, normal retirement age generally can be no 
     later than age 65. For purposes of applying the limits on 
     contributions and benefits (sec. 415), Social Security 
     retirement age is generally used as

[[Page H9631]]

     retirement age. The Social Security retirement age as used 
     for such purposed is presently age 65, but is scheduled to 
     gradually increase.
     House bill
       The House bill provides that for purposes of the general 
     nondiscrimination rules (sec. 401(a)(4)) the Social Security 
     retirement age (as defined in sec. 415) is a uniform 
     retirement age and that subsidized early retirement benefits 
     and joint and survivor annuities are not treated as not being 
     available to employees on the same terms merely because they 
     are based on an employee's Social Security retirement age (as 
     defined in sec. 415).
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


            6. Contributions on behalf of disabled employees

       (Sec. 1446 of the House bill and the Senate amendment.)
     Present law
       Under present law, an employer may elect to continue 
     deductible contributions to a defined contribution plan on 
     behalf of an employee who is permanently and totally 
     disabled. For purposes of the limit on annual additions (sec. 
     415(c)), the compensation of a disabled employee is deemed to 
     be equal to the annualized compensation of the employee prior 
     to the employee's becoming disabled. Contributions are not 
     permitted on behalf of disabled employees who were officer, 
     owners, or highly compensated before they become disabled.
     House bill
       The House bill provides that the special rule for 
     contributions on behalf of disabled employees is applicable 
     without an employer election and to highly compensated 
     employees if the defined contribution plan provides for the 
     continuation of contributions on behalf of all participants 
     who are permanently and totally disabled.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


    7. Treatment of deferred compensation plans of State and local 
                governments and tax-exempt organizations

       (Sec. 1447 of the House bill and the Senate amendment.)
     Present law
       Under an unfunded deferred compensation plan of a State or 
     local government or a tax-exempt organization (a ``sec. 457 
     plan''), an employee who elects to defer the receipt of 
     current compensation is taxed on the amounts deferred when 
     such amounts are paid or made available. The maximum annual 
     deferral under such a plan is the lesser of (1) $7,500 or (2) 
     33\1/3\ percent of compensation (net of the deferral).
       Amounts deferred under a section 457 plan may not be made 
     available to an employee before the earliest of (1) the 
     calendar year in which the participant attains age 70\1/2\, 
     (2) when the participant is separated from the service with 
     the employer, or (3) when the participant is faced with an 
     unforeseeable emergency.
       Benefits under a section 357 plan are not treated as made 
     available if the participant may elect to receive a lump sum 
     payable after separation from service and within 60 days of 
     the election. This exception is available only if the total 
     amount payable to the participant under the plan does not 
     exceed $3,500 and no additional amounts may be deferred under 
     the plan with respect to the participant.
     House bill
       The House bill makes three changes to the rules governing 
     section 457 plans.
       The House bill: (1) permits in-service distributions of 
     accounts that do not exceed $3,500 under certain 
     circumstances; (2) increases the number of elections that can 
     be made with respect to the time distributions must begin 
     under the plan; and (3) provides for indexing (in $500 
     increments) of the dollar limit on deferrals.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


8. Trust requirement for deferred compensation plans of State and local 
                              governments

       (Sec. 1448 of the House bill and the Senate amendment.)
     Present law
       Until deferrals under an unfunded deferred compensation 
     plan of a State or local government or a tax-exempt 
     organization (a ``sec. 457 plan'') are made available to a 
     plan participant, the amounts deferred, all property and 
     rights purchased with such amounts, and all income 
     attributable to such amounts, property, or rights must remain 
     solely the property and rights of the employer, subject only 
     to the claims of the employer's general creditors.
     House bill
       Under the House bill, all amounts deferred under a section 
     457 plan maintained by a State and local governmental 
     employer have to be held in trust (or custodial account or 
     annuity contract) for the exclusive benefit of employees. The 
     trust (or custodial account or annuity contract) is provided 
     tax-exempt status. Amounts are not considered made available 
     merely because they are held in a trust, custodial account, 
     or annuity contract.
       Effective date.--The provision generally is effective with 
     respect to amounts held on or after the date of enactment. In 
     the case of amounts deferred before the date of enactment 
     (and income thereon), the trust requirement does not have to 
     be satisfied until January 1, 1999.
     Senate amendment
       The Senate amendment is the same as the House bill.
       Effective date.--The Senate amendment is the same as the 
     House bill, except that in the case of plans in existence on 
     the date of enactment, the trust requirement does not have to 
     be satisfied until January 1, 1999. Thus, deferrals prior to 
     and after the date of enactment (and earnings thereon) do not 
     have to be held in trust (or custodial account or annuity 
     contract) until January 1, 1999.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment. The conference agreement clarifies that 
     amounts held in trust (or custodial account or annuity 
     contract), may be loaned to plan participants (or 
     beneficiaries) pursuant to rules applicable to loans from 
     qualified plans (sec. 72(p)).\35\ A section 457 plan is not 
     required to permit loans. The conferees intend that the 
     income inclusion rules in the Code (secs. 83 and 402(b), do 
     not apply to amounts deferred under the section 457 plan (and 
     income thereon) merely because such amounts are contributed 
     to the trust (or custodial account or annuity contract).
---------------------------------------------------------------------------
     \35\ Under section 72(p), a loan from a plan is treated as a 
     distribution unless the loan generally (1) does not exceed 
     certain limits (generally, the lesser of $50,000 or one-half 
     of the participant's vested plan benefit; (2) must be repaid 
     within 5 years; and (3) must be amortized on a substantially 
     level basis with payments at least quarterly.
---------------------------------------------------------------------------
       Effective date.--The conference agreement follows the House 
     bill and the Senate amendment. Under the conference 
     agreement, in the case of plans in existence on the date of 
     enactment, the trust requirement does not have to be 
     satisfied until January 1, 1999. Thus, deferrals prior to and 
     after the date of enactment (and earnings thereon) do not 
     have to be held in trust (or custodial account or annuity 
     contract) until January 1, 1999.


  9. Correction of GATT interest and mortality rate provisions in the 
                       Retirement Protection Act

       (Sec. 1449 of the House bill and the Senate amendment.)
     Present law
       The Retirement Protection Act of 1994, enacted as part of 
     the implementing legislation for the General Agreement on 
     Tariffs and Trade (``GATT''), modified the acturial 
     assumptions that must be used in adjusting benefits and 
     limitations. In general, in adjusting a benefit that is 
     payable in a form other than a straight life annuity and in 
     adjusting the dollar limitation if benefits begin before age 
     62, the interest rate to be used cannot be less than the 
     greater of 5 percent or the rate specified in the plan. Under 
     GATT, if the benefit is payable in a form subject to the 
     requirements of section 417(e)(3), then the interest rate on 
     30-year Treasury securities is substituted for 5 percent. 
     Also under GATT, for purposes of adjusting any limit or 
     benefit, the mortality table prescribed by the Secretary must 
     be used.
       This provision of GATT is generally effective as of the 
     first day of the first limitation year beginning in 1995.
       GATT made similar changes to the interest rate and 
     mortality assumptions used to calculate the value of lump-sum 
     distributions for purposes of the rule permitting involuntary 
     dispositions of certain accrued benefits. In the case of a 
     plan adopted and in effect before December 8, 1995, those 
     provisions do not apply before the earlier of (1) the date a 
     plan amendment applying the new assumption is adopted or made 
     effective (whichever is later), or (2) the first day of the 
     first plan year beginning after December 31, 1999.
     House bill
       The House bill conforms the effective date of the new 
     interest rate and mortality assumptions that must be used 
     under section 415 to calculate the limits on benefits and 
     contributions to the effective date of the provision relating 
     to the calculation of lump-sum distributions. This rule 
     applies only in the case of plans that were adopted and in 
     effect before the date of enactment of GATT (December 8, 
     1994). To the extent plans have already been amended to 
     reflect the new assumptions, plan sponsors are permitted 
     within 1 year of the date of enactment to amend the plan to 
     reverse retroactively such amendment.
       The House bill also repeals the GATT provision which 
     requires that if the benefit is

[[Page H9632]]

     payable before age 62 in a form subject to the requirements 
     of section 417(e)(3) (e.g., lump sum), then the interest rate 
     to be used to reduce the dollar limit on benefits under 
     section 415 cannot be less than the greater of the rate on 
     30-year Treasury securities or the rate specified in the 
     plan. Consequently, regardless of the form of benefit, the 
     interest rate to be used cannot be less than the greater of 5 
     percent or the rate specified in the plan.
       Effective date.--The provision is effective as if included 
     in GATT.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


10. multiple salary reduction agreements permitted under section 403(b)

       (Sec. 1450(a) of the House bill and the Senate amendment.)
     Present law
       Under Treasury regulations, a participant in a tax-
     sheltered annuity plan (sec. 403(b)) is not permitted to 
     enter into more than one salary reduction agreement in any 
     taxable year.
       These restrictions do not apply to other elective deferral 
     arrangements such as a qualified cash or deferred arrangement 
     (sec. 401(k)).
     House bill
       Under the House bill, for participants in a tax-sheltered 
     annuity plan, the frequency that a salary reduction agreement 
     may be entered into the compensation to which such agreement 
     applies, and the ability to revoke such agreement shall be 
     determined under the rules applicable to qualified cash or 
     deferred arrangements.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1995.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


    11. treatment of indian tribal governments under section 403(b)

       (Sec. 1450(b) of the House bill and the Senate amendment.)
     Present law
       Under present law, certain tax-exempt employers and certain 
     State and local government educational organizations are 
     permitted to maintain tax-sheltered annuity plans (sec. 
     403(b)). Indian tribal governments are treated as States for 
     this purpose, so certain educational organizations associated 
     with a tribal government are eligible to maintain tax-
     sheltered annuity plans.
     House bill
       The House bill provides that any section 403(b) annuity 
     contract purchased in a plan year beginning before January 1, 
     1995, by an Indian tribal government will be treated as 
     purchased by an entity permitted to maintain a tax-sheltered 
     annuity plan. The House bill also provides that such 
     contracts may be rolled over into a section 401(k) plan 
     maintained by the Indian tribal government.
       Effective date.--The provision is effective on the date of 
     enactment.
     Senate amendment
       The Senate amendment provides that any section 403(b) 
     annuity contract purchased in a plan year beginning before 
     January 1, 1997, by an Indian tribal government will be 
     treated as purchased by an entity permitted to maintain a 
     tax-sheltered annuity plan. The Senate amendment also 
     provides that such contracts may be rolled over into a 
     section 401(k) plan maintained by the Indian tribal 
     government.
       In addition, beginning January 1, 1997, Indian tribal 
     governments are permitted to maintain tax-sheltered annuity 
     plans.
       Effective date.--The provision generally is effective on 
     the date of enactment, except that the provision permitting 
     Indian tribal governments to maintain tax-sheltered annuity 
     plans is effective for taxable years beginning after December 
     31, 1996.
     Conference agreement
       The conference agreement follows the House bill.


 12. application of elective deferral limit to section 403(b) contracts

       (Sec. 1450(c) of the House bill and the Senate amendment.)
     Present law
       A tax-sheltered annuity plan must provide that elective 
     deferrals made under the plan on behalf of an employee may 
     not exceed the annual limit on elective deferrals ($9,500 for 
     1996). Plans that do not comply with this requirement may 
     lose their tax-favored status.
     House bill
       Under the House bill, each tax-sheltered annuity contract, 
     not the tax-sheltered annuity plan, must provide that 
     elective deferrals made under the contract may not exceed the 
     annual limit on elective deferrals. It is intended that the 
     contract terms be given effect in order for this requirement 
     to be satisfied.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1995, except that an annuity 
     contract is not required to meet any change in any 
     requirement by reason of the provision before the 90th day 
     after the date of enactment. No inference is intended as to 
     whether the exclusion of elective deferrals from gross income 
     by employees who have not exceeded the annual limit on 
     elective deferrals is affected to the extent other employees 
     exceed the annual limit prior to the effective date of this 
     provision.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


 13. waiver of minimum waiting period for qualified plan distributions

       (Sec. 1451 of the House bill.)
     Present law
       Under present law, in the case of a qualified joint and 
     survivor annuity (``QJSA''), a written explanation of the 
     form of benefit must generally be provided to participants no 
     less than 30 days and no more than 90 days before the annuity 
     starting date. Temporary Treasury regulations provide that a 
     plan may permit a participant to elect (with any applicable 
     spousal consent) a distribution with an annuity starting date 
     before 30 days have elapsed since the explanation was 
     provided, as long as the distribution commences more than 
     seven days after the explanation was provided.
     House bill
       The House bill provides that the minimum period between the 
     date the explanation of the qualified joint and survivor 
     annuity is provided and the annuity starting date does not 
     apply if it is waived by the participant and, if applicable, 
     the participant's spouse.
       Effective date.--The provision is effective with respect to 
     plan years beginning after December 31, 1996.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement codifies the provision in the 
     temporary Treasury regulations which provides that a plan may 
     permit a participant to elect (with any applicable spousal 
     consent) a distribution with an annuity starting date before 
     30 days have elapsed since the explanation was provided, as 
     long as the distribution commences more than seven days after 
     the explanation was provided. The conference agreement also 
     provides that a plan is permitted to provide the explanation 
     after the annuity starting date if the distribution commences 
     at least 30 days after such explanation was provided, subject 
     to the same waiver of the 30-day minimum waiting period as 
     described above. This is intended to allow retroactive 
     payments of benefits which are attributable to the period 
     before the explanation was provided.


           14. Expansion of PBGC missing participant program

       (Sec. 1451 of the Senate amendment.)
     Present law
       The Retirement Protection Act (``RPA''), enacted as part of 
     the legislation implementing the General Agreement on Tariffs 
     and Trade (``GATT'') in 1994, provided special rules for the 
     payment of benefits with respect to missing participants 
     under a terminating single-employer defined benefit plan 
     covered by the Pension Benefit Guaranty Corporation 
     (``PBFC''). These rules generally required the plan 
     administrator to (1) transfer the missing participant's 
     designated benefit to the PBGC or purchase an annuity from an 
     insurer to satisfy the benefit liability, and (2) provide the 
     PBGC with such information and certifications with respect to 
     the benefits or annuity as the PBGC may specify. The missing 
     participant program does not apply to multiemployer defined 
     benefit plans, defined contribution plans, and defined 
     benefit plans not covered by the PBGC (generally governmental 
     plans, church plans, and plans sponsored by professional 
     service employers with less than 25 employees).
     House bill
       No provision.
     Senate amendment
       The missing participant program is generally expanded to be 
     available to multiemployer defined benefit plans, defined 
     contribution plans, and defend benefit plans not covered by 
     the PBGC (other than governmental and church plans). Under 
     the Senate amendment, the present law missing participant 
     program applicable to single-employer defined benefits plans 
     applies to a terminating muiltiemployer defined benefit plan 
     under rules prescribed by the PBGC.
       In the case of a terminating defined contribution plan or a 
     terminating defined benefit plan not covered by the PBGC, the 
     missing participant program does not apply unless the plan 
     elects to transfer a missing participant's benefits to the 
     PBGC. To the extent provided in regulations issued by the 
     PBGC, the administrator of the plan making such an election 
     is required to provide the PBGC with information with respect 
     to the benefits of a missing participant. Upon location of 
     the missing participant, the missing participant's benefits 
     would be paid by the PBGC in a lump sum or in such other form 
     as specified in regulations.
       Effective date.--The provisions is effective with respect 
     to distribution made on or after the date final regulations 
     implementing the provision are issued by the PBGC.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.

[[Page H9633]]

                   15. Repeal of combined plan limit

       (Sec. 1452 of the House bill and the Senate amendment.)
     Present law
       Combined plan limit
       Present law provides limits on contributions and benefits 
     under qualified retirement plans based on the type of plan 
     (i.e., based on whether the plan is a defined contribution 
     plan or a defined benefit pension plan). In the case of a 
     defined contribution plan, annual contributions are generally 
     limited to the lesser of $30,000 (for 1996) and 25 percent of 
     compensation. In the case of a defined benefit pension plan, 
     the annual benefit is generally limited to the lesser of 
     $120,000 (for 1996) and 100 percent of the participant's 
     average compensation for the highest 3 years. An overall 
     limit applies if an individual is a participant in both a 
     defined benefit pension plan and a defined contribution plan 
     (called the combined plan limit).
       Excess distribution tax
       Present law imposes a 15-percent excise tax on excess 
     distributions from qualified retirement plans, tax-sheltered 
     annuities, and IRAs. Excess distributions are generally the 
     aggregate amount of retirement distributions from such plans 
     during any calendar year in excess of $150,000 (or $750,000 
     in the case of a lump-sum distribution). An additional 15-
     percent estate tax is also imposed on an individual's excess 
     retirement accumulation.
     House bill
       Combined plan limit
       The House bill repeals the combined plan limit.
       Effective date.--The provision repealing the combined plan 
     limit is effective with respect to limitation years beginning 
     after December 31, 1998.
       Excess distribution tax
       Until the repeal of the combined plan limit is effective, 
     the House bill suspends the excise tax on excess 
     distributions. The additional estate tax on excess 
     accumulations continues to apply.
       Effective date.--The provision relating to the excise tax 
     on excess distributions is effective with respect to 
     distributions received in 1996, 1997, and 1998.
     Senate amendment
       Combined plan limit
       The Senate amendment is the same as the House bill.
       Effective date.--The provision repealing the combined plan 
     limit is effective with respect to limitation years beginning 
     after December 31, 1999.
       Excess distribution tax
       The Senate amendment is the same as the House bill.
       Effective date.--The provision relating to the excise tax 
     on excess distribution is effective with respect to 
     distributions received in 1997, 1998, and 1999.
     Conference agreement
       Combined plan limit
       The conference agreement follows the Senate amendment.
       Excess distribution tax
       The conference agreement follows the Senate amendment.


                   16. tax on prohibited transactions

       (Sec. 1453 of the House bill and the Senate amendment.)
     Present law
       Present law prohibits certain transactions (prohibited 
     transactions) between a qualified plan and a disqualified 
     person in order to prevent with a close relationship to the 
     qualified plan from using that relationship to the detriment 
     of plan participants and beneficiaries. A two-tier excise tax 
     is imposed on prohibited transactions. The initial level tax 
     is equal to 5 percent of the amount involved with respect to 
     the transaction. If the transaction is not corrected within a 
     certain period, a tax equal to 100 percent of the amount 
     involved may be imposed.
     House bill
       The House bill increases the initial-level prohibited 
     transaction tax from 5 percent to 10 percent.
       Effective date.--The provision is effective with respect to 
     prohibited transactions occuring after the date of enactment.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


                   17. Treatment of leased employees

       (Sec. 1454 of the House bill and the Senate amendment.)
     Present law
       An individual (a leased employee) who performs services for 
     another person (the recipient) may be required to be treated 
     as the recipient's employee for various employee benefit 
     provisions, if the services are performed pursuant to an 
     agreement between the recipient and any other person (the 
     leasing organization) who is otherwise treated as the 
     individual's employer (sec. 414(n)). The individual is to be 
     treated as the recipient's employee only if the individual 
     has performed services for the recipient on a substantially 
     full-time basis for a year, and the services are of a type 
     historically performed by employees in the recipient's 
     business field.
       An individual who otherwise would be treated as a 
     recipient's leased employee will not be treated as such an 
     employee if the individual participates in a safe harbor plan 
     maintained by the leasing organization meeting certain 
     requirements. Each leased employee is to be treated as an 
     employee of the recipient, regardless of the existence of a 
     safe harbor plan, if more than 20 percent of an employer's 
     nonhighly compensated workforce are leased.
     House bill
       Under the House bill, the present-law ``historically 
     performed'' test is replaced with a new test under which an 
     individual is not considered a leased employee unless the 
     individual's services are performed under primary direction 
     or control by the service recipient. As under present law, 
     the determination of whether someone is a leased employee is 
     made after determining whether the individual is a common-law 
     employee of the recipient. Thus, an individual who is not a 
     common-law employee of the service recipient could 
     nevertheless be a leased employee of the service recipient. 
     Similarly, the fact that a person is or is not found to 
     perform services under primary direction or control of the 
     recipient for purposes of the employee leasing rules is not 
     determinative of whether the person is or is not a common-law 
     employee of the recipient.
       Whether services are performed by an individual under 
     primary direction or control by the service recipient depends 
     on the facts and circumstances. In general, primary direction 
     and control means that the service recipient exercises the 
     majority of direction and control over the individual. 
     Factors that are relevant in determining whether primary 
     direction or control exists include whether the individual is 
     required to comply with instructions of the service recipient 
     about when, where, and how he or she is to perform the 
     services, whether the services must be performed by a 
     particular person, whether the individual is subject to the 
     supervision of the service recipient, and whether the 
     individual must perform services in the order or sequence set 
     by the service recipient. Factors that generally are not 
     relevant in determining whether such direction or control 
     exists include whether the service recipient has the right to 
     hire or fire the individual and whether the individual works 
     for others.
       For example, an individual who works under the direct 
     supervision of the service recipient would be considered to 
     be subject to primary direction or control of the service 
     recipient even if another company hired and trained the 
     individual, had the ultimate (but unexercised) legal right to 
     control the individual, paid his wages, withheld his 
     employment and income taxes, and had the exclusive right to 
     fire him. Thus, for example, temporary secretaries, 
     receptionists, word processing personnel and similar office 
     personnel who are subject to the day-to-day control of the 
     employer in essentially the same manner as a common law 
     employee are treated as leased employees if the period of 
     service threshold is reached.
       On the other hand, an individual who is a common-law 
     employee of Company A who performs services for Company B on 
     the business premises of Company B under the supervision of 
     Company A would generally not be considered to be under 
     primary direction or control of Company B. The supervision by 
     Company A must be more than nominal, however, and not merely 
     a mechanism to avoid the literal language of the direction or 
     control test.
       An example of the situation in the preceding paragraph 
     might be a work crew that comes into a factory to install, 
     repair, maintain, or modify equipment or machinery at the 
     factory. The work crew includes a supervisor who is an 
     employee of the equipment (or equipment repair) company and 
     who has the authority to direct and control the crew, and who 
     actually does exercise such direction and control. In this 
     situation, the supervisor and his or her crew are required to 
     comply with the safety and environmental precautions of the 
     manufacturer, and the supervisor is in frequent communication 
     with the employees of the manufacturer. As another example, 
     certain professionals (e.g., attorneys, accountants, 
     actuaries, doctors, computer programmers, systems analysts, 
     and engineers) who regularly make use of their own judgment 
     and discretion on matters of importance in the performance of 
     their services and are guided by professional, legal, or 
     industry standards, are not leased employees even though the 
     common law employer does not closely supervise the 
     professional on a continuing basis, and the service recipient 
     requires the services to be performed on site and according 
     to certain stages, techniques, and timetables. In addition to 
     the example above, outside professionals who maintain their 
     own businesses (e.g., attorneys, accountants, actuaries, 
     doctors, computer programmers, systems analysts, and 
     engineers) generally would not be considered to be subject to 
     such primary direction or control.
       Under the direction or control test, clerical and similar 
     support staff (e.g., secretaries and nurses in a doctor's 
     office), generally would be considered to be subject to 
     primary direction or control of the service recipient and 
     would be leased employees provided the other requirements of 
     section 414(n) are met.
       In many cases, the ``historically performed'' test is 
     overly broad, and results in the unintended treatment of 
     individuals as leased employees. One of the principal 
     purposes for changing the leased employee rules

[[Page H9634]]

     is to relieve the unnecessary hardship and uncertainty 
     created for employers in these circumstances. However, it is 
     not intended that the direction or control test enable 
     employers to engage in abusive practices. Thus, it is 
     intended that the Secretary interpret and apply the leased 
     employee rules in a manner so as to prevent abuses. This 
     ability to prevent abuses under the leasing rules is in 
     addition to the present-law authority of the Secretary under 
     section 414(o). For example, one potentially abusive 
     situation exists where the benefit arrangements of the 
     service recipient overwhelmingly favor its highly compensated 
     employees, the employer has no or very few nonhighly 
     compensated common-law employees, yet the employer makes 
     substantial use of the services of nonhighly compensated 
     individuals who are not its common-law employees.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996, except that the House bill 
     would not apply to relationships that have been previously 
     determined by an IRS ruling not to involve leased employees. 
     In applying the leased employee rules to years beginning 
     before the effective date, it is intended that the Secretary 
     use a reasonable interpretation of the statute to apply the 
     leasing rules to prevent abuse.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


 18. Uniform penalty provisions to apply to certain pension reporting 
                              requirements

       (Sec. 1455 of the House bill and the Senate amendment.)
     Present law
       Any person who fails to file an information report with the 
     IRS on or before the prescribed filing date is subject to 
     penalties for each failure. A different, flat-amount penalty 
     applies for each failure to provide information reports to 
     the IRS or statements to payees relating to pension payments.
     House bill
       The House bill incorporates into the general penalty 
     structure the penalties for failure to provide information 
     reports relating to pension payments to the IRS and to 
     recipients.
       Effective date.--The provision is effective with respect to 
     returns and statements the due date for which is after 
     December 31, 1996.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


19. Retirement benefits of ministers not subject to tax on net earnings 
                          from self-employment

       (Sec. 1456 of the House bill and the Senate amendment.)
     Present law
       Under present law, certain benefits provided to ministers 
     after they retire are subject to self-employment tax.
     House bill
       The House bill provides that retirement benefits received 
     from a church plan after a minister retires, and the rental 
     value or allowance of a parsonage (including utilities) 
     furnished to a minister after retirement, are not subject to 
     self-employment taxes.
       Effective date.--The provision is effective for years 
     beginning before, on, or after December 31, 1994.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment.


 20. Treasury to provide model forms for spousal consent and qualified 
                       domestic relations orders

       (Sec. 1457 of the Senate amendment.)
     Present law
       Present law contains a number of rules designed to provide 
     income to the surviving spouse of a deceased employee. Under 
     these spousal protection rules, defined benefit pension plans 
     and money purchase pension plans are required to provide that 
     vested retirement benefits with a present value in excess of 
     $3,500 are payable in the form of a qualified joint and 
     survivor annuity (``QJSA'') or, in the case of a participant 
     who dies before the annuity starting date, a qualified 
     preretirement survivor annuity (``QPSA''). Benefits from a 
     plan subject to the survivor benefit rules may be paid in a 
     form other than a QJSA or QPSA if the participant waives the 
     QJSA or QPSA (or both) and the applicable notice, election, 
     and spousal consent requirements are satisfied.
       Also, under present law, benefits under a qualified 
     retirement plan are subject to prohibitions against 
     assignment or alienation of benefits. An exception to this 
     rule generally applies in the case of plan benefits paid to a 
     former spouse pursuant to a qualified domestic relations 
     order (``QDRO'').
     House bill
       No provision.
     Senate amendment
       Model spousal consent form
       The Secretary is required to develop a model spousal 
     consent from, no later than January 1, 1997, waving the QJSA 
     and QPSA forms of benefit. Such form must be written in a 
     manner calculated to be understood by the average person, and 
     must disclose in plain form whether the waiver is irrevocable 
     and that it may be revoked by a QDRO.
       Model QDRO
       The Secretary is required to develop a model QDRO, no later 
     than January 1, 1997, which satisfies the requirements of a 
     QDRO under present law, and the provisions of which focus 
     attention on the need to consider the treatment of any lump 
     sum payment, QJSA, or QPSA.
       Effective date
       The provisions are effective on the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment, 
     except that instead of developing a model spousal consent 
     form and a model QDRO, the Secretary must develop sample 
     language for inclusion in a spousal consent form and QDRO.


21. Treatment of length of service awards for certain volunteers under 
                              section 457

       (Sec. 1458 of the Senate amendment.)
     Present law
       Compensation deferred under an eligible deferred 
     compensation plan of a tax-exempt or governmental employer 
     that meets certain requirements (a ``sec. 457 plan'') is not 
     includible in gross income until paid or made available. One 
     of the requirements for a section 457 plan is that the 
     maximum annual amount that can be deferred is the lesser of 
     $7,500 or 33\1/3\ percent of the individual's taxable 
     compensation.
       Amounts deferred under plans of tax-exempt and governmental 
     employers that do not meet the requirements of section 457 
     (other than amounts deferred under tax-qualified retirement 
     plans, section 403(b) annuities and certain other plans) are 
     includible in gross income in the first year in which there 
     is no substantial risk of forfeiture of such amounts.
     House bill
       No provision.
     Senate amendment
       Under the Senate amendment, the requirements of section 457 
     do not apply to any plan paying solely length of service 
     awards to bona fide volunteers (or their beneficiaries) on 
     account of fire fighting and prevention, emergency medical, 
     and ambulance services performed by such volunteers. An 
     individual is considered a ``bona fide volunteer'' if the 
     only compensation received by such individual for performing 
     such services is reimbursement (or a reasonable allowance) 
     for expenses incurred in the performance of such services, or 
     reasonable benefits (including length of service awards) and 
     nominal fees for such services customarily paid by tax-exempt 
     or governmental employers in connection with the performance 
     of such services by volunteers. Under the Senate amendment, a 
     length of service award plan will not qualify for this 
     special treatment under section 457 if the aggregate amount 
     of length of service awards accruing with respect to any year 
     of service for any bona fide volunteer exceeds $3,000.
       In addition, any amounts exempt from the requirements of 
     section 457 under the Senate amendment are not considered 
     wages for purposes of the Federal Insurance Contribution Act 
     (``FICA'') taxes.
       Effective date.--The provision applies to accruals of 
     length of service awards after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment.


 22. alternative nondiscrimination rules for certain plans that provide 
                        for early participation

       (Sec. 1459 of the Senate amendment.)
     Present law
       Under present law, a special nondiscrimination test applies 
     to qualified cash or deferred arrangements (sec. 401(k) 
     plans). The special nondiscrimination test is satisfied if 
     the actual deferral percentage (``ADP'') for eligible highly 
     compensated employees for a plan year is equal to or less 
     than either (1) 125 percent of the ADP of all nonhighly 
     compensated employees eligible to defer under the arrangement 
     or (2) the lesser of 200 percent of the ADP of all eligible 
     nonhighly compensated employees or such ADP plus 2 percentage 
     points. Employer matching contributions and after-tax 
     employee contributions under qualified defined contribution 
     plans are subject to a special nondiscrimination test (the 
     actual contribution percentage (``ACP'') test) similar to the 
     special nondiscrimination test applicable to qualified cash 
     or deferred arrangements.
       In general, a plan need not permit employees to enter a 
     plan prior to the attainment of age 21 and the completion of 
     1 year service. For purposes of the nondiscrimination rules 
     (including the ADP and ACP tests), an employer that chooses 
     less restrictive entry conditions (e.g., age 18 rather than 
     age 21) may choose ``separate testing'' under which all 
     employees who have not met the statutory age and service 
     entry maximums are disregarded, provided that the plan 
     satisfies the nondiscrimination rules taking into account 
     only those employees whose age and service are less than the 
     statutory age and service maximums. Thus, for example, such a

[[Page H9635]]

     plan would apply one ADP test for employees who are over age 
     21 with 1 year of service, under which the plan would 
     disregard elective contributions for other employees, and a 
     second ADP test looking solely at elective contribution for 
     employees under age 21 or who have not completed 1 year of 
     service.
     House bill
       No provision.
     Senate amendment
       Under the Senate amendment, for purposes of the ADP test, a 
     section 401(k) plan may elect to disregard employees (other 
     than highly compensated employees) eligible to participate 
     before they have completed 1 year of service and reached age 
     21, provided the plan separately satisfies the minimum 
     coverage rules (sec. 410(b)) taking into account only those 
     employees who have not completed 1 year of service or are 
     under age 21. Instead of applying two separate ADP tests, 
     such a plan could apply a single ADP test that compares the 
     ADP for all highly compensated employees who are eligible to 
     make elective contributions with the ADP for those nonhighly 
     compensated employees who are eligible to make elective 
     contributions and who have completed one year of service and 
     reached age 21. A similar rule applies for purposes of the 
     ACP test.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 1998.
     Conference agreement
       The conference agreement follows the Senate amendment.


      23. modifications of joint and survivor annuity requirements

       (Sec. 1460 of the Senate amendment.)
     Present law
       Present law contains a number of rules designed to provide 
     income to the surviving spouse of a deceased employee. These 
     rules are in both the Internal Revenue Code and title I of 
     the Employee Retirement Income Security Act of 1974, as 
     amended.
       Under the spousal protection rules, defined benefit pension 
     plans and money purchase pension plans are required to 
     provide that vested retirement benefits with a present value 
     in excess of $3,500 are payable in the form of a qualified 
     joint and survivor annuity (``QJSA'') or, in the case of a 
     participant who dies before the annuity starting date, a 
     qualified preretirement survivor annuity (``QPSA''). A QJSA 
     is generally defined as an annuity for the life of the 
     participant with a survivor annuity for the life of the 
     spouse which is not less than 50 percent of (and not greater 
     than 100 percent of) the amount of the participant's annuity, 
     and which is the actuarial equivalent of a single life 
     annuity for the life of the participant. A QPSA is generally 
     defined as an annuity for the life of the surviving spouse of 
     the participant, the payments of which are not less than the 
     amount which would be payable as a survivor annuity under the 
     plan's QJSA.
       The survivor benefit rules do not apply to defined 
     contribution plans other than money purchase pension plans if 
     (1) the plan provides that, upon the death of the 
     participant, the participant's accrued benefit is payable to 
     the participant's surviving spouse, (2) the participant does 
     not elect payment of benefits in the form of an annuity, and 
     (3) the plan is not a transferee plan of a plan subject to 
     the joint and survivor rules.
       Benefits from a plan subject to the survivor benefit rules 
     may be paid in a form other than a QJSA or QPSA if the 
     participant waives the QJSA or QPSA and the applicable 
     notice, election, and spousal consent requirements are 
     satisfied. Similarly, under a defined contribution plan not 
     subject to the survivor benefit rules, the spouse can consent 
     to have benefits paid to another beneficiary.
     House bill
       No provision.
     Senate amendment
       Under the Senate amendment, if a plan provides as its QJSA 
     a benefit which provides a survivor annuity for the life of 
     the spouse which is not equal to 66\2/3\ percent of the 
     amount of the participant's annuity, the plan is required to 
     provide the participant with an election to receive an 
     annuity for the life of the participant with a survivor 
     annuity for the life of the spouse which is 66\2/3\ percent 
     of the amount of the participant's annuity.\36\ If the 
     participant makes such an election the benefit received is 
     treated as a QJSA for purposes of the qualified plan 
     requirements; however the fact that such an election is 
     offered does not affect how the QPSA is calculated. In other 
     words, the QPSA continues to be based on the regular QJSA 
     provided under the plan.
---------------------------------------------------------------------------
     \36\ As with the QJSA, this benefit would be the actuarial 
     equivalent of a single life annuity for the life of the 
     participant.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 1996. However, plans in 
     existence on the date of enactment do not have to comply with 
     the requirements of the amendment before the plan year 
     immediately following the first plan year in which any 
     amendment to the plan that is otherwise made becomes 
     effective.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


24. clarification of application of erisa to insurance company general 
                                accounts

       (Sec. 1461 of the Senate amendment.)
     Present law
       The Employee Retirement Income Security Act of 1974 
     (``ERISA'') imposes certain fiduciary requirements (including 
     restrictions on certain prohibited transactions) with respect 
     to the assets of an employee benefit plan (``plan assets''). 
     The International Revenue Code of 1986 (the ``Code'') imposes 
     an excise tax in the case of certain prohibited transactions 
     involving plan assets.
       In 1975, the Department of Labor issued guidance providing 
     that if an insurance company issues a contract or policy of 
     insurance to an employee benefit plan and places the 
     consideration for such contract or policy in its general 
     asset account, the assets in such account are not considered 
     to be plan assets.\37\ In 1993, the Supreme Court \38\ ruled 
     that certain assets held in an insurance company's general 
     account should be considered plan assets.
---------------------------------------------------------------------------
     \37\ Interpretive Bulletin 1975-2, 29 CFR section 2509.75-
     2(b) (1992). The term ``general account'' refers to all 
     assets of an insurance company which are not legally 
     segregated and allocated to separate accounts. The assets in 
     a general account are derived from all classes of business 
     and support the insurer's obligations on an unsegregated 
     basis, with no particular assets being specifically committed 
     to meet the obligations under any particular contract or 
     policy.
     \38\ John Hancock Mutual Life Insurance Company v. Harris 
     Trust and Savings Bank, 510 U.S. 86 (1993).
---------------------------------------------------------------------------
     House bill
       No provision.
     Senate amendment
       Under the Senate amendment, not later than December 31, 
     1996, the Secretary of Labor is required to issue proposed 
     regulations providing guidance for the purpose of 
     determining, in cases where an insurer issues 1 or more 
     policies (supported by the assets of the insurer's general 
     account) to or for the benefit of an employee benefit plan, 
     which assets of the insurer (other than plan assets held in 
     its separate account) constitute plan assets for purposes of 
     the fiduciary rules of ERISA and the prohibited transaction 
     provisions of the Code. Such proposed regulations must be 
     subject to public notice and comment until March 31, 1997, 
     and the Secretary of Labor is required to issue final 
     regulations by June 30, 1997. Any regulations issued by the 
     Secretary of Labor in accordance with the Senate amendment 
     generally could not take effect before the date on which such 
     regulations became final.
       In issuing regulations, the Secretary of Labor would have 
     to ensure that such regulations are administratively feasible 
     and are designed to protect the interests and rights of the 
     plan and of the plans participants and beneficiaries. In 
     issuing regulations, the Secretary of Labor may exclude any 
     assets of the insurer with respect to its operations, 
     products, or services from treatment as plan assets. Further, 
     the regulations would have to provide that plan assets do not 
     include assets which are not treated as plan assets under 
     present law because they are (1) assets of an investment 
     company registered under the Investment Company Act of 1940, 
     or (2) assets of an insurer with respect to a guaranteed 
     benefit policy issued by such insurer.
       Under the Senate amendment, no person is liable under ERISA 
     or the Code for conduct which occurred prior to the date 
     which is 18 months following the effective date of the final 
     regulations on the basis of a claim that the assets of the 
     insurer (other than plan assets held in a separate account) 
     constituted plan assets, except as otherwise provided by the 
     Secretary of Labor in order to prevent avoidance of the 
     guidance in the regulations or as provided in an action 
     brought by the Secretary of Labor under ERISA's enforcement 
     provisions for a breach of fiduciary responsibility which 
     would also constitute a violation of Federal criminal law or 
     constitute a felony under applicable State law.\39\
---------------------------------------------------------------------------
     \39\ The Senate amendment provides that the term policy 
     includes a contract.
---------------------------------------------------------------------------
       The Senate amendment does not preclude the application of 
     any Federal criminal law.
       Effective date.--The provision generally would be effective 
     on January 1, 1975. However, the provision would not apply to 
     any civil action commenced before January 7, 1995.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     the following modifications.
       Proposed regulations need not be issued by the Secretary of 
     Labor until June 30, 1997. Such proposed regulations will be 
     subject to public notice and comment until September 30, 
     1997. Final regulations need not be issued until December 31, 
     1997.
       Such regulations will only apply with respect to a policy 
     issued by an insurer on or before December 31, 1998. In the 
     case of such a policy, the regulations will take effect at 
     the end of the 18 month period following the date such 
     regulations become final. New policies issued after December 
     31, 1998, will be subject to the fiduciary obligations under 
     ERISA.
       In issuing regulations, the Secretary of Labor must ensure 
     that such regulations protect the interests and rights of the 
     plan and of its participants and beneficiaries as opposed to 
     ensuring that such regulations are designed to protect the 
     interests and rights of the plan and of its participants and 
     beneficiaries.
       Under the conference agreement, in connection with any 
     policy (other than a guaranteed benefit policy) issued by an 
     insurer to

[[Page H9636]]

     or for the benefit of an employee benefit plan, the 
     regulations issued by the Secretary of Labor must require (1) 
     that a plan fiduciary totally independent of the insurer 
     authorize the purchase of such policy (unless it is the 
     purchase of a life insurance, health insurance, or annuity 
     contract exempt from ERISA's prohibited transaction rules); 
     (2) that after the date final regulations are issued the 
     insurer provide periodic reports to the policyholder 
     disclosing the method by which any income or expenses of the 
     insurer's general account are allocated to the policy and 
     disclosing the actual return to the plan under the policy and 
     such other financial information the Secretary may deem 
     appropriate; and (3) that the insurer disclose to the plan 
     fiduciary the extent to which alternative arrangements 
     supported by assets of separate accounts of the insurer are 
     available, whether there is a right under the policy to 
     transfer funds to a separate account and the terms governing 
     any such right, and the extent to which support by assets of 
     the insurer's general account and support by assets of 
     separate accounts of the insurer might pose differing risks 
     to the plan; and (4) that the insurer must manage general 
     account assets with the level of care, skill, prudence and 
     diligence under the circumstances then prevailing that a 
     prudent man acting in a like capacity and familiar with such 
     matters would use in the conduct of an enterprise of a like 
     character and with like aims, taking into account all 
     obligations supported by such enterprise.
       Under the Conference agreement, compliance by the insurer 
     with all the requirements of the regulations issued by the 
     Secretary of Labor will be deemed compliance by such insurer 
     with ERISA's fiduciary duties, prohibited transactions, and 
     limitations on holding employer securities and employer real 
     property provisions (ERISA secs. 404, 406, and 407).


                 25. church pension plan simplification

       (Secs. 1462-1464 of the Senate amendment.)
     Present law
       In general, a church plan is a plan established and 
     maintained for employees (or their beneficiaries) by a church 
     or a church convention or association of churches that is 
     exempt from tax (sec. 414(e)). Church plans include plans 
     maintained by an organization, whether a corporation or 
     otherwise, that has as its principal purpose or function the 
     administration or funding of a plan or program for providing 
     retirement or welfare benefits for the employees of the 
     church or convention or association of churches. Employees of 
     a church include any minister, regardless of the source of 
     his or her compensation, and an employee of an organization 
     which is exempt from tax and which is controlled by or 
     associated with a church or a convention or association of 
     churches.\40\
---------------------------------------------------------------------------
     \40\ With respect to certain provisions (e.g., the exemption 
     for church plans from nondiscrimination requirements 
     applicable to tax-sheltered annuities), the more limited 
     definition of church under the employment tax rules applies 
     (secs. 3121(w)(3)(A) and (B)).
---------------------------------------------------------------------------
       Plans maintained by churches and certain church-controlled 
     organizations are exempt from certain of the requirements 
     applicable to pension plans under the Code pursuant to the 
     Employee Retirement Income Security Act of 1974 (as amended) 
     (``ERISA''). For example, such plans are not subject to 
     ERISA's vesting, coverage, and funding requirements. In some 
     cases, such plans are subject to provisions in effect before 
     the enactment of ERISA. Under the rules in effect before 
     ERISA, a plan cannot discriminate in favor of officers, 
     shareholder, persons whose principal duties consist in 
     supervising the work of other employees, or highly 
     compensated employees. Church plans may elect to waive the 
     exemption from the qualification rules (sec. 410(d)). 
     Electing plans become subject to all the tax Code (sec. 
     401(a)) qualification requirements, Title I of ERISA, the 
     excise tax on prohibited transactions, and participation in 
     the pension plan termination insurance program administered 
     by the Pension Benefit Guaranty Corporation.
       Certain eligible employers may maintain tax-sheltered 
     annuity plans (sec. 403(b)). These plans provide tax-deferred 
     retirement savings for employees of public education 
     institutions and employees of certain tax-exempt 
     organizations (including churches and certain organizations 
     associated with churches). In addition to tax-sheltered 
     annuities, alternative funding mechanisms that provide 
     similar tax benefits include church-maintained retirement 
     income accounts (sec. 403(b)(9)).
       For purposes of determining an employee's investment in the 
     contract under the rules relating to taxation of annuities, 
     amounts contributed by the employer are included as 
     investment in the contract, but only to the extent that such 
     amounts were includible in the gross income of the employee 
     or, if such amounts had been paid directly to the employee, 
     would not have been includible in income. However, amounts 
     contributed by the employer which, if they had been paid 
     directly to the employee, would have been excludable under 
     section 911 are not treated as investment in the contract, 
     except to the extent attributable to services performed 
     before January 1, 1963.
     House bill
       No provision.
     Senate amendment
       The Senate amendment allows self-employed ministers to 
     participate in a church plan. For purposes of the definition 
     of a church plan, a self-employed minister is treated as his 
     or her own employer and as if the employer were a tax-exempt 
     organization under section 501(c)(3). The earned income of 
     the self-employed minister is treated as his or her 
     compensation. Self-employed ministers are able to deduct 
     their contributions.
       In addition, ministers employed by an organization other 
     than a church are treated as if employed by a church. Thus, 
     such ministers can also participate in a church plan.
       The Senate amendment provides that if a minister is 
     employed by an employer that is not eligible to maintain a 
     church plan, the minister is not taken into account by that 
     employer in applying nondiscrimination rules.
       The Senate amendment permits retirement income accounts to 
     be established for self-employed minister.
       The Senate amendment provides that church plans subject to 
     the pre-ERISA nondiscrimination rules are to apply the same 
     definition of highly compensated employee as other pension 
     plans, rather than the pre-ERISA rule relating to employees 
     who are officers, shareholders, persons whose principal 
     duties consist of supervising the work of other employees or 
     highly compensated employees.
       The Senate amendment provides that the Secretary of the 
     Treasury may develop safe harbor rules for church plans under 
     the applicable coverage and nondiscrimination rules.
       The Senate amendment provides that, in the case of foreign 
     missionaries, amounts contributed to a plan by the employer 
     are investment in the contract even though the amounts, if 
     paid directly to the employee would have been excludable 
     under section 911.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     technical modifications.


         26. increase in multiemployer plan benefits guaranteed

       (Sec. 1465 of the Senate amendment.)
     Present law
       The Pension Benefit Guaranty Corporation (``PBGC'') 
     guarantees benefits of workers under multiemployer plans. The 
     monthly guarantee is equal to the participant's years of 
     service multiplied by the sum of (1) 100 percent of the first 
     $5 of the monthly benefit accrual rate, and (2) 75 percent of 
     the next $15 of the accrual rate.
     House bill
       No provision.
     Senate amendment
       The Senate amendment generally adjusts the amount 
     guaranteed under multiemployer plans to account for changes 
     in the Social Security wage index since 1980. Under the 
     Senate amendment, the monthly benefit guaranteed by the PBGC 
     is generally increased to the participant's years of service 
     multiplied by the sum of (1) 100 percent of the first $11 of 
     the monthly benefit accrual rate, and (2) 75 percent of the 
     next $33 of the accrual rate. The maximum annual guarantee 
     for a retiree with 30 years of service is generally increased 
     to $12,870.
       The increase in guaranteed multiemployer plan benefits only 
     applies in the case of multiemployer plans which first 
     receive financial assistance from the PBGC during the 
     applicable period. The applicable period is the period 
     beginning on the date of enactment and ending on the last day 
     of the first fiscal year in which the surplus in the PBGC's 
     multiemployer insurance program is less than half of the 
     surplus for the fiscal year ending September 30, 1995, as 
     reflected in the Statement of Financial Condition in the 
     PBGC's 1995 Annual Report. In determining the surplus in the 
     multiemployer insurance program in any fiscal year, the PBGC 
     is required to use the same actuarial assumptions that it 
     used in determining the surplus for the fiscal year ending 
     September 30, 1995. If the PBGC surplus declines by more than 
     50 percent, benefits of participants in multiemployer plans 
     that first received financial assistance from the PBGC during 
     the applicable period would continue to be guaranteed at the 
     increased level; however, other benefits would be guaranteed 
     at the present-law levels. The guaranteed benefit level would 
     not automatically increase if the surplus increases.
       Effective date.--The provision is effective on the date of 
     enactment.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


     27. Waiver of excise tax on failure to pay liquidity shortfall

       (Sec. 1466 of the Senate amendment.)
     Present law
       A provision in the Retirement Protection Act of 1994, 
     enacted as part of the implementing legislation for the 
     General Agreement on Tariffs and Trade (``GATT''), generally 
     requires certain underfunded single-employer defined benefit 
     plans to make quarterly contributions sufficient to maintain 
     liquid plan assets, i.e., cash and marketable securities, at 
     an amount approximately equal to three times the total trust 
     disbursements for the preceding 12-month period. This 
     liquidity requirement only applies to underfunded single-
     employer defined benefit

[[Page H9637]]

     plans (other than small plans) \41\ that (1) are required to 
     make quarterly installments of their estimated minimum 
     funding contribution for the plan year, and (2) have a 
     liquidity shortfall for any quarter during the plan year.
---------------------------------------------------------------------------
     \41\ A plan is a small plan if it had 100 or fewer 
     participants on each day during the plan year (as determined 
     in Code sec. 412(l)(6)).
---------------------------------------------------------------------------
       A plan has a liquidity shortfall if its liquid assets as of 
     the last day of the quarter are less than the base amount for 
     the quarter. Liquid assets are cash, marketable securities 
     and such other assets as specified by the Secretary. The base 
     amount for the quarter is an amount equal to the product of 
     three times the adjusted disbursements from the plan for the 
     12 months ending on the last day of the last month preceding 
     the quarterly installment due date. If the base amount 
     exceeds the product of two times the sum of adjusted 
     disbursements for the 36 months ending on the last day of the 
     last month preceding the quarterly installment due date, and 
     an enrolled actuary certifies to the satisfaction of the 
     Secretary that the excess is the result of nonrecurring 
     circumstances, such nonrecurring circumstances are not 
     included in the base amount. For purposes of determining the 
     base amount, adjusted disbursements mean the amount of all 
     disbursements from the plan's trust, including purchases of 
     annuities, payments of single sums, other benefit payments, 
     and administrative expenses reduced by the product of the 
     plan's funded current liability percentage for the plan year 
     and the sum of the purchases of annuities, payments of single 
     sums, and such other disbursements as the Secretary provides 
     in regulations.
       The amount of the required quarterly installment for 
     defined benefit plans that have a liquidity shortfall for any 
     quarter is the greater of the quarterly installment or the 
     liquidity shortfall. The amount of the liquidity shortfall 
     must be paid in the form of liquid assets. It may not be paid 
     by the application of credit balances in the funding standard 
     account. The amount of any liquidity shortfall payment when 
     added to prior installments for the plan year cannot exceed 
     the amount necessary to increase the funded current liability 
     percentage of the plan to 100 percent taking into account the 
     expected increase in current liability due to benefits 
     accruing during the plan year.
       If a liquidity shortfall payment is not made, then the plan 
     sponsor is subject to a nondeductible excise tax equal to 10 
     percent of the amount of the outstanding liquidity shortfall. 
     A liquidity shortfall payment is no longer considered 
     outstanding on the earlier of (1) the last day of a later 
     quarter for which the plan does not have a liquidity 
     shortfall or (2) the date on which the liquidity shortfall 
     for a later quarter is timely paid. If the liquidity 
     shortfall remains outstanding after four quarters, the excise 
     tax increases to 100 percent.
     House bill
       No provision.
     Senate amendment
       The Senate amendment gives the Secretary authority to waive 
     all or part of the excise tax imposed for a failure to make a 
     liquidity shortfall payment if the plan sponsor establishes 
     to the satisfaction of the Secretary that the liquidity 
     shortfall was due to reasonable cause and not willful neglect 
     and reasonable steps have been taken to remedy such 
     shortfall.
       Effective date.--The provision is effective as if included 
     in GATT.
     Conference agreement
       The conference agreement follows the Senate amendment.


         28. treatment of multiemployer plans under section 415

       (Sec. 1467 of the Senate amendment.)
     Present law
       Present law imposes limits on contributions and benefits 
     under qualified plans based on the type of plan. In the case 
     of defined benefit pension plans, the limit on the annual 
     retirement benefit is the lesser of (1) 100 percent of 
     compensation or (2) $120,000 (indexed for inflation). The 
     dollar limit is reduced in the case of early retirement or if 
     the employee has less than 10 years of plan participation.
     House bill
       No provision.
     Senate amendment
       The Senate amendment makes the following modifications to 
     the limits on contributions and benefits as applied to 
     multiemployer plans:
       (1) the 100 percent of compensation limitation on defined 
     benefit pension plan benefits does not apply; and
       (2) the early retirement reduction and the 10-year phase-in 
     of the defined benefit pension plan dollar limit does not 
     apply to certain disability and survivor benefits.
       Effective date.--The provision applies to multiemployer 
     plans for years beginning after December 31, 1996.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


 29. payment of lump-sum credit for former spouses of federal employees

       (Sec. 1468 of the Senate amendment.)
     Present law
       When a Federal employee or former Federal employee dies, 
     any contribution to his or her credit in the Civil Service 
     Retirement and Disability Fund must be paid to whomever the 
     employee designated to receive that contribution. If no 
     designation was made, there is a statutory order of 
     precedence beginning with the surviving spouse. There is no 
     provision in law that permits a domestic relations order to 
     interfere with these arrangements. Thus, if an employee 
     agreed in a divorce settlement to designate a former spouse 
     to receive these funds, and later designated another 
     individual, present law would require payment of the funds to 
     the other individual. By contrast, under present law, an 
     employee's annuity and survivor benefits are subject to the 
     provisions of a domestic relations order.
     House bill
       No provision.
     Senate amendment
       The payment of contributions to the employee's credit in 
     the Civil Service Retirement and Disability Fund is subject 
     to the provisions of a domestic relations order, in the same 
     way as the employee's annuity and survivor benefits. Thus, a 
     domestic relations order on file with the Office of Personnel 
     Management supersedes any designation of beneficiary by the 
     employee.
       Effective date.--The provision is effective with respect to 
     deaths occurring after the 90th day after the date of 
     enactment.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment.


                30. Date for adoption of plan amendments

       (Sec. 1459 of the House bill and sec. 1469 of the Senate 
     amendment.)
     Present law
       Plan amendments to reflect amendments to the law generally 
     must be made by the time prescribed by law for filing the 
     income tax return of the employer for the employer's taxable 
     year in which the change in law occurs.
     House bill
       The House bill generally provides that any amendments to a 
     plan or annuity contract required by the pension 
     simplification amendments would not be required to be made 
     before the first plan year beginning on or after January 1, 
     1997. The date for amendments is extended to the first plan 
     year beginning on or after January 1, 1999, in the case of a 
     governmental plan.
       Effective date.--The provision is effective on the date of 
     enactment.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       Under the conference agreement, any amendments to a plan or 
     annuity contract required by the pension simplification 
     amendments would not be required to be made before the first 
     plan year beginning on or after January 1, 1998. The date for 
     amendments is extended to the first plan year beginning on or 
     after January 1, 2000, in the case of a governmental plan.
       Effective date.--The provision is effective on the date of 
     enactment.

                  IV. FOREIGN SIMPLIFICATION PROVISION


              1. Repeal of excess passive assets provision

       (Sec. 1501 of the House bill.)
     Present law
       Under the rules of subpart F (secs. 951-964), certain 10-
     percent U.S. shareholders of a controlled foreign corporation 
     (CFC) are required to include in income currently for U.S. 
     tax purposes certain earnings of the CFC, whether or not such 
     earnings are actually distributed currently to the 
     shareholders. The 10-percent U.S. shareholders of a CFC are 
     subject to current U.S. tax on their shares of certain income 
     earned by the CFC (referred to as ``subpart F income''). The 
     10-percent U.S. shareholders are also subject to current U.S. 
     tax on their shares of the CFC's earnings to the extent such 
     earnings are invested by the CFC in certain U.S. property.
       In addition to these current inclusion rules, the Omnibus 
     Budget Reconciliation Act of 1993 enacted section 956A, which 
     applies another current inclusion rule to U.S. shareholders 
     of a CFC. Section 956A requires the 10-percent U.S. 
     shareholder of a CFC to include in income currently their 
     shares of the CFC's earnings to the extent such earnings are 
     invested by the CFC in excess passive assets. A CFC generally 
     is treated as having excess passive assets if the average of 
     the amounts of its passive assets exceeds 25 percent of the 
     average of the amounts of its total assets; this calculation 
     requires a quarterly determination of the CFC's passive 
     assets and total assets.
     House bill
       The House bill repeals section 956A.
       Effective date.--The provision applies to taxable years of 
     foreign corporations beginning after December 31, 1996, and 
     taxable years of U.S. shareholders with or within which such 
     taxable years of foreign corporations end.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.

                          V. OTHER PROVISIONS


1. EXEMPT ALASKA FROM DIESEL DYEING REQUIREMENT WHILE ALASKA IS EXEMPT 
             FROM SIMILAR CLEAN AIR ACT DYEING REQUIREMENT

       (Sec. 1801 of the Senate amendment.)

[[Page H9638]]

     Present law
       An excise tax totaling 24.3 cents per gallon is imposed on 
     diesel fuel. In the case of fuel used in highway 
     transportation, 20 cents per gallon is dedicated to the 
     Highway Trust Fund. The remaining portion of this tax is 
     imposed on transportation generally and is retained in the 
     General Fund.
       The diesel fuel tax is imposed on removal of the fuel from 
     a pipeline or barge terminal facility (i.e., at the 
     ``terminal rack''). Present law provides that tax is imposed 
     on all diesel fuel removed from terminal facilities unless 
     the fuel is destined for a nontaxable use and is indelibly 
     dyed pursuant to Treasury Department regulations.
       In general, the diesel fuel tax does not apply to non-
     transportation uses of the fuel. A specific exemption is 
     provided for off-highway business uses (e.g., use as fuel 
     powering off-highway equipment). Use as heating oil also is 
     exempt. (Most fuel commonly referred to a heating oil is 
     diesel fuel.) The tax also does not apply to fuel used on a 
     farm for farming purposes or by State and local governments, 
     to exported fuels, and to fuel used in commercial shipping. 
     Fuel used by intercity buses and trains is partially exempt 
     from the diesel fuel tax.
       A similar dyeing regime exists for diesel fuel under the 
     Clean Air Act. That Act prohibits the use on highways, of 
     diesel fuel with a sulfur content exceeding prescribed 
     levels. This ``high sulfur'' diesel fuel is required to be 
     dyed by the EPA. The State of Alaska generally was exempted 
     from the Clean Air Act, but not the excise tax, dyeing regime 
     for three years (until October 1, 1996) (urban areas) or 
     permanently (remote areas).
     House bill
       No provision
     Senate amendment
       The Senate amendment provides that diesel fuel sold in the 
     State of Alaska will be exempt from the diesel dyeing 
     requirement during the period when that State is exempt from 
     the Clean Air Act dyeing requirements. Thus, subject to a 
     certification procedure to be developed by the Treasury 
     Department, undyed diesel fuel which is destined for a 
     nontaxable use may be removed from terminals without payment 
     of tax through September 30, 1996 (urban areas, unless 
     extended by the Environmental Protection Agency) or 
     permanently (remote areas).
       Effective date.--Effective beginning with the first 
     calendar quarter after the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment


2. APPLICATION OF COMMON PAYMASTER RULES TO CERTAIN AGENCY ACCOUNTS AT 
                           STATE UNIVERSITIES

       (Sec. 1802 of the Senate amendment.)
     Present law
       In general, the OASDI portion of FICA taxes are payable 
     with respect to employee remuneration not in excess of a 
     contribution base. If an employee works for more than one 
     employer during a year, these taxes are payable for each 
     employer up to the contribution base. Under the common 
     paymaster rule if an individual works for two or more related 
     corporations, the remuneration may be treated as being from 
     one employer and therefore taxable for one contribution base.
       Section 125 of Social Security Amendments of 1983 provided 
     a common paymaster rule for certain State universities that 
     employ health care professionals as faculty members at a 
     medical school and at a tax-exempt faculty practice plan. 
     This rule does not explicitly apply to situations where 
     compensation is made through a university agency account and 
     not directly by a medical school faculty practice plan.
     House bill
       No provision.
     Senate amendment
       The Senate amendment establishes a common paymaster rule in 
     cases where: (1) a State or State university provides 
     remuneration pursuant to a single contract of employment to 
     certain health care professionals as members of its medical 
     school faculty; and (2) as agency account at such institution 
     also provides remuneration to such health care professionals. 
     The agency account must receive funds for the remuneration 
     from a faculty practice plan described in section 501(c)(3) 
     of the Code. The payments may only be distributed by the 
     agency account to faculty members who render patient care at 
     the medical school. The faculty members receiving payments 
     must comprise at least 30 percent of the membership of the 
     faculty practice plan.
       Effective date.--Remuneration paid after December 31, 1996. 
     It is intended that, with respect to years before the 
     effective date, the Secretary apply present law in a manner 
     consistent with the proposal.
     Conference agreement
       The conference agreement includes the Senate amendment 
     provision.


      3. modifications to excise tax on ozone-depleting chemicals

    a. Exempt imported recycled halons from the excise tax on ozone-
                          depleting chemicals

       (Sec. 1803(a) of the bill.)
     Present law
       An excise tax is imposed on the sale or use by the 
     manufacturer or importer of certain ozone-depleting chemicals 
     (Code sec. 4681). The amount of tax generally is determined 
     by multiplying the base tax amount applicable for the 
     calendar year by an ozone-depleting factor assigned to each 
     taxable chemical. The base tax amount is $5.80 per pound in 
     1996 and will increase by 45 cents per pound per year 
     thereafter. The ozone-depleting factors for taxable halons 
     are 3 for halon-1211, 10 for halon-1301, and 6 for halon-
     2402.
       Taxable chemicals that are recovered and recycled within 
     the United States are exempt from tax.
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the exemption from tax for 
     domestically recovered and recycled ozone-depleting chemicals 
     to imported recycled halons. The exemption for imported 
     recycled halons applies only to such chemicals imported from 
     countries that are signatories to the Montreal Protocol on 
     Substances that Deplete the Ozone Layer.
       Effective date.--The provision is effective for chemicals 
     imported after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     a modification to the effective date.
       Effective date.--The provision is effective for halon-1301 
     and halon-2402 imported after December 31, 1996, and for 
     halon-1211 imported after December 31, 1997.

 b. Exempt chemicals used in metered-dose inhalers from the excise tax 
                      on ozone-depleting chemicals

       (Sec. 1803(b) of the bill.)
     Present law
       An excise tax is imposed on the sale or use by the 
     manufacturer or importer of certain ozone-depleting chemicals 
     (Code sec. 4681). The amount of tax generally is determined 
     by multiplying the base tax amount applicable for the 
     calendar year by an ozone-depleting factor assigned to each 
     taxable chemical. The base tax amount is $5.80 per pound in 
     1996 and will increase by 45 cents per pound per year 
     thereafter.
       A reduced rate of tax of $1.67 per pound applies to 
     chemicals used as propellants in metered-dose inhalers (sec. 
     4682(g)(4)).
     House bill
       No provision.
     Senate amendment
       The Senate amendment exempts chemicals used as propellants 
     in metered-dose inhalers from the excise tax on ozone-
     depleting chemicals.
       Effective date.--The provision is effective for chemicals 
     sold or used seven days after the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.


  4. tax-exempt bonds for the sale of the alaska power administration 
                                facility

       (Sec. 1804 of the Senate amendment.)
     Present law
       Interest on State and local government bonds to provide 
     financing to private parties (private activity bonds) is 
     taxable unless an exception is provided in the Internal 
     Revenue Code. One such exception relates to the financing of 
     facilities for the furnishing of electricity and gas.
       Most private activity bonds are subject to annual State 
     volume limits of the greater of $50 per resident of the State 
     or $150 million. Additionally, persons acquiring existing 
     property financed with most private activity bonds must 
     satisfy a rehabilitation requirement as a condition of the 
     financing.
     House bill
       No provision.
     Senate amendment
       Provides an exception from the general rehabilitation 
     requirement for private activity bonds used to acquire 
     existing property for certain bonds to finance the 
     acquisition of the Snettisham hydroelectric project for the 
     Alaska Power Administration pursuant to legislation that has 
     been enacted authorizing that transaction. These bonds are 
     subject to the State of Alaska's private activity bond volume 
     limit.
       Effective date.--Bonds issued after the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.


   5. allow bank common trust funds to transfer assets to regulated 
                 investment companies without taxation

       (Sec. 1805 of the Senate amendment.)
     Present law
       Common trust funds
       A common trust fund is a fund maintained by a bank 
     exclusively for the collective investment and reinvestment of 
     monies contributed by the bank in its capacity as a trustee, 
     executor, administrator, guardian, or custodian of certain 
     accounts and in conformity with rules and regulations of the 
     Board of Governors of the Federal Reserve System or the 
     Comptroller of the Currency pertaining to the collective 
     investment of trust funds by national banks (sec. 584(a)).
       The common trust fund is not subject to tax and is not 
     treated as a corporation (sec. 584(b)). Each participant in a 
     common trust fund includes his proportional share of common 
     trust fund income, whether or not the

[[Page H9639]]

     income is distributed or distributable (sec. 584(c)).
       No gain or loss is realized by the fund upon admission or 
     withdrawal of a participant. Participants generally treat 
     their admission to the fund as the purchase of an interest. 
     Withdrawals from the fund generally are treated as the sale 
     of an interest by the participant (sec. 584(e)).
       Regulated investment companies (``RICs'')
       A RIC also is treated as a conduit for Federal income tax 
     purposes. Conduit treatment is accorded by allowing the RIC a 
     deduction for dividend distributions to its shareholders. 
     Present law is unclear as to the tax consequences when a 
     common trust fund transfers its assets to one or more RICs.
     House bill
       No provision.
     Senate amendment
       In general, the Senate amendment permits a common trust 
     fund to transfer substantially all of its assets to one or 
     more RICs without gain or loss being recognized by the fund 
     or its participants. The fund must transfer its assets to the 
     RICs solely in exchange for shares of the RICs, and the fund 
     must then distribute the RIC shares to the fund's 
     participants in exchange for the participants' interests in 
     the fund.
       The basis of any asset received by a RIC will be the basis 
     of the asset in the hands of the fund prior to transfer 
     (increased by the amount of gain recognized by reason of the 
     rule regarding the assumption of liabilities). In addition, 
     the basis of any RIC shares that are received by a fund 
     participant will be an allocable portion of the participant's 
     basis in the interests exchanged. If stock in more than one 
     RIC is received in exchange for assets of a common trust 
     fund, the basis of the shares in each RIC shall be determined 
     by allocating the basis of common fund assets used in the 
     exchange among the shares of each RIC received in the 
     exchange on the basis of the respective fair market values of 
     the RICs.
       The tax-free transfer is not available to a common trust 
     fund with assets that are not diversified under the 
     requirements of section 368(a)(2)(F)(ii), except that the 
     diversification test is modified so that Government 
     securities are not to be included as securities of an issuer 
     and are to be included in determining total assets for 
     purposes of the 25- and 50-percent tests.
       Effective date.--The provision is effective for transfers 
     after December 31, 1995.
     Conference agreement
       The conference agreement follows the Senate amendment. In 
     order to qualify for the provision, the transfer by the 
     common trust fund to the RIC must occur after December 31, 
     1995. The conferees intend that there is no requirement for 
     qualification that the transfer of assets by the common trust 
     fund to one or more RICs and the distribution of RIC shares 
     to participants in the common trust fund be made 
     contemporaneously or pursuant to a single plan.


            6. treatment of qualified state tuition programs

       (Sec. 1806 of the Senate amendment.)
     Present law
       In Michigan v. United States, 40 F.3d 817 (6th Cir. 1994), 
     the Sixth Circuit held that the Michigan Education Trust, an 
     entity created by the State of Michigan to operate a prepaid 
     tuition payment program, is an integral part of the State, 
     and, thus, the investment income realized by the Trust is not 
     currently subject to Federal income tax. The Trust was 
     established to receive advance payments of college tuition, 
     invest the money, and ultimately make disbursements under a 
     program that allows beneficiaries to attend any of the 
     State's public colleges or universities without further 
     tuition costs for a year or more (depending on the terms of 
     the contract).
       Section 115 of the Code provides that gross income does not 
     include income derived from any public utility or the 
     exercise of any essential governmental function and accruing 
     to a State or any political subdivision thereof, or the 
     District of Columbia.
       Section 2501 imposes a Federal gift tax on certain 
     transfers of property by gift. Section 2503(e) specifically 
     excludes from gifts subject to tax under section 2501 any 
     ``qualified transfer,'' which includes any amount paid on 
     behalf of an individual as tuition to an educational 
     institution (as described in sec. 170(b)(1)(A)(ii)) for the 
     education or training of such individual.
       On June 11, 1996, the Treasury Department issued final 
     regulations under the original issue discount (``OID'') 
     provisions of the Code (secs. 163(e) and 1271 through 1275), 
     including regulations relating to debt instruments that 
     provide for contingent payments (see TD 8674). These 
     regulations specifically provide that they do not apply to 
     contracts issued pursuant to State-sponsored prepaid tuition 
     programs, whether or not the contracts are debt instruments. 
     In addition, the IRS announced in Rev. Proc. 96-34 that it 
     will not issue advance rulings or determination letters 
     regarding State-sponsored prepaid tuition plans because 
     issues that arise under such plans are being studied.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides tax-exempt status to 
     ``qualified State tuition programs,'' meaning programs 
     established and maintained by a State (or agency or 
     instrumentality thereof) under which persons may (1) purchase 
     tuition credits or certificates on behalf of a designated 
     beneficiary that entitle the beneficiary to a waiver or 
     payment of qualified higher education expenses of the 
     beneficiary, or (2) make contributions to an account that is 
     established for the sole purpose of meeting qualified higher 
     education expenses of the designated beneficiary of the 
     account. ``Qualified higher education expenses'' are defined 
     at tuition, fees, books, and equipment required for 
     enrollment or attendance at a college or university (or 
     certain vocational schools). The Senate amendment 
     specifically provides that, although a qualified State 
     tuition program generally is exempt from Federal income tax, 
     such a program is subject to the unrelated business income 
     tax (UBIT).\42\
---------------------------------------------------------------------------
     \42\ The bill specifically provides that an interest in a 
     qualified State tuition program will not be treated as debt 
     for purposes of the UBIT debt-financed property rules (sec. 
     514). Consequently, a qualified State tuition program's 
     investment income will not constitute debt-financed property 
     income subject to the UBIT merely because the program accepts 
     contributions and is obligated to pay out (or refund) such 
     contributions and certain earnings thereon to designated 
     beneficiaries or to contributors. However, investment income 
     of a qualified State tuition program could be subject to the 
     UBIT as debt-financed property income to the extent the 
     program acquires indebtedness when investing the 
     contributions made on behalf of designated beneficiaries.
---------------------------------------------------------------------------
       A qualified State tuition program is required to provide 
     that purchases or contributions only be made in cash. 
     Contributors and beneficiaries are not allowed to direct any 
     investments made on their behalf by the program. The program 
     is required to maintain a separate accounting for each 
     designated beneficiary. A specified individual must be 
     designated as the beneficiary at the commencement of 
     participation in a qualified State tuition program (i.e., 
     when contributions are first made to purchase an interest in 
     such a program \43\), unless interests in such a program are 
     purchased by a State or local government or a tax-exempt 
     charity described in section 501(c)(3) as part of a 
     scholarship program operated by such government or charity 
     under which beneficiaries to be named in the future will 
     receive such interests as scholarships. A transfer of credits 
     (or other amounts) from one account benefiting one designated 
     beneficiary to another account benefiting a different 
     beneficiary will be considered a distribution (as will a 
     change in the designated beneficiary of an interest in a 
     qualified State tuition program) unless the beneficiaries are 
     members of the same family.\44\ Earnings on an account may be 
     refunded to a contributor or beneficiary, but the State or 
     instrumentality must impose a more than de minimis monetary 
     penalty unless the refund is (1) used for qualified higher 
     education expenses of the beneficiary, (2) made on account of 
     the death or disability of the beneficiary,\45\ or (3) made 
     on account of a scholarship received by the designated 
     beneficiary to the extent the amount refunded does not exceed 
     the amount of the scholarship used for higher education 
     expenses. A qualified State tuition program may not allow any 
     interest in the program or any portion thereof to be used as 
     security for a loan.
---------------------------------------------------------------------------
     \43\ The bill allows for a change in designated 
     beneficiaries, so long as the new beneficiary is a member of 
     the family of the old beneficiary.
     \44\ For this purpose, the term ``member of the family'' is 
     defined under present-law section 2032A(e)(2).
     \45\ Thus, a State need not impose a monetary penalty when a 
     refund is made from a qualified State tuition program in 
     order to cover medical expenses incurred by (or on behalf of) 
     a designated beneficiary who suffers a disabling illness (and 
     who could be any member of the same family of the originally 
     designated beneficiary).
---------------------------------------------------------------------------
       In addition, the Senate amendment provides that no amount 
     shall be included in the gross income of a contributor to, or 
     beneficiary of, a qualified State tuition program with 
     respect to any distribution from, or earnings under, such 
     program, except that (1) amounts distributed or educational 
     benefits provided to a beneficiary (e.g., when the 
     beneficiary attends college) will be included in the 
     beneficiary's gross income (unless excludable under another 
     Code section) to the extent such amount or the value of the 
     educational benefits exceeds contributions made on behalf of 
     the beneficiary, and (2) amounts distributed to a contributor 
     (e.g., when a parent or other relative receives a refund) 
     will be included in the contributor's gross income to the 
     extent such amounts exceed contributions made by that 
     person.\46\
---------------------------------------------------------------------------
     \46\ Specifically, the bill provides that any distribution 
     under a qualified State tuition program shall be includible 
     in the gross income of the distributee in the same manner as 
     provided under present-law section 72 to the extent not 
     excluded from gross income under any other provision of the 
     Code.
---------------------------------------------------------------------------
       The Senate amendment further provides that, for purposes of 
     present-law section 2503(e), contributions made by an 
     individual to a qualified State tuition program are treated 
     as a qualified transfer and, thus, not subject to Federal 
     gift tax.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment. The bill also 
     includes a transition rule providing that if (1) a State 
     maintains (on the date of enactment) a program under which 
     persons may purchase tuition credits on behalf of, or make 
     contributions for educational expenses of, a designated 
     beneficiary, and (2) such program meets the requirements of a 
     qualified State tuition program before the later of (a) one 
     year after the date of enactment, or (b) the first day of the 
     first calendar quarter after the close of

[[Page H9640]]

     the first regular session of the State legislature that 
     begins after the date of enactment, then the provisions of 
     the bill will apply to contributions (and earnings allocable 
     thereto) made before the date the program meets the 
     requirements of a qualified State tuition program, without 
     regard to whether the requirements of a qualified State 
     tuition program are satisfied with respect to such 
     contributions and earnings (e.g., even if the interest in the 
     tuition or educational savings program covers not only 
     qualified higher education expenses but also room and board 
     expenses).
     Conference agreement
       The conference agreement generally follows the Senate 
     amendment, with the following modifications:
       (1) A program will not be treated as a qualified State 
     tuition program unless it provides adequate safeguards to 
     prevent contributions on behalf of a designated beneficiary 
     in excess of those necessary to provide for the qualified 
     higher education expenses of the beneficiary.
       (2) Contributions made to a qualified State tuition program 
     will be treated as incomplete gifts for Federal gift tax 
     purposes. Thus, any Federal gift tax consequences will be 
     determined at the time that a distribution is made from an 
     account under the program.
       (3) The waiver (or payment) of qualified higher education 
     expenses of a designated beneficiary by (or to) an 
     educational institution under a qualified State tuition 
     program will be treated as a qualified transfer for purposes 
     of present-law section 2503(e).\47\
---------------------------------------------------------------------------
     \47\ In this regard, the conferees intend that if a qualified 
     State tuition program issues a check in the names of both the 
     designated beneficiary and an educational institution at 
     which the beneficiary incurs (or will incur) qualified higher 
     education expenses, then the issuance of the check will be 
     considered a payment of qualified higher education expenses 
     to an educational institution if the check (after endorsement 
     by the beneficiary) is deposited in the institution's bank 
     account.
---------------------------------------------------------------------------
       (4) Amounts contributed to a qualified State tuition 
     program (and earnings thereon) will be included in the 
     contributor's estate for Federal estate tax purposes in the 
     event that the contributor dies before such amounts are 
     distributed under the program.
       The conference agreement provides that any distribution 
     under a qualified State tuition program shall be includible 
     in the gross income of the distributee in the manner as 
     provided under section 72 to the extent not excluded from 
     gross income under any other provision of the Internal 
     Revenue Code. Thus, the conferees understand that if 
     matching-grant amounts are distributed to (or on behalf of) a 
     beneficiary as part of a qualified State tuition program, 
     then such matching-grant amounts still may be excluded from 
     the gross income of the beneficiary as a scholarship under 
     present-law section 117.
       Effective date.--The conference agreement follows the 
     Senate amendment.


                         7. Adoption assistance

       (Sec. 101 of H.R. 3286.)
     Present law
       Present law does not provide a tax credit for adoption 
     expenses. Also, present law does not provide an exclusion 
     from gross income for employer-provided adoption assistance. 
     The Federal Adoption Assistance program (a Federal outlay 
     program) provides financial assistance for the adoption of 
     certain special needs children. In general, a special needs 
     child is defined as a child who (1) according to a State 
     determination, could not or should not be returned to the 
     home of the birth parents and (2) on account of a specific 
     factor or condition (such as ethnic background, age, 
     membership in a minority or sibling group, medical condition, 
     or physical, mental or emotional handicap), could not 
     reasonably be expected to be adopted unless adoption 
     assistance is provided. Specifically, the program provides 
     assistance for adoption expenses for those special needs 
     children receiving Federally assisted adoption assistance 
     payments as well as special needs children in private and 
     State-funded programs. The maximum Federal reimbursement is 
     $1,000 per special needs child. Reimbursable expenses include 
     those nonrecurring costs directly associated with the 
     adoption process such as legal costs, social service review, 
     and transportation costs.
     House bill
       Tax credit
       No provision. However, H.R. 3286 provides taxpayers with a 
     maximum nonrefundable credit against income tax liability of 
     $5,000 per child for qualified adoption expenses paid or 
     incurred by the taxpayer. Any unused adoption credit may be 
     carried forward by the taxpayer for up to five years. 
     Qualified adoption expenses are reasonable and necessary 
     adoption fees, court costs, attorneys' fees and other 
     expenses that are directly related to the legal adoption of 
     an eligible child. In the case of an international adoption, 
     the credit is not available unless the adoption is finalized. 
     An eligible child is an individual (1) who has not attained 
     age 18 as of the time of the adoption, or (2) who is 
     physically or mentally incapable of caring for himself or 
     herself. No credit is allowed for expenses incurred (1) in 
     violation of State or Federal law, (2) in carrying out any 
     surrogate parenting arrangement, or (3) in connection with 
     the adoption of a child of the taxpayer's spouse. The credit 
     is phased out ratably for taxpayers with modified adjusted 
     gross income (AGI) above $75,000, and is fully phased out at 
     $115,000 of modified AGI.
       The credit is not allowed for any expenses for which a 
     grant is received under any Federal, State, or local program. 
     This limit, however, does not apply in the case of special 
     needs adoptions.
       Exclusion from income
       The proposal provides a maximum $5,000 exclusion from the 
     gross income of an employee for specified certain adoption 
     expenses paid by the employer. The $5,000 limit is a per 
     child limit, not an annual limitation. The exclusion is 
     phased out ratably for taxpayers with modified AGI above 
     $75,000 and is fully phased out at $115,000 of modified AGI.
       No credit is allowed for adoption expenses paid or 
     reimbursed under an adoption assistance program.
       Effective date
       The House bill is effective for taxable years beginning 
     after December 31, 1996.
     Senate amendment
       Tax credit
       The Senate amendment to H.R. 3286 is the same as the House 
     bill, with three changes:
       (1) The maximum credit is increased from $5,000 to $6,000 
     in the case of special needs adoptions.
       (2) The credit for non-special needs adoptions is repealed 
     for expenses paid or incurred after December 31, 2000.
       (3) No credit is allowed in the case of special needs 
     adoptions for expenses for which a grant is received under 
     any Federal, State or local program.
       Exclusion from income
       The Senate amendment to H.R. 3286 is the same as the House 
     bill except:
       (1) The maximum exclusion is increased from $5,000 to 
     $6,000 in the case of special needs adoptions.
       (2) The exclusion is repealed after December 31, 2000.
       Effective date
       The Senate amendment to H.R. 3286 is the same as the House 
     bill.
     Conference agreement
       Tax credit
       The conference agreement follows the Senate amendment 
     provision of H.R. 3286 with four modifications:
       (1) The repeal of the credit for non-special needs 
     adoptions is delayed for one year. Therefore, the credit for 
     non-special needs adoptions is not available for expenses 
     paid or incurred after December 31, 2001.
       (2) Special needs foreign adoptions are limited to a 
     maximum credit of $5,000 (rather than $6,000) for qualified 
     adoption expenses until December 31, 2001, at which time the 
     credit for special needs foreign adoptions is also repealed.
       (3) The taxpayer is required to provide available 
     information about the name, age, and taxpayer identification 
     number of each adopted child.
       (4) Otherwise, qualified adoption expenses paid in one 
     taxable year are not taken into account for purposes of the 
     credit until the next taxable year unless the expenses are 
     incurred in the year the adoption becomes final.
       Exclusion from income
       The conference agreement follows the Senate amendment 
     provision of H.R. 3286 with three modifications;
       (1) The repeal of the exclusion is delayed for one year. 
     Therefore, the exclusion is not available for expenses paid 
     or incurred after December 31, 2001.
       (2) Special needs foreign adoptions are limited to a 
     maximum exclusion of $5,000 (rather than $6,000) for 
     qualified adoption expenses until December 31, 2001, at which 
     time the exclusion is repealed.
       (3) The taxpayer is required to provide available 
     information about the name, age, and taxpayer identification 
     number of each adopted child.
       Taxpayer identification numbers
       The conference committee is concerned that problems may 
     arise in processing tax returns of adopting parents because 
     of unavoidable delays involved in obtaining a social security 
     number of a child who is being adopted. The conference 
     understands that the Internal Revenue Service recognizes 
     these concerns and is committed to working with the Congress 
     to develop as soon as possible an administrative solution 
     that minimizes the burdens imposed on adopting parents while 
     balancing processing and potential compliance considerations.
       Effective date
       The conference agreement follows the House bill and the 
     Senate amendment.
       The conferees wish to clarify the operation of the 
     effective date by way of an example. Suppose that, in the 
     course of attempting to adopt a child, a taxpayer incurs 
     $1,000 in qualified adoption expenses in November, 1996, and 
     an additional $3,000 in qualified adoption expenses in 
     February, 1997, when the adoption becomes final. The taxpayer 
     is entitled to claim a credit for tax year 1997 only with 
     respect to the $3,000 of qualified adoption expenses in 
     February, 1997. The taxpayer is never entitled to claim a 
     credit with respect to the $1,000 in qualified adoption 
     expenses in November, 1996, because those expenses were 
     incurred prior to the effective date of this provision.


8. Six-month delay in implementation of electronic fund transfer system 
                    for collection of certain taxes

     Present law
       Employers are required to withhold income taxes and FICA 
     taxes from wages paid to

[[Page H9641]]

     their employees. Employers also are liable for their portion 
     of FICA taxes, excise taxes, and estimated payments of their 
     corporate income tax liability.
       The Code requires the development and implementation of an 
     electronic fund transfer system to remit these taxes and 
     convey deposit information directly to the Treasury (Code 
     sec. 6302(h)). The Electronic Federal Tax Payment System 
     (``EFTPS'') was developed by Treasury in response to this 
     requirement.\48\ Employers must enroll with one of two 
     private contractors hired by the Treasury. After enrollment, 
     employers generally initiate deposits either by telephone or 
     by computer.
---------------------------------------------------------------------------
     \48\ Treasury had earlier developed TAXLINK as the prototype 
     for EFTPS. TAXLINK has been operational for several years; 
     EFTPS is currently becoming operational. Employers currently 
     using TAXLINK will ultimately be required to participate in 
     EFTPS.
---------------------------------------------------------------------------
       The new system is phased in over a period of years by 
     increasing each year the percentage of total taxes subject to 
     the new EFTPS system. For fiscal year 1994, 3 percent of the 
     total taxes are required to be made by electronic fund 
     transfer. These percentages increased gradually for fiscal 
     years 1995 and 1996. For fiscal year 1996, the percentage was 
     20.1 percent (30 percent for excise taxes and corporate 
     estimated tax payments). For fiscal year 1997, these 
     percentages increased significantly, to 58.3 percent (60 
     percent for excise taxes and corporate estimated tax 
     payments). The specific implementation method required to 
     achieve the target percentages is set forth in Treasury 
     regulations. Implementation began with the largest 
     depositors. Treasury has implemented the 1997 percentages by 
     requiring that all employers who deposit more than $50,000 in 
     1995 must begin using EFTPS by January 1, 1997.
     House bill
       No provision.
     Senate amendment
       No provision.
     Conference agreement
       The conferees are concerned that the initial mailing by IRS 
     to employers that informed them of the 1997 requirements 
     confused many of these employers. The conferees believe that 
     it is necessary to provide additional time prior to 
     implementation of the 1997 requirements so that employers may 
     be better informed about their responsibilities. Accordingly, 
     the conference agreement provides that the increase in the 
     required percentages for fiscal year 1997 (which, pursuant to 
     Treasury regulations, was to take effect on January 1, 1997) 
     shall not take effect until July 1, 1997.
       Effective date.--The provision is effective on the date of 
     enactment.

                          VI. REVENUE OFFSETS


     1. Modifications of the Puerto Rico and possession tax credit

       (Sec. 1601 of the bill and the Senate amendment.)
     Present law
       Certain domestic corporations with business operations in 
     the U.S. possessions (including, for this purpose, Puerto 
     Rico and the U.S. Virgin Islands) may elect the Puerto Rico 
     and possession tax credit which generally eliminates the U.S. 
     tax on certain income related to their operations in the 
     possessions. In contrast to the foreign tax credit, the 
     Puerto Rico and possession tax credit is a ``tax sparing'' 
     credit. That is, the credit is granted whether or not the 
     electing corporation pays income tax to the possession. 
     Income eligible for the credit under this provision falls 
     into two broad categories: (1) possession business income, 
     which is derived from the active conduct of a trade or 
     business within a U.S. possession or from the sale or 
     exchange of substantially all of the assets that were used in 
     such a trade or business; and (2) qualified possession source 
     investment income (``QPSII''), which is attributable to the 
     investment in the possession or in certain Caribbean Basin 
     countries of funds derived from the active conduct of a 
     possession business.
       In order to qualify for the Puerto Rico and possession tax 
     credit for a taxable year, a domestic corporation must 
     satisfy two conditions. First, the corporation must derive at 
     least 80 percent of it gross income for the three-year period 
     immediately preceding the close of the taxable year from 
     sources within a possession. Second, the corporation must 
     derive at least 75 percent of its gross income for that same 
     period from the active conduct of a possession business.
       A domestic corporation that has elected the Puerto Rico and 
     possession tax credit and that satisfies these two conditions 
     for a taxable year generally is entitled to a credit based on 
     the U.S. tax attributable to the sum of the taxpayer's 
     possession business income and its QPSII. However, the amount 
     of the credit attributable to possession business income is 
     subject to the limitations enacted by the Omnibus Budget 
     Reconciliation Act of 1993. Under the economic activity 
     limit, the amount of the credit with respect to such income 
     cannot exceed an amount equal to the sum of (i) 60 percent of 
     the taxpayer's qualifying wage and fringe benefit expenses, 
     (ii) specified percentages of the taxpayer's depreciation 
     allowances with respect to qualifying tangible property, and 
     (iii) in certain cases, the taxpayer's qualifying possession 
     income taxes. The credit calculated under the economic 
     activity limit is referred to herein as the ``wage credit.'' 
     In the alternative, the taxpayer may elect to apply a limit 
     equal to the applicable percentage of the credit that would 
     otherwise be allowable with respect to possession business 
     income; the applicable percentage is phased down to 50 
     percent for 1995, 45 percent for 1997, and 40 percent for 
     1998 and thereafter. The credit calculated under the 
     applicable percentage limit is referred to herein as the 
     ``income credit.'' The amount of the Puerto Rico and 
     possession tax
     House bill
       In general.--The House bill generally repeals the Puerto 
     Rico and possession tax credit for taxable years beginning 
     after December 31, 1995. However, the House bill provides 
     grandfather rules under which a corporation that is an 
     existing credit claimant would be eligible to claim credits 
     for a transition period. A special transition rule applies to 
     the credit attributable to operations in Guam, American 
     Samoa, and the Commonwealth of the Northern Mariana Islands.
       For taxable years beginning after December 31, 1995, the 
     Puerto Rico and possession tax credit applies only to a 
     corporation that qualifies as an existing credit claimant (as 
     defined below). The determination of whether a corporation is 
     an existing credit claimant is made separately for each 
     possession. A corporation that is an existing credit claimant 
     with respect to a possession is entitled to the credit for 
     income from such possession for taxable years beginning after 
     December 31, 1995, subject to the limitations described 
     below. The credit, subject to such limitations, is computed 
     separately for each possession with respect to which the 
     corporation is an existing credit claimant.
       The Puerto Rico and possession tax credit attributable to 
     QPSII is eliminated for taxable years beginning after 
     December 31, 1995. For taxable years beginning after December 
     31, 1995, the Puerto Rico and possession tax credit is 
     available only with respect to possession business income. 
     The computation of the Puerto Rico and possession tax credit 
     attributable to possession business income during the 
     grandfather period depends upon whether the corporation is 
     using the economic activity limit or the applicable 
     percentage limit.
       Wage credit.--For corporations that are existing credit 
     claimants with respect to a possession and that use the wage 
     credit method, the possession tax credit attributable to 
     business income from the possession (determined under the 
     wage credit method) continues to be determined as under 
     present law for taxable years beginning after December 31, 
     1995 and before January 1, 2002. For taxable years beginning 
     after December 31, 2001 and before January 1, 2006, the 
     corporation's possession business income that is eligible for 
     the wage credit is subject to a cap computed as described 
     below. For taxable years beginning in 2006 and thereafter, 
     the credit attributable to possession business income 
     (determined under the wage credit method) is eliminated.
       The House bill adds to the Code a new section which 
     provides a credit determined under the wage credit method for 
     business income from Puerto Rico. Such credit is computed 
     under the rules described above with respect to the 
     possession tax credit determined under the wage credit 
     method. Such section applies for taxable years beginning 
     after December 31, 1995 and before January 1, 2006.
       Income credit.--For corporations that are existing credit 
     claimants with respect to a possession and that elected to 
     use the income credit method and not to use the wage credit 
     method, the Puerto Rico and possession tax credit 
     attributable to business income from the possession continues 
     to be determined as under present law for taxable years 
     beginning after December 31, 1995 and before January 1, 1998. 
     For taxable years beginning after December 31, 1997 and 
     before January 1, 2006, the corporation's possession business 
     income tax is eligible for the credit is subject to a cap 
     computed as described below. For taxable years beginning in 
     2006 and thereafter, the credit attributable to possession 
     business income (determined under the income credit method) 
     is eliminated.
       A corporation that had elected to use the income credit 
     method is permitted to revoke that election under present 
     law. Under the House bill, such a revocation is required to 
     be made not later than with respect to the first taxable year 
     beginning after December 31, 1996; such revocation, if made, 
     applies to such taxable year and to all subsequent taxable 
     years. Accordingly, a corporation that had an election in 
     effect to use the income credit method could revoke such 
     election effective for its taxable year beginning in 1997 and 
     thereafter; such corporation would continue to use the income 
     credit method for its taxable year beginning in 1996 and 
     would use the wage credit method for its taxable year 
     beginning in 1997 and thereafter.
       Computation of income cap.--The cap on a corporation's 
     possession business income that is eligible for the Puerto 
     Rico and possession tax credit is computed based on the 
     corporation's possession business income for the base period 
     years (``average adjusted base period possession business 
     income''). Average adjusted base period possession business 
     income is the average of the adjusted possession business 
     income for each of the corporation's base period years. For 
     the purpose of this computation, the corporation's possession 
     business income for a base period year is adjusted by an 
     inflation factor that reflects inflation from such year to 
     1995.

[[Page H9642]]

     In addition, as a proxy for real growth in income throughout 
     the base period, the inflation factor is increased by 5 
     percentage points compounded for each year from such year to 
     the corporation's first taxable year beginning on or after 
     October 14, 1995.
       The corporation's base period years generally are three of 
     the corporation's five most recent years ending before 
     October 14, 1995, determined by disregarding the taxable 
     years in which the adjusted possession business incomes were 
     highest and lowest. For purposes of this computation, only 
     years in which the corporation had significant possession 
     business income are taken into account. A corporation is 
     considered to have significant possession business income for 
     a taxable year if such income exceeds two percent of the 
     corporation's possession business income for the each of the 
     six taxable years ending with the first taxable year ending 
     on or after October 14, 1995. If the corporation has 
     significant possession business income for only four of the 
     five most recent taxable years ending before October 14, 
     1995, the base period years are determined by disregarding 
     the year in which the corporation's possession business 
     income was lowest. If the corporation has significant 
     possession business income for three years or fewer of such 
     five years, then the base period years are all such years. If 
     there is no year of such five taxable years in which the 
     corporation has significant possession business income, then 
     the corporation is permitted to use as its base period its 
     first taxable year ending on or after October 14, 1995; for 
     this purpose, the amount of possession business income taken 
     into account is the annualized amount of such income for the 
     portion of the year ended September 30, 1995.
       As one alternative, the corporation may elect to use its 
     taxable year ending in 1992 as its base period (with the 
     adjusted possession business income for such year 
     constituting its cap). As another alternative, the 
     corporation may elect to use as its cap the annualized amount 
     of its possession business income for the first ten months of 
     calendar year 1995, calculated by excluding any extraordinary 
     items (as determined under generally accepted accounting 
     principles) for such period. For this purpose, it is intended 
     that transactions with a related party that are not in the 
     ordinary course of business will be considered to be 
     extraordinary items.
       If a corporation's possession business income in a year for 
     which the cap is applicable exceeds the cap, then the 
     corporation's possession business income for purposes of 
     computing its Puerto Rico and possession tax credit for the 
     year is an amount equal to the cap. The corporation's credit 
     continues to be subject to either the economic activity limit 
     or the applicable percentage limit, with such limit applied 
     to the corporation's possession business income as reduced to 
     reflect the application of the cap.
       Qualification as existing credit claimant.--A corporation 
     is an existing credit claimant with respect to a possession 
     if (1) the corporation is engaged in the active conduct of a 
     trade or business within the possession on October 13, 1995, 
     and (2) the corporation has elected the benefits of the 
     Puerto Rico and possession tax credit pursuant to an election 
     which is in effect for its taxable year that includes October 
     13, 1995. A corporation that adds a substantial new line of 
     business after October 13, 1995, ceases to be an existing 
     credit claimant as of the beginning of the taxable year 
     during which such new line of business is added.
       For purposes of these rules, a corporation is treated as 
     engaged in the active conduct of a trade or business within a 
     possession on October 13, 1995, if such corporation is 
     engaged in the active conduct of such trade or business 
     before January 1, 1996, and such corporation has in effect on 
     October 13, 1995, a binding contract for the acquisition of 
     assets to be used in, or the sale of property to be produced 
     in, such trade or business. For example, if a corporation has 
     in effect on October 13, 1995, binding contracts for the 
     lease of a facility and the purchase of machinery to be used 
     in manufacturing business in a possession and if the 
     corporation begins actively conducting that manufacturing 
     business in the possession before January 1, 1996, that 
     corporation would be an existing credit claimant. A change in 
     the ownership of a corporation will not affect its status as 
     an existing credit claimant.
       In determining whether a corporation has added a 
     substantial new line of business, the Committee intends that 
     principles similar to those reflected in Treas. Reg. section 
     1.7704-2(d) (relating to the transition rules for existing 
     publicly traded partnerships) apply. For example, a 
     corporation that modifies its current production methods, 
     expands existing facilities, or adds new facilities to 
     support the production of its current product lines and 
     products within the same four-digit Industry Number Standard 
     Industrial Classification Code (Industry SIC Code) will not 
     be considered to have added a substantial new line of 
     business. In this regard, the Committee intends that the fact 
     that a business which is added is assigned a different four-
     digit Industry SIC Code than is assigned to an existing 
     business of the corporation will not automatically cause the 
     corporation to be considered to have added a new line of 
     business. For example, a pharmaceutical corporation that 
     begins manufacturing a new drug will not be considered to 
     have added a new line of business. Moreover, a pharmaceutical 
     corporation that begins to manufacture a complete product 
     from the bulk active chemical through the finished dosage 
     form, a process that may be assigned two separate four-digit 
     Industry SIC Codes, will not be considered to have added a 
     new line of business even though it was previously engaged in 
     activities that involved only a portion of the entire 
     manufacturing process from bulk chemicals to finished 
     dosages. The Committee further intends that, in the case of a 
     merger of affiliated possession corporations that are 
     existing credit claimants, the corporation that survives the 
     merger will not be considered to have added a substantial new 
     line of business by reason of its operation of the existing 
     business of the affiliate that was merged into it.
       Special rules for certain possessions.--A special 
     transition rule applies to the Puerto Rico and possession tax 
     credit with respect to operations in Guam, American Samoa, 
     and the Commonwealth of the Northern Mariana Islands. For any 
     taxable year beginning after December 31, 1995, and before 
     January 1, 2006, a corporation that is an existing credit 
     claimant with respect to one of these possessions for such 
     year continues to determine its credit with respect to 
     operations in such possession as under present law. For 
     taxable years beginning in 2006 and thereafter, the Puerto 
     Rico and possession tax credit with respect to operations in 
     Guam, American Samoa, and the Commonwealth of the Northern 
     Mariana Islands is eliminated.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 1995.
     Senate amendment
       The Senate amendment is the same as the House bill with 
     three modifications.
       Under the Senate amendment, the Puerto Rico and possession 
     tax credit attributable to QPSII continues to be allowed for 
     QPSII earned before July 1, 1996.
       Under the Senate amendment, a corporation that is an 
     existing credit claimant continues to be eligible to claim 
     credits under the wage credit method for taxable years 
     beginning after December 31, 2005. For taxable years 
     beginning in 2006 and thereafter, in computing the economic 
     activity limit on the wage credit, the percentage of the 
     corporation's qualifying wage and fringe benefit expenses 
     that is taken into account is reduced from 60 percent of 40 
     percent. The corporation's business income that is eligible 
     for the wage credit continues to be subject to the income 
     cap. For taxable years beginning in 2006 and thereafter, a 
     corporation that is an existing credit claimant with respect 
     to Guam, American Samoa, or the Commonwealth of the Northern 
     Mariana Islands continues to be eligible to claim credits 
     under the wage credit method, determined under the foregoing 
     rules, with respect to its operations in such possession.
       Under the Senate amendment, the Treasury Department is 
     directed to study the effect on the economy of Puerto Rico of 
     the wage credit (under present law and as amended), including 
     an analysis of the impact of such credit on unemployment 
     rates and economic growth. The Treasury Department is 
     directed to submit to the House Committee on Ways and Means 
     and the Senate Committee on Finance reports on its findings 
     with respect to the impact of the wage credit within two 
     years of the date of enactment and every four years 
     thereafter.
       Effective date.--Same as the House bill.
     Conference agreement
       The conference agreement follows the House bill with 
     modifications.
       Under the conference agreement, as under the Senate 
     amendment, the Puerto Rico and possession tax credit 
     attributable to QPSII continues to be allowed for QPSII 
     earned before July 1, 1996. The conferees note that the 
     repeal of the credit for QPSII will have the effect of 
     eliminating a provision that has supported economic 
     development and trade-related growth in the Caribbean Basin 
     and served U.S. interests in the region. The loss of this 
     program should not be interpreted as a loss of U.S. interest 
     in the region. The conferees continue to support efforts 
     furthering stable commercial and economic relations in that 
     region.
       Under the conference agreement, a corporation that acquires 
     all the assets of a trade or business of an existing credit 
     claimant will qualify as an existing credit claimant. The 
     adjusted base period income of the existing credit claimant 
     from which the assets are acquired is divided between such 
     corporation and the corporation that acquires such assets. It 
     is intended that regulations or other guidance will prevent 
     taxpayers from abusing this rule through transactions that 
     manipulate base period income amounts.
       Under the conference agreement, for purposes of estimated 
     tax payments due before October 1, 1996, a taxpayer whose tax 
     liability is increased by reason of the modifications of the 
     Puerto Rico and possession tax credit is not required to make 
     a deposit with respect to more than 50 percent of such 
     increase; any amount not deposited by such date will be 
     required to be deposited, without penalty or interest, on the 
     next estimated tax payment due date.


     2. Repeal 50-percent interest income exclusion for financial 
                      institution loans to ESOP's

       (Sec. 1602 of the House bill and the Senate amendment.)
     Present law
       A bank, insurance company, regulated investment company, or 
     a corporation actively engaged in the business of lending 
     money may generally exclude from gross income 50

[[Page H9643]]

     percent of interest received on an ESOP loan (sec. 133). The 
     50-percent interest exclusion only applies if: (1) 
     immediately after the acquisition of securities with the loan 
     proceeds, the ESOP owns more than 50 percent of the 
     outstanding stock or more than 50 percent of the total value 
     of all outstanding stock of the corporation; (2) the ESOP 
     loan term will not exceed 15 years; and (3) the ESOP provides 
     for full pass-through voting to participants on all allocated 
     shares acquired or transferred in connection with the loan.
     House bill
       The provision repeals the 50-percent interest exclusion 
     with respect to ESOP's.
       Effective date.--The provision generally is effective with 
     respect to loans made after October 13, 1995. The repeal of 
     the exclusion does not apply to the refinancing of an ESOP 
     loan originally made on or before October 13, 1995, provided: 
     (1) such refinancing loan otherwise meets the requirements of 
     section 133 in effect on or before October 13, 1993; (2) the 
     outstanding principal amount of the loan is not increased; 
     and (3) the term of the refinancing loan does not extend 
     beyond the term of the original ESOP loan.
     Senate amendment
       Same as the House bill.
       Effective date.--The provision is effective with respect to 
     loans made after the date of enactment, other than loans made 
     pursuant to a written binding contract in effect before June 
     10, 1996, and at all times thereafter before such loan is 
     made. The repeal of the 50-percent interest exclusion does 
     not apply to the refinancing of an ESOP loan originally made 
     on or before the date of enactment or pursuant to a binding 
     contract in effect before June 10, 1996, provided: (1) such 
     refinancing loan otherwise meets the requirements of section 
     133 in effect on the day before the date of enactment; (2) 
     the outstanding principal amount of the loan is not 
     increased; and (3) the term of the refinancing loan does not 
     extend beyond the term of the original ESOP loan.
     Conference agreement
       The conference agreement follows the Senate amendment.


   3. Apply look-through rule for purposes of characterizing certain 
    subpart F insurance income as unrelated business taxable income

       (Sec. 1602 of the House bill.)
     Present law
       An organization that is exempt from tax by reason of Code 
     section 501(a) (e.g., a charity, business league, or 
     qualified pension trust) is nonetheless subject to tax on its 
     unrelated business taxable income (UBTI) (sec. 511). 
     Unrelated business taxable income generally excludes dividend 
     income (sec. 512(b)(1)).
       Special rules apply to a tax-exempt organization described 
     in section 501(c)(3) or (c)(4) (i.e., a charity or social 
     welfare or organization) that is engaged in commercial-type 
     insurance activities. Such activities are treated as an 
     unrelated trade or business and the tax-exempt organization 
     is subject to tax on the income from such insurance 
     activities (including investment income that might otherwise 
     be excluded from the definition of unrelated business taxable 
     income) under subchapter L (sec. 501(m)(2)).\49\ Accordingly, 
     a tax-exempt organization described in section 501(c)(3) or 
     (c)(4) generally is subject to tax on its income from 
     commercial-type insurance activities in the same manner as a 
     taxable insurance company.
---------------------------------------------------------------------------
     \49\ If the commercial-type insurance activities constitute a 
     substantial part of the organization's activities, the 
     organization will not be tax-exempt under section 501(c)(3) 
     or (c)(4) (sec. 501(m)(1)).
---------------------------------------------------------------------------
       A tax-exempt organization that conducts insurance 
     activities through a foreign corporation is not subject to 
     U.S. tax with respect to such activities. Under the subpart F 
     rules, the United States shareholders (as defined in sec. 
     951(b)) of a controlled foreign corporation (CFC) are 
     required to include in income currently their shares of 
     certain income of the CFC, whether or not such income is 
     actually distributed to the shareholders. This current 
     inclusion rule applies to certain insurance income of the CFC 
     (sec. 953). However, income inclusions under subpart F have 
     been characterized as dividends for unrelated business income 
     tax purposes.\50\ Accordingly, insurance earned by the CFC 
     that is includible in income currently under subpart F by the 
     taxable United States shareholders of the CFC is excluded 
     from unrelated business taxable income in the case of a 
     shareholder that is a tax-exempt organization.
---------------------------------------------------------------------------
     \50\The Internal Revenue Service has concluded in private 
     letter rulings, which are not to be used or cited as 
     precedent, that subpart F inclusions are treated as dividends 
     received by the United States shareholders (a tax-exempt 
     entity) for purposes of computing the shareholder's UBTI (see 
     LTRs 9407007 (November 12, 1993), 90227051 (April 13, 1990), 
     9024086 (March 22, 1990), 9024026 (March 15, 1990), 8922047 
     (March 6, 1989), 8836037 (June 14, 1988), 8819034 (February 
     10, 1988)). However, the IRS issued on private ruling in 
     which it concluded that subpart F inclusions are treated as 
     if the underlying income were realized directly by the United 
     States shareholder (a tax-exempt entity) for purposes of 
     computing the shareholder's UBTI (see LTR 9043039 (July 30, 
     1990)). This ruling gave no explanation for the IRS's 
     departure from the position in its prior rulings, and the IRS 
     reiterated in a subsequent ruling the position that subpart F 
     inclusions are characterized as dividends for purposes of 
     computing UBTI. Moreover, the application of the look-through 
     rule in the ruling in question did not affect the ultimate 
     result in the ruling because the income to which the subpart 
     F inclusion was attributable was of a type that was 
     excludible from UBTI. The conferees believe that LTR 9043039 
     (July 30, 1990) is incorrect in its application of a look-
     through rule in characterizing income inclusions under 
     subpart F for unrelated business income tax purposes.
---------------------------------------------------------------------------
     House bill
       The House bill applies a look-through rule in 
     characterizing certain subpart F insurance income for 
     unrelated business income tax purposes. Under the House bill, 
     the look-through rule applies to amounts that constitute 
     insurance income currently includible in gross income under 
     the subpart F rules and that are not attributable to the 
     insurance of risks of (1) the tax-exempt organization itself, 
     (2) certain tax-exempt affiliates of such organization, or 
     (3) an officer or director of, or an individual who (directly 
     or indirectly) performs services for, the tax-exempt 
     organization (or certain tax-exempt affiliates) provided that 
     the insurance covers primarily risks associated with the 
     individual's performance of services in connection with the 
     tax-exempt organization (or tax-exempt affiliates). For 
     purposes of this provision, a tax-exempt organization is an 
     affiliate of another tax-exempt organization if (1) the two 
     organizations have significant common purposes and 
     substantial common membership of (2) the two organizations 
     have directly or indirectly substantial common direction or 
     control.
       Effective date.--The provision applies to amounts 
     includible in gross income in taxable years beginning after 
     December 31, 1995.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill with one 
     modification. For purposes of the provision, two or more 
     organizations generally are treated as affiliates if such 
     organizations are colleges or universities described in 
     section 170(b)(1)(A)(ii) or hospitals or other medical 
     entities described in section 170(b)(1)(A)(iii). Accordingly, 
     in applying the provision to two or more such organizations 
     that are the shareholders of a CFC, the exceptions from the 
     look-through rule apply to each shareholder's share of the 
     income attributable to insurance of risks of all such 
     shareholders; the look-through rule applies to a 
     shareholder's share of any income attributable to insurance 
     of risks of a third party.


            4. DEPRECIATION UNDER THE INCOME FORECAST METHOD

       (Sec. 1604 of the House bill.)
     Present law
       In general
       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and is allowed to recover such 
     cost over time through allowances for depreciation or 
     amortization.
       The ``income forecast'' method is an allowable method for 
     calculating depreciation for certain property. Under the 
     income forecast method, the depreciation deduction for a 
     taxable year for a property is determined by multiplying the 
     cost of the property \51\ (less estimated salvage value) by a 
     fraction, the numerator of which is the income generated by 
     the property during the year and the denominator of which is 
     the total forecasted or estimated income to be derived from 
     the property during its useful life. The income forecast 
     method has been held to be applicable for computing 
     depreciation deductions for motion picture films, television 
     films and taped shows, books, patents, master sound 
     recordings and video games. The total forecasted or estimated 
     income to be derived from a property is to be based on the 
     conditions known to exist at the end of the period for which 
     depreciation is claimed.
---------------------------------------------------------------------------
     \51\ In Transamerica Corp. v. U.S., 999 F.2d 1362, (9th Cir. 
     1993), the Ninth Circuit overturned the District Court and 
     held that, for purposes of applying the income forecast 
     method to a film, the ``cost of a film'' includes 
     ``participation'' and ``residual'' payments (i.e., payments 
     to producers, writers, directors, actors, guilds, and others 
     based on a percentage of the profits from the film) even 
     though these payments were contingent on the occurrence of 
     future events. It is unclear to what extent, if any, the 
     Transamerica decision applies to amounts incurred after the 
     enactment of the economic performance rules of Code section 
     461(h), as contained in the Deficit Reduction Act of 1984.
---------------------------------------------------------------------------
     House bill
       The House bill makes several amendments to the income 
     forecast method of determining depreciation deductions.
       First, the bill provides that income to be taken into 
     account under the income forecast method includes all 
     estimated income generated by the property. In applying this 
     rule, a taxpayer generally need not take into account income 
     expected to be generated after the close of the tenth taxable 
     year after the year the property was placed in service. 
     Pursuant to a special rule, in the case of television and 
     motion picture films, the income from the property shall 
     include income from the financial exploitation of characters, 
     designs, scripts, scores, and other incidental income 
     associated with such films, but only to the extent the income 
     is earned in connection with the ultimate use of such items 
     by, or the ultimate sale of merchandise to, persons who are 
     not related to the taxpayer (within the meaning of sec. 
     267(b)). In addition, pursuant to another special rule, if a 
     taxpayer produces a television series and initially does not 
     anticipate syndicating the episodes from the series, the

[[Page H9644]]

     forecasted income for the episodes of the first three years 
     of the series need not take into account any future 
     syndication fees (unless the taxpayer enters into an 
     arrangement to syndicate such episodes during such period). 
     The 10th-taxable-year rule, the financial exploitation rule, 
     and the syndication rule apply for purposes of the lookback 
     method described below.
       Second, the adjusted basis of property that may be taken 
     into account under the income forecast method only will 
     include amounts that satisfy the economic performance 
     standard of section 461(h).
       Finally, taxpayers that claim depreciation deductions under 
     the income forecast method are required to pay (or would 
     receive) interest based on the recalculation of depreciation 
     under a ``look-back'' method. The ``look-back'' method is 
     applied in any ``recomputation year'' by (1) comparing 
     depreciation deductions that had been claimed in prior 
     periods to depreciation deductions that would have been 
     claimed had the taxpayer used actual, rather than estimated, 
     total income from the property; (2) determining the 
     hypothetical overpayment or underpayment of tax based on this 
     recalculated depreciation; and (3) applying the overpayment 
     rate of section 6621 of the Code. Except as provided in 
     Treasury regulations, a ``recomputation year'' is the third 
     and tenth taxable year after the taxable year the property 
     was placed in service, unless the actual income from the 
     property for each taxable year ending with or before the 
     close of such years was within 10 percent of the estimated 
     income from the property for such years. Property that had a 
     basis of $100,000 or less when placed in service is not 
     subject to the look-back method.
       Effective date.--The provision is effective for property 
     placed in service after September 13, 1995, unless placed in 
     service pursuant to a binding written contract in effect on 
     such date and all times thereafter.
     Senate amendment
       No provision. A similar provision was contained in section 
     402 of the Senate amendment to H.R. 3286, the ``Adoption, 
     Promotion and Stability Act of 1996,'' as favorably reported 
     by the Senate Finance Committee on June 12, 1996.
     Conference agreement
       The conference agreement follows the provision that was 
     contained in section 402 of the Senate amendment to H.R. 
     3286, the ``Adoption, Promotion and Stability Act of 1996,'' 
     as favorably reported by the Senate Finance Committee on June 
     12, 1996. Thus, the conference agreement provides the 
     following modifications to the income forecast method of 
     present law.
       Determination of estimated income
       First, the agreement provides that income to be taken into 
     account under the income forecast method includes all 
     estimated income generated by the property. In applying this 
     rule, a taxpayer generally need not take into account income 
     expected to be generated after the close of the tenth taxable 
     year after the year the property was placed in service. In 
     the case of a film, television show, or similar property, 
     such income includes, but is not necessarily limited to, 
     income form foreign and domestic theatrical, television, and 
     other releases and syndications; and video tape releases, 
     sales, rentals, and syndications.
       Pursuant to a special rule, in the case of television and 
     motion picture films, the income from the property shall 
     include income from the financial exploitation of characters, 
     designs, scripts, scores, and other incidental income 
     associated with such films, but only to the extent the income 
     is earned in connection with the ultimate use of such items 
     by, or the ultimate sale of merchandise to, persons who are 
     not related to the taxpayer (within the meaning of sec. 
     267(b)). As an example of this special rule, assume a 
     taxpayer produces a motion picture the subject of which is 
     the adventures of a newly-created fictional character. If the 
     taxpayer produces dolls or T-shirts using the character's 
     image, income from the sales of these products by the 
     taxpayer to consumers would be taken into account in 
     determining depreciation for the motion picture under the 
     income forecast method. Similarly, if the taxpayer enters 
     into any licensing or similar agreement with an unrelated 
     party with respect to the use of the image, such licensing 
     income would be taken into account in determining 
     depreciation for the motion picture. However, if the taxpayer 
     uses the character's image to promote a ride at an amusement 
     park that is wholly-owned by the taxpayer, no portion of the 
     admission fees for the amusement park are to be taken into 
     account under the income forecast method with respect to the 
     motion picture.
       In addition, pursuant to another special rule, if a 
     taxpayer produces a television series and initially does not 
     anticipate syndicating the episodes from the series, the 
     forecasted income for the episodes of the first three years 
     of the series need not take into account any future 
     syndication fees (unless the taxpayer enters into an 
     arrangement to syndicate such episodes during such period).
       The 10th-taxable-year rule, the financial exploitation 
     rule, and the syndication rule apply for purposes of the 
     look-back method described below.
       Determination and treatment of costs of property
       The adjusted basis of property that may be taken into 
     account under the income forecast method only will include 
     amounts that satisfy the economic performance standard of 
     section 461(h).\52\ For this purpose, if the taxpayer incurs 
     a noncontingent liability to acquire property subject to the 
     income forecast method from another person, economic 
     performance will be deemed to occur with respect to such 
     noncontingent liability when the property is provided to the 
     taxpayer. In addition, the recurring item exception of 
     section 461(h)(3) will apply in a manner similar to the way 
     such exception applies under present law. Thus, expenditures 
     that relate to an item of property that are incurred in the 
     taxable year following the taxable year in which the property 
     is placed in service may be taken into account in the year 
     the property is placed in service to the extent such 
     expenditures meet the recurring item exception for such year.
---------------------------------------------------------------------------
     \52\ No inference is intended as to the proper application of 
     section 461(h) to the income forecast method under present 
     law.
---------------------------------------------------------------------------
       Any costs that are taken into account after the property is 
     placed in service are treated as a separate piece of property 
     to the extent (1) such amounts are significant and are 
     expected to give rise to a significant increase in the income 
     from the property that was not included in the estimated 
     income from the property, or (2) such costs are incurred more 
     than 10 years after the property was placed in service. To 
     the extent costs are incurred more than 10 years after the 
     property was placed in service and give rise to a separate 
     piece of property for which no income is generated, such 
     costs may be written off and deducted they are incurred. For 
     example, assume a taxpayer places property subject to the 
     income forecast method in service during a taxable year and 
     all income from the property is generated in the following 
     four-year period. If the taxpayer incurs additional costs 
     with respect to that property more than 10 years later (e.g., 
     a payment pursuant to a deferred contingent compensation 
     arrangement to a person that produced the property), such 
     costs may be deducted in the year incurred provided no more 
     income is generated with respect to such costs or the 
     original property.
       Any costs that are not recovered by the end of the tenth 
     taxable year after the property was placed in service may be 
     taken into account as depreciation in such year.
       Look-back method
       Finally, taxpayers that claim depreciation deductions under 
     the income forecast method are required to pay (or would 
     receive) interest based on the recalculation of depreciation 
     under a ``look-back'' method.\53\ The ``look-back'' method is 
     applied in any ``recomputation year'' by (1) comparing 
     depreciation deductions that had been claimed in prior 
     periods of depreciation deductions that would have been 
     claimed had the taxpayer used actual, rather than estimated, 
     total income from the property; (2) determining the 
     hypothetical overpayment or underpayment of tax based on this 
     recalculated depreciation; and (3) applying the overpayment 
     rate of section 6621 of the Code.
---------------------------------------------------------------------------
     \53\ The ``look-back'' method of the provision resembles the 
     look-back method applicable to long-term contracts accounted 
     for under the percentage-of-completion method of present-law 
     sec. 460.
---------------------------------------------------------------------------
       Except as provided in Treasury regulations, a 
     ``recomputation year'' is the third and tenth taxable year 
     after the taxable year the property was placed in service, 
     unless the actual income from the property for each taxable 
     year ending with or before the close of such years was within 
     10 percent of the estimated income from the property for such 
     years. The Secretary of the Treasury has the authority to 
     allow a taxpayer to delay the initial application of the 
     look-back method where the taxpayer may be expected to have 
     significant income from the property after the third taxable 
     year after the taxable year the property was placed in 
     service (e.g., the Treasury Secretary may exercise such 
     authority where the depreciable life of the property is 
     expected to be longer than three years).
       In applying the look-back method, any cost that is taken 
     into account after the property was placed in service may be 
     taken into account by discounting (using the Federal mid-term 
     rate determined under sec. 1274(d) as of the time the costs 
     were taken into account) such cost to its value as of the 
     date the property was placed in service.
       Property that had an unadjusted basis of $100,000 or less 
     is not subject to the look-back method. For this purpose, 
     ``unadjusted basis'' means the total capitalized cost of a 
     property as of the close of a recomputation year.
       The agreement provides a simplified look-back method for 
     pass-through entities.
     Effective date
       The agreement is effective for property placed in service 
     after September 13, 1995, unless produced or acquired 
     pursuant to a binding written contract in effect on such date 
     and all times thereafter. For this purpose, the binding 
     contract exception may apply to a written contract in effect 
     on the relevant dates if that contract binds a taxpayer to 
     produce, license or deliver property that will be used by the 
     other party to the contract once the property is produced.
       The agreement may apply to property placed in service in 
     taxable years that ended before the date of enactment of this 
     Act. The agreement waives additions to tax imposed under 
     sections 6654, 6655, and 6662(d) for any

[[Page H9645]]

     underpayments of tax or estimated tax for any taxable year 
     ending before the date of enactment of this Act to the extent 
     the underpayment was created or increased by the changes made 
     to the income forecast method of depreciation by the 
     provision. The application of the agreement (including the 
     look-back method) is not waived for any taxable year that 
     ends after the date of enactment of this Act.


 5. MODIFY EXCLUSION OF DAMAGES RECEIVED ON ACCOUNT OF PERSONAL INJURY 
                              OR SICKNESS

       (Sec. 1605 of the House bill and sec. 1603 of the Senate 
     amendment.)
     Present law
       Under present law, gross income does not include any 
     damages received (whether by suit or agreement and whether as 
     lump sums or as periodic payments) on account of personal 
     injury or sickness (sec. 104(a)(2)).
       The exclusion from gross income of damages received on 
     account of personal injury or sickness specifically does not 
     apply to punitive damages received in connection with a case 
     not involving physical injury or sickness. Courts presently 
     differ as to whether the exclusion applies to punitive 
     damages received in connection with a case involving a 
     physical injury or physical sickness.\54\ Certain States 
     provide that, in the case of claims under a wrongful death 
     statute, only punitive damages may be awarded.
---------------------------------------------------------------------------
     \54\ The Supreme Court recently agreed to decide whether 
     punitive damages awarded in a physical injury lawsuit are 
     excludable from gross income. O'gilvie v. U.S., 66 F.3d 1550 
     (10th Cir. 1995), cert. granted, 64 U.S.L.W. 36+39 (U.S. 
     March 25, 1996) (No. 95-966). Also, the Tax Court recently 
     held that if punitive damages are not of a compensatory 
     nature, they are not excludable from income, regardless of 
     whether the underlying claim involved a physical injury or 
     physical sickness. Bagley v. Commissioner, 105 T.C. No. 27 
     (1995).
---------------------------------------------------------------------------
       Courts have interpreted the exclusion from gross income of 
     damages received on account of personal injury or sickness 
     broadly in some cases to cover awards for personal injury 
     that do not relate to a physical injury or sickness. For 
     example, some courts have held that the exclusion applies to 
     damages in cases involving certain forms of employment 
     discrimination and injury to reputation where there is no 
     physical injury or sickness. The damages received in these 
     cases generally consist of back pay and other awards intended 
     to compensate the claimant for lost wages or lost profits. 
     The Supreme Court recently held that damages received based 
     on a claim under the Age Discrimination in Employment Act 
     could not be excluded from income.\55\ In light of the 
     Supreme Court decision, the internal Revenue Service has 
     suspended existing guidance on the tax treatment of damages 
     received on account of other forms of employment 
     discrimination.
---------------------------------------------------------------------------
     \55\ Schleier v. Commissioner, 115 S. Ct. 2159 (1995).
---------------------------------------------------------------------------
     House bill
       Include in income all punitive damages
       The House bill provides that the exclusion from gross 
     income does not apply to any punitive damages received on 
     account of personal injury or sickness whether or not related 
     to a physical injury or physical sickness. Under the House 
     bill, present law continues to apply to punitive damages 
     received in a wrongful death action if the applicable State 
     law (as in effect on September 13, 1995 without regard to 
     subsequent modification) provides, or has been construed to 
     provide by a court decision issued on or before such date, 
     that only punitive damages may be awarded in a wrongful death 
     action. No inference is intended as to the application of the 
     exclusion to punitive damages prior to the effective date of 
     the House bill in connection with a case involving a physical 
     injury or physical sickness.
       Include in income damage recoveries for nonphysical 
           injuries
       The House bill provides that the exclusion from gross 
     income only applies to damages received on account of a 
     personal physical injury or physical sickness. If an action 
     has its origin in a physical injury or physical sickness, 
     then all damages (other than punitive damages) that flow 
     therefrom are treated as payments received on account of 
     physical injury or physical sickness whether or not the 
     recipient of the damages is the injured party. For example, 
     damages (other than punitive damages) received by an 
     individual on account of a claim for loss of consortium due 
     to the physical injury or physical sickness of such 
     individual's spouse are excludable from gross income. In 
     addition, damages (other than punitive damages) received on 
     account of a claim of wrongful death continue to be 
     excludable from taxable income as under present law.
       The House bill also specifically provides that emotional 
     distress is not considered a physical injury or physical 
     sickness.\56\ Thus, the exclusion from gross income does not 
     apply to any damages received (other than for medical 
     expenses as discussed below) based on a claim of employment 
     discrimination or injury to reputation accompanied by a claim 
     of emotional distress. Because all damages received on 
     account of physical injury or physical sickness are 
     excludable from gross income, the exclusion from gross income 
     applies to any damages received based on a claim of emotional 
     distress that is attributable to a physical injury or 
     physical sickness. In addition, the exclusion from gross 
     income specifically applies to the amount of damages received 
     that is not in excess of the amount paid for medical care 
     attributable to emotional distress.
---------------------------------------------------------------------------
     \56\ It is intended that the term emotional distress includes 
     symptoms (e.g., insomnia, headaches, stomach disorders) which 
     may result from such emotional distress.
---------------------------------------------------------------------------
       No inference is intended as to the application of the 
     exclusion to damages prior to the effective date of the House 
     bill in connection with a case not involving a physical 
     injury or physical sickness.
       Effective date.--The provisions generally are effective 
     with respect to amounts received after June 30, 1996. The 
     provisions do not apply to amounts received under a written 
     binding agreement, court decree, or mediation award in effect 
     on (or issued on or before) September 13, 1995.
     Senate amendment
       Include in income all punitive damages
       The Senate amendment is the same as the House bill.
       Include in income damage recoveries for nonphysical 
           injuries
       No provision.
     Conference agreement
       Include in income all punitive damages
       The conference agreement follows the House bill and the 
     Senate amendment.
       Include in income damage recoveries for nonphysical 
           injuries
       The conference agreement follows the House bill.
       Effective date.--The provision generally are effective with 
     respect to amounts received after date of enactment. The 
     provisions do not apply to amounts received under a written 
     binding agreement, court decree, or mediation award in effect 
     on (or issued on or before) September 13, 1995.


 6. repeal advance refunds of diesel fuel tax for purchasers of diesel-
               powered automobiles, vans and light trucks

       (Sec. 1606 of the House bill.)
     Present Law
       Excise taxes are imposed on gasoline (14 cents per gallon) 
     and diesel fuel (20 cents per gallon) to fund the Federal 
     Highway Trust Fund. Before 1985, the gasoline and diesel fuel 
     tax rates were the same. The predominate highway use of 
     diesel fuel is by trucks. In 1984, the diesel excise tax rate 
     was increased above the gasoline tax as the revenue offset 
     for a reduction in the annual heavy truck use tax. Because 
     automobiles, vans, and light trucks did not benefit from the 
     use tax reductions, a provision was enacted allowing first 
     purchasers of model year 1979 and later diesel-powered 
     automobiles and light trucks a tax credit to offset this 
     increased diesel fuel tax. The credit is $102 for automobiles 
     and $198 for vans and light trucks.
     House bill
       The House bill repeals the tax credit for purchasers of 
     diesel-powered automobiles, vans and light trucks.
       Effective date.--Vehicles purchased after the date of 
     enactment.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.


     7. extension and phaseout of excise tax on luxury automobiles

       (Sec. 1604 of the bill and sec. 4001 of the Code.)
     Present law
       Present law imposes an excise tax on the sale of an 
     automobile whose price exceeds a designated threshold, 
     currently $34,000. The excise tax is imposed at a rate of 10-
     percent on the excess of the sales price above the designated 
     threshold. The $34,000 threshold is indexed for inflation.
       The tax applies to sales before January 1, 2000.
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends and phases out the luxury tax 
     on automobiles. The tax rate is reduced by one percentage 
     point per year beginning in 1996. The tax rate for sales (on 
     or after the date of enactment plus seven days) in 1996 is 9 
     percent. The tax rate for sales in 1997 is 8 percent. The tax 
     rate for sales in 1998 is 7 percent. The tax rate for sales 
     in 1999 is 6 percent. The tax rate for sales in 2000 is 5 
     percent. The tax rate for sales in 2001 is 4 percent. The tax 
     rate for sales in 2002 is 3 percent. The tax will expire 
     after December 31, 2002.
       Effective date.--The provision is effective for sales on or 
     after date of enactment plus seven days.
     Conference agreement
       The conference agreement follows the Senate amendment.


8. allow certain persons engaged in the local furnishing of electricity 
or gas to elect not to be eligible for future tax-exempt bond financing

       (Sec. 1605 of the amendment.)
       Interest on State and local government bonds generally is 
     excluded from income except where the bonds are issued to 
     provide financing for private parties. Present law includes 
     several exceptions, however, that allow tax-exempt bonds to 
     be used to provide financing for certain specifically 
     identified private parties. One such exception allows tax-
     exempt bonds to be issued to finance facilities for the 
     furnishing of electricity or gas by private parties if the 
     area served by the facilities does not exceed (1) two 
     contiguous counties or (2) a city and a contiguous

[[Page H9646]]

     county (commonly referred to as the ``local furnishing'' of 
     electricity or gas).
       Most private activity tax-exempt bonds are subject to 
     general State private activity bond volume limits of $50 per 
     resident of the State ($150 million, if greater) per year. 
     Tax-exempt bonds for facilities used in the local furnishing 
     of electricity or gas are subject to this limit. Like most 
     other private beneficiaries of tax-exempt bonds, borrowers 
     using tax-exempt bonds to finance these facilities are denied 
     interest deductions on the debt underlying the bonds if the 
     facilities cease to be used in qualified local furnishing 
     activities. Additionally, as with all tax-exempt bonds, if 
     the use of facilities financed with the bonds changes to a 
     use a not qualified for tax-exempt financing after the debt 
     is incurred, interest on the bonds becomes taxable unless 
     certain safe harbor standards are satisfied.
     House bill
       No provision.
     Senate amendment
       The Senate amendment allows persons that have received tax-
     exempt financing of facilities that currently qualify as used 
     in the local furnishing of electricity or gas to elect to 
     terminate their qualification for this tax-exempt financing 
     and to expand their service areas without incurring the 
     present-law loss of interest deductions and loss of tax-
     exemption penalties if--
       (1) no additional bonds are issued for facilities of the 
     person making the election (or were issued for any 
     predecessor) after the date of the provision's enactment;
       (2) the expansion of the person's service area is not 
     financed with any tax-exempt bond proceeds; and
       (3) all outstanding tax-exempt bounds of the person making 
     the election (and any predecessor) are redeemed no later than 
     six months after the earliest date on which redemption is not 
     prohibited under the terms of the bonds, as issued, (or six 
     months after the election, if later).
       Except as described below, the provision further limits the 
     local furnishing exception to bonds for facilities of (1) of 
     persons that qualified as engaged in that activity on the 
     date of the provision's enactment and (2) that serve areas 
     served by those persons on that date. The area which is 
     considered to be served on the date of the provision's 
     enactment consists of the geographic area in which service 
     actually is being provided on that date. Service initially 
     provided after the date of enactment to a new customer within 
     that area (e.g., as a result of new construction or of a 
     change in heating fuel type) is not treated as a service area 
     expansion.
       For purposes of this requirement, a change in the identity 
     of a person serving an area is disregarded if the change is 
     the result of a corporate reorganization where the area 
     served remains unchanged and there is common ownership of 
     both the predecessor and successor entities. To facilitate 
     compliance with electric and gas industry restructuring now 
     in progress, the Senate amendment further permits continued 
     qualification of successor entities under a ``step-in-the-
     shoes'' rule without regard to common ownership if the 
     service provided remains unchanged and the area served after 
     the facilities are transferred does not exceed the service 
     area before the transfer. For example, if facilities of a 
     person engaged in local furnishing are sold to another 
     person, the purchaser (when it engages in otherwise qualified 
     local furnishing activities) is eligible for continued tax-
     exempt financing to the same extent that the seller would 
     have been had the sale not occurred if the service provided 
     and the area served by the facilities do not change.
       Similarly, a purchaser ``steps into the shoes'' of its 
     seller with regard to eligibility (or the lack thereof) for 
     making the election to terminate its status as engaged in 
     local furnishing without imposition of certain penalties on 
     outstanding tax-exempt bonds. For example, if a person 
     engaged in local furnishing activities on the date of the 
     provision's enactment receives financing from tax-exempt 
     bonds issued after the date of the provision's enactment (and 
     is thereby ineligible to make the election), any purchaser 
     from that person likewise is ineligible.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     two modifications to the portion of the provision that 
     generally limits the benefit of tax-exempt financing to 
     persons engaged in local furnishing activities on the date of 
     the provision's enactment. First, the conference agreement 
     allows certain expansions of existing local furnishing 
     service areas to occur after the effective date of the 
     provision without affecting continued qualification under the 
     local furnishing exception, both within the existing service 
     area and in the expansion area. Under this modification, a 
     qualified local furnishing service area which includes a 
     portion of a city or a county on the effective date of the 
     provision may be expanded after that date to include other 
     portions of the same city or county. For example, if a gas 
     utility's service area on the effective date of the provision 
     includes only an urban section of a county, a subsequent 
     expansion of the utility's service area to include rural 
     portions of the same county (e.g., as a result of population 
     growth), does not in itself preclude qualification of the 
     entire, expanded service area as a local furnishing area. 
     This exception does not, however, allow expansion of local 
     furnishing service areas beyond the borders of a city or 
     county where service is being provided on the effective date 
     of the provision or interconnection of facilities serving 
     those areas with other facilities or persons in a manner not 
     permitted under present law.
       Second, the date by which an entity must be engaged in 
     local furnishing activities (i.e., have facilities for local 
     furnishing placed in service in that activity) as a condition 
     of receiving future tax-exempt financing is delayed until 
     January 1, 1997 (rather than the date of the provision's 
     enactment).
       The conferees also wish to clarify several questions that 
     have risen since passage of the Senate amendment with respect 
     to the limitation on future eligibility under the local 
     furnishing exception. First, because the conference agreement 
     precludes issuance of tax-exempt bonds except for local 
     furnishers engaged in that activity on January 1, 1997 (and 
     successors in interest), the statutory wording of the 
     provision differs from the traditional focus of the local 
     furnishing exception on a two county (or city and contiguous 
     county) area without regard to the entity providing the 
     service. The statutory references to ``persons'' engaged in 
     the local furnishing of electricity or gas contained in the 
     conference agreement are intended to prevent new entities 
     (other than successors in interest) from qualifying for tax-
     exempt financing under the local furnishing exception. They 
     are not to be construed in a manner affecting the tax-exempt 
     status of interest on any outstanding bonds or the receipt of 
     additional tax-exempt financing by an existing local 
     furnisher, provided that the facilities financed with those 
     bonds are used at all times in qualified local furnishing 
     activities (defined under present law as modified by the 
     conference agreement) and the bonds comply otherwise with the 
     Internal Revenue Code's requirements for tax-exemption.
       Second, the conferees are aware that present-law disregards 
     certain transmission of electricity pursuant to FERC orders 
     in determining whether a facility is used in the local 
     furnishing of electricity. The conference agreement retains 
     the relevant statutory rule to that effect, and the conferees 
     intend no change in that rule.
       Third, the conferees wish to clarify, by example, the 
     application of the restriction on qualified local furnishing 
     activities contained in this portion of the conference 
     agreement to certain utility transactions such as those that 
     may be expected to occur as a result of deregulation of the 
     electric and gas industries.
       Example (1).--As part of a corporate reorganization, an 
     existing local furnishing utility sells a portion of its 
     service area to a third party. The retained portion of the 
     utility's service territory continues to qualify for tax-
     exempt financing under the local furnishing exception 
     provided that no violations of that exception such as an 
     impermissible interconnection with facilities outside the 
     area occur. The determination of whether the portion of the 
     service territory that is sold to a third party continues to 
     qualify under the local furnishing exception depends on the 
     manner in which the purchaser provides service in the area it 
     acquires. If, for example, the purchaser operates in the area 
     which it purchases in a manner that otherwise qualifies under 
     the local furnishing exception, the purchaser is treated as a 
     successor in interest to the seller and facilities for the 
     area that is sold continue to be treated as used in local 
     furnishing. However, if that area is merged into, or 
     impermissibly (under present-law rules) and interconnected 
     with, another service area that does not qualify as a local 
     furnishing area after the transaction, the successor in 
     interest rule does not preserve the status as a local 
     furnishing area of the area sold.
       Example (2).--Two independent utilities, both qualifying as 
     engaged in local furnishing on the effective date of the 
     provision, serve adjoining areas. The utilities decide to 
     adjust their common service area boundary line to eliminate 
     irregular geographic patterns. The parties to this 
     transaction may be treated as successors in interest with 
     respect to the area each acquires if the resulting service 
     areas each qualify under the local furnishing exception (as 
     modified by the conference agreement).
       Example (3).--Assume the facts of Example (2), except the 
     area acquired by one of the utilities is in a county where it 
     did not provide service before the boundary line adjustments, 
     and the utility's resulting service area includes all or part 
     of three counties. That utility would no longer qualify as 
     engaged in local furnishing under present law. The result is 
     the same under the conference agreement.
       Example (4).--Assume the facts of Example (2), except the 
     utilities merge into a single company with a single service 
     area. If the resulting combined service area of the new 
     company does not exceed two counties (or a city and a 
     contiguous county), the new company continues to be eligible 
     for tax-exempt financing as a successor in interest.
       Example (5).--Assume that a local furnishing utility 
     decides to contract with a newly-formed independent power 
     generating venture to construct a generating plant that will 
     sell electricity to it exclusively for use in its service 
     area. Tax-exempt bonds may not be issued under the local 
     furnishing exception for construction of the generating 
     plant. The independent power producer was neither engaged in 
     the local furnishing of electricity to the service area 
     involved on the effective date of the conference agreement's 
     restriction nor is it a successor in interest under the 
     agreement.

[[Page H9647]]

       Effective date.--These provisions are effective on the date 
     of the conference agreement's enactment.


    9. Repeal of financial institution transition rule to interest 
                            allocation rules

     Present law
       For foreign tax credit purposes, taxpayers generally are 
     required to allocate and apportion interest expense U.S. and 
     foreign source income based on the proportion of the 
     taxpayer's total assets in each location. Such allocation and 
     apportionment is required to be made for affiliated groups 
     (as defined in sec. 864(e)(5)) as a whole rather than on a 
     subsidiary-by-subsidiary basis. However, certain types of 
     financial institutions that are members of an affiliated 
     group are treated as members of a separate affiliated group 
     for purposes of allocating and apportioning their interest 
     expense. Section 1215(c)(5) of the Tax Reform Act of 1986 
     (P.L. 99-145, 100 Stat. 2548) includes a targeted rule which 
     treats a certain corporation as a financial institution for 
     this purpose.
     House bill
       No provision.
     Senate amendment
       No provision. However section 1606 of the Senate amendment 
     to H.R. 3448 (Small Business Job Protection Act of 1996) 
     contained a provision that repeals section 1215(c)(5) of the 
     Tax Reform Act of 1986.
       Effective date.--Taxable years beginning after December 31, 
     1995.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


      10. extension of airport and airway trust fund excise taxes

       (Sec. 1607 of the Senate amendment and secs. 4041, 4081, 
     4261, and 4271 of the Code)
     Present law
       Extension of aviation taxes
       Before January 1, 1996, the following excise taxes were 
     imposed to fund the Airport and Airway Trust Fund: (1) a 10-
     percent tax on domestic air passenger tickets; (2) a 6.25-
     percent tax on domestic air freight waybills; (3) a $6-per-
     person tax on international air departures; (4) a 17.5 cents-
     per-gallon tax on jet fuel used in noncommercial aviation; 
     and (5) a 15-cents-per-gallon tax on gasoline used in 
     noncommercial aviation (14 cents per gallon of this tax 
     continues, with the revenues being deposited in the Highway 
     Trust Fund). In addition, jet fuel and gasoline used in 
     noncommercial aviation are subject to a tax of 4.3 cents per 
     gallon, the revenues of which are deposited in the General 
     Fund of the Treasury. Prior to January 1, 1996, of the total 
     tax of 19.3 cents per gallon imposed on gasoline used in 
     noncommercial aviation, 18.3 cents per gallon was collected 
     when the gasoline was removed from a pipeline or barge 
     terminal. The remaining 1 cent per gallon was imposed at the 
     retail level.
       Exemption for certain medical air transportation
       An exemption is provided from the air passenger and air 
     freight taxes for emergency medical helicopter transportation 
     if the helicopter does not take off from or land at Federally 
     assisted airports or otherwise use Federal aviation 
     facilities or services.
       Exemption for helicopters used in exploration or 
           development of hard minerals or oil or gas
       An exemption is provided from the air passenger tax for 
     helicopter transportation for exploration, development, or 
     removal of hard minerals or oil or gas if the helicopter does 
     not take off from or land at Federally assisted airports or 
     otherwise use Federal aviation facilities or services.
       Transportation of employees of affiliated companies
       Generally, when employees fly on their employer's aircraft, 
     the fuel tax applies, but when a company flies other 
     passengers for compensation or hire, the passenger ticket tax 
     applies. Employees of affiliated corporations do not cause 
     the air ticket tax to apply. The Internal Revenue Service has 
     interpreted the use limitation of present-law section 4282 on 
     an all-or nothing basis relating to aircraft of affiliated 
     groups. That is, if an aircraft is available for hire by 
     persons outside the affiliated group, all amounts paid for 
     transportation, including charges among members of an 
     affiliated group, are subject to the passenger ticket tax 
     rather than the fuels tax.\57\
---------------------------------------------------------------------------
     \57\ Rev. Rul. 770405, 1977-2 C.B. 381; Rev. Rul. 76-394, 
     1976-2 C.B. 355.
---------------------------------------------------------------------------
     House bill
       No provision.
     Senate amendment
       Extension of aviation taxes
       The five Airport and Airway Trust Fund excise taxes are 
     reinstated at the pre-1996 rates for the period beginning 
     seven days after the date of enactment through April 15, 
     1997.
       Exemption for certain medical air transportation
       The Senate amendment: (1) expands the exemption for 
     emergency medical helicopters to also include fixed-wing 
     aircraft equipped for and exclusively dedicated to acute care 
     emergency medical services; and (2) removes the reference to 
     non-use of Federally assisted airports or other Federal 
     aviation facilities or services for such medical aircraft to 
     qualify for the exemption.
       Exemption for helicopters used in exploration or 
           development of hard minerals or oil or gas
       The Senate amendment provides that the exemption for such 
     helicopter transportation applies on a flight segment basis.
       Effective date.--The Senate amendment applies for 
     transportation or fuel sold beginning seven days after the 
     date of enactment. The air passenger and air freight taxes do 
     not apply to any amount paid before that date, even if for 
     transportation occurring during the reinstatement period.
     Conference agreement
       The conference agreement follows the Senate amendment with 
     three modifications. First, the conference agreement 
     reinstates the five Airport and Airway Trust Fund excise 
     taxes at the pre-1996 rates for the period beginning seven 
     calendar days after the date of enactment and through 
     December 1, 1996 (rather than through April 15, 1997).
       Second, the conference agreement consolidates imposition of 
     the aviation gasoline excise tax, with the entire 19.3-cents-
     per-gallon rate being imposed when the gasoline is removed 
     from a pipeline or barge terminal facility.
       Third, the conference agreement provides that the 
     determination of which tax, the passenger ticket tax or the 
     fuels tax, applies to flights of aircraft of affiliated 
     groups of corporations will be made on a flight-by-flight 
     basis.
       Effective date,--Same as Senate amendment.


          11. Modify basis adjustment rules under section 1033

       (Sec. 1608 of the Senate amendment.)
     Present law
       Under section 1033, gain realized by a taxpayer from 
     certain involuntary conversions of property is deferred to 
     the extent the taxpayer purchases property similar or related 
     in service of use to the converted property within a 
     specified replacement period of time. The replacement 
     property may be acquired directly or by acquiring control of 
     a corporation (generally, 80 percent of the stock of the 
     corporation) that owns replacement property. The taxpayer's 
     basis in the replacement property generally is the same as 
     the taxpayer's basis in the converted property, decreased by 
     the amount of any money or loss recognized on the conversion, 
     and increased by the amount of any gain recognized on the 
     conversion. In cases in which a taxpayer purchases stock as 
     replacement property, the taxpayer generally reduces the 
     basis of the stock, but does not reduce the basis of the 
     underlying assets. Thus, the reduction in the basis of the 
     stock generally does not result in reduced depreciation 
     deductions where the corporation holds depreciable property, 
     and may result in the taxpayer having more aggregate 
     depreciable basis after the acquisition of replacement 
     property than before the involuntary conversion.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides that where the taxpayer 
     satisfies the replacement property requirement of section 
     1033 by acquiring stock in a corporation, the corporation 
     generally will reduce its adjusted bases in its assets by the 
     amount by which the taxpayer reduces its basis in the stock. 
     The corporation's adjusted bases in its assets will not be 
     reduced, in the aggregate, below the taxpayer's basis is its 
     stock (determined after the appropriate basis adjustment for 
     the stock). In addition, the basis of any individual asset 
     will not be reduced below zero. The basis reduction first is 
     applied to: (1) property that is similar or related in 
     service or use to the converted property, then (2) to other 
     depreciable property, then (3) to other property.
       Effective date.--The provision applies to involuntary 
     conversions occurring after the date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.


       12. Extension of withholding to certain gambling winnings

       (Sec. 1609 of the Senate amendment.)
     Present law
       In general, proceeds from a wagering transaction are 
     subject to withholding at a rate of 28 percent if the 
     proceeds exceed $5,000 and are at least 300 times as large as 
     the amount wagered. No withholding tax is imposed on winnings 
     from bingo or keno.
     House bill
       No provision.
     Senate amendment
       The Senate amendment imposes withholding on proceeds from 
     bingo or keno wagering transactions at a rate of 28 percent 
     if such proceeds exceed $5,000, regardless of the odds of the 
     wager.
       Effective date.--The provision is effective 30 days after 
     the date of enactment.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


     13. Treatment of certain insurance contracts on retired lives

       (Sec. 1610 of the Senate amendment.)
     Present law
       Life insurance companies are allowed a deduction for any 
     net increase in reserves and are required to include in 
     income any net decrease in reserves. The reserve of a life 
     insurance company for any contract is the greater

[[Page H9648]]

     of the net surrender value of the contract or the reserve 
     determined under Federally prescribed rules. In no event, 
     however, may the amount of the reserve for tax purposes for 
     any contract at any time exceed the amount of the reserve for 
     annual statement purposes.
       Special rules are provided in the case of a variable 
     contract. Under these rules, the reserve for a variable 
     contract is adjusted by (1) subtracting any amount that has 
     been added to the reserve by reason of appreciation in the 
     value of assets underlying such contract, and (2) adding any 
     amount that has been subtracted from the reserve by reason of 
     depreciation in the value of assets underlying such contract. 
     In addition, the basis of each asset underlying a variable 
     contract is adjusted for appreciation or depreciation to the 
     extent the reserve is adjusted.
       A variable contract generally is defined as any annuity or 
     life insurance contract (1) that provides for the allocation 
     of all or part of the amounts received under the contract to 
     an account that is segregated from the general asset accounts 
     of the company, and (2) under which, in the case of an 
     annuity contract, the amounts paid in, or the amounts paid 
     out, reflect the investment return and the market value of 
     the segregated asset account, or, in the case of a life 
     insurance contract, the amount of the death benefit (or the 
     period of coverage) is adjusted on the basis of the 
     investment return and the market value of the segregated 
     asset account. A pension plan contract that is not a life, 
     accident, or health, property, casualty, or liability 
     insurance contract is treated as an annuity contract for 
     purposes of this definition.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides that a variable contract is 
     to include a contract that provides for the funding of group 
     term life or group accident and health insurance on retired 
     lives if: (1) the contract provides for the allocation of all 
     or part of the amounts received under the contract to an 
     account that is segregated from the general asset account of 
     the company; and (2) the amounts paid in, or the amounts paid 
     out, under the contract reflect the investment return and the 
     market value of the segregated asset account underlying the 
     contract.
       Thus, the reserve for such a contract is to be adjusted by 
     (1) subtracting any amount that has been added to the reserve 
     by reason of appreciation in the value of assets underlying 
     such contract, and (2) adding any amount that has been 
     subtracted from the reserve by reason of depreciation in the 
     value of assets underlying such contract. In addition, the 
     basis of each asset underlying the contract is to be adjusted 
     for appreciation or depreciation to the extent that the 
     reserve is adjusted.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1995.
     Conference agreement
       The conference agreement follows the Senate amendment.


             14. treatment of modified guaranteed contracts

     Present law
       Life insurance companies are allowed a deduction for any 
     net increase in reserves and are required to include in 
     income any net decrease in reserves. The reserve of a life 
     insurance company for any contract is the greater of the net 
     surrender value of the contract or the reserve determined 
     under Federally prescribed rules. The net surrender value of 
     a contract is the cash surrender value reduced by any 
     surrender penalty, except that any market value adjustment 
     required on surrender is not taken into account. In no event, 
     however, may the amount of the reserve for tax purposes for 
     any contract at any time exceed the amount of the reserve for 
     annual statement purposes.
       In general, assets held for investment are treated as 
     capital assets. Any gain or loss from the sale or exchange of 
     a capital asset is treated as a capital gain or loss and is 
     taken into account for the taxable year in which the asset is 
     sold or exchanged.
     House bill
       No provision.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement generally applies a mark-to-market 
     regime to assets held as part of a segregated account under a 
     modified guaranteed contract issued by a life insurance 
     company. Gain or loss with respect to such assets held as of 
     the close of any taxable year are taken into account for that 
     year (even though the assets have not been sold or 
     exchanged),\58\ and are treated as ordinary. If gain or loss 
     is taken into account by reason of the mark-to-market 
     requirement, then the amount of gain or loss subsequently 
     realized as a result of sale, exchange, or other disposition 
     of the asset, or as a result of the application of the mark-
     to-market requirement is appropriately adjusted to reflect 
     such gain or loss. In addition, the reserve for a modified 
     guaranteed contract is determined by taking into account the 
     market value adjustment required on surrender of the 
     contract.
---------------------------------------------------------------------------
     \58\ The wash sale rules of section 1091 of the Code are not 
     to apply to any loss that is required to be taken into 
     account solely by reason of the mark-to-market requirement.
---------------------------------------------------------------------------
       A modified guaranteed contract is defined as any life 
     insurance contract, annuity contract or pension plan contract 
     \59\ that is not a variable contract (within the meaning of 
     Code section 817), and that satisfies the following 
     requirements. All or part of the amounts received under the 
     contract must be allocated to an account which, pursuant to 
     State law or regulation, is segregated from the general asset 
     accounts of the company and is valued from time to time by 
     reference to market values.
---------------------------------------------------------------------------
     \59\ The provision applies only to a pension plan contract 
     that is not a life, accident or health, property, casualty, 
     or liability contract.
---------------------------------------------------------------------------
       The reserves for the contract must be valued at market for 
     annual statement purposes and the Federally prescribed 
     reserve for the contract under section 807(d)(2) must be 
     valued at market. Further, a modified guaranteed contract 
     includes only a contract that provides either for a net 
     surrender value or for a policyholder's fund (within the 
     meaning of section 807(e)(1)). It is intended that a 
     policyholder's fund be more than de minimis. For example, 
     Treasury regulations could provide that a policyholder's fund 
     that represents 15 percent or less of the insurer's reserve 
     for the contract under section 807, and that is attributable 
     to employee contributions, would be considered de minimis.
       If only a portion of the contract is not described in 
     section 817, that portion is treated as a separate contract 
     for purposes of the provision.
       The Treasury Department is authorized to issue regulations 
     that provide for the application of the mark-to-market 
     requirement at times other than the close of a taxable year 
     or the last business day of a taxable year. The Treasury 
     Department is also authorized to issue such regulations as 
     may be necessary or appropriate to carry out the purposes of 
     the provision and to provide for treatment of modified 
     guaranteed contracts under sections 72, 7702, and 7702A. In 
     addition, the Treasury Department is authorized to determine 
     the interest rates applicable under section 807(c)(3), 
     807(d)(2)(B) and 812 with respect to modified guaranteed 
     contracts annually, calculating such rates as appropriate for 
     modified guaranteed contracts. The Treasury Department has 
     discretion to determine an appropriate rate that is a current 
     market rate, which could be determined, for example, either 
     by using a rate that is appropriate for the obligations under 
     the contract to which the reserve relates, or by taking into 
     account the yield on the assets underlying the contract. The 
     Treasury Department may exercise this authority by issuing a 
     periodic announcement of the appropriate market interest 
     rates or formula for determining such rates. The Treasury 
     Department is also authorized, to the extent appropriate for 
     such a contract, to modify or waive section 811(d).
       The Treasury Department is also authorized to provide rules 
     limiting the ordinary treatment provided under the provision 
     to gain or loss on those assets properly taken into account 
     in calculating the reserve for Federal tax purposes (and 
     necessary to support such reserves) for modified guaranteed 
     contracts, and to provide rules for limiting such treatment 
     with respect to other assets (such as assets representing 
     surplus of the company). Particular concern has been 
     expressed about characterization of gain or loss as ordinary 
     under the provision in transactions that would otherwise 
     either (1) have to meet the requirements of the hedging 
     exception to the straddle rules to receive this treatment, or 
     (2) by treated as capital transactions under present law. It 
     is intended that the mark-to-market treatment apply to all 
     assets held as part of a segregated account established under 
     the provision, even though ordinary treatment may not apply 
     (pursuant to Treasury regulatory authority) to assets held as 
     part of the segregated account that are not necessary to 
     support the reserve for modified guaranteed contracts.
       The conference agreement authorizes the Treasury Department 
     to prescribe regulations that provide for the treatment of 
     assets transferred to or from a segregated account. This 
     regulatory authority is provided because of concern that 
     taxpayers may exercise selective ordinary loss (or income or 
     gain) recognition by virtue of the ordinary treatment under 
     the provision. One example of selective ordinary loss 
     recognition could arise if assets are always marked to market 
     when transferred out of the segregated account. For example, 
     if at the beginning of the taxable year an asset in the 
     segregated account is worth $1,000, but declines to $900 in 
     July, the taxpayer might choose to recognize $100 of ordinary 
     loss while continuing to own the asset, simply by 
     transferring it out of the segregated account in July and 
     replacing $1,000 of cash (for example) in the segregated 
     account.
       It is intended that the regulations relating to asset 
     transfers will forestall opportunities for selective 
     recognition of ordinary items. Prior to the issuance of these 
     regulations, the following rules shall apply.
       If an asset is transferred to a segregated account, gain or 
     loss attributable to the period during which the asset was 
     not in the segregated account is taken into account when the 
     asset is actually sold, and retains the character (as 
     ordinary or capital) properly attributable to that period. 
     Appropriate adjustments are made to the basis of the asset to 
     reflect gain or loss attributable to that period.
       If an asset is transferred out of a segregated account, the 
     transfer is deemed to

[[Page H9649]]

     occur on the last business day of the taxable year and gain 
     or loss with respect to the transferred asset is taken into 
     account as of that day. Loss with respect to such transferred 
     asset is treated as ordinary to the extent of the lesser of 
     (1) the loss (if any) that would have been recognized if the 
     asset had been sold for its fair market value on the last 
     business day of the taxable year (or the date the asset was 
     actually sold by the taxpayer, if earlier) or (2) the loss 
     (if any) that would have been recognized if the asset had 
     been sold for its fair market value on the date of the 
     transfer. A similar rule applies for gains. Proper adjustment 
     is made in the amount of any gain or loss subsequently 
     realized to reflect gain or loss under the provision.
       For example, assume that a capital asset in the segregated 
     account that is worth $1,000 at the beginning of the year is 
     transferred out of the segregated account in July at a value 
     of $900, is retained by the company and is worth $950 on the 
     last business day of the taxable year. A $50 ordinary loss is 
     taken into account with respect to the asset for the taxable 
     year (the difference Between $1,000 and $950). The asset is 
     not marked to market in any subsequent year under the 
     provision, provide that it is not transferred back to the 
     segregated account.
       As an additional example, assume that a capital asset in 
     the segregated account that is worth $1,000 at the beginning 
     of the year is transferred out of the segregated accounted in 
     July at a value of $900, is retained by the company and 
     continues to decline in value to $850 on the last business 
     day of the taxable year. A $100 ordinary loss ($1,000 less 
     $900) and a $50 capital loss ($900 less $850) is taken into 
     account with respect to the asset for the taxable year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1995. A taxpayer that is 
     required to (1) change its calculation of reserves to take 
     into account market value adjustments and (2) mark to market 
     its segregated assets in order to comply with the 
     requirements of the provision is treated as having initiated 
     changes in methods of accounting and as having received the 
     consent of the Treasury Department to make such changes.
       Except as otherwise provided in special rules (described 
     below), the section 481(a) adjustments required by reason of 
     the changes in method of accounting are to be taken into 
     account as ordinary income for the taxpayer's first taxable 
     year beginning after December 31, 1995.
       Special rules providing for a seven-year spread apply in 
     the case of certain losses (if any), and in the case of 
     certain reserve increases (if any), in order to limit 
     selective loss recognition or selective minimization of gain 
     recognition. Thus, the seven-year spread rule applies when 
     the taxpayer's section 481(a) adjustment is negative.
       First, if, for the taxpayer's first taxable year beginning 
     after December 31, 1995, (1) the aggregate amount of the loss 
     recognized by reason of the change in method of accounting 
     with respect to segregated assets under modified guaranteed 
     contracts (i.e., the switch to a mark-to-market regime for 
     such assets) exceeds (2) the amount include in income by 
     reason of the change in method of accounting with respect to 
     reserves (i.e., the change permitting a market value 
     adjustment to be taken into account with respect to a 
     modified guaranteed contract), then the excess is not allowed 
     as a deduction in the taxpayer's first taxable year beginning 
     after December 31, 1995. Rather, such excess is allowed 
     ratably over the period of seven taxable years beginning with 
     the taxpayer's first taxable year beginning after December 
     31, 1995. The adjusted basis of each such segregated asset is 
     nevertheless determined as if such losses were realized in 
     the taxpayer's first taxable year beginning after December 
     31, 1995.
       Second, if, for the taxpayer's first taxable year beginning 
     after December 31, 1995, (1) the aggregate amount the 
     taxpayer's deduction that arises by reason of the change in 
     method of accounting with respect to reserves (i.e., the 
     change permitting a market value adjustment to be taken into 
     account with respect to a modified guaranteed contract), 
     exceeds (2) the aggregate amount of the gain recognized by 
     reason of the change in method of accounting with respect to 
     segregated assets under modified guaranteed contracts (i.e., 
     the switch to a mark-to-market regime for such assets), then 
     the excess is not allowed as a deduction in the taxpayer's 
     first taxable year beginning after December 31, 1995. Rather, 
     such excess is allowed ratably over the period of seven 
     taxable years beginning with the taxpayer's first taxable 
     year beginning after December 31, 1995.


    15. treatment of contributions in aid of construction for water 
                               utilities

       (Sec. 1611(a) of the Senate amendment.)
     Present and prior law
       The gross income of a corporation does not include 
     contributions to its capital. A contribution to the capital 
     of a corporation does not include any contribution in aid of 
     construction or any other contribution as a customer or 
     potential customer.
       Prior to the enactment of the Tax Reform Act of 1986 
     (``1986 Act''), a regulated public utility that provided 
     electric energy, gas water, or sewage disposal services was 
     allowed to treat any amount of money or property received 
     from any person as a tax-free contribution to its capital so 
     long as such amount: (1) was a contribution in aid of 
     construction; and (2) was not included in the taxpayer's rate 
     base for rate-making purposes. A contribution in aid of 
     construction did not include a connection fee. The basis of 
     any property acquired with a contribution in aid of 
     construction was zero.
       If the contribution was in property other than electric 
     energy, gas, steam, water, or sewerage disposal facilities, 
     such contribution was not includible in the utility's gross 
     income so long as: (1) an amount at least equal to the amount 
     of the contribution was expended for the acquisition or 
     construction of tangible property that was used predominantly 
     in the trade or business of furnishing utility services; (2) 
     the expenditure occurred before the end of the second taxable 
     year after the year that the contribution was received; and 
     (3) certain records were kept with respect to the 
     contribution and the expenditure. In addition, the status of 
     limitations for the assessment of deficiencies was extended 
     in the case of these contributions.
       These rules were repealed by the 1986 Act. Thus, after the 
     1986 Act, the receipt by a utility of a contribution in aid 
     of construction is includible in the gross income of the 
     utility, and the basis of property received or constructed 
     pursuant to the contribution is not reduced.
     House bill
       No. provision.
     Senate amendment
       The Senate amendment restores the contributions in aid of 
     construction provisions that were repealed by the 1986 Act 
     for regulated public utilities that provide water or sewerage 
     disposal services.
       Effective date.--The provision is effective for amounts 
     received after June 12, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment.


   16. require water utility property to be depreciated over 25 years

       (Sec. 1611(b) of the Senate amendment.)
     Present law
       Property used by a water utility in the gathering, 
     treatment, and commercial distribution of water and municipal 
     sewers are depreciated over a 20-year period for regular tax 
     purposes. The depreciation method generally applicable to 
     property with a recovery period of 20 years is the 150-
     percent declining balance method (switching to the straight-
     line method in the year that maximizes the depreciation 
     deduction). The straight-line method applies to property with 
     a recovery period over 20 years.
     House bill
       No provision.
     Senate amendment
       The Senate amendment provides that water utility property 
     will be depreciated using a 25-year recovery period and the 
     straight-line method for regular tax purposes. For this 
     purpose, ``water utility property'' means (1) property that 
     is an integral part of the gathering, treatment, or 
     commercial distribution of water, and that, without regard to 
     the proposal, would have had a recovery period of 20 years 
     and (2) any municipal sewer. Such property generally is 
     described in Asset Classes 49.3 and 51 of Revenue Procedure 
     87-56, 1987-2 C.B. 674. The Senate amendment does not change 
     the class lives of water utility property for purposes of the 
     alternative depreciation system of section 168(g).
       Effective date.--The provision is effective for property 
     placed in service after June 12, 1996, other than property 
     placed in service pursuant to a binding contract in effect 
     before June 10, 1996, and at all times thereafter before the 
     property is placed in service.
     Conference agreement
       The conference agreement follows the Senate amendment.


  17. allow conversion of scholarship funding corporation to taxable 
                              corporation

       (Sec. 1621 of the Senate amendment.)
     Present law
       Qualified scholarship funding corporations are nonprofit 
     corporations established and operated exclusively for the 
     purpose of acquiring student loan notes incurred under the 
     Higher Education Act of 1965 (sec. 150(d)). In addition, a 
     qualified scholarship funding corporation must be required by 
     its corporate charter and bylaws, or under State law, to 
     devote any income (after payment of expenses, debt service 
     and the creation of reserves for the same) to the purchase of 
     additional student loan notes or to pay over any income to 
     the United States.
       In general, State and local government bonds issued to 
     finance private loans (e.g., student loans) are taxable 
     private activity bonds. However, interest on qualified 
     student loan bonds is tax-exempt. Qualified scholarship 
     funding corporations are eligible issuers of qualified 
     student loan bonds.
       The Internal Revenue Code restricts the direct and indirect 
     investment of bond proceeds in higher yielding investments 
     and requires that profits on investments that are unrelated 
     to the government purpose for which the bonds are issued be 
     rebated to the United States. Special allowance payments 
     (SAP) made by the Department of Education are treated as 
     interest on notes and, therefore, are permitted arbitrage 
     that need not be rebated to the United States.
       Generally, a private foundation and disqualified persons 
     may, in the aggregate, own 20 percent of the voting stock of 
     a functionally unrelated corporation.

[[Page H9650]]

     House bill
       No provision.
     Senate amendment
       In general.--The amendment would provide that a nonprofit 
     student loan funding corporation may elect to cease its 
     status as a qualified scholarship funding corporation. If the 
     corporation meets the requirements outlined below, such an 
     election would not cause any bond outstanding as of the date 
     of the issuer's election and any bond issued to refund such a 
     bond to fail to be a qualified student loan bond. Once made, 
     an election could be revoked only with the consent of the 
     Secretary of the Treasury. After making the election, the 
     issuer would not be authorized to issue any new bonds.
       Requirements.--First, upon making the election, the issuer 
     would be required to transfer all of the student loan notes 
     to another, taxable, corporation in exchange for senior stock 
     of such corporation within a reasonable period of time after 
     the election is made. Immediately after the transfer, the 
     issuer, and any other issuer who made the election, would be 
     required to hold all of the senior stock of the corporation. 
     Senior stock is stock whose rights to dividends, liquidation 
     or redemption rights are not inferior to those of any other 
     class of stock and that (1) participates pro rata and fully 
     in the equity value of any other common stock of the 
     corporation, (2) has the right to payments receivable in 
     liquidation prior to any other stock in the corporation, (3) 
     upon liquidation or redemption, has a fixed right to receive 
     the greater of (a) the fair market value of the stock at the 
     date of liquidation or redemption or (b) the net fair market 
     value of all assets transferred to the corporation by the 
     issuer, and (4) has a right to require its redemption by a 
     date which is not later than 10 years after the date that the 
     election is made.
       Second, the transferee corporation would be required to 
     assume or otherwise provide for the payment of all the 
     qualified scholarship funding bond indebtedness of the issuer 
     within a reasonable period after the election.
       Third, immediately after the transfer, the issuer (i.e., 
     the nonprofit student loan funding corporation) would be 
     required to become a charitable organization (described in 
     section 501(c)(3) that is exempt from tax under section 
     501(a)), at least 80 percent of the members of its board of 
     directors must be independent members, and it must hold all 
     of the senior stock of the corporation.
       Excess business holdings.--For purposes of the excess 
     business holding restrictions imposed on a private 
     foundation, the charity would not be required to divest its 
     ownership in a corporation most of whose assets are student 
     loan notes incurred under the Higher Education Act of 1965.
       Effective date.--The amendment would be effective on the 
     date of enactment.
     Conference agreement
       The conference agreement follows the Senate amendment.


  18. APPLY MATHEMATICAL OR CLERICAL ERROR PROCEDURES FOR DEPENDENCY 
   EXEMPTIONS AND FILING STATUS WHEN CORRECT TAXPAYER IDENTIFICATION 
                        NUMBERS ARE NOT PROVIDED

       (Sec. 1613 of the Senate amendment.)
     Present law
       In general
       Individuals who claim personal exemptions for dependents 
     must include on their tax return the name and taxpayer 
     identification number (TIN) of each dependent. For returns 
     filed with respect to tax year 1996, individuals must provide 
     a TIN for all dependents born on or before November 30, 1996. 
     For returns filed with respect to tax year 1997 and all 
     subsequent years, individuals must provide TINs for all 
     dependents, regardless of their age. An individual's TIN is 
     generally that individual's social security number.
       If the individual fails to provide a correct TIN for a 
     dependent, the Internal revenue Service may impose a $50 
     penalty.
       Mathematical or clerical errors
       The IRS may summarily assess additional tax due as a result 
     of a mathematical or clerical error without sending the 
     taxpayer a notice of deficiency and giving the taxpayer an 
     opportunity to petition the Tax Court. Where the IRS uses the 
     summary assessment procedure for mathematical or clerical 
     errors, the taxpayer must be given an explanation of the 
     asserted error and a period of 60 days to request that the 
     IRS abate its assessments. The IRS may not proceed to collect 
     the amount of the assessment until the taxpayer has agreed to 
     it or has allowed the 60-day period for objecting to expire. 
     If the taxpayer files a request for abatement of the 
     assessment specified in the notice, the IRS must abate the 
     assessment. Any reassessment of the abated amount is subject 
     to the ordinary deficiency procedures. The request for 
     abatement of the assessment is the only procedure a taxpayer 
     may use prior to paying the assessed amount in order to 
     contest an assessment arising out of a mathematical or 
     clerical error. Once the assessment is satisfied, however, 
     the taxpayer may file a claim for refund if he or she 
     believes the assessment was made in error.
     House bill
       No provision.
     Senate amendment
       If an individual fails to provide a correct TIN for a 
     dependent, the IRS is authorized to deny the dependency 
     exemption. Such a change also has indirect consequences for 
     other tax benefits currently conditioned on being able to 
     claim a dependency exemption (e.g., head of household filing 
     status and the dependent care credit). In addition, the 
     failure to provide a correct TIN for a dependent will be 
     treated as a mathematical or clerical error and thus any 
     notification that the taxpayer owes additional tax because of 
     that failure will not be treated as a notice of deficiency.
       Effective date.--The provision is effective for tax returns 
     for which the due date (without regard to extensions) is 30 
     days or more after the date of enactment. For taxable years 
     beginning in 1995, no requirement to obtain a TIN applies in 
     the case of dependents born after October 31, 1995. For 
     taxable years beginning in 1996, no requirement to obtain a 
     TIN applies in the case of dependents born after November 30, 
     1996.
     Conference agreement
       The conference agreement follows the Senate amendment.


   19. Treatment of financial asset securitization investment trusts 
                              (``FASITs'')

       (Sec. 1621 of the Senate amendment.)
     Present law
       An individual can own income-producing assets directly, or 
     indirectly through an entity (i.e., a corporation, 
     partnership, or trust). Where an individual owns assets 
     through an entity (e.g., a corporation), the nature of the 
     interest in the entity (e.g., stock of a corporation) is 
     different than the nature of the assets held by the entity 
     (e.g., assets of the corporation).
       Securitization is the process of converting one type of 
     asset into another and generally involves the use of an 
     entity separate from the underlying assets. In the case of 
     securitization of debt instruments, the instruments created 
     in the securitization typically have different maturities and 
     characteristics than the debt instruments that are 
     securitized.
       Entities used in securitization include entities that are 
     subject to tax (e.g., a corporation), conduit entities that 
     generally are not subject to tax (e.g., a partnership, 
     grantor trust, or real estate mortgage investment conduit 
     (``REMIC'')), or partial-conduit entities that generally are 
     subject to tax only to the extent income is not distributed 
     to owners (e.g., a trust, real estate investment trust 
     (``REIT''), or regulated investment company (``RIC'')).
       There is no statutory entity that facilitates the 
     securitization of revolving, non-mortgage debt obligations.
     House bill
       No provision.
     Senate amendment
       In general
       The Senate amendment would create a new type of statutory 
     entity called a ``financial asset securitization investment 
     trust'' (``FASIT'') that facilitates the securitization of 
     debt obligations such as credit card receivables, home equity 
     loans, and auto loans. A FASIT generally will not be taxable; 
     the FASIT's taxable income or net loss will flow through to 
     the owner of the FASIT.
       The ownership interest of a FASIT generally will be 
     required to be entirely held by a single domestic C 
     corporation. The Finance Committee expected that the Treasury 
     Department will issue guidance on how this rule would apply 
     to cases in which the entity that owns the FASIT joins in the 
     filing of a consolidated return with other members of the 
     group that wish to hold an ownership interest in the FASIT. 
     In addition, a FASIT generally may hold only qualified debt 
     obligations, and certain other specified assets, and will be 
     subject to certain restrictions on its activities. An entity 
     that qualifies as a FASIT can issue instruments that meet 
     certain specified requirements and treat those instruments as 
     debt for Federal income tax purposes. Instruments issued by a 
     FASIT bearing yields to maturity over five percentage points 
     above the yield to maturity on specified United States 
     government obligations (i.e., ``high-yield interests'') must 
     be held, directly or indirectly, only by domestic C 
     corporations that are not exempt from income tax.
       Qualification as a FASIT
       In general.--To qualify as a FASIT, an entity must: (1) 
     make an election to be treated as a FASIT for the year of the 
     election and all subsequent years; (2) have assets 
     substantially all of which (including assets that the FASIT 
     is treated as owning because they support regular interests) 
     are specified types called ``permitted assets;'' (3) have 
     non-ownership interests be certain specified types of debt 
     instruments called ``regular interests''; (4) have a single 
     ownership interest which is held by an ``eligible holder''; 
     and (5) not qualify as a RIC. Any entity, including a 
     corporation, partnership, or trust may be treated as a FASIT. 
     In addition, a segregated pool of assets may qualify as a 
     FASIT.
       Election to be a FASIT.--Once an election to be a FASIT is 
     made, the election applies from the date specified in the 
     election and all subsequent years until the entity ceases to 
     be a FASIT. The manner of making the election to be a FASIT 
     is to determined by the Secretary of the Treasury. If an 
     election to be a FASIT is made after the initial year of an 
     entity, all of the assets in the entity at the time of the 
     FASIT election are deemed contributed to the FASIT at that 
     time and,

[[Page H9651]]

     accordingly, any gain (but not loss) on such assets will be 
     recognized at that time.\60\
---------------------------------------------------------------------------
     \60\ The Senate amendment provided transitional relief under 
     which gain in pre-effective date entities that make a FASIT 
     election may be deferred.
---------------------------------------------------------------------------
       Ceasing to be a FASIT.--Once an entity ceases to be a 
     FASIT, it is not a FASIT for that year or any subsequent 
     year. Nonetheless, an entity can continue to be a FASIT where 
     the Treasury Department determines that the entity 
     inadvertently ceases to be a FASIT, steps are taken 
     reasonably soon after it is discovered that the entity ceased 
     being a FASIT so that it again qualifies as a FASIT, and the 
     FASIT and its owner take those steps that the Treasury 
     Department deems necessary. An entity will cease qualifying 
     as a FASIT if the entity's owner ceases being an eligible 
     corporation. Loss of FASIT status is to be treated as if all 
     of the regular interests of the FASIT were retired and then 
     reissued without the application of the rule which deems 
     regular interests of a FASIT to be debt. The Finance 
     Committee understood that this treatment could result in the 
     creation of cancellation of indebtedness income where the new 
     instruments deemed to be issued are treated as stock under 
     general tax principles.
       Permitted assets. In general.--For an entity or arrangement 
     to qualify as a FASIT, substantially all of its assets must 
     consist of the following ``permitted assets'': (1) cash and 
     cash equivalents; (2) certain permitted debt instruments; (3) 
     certain foreclosure property; (4) certain instruments or 
     contracts that represent a hedge or guarantee of debt held or 
     issued by the FASIT; (5) contract rights to acquire permitted 
     debt instruments or hedges; and (6) a regular interest in 
     another FASIT. A FASIT must meet the asset test at the 90th 
     day after its formation and at all times thereafter. 
     Permitted assets may be acquired at any time by a FASIT, 
     including any time after its formation.
       Permitted debt instruments.--A debt instrument will be a 
     permitted asset only if the instrument is indebtedness for 
     Federal income tax purposes including trade receivables, 
     regular interests in a real estate mortgage investment 
     conduit (REMIC), or regular interests issued by another FASIT 
     and it bears (1) fixed interest or (2) variable interest of a 
     type that relates to qualified variable rate debt (as defined 
     in Treasury regulations prescribed under sec. 860G(a)(1)(B)). 
     Except for cash equivalents, permitted debt obligations 
     cannot be obligations issued, directly or indirectly, by the 
     owner of the FASIT or a related person.
       Foreclosure property.--Permitted assets include property 
     acquired on default (or imminent default) of debt 
     instruments, swap contracts, forward contracts, or similar 
     contracts held by the FASIT that would be foreclosure 
     property to a REIT (under sec. 856(e)) if the property that 
     was acquired by foreclosure by the FASIT was real property or 
     would be foreclosure property to a REIT but for certain 
     leases entered into or construction performed (as described 
     in sec. 856(e)(4)) while held by the FASIT.
       Hedges.--Permitted assets include interest rate or foreign 
     currency notional principal contracts, letters of credit, 
     insurance, guarantees against payment defaults, notional 
     principal contracts that are ``in the money,'' or other 
     similar instruments as permitted under Treasury regulations, 
     which are reasonably required to guarantee or hedge against 
     the FASIT's risks associated with being the obligor of 
     regular interests. An instrument is a hedge if it results in 
     risk reduction as described in Treasury regulation section 
     1.1221-2.
       ``Regular interests'' of a FASIT.--Under the Senate 
     amendment, ``regular interests'' of a FASIT, including 
     ``high-yield interests,'' are treated as debt for Federal 
     income tax purposes regardless of whether instruments with 
     similar terms issued by non-FASITs might be characterized as 
     equity under general tax principles. To be treated as a 
     ``regular interest,'' an instrument must have fixed terms and 
     must: (1) unconditionally entitle the holder to receive a 
     specified principal amount; (2) pay interest that is based on 
     (a) one or more rates that are fixed, (b) rates that measure 
     contemporaneous variations in the cost of newly borrowed 
     funds,\61\ or (c) to the extent permitted by Treasury 
     regulations, variable rates allowed to regular interests of a 
     REMIC if the FASIT would otherwise qualify as a REMIC; (3) 
     have a term to maturity of no more than 30 years, except as 
     permitted by Treasury regulations; (4) be issued to the 
     public with a premium of not more than 25 percent of its 
     stated principal amount; and (5) have a yield to maturity 
     determined on the date of issue of no more than five 
     percentage points above the applicable Federal rate (AFR) for 
     the calendar month in which the instrument is issued.
---------------------------------------------------------------------------
     \61\ Variable interest rates that would meet this standard 
     include variable interest rates described in Treasury Income 
     Tax Regulations 1.860G-1(a)(3).
---------------------------------------------------------------------------
       A FASIT also may issue high-yield debt instruments, which 
     includes any debt instrument issued by a FASIT that meets the 
     second and third conditions described above, so long as such 
     interests are not held by a disqualified holder. A 
     ``disqualified holder'' generally is any holder other than 
     (1) a domestic C corporation that does not qualify as a RIC, 
     REIT, REMIC, or cooperative \62\ or (2) a dealer who acquires 
     FASIT debt for resale to customers in the ordinary course of 
     business. An excise tax is imposed at the highest corporate 
     rate on a dealer if there is a change in dealer status or if 
     the holding of the instrument is for investment purposes. A 
     31-day grace period is granted before ownership of an 
     interest held by a dealer generally could be treated as held 
     by the FASIT owner for investment purposes.
---------------------------------------------------------------------------
     \62\ The Senate amendment treats cooperatives as disqualified 
     holders since cooperatives, like RICs and REITs, are treated 
     as pass-through entities and, also like the owners of RICs 
     and REITs, the cooperative's members and patrons need not be 
     C corporations.
---------------------------------------------------------------------------
       Permitted ownership holder.--A permitted holder of the 
     ownership interest in a FASIT generally is a non-exempt 
     domestic C corporation, other than a corporation that 
     qualifies as a RIC, REIT, REMIC, or cooperative.
       Transfers to non-permitted holders of high-yield interests
       A transfer of a high-yield interest to a disqualified 
     holder is to be ignored for Federal income tax purposes. 
     Thus, such a transferor will continue to be liable for any 
     taxes due with respect to the transferred interest.
       Taxation of a FASIT
       In general.--A FASIT generally is not subject to tax. 
     Instead, all of the FASIT's assets and liabilities are 
     treated as assets and liabilities of the FASIT's owner and 
     any income, gain, deduction or loss of the FASIT is allocable 
     directly to its owner. Accordingly, income tax rules 
     applicable to a FASIT (e.g., related party rules, sec. 
     871(h), sec. 165(g)(2)) are to be applied in the same manner 
     as they apply to the FASIT's owner. Any securities held by 
     the FASIT that are treated as held by its owner are treated 
     as held for investment. The taxable income of a FASIT is 
     calculated using an accrual method of accounting. The 
     constant yield method and principles that apply for purposes 
     of determining OID accrual on debt obligations whose 
     principal is subject to acceleration apply to all debt 
     obligations held by a FASIT to calculate the FASIT's interest 
     and discount income and premium deductions or adjustments. 
     For this purpose, a FASIT's income does not include any 
     income subject to the 100-percent penalty excise tax on 
     prohibited transactions.
       Income from prohibited transactions..--The owner of a FASIT 
     is required to pay a penalty excise tax equal to 100 percent 
     of net income derived from (1) an asset that is not a 
     permitted asset, (2) any disposition of an asset other than a 
     permitted disposition, (3) any income attributable to loans 
     originated by the FASIT, and (4) compensation for services 
     (other than fees for a waiver, amendment, or consent under 
     permitted assets not acquired through foreclosure). A 
     permitted disposition is any disposition of any permitted 
     asset (1) arising from complete liquidation of a class of 
     regular interests (i.e., a qualified liquidation\63\), (2) 
     incident to the foreclosure, default, or imminent default of 
     the asset, (3) incident to the bankruptcy or insolvency of 
     the FASIT, (4) necessary to avoid a default on any 
     indebtedness of the FASIT attributable to a default (or 
     imminent default) on an asset of the FASIT, (5) to facilitate 
     a clean-up call, (6) to substitute a permitted debt 
     instrument for another such instrument, or (7) in order to 
     reduce over-collateralization where a principal purpose of 
     the disposition was not to avoid recognition of gain arising 
     from an increase in its market value after its acquisition by 
     the FASIT. Notwithstanding this rule, the owner of a FASIT 
     may currently deduct its losses incurred in prohibited 
     transactions in computing its taxable income for the year of 
     the loss.
---------------------------------------------------------------------------
     \63\ for this purpose, a ``qualified liquidation'' has the 
     same meaning as it does purposes of the exemption from the 
     tax on prohibited transactions of a REMIC in section 
     860F(a)(4).
---------------------------------------------------------------------------
       Taxation of interests in the FASIT
       Taxation of holders of regular interests.--In general.--A 
     holder of a regular interest, including a high-yield 
     interest, is taxed in the same manner as a holder of any 
     other debt instrument, except that the regular interest 
     holder is required to account for income relating to the 
     interest on an accrual method of accounting, regardless of 
     the method of accounting otherwise used by the holder.\64\
---------------------------------------------------------------------------
     \64\ Regular interests in a FASIT 95 percent or more of whose 
     assets are real estate mortgages are treated as real estate 
     assets where relevant (e.g., secs. 856, 593, 7701(a)(19)).
---------------------------------------------------------------------------
       High-yield interests.--Holders of high-yield interests are 
     not allowed to use net operating losses to offset any income 
     derived from the high-yield debt. Any net operating loss 
     carryover shall be computed by disregarding any income 
     arising by reason of the disallowed loss.
       In addition, a transfer of a high-yield interest to a 
     disqualified holder is not recognized for Federal income tax 
     purposes such that the transferor will continue to be taxed 
     on the income from the high-yield interest unless the 
     transferee provides the transferor with an affidavit that the 
     transferee is not a disqualified person or the Treasury 
     Secretary determines that the high-yield interest is no 
     longer held by a disqualified person and a corporate tax has 
     been paid on the income from the high-yield interest while it 
     was held by a disqualified person.\65\ High-yield interests 
     may be held without a corporate tax being imposed on the 
     income from the high-yield interest where the interest is 
     held by a dealer in securities who acquired such high-yield 
     interest for sale in the ordinary course of his business as a 
     securities

[[Page H9652]]

     dealer. In such a case, a corporate tax is imposed on such a 
     dealer if his reason for holding the high-yield interest 
     changes to investment. There is a presumption that the dealer 
     has not changed his intent for holding high-yield instruments 
     to investment for the first 31 days he holds such interests 
     unless such holding is part of a plan to avoid the 
     restriction on holding of high-yield interests by 
     disqualified persons.
---------------------------------------------------------------------------
     \65\ Under this rule, no high-yield interests will be treated 
     as issued where the FASIT directly issues such interests to a 
     disqualified holder.
---------------------------------------------------------------------------
       Where a pass-through entity (other than a FASIT) issues 
     either debt or equity instruments that are secured by regular 
     interests in a FASIT and such instruments bear a yield to 
     maturity greater than the yield on the regular iterests and 
     the applicable Federal rate plus five percentage points 
     (determined on date that the pass-through entity acquires the 
     regular interests in the FASIT) and the pass-through entity 
     issued such debt or equity with a principal purpose of 
     avoiding the rule that high-yield interests be held by 
     corporations, then an excise tax is imposed on the pass-
     through entity at a rate equal to the highest corporate rate 
     on the income of any holder of such instrument attributable 
     to the regular interests.
       Taxation of holder of ownership interest.--All of the 
     FASIT's assets and liabilities are treated as assets and 
     liabilities of the holder of a FASIT ownership interest and 
     that owner takes into account all of the FASIT's income, 
     gain, deduction, or loss in computing its taxable income or 
     net loss for the taxable year. The character of the income to 
     the holder of an ownership interest is the same as its 
     character to the FASIT, except tax-exempt interest is taken 
     into income of the holder as ordinary income.\66\
---------------------------------------------------------------------------
     \66\ Ownership interests in a FASIT 95 percent or more of 
     whose assets are real estate mortgages are treated as real 
     estate assets where relevant (e.g., secs. 856, 593, 
     7701(a)(19)).
---------------------------------------------------------------------------
       Losses on assets contributed to the FASIT are not allowed 
     upon their contribution, but may be allowed to the FASIT 
     owner upon their disposition by the FASIT. A special rule 
     provides that the holder of a FASIT ownership interest cannot 
     offset income or gain from the FASIT ownership interest with 
     any other losses. Any net operating loss carryover of the 
     FASIT owner shall be computed by disregarding any income 
     arising by reason arising by reason of a disallowed loss.
       For purposes of the alternative minimum tax, the owner's 
     taxable income is determined without regard to the minimum 
     FASIT income. The alternative minimum taxable income of the 
     FASIT owner cannot be less than the FASIT income for that 
     year, and the alternative minimum tax net operating loss 
     deduction is computed without regard to the minimum FASIT 
     income.
       Transfers to FASITs
       Gain generally is recognized immediately by the owner of 
     the FASIT upon the transfer of assets to a FASIT. Assets that 
     are acquired by the FASIT from someone other than its owner 
     are treated as if they were acquired by the owner and then 
     contributed to the FASIT. In addition, any assets of the 
     FASIT owner or a related person that are used to support \67\ 
     FASIT regular interests are treated as contributed to the 
     FASIT and, thus, any gain on any such assets also will be 
     recognized at the earliest date that such assets support any 
     FASIT's regular interests.\68\ To the extent provided by 
     Treasury regulations, gain recognition on the contributed 
     assets may be deferred until such assets support regular 
     interests issued by the FASIT or any indebtedness of the 
     owner or related person. These regulations my adjust other 
     statutory FASIT provisions to the extent such provisions are 
     inconsistent with such regulations. For example, such 
     regulations may disqualify certain assets as permitted 
     assets. The basis of any FASIT assets is increased by the 
     amount of the taxable gain recognized on the contribution of 
     the assets to the FASIT.
---------------------------------------------------------------------------
     \67\ For this purpose, supporting assets includes any assets 
     that are reasonably expected to directly or indirectly pay 
     regular interests or to otherwise secure or collateralize 
     regular interests. In the case where there is a commitment to 
     make additional contributions to a FASIT, any such assets 
     will not be treated as supporting the FASIT until they are 
     transferred to the FASIT or set aside for such use.
     \68\ In the case of a securities dealer which may be an 
     eligible holder, the Finance Committee understood that the 
     mark-to-market rule of section 475 will not apply to an 
     ownership interest in a FASIT or assets held in the FASIT.
---------------------------------------------------------------------------
       Valuation rules
       In general, except in the case of debt instruments, the 
     value of FASIT assets is their fair market value. In the case 
     of debt instruments that are traded on an established 
     securities market, then the market price will be used for 
     purposes of determining the amount of gain realized upon 
     contribution of such assets to a FASIT. Nonetheless, the 
     Senate amendment contained special rules for valuing other 
     debt instruments for purposes of computing gain on the 
     transfer to a FASIT. Under these rules, the value of such 
     debt instruments is the sum of the present values of the 
     reasonably expected cash flows from such obligations 
     discounted over the weighted average life of such assets. The 
     discount rate is 120 percent of the applicable Federal rate, 
     compounded semiannually, or such other rate that the Treasury 
     Secretary shall prescribe by regulations. For purposes of 
     determining the value of a pool of revolving loan accounts 
     having substantially the same terms, each extension of credit 
     (other than the accrual of interest) is treated as a separate 
     debt instrument and the maturity of the instruments is 
     determined using the reasonably anticipated periodic payment 
     rate at which principal payments will be made as a proportion 
     of their aggregate outstanding principal assuming that 
     payments are applied to the earliest credit extensions. The 
     Finance Committee understood that reasonably expected cash 
     flows from loans will reflect nonpayment (i.e., losses), 
     early payments (i.e., prepayments), and reasonable costs of 
     servicing the loans. This value shall be used in determining 
     the amount of gain realized upon the contribution of assets 
     to a FASIT even though that value may be different than the 
     value of such assets would be applying a willing buyer/
     willing seller standard.
       Related person
       For purposes of the FASIT rules, a person is related to 
     another person if that person bears a relationship to the 
     other person specified in sections 267(b) or 707(b)(1), using 
     a 20-percent ownership test instead of the 50-percent test, 
     or such persons are engaged in trades or businesses under 
     common control as determined under sections 52(a) or (b).
       Related amendments
       For purposes of the wash sale rule (sec. 1091), an 
     ownership interest of a FASIT is treated as a ``security.'' 
     In addition, an ownership interest in a FASIT and a residual 
     interest in a pool of debt obligations that are substantially 
     similar to the debt obligations in the FASIT shall be treated 
     as ``substantially identical stock or securities''. Finally, 
     the wash sale period begins six months before, and ends six 
     months after, the sale of the ownership interest of the 
     FASIT.
       Effective date
       The Senate amendment would take effect on the date of 
     enactment. The Senate amendment provided a special transition 
     rule for entities (e.g., a trust whose interests are taxed 
     like a partnership) that were in existence on June 10, 1996, 
     that subsequently elect to be a FASIT (called a ``pre-
     effective date FASIT''). Under the special transitional rule, 
     gain is not recognized on property contributed, or deemed 
     contributed, to the FASIT to the extent that any such 
     property is allocable to interests issued by a ``pre-
     effective date FASIT'' (called a ``pre-FASIT interest''). The 
     portion of such property that is allocable to pre-FASIT 
     interests is to be determined by the Treasury Secretary, 
     except that the property of the entity allocable to ``pre-
     FASIT interests'' shall not be less than 107 percent of the 
     aggregate principal amounts of outstanding ``pre-FASIT 
     interests.''
     Conference agreement
       The conference agreement follows the Senate amendment with 
     the following changes and clarifications:
       The conference agreement modifies the rule under which 
     property that is acquired by a FASIT from someone other than 
     the FASIT's owner or a person related to the FASIT's owner is 
     treated as being first acquired by the FASIT's owner who then 
     transfers that asset to the FASIT. The conference 
     modification would clarify that the deemed acquisition by the 
     FASIT's owner would be for the FASIT's cost in acquiring that 
     asset from the non-owner or related person.
       The conference agreement makes a technical modification to 
     the rule which deems gain to be recognized on assets held by 
     the owner of the FASIT or a related person that support any 
     regular interest of the FASIT to clarify that the gain will 
     be deemed realized to the related person when the assets 
     which support a regular interest in the FASIT is held by that 
     related person.
       The conference agreement clarifies that the taxable income 
     of the holder of the ownership interest or a high-yield 
     interest, that may not be offset by non-FASIT losses, 
     includes gain and loss from the sale of the ownership 
     interest or high-yield interest. In addition, the conference 
     agreement coordinates the rule that limits a taxpayer's 
     ability to offset REMIC excess inclusion income against net 
     operating losses with this similar rule under the FASIT 
     provisions.
       The conference agreement provides that the taxable income 
     of a holder of a FASIT ownership interest cannot be less than 
     the taxable income with respect to the FASIT interest applies 
     to any consolidated group of corporations of which the holder 
     is a member as if the group were a single taxpayer.
       The conference agreement makes a technical modification to 
     the wording of a waiver of the rule that treats transfers of 
     high-yield interest to disqualified persons as being 
     ineffective such that the income for such high-yield 
     interests will remain includable in the gross income of the 
     transferor in computing its tax.
       The conference agreement limits the rule of the Senate 
     amendment that imposes a corporate tax on a pass-thru entity 
     that issues a debt or equity interest that is supported by a 
     regular interest in a FASIT and has high yield to cases where 
     a principal purpose of such arrangement is the avoidance of 
     the restriction that high-yield interests be held only by 
     qualified holders.
       The conference agreement modifies the rule of the Senate 
     amendment which deals with terminations of a FASIT to provide 
     that such terminations become effective on the date of the 
     termination, instead of the beginning of the FASIT's taxable 
     year in which the termination occurs.
       The conference agreement provides that an asset which was a 
     permitted asset at the time that it was acquired by the FASIT 
     shall not be treated as an interest in the FASIT,

[[Page H9653]]

     except to the extent provided by regulation issued by the 
     Treasury Secretary. Thus, an instrument acquired by the FASIT 
     as a hedge (e.g., an interest rate swap) will not later 
     become an interest in the FASIT when there is later an 
     obligation by the FASIT to make payments to the counterparty 
     under that hedge instrument.
       The conference agreement clarifies that a FASIT may issue 
     regular instruments with fixed rates or, except as provided 
     by regulations issued by Treasury Secretary, variable rates 
     permitted to be issued by real estate mortgage investment 
     conduits (``REMICs'').
       The conference agreement clarifies that ``interest-only 
     instruments'' (``IOs'') may be issued by a FASIT as high-
     yield instruments if the instrument makes payments which 
     consist of a specified portion of the interest payments in 
     permitted assets and that portion does not vary throughout 
     the life of that instrument.
       The conference agreement clarifies that foreclosure 
     property, which may be permitted asset of a FASIT, includes 
     property acquired by foreclosure even though the acquired 
     property is not real property. The conference agreement also 
     grants the Treasury Secretary the power to reduce by 
     regulations the two-year period that foreclosure property may 
     be held as a permitted asset of the FASIT.
       The conference agreement clarifies the application of 
     section 475 to a securities dealer that holds an ownership 
     interest in a FASIT. Under this clarification, except as 
     provided in Treasury regulations, if section 475 applies to 
     securities before their transfer to the FASIT, section 475 
     will continue to apply to securities that have been 
     transferred (or deemed transferred) to the FASIT, except that 
     the amount realized under the mark-to-market rule of section 
     475 shall be the greater of the securities' value under 
     present law or their value determined under the special 
     valuation rules applicable to FASITs.
       The conference agreement deletes in technical amendments 
     the rules that treat an ownership interests in a FASIT (a) as 
     a noncapital asset of a bank or (b) as a permitted asset of a 
     real estate investment trust (``REIT'').
       The conference agreement provides that a regular interest, 
     but not an ownership interest, in a FASIT is treated as a 
     qualified mortgage of a real estate mortgage investment 
     conduit (``REMIC'') if 95 percent or more of the value of the 
     FASIT's assets consists, at all times, of real estate 
     mortgages.
       The conference agreement clarifies that a regular interest, 
     but not an ownership interest, in a FASIT is treated as a 
     qualifying asset for purposes of the definition of a domestic 
     building and loan association so long as at least 95 percent 
     of the assets of the FASIT are, at all times, qualified 
     assets.
       The conference agreement delays the effective date of the 
     provision from the date of enactment of the provision to 
     September 1, 1997, and extends the special transitional rule 
     to any entity created before that date. The conferees expect 
     that, prior to September 1, 1997, Treasury will issue 
     guidance on how the ownership rule would apply to cases in 
     which the entity that owns the FASIT joins in the filing of a 
     consolidated return with other members of the group that wish 
     to hold an ownership interest in the FASIT.


                 20. revision of expatriation tax rules

       (Secs. 1631-1633 of the Senate amendment.)
     Present law
       Individuals who relinquish U.S. citizenship with a 
     principal purpose of avoiding U.S. taxes are subject to 
     special tax provisions for 10 years after expatriation. The 
     determination of who is a U.S. citizen for tax purposes, and 
     when such citizenship is lost, is governed by the provisions 
     of the Immigration and nationality Act, 8 U.S.C. section 
     1401, et. seq.
       An individual who relinquishes his U.S. citizenship with a 
     principal purpose of avoiding U.S. taxes is subject to tax on 
     his or her U.S. source income at the rates applicable to U.S. 
     citizens, rather than the rates applicable to other non-
     resident aliens, for 10 years after expatriation. In 
     addition, the scope of items treated as U.S. source income 
     for this purpose is broader than those items generally 
     considered to be U.S. source income. For example, gains on 
     the sale of personal property located in the United States 
     and gains on the sale or exchange of stock or securities 
     issued by U.S. persons are treated as U.S. source income. 
     This alternative method of income taxation applies only if it 
     results in a higher U.S. tax liability.
       Rules applicable in the estate and gift tax contexts expand 
     the categories of items that are subject to the gift and 
     estate taxes in the case of a U.S. citizen who relinquished 
     citizenship with a principal purpose of avoiding U.S. taxes 
     within the 10-year period ending on the date of the transfer. 
     For example, U.S. property held through a foreign corporation 
     controlled by such individual and related persons is included 
     in his or her estate and gifts of U.S.-situs intangible 
     property by such individual are subject to the gift tax.
     House bill
       No provision.
     Senate amendment
       The Senate amendment replaces the present-law expatriation 
     income tax rules with rules that generally subject certain 
     U.S. citizens who relinquish their U.S. citizenship and 
     certain long-term U.S. residents who relinquish their U.S. 
     residency to tax on the net unrealized gain in their property 
     as if such property were sold for fair market value on the 
     expatriation date. The Senate amendment modifies the present-
     law expatriation estate and gift tax rules to apply to 
     certain long-term U.S. residents and to provide that, for 
     purposes of applying such rules, certain persons would be 
     treated as having relinquished citizenship or residency for a 
     principal purpose of avoiding U.S. taxes. The Senate 
     amendment also imposes information reporting and sharing 
     obligations with respect to U.S. citizens who relinquish 
     their citizenship and long-term residents whose U.S. 
     residency is terminated.
       Effective date.--The provision generally is effective for 
     U.S. citizens whose date of relinquishment of citizenship 
     occurs on or after February 6, 1995 and for long-term 
     residents who terminate their U.S. residency on or after such 
     date.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment provision.


                 21. Modify treatment of foreign trusts

       (Secs. 411-417 of H.R. 3286.)
     Present law
       Inbound grantor trusts with foreign grantors
       Under the grantor trust rules (secs. 671-679), a grantor 
     that retains certain rights or powers generally is treated as 
     the owner of the trust's assets without regard to whether the 
     grantor is a domestic or foreign person. Under these rules, 
     U.S. trust beneficiaries are not subject to U.S. tax on 
     distributions from a trust where a foreign grantor is treated 
     as owner of the trust, even though no tax may be imposed on 
     the trust income by any jurisdiction. In addition, a special 
     rule provides that if a U.S. beneficiary of an inbound 
     grantor trust transfers property to the foreign grantor by 
     gift, that U.S. beneficiary is treated as the grantor of the 
     trust to the extent of the transfer.
       Foreign trusts that are no grantor trusts
       Under the accumulation distribution rules (which generally 
     apply to distributions from a trust in excess of the trust's 
     distributable net income for the taxable year), a 
     distribution by a foreign nongrantor trust of previously 
     accumulated income generally is taxed at the U.S. 
     beneficiary's average marginal rate for the prior 5 years, 
     plus interest (secs. 666 and 667). Interest is computed at a 
     fixed annual rate of 6 percent, with no compounding (sec. 
     668). If adequate records of the trust are not available to 
     determine the proper application of the rules relating to 
     accumulation distributions to any distribution from a trust, 
     the distribution is treated as an accumulation distribution 
     out of income earned during the first year of the trust (sec. 
     666(d)).
       If a foreign nongrantor trust makes a loan to one of its 
     beneficiaries, the principal of such a loan generally is not 
     taxable as income to the beneficiary.
       Outbound foreign grantor trusts with U.S. grantors
       Under the grantor trust rules, a U.S. person that transfers 
     property to a foreign trust generally is treated as the owner 
     of the portion of the trust comprising that property for any 
     taxable year in which there is a U.S. beneficiary of any 
     portion of the trust (sec. 679(a)). This treatment generally 
     does not apply, however, to transfers by reason of death, to 
     transfers made before the transferor became a U.S. person, or 
     to transfers that represent sales or exchanges of property at 
     fair market value where gain is recognized to the transferor.
       Residence of trusts
       A trust is treated as foreign if it is not subject to U.S. 
     income taxation on its income that is neither derived from 
     U.S. sources nor effectively connected with the conduct of a 
     U.S. trade or business. Thus, if a trust is taxed in a manner 
     similar to a nonresident alien individual, it is considered 
     to be a foreign trusts. Any other trust is treated as 
     domestic.
       Section 1491 generally imposes a 35-percent excise tax on a 
     U.S. person that transfers appreciated property to certain 
     foreign entities, including a foreign trust. In the case of a 
     domestic trust that changes its situs and becomes a foreign 
     trust, it is unclear whether property has been transferred 
     from a U.S. person to a foreign entity and, thus, whether the 
     transfer is subject to the excise tax.
       Information reporting and penalties related to foreign 
           trusts
       Any U.S. person that creates a foreign trust or transfers 
     money or property to a foreign trust is required to report 
     that event to the Treasury Department without regard to 
     whether the trust is a grantor or a nongrantor trust. 
     Similarly, any U.S. person that transfers property to a 
     foreign trust that has one or more U.S. beneficiaries is 
     required to report annually to the Treasury Department. In 
     addition, any U.S. person that makes a transfer described in 
     section 1491 is required to report the transfer to the 
     Treasury Department.
       Any person that fails to file a required report with 
     respect to the creation of, or a transfer to, a foreign trust 
     may be subject to a penalty of 5 percent of the amount 
     transferred to the foreign trust. Similarly, any person that 
     fails to file a required annual report with respect to a 
     foreign trust with U.S. beneficiaries may be subject to a 
     penalty of 5 percent of the value of the corpus of the trust 
     at the close of the taxable year. The maximum amount of the 
     penalty imposed under either case may not exceed $1,000. A 
     reasonable cause exception is available.

[[Page H9654]]

       Reporting of foreign gifts
       There is no requirement to report gifts or bequests from 
     foreign sources.
     House bill
       No provision. However, sections 411-417 of H.R. 3286 
     (Adoption Promotion and Stability Act of 1996) contains the 
     following provisions:
       Inbound grantor trusts with foreign grantors
       The House bill generally applies only to the extent it 
     results, directly or indirectly, in income or other amounts 
     (if any) being currently taken into account in computing the 
     income of a U.S. citizen or resident or a domestic 
     corporation. Certain exceptions apply to this rule. Under one 
     exception, the grantor trust rules continue to apply to the 
     portion of a trust where that portion of the trust is 
     revocable by the grantor either without approval of another 
     person or with the consent of a related or subordinate party 
     who is subservient to the grantor. Under another exception, 
     the grantor trust rules continue to apply to the portion of a 
     trust where the only amounts distributable from that portion 
     during the lifetime of the grantor are to the grantor or the 
     grantor's spouse. The general rule denying grantor trust 
     status does not apply to trusts established to pay 
     compensation, and certain trusts in existence as of September 
     19, 1995 provided that such trust is treated as owned by the 
     grantor under section 676 or 677 (other than sec. 
     677(a)(3)).\69\ In addition, the grantor trust rules 
     generally apply where the grantor is a controlled foreign 
     corporation (as defined in sec. 957). Finally, the grantor 
     trust rules continue to apply in determining whether a 
     foreign corporation is characterized as a passive foreign 
     investment company (``PFIC''). Thus, a foreign corporation 
     cannot avoid PFIC status by transferring its assets to a 
     grantor trust.
---------------------------------------------------------------------------
     \69\ The exception does not apply to the portion of any such 
     trust attributable to any transfers made after September 19, 
     1995.
---------------------------------------------------------------------------
       If a U.S. beneficiary, or a family member of such a 
     beneficiary,\70\ of an inbound grantor trust transfers 
     property to the foreign grantor, such beneficiary generally 
     is treated as a grantor of a portion of the trust to the 
     extent of the transfer. This rule applies without regard to 
     whether the foreign grantor is otherwise treated as the owner 
     of any portion of such trust. However, this rule does not 
     apply if the transfer is a sale of the property for full and 
     adequate consideration or if the transfer is a gift that 
     qualifies for the annual exclusion described in section 
     2503(b).
---------------------------------------------------------------------------
     \70\ For this purpose, a family member is generally defined 
     as a brother, sister, spouse, ancestor or lineal descendant.
---------------------------------------------------------------------------
       The House bill provides a special rule that allows the 
     Secretary of the Treasury to recharacterize a transfer, 
     directly or indirectly, from a partnership or foreign 
     corporation which the transferee treats as a gift or bequest, 
     to prevent the avoidance of the purpose of section 
     672(f).\71\ In a case where a foreign person (that would be 
     treated as the owner of a trust but for the above rule) 
     actually pays tax on the income of the trust to a foreign 
     country, it is anticipated that Treasury regulations will 
     provide that, for foreign tax credit purposes, U.S. 
     beneficiaries that are subject to U.S. income tax on the same 
     income will be treated as having paid the foreign taxes that 
     are paid by the foreign grantor. Any resulting foreign tax 
     credits would be subject to applicable foreign tax credit 
     limitations.
---------------------------------------------------------------------------
     \71\ See discussion below for reporting requirements under 
     the House bill with respect to certain foreign gifts and 
     bequests received by a U.S. person.
---------------------------------------------------------------------------
       The House bill provides a transition rule for any domestic 
     trust that has a foreign grantor that is treated as the owner 
     of the trust under present law, but becomes a nongrantor 
     trust under the bill. If such a trust becomes a foreign trust 
     before January 1, 1997, or if the assets of such a trust are 
     transferred to a foreign trust before that date, such trust 
     is exempt from the excise tax on transfers to a foreign trust 
     otherwise imposed by section 1491. However, the House bill's 
     new reporting requirements and penalties are applicable to 
     such a trust and its beneficiaries. In addition, the assets 
     of such a trust will be treated as if they were recontributed 
     to a nongrantor trust by the foreign grantor, with no 
     recognition of gain or loss, on the date the trust ceases to 
     be treated as a grantor trust. The nongrantor trust will have 
     the same basis in such assets as did the grantor on the date 
     the trust ceases to be treated as a grantor trust.
       Effective date.--The provisions described in this part are 
     effective on the date of enactment.
       Foreign trusts that are not grantor trusts
       The House bill changes the interest rate applicable to 
     accumulation distributions from foreign trusts from simple 
     interest at a fixed rate of 6 percent to compound interest 
     determined in the same manner as interest imposed on 
     underpayments of tax under section 6621(a)(2). Simple 
     interest is accrued at the rate of 6 percent through 1995. 
     Beginning on January 1, 1996, however, compound interest 
     based on the underpayment rate is imposed not only on tax 
     amounts determined under the accumulation distribution rules 
     but also on the total simple interest for pre-1996 periods, 
     if any. For purposes of computing the interest charge, the 
     accumulation distribution is allocated proportionately to 
     prior trust years in which the trust has undistributed net 
     income (and the beneficiary receiving the distribution was a 
     U.S. citizen or resident), rather than to the earliest of 
     such years. An accumulation distribution is treated as 
     reducing proportionately the undistributed net income from 
     prior years.
       In the case of a loan of cash or marketable securities by 
     the foreign trust to a U.S. grantor or a U.S. beneficiary (or 
     a U.S. person related to such grantor or beneficiary\72\ ), 
     except, to the extent provided by Treasury regulations, the 
     House bill treats the full amount of the loan as distributed 
     to the grantor or beneficiary. It is expected that Treasury 
     regulations will provide an exception from this treatment for 
     loans with arm's-length terms. In applying this exception, it 
     is further expected that consideration be given to whether 
     there is a reasonable expectation that a loan will be repaid. 
     In addition, any subsequent transaction between the trust and 
     the original borrower regarding the principal of the loan 
     (e.g., repayment) is disregarded for all purposes of the 
     Code. This provision does not apply to loans made to persons 
     that are exempt from U.S. income tax.
---------------------------------------------------------------------------
     \72\ For this purpose, a person generally would be treated as 
     related to the grantor or beneficiary if the relationship 
     between such person and the grantor or beneficiary would 
     result in a disallowance of losses under section 267 or 
     707(b), except that in applying section 267(c)(4) an 
     individual's family includes the spouses of the members of 
     the family.
---------------------------------------------------------------------------
       Effective date.--The provision to modify the interest 
     charge on accumulation distributions applies to distributions 
     after the date of enactment. The provision with respect to 
     loans to U.S. grantors, U.S. beneficiaries or a related U.S. 
     person related to such a grantor or beneficiary applies to 
     loans made after September 19, 1995.
       Outbound foreign grantor trusts with U.S. grantors
       The House bill makes several modifications to the general 
     rule of section 679(a)(1) under which a U.S. person who 
     transfer property to a foreign trust generally is treated as 
     the owner of the portion of the trust comprising that 
     property for any taxable year in which there is a U.S. 
     beneficiary of the trust. The House bill also contains an 
     amendment to conform the definition of certain foreign 
     corporations the income of which is deemed to be accumulated 
     for the benefit of a U.S. beneficiary to the definition 
     controlled foreign corporations (as defined in sec. 957(a)).
       Sale or exchange at market value.--Present law contains 
     several exceptions to grantor trust treatment under section 
     679(a)(1) described above. Under one of the exceptions, 
     grantor trust treatment does not result from a transfer of 
     property by a U.S. person to a foreign trust in the form of a 
     sale or exchange at fair market value where gain is 
     recognized to the transferor. In determining whether the 
     trust paid fair markets value to the transferor, the House 
     bill provides that obligations issued (or, to the extent 
     provided by regulations, guaranteed) by the trust, by any 
     grantor or beneficiary of the trust, or by any person related 
     to any grantor or beneficiary \73\ (referred to as ``trust 
     obligations'') generally are not taken into account except as 
     provided in Treasury re