H. Rept. 104-737 - 104th Congress (1995-1996)
August 01, 1996

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House Report 104-737 - SMALL BUSINESS JOB PROTECTION ACT OF 1996




[House Report 104-737]
[From the U.S. Government Printing Office]



104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     104-737
_______________________________________________________________________


 
               SMALL BUSINESS JOB PROTECTION ACT OF 1996

                                _______
                                

                 August 1, 1996.--Ordered to be printed

_______________________________________________________________________


 Mr. Archer, from the committee of conference, submitted the following

                           CONFERENCE REPORT

                        [To accompany H.R. 3448]

    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.*COM003*
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.
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 the taxable year                                 The applicable
      begins in:                                              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 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 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,
                    ``(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.
                    ``(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 
                        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:
                            ``(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:
            ``(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 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.

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 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:
                    ``(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 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 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 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 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.--
            (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) 
        --
                    ``(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 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.--
                            ``(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.
            (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:
                            ``(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 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.
            ``(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
                    ``(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.''.
            (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)''.
            (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).
    ``(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 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
                    (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 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.''.
    (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 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 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)''.
            (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:
    ``(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 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--
                            ``(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 forpurposes 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 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 2d 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 3d 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 and 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 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 willfulneglect. 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
                            ``(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 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 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.
                    ``(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.--
                    ``(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.
``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 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 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, 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 makes 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 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 provided 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 having 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 than 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 
withholding and 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 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 list 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 sparkling 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 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 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 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.
House bill
      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 
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\
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    \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)).
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      In computing the credit, a taxpayer's base amount may not 
be less than 50 percent of its current-year qualified research 
expenditures.
      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\
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    \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.
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      In addition, the Senate amendment allows 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 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 from 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.
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    \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\
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    \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 
(secs. 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 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\
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    \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.
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      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 then 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.
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 includible 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.)
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 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 corporations 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)).
      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 to 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 5-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 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 House bill and the 
Senate amendment.
            Recovery of basis
      The conference agreement follows the House bill and 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 the employee 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-
sponsored 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 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 becoming 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) of 
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 in 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 of $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 time 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 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, 1998.
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. plans 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 retirement age. The Social Security 
retirement age as used for such purposes 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 officers, 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 457 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 actuarial 
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 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 provision is effective with respect 
to distributions 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.

                   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 occurring 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 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 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 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, 
shareholders, 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 ministers.
      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 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.)
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 as 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 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 as 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\
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    \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 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 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.
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    \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.
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      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 its 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 that 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. 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 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 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.
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    \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)).
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      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 income 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.
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    \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), 9027051 
(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 one 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.
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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 or (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.
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    \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.
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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 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 as 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 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. 3639 (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 provisions 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.)
Present law
      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 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 arisen 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) 
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.
      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 between 
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. 99-514, 
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\
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    \57\ Rev. Rul. 770405, 1977-2 C.B. 381; Rev. Rul. 76-394, 1976-2 
C.B. 355.
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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 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 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 included 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 l