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105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________


 
                   REVENUE RECONCILIATION ACT OF 1997

                               ----------                              

                              R E P O R T

                                 of the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 2014

A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND 
   (d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR 
                            FISCAL YEAR 1998

                             together with

                    ADDITIONAL AND DISSENTING VIEWS




 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed



                   REVENUE RECONCILIATION ACT OF 1997



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________


                   REVENUE RECONCILIATION ACT OF 1997

                               __________

                              R E P O R T

                                 of the

                        COMMITTEE ON THE BUDGET

                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 2014

A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND 
   (d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR 
                            FISCAL YEAR 1998

                             together with

                    ADDITIONAL AND DISSENTING VIEWS





 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
DAVID L. HOBSON, Ohio,               JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
JIM BUNNING, Kentucky                  Leadership Designee
LAMAR S. SMITH, Texas                ALAN B. MOLLOHAN, West Virginia
DAN MILLER, Florida                  JERRY F. COSTELLO, Illinois
BOB FRANKS, New Jersey               PATSY T. MINK, Hawaii
NICK SMITH, Michigan                 EARL POMEROY, North Dakota
BOB INGLIS, South Carolina           LYNN C. WOOLSEY, California
SUSAN MOLINARI, New York             LUCILLE ROYBAL-ALLARD, California
JIM NUSSLE, Iowa                     LYNN N. RIVERS, Michigan
PETER HOEKSTRA, Michigan             LLOYD DOGGETT, Texas
JOHN SHADEGG, Arizona                BENNIE G. THOMPSON, Mississippi
GEORGE P. RADANOVICH, California     BENJAMIN L. CARDIN, Maryland
CHARLES F. BASS, New Hampshire       DAVID MINGE, Minnesota
MARK W. NEUMANN, Wisconsin           SCOTTY BAESLER, Kentucky
MIKE PARKER, Mississippi             KEN BENTSEN, Texas
BOB EHRLICH, Maryland                JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             BRAD SHERMAN, California
VAN HILLEARY, Tennessee              ROBERT A. WEYGAND, Rhode Island
KAY GRANGER, Texas                   EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire
JOSEPH PITTS, Pennsylvania

                           Professional Staff

                     Richard E. May, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Legislative Language.............................................     1
Report Language:
    I. Introduction..............................................   287
    II. Explanation of the Bill..................................   309
    III. Votes of the Committee..................................   670
    IV. Budget Effects of the Bill...............................   678
    V. Other Matters to be Discussed Under the Rules of the House   700
    Miscellaneous House Report Requirements......................   703
    Additional and Dissenting Views..............................   731
                                                                       



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________



PROVIDING FOR RECONCILIATION PURSUANT TO SUBSECTIONS (B)(2) AND (D) OF 
SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 
                                  1998

_______________________________________________________________________


 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Kasich, from the Committee on the Budget, submitted the following

                              R E P O R T

                             together with

                    ADDITIONAL AND DISSENTING VIEWS

                        [To accompany H.R. 2014]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Budget, to whom reconciliation 
recommendations were submitted pursuant to subsections (b)(2) 
and (d) of section 105 of House Concurrent Resolution 84, the 
concurrent resolution on the budget for fiscal year 1998, 
having considered the same, reports favorably thereon without 
amendment and recommends that the bill do pass.

A BILL To provide for reconciliation pursuant to subsections (b)(2) and 
   (d) of section 105 of the concurrent resolution on the budget for 
                           fiscal year 1998.

    Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Revenue 
Reconciliation Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.
    (c) Table of Contents.--The table of contents for this Act 
is as follows:
Sec. 1. Short title; amendment of 1986 Code.

TITLE I--CHILD TAX CREDIT; TAX INCENTIVES FOR DEPENDENT CARE AND HEALTH 
                            CARE FOR CHILDREN

Sec. 101. Child tax credit.
Sec. 102. Inflation adjustment of limits and other modifications of 
          dependent care credit.

                     TITLE II--EDUCATION INCENTIVES

         Subtitle A--Tax Benefits Relating to Education Expenses

Sec. 201. Hope credit for higher education tuition and related expenses.
Sec. 202. Deduction for qualified higher education expenses.
Sec. 203. Penalty-free withdrawals from individual retirement plans for 
          higher education expenses.
Sec. 204. Expenses for education which supplements elementary and 
          secondary education.

     Subtitle B--Expanded Education Investment Savings Opportunities

Sec. 211. Eligible educational institutions permitted to maintain 
          qualified tuition programs; other modifications of qualified 
          State tuition programs.
Sec. 212. Education investment accounts.

                 Subtitle C--Other Education Initiatives

Sec. 221. Extension of exclusion for employer-provided educational 
          assistance.
Sec. 222. Increase in limitation on qualified 501(c)(3) bonds other than 
          hospital bonds.
Sec. 223. Contributions of computer technology and equipment for 
          elementary or secondary school purposes.
Sec. 224. Treatment of cancellation of certain student loans.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

Sec. 301. Establishment of American Dream IRA.

                        Subtitle B--Capital Gains

                    Part I--Individual Capital Gains

Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Indexing of certain assets acquired after December 31, 2000, 
          for purposes of determining gain.
Sec. 313. Exemption from tax for gain on sale of principal residence.

                    Part II--Corporate Capital Gains

Sec. 321. Reduction of alternative capital gain tax for corporations.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

Sec. 401. Adjustment of exemption amounts for taxpayers other than 
          corporations.
Sec. 402. Exemption from alternative minimum tax for small corporations.
Sec. 403. Repeal of adjustment for depreciation.
Sec. 404. Minimum tax not to apply to farmers' installment sales.

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

               Subtitle A--Estate and Gift Tax Provisions

Sec. 501. Cost-of-living adjustments relating to estate and gift tax 
          provisions.
Sec. 502. 20-year installment payment where estate consists largely of 
          interest in closely held business.
Sec. 503. No interest on certain portion of estate tax extended under 
          section 6166, reduced interest on remaining portion, and no 
          deduction for such reduced interest.
Sec. 504. Extension of treatment of certain rents under section 2032A to 
          lineal descendants.
Sec. 505. Clarification of judicial review of eligibility for extension 
          of time for payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after 
          expiration of statute of limitations.
Sec. 507. Termination of throwback rules for domestic trusts.
Sec. 508. Unified credit of decedent increased by unified credit of 
          spouse used on split gift included in decedent's gross estate.
Sec. 509. Reformation of defective bequests, etc., to spouse of 
          decedent.

             Subtitle B--Generation-Skipping Tax Provisions

Sec. 511. Severing of trusts holding property having an inclusion ratio 
          of greater than zero.
Sec. 512. Expansion of exception from generation-skipping transfer tax 
          for transfers to individuals with deceased parents.

   TITLE VI--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS

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

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

Sec. 701. Tax incentives for revitalization of the District of Columbia.
Sec. 702. Incentives conditioned on other DC reform.

                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

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

                   TITLE IX--MISCELLANEOUS PROVISIONS

             Subtitle A--Provisions Relating to Excise Taxes

Sec. 901. Repeal of tax on diesel fuel used in recreational boats.
Sec. 902. Continued application of tax on imported recycled Halon-1211.
Sec. 903. Uniform rate of tax on vaccines.
Sec. 904. Operators of multiple gasoline retail outlets treated as 
          wholesale distributor for refund purposes.
Sec. 905. Exemption of electric and other clean-fuel motor vehicles from 
          luxury automobile classification.

     Subtitle B--Provisions Relating to Pensions and Fringe Benefits

Sec. 911. Section 401(k) plans for certain irrigation and drainage 
          entities.
Sec. 912. Extension of moratorium on application of certain 
          nondiscrimination rules to State and local governments.
Sec. 913. Treatment of certain disability benefits received by former 
          police officers or firefighters.
Sec. 914. Portability of permissive service credit under governmental 
          pension plans.
Sec. 915. Gratuitous transfers for the benefit of employees.
Sec. 916. Treatment of certain transportation on non-commercially 
          operated aircraft as a fringe benefit excludable from gross 
          income.
Sec. 917. Minimum pension accrued benefit distributable without consent 
          increased to $5,000.
Sec. 918. Clarification of certain rules relating to employee stock 
          ownership plans of S corporations.

               Subtitle C--Revisions Relating to Disasters

Sec. 921. Authority to postpone certain tax-related deadlines by reason 
          of presidentially declared disaster.
Sec. 922. Use of certain appraisals to establish amount of disaster 
          loss.
Sec. 923. Treatment of livestock sold on account of weather-related 
          conditions.
Sec. 924. Mortgage financing for residences located in disaster areas.

           Subtitle D--Provisions Relating to Employment Taxes

Sec. 931. Clarification of employment tax status of individuals 
          distributing bakery products.
Sec. 932. Clarification of standard to be used in determining employment 
          tax status of retail securities brokers.
Sec. 933. Clarification of exemption from self-employment tax for 
          certain termination payments received by former insurance 
          salesmen.
Sec. 934. Standards for determining whether individuals are not 
          employees.

           Subtitle E--Provisions Relating to Small Businesses

Sec. 941. Waiver of penalty through 1998 on small businesses failing to 
          make electronic fund transfers of taxes.
Sec. 942. Clarification of treatment of home office use for 
          administrative and management activities.

                      Subtitle F--Other Provisions

Sec. 951. Use of estimates of shrinkage for inventory accounting.
Sec. 952. Assignment of workmen's compensation liability eligible for 
          exclusion relating to personal injury liability assignments.
Sec. 953. Tax-exempt status for certain State worker's compensation act 
          companies.
Sec. 954. Election to continue exception from treatment of publicly 
          traded partnerships as corporations.
Sec. 955. Exclusion from unrelated business taxable income for certain 
          sponsorship payments.
Sec. 956. Associations of holders of timeshare interests to be taxed 
          like other homeowners associations.
Sec. 957. Additional advance refunding of certain Virgin Island bonds.
Sec. 958. Nonrecognition of gain on sale of stock to certain farmers' 
          cooperatives.
Sec. 959. Exception from reporting of real estate transactions for sales 
          and exchanges of certain principal residences.
Sec. 960. Increased deductibility of business meal expenses for 
          individuals subject to Federal hours of service.
Sec. 961. Qualified lessee construction allowances for short-term 
          leases.
Sec. 962. Tax treatment of consolidations of life insurance departments 
          of mutual savings banks.
Sec. 963. Offset of past-due, legally enforceable State tax obligations 
          against overpayments.
Sec. 964. Exemption of the incremental cost of a clean fuel vehicle from 
          the limits on depreciation for vehicles.
Sec. 965. Tax benefits for law enforcement officers killed in the line 
          of duty.
Sec. 966. Temporary suspension of taxable income limit on percentage 
          depletion for marginal production.

Subtitle G--Extension of Duty-Free Treatment Under Generalized System of 
Preferences; Tariff Treatment of Certain Equipment and Repair of Vessels

Sec. 971. Generalized system of preferences.
Sec. 972. Equipment and repair of vessels.

     Subtitle H--United States-Caribbean Basin Trade Partnership Act

Sec. 981. Short title.
Sec. 982. Findings and policy.
Sec. 983. Definitions.
Sec. 984. Temporary provisions to provide NAFTA parity to partnership 
          countries.
Sec. 985. Effect of NAFTA on sugar imports from beneficiary countries.
Sec. 986. Duty-free treatment for certain beverages made with Caribbean 
          rum.
Sec. 987. Meetings of trade ministers and USTR.
Sec. 988. Report on economic development and market oriented reforms in 
          the Caribbean.

                            TITLE X--REVENUES

                     Subtitle A--Financial Products

Sec. 1001. Constructive sales treatment for appreciated financial 
          positions.
Sec. 1002. Limitation on exception for investment companies under 
          section 351.
Sec. 1003. Modification of rules for allocating interest expense to tax-
          exempt interest.
Sec. 1004. Gains and losses from certain terminations with respect to 
          property.
Sec. 1005. Determination of original issue discount where pooled debt 
          obligations subject to acceleration.
Sec. 1006. Denial of interest deductions on certain debt instruments.

         Subtitle B--Corporate Organizations and Reorganizations

Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions followed by 
          acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Modification of holding period applicable to dividends 
          received deduction.

                 Subtitle C--Other Corporate Provisions

Sec. 1021. Registration and other provisions relating to confidential 
          corporate tax shelters.
Sec. 1022. Certain preferred stock treated as boot.

                  Subtitle D--Administrative Provisions

Sec. 1031. Reporting of certain payments made to attorneys.
Sec. 1032. Decrease of threshold for reporting payments to corporations 
          performing services for Federal agencies.
Sec. 1033. Disclosure of return information for administration of 
          certain veterans programs.
Sec. 1034. Continuous levy on certain payments.
Sec. 1035. Modification of levy exemption.
Sec. 1036. Confidentiality and disclosure of returns and return 
          information.
Sec. 1037. Returns of beneficiaries of estates and trusts required to 
          file returns consistent with estate or trust return or to 
          notify secretary of inconsistency.

                    Subtitle E--Excise Tax Provisions

Sec. 1041. Extension and modification of Airport and Airway Trust Fund 
          taxes.
Sec. 1042. Kerosene taxed as diesel fuel.
Sec. 1043. Reduction of incentives for alcohol fuels.
Sec. 1044. Restoration of Leaking Underground Storage Tank Trust Fund 
          taxes.
Sec. 1045. Application of communications tax to long-distance prepaid 
          telephone cards.

         Subtitle F--Provisions Relating to Tax-Exempt Entities

Sec. 1051. Expansion of look-thru rule for interest, annuities, 
          royalties, and rents derived by subsidiaries of tax-exempt 
          organizations.
Sec. 1052. Limitation on increase in basis of property resulting from 
          sale by tax-exempt entity to a related person.
Sec. 1053. Modifications to exception from reporting, etc. of lobbying 
          activities.
Sec. 1054. Termination of certain exceptions from rules relating to 
          exempt organizations which provide commercial-type insurance.

                  Subtitle G--Other Revenue Provisions

Sec. 1061. Termination of suspense accounts for family corporations 
          required to use accrual method of accounting.
Sec. 1062. Modification of taxable years to which net operating losses 
          may be carried.
Sec. 1063. Expansion of denial of deduction for certain amounts paid in 
          connection with insurance.
Sec. 1064. Allocation of basis among properties distributed by 
          partnership.
Sec. 1065. Repeal of requirement that inventory be substantially 
          appreciated.
Sec. 1066. Extension of time for taxing precontribution gain.
Sec. 1067. Restrictions on availability of earned income credit for 
          taxpayers who improperly claimed credit in prior year.
Sec. 1068. Limitation on property for which income forecast method may 
          be used.
Sec. 1069. Repeal of special rule for rental use of vacation homes, 
          etc., for less than 15 days.
Sec. 1070. Expansion of requirement that involuntarily converted 
          property be replaced with property acquired from an unrelated 
          person.
Sec. 1071. Treatment of exception from installment sales rules for sales 
          of property by a manufacturer to a dealer.

      TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

Sec. 1101. Treatment of computer software as FSC export property.
Sec. 1102. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1103. Certain individuals exempt from foreign tax credit 
          limitation.
Sec. 1104. Exchange rate used in translating foreign taxes.
Sec. 1105. Election to use simplified section 904 limitation for 
          alternative minimum tax.
Sec. 1106. Treatment of personal transactions by individuals under 
          foreign currency rules.
Sec. 1107. All noncontrolled section 902 corporations which are not 
          passive foreign investment companies in one foreign tax 
          limitation basket.

        Subtitle B--Treatment of Controlled Foreign Corporations

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

      Subtitle C--Treatment of Passive Foreign Investment Companies

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

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

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

                    Subtitle E--Information Reporting

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

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

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

               Subtitle G--Other Simplification Provisions

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

                      Subtitle H--Other Provisions

Sec. 1171. Definition of foreign personal holding company income.
Sec. 1172. Personal property used predominantly in the United States 
          treated as not property of a like kind with respect to 
          property used predominantly outside the United States.
Sec. 1173. Holding period requirement for certain foreign taxes.
Sec. 1174. Penalties for failure to disclose position that certain 
          international transportation income is not includible in gross 
          income.
Sec. 1175. Denial of treaty benefits for certain payments through hybrid 
          entities.
Sec. 1176. Interest on underpayments not reduced by foreign tax credit 
          carrybacks.
Sec. 1177. Clarification of period of limitations on claim for credit or 
          refund attributable to foreign tax credit carryforward.
Sec. 1178. Miscellaneous clarifications.

    TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES

             Subtitle A--Provisions Relating to Individuals

Sec. 1201. Basic standard deduction and minimum tax exemption amount for 
          certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax 
          requirements.
Sec. 1203. Optional methods for computing SECA tax combined.
Sec. 1204. Treatment of certain reimbursed expenses of rural mail 
          carriers.
Sec. 1205. Treatment of traveling expenses of certain Federal employees 
          engaged in criminal investigations.
Sec. 1206. Payment of tax by commercially acceptable means.

         Subtitle B--Provisions Relating to Businesses Generally

Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty 
          insurance companies.

   Subtitle C--Simplification Relating to Electing Large Partnerships

                       Part I--General Provisions

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

      Part II--Provisions Related to TEFRA Partnership Proceedings

Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures to 
          be followed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on 
          assessment.
Sec. 1236. Extension of time for filing a request for administrative 
          adjustment.
Sec. 1237. Availability of innocent spouse relief in context of 
          partnership proceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or 
          5-percent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational 
          adjustment resulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with 
          respect to bad debts or worthless securities.

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

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

    Subtitle D--Provisions Relating to Real Estate Investment Trusts

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

    Subtitle E--Provisions Relating to Regulated Investment Companies

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

                    Subtitle F--Taxpayer Protections

Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror has 
          been audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
Sec. 1286. Penalty for unauthorized inspection of tax returns or tax 
          return information.
Sec. 1287. Civil damages for unauthorized inspection of returns and 
          return information; notification of unlawful inspection or 
          disclosure.

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

Sec. 1301. Gifts to charities exempt from gift tax filing requirements. 
Sec. 1302. Clarification of waiver of certain rights of recovery. 
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Clarifications relating to disclaimers.
Sec. 1305. Increase of amount of lapse of general power of appointment 
          not treated as release for purposes of estate and gift tax (5 
          or 5 power).
Sec. 1306. Treatment for estate tax purposes of short-term obligations 
          held by nonresident aliens.
Sec. 1307. Certain revocable trusts treated as part of estate.
Sec. 1308.  Distributions during first 65 days of taxable year of 
          estate.
Sec. 1309. Separate share rules available to estates.
Sec. 1310. Executor of estate and beneficiaries treated as related 
          persons for disallowance of losses, etc.
Sec. 1311. Limitation on taxable year of estates.
Sec. 1312. Treatment of funeral trusts.
Sec. 1313. Adjustments for gifts within 3 years of decedent's death.
Sec. 1314. Clarification of treatment of survivor annuities under 
          qualified terminable interest rules.
Sec. 1315. Treatment under qualified domestic trust rules of forms of 
          ownership which are not trusts.
Sec. 1316. Opportunity to correct certain failures under section 2032A.
Sec. 1317. Authority to waive requirement of United States trustee for 
          qualified domestic trusts.

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

                  Subtitle A--Excise Tax Simplification

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

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

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

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

                  Part III--Other Excise Tax Provisions

Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.

                 Subtitle B--Tax-Exempt Bond Provisions

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

                    Subtitle C--Tax Court Procedures

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

                      Subtitle D--Other Provisions

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

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

Sec. 1501. Amendments related to Small Business Job Protection Act of 
          1996.
Sec. 1502. Amendments related to Health Insurance Portability and 
          Accountability Act of 1996.
Sec. 1503. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1504. Miscellaneous provisions.

    TITLE I--CHILD TAX CREDIT; MODIFICATION OF DEPENDENT CARE CREDIT

SEC. 101. CHILD TAX CREDIT.

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

``SEC. 24. CHILD TAX CREDIT.

    ``(a) Allowance of Credit.--There shall be allowed as a 
credit against the tax imposed by this chapter for the taxable 
year an amount equal to $500 multiplied by the number of 
qualifying children of the taxpayer.
    ``(b) Limitations.--
          ``(1) Limitation based on adjusted gross income.--For 
        limitation based on adjusted gross income, see section 
        26(c).
          ``(2) Reduction for dependent care credit.--In the 
        case of taxable years beginning after December 31, 
        2001--
                  ``(A) In general.--The credit allowed by 
                subsection (a) for the taxable year (determined 
                after paragraph (1) but before paragraph (3)) 
                shall be reduced by the amount equal to 50 
                percent of the credit allowed under section 21 
                for such taxable year (determined after section 
                26(c)).
                  ``(B) No reduction for dependent care of 
                individuals incapable of self-care.--
                Subparagraph (A) shall not apply to so much of 
                the credit which would have been allowed under 
                section 21 (determined without regard to 
                section 26(c)) if only qualifying individuals 
                described in subparagraph (B) or (C) of section 
                21(b)(1) were taken into account.
          ``(3) Limitation based on amount of tax.--The credit 
        allowed by subsection (a) (determined after paragraphs 
        (1) and (2)) shall not exceed the excess (if any) of--
                  ``(A) the taxpayer's regular tax liability 
                for the taxable year reduced by the credits 
                allowable against such tax under this subpart 
                (other than this section), over
                  ``(B) the sum of--
                          ``(i) the taxpayer's tentative 
                        minimum tax for such taxable year 
                        (determined without regard to the 
                        alternative minimum tax foreign tax 
                        credit), plus
                          ``(ii) the credit allowed for the 
                        taxable year under section 32.
    ``(c) Qualifying Child.--For purposes of this section--
          ``(1) In general.--The term `qualifying child' means 
        any individual if--
                  ``(A) the taxpayer is allowed a deduction 
                under section 151 with respect to such 
                individual for the taxable year,
                  ``(B) such individual has not attained the 
                age of 17 as of the close of the calendar year 
                in which the taxable year of the taxpayer 
                begins, and
                  ``(C) such individual bears a relationship to 
                the taxpayer described in section 32(c)(3)(B).
          ``(2) Exception for certain noncitizens.--The term 
        `qualifying child' shall not include any individual who 
        would not be a dependent if the first sentence of 
        section 152(b)(3) were applied without regard to all 
        that follows `resident of the United States'.
    ``(d) Taxable Year Must Be Full Taxable Year.--Except in 
the case of a taxable year closed by reason of the death of the 
taxpayer, no credit shall be allowable under this section in 
the case of a taxable year covering a period of less than 12 
months.
    ``(e) Phasein of Credit.--In the case of taxable years 
beginning in 1998, subsection (a) shall be applied by 
substituting `$400' for `$500'.''
    (b) High Risk Pools Permitted To Cover Dependents of High 
Risk Individuals.--Paragraph (26) of section 501(c) is amended 
by adding at the end the following flush sentence:
        ``A qualifying child (as defined in section 24(c)) of 
        an individual described in subparagraph (B) (without 
        regard to this sentence) shall be treated as described 
        in subparagraph (B).''
    (c) Conforming Amendments.--
          (1) Subsection (a) of section 26 is amended by 
        inserting ``(other than the credit allowed by section 
        24)'' after ``credits allowed by this subpart''.
          (2) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 is amended by inserting after 
        the item relating to section 23 the following new item:

        ``Sec. 24. Child tax credit.''

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 102. INFLATION ADJUSTMENT OF LIMITS AND OTHER MODIFICATIONS OF 
                    DEPENDENT CARE CREDIT.

    (a) Inflation Adjustment.--
          (1) In general.--Subsection (c) of section 21 
        (relating to expenses for household and dependent care 
        services necessary for gainful employment) is amended 
        to read as follows:
    ``(c) Dollar Limit on Amount Creditable.--
          ``(1) In general.--The amount of the employment-
        related expenses incurred during any taxable year which 
        may be taken into account under subsection (a) shall 
        not exceed--
                  ``(A) $2,400 if there is 1 qualifying 
                individual with respect to the taxpayer for 
                such taxable year, or
                  ``(B) $4,800 if there are 2 or more 
                qualifying individuals with respect to the 
                taxpayer for such taxable year.
        The amount determined under subparagraph (A) or (B) 
        (whichever is applicable) shall be reduced by the 
        aggregate amount excludable from gross income under 
        section 129 for the taxable year.
          ``(2) Inflation adjustment.--In the case of taxable 
        years beginning in a calendar year after 1997, each of 
        the dollar amounts contained in paragraph (1) shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1996' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $50, such amount shall be rounded 
        to the next lowest multiple of $50.''
          (2) Conforming amendment.--Paragraph (2) of section 
        21(d) is amended by striking ``(c)(1)'' and inserting 
        ``(c)(1)(A)'' and by striking ``(c)(2)'' and inserting 
        ``(c)(1)(B)''.
    (b) Reduction of Benefit Based on Adjusted Gross Income.--
          (1) In general.--Section 26 is amended by 
        redesignating subsection (c) as subsection (d) and by 
        inserting after subsection (b) the following new 
        subsection:
    ``(c) Reduction of Dependent Care Credit and Child Credit 
Based on Adjusted Gross Income.--
          ``(1) In general.--The aggregate amount which would 
        (but for subsection (a), this subsection, and 
        paragraphs (2) and (3) of section 24(b)) be allowed 
        under sections 21 and 24 shall be reduced (but not 
        below zero) by$25 for each $1,000 (or fraction thereof) 
by which the taxpayer's modified adjusted gross income exceeds the 
threshold amount. For purposes of the preceding sentence, the term 
`modified adjusted gross income' means adjusted gross income increased 
by any amount excluded from gross income under section 911, 931, or 
933.
          ``(2) Threshold amount.--For purposes of paragraph 
        (1), the term `threshold amount' means--
                  ``(A) $110,000 in the case of a joint return,
                  ``(B) $75,000 in the case of an individual 
                who is not married, and
                  ``(C) $55,000 in the case of a married 
                individual filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.
          ``(3) Remaining credit treated as attributable to 
        dependent care tax credit.--The aggregate amount 
        allowable under sections 21 and 24 after the 
        application of paragraph (1) shall be treated as 
        allowable solely under section 21 to the extent such 
        amount does not exceed the amount allowable under 
        section 21 (determined without regard to section 
        21(a)(3)).''
          (2) Conforming amendments.--
                  (A) Subsection (a) of section 21 is amended 
                by adding at the end the following new 
                paragraph:
          ``(3) Limitation based on adjusted gross income.--

          ``For limitation based on adjusted gross income, see section 
        26(c).''

                  (B) The section heading for section 26 is 
                amended by inserting before the period ``; 
                PHASEOUT OF CERTAIN CREDITS BASED ON INCOME''.
                  (C) The item relating to section 26 in the 
                table of sections for subpart A of part IV of 
                subchapter A of chapter 1 is amended by 
                inserting before the period ``; phaseout of 
                certain credits based on income''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                     TITLE II--EDUCATION INCENTIVES

        Subtitle A--Tax Benefits Relating to Education Expenses

SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION AND RELATED 
                    EXPENSES.

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

``SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EXPENSES.

    ``(a) Allowance of Credit.--In the case of an individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year the amount equal to 50 
percent of qualified tuition and related expenses paid by the 
taxpayer during such taxable year for education furnished 
during any academic period beginning in such year.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount allowed as a 
        credit under subsection (a) for any taxable year with 
        respect to the qualified tuition and related expenses 
        of any 1 individual shall not exceed $1,500.
          ``(2) Credit allowed only for 2 taxable years.--No 
        credit shall be allowed under subsection (a) for a 
        taxable year with respect to the qualified tuition and 
        related expenses of an individual unless the taxpayer 
        elects to have this section apply with respect to such 
        individual for such year. An election under this 
        paragraph shall not take effect with respect to an 
        individual for any taxable year if an election under 
        this paragraph (by the taxpayer or any other 
        individual) is in effect with respect to such 
        individual for any 2 prior taxable years.
          ``(3) Credit allowed for year only if individual is 
        at least \1/2\ time student for portion of year.--No 
        credit shall be allowed under subsection (a) for a 
        taxable year with respect to the qualified tuition and 
        related expenses of an individual unless such 
        individual is an eligible student for at least one 
        academic period which begins during such year.
          ``(4) Credit allowed only for first two years of 
        postsecondary education.--No credit shall be allowed 
        under subsection (a) for a taxable year with respect to 
        the qualified tuition and related expenses of an 
        individual if the individual has completed (before the 
        beginning of such taxable year) the first 2 years of 
        postsecondary education at an eligible educational 
        institution.
    ``(c) Limitation Based on Modified Adjusted Gross Income.--
          ``(1) In general.--The amount which would (but for 
        this subsection) be taken into account under subsection 
        (a) for the taxable year shall be reduced (but not 
        below zero) by the amount determined under paragraph 
        (2).
          ``(2) Amount of reduction.--The amount determined 
        under this paragraph is the amount which bears the same 
        ratio to the amount which would be so taken into 
        account as--
                  ``(A) the excess of--
                          ``(i) the taxpayer's modified 
                        adjusted gross income for such taxable 
                        year, over
                          ``(ii) $40,000 ($80,000 in the case 
                        of a joint return), bears to
                  ``(B) $10,000 ($20,000 in the case of a joint 
                return).
          ``(3) Modified adjusted gross income.--The term 
        `modified adjusted gross income' means the adjusted 
        gross income of the taxpayer for the taxable year 
        increased by any amount excluded from gross income 
        under section 911, 931, or 933.
    ``(d) Definitions.--For purposes of this section--
          ``(1) Qualified tuition and related expenses.--
                  ``(A) In general.--The term `qualified 
                tuition and related expenses' means tuition and 
                fees required for the enrollment or attendance 
                of--
                          ``(i) the taxpayer,
                          ``(ii) the taxpayer's spouse, or
                          ``(iii) any dependent of the taxpayer 
                        with respect to whom the taxpayer is 
                        allowed a deduction under section 151,
                at an eligible educational institution and 
                books required for courses of instruction of 
                such individual at such institution.
                  ``(B) Exception for education involving 
                sports, etc.--Such term does not include 
                expenses with respect to any course or other 
                education involving sports, games, or hobbies, 
                unless such course or other education is part 
                of the individual's degree program.
                  ``(C) Exception for nonacademic fees.--Such 
                term does not include student activity fees, 
                athletic fees, insurance expenses, or other 
                expenses unrelated to an individual's academic 
                course of instruction.
          ``(2) Eligible educational institution.--The term 
        `eligible educational institution' means an 
        institution--
                  ``(A) which is described in section 481 of 
                the Higher Education Act of 1965 (20 U.S.C. 
                1088), as in effect on the date of the 
                enactment of this section, and
                  ``(B) which is eligible to participate in a 
                program under title IV of such Act.
          ``(3) Eligible student.--The term `eligible student' 
        means, with respect to any academic period, a student 
        who--
                  ``(A) meets the requirements of section 
                484(a)(1) of the Higher Education Act of 1965 
                (20 U.S.C.1091(a)(1)), as in effect on the date 
of the enactment of this section, and
                  ``(B) is carrying at least \1/2\ the normal 
                full-time work load for the course of study the 
                student is pursuing.
          ``(4) Other terms relating to the higher education 
        act.--The following terms shall have the meanings 
        prescribed in regulations under section 481(g) of the 
        Higher Education Act of 1965 (20 U.S.C. 1088(g)), as 
        added by the Student Financial Aid Improvements Act of 
        1997:
                  ``(A) Academic period.
                  ``(B) Normal full-time workload.
                  ``(C) First two years of postsecondary 
                education.
    ``(e) Treatment of Expenses Paid by Dependent.--If a 
deduction under section 151 with respect to an individual is 
allowed to another taxpayer for a taxable year beginning in the 
calendar year in which such individual's taxable year begins--
          ``(1) no credit shall be allowed under subsection (a) 
        to such individual for such individual's taxable year, 
        and
          ``(2) qualified tuition and related expenses paid by 
        such individual during such individual's taxable year 
        shall be treated for purposes of this section as paid 
        by such other taxpayer.
    ``(f) Treatment of Certain Prepayments.--If qualified 
tuition and related expenses are paid by the taxpayer during a 
taxable year for an academic period which begins during the 
first 3 months following such taxable year, such academic 
period shall be treated for purposes of this section as 
beginning during such taxable year.
    ``(g) Special Rules.--
          ``(1) Identification requirement.--No credit shall be 
        allowed under subsection (a) to a taxpayer with respect 
        to the qualified tuition and related expenses of an 
        individual unless the taxpayer includes the name and 
        taxpayer identification number of such individual on 
        the return of tax for the taxable year.
          ``(2) Adjustment for certain scholarships, etc.--The 
        amount of qualified tuition and related expenses 
        otherwise taken into account under subsection (a) with 
        respect to an individual for an academic period shall 
        be reduced (before the application of subsections (b) 
        and (c)) by the sum of any amounts paid for the benefit 
        of such individual which are allocable to such period 
        as--
                  ``(A) a qualified scholarship which is 
                excludable from gross income under section 117,
                  ``(B) an educational assistance allowance 
                under chapter 30, 31, 32, 34, or 35 of title 
                38, United States Code, or under chapter 1606 
                of title 10, United States Code, and
                  ``(C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of 
                section 102(a)) for such individual's 
                educational expenses, or attributable to such 
                individual's enrollment at an eligible 
                educational institution, which is excludable 
                from gross income under any law of the United 
                States.
          ``(3) Denial of credit if student convicted of a 
        felony drug offense.--No credit shall be allowed under 
        subsection (a) for qualified tuition and related 
        expenses for the enrollment or attendance of a student 
        for any academic period if such student has been 
        convicted of a Federal or State felony offense 
        consisting of the possession or distribution of a 
        controlled substance before the end of the taxable year 
        with or within which such period ends.
          ``(4) Denial of double benefit.--No credit shall be 
        allowed under this section for any expense for which a 
        deduction is allowed under any other provision of this 
        chapter.
          ``(5) No credit for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and the 
        taxpayer's spouse file a joint return for the taxable 
        year.
          ``(6) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
    ``(h) Inflation Adjustments.--
          ``(1) Dollar limitation on amount of credit.--
                  ``(A) In general.--In the case of a taxable 
                year beginning after 1998, the $1,500 amount in 
                subsection (b)(1) shall be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                  ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $50, such amount shall be rounded to the next 
                lowest multiple of $50.
          ``(2) Income limits.--
                  ``(A) In general.--In the case of a taxable 
                year beginning after 2000, the $40,000 and 
                $80,000 amounts in subsection (c)(2) shall each 
                be increased by an amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 1999' for `calendar year 
                        1992' in subparagraph (B) thereof.
                  ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $5,000, such amount shall be rounded to the 
                next lowest multiple of $5,000.
    ``(i) Regulations.--The Secretary may prescribe such 
regulations as may be necessary or appropriate to carry out 
this section, including regulations providing for a recapture 
of credit allowed under this section in cases where there is a 
refund in a subsequent taxable year of any amount which was 
taken into account in determining the amount of such credit.''
    (b) Extension of Procedures Applicable to Mathematical or 
Clerical Errors.--Paragraph (2) of section 6213(g) (relating to 
the definition of mathematical or clerical errors) is amended 
by striking ``and'' at the end of subparagraph (G), by striking 
the period at the end of subparagraph (H) and inserting ``, 
and'', and by inserting after subparagraph (H) the following 
new subparagraph:
                  ``(I) an omission of a correct TIN required 
                under section 25A(g)(1) (relating to higher 
                education tuition and related expenses) to be 
                included on a return.''
    (c) Returns Relating to Tuition and Related Expenses.--
          (1) In general.--Subpart B of part III of subchapter 
        A of chapter 61 (relating to information concerning 
        transactions with other persons) is amended by 
        inserting after section 6050R the following new 
        section:

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

    ``(a) In General.--Any person--
          ``(1) which is an eligible educational institution 
        which receives payments for qualified tuition and 
        related expenses with respect to any individual for any 
        calendar year, or
          ``(2) which is engaged in a trade or business and 
        which, in the course of such trade or business, makes 
        payments during any calendar year to any individual 
        which constitute reimbursements or refunds (or similar 
        amounts) of qualified tuition and related expenses of 
        such individual,shall make the return described in 
subsection (b) with respect to the individual at such time as the 
Secretary may by regulations prescribe.
    ``(b) Form and Manner of Returns.--A return is described in 
this subsection if such return--
          ``(1) is in such form as the Secretary may prescribe,
          ``(2) contains--
                  ``(A) the name, address, and TIN of the 
                individual with respect to whom payments 
                described in subsection (a) were received from 
                (or were paid to),
                  ``(B) the name, address, and TIN of any 
                individual certified by the individual 
                described in subparagraph (A) as the taxpayer 
                who will claim the individual as a dependent 
                for purposes of the deduction allowable under 
                section 151 for any taxable year ending with or 
                within the calendar year, and
                  ``(C) the--
                          ``(i) aggregate amount of payments 
                        for qualified tuition and related 
                        expenses received with respect to the 
                        individual described in subparagraph 
                        (A) during the calendar year, and
                          ``(ii) aggregate amount of 
                        reimbursements or refunds (or similar 
                        amounts) paid to such individual during 
                        the calendar year, and
                  ``(D) such other information as the Secretary 
                may prescribe.
    ``(c) Application to Governmental Units.--For purposes of 
this section--
          ``(1) a governmental unit or any agency or 
        instrumentality thereof shall be treated as a person, 
        and
          ``(2) any return required under subsection (a) by 
        such governmental entity shall be made by the officer 
        or employee appropriately designated for the purpose of 
        making such return.
    ``(d) Statements To Be Furnished to Individuals With 
Respect to Whom Information Is Required.--Every person required 
to make a return under subsection (a) shall furnish to each 
individual whose name is required to be set forth in such 
return under subparagraph (A) or (B) of subsection (b)(2) a 
written statement showing--
          ``(1) the name, address, and phone number of the 
        information contact of the person required to make such 
        return, and
          ``(2) the aggregate amounts described in subsection 
        (b)(2)(C).
The written statement required under the preceding sentence 
shall be furnished on or before January 31 of the year 
following the calendar year for which the return under 
subsection (a) was required to be made.
    ``(e) Definitions.--For purposes of this section, the terms 
`eligible educational institution' and `qualified tuition and 
related expenses' have the meanings given such terms by section 
25A.
    ``(f) Returns Which Would Be Required To Be Made by 2 or 
More Persons.--Except to the extent provided in regulations 
prescribed by the Secretary, in the case of any amount received 
by any person on behalf of another person, only the person 
first receiving such amount shall be required to make the 
return under subsection (a).
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section. No penalties shall be imposed under section 6724 
with respect to any return or statement required under this 
section until such time as such regulations are issued.''
          (2) Assessable penalties.--
                  (A) Subparagraph (B) of section 6724(d)(1) 
                (relating to definitions) is amended by 
                redesignating clauses (ix) through (xiv) as 
                clauses (x) through (xv), respectively, and by 
                inserting after clause (viii) the following new 
                clause:
                          ``(ix) section 6050S (relating to 
                        returns relating to payments for 
                        qualified tuition and related 
                        expenses),''.
                  (B) Paragraph (2) of section 6724(d) is 
                amended by striking ``or'' at the end of the 
                next to last subparagraph, by striking the 
                period at the end of the last subparagraph and 
                inserting ``, or'', and by adding at the end 
                the following new subparagraph:
                  ``(Z) section 6050S(d) (relating to returns 
                relating to qualified tuition and related 
                expenses).''
          (3) Clerical amendment.--The table of sections for 
        subpart B of part III of subchapter A of chapter 61 is 
        amended by inserting after the item relating to section 
        6050R the following new item:

        ``Sec. 6050S. Returns relating to higher education tuition and 
                  related expenses.''

    (d) Coordination With Section 135.--Subsection (d) of 
section 135 is amended by redesignating paragraphs (2) and (3) 
as paragraphs (3) and (4), respectively, and by inserting after 
paragraph (1) the following new paragraph:
          ``(2) Coordination with higher education credit.--The 
        amount of the qualified higher education expenses 
        otherwise taken into account under subsection (a) with 
        respect to the education of an individual shall be 
        reduced (before the application of subsection (b)) by 
        the amount of such expenses which are taken into 
        account in determining the credit allowable to the 
        taxpayer or any other person under section 25A with 
        respect to such expenses.''
    (e) Clerical Amendment.--The table of sections for subpart 
A of part IV of subchapter A of chapter 1 is amended by 
inserting after the item relating to section 25 the following 
new item:

        ``Sec. 25A. Higher education tuition and related expenses.''

    (f) Effective Date.--The amendments made by this section 
shall apply to expenses paid after December 31, 1997 (in 
taxable years ending after such date), for education furnished 
in academic periods beginning after such date.

SEC. 202. DEDUCTION FOR QUALIFIED HIGHER EDUCATION EXPENSES.

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

``SEC. 221. QUALIFIED HIGHER EDUCATION EXPENSES.

    ``(a) Allowance of Deduction.--In the case of an 
individual, there shall be allowed as a deduction the amount of 
qualified higher education expenses paid by the taxpayer during 
the taxable year for education furnished during any academic 
period (within the meaning of section 25A) beginning in such 
year.
    ``(b) Limitations.--
          ``(1) Annual limit.--The amount allowed as a 
        deduction under subsection (a) for any taxable year 
        with respect to expenses paid for education furnished 
        to any 1 individual shall not exceed the lesser of--
                  ``(A) $10,000, or
                  ``(B) the amount includible in the taxpayer's 
                gross income for such taxable year by reason of 
                a distribution from a qualified tuition program 
                (as defined in section 529), or an education 
                investment account (as defined in section 530), 
                the beneficiary of which is such individual.
          ``(2) Aggregate limit.--The amount allowed as a 
        deduction under subsection (a) to the taxpayer or any 
        other individual with respect to expenses paid for 
        education furnished to any 1 individual shall not 
        exceed $40,000 for all taxable years.
          ``(3) Deduction allowed for year only if individual 
        is at least \1/2\ time student for portion of year.--No 
        deduction shall be allowed under subsection (a)for a 
taxable year with respect to the qualified higher education expenses of 
an individual unless such individual is an eligible student (as defined 
in section 25A(d)(3)) for at least one academic period which begins 
during such year.
          ``(4) Deduction allowed only for first 4 years of 
        postsecondary education.--No deduction shall be allowed 
        under subsection (a) for a taxable year with respect to 
        the qualified higher education expenses of an 
        individual if the individual has completed (before the 
        beginning of such taxable year) the equivalent of the 
        first 4 years of postsecondary education at an eligible 
        educational institution (determined under the rules of 
        section 25A).
          ``(5) Coordination with credit for higher education 
        expenses.--No deduction shall be allowed under this 
        section for a taxable year with respect to the 
        qualified higher education expenses of an individual if 
        an election is in effect under section 25A with respect 
        to such individual for such taxable year.
    ``(c) Qualified Higher Education Expenses.--The term 
`qualified higher education expenses' means qualified higher 
education expenses (as defined in section 529) for the 
education of--
          ``(1) the taxpayer,
          ``(2) the taxpayer's spouse, or
          ``(3) any dependent of the taxpayer with respect to 
        whom the taxpayer is allowed a deduction under section 
        151,
at an eligible educational institution (as defined in section 
529(e)(5)).
    ``(d) Treatment of Expenses Paid by Dependent.--If a 
deduction under section 151 with respect to an individual is 
allowed to another taxpayer for a taxable year beginning in the 
calendar year in which such individual's taxable year begins--
          ``(1) no deduction shall be allowed under subsection 
        (a) to such individual for such individual's taxable 
        year, and
          ``(2) qualified higher education expenses paid by 
        such individual during such individual's taxable year 
        shall be treated for purposes of this section as paid 
        by such other taxpayer.
    ``(e) Coordination With Amounts Includible in Gross Income 
Under Section 529 or 530.--If any deduction is allowed under 
subsection (a) with respect to the qualified higher education 
expenses of an individual with respect to whom the taxpayer is 
allowed a deduction under section 151(c), any amount which 
would (but for this subsection) be includible in such 
individual's gross income by reason of section 529 or section 
530 shall be includible in the gross income of the taxpayer and 
not such individual.
    ``(f) Adjustment for Certain Scholarships, Etc.--The amount 
of qualified higher education expenses otherwise taken into 
account under subsection (a) with respect to an individual for 
an academic period shall be reduced (before the application of 
subsection (b)) by the sum of--
          ``(1) the aggregate amount of the reductions under 
        section 25A(g)(2) for the benefit of such individual 
        for such period, and
          ``(2) the amount excludable from gross income under 
        section 135 by reason of such expenses with respect to 
        such individual which are allocable to such period.
    ``(g) Denial of Deduction if Student Convicted of a Felony 
Drug Offense.--No deduction shall be allowed under subsection 
(a) for qualified higher education expenses for the enrollment 
or attendance of a student for any academic period if such 
student has been convicted of a Federal or State felony offense 
consisting of the possession or distribution of a controlled 
substance before the end of the taxable year with or within 
which such period ends.
    ``(h) Denial of Double Benefit.--No deduction shall be 
allowed under subsection (a) for any expense for which a 
deduction is allowed to the taxpayer under any other provision 
of this chapter.''
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes 
Other Deductions.--
          (1) In general.--Subsection (b) of section 63 is 
        amended by striking ``and'' at the end of paragraph 
        (1), by striking the period at the end of paragraph (2) 
        and inserting ``, and'', and by adding at the end the 
        following new paragraph:
          ``(3) the deduction allowed by section 221 (relating 
        to deduction for qualified higher education 
        expenses).''
          (2) Conforming amendment.--Subsection (d) of section 
        63 is amended by striking ``and'' at the end of 
        paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at 
        the end the following new paragraph:
          ``(3) the deduction allowed by section 221 (relating 
        to deduction for qualified higher education 
        expenses).''
    (c) Phaseout of Exclusion for Qualified Tuition 
Reductions.--Subsection (d) of section 117 is amended by 
redesignating the last paragraph as paragraph (4) and by adding 
at the end the following new paragraph:
          ``(5) Phaseout of exclusion.--
                  ``(A) Termination.--Paragraph (1) shall not 
                apply to any qualified tuition reduction for 
                any course of instruction beginning after 
                December 31, 2001.
                  ``(B) Phaseout.--The amount excludable from 
                gross income under paragraph (1) for any course 
                of instruction beginning in a calendar year 
                after 1997 and before 2002 shall not exceed the 
                applicable percentage (determined in accordance 
                with the following table) for such calendar 
                year of the amount which would be so excludable 
                but for this subparagraph:

        In the case of                                    The applicable
          calendar year:                                  percentage is:

          1998..........................................             80 
          1999..........................................             60 
          2000..........................................             40 
          2001..........................................           20.''

    (d) Technical Amendments.--
          (1) Subparagraph (A) of section 529(e)(3) is amended 
        by inserting ``(except as provided in section 221(e))'' 
        after ``distributee''.
          (2) The table of sections for part VII of subchapter 
        B of chapter 1 is amended by striking the item relating 
        to section 221 and inserting:

        ``Sec. 221. Qualified higher education expenses.
        ``Sec. 222. Cross reference.''

    (e) Effective Date.--The amendments made by this section 
shall apply to expenses paid after December 31, 1997 (in 
taxable years ending after such date), for education furnished 
in academic periods beginning after such date.

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

    (a) In General.--Paragraph (2) of section 72(t) (relating 
to exceptions to 10-percent additional tax on early 
distributions from qualified retirement plans) is amended by 
adding at the end the following new subparagraph:
                  ``(E) Distributions from individual 
                retirement plans for higher education 
                expenses.--Distributions to an individual from 
                an individual retirement plan to the extent 
                such distributions do not exceed the qualified 
                higher education expenses (as defined in 
                paragraph (7)) of the taxpayer for the taxable 
                year. Distributions shall not be taken into 
                account under the preceding sentence if such 
                distributions are described in subparagraph 
                (A), (C), or (D) or to the extent paragraph (1) 
                does not apply to such distributions by reason 
                of subparagraph (B).''
    (b) Definition.--Section 72(t) is amended by adding at the 
end the following new paragraph:
          ``(7) Qualified higher education expenses.--For 
        purposes of paragraph (2)(E)--
                  ``(A) In general.--The term `qualified higher 
                education expenses' means qualified higher 
                education expenses (as defined in section 
                529(e)(3) without regard to subparagraph (C) 
                thereof) for education furnished to--
                          ``(i) the taxpayer,
                          ``(ii) the taxpayer's spouse, or
                          ``(iii) any child (as defined in 
                        section 151(c)(3)) or grandchild of the 
                        taxpayer or the taxpayer's spouse,
                at an eligible educational institution (as 
                defined in section 529(e)(5)).
                  ``(B) Coordination with other benefits.--The 
                amount of qualified higher education expenses 
                for any taxable year shall be reduced as 
                provided in section 25A(g)(2).''
    (c) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 1997, with 
respect to expenses paid after such date (in taxable years 
ending after such date), for education furnished in academic 
periods beginning after such date.

SEC. 204. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY AND 
                    SECONDARY EDUCATION.

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

``SEC. 25B. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY AND 
                    SECONDARY EDUCATION.

    ``(a) Allowance of Credit.--In the case of an individual, 
there shall be allowed a credit against the tax imposed by this 
chapter for the taxable year an amount equal to 50 percent of 
the qualifying educational assistance expenses paid by the 
taxpayer during the taxable year.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount allowed as a 
        credit under subsection (a) for any taxable year with 
        respect to the qualified educational assistance 
        expenses of any 1 individual shall not exceed $150.
          ``(2) Reduction of credit based on adjusted gross 
        income.--
                  ``(A) In general.--The aggregate amount which 
                would (but for this paragraph) be allowed by 
                this section shall be reduced (but not below 
                zero) by $25 for each $1,000 (or fraction 
                thereof) by which the taxpayer's modified 
                adjusted gross income exceeds the threshold 
                amount. For purposes of the preceding sentence, 
                the term `modified adjusted gross income' means 
                adjusted gross income increased by any amount 
                excluded from gross income under section 911, 
                931, or 933.
                  ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the term `threshold amount' 
                means--
                          ``(i) $80,000 in the case of a joint 
                        return,
                          ``(ii) $50,000 in the case of an 
                        individual who is not married, and
                          ``(iii) $40,000 in the case of a 
                        married individual filing a separate 
                        return.
                For purposes of this subparagraph, marital 
                status shall be determined under section 7703.
    ``(c) Qualified Educational Assistance Expenses.--For 
purposes of this section--
          ``(1) In general.--The term `qualified educational 
        assistance expenses' means amounts paid to a qualified 
        entity to provide supplementary education to any 
        dependent (within the meaning of section 152) of the 
        taxpayer--
                  ``(A) who is less than 18 years of age as of 
                the close of the taxable year, and
                  ``(B) who is enrolled as a full-time student 
                in an elementary or secondary school.
          ``(2) Supplementary education.--For purposes of 
        paragraph (1), supplementary education is education 
        provided with respect to reading, mathematics, or any 
        subject that the dependent student is studying at the 
        time in elementary or secondary school classes. 
        Eligible courses of study shall not include courses 
        providing assistance with respect to preparation for 
        college entrance examinations.
          ``(3) Qualified entity.--The term `qualified entity' 
        means a person that is accredited as a supplementary 
        education service provider by an accreditation 
        organization that is recognized by the Secretary of 
        Education or by any other agency, association, or group 
        that is certified by the Secretary for purposes of this 
        section.''
    (b) Clerical Amendment.--The table of sections for subpart 
A of part IV of subchapter A of chapter 1 is amended by 
inserting after the item relating to section 25A the following 
new item:

        ``Sec. 25B. Expenses for education which supplements elementary 
                  and secondary education.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

    Subtitle B--Expanded Education Investment Savings Opportunities

SEC. 211. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAINTAIN 
                    QUALIFIED TUITION PROGRAMS; OTHER MODIFICATIONS OF 
                    QUALIFIED STATE TUITION PROGRAMS.

    (a) Eligible Educational Institutions Permitted to Maintain 
Qualified Tuition Programs.--Paragraph (1) of section 529(b) 
(defining qualified State tuition program) is amended by 
inserting ``or by one or more eligible educational 
institutions'' after ``maintained by a State or agency or 
instrumentality thereof''.
    (b) Qualified Higher Education Expenses To Include Room and 
Board.--Paragraph (3) of section 529(e) (defining qualified 
higher education expenses) is amended to read as follows:
          ``(3) Qualified higher education expenses.--
                  ``(A) In general.--The term `qualified higher 
                education expenses' means tuition, fees, books, 
                supplies, and equipment required for the 
                enrollment or attendance of a designated 
                beneficiary at an eligible education 
                institution.
                  ``(B) Room and board included for students 
                who are at least half-time.--In the case of an 
                individual who is an eligible student (as 
                defined in section 25A(d)(3)) for any academic 
                period, such term shall also include reasonable 
                costs for such period (as determined under the 
                qualified tuition program) incurred by the 
                designated beneficiary for room and board while 
                attending such institution. The amount treated 
                as qualified higher education expenses by 
                reason of the preceding sentence shall not 
                exceed the minimum amount (applicable to the 
                student) included for room and board for such 
                period in the cost of attendance (as defined in 
                section 472 of the Higher Education Act of 
                1965, 20 U.S.C. 1087ll, as in effect on the 
                date of the enactment of this paragraph) for 
                the eligible educational institution for such 
                period.
                  ``(C) Exclusion for graduate level courses.--
                Such term shall not include expenses for 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. Such courses 
                shall not be taken into account in determining 
                whether an individual is described in 
                subsection (f)(3)(A).''
    (c) Additional Modifications.--
          (1) Member of family.--Paragraph (2) of section 
        529(e) (relating to other definitions and special 
        rules) is amended to read as follows:
          ``(2) Member of family.--The term `member of the 
        family' means--
                  ``(A) an individual who bears a relationship 
                to another individual which is a relationship 
                described in paragraphs (1) through (8) of 
                section 152(a), and
                  ``(B) the spouse of any individual described 
                in subparagraph (A).''
          (2) Eligible educational institution.--Section 529(e) 
        is amended by adding at the end the following:
          ``(5) Eligible educational institution.--The term 
        `eligible educational institution' means an 
        institution--
                  ``(A) which is described in section 481 of 
                the Higher Education Act of 1965 (20 U.S.C. 
                1088), as in effect on the date of the 
                enactment of this paragraph, and
                  ``(B) which is eligible to participate in a 
                program under title IV of such Act.''
          (3) No contributions after beneficiary attains age 
        18; distributions required in certain cases.--
        Subsection (b) of section 529 (as amended by subsection 
        (f) of this section) is amended by adding at the end 
        the following new paragraph:
          ``(7) Restrictions relating to age of beneficiary; 
        completion of education.--
                  ``(A) In general.--A program shall be treated 
                as a qualified tuition program only if--
                          ``(i) no contribution is accepted on 
                        behalf of a designated beneficiary 
                        after the date on which such 
                        beneficiary attains age 18, and
                          ``(ii) any balance to the credit of a 
                        designated beneficiary (if any) on the 
                        account termination date shall be 
                        distributed within 30 days after such 
                        date to such beneficiary (or in the 
                        case of death, the estate of the 
                        beneficiary).
                  ``(B) Account termination date.--For purposes 
                of subparagraph (A), the term `account 
                termination date' means whichever of the 
                following dates is the earliest:
                          ``(i) The date on which the 
                        designated beneficiary completes the 
                        equivalent of 4 years of post-secondary 
                        education (whether or not at the same 
                        eligible educational institution).
                          ``(ii) The date on which the 
                        designated beneficiary attains age 30.
                          ``(iii) The date on which the 
                        designated beneficiary dies.''
          (4) Estate and gift tax treatment.--
                  (A) Gift tax treatment.--
                          (i) Paragraph (2) of section 529(c) 
                        is amended to read as follows:
          ``(2) Gift tax treatment of contributions.--For 
        purposes of chapters 12 and 13, any contribution to a 
        qualified tuition program on behalf of any designated 
        beneficiary--
                  ``(A) shall be treated as a completed gift to 
                such beneficiary which is not a future interest 
                in property, and
                  ``(B) shall not be treated as a qualified 
                transfer under section 2503(e).''
                          (ii) Paragraph (5) of section 529(c) 
                        is amended to read as follows:
          ``(5) Other gift tax rules.--For purposes of chapters 
        12 and 13--
                  ``(A) Treatment of distributions.--In no 
                event shall a distribution from a qualified 
                tuition program be treated as a taxable gift.
                  ``(B) Treatment of designation of new 
                beneficiary.--The taxes imposed by chapters 12 
                and 13 shall apply to a transfer by reason of a 
                change in the designated beneficiary under the 
                program (or a rollover to the account of a new 
                beneficiary) only if the new beneficiary is a 
                generation below the generation of the old 
                beneficiary (determined in accordance with 
                section 2651).''
                  (B) Estate tax treatment.--Paragraph (4) of 
                section 529(c) is amended to read as follows:
          ``(4) Estate tax treatment.--
                  ``(A) In general.--No amount shall be 
                includible in the gross estate of any 
                individual for purposes of chapter 11 by reason 
                of an interest in a qualified tuition program.
                  ``(B) Amounts includible in estate of 
                designated beneficiary in certain cases.--
                Subparagraph (A) shall not apply to amounts 
                distributed on account of the death of a 
                beneficiary.''
          (5) Limitation on contributions to qualified tuition 
        programs not maintained by a state.--Subsection (b) of 
        section 529 is amended by adding at the end the 
        following new paragraph:
          ``(9) Limitation on contributions to qualified 
        tuition programs not maintained by a state.--In the 
        case of a program not maintained by a State or agency 
        or instrumentality thereof, such program shall not be 
        treated as a qualified tuition program unless it limits 
        the annual contribution to the program on behalf of a 
        designated beneficiary to an amount equal to the lesser 
        of--
                  ``(A) $5,000, or
                  ``(B) the excess of--
                          ``(i) $50,000, over
                          ``(ii) the aggregate amount 
                        contributed to such program on behalf 
                        of such beneficiary for all prior 
                        taxable years.''
    (d) Additional Tax on Amounts Not Used For Higher Education 
Expenses.--Section 529 is amended by adding at the end the 
following new subsection:
    ``(f) Imposition of Additional Tax.--
          ``(1) In general.--The tax imposed by this chapter 
        for any taxable year on any taxpayer who receives a 
        payment or distribution from a qualified tuition 
        program which is includible in gross income shall be 
        increased by 10 percent of the amount which is so 
        includible.
          ``(2) Exceptions.--Paragraph (1) shall not apply if 
        the payment or distribution is--
                  ``(A) used for qualified higher education 
                expenses of the designated beneficiary,
                  ``(B) made to a beneficiary (or to the estate 
                of the designated beneficiary) on or after the 
                death of the designated beneficiary,
                  ``(C) attributable to the designated 
                beneficiary's being disabled (within the 
                meaning of section 72(m)(7)), or
                  ``(D) made on account of a scholarship, 
                allowance, or payment described in subparagraph 
                (A), (B), or (C) of section 135(d)(1) received 
                by the account holder to the extent the amount 
                of the payment or distribution does not exceed 
                the amount of the scholarship, allowance, or 
                payment.
          ``(3) Excess contributions returned before due date 
        of return.--In the case of a qualified tuition program 
        not maintained by a State or any agency or 
        instrumentality thereof, paragraph (1) shall not apply 
        to the distribution to a contributor of any 
        contribution made during a taxable year on behalf of a 
        designated beneficiary to the extent that such 
        contribution exceeds the limitation in section 4973(e) 
        if--
                  ``(A) such distribution is received on or 
                before the day prescribed by law (including 
                extensions of time) forfiling such 
contributor's return for such taxable year, and
                  ``(B) such distribution is accompanied by the 
                amount of net income attributable to such 
                excess contribution.
        Any net income described in subparagraph (B) shall be 
        included in the gross income of the contributor for the 
        taxable year in which such excess contribution was 
        made.''
    (e) Coordination With Education Savings Bond.--Section 
135(c)(2) (defining qualified higher education expenses) is 
amended by adding at the end the following:
                  ``(C) Contributions to qualified tuition 
                program.--Such term shall include any 
                contribution to a qualified tuition program (as 
                defined in section 529) on behalf of a 
                designated beneficiary (as defined in such 
                section) who is an individual described in 
                subparagraph (A); but there shall be no 
                increase in the investment in the contract for 
                purposes of applying section 72 by reason of 
                the portion of such contribution which is not 
                includible in gross income by reason of this 
                subparagraph.''
    (f) Tax on Excess Contributions.--
          (1) In general.--Subsection (a) of section 4973 is 
        amended by striking ``or'' at the end of paragraph (2) 
        and by inserting after paragraph (3) the following new 
        paragraphs:
          ``(4) a qualified tuition program (as defined in 
        section 529) not maintained by a State or any agency or 
        instrumentality thereof, or
          ``(5) an education investment account (as defined in 
        section 530),''.
          (2) Excess contributions defined.--Section 4973 is 
        amended by adding at the end the following new 
        subsection:
    ``(e) Excess Contributions to Private Qualified Tuition 
Program and Education Investment Accounts.--For purposes of 
this section--
          ``(1) In general.--In the case of private education 
        investment accounts maintained for the benefit of any 1 
        beneficiary, the term `excess contributions' means the 
        amount by which the amount contributed for the taxable 
        year to such accounts exceeds the lesser of--
                  ``(A) the excess of--
                          ``(i) $5,000, over
                          ``(ii) the aggregate amount 
                        contributed to all qualified tuition 
                        programs (as defined in section 529) 
                        maintained by a State or any agency or 
                        instrumentality thereof on behalf of 
                        such beneficiary for such taxable year, 
                        or
                  ``(B) the excess of--
                          ``(i) $50,000, over
                          ``(ii) the sum of--
                                  ``(I) the aggregate amount 
                                contributed to such accounts 
                                for all prior taxable years, 
                                and
                                  ``(II) the aggregate amount 
                                contributed to all qualified 
                                tuition programs (as defined in 
                                section 529) maintained by a 
                                State or any agency or 
                                instrumentality thereof on 
                                behalf of such beneficiary for 
                                such taxable year and all prior 
                                taxable years.
          ``(2) Private education investment account.--For 
        purposes of paragraph (1), the term `private education 
        investment account' means--
                  ``(A) a qualified tuition program (as defined 
                in section 529) not maintained by a State or 
                any agency or instrumentality thereof, and
                  ``(B) an education investment account (as 
                defined in section 530).
          ``(3) Special rules.--For purposes of paragraph (1), 
        the following contributions shall not be taken into 
        account:
                  ``(A) Any contribution which is distributed 
                out of the education investment account in a 
                distribution to which section 530(c)(3)(B) 
                applies.
                  ``(B) Any contribution to a qualified tuition 
                program (as so defined) described in section 
                530(b)(2)(B) from any such account.
                  ``(C) Any rollover contribution.''
    (g) Technical Amendments.--
          (1) Paragraph (2) of section 26(b) is amended by 
        redesignating subparagraphs (E) through (P) as 
        subparagraphs (F) through (Q), respectively, and by 
        inserting after subparagraph (D) the following new 
        subparagraph:
                  ``(E) section 529(f) (relating to additional 
                tax on certain distributions from qualified 
                tuition programs),''.
          (2) The text of section 529 is amended by striking 
        ``qualified State tuition program'' each place it 
        appears and inserting ``qualified tuition program''.
          (3) Subsection (b) of section 529 is amended by 
        striking paragraph (3) and by redesignating paragraphs 
        (4) through (7) as paragraphs (3) through (6), 
        respectively.
          (4)(A) The section heading of section 529 is amended 
        to read as follows:

``SEC. 529. QUALIFIED TUITION PROGRAMS.''

          (B) The item relating to section 529 in the table of 
        sections for part VIII of subchapter F of chapter 1 is 
        amended by striking ``State''.
          (5)(A) The heading for part VIII of subchapter F of 
        chapter 1 is amended to read as follows:

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

          (B) The table of parts for subchapter F of chapter 1 
        is amended by striking the item relating to part VIII 
        and inserting:

        ``Part VIII. Higher education savings entities.''

    (h) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall 
        take effect on January 1, 1998.
          (2) Expenses to include room and board, etc.--The 
        amendments made by subsection (b) and (c)(2) shall 
        apply to distributions after December 31, 1997, with 
        respect to expenses paid after such date (in taxable 
        years ending after such date), for education furnished 
        in academic periods beginning after such date.
          (3) Penalty for noneducation withdrawals.--The 
        amendment made by subsection (d) shall apply to 
        distributions after December 31, 1997.
          (4) Coordination with education savings bonds.--The 
        amendment made by subsection (e) shall apply to taxable 
        years beginning after December 31, 1997.
          (5) Estate and gift tax changes.--
                  (A) Gift tax changes.--Paragraphs (2) and (5) 
                of section 529(c) of the Internal Revenue Code 
                of 1986, as amended by this section, shall 
                apply to transfers (including designations of 
                new beneficiaries) made after the date of the 
                enactment of this Act.
                  (B) Estate tax changes.--Paragraph (4) of 
                such section 529(c) shall apply to estates of 
                decedents dying after June 8, 1997.

SEC. 212. EDUCATION INVESTMENT ACCOUNTS.

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

``SEC. 530. EDUCATION INVESTMENT ACCOUNTS.

    ``(a) General Rule.--An education investment account shall 
be exempt from taxation under this subtitle. Notwithstanding 
the preceding sentence, the education investment account shall 
be subject to the taxes imposed by section 511 (relating to 
imposition of tax on unrelated business income of charitable 
organizations).
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
          ``(1) Education investment account.--The term 
        `education investment account' means a trust created or 
        organized in the United States exclusively for the 
        purpose of paying the qualified higher education 
        expenses of the account holder, but only if the written 
        governing instrument creating the trust meets the 
        following requirements:
                  ``(A) No contribution will be accepted--
                          ``(i) unless it is in cash,
                          ``(ii) after the date on which the 
                        account holder attains age 18, or
                          ``(iii) in excess of $5,000 for the 
                        taxable year.
                  ``(B) The trustee is a bank (as defined in 
                section 408(n)) or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which that person 
                will administer the trust will be consistent 
                with the requirements of this section.
                  ``(C) No part of the trust assets will be 
                invested in life insurance contracts.
                  ``(D) The assets of the trust shall not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                  ``(E) Any balance in the account will be 
                distributed as required under section 
                529(b)(8)(B) (as if such account were a 
                qualified tuition program).
        For $50,000 limit on aggregate contributions to 
        accounts, see section 4973(e).
          ``(2) Qualified higher education expenses.--
                  ``(A) In general.--The term `qualified higher 
                education expenses' has the same meaning given 
                such term by section 529(e)(3).
                  ``(B) Qualified tuition programs.--Such term 
                shall include amounts paid or incurred to 
                purchase tuition credits or certificates, or to 
                make contributions to an account, under a 
                qualified tuition program (as defined in 
                section 529(b)) for the benefit of the account 
                holder.
          ``(3) Eligible educational institution.--The term 
        `eligible educational institution' has the meaning 
        given such term by section 529(e)(5).
          ``(4) Account holder.--The term `account holder' 
        means the individual for whose benefit the education 
        investment account is established.
    ``(c) Tax Treatment of Distributions.--
          ``(1) In general.--Any amount paid or distributed 
        shall be includible in gross income as required by 
        section 529(c)(3) (determined as if such account were a 
        qualified tuition program).
          ``(2) Special rules for applying estate and gift 
        taxes with respect to account.--Rules similar to the 
        rules of paragraphs (2), (4), and (5) of section 529(c) 
        shall apply for purposes of this section.
          ``(3) Additional tax for distributions not used for 
        educational expenses.--
                  ``(A) In general.--The tax imposed by section 
                529(f) shall apply to payments and 
                distributions from an education investment 
                account in the same manner as such tax applies 
                to qualified tuition programs (as defined in 
                section 529).
                  ``(B) Excess contributions returned before 
                due date of return.--Subparagraph (A) shall not 
                apply to the distribution to a contributor of 
                any contribution paid during a taxable year to 
                an education investment account to the extent 
                that such contribution exceeds the limitation 
                in section 4973(e) if such distribution (and 
                the net income with respect to such excess 
                contribution) meet requirements comparable to 
                the requirements of section 529(f)(3).
          ``(4) Rollover contributions.--Paragraph (1) shall 
        not apply to any amount paid or distributed from an 
        education investment account to the extent that the 
        amount received is paid into another education 
        investment account for the benefit of the account 
        holder or a member of the family (within the meaning of 
        section 529(e)(2)) of the account holder not later than 
        the 60th day after the date of such payment or 
        distribution. The preceding sentence shall not apply to 
        any payment or distribution if it applied to any prior 
        payment or distribution during the 12-month period 
        ending on the date of the payment or distribution.
          ``(5) Change in account holder.--Any change in the 
        account holder of an education investment account shall 
        not be treated as a distribution for purposes of 
        paragraph (1) if the new account holder is a member of 
        the family (as so defined) of the old account holder.
          ``(6) Special rules for death and divorce.--Rules 
        similar to the rules of paragraphs (7) and (8) of 
        section 220(f) shall apply.
    ``(d) Tax Treatment of Accounts.--Rules similar to the 
rules of paragraphs (2) and (4) of section 408(e) shall apply 
to any education investment account.
    ``(e) Community Property Laws.--This section shall be 
applied without regard to any community property laws.
    ``(f) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of 
such account are held by a bank (as defined in section 408(n)) 
or another person who demonstrates, to the satisfaction of the 
Secretary, that the manner in which he will administer the 
account will be consistent with the requirements of this 
section, and if the custodial account would, except for the 
fact that it is not a trust, constitute an account described in 
subsection (b)(1). For purposes of this title, in the case of a 
custodial account treated as a trust by reason of the preceding 
sentence, the custodian of such account shall be treated as the 
trustee thereof.
    ``(g) Reports.--The trustee of an education investment 
account shall make such reports regarding such account to the 
Secretary and to the account holder with respect to 
contributions, distributions, and such other matters as the 
Secretary may require under regulations. The reports required 
by this subsection shall be filed at such time and in such 
manner and furnished to such individuals at such time and in 
such manner as may be required by those regulations.''
    (b) Tax on Prohibited Transactions.--
          (1) In general.--Paragraph (1) of section 4975(e) 
        (relating to prohibited transactions) is amended by 
        striking ``or'' at the end of subparagraph (D), by 
        redesignating subparagraph (E) as subparagraph (F), and 
        by inserting after subparagraph (D) the following new 
        subparagraph:
                  ``(E) an education investment account 
                described in section 530, or''.
          (2) Special rule.--Subsection (c) of section 4975 is 
        amended by adding at the end of subsection (c) the 
        following new paragraph:
          ``(5) Special rule for education investment 
        accounts.--An individual for whose benefit an education 
        investment account is established and any contributor 
        to such account shall be exempt from the tax imposed by 
        this section with respect to any transaction concerning 
        such account (which would otherwise be taxable under 
        this section) if section 530(d) applies with respect to 
        such transaction.''
    (c) Failure To Provide Reports on Education Investment 
Accounts.--
          (1) In general.--Paragraph (2) of section 6693(a) 
        (relating to failure to provide reports on individual 
        retirement accounts or annuities) is amended by 
        striking ``and'' at the end of subparagraph (A), by 
        striking the period atthe end of subparagraph (B) and 
inserting ``, and'', and by adding at the end the following new 
subparagraph:
                  ``(C) section 530(g) (relating to education 
                investment accounts).''
          (2) Clerical amendment.--The section heading for 
        section 6693 is amended by striking ``INDIVIDUAL 
        RETIREMENT'' and inserting ``CERTAIN TAX-FAVORED''.
    (d) Technical Amendments.--
          (1) Subparagraph (F) of section 26(b)(2), as added by 
        the preceding section, is amended by inserting before 
        the comma ``and section 530(c)(3) (relating to 
        additional tax on certain distributions from education 
        investment accounts)''.
          (2) Subparagraph (C) of section 135(c)(2), as added 
        by the preceding section, is amended by inserting ``, 
        or to an education investment account (as defined in 
        section 530) on behalf of an account holder (as defined 
        in such section),'' after ``(as defined in such 
        section)''.
          (3) The table of sections for part VIII of subchapter 
        F of chapter 1 is amended by adding at the end the 
        following new item:

        ``Sec. 530. Education investment accounts.''

          (4) The item relating to section 6693 in the table of 
        sections for part I of subchapter B of chapter 68 is 
        amended by striking ``individual retirement'' and 
        inserting ``certain tax-favored''.
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                Subtitle C--Other Education Initiatives

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

    (a) In General.--Subsection (d) of section 127 (relating to 
educational assistance programs) is amended to read as follows:
    ``(d) Termination.--This section shall not apply to 
expenses paid with respect to courses of instruction beginning 
after December 31, 1997.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996.

SEC. 222. INCREASE IN LIMITATION ON QUALIFIED 501(C)(3) BONDS OTHER 
                    THAN HOSPITAL BONDS.

    (a) In General.--The text of paragraph (1) of section 
145(b) is amended by striking ``$150,000,000.'' and inserting 
``the limitation determined in accordance with the following 
table:

In the case of
  calendar year:                                      The limitation is:
  1998..................................................   $160,000,000 
  1999..................................................    170,000,000 
  2000..................................................    180,000,000 
  2001..................................................    190,000,000 
  2002 or thereafter....................................  200,000,000.''

    (b) Conforming Amendment.--The heading for subsection (b) 
of section 145 is amended by striking ``$150,000,000''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 223. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT FOR 
                    ELEMENTARY OR SECONDARY SCHOOL PURPOSES.

    (a) Contributions of Computer Technology and Equipment for 
Elementary or Secondary School Purposes.--Subsection (e) of 
section 170 is amended by adding at the end the following new 
paragraph:
          ``(6) Special rule for contributions of computer 
        technology and equipment for elementary or secondary 
        school purposes.--
                  ``(A) Limit on reduction.--In the case of a 
                qualified elementary or secondary educational 
                contribution, the reduction under paragraph 
                (1)(A) shall be no greater than the amount 
                determined under paragraph (3)(B).
                  ``(B) Qualified elementary or secondary 
                educational contribution.--For purposes of this 
                paragraph, the term `qualified elementary or 
                secondary educational contribution' means a 
                charitable contribution by a corporation of any 
                computer technology or equipment, but only if--
                          ``(i) the contribution is to--
                                  ``(I) an educational 
                                organization described in 
                                subsection (b)(1)(A)(ii), or
                                  ``(II) an entity described in 
                                section 501(c)(3) and exempt 
                                from tax under section 501(a) 
                                (other than an entity described 
                                in subclause (I)) that is 
                                organized primarily for 
                                purposes of supporting 
                                elementary and secondary 
                                education,
                          ``(ii) the contribution is made not 
                        later than 2 years after the date the 
                        taxpayer acquired the property (or in 
                        the case of property constructed by the 
                        taxpayer, the date the construction of 
                        the property is substantially 
                        completed),
                          ``(iii) substantially all of the use 
                        of the property by the donee is for use 
                        within the United States for 
                        educational purposes in any of the 
                        grades K-12 that are related to the 
                        purpose or function of the organization 
                        or entity,
                          ``(iv) the property is not 
                        transferred by the donee in exchange 
                        for money, other property, or services, 
                        except for shipping, installation and 
                        transfer costs,
                          ``(v) the property will fit 
                        productively into the entity's 
                        education plan, and
                          ``(vi) the entity's use and 
                        disposition of the property will be in 
                        accordance with the provisions of 
                        clauses (iii) and (iv).
                  ``(C) Contribution to private foundation.--A 
                contribution by a corporation of any computer 
                technology or equipment to a private foundation 
                (as defined in section 509) shall be treated as 
                a qualified elementary or secondary educational 
                contribution for purposes of this paragraph 
                if--
                          ``(i) the contribution to the private 
                        foundation satisfies the requirements 
                        of clauses (ii) and (iv) of 
                        subparagraph (B), and
                          ``(ii) within 30 days after such 
                        contribution, the private foundation--
                                  ``(I) contributes the 
                                property to an entity described 
                                in clause (i) of subparagraph 
                                (B) that satisfies the 
                                requirements of clauses (iii) 
                                through (vi) of subparagraph 
                                (B), and
                                  ``(II) notifies the donor of 
                                such contribution.
                  ``(D) Special rule relating to construction 
                of property.--For the purposes of this 
                paragraph, the rules of paragraph (4)(C) shall 
                apply.
                  ``(E) Definitions.--For the purposes of this 
                paragraph--
                          ``(i) Computer technology or 
                        equipment.--The term `computer 
                        technology or equipment' means computer 
                        software (as defined by section 
                        197(e)(3)(B)), computer or peripheral 
                        equipment (as defined by section 
                        168(i)(2)(B)), and fiber optic cable 
                        related to computer use.
                          ``(ii) Corporation.--The term 
                        `corporation' has the meaning given to 
                        such term by paragraph (4)(D).''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the calendar year 
in which this Act is enacted.

SEC. 224. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

    (a) Certain Direct Student Loans the Repayment of Which Is 
Income Contingent.--Paragraph (1) of section 108(f) is amended 
by striking ``any student loan if '' and all that follows and 
inserting ``any student loan if--
                  ``(A) such discharge was pursuant to a 
                provision of such loan under which all or part 
                of the indebtedness of the individual would be 
                discharged if the individual worked for a 
                certain period of time in certain professions 
                for any of a broad class of employers, or
                  ``(B) in the case of a loan made under part D 
                of title IV of the Higher Education Act of 1965 
                which has a repayment schedule established 
                under section 455(e)(4) of such Act (relating 
                to income contingent repayments), such 
                discharge is after the maximum repayment period 
                under such loan (as prescribed under such 
                part).''
    (b) Certain Loans by Exempt Organizations.--
          (1) In general.--Paragraph (2) of section 108(f) 
        (defining student loan) is amended by striking ``or'' 
        at the end of subparagraph (B) and by striking 
        subparagraph (D) and inserting the following:
                  ``(D) any educational organization described 
                in section 170(b)(1)(A)(ii) if such loan is 
                made--
                          ``(i) pursuant to an agreement with 
                        any entity described in subparagraph 
                        (A), (B), or (C) under which the funds 
                        from which the loan was made were 
                        provided to such educational 
                        organization, or
                          ``(ii) pursuant to a program of such 
                        educational organization which is 
                        designed to encourage its students to 
                        serve in occupations with unmet needs 
                        or in areas with unmet needs and under 
                        which the services provided by the 
                        students (or former students) are for 
                        or under the direction of a 
                        governmental unit or an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a).
        The term `student loan' includes any loan made by an 
        educational organization so described or by an 
        organization exempt from tax under section 501(a) to 
        refinance a loan meeting the requirements of the 
        preceding sentence.''
          (2) Exception for discharges on account of services 
        performed for certain lenders.--Subsection (f) of 
        section 108 is amended by adding at the end the 
        following new paragraph:
          ``(3) Exception for discharges on account of services 
        performed for certain lenders.--Paragraph (1) shall not 
        apply to the discharge of a loan made by an 
        organization described in paragraph (2)(D) (or by an 
        organization described in paragraph (2)(E) from funds 
        provided by an organization described in paragraph 
        (2)(D)) if the discharge is on account of services 
        performed for either such organization.''
    (c) Effective Date.--The amendments made by this section 
shall apply to discharges of indebtedness after the date of the 
enactment of this Act.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

SEC. 301. ESTABLISHMENT OF AMERICAN DREAM IRA.

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

``SEC. 408A. AMERICAN DREAM IRA.

    ``(a) General Rule.--Except as provided in this section, an 
American Dream IRA shall be treated for purposes of this title 
in the same manner as an individual retirement plan.
    ``(b) American Dream IRA.--For purposes of this title, the 
term `American Dream IRA' or `AD IRA' means an individual 
retirement plan (as defined in section 7701(a)(37)) which is 
designated at the time of the establishment of the plan as an 
American Dream IRA. Such designation shall be made in such 
manner as the Secretary may prescribe.
    ``(c) Treatment of Contributions.--
          ``(1) No deduction allowed.--No deduction shall be 
        allowed under section 219 for a contribution to an AD 
        IRA.
          ``(2) Contribution limit.--
                  ``(A) In general.--The aggregate amount of 
                contributions for any taxable year to all AD 
                IRAs maintained for the benefit of an 
                individual shall not exceed $2,000.
                  ``(B) Inflation adjustment.--In the case of 
                taxable years beginning in a calendar year 
                after 1998, the $2,000 amount contained in 
                subparagraph (A) shall be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If the amount as adjusted under the preceding 
                sentence is not a multiple of $50, such amount 
                shall be rounded to the next lowest multiple of 
                $50.
          ``(3) Contributions permitted after age 70\1/2\.--
        Contributions to an AD IRA may be made even after the 
        individual for whom the account is maintained has 
        attained age 70\1/2\.
          ``(4) Mandatory distribution rules not to apply, 
        etc.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), subsections (a)(6) and (b)(3) 
                of section 408 (relating to required 
                distributions) and section 4974 (relating to 
                excise tax on certain accumulations in 
                qualified retirement plans) shall not apply to 
                any AD IRA.
                  ``(B) Post-death distributions.--Rules 
                similar to the rules of section 401(a)(9) 
                (other than subparagraph (A) thereof) shall 
                apply for purposes of this section.
          ``(5) Rules relating to rollover contributions.--
                  ``(A) In general.--No rollover contribution 
                may be made to an AD IRA unless it is a 
                qualified rollover contribution.
                  ``(B) Coordination with limit.--A qualified 
                rollover contribution shall not be taken into 
                account for purposes of paragraph (2).
          ``(6) Time when contributions made.--For purposes of 
        this section, the rule of section 219(f)(3) shall 
        apply.
    ``(d) Distribution Rules.--For purposes of this title--
          ``(1) General rules.--
                  ``(A) Exclusions from gross income.--Any 
                qualified distribution from an AD IRA shall not 
                be includible in gross income.
                  ``(B) Nonqualified distributions.--In 
                applying section 72 to any distribution from an 
                AD IRA which is not a qualified distribution, 
                such distribution shall be treated as made from 
                contributions to the AD IRA to the extent that 
                such distribution, when added to all previous 
                distributions from the AD IRA, does not exceed 
                the aggregate amount of contributions to the AD 
                IRA. For purposes of the preceding sentence, 
                all AD IRAs maintained for the benefit of an 
                individual shall be treated as 1 account.
                  ``(C) Exception from penalty tax.--Section 
                72(t) shall not apply to--
                          ``(i) any qualified distribution from 
                        an AD IRA, and
                          ``(ii) any qualified first-time 
                        homebuyer distribution (whether or not 
                        a qualified distribution) from an AD 
                        IRA.
          ``(2) Qualified distribution.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `qualified 
                distribution' means any payment or 
                distribution--
                          ``(i) made on or after the date on 
                        which the individual attains age 59\1/
                        2\,
                          ``(ii) made to a beneficiary (or to 
                        the estate of the individual) on or 
                        after the death of the individual,
                          ``(iii) attributable to the 
                        individual's being disabled (within the 
                        meaning of section 72(m)(7)), or
                          ``(iv) which is a qualified first-
                        time homebuyer distribution.
                  ``(B) Distributions within 5 years.--No 
                payment or distribution shall be treated as a 
                qualified distribution if--
                          ``(i) it is made within the 5-taxable 
                        year period beginning with the 1st 
                        taxable year for which the individual 
                        made a contribution to an AD IRA (or 
                        such individual's spouse made a 
                        contribution to an AD IRA) established 
                        for such individual, or
                          ``(ii) in the case of a payment or 
                        distribution properly allocable (as 
                        determined in the manner prescribed by 
                        the Secretary) to a qualified rollover 
                        contribution (or income allocable 
                        thereto), it is made within the 5-
                        taxable year period beginning with the 
                        taxable year in which the rollover 
                        contribution was made.
                Clause (ii) shall not apply to a qualified 
                rollover contribution from an AD IRA.
          ``(3) Rollovers.--
                  ``(A) In general.--Paragraph (1) shall not 
                apply to any distribution which is transferred 
                in a qualified rollover contribution to an AD 
                IRA.
                  ``(B) Income inclusion for rollovers from 
                non-ad iras.--
                          ``(i) In general.--In the case of any 
                        distribution to which this subparagraph 
                        applies--
                                  ``(I) sections 72(t) and 
                                408(d)(3) shall not apply (but 
                                section 4980A shall apply), and
                                  ``(II) any amount required to 
                                be included in gross income by 
                                reason of this paragraph shall 
                                be so included ratably over the 
                                4-taxable year period beginning 
                                with the taxable year in which 
                                the distribution is made.
                          ``(ii) Distributions to which 
                        subparagraph applies.--This 
                        subparagraph shall apply to a 
                        distribution before January 1, 1999, 
                        from an individual retirement plan 
                        (other than an AD IRA) maintained for 
                        the benefit of an individual to an AD 
                        IRA maintained for the benefit of such 
                        individual if such distribution would 
                        be a qualified rollover contribution 
                        were such individual retirement plan an 
                        AD IRA.
                          ``(iii) Conversions.--The conversion 
                        of an individual retirement plan (other 
                        than an AD IRA) to an AD IRA shall be 
                        treated for purposes of this 
                        subparagraph as a distribution from 
                        such plan to such AD IRA.
                  ``(C) Additional reporting requirements.--The 
                Secretary shall require that trustees of AD 
                IRAs, trustees of individual retirement plans, 
                or both, whichever is appropriate, shall 
                include such additional information in reports 
                required under section 408(i) as is necessary 
                to ensure that amounts required to be included 
                in gross income under subparagraph (B) are so 
                included.
          ``(4) Qualified first-time homebuyer distribution.--
        For purposes of this section--
                  ``(A) In general.--The term `qualified first-
                time homebuyer distribution' means any payment 
                or distribution received by an individual to 
                the extent such payment or distribution is used 
                by the individual before the close of the 60th 
                day after the day on which such payment or 
                distribution is received to pay qualified 
                acquisition costs with respect to a principal 
                residence of a first-time homebuyer who is such 
                individual, the spouse of such individual, or 
                any child, grandchild, or ancestor of such 
                individual or the individual's spouse.
                  ``(B) Lifetime dollar limitation.--The 
                aggregate amount of payments or distributions 
                received by an individual which may be treated 
                as qualified first-time homebuyer distributions 
                for any taxable year shall not exceed the 
                excess (if any) of--
                          ``(i) $10,000, over
                          ``(ii) the aggregate amounts treated 
                        as qualified first-time homebuyer 
                        distributions with respect to such 
                        individual for all prior taxable years.
                  ``(C) Qualified acquisition costs.--For 
                purposes of this paragraph, the term `qualified 
                acquisition costs' means the costs of 
                acquiring, constructing, or reconstructing a 
                residence. Such term includes any usual or 
                reasonable settlement, financing, or other 
                closing costs.
                  ``(D) First-time homebuyer; other 
                definitions.--For purposes of this paragraph--
                          ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any 
                        individual if--
                                  ``(I) such individual (and if 
                                married, such individual's 
                                spouse) had no present 
                                ownership interest in a 
                                principal residence during the 
                                2-year period ending on the 
                                date of acquisition of the 
                                principal residence to which 
                                this paragraph applies, and
                                  ``(II) subsection (h) or (k) 
                                of section 1034 (as in effect 
                                on the day before the date of 
                                the enactment of this section) 
                                did not suspend the running of 
                                any period of time specified in 
                                section 1034 (as so in effect) 
                                with respect to such individual 
                                on the day before the date the 
                                distribution is applied 
                                pursuant to subparagraph (A).
                          ``(ii) Principal residence.--The term 
                        `principal residence' has the same 
                        meaning as when used in section 121.
                          ``(iii) Date of acquisition.--The 
                        term `date of acquisition' means the 
                        date--
                                  ``(I) on which a binding 
                                contract to acquire the 
                                principal residence to which 
                                subparagraph (A) applies is 
                                entered into, or
                                  ``(II) on which construction 
                                or reconstruction of such a 
                                principal residence is 
                                commenced.
                  ``(E) Special rule where delay in 
                acquisition.--If any distribution from any 
                individual retirement plan fails to meet the 
                requirements of subparagraph (A) solely by 
                reason of a delay or cancellation of the 
                purchase or construction of the residence, the 
                amount of the distribution may be contributed 
                to an individual retirement plan as provided in 
                section 408(d)(3)(A)(i) (determined by 
                substituting `120 days' for `60 days' in such 
                section), except that--
                          ``(i) section 408(d)(3)(B) shall not 
                        be applied to such contribution, and
                          ``(ii) such amount shall not be taken 
                        into account in determining whether 
                        section 408(d)(3)(A)(i) applies to any 
                        other amount.
    ``(e) Qualified Rollover Contribution.--For purposes of 
this section, the term `qualified rollover contribution' means 
a rollover contribution to an AD IRA from another such account, 
but only if such rollover contribution meets the requirements 
of section 408(d)(3).''
    (b) Repeal of Nondeductible Contributions.--
          (1) Subsection (f) of section 219 is amended by 
        striking paragraph (7).
          (2) Paragraph (5) of section 408(d) is amended by 
        striking the last sentence.
          (3) Section 408(o) is amended by adding at the end 
        the following new paragraph:
          ``(5) Termination.--This subsection shall not apply 
        to any designated nondeductible contribution for any 
        taxable year beginning after December 31, 1997.''
          (4) Subsection (b) of section 4973 is amended by 
        striking the last sentence.
    (c) Excess Distributions Tax Not To Apply.--
          (1) Subparagraph (A) of section 4980A(d)(3) is 
        amended by inserting ``(other than AD IRAs, as defined 
        in section 4980A(b))'' after ``individual retirement 
        plans''.
          (2) Subparagraph (B) of section 4980A(e)(1) is 
        amended by inserting ``other than an AD IRA (as defined 
        in section 408A(b))'' after ``retirement plan''.
    (d) Excess Contributions.--
          (1) Section 4973 is amended by adding at the end the 
        following new subsection:
    ``(f) Excess Contributions to American Dream IRAs.--For 
purposes of this section, in the case of American Dream IRAs, 
the term `excess contributions' means the amount by which the 
amount contributed for the taxable year to such IRAs exceeds 
the limitation in section 408A(c)(2).''
          (2) Subsection (b) of section 4973 is amended by 
        adding at the end the following new sentence: ``For 
        purposes of this subsection, an American Dream IRA 
        shall not be treated as an individual retirement 
        plan.''
    (e) Clerical Amendment.--The table of sections for subpart 
A of part I of subchapter D of chapter 1 is amended by 
inserting after the item relating to section 408 the following 
new item:

        ``Sec. 408A. American Dream IRA.''

    (f) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                       Subtitle B--Capital Gains

                    PART I--INDIVIDUAL CAPITAL GAINS

SEC. 311. 20 PERCENT MAXIMUM CAPITAL GAINS RATE FOR INDIVIDUALS.

    (a) In General.--Subsection (h) of section 1 (relating to 
maximum capital gains rate) is amended to read as follows:
    ``(h) Maximum Capital Gains Rate.--
          ``(1) In general.--If a taxpayer has a net capital 
        gain for any taxable year, the tax imposed by this 
        section for such taxable year shall not exceed the sum 
        of--
                  ``(A) the base tax amount,
                  ``(B) 10 percent of so much of the taxpayer's 
                adjusted net capital gain (or, if less, taxable 
                income) as does not exceed the excess (if any) 
                of--
                          ``(i) the amount of taxable income 
                        which would (without regard to this 
                        paragraph) be taxed at a rate of 15 
                        percent or less, over
                          ``(ii) the taxable income reduced by 
                        the adjusted net capital gain, plus
                  ``(C) 20 percent of the taxpayer's adjusted 
                net capital gain (or, if less, taxable income) 
                in excess of the amount on which a tax is 
                determined under subparagraph (B).
          ``(2) Net capital gain taken into account as 
        investment income.--For purposes of this subsection, 
        the net capital gain for any taxable year shall be 
        reduced (but not below zero) by the amount which the 
        taxpayer takes into account as investment income under 
        section 163(d)(4)(B)(iii).
          ``(3) Base tax amount.--For purposes of paragraph 
        (1), the base tax amount is the lesser of--
                  ``(A) a tax computed at the rates and in the 
                same manner as if this subsection had not been 
                enacted on taxable income reduced by the 
                adjusted net capital gain, or
                  ``(B) the sum of--
                          ``(i) a tax computed at the rates and 
                        in the same manner as if this 
                        subsection had not been enacted on the 
                        greater of--
                                  ``(I) taxable income reduced 
                                by the net capital gain, or
                                  ``(II) the amount of taxable 
                                income taxed at a rate below 28 
                                percent,
                          ``(ii) a tax of 26 percent of the 
                        lesser of--
                                  ``(I) the section 1250 gain, 
                                or
                                  ``(II) the amount of taxable 
                                income in excess of the sum of 
                                the amount on which tax is 
                                determined under clause (i) 
                                plus the net capital gain 
                                determined without regard to 
                                section 1250 gain, plus
                          ``(iii) a tax of 28 percent of the 
                        amount of taxable income in excess of 
                        the sum of--
                                  ``(I) the adjusted net 
                                capital gain, plus
                                  ``(II) the sum of the amounts 
                                on which tax is determined 
                                under clauses (i) and (ii).
          ``(4) Adjusted net capital gain.--For purposes of 
        this subsection, the term `adjusted net capital gain' 
        means net capital gain determined without regard to--
                  ``(A) collectibles gain,
                  ``(B) section 1202 gain, and
                  ``(C) section 1250 gain.
          ``(5) Collectibles gain.--For purposes of paragraph 
        (4)--
                  ``(A) In general.--The term `collectibles 
                gain' means gain from the sale or exchange of a 
                collectible (as defined in section 408(m) 
                without regard to paragraph (3) thereof) which 
                is a capital asset held for more than 1 year 
                but only to the extent such gain is taken into 
                account in computing gross income.
                  ``(B) Coordination with section 1022.--Gain 
                from the disposition of a collectible which is 
                an indexed asset to which section 1022(a) 
                applies shall be disregarded for purposes of 
                this subsection. A taxpayer may elect to treat 
                any collectible specified in such election as 
                not being an indexed asset for purposes of 
                section 1022. Any such election, and any 
                specification therein, once made, shall be 
                irrevocable.
                  ``(C) Partnerships, etc.--For purposes of 
                subparagraph (A), any gain from the sale of an 
                interest in a partnership, S corporation, or 
                trust which is attributable to unrealized 
                appreciation in the value of collectibles shall 
                be treated as gain from the sale or exchange of 
                a collectible. Rules similar to the rules of 
                section 751 shall apply for purposes of the 
                preceding sentence.
          ``(6) Section 1202 gain.--For purposes of paragraph 
        (4), the term `section 1202 gain' means gain from the 
        sale or exchange of any qualified small business stock 
        (as defined in section 1202(c)) held more than 5 years 
        which is taken into account in computing gross income.
          ``(7) Section 1250 gain.--For purposes of paragraph 
        (4), the term `section 1250 gain' means the excess (if 
        any) of--
                  ``(A) the amount which would be treated as 
                ordinary income under section 1245 if all 
                section 1250 property disposed of by the 
                taxpayer were section 1245 property, over
                  ``(B) the amount treated as ordinary income 
                under section 1250.
        In the case of a taxable year which includes May 7, 
        1997, section 1250 gain shall be determined by taking 
        into account only the gain properly taken into account 
        for the portion of the taxable year after May 6, 1997.
          ``(8) Pre-effective date gain.--
                  ``(A) In general.--In the case of a taxable 
                year which includes May 7, 1997, adjusted net 
                capital gain shall be determined without regard 
                to pre-May 7, 1997, gain.
                  ``(B) Pre-may 7, 1997, gain.--The term `pre-
                May 7, 1997, gain' means the amount which would 
                be adjusted net capital gain for the taxable 
                year if adjusted net capital gain were 
                determined by taking into account only the gain 
                or loss properly taken into account for the 
                portion of the taxable year before May 7, 1997.
                  ``(C) Special rules for pass-thru entities.--
                In applying subparagraph (A) with respect to 
                any pass-thru entity, the determination of when 
                gains and loss are properly taken into account 
                shall be made at the entity level.
                  ``(D) Pass-thru entity defined.--For purposes 
                of subparagraph (C), the term `pass-thru 
                entity' means--
                          ``(i) a regulated investment company,
                          ``(ii) a real estate investment 
                        trust,
                          ``(iii) an S corporation,
                          ``(iv) a partnership,
                          ``(v) an estate or trust, and
                          ``(vi) a common trust fund.''
    (b) Minimum tax.--
          (1) In general.--Subsection (b) of section 55 is 
        amended by adding at the end the following new 
        paragraph:
          ``(3) Maximum rate of tax on net capital gain of 
        noncorporate taxpayers.--The amount determined under 
        the first sentence of paragraph (1)(A)(i) shall not 
        exceed the sum of--
                  ``(A) the lesser of--
                          ``(i) the amount determined under 
                        such first sentence computed at the 
                        rates and in the same manner as if this 
                        paragraph had not been enacted on the 
                        taxable excess reduced by the adjusted 
                        net capital gain (as defined in section 
                        1(h)(4)), or
                          ``(ii) the sum of--
                                  ``(I) the amount determined 
                                under such first sentence 
                                computed at the rates and in 
                                the same manner as if this 
                                paragraph had not been enacted 
                                on the taxable excess reduced 
                                by the sum of the adjusted net 
                                capital gain (as so defined) 
                                and the section 1250 gain (as 
                                defined in section 1(h)(7)), 
                                plus
                                  ``(II) 26 percent of the 
                                lesser of the section 1250 gain 
                                (as so defined) or the taxable 
                                excess reduced by the adjusted 
                                net capital gain (as so 
                                defined),
                  ``(B) a tax of 10 percent of so much of the 
                taxpayer's adjusted net capital gain (or, if 
                less, taxable excess) as does not exceed the 
                amount on which a tax is determined under 
                section 1(h)(1)(B), plus
                  ``(C) a tax of 20 percent of the taxpayer's 
                adjusted net capital gain (or, if less, taxable 
                excess) in excess of the amount on which tax is 
                determined under subparagraph (B).''
          (2) Conforming amendment.--Clause (ii) of section 
        55(b)(1)(A) is amended by striking ``clause (i)'' and 
        inserting ``this subsection''.
    (c) Other Conforming Amendments.--
          (1) Subsection (d) of section 291 is amended by 
        inserting at the end the following new sentence: ``Any 
        capital gain dividend treated as having been paid out 
        of such difference to a shareholder which is not a 
        corporation retains its characters as section 1250 gain 
        for purposes of applying section 1(h) to such 
        shareholder.''
          (2) Paragraph (1) of section 1445(e) is amended by 
        striking ``28 percent'' and inserting ``20 percent''.
          (3) The second sentence of section 7518(g)(6)(A), and 
        the second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, are each amended by striking 
        ``28 percent'' and inserting ``20 percent''.
    (d) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        taxable years ending after May 6, 1997.
          (2) Withholding.--The amendment made by subsection 
        (c)(2) shall apply only to amounts paid after the date 
        of the enactment of this Act.
          (3) Application of estimated tax rules.--Clause (i) 
        of section 6654(d)(1)(C) of the Internal Revenue Code 
        of 1986 shall be applied by substituting ``109 
        percent'' for ``110 percent'' where the preceding 
        taxable year referred in such clause is a taxable year 
        beginning in calendar year 1996.

SEC. 312. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 2000, 
                    FOR PURPOSES OF DETERMINING GAIN.

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

``SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 
                    2000, FOR PURPOSES OF DETERMINING GAIN.

    ``(a) General Rule.--
          ``(1) Indexed basis substituted for adjusted basis.--
        Solely for purposes of determining gain on the sale or 
        other disposition by a taxpayer (other than a 
        corporation) of an indexed asset which has been held 
        for more than 3 years, the indexed basis of the asset 
        shall be substituted for its adjusted basis.
          ``(2) Exception for depreciation, etc.--The 
        deductions for depreciation, depletion, and 
        amortization shall be determined without regard to the 
        application of paragraph (1) to the taxpayer or any 
        other person.
          ``(3) Exception for principal residences.--Paragraph 
        (1) shall not apply to any disposition of the principal 
        residence (within the meaning of section 121) of the 
        taxpayer .
    ``(b) Indexed Asset.--
          ``(1) In general.--For purposes of this section, the 
        term `indexed asset' means--
                  ``(A) common stock in a C corporation (other 
                than a foreign corporation), and
                  ``(B) tangible property,
        which is a capital asset or property used in the trade 
        or business (as defined in section 1231(b)).
          ``(2) Stock in certain foreign corporations 
        included.--For purposes of this section--
                  ``(A) In general.--The term `indexed asset' 
                includes common stock in a foreign corporation 
                which is regularly traded on an established 
                securities market.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to--
                          ``(i) stock of a foreign investment 
                        company (within the meaning of section 
                        1246(b)),
                          ``(ii) stock in a passive foreign 
                        investment company (as defined in 
                        section 1296),
                          ``(iii) stock in a foreign 
                        corporation held by a United States 
                        person who meets the requirements of 
                        section 1248(a)(2), and
                          ``(iv) stock in a foreign personal 
                        holding company (as defined in section 
                        552).
                  ``(C) Treatment of american depository 
                receipts.--An American depository receipt for 
                common stock in a foreign corporation shall be 
                treated as common stock in such corporation.
    ``(c) Indexed Basis.--For purposes of this section--
          ``(1) General rule.--The indexed basis for any asset 
        is--
                  ``(A) the adjusted basis of the asset, 
                increased by
                  ``(B) the applicable inflation adjustment.
          ``(2) Applicable inflation adjustment.--The 
        applicable inflation adjustment for any asset is an 
        amount equal to--
                  ``(A) the adjusted basis of the asset, 
                multiplied by
                  ``(B) the percentage (if any) by which--
                          ``(i) the chain-type price index for 
                        GDP for the last calendar quarter 
                        ending before the asset is disposed of, 
                        exceeds
                          ``(ii) the chain-type price index for 
                        GDP for the last calendar quarter 
                        ending before the asset was acquired by 
                        the taxpayer.
        The percentage under subparagraph (B) shall be rounded 
        to the nearest \1/10\ of 1 percentage point.
          ``(3) Chain-type price index for GDP.--The chain-type 
        price index for GDP for any calendar quarter is such 
        index for such quarter (as shown in the last revision 
        thereof released by the Secretary of Commerce before 
        the close of the following calendar quarter).
    ``(d) Suspension of Holding Period Where Diminished Risk of 
Loss; Treatment of Short Sales.--
          ``(1) In general.--If the taxpayer (or a related 
        person) enters into any transaction which substantially 
        reduces the risk of loss from holding any asset, such 
        asset shall not be treated as an indexed asset for the 
        period of such reduced risk.
          ``(2) Short sales.--
                  ``(A) In general.--In the case of a short 
                sale of an indexed asset with a short sale 
                period in excess of 3 years, for purposes of 
                this title, the amount realized shall be an 
                amount equal to the amount realized (determined 
                without regard to this paragraph) increased by 
                the applicable inflation adjustment. In 
                applying subsection (c)(2) for purposes of the 
                preceding sentence, the date on which the 
                property is sold short shall be treated as the 
                date of acquisition and the closing date for 
                the sale shall be treated as the date of 
                disposition.
                  ``(B) Short sale period.--For purposes of 
                subparagraph (A), the short sale period begins 
                on the day that the property is sold and ends 
                on the closing date for the sale.
    ``(e) Treatment of Regulated Investment Companies and Real 
Estate Investment Trusts.--
          ``(1) Adjustments at entity level.--
                  ``(A) In general.--Except as otherwise 
                provided in this paragraph, the adjustment 
                under subsection (a) shall be allowed to any 
                qualified investment entity (including for 
                purposes of determining the earnings and 
                profits of such entity).
                  ``(B) Exception for corporate shareholders.--
                Under regulations--
                          ``(i) in the case of a distribution 
                        by a qualified investment entity 
                        (directly or indirectly) to a 
                        corporation--
                                  ``(I) the determination of 
                                whether such distribution is a 
                                dividend shall be made without 
                                regard to this section, and
                                  ``(II) the amount treated as 
                                gain by reason of the receipt 
                                of any capital gain dividend 
                                shall be increased by the 
                                percentage by which the 
                                entity's net capital gain for 
                                the taxable year (determined 
                                without regard to this section) 
                                exceeds the entity's net 
                                capital gain for such year 
                                determined with regard to this 
                                section, and
                          ``(ii) there shall be other 
                        appropriate adjustments (including 
                        deemed distributions) so as to ensure 
                        that the benefits of this section are 
                        not allowed (directly or indirectly) to 
                        corporate shareholders of qualified 
                        investment entities.
                For purposes of the preceding sentence, any 
                amount includible in gross income under section 
                852(b)(3)(D) shall be treated as a capital gain 
                dividend and an S corporation shall not be 
                treated as a corporation.
                  ``(C) Exception for qualification purposes.--
                This section shall not apply for purposes of 
                sections 851(b) and 856(c).
                  ``(D) Exception for certain taxes imposed at 
                entity level.--
                          ``(i) Tax on failure to distribute 
                        entire gain.--If any amount is subject 
                        to tax under section 852(b)(3)(A) for 
                        any taxable year, the amount on which 
                        tax is imposed under such section shall 
                        be increased by the percentage 
                        determined under subparagraph 
                        (B)(i)(II). A similar rule shall apply 
                        in the case of any amount subject to 
                        tax under paragraph (2) or (3) of 
                        section 857(b) to the extent 
                        attributable to the excess of the net 
                        capital gain over the deduction for 
                        dividends paid determined with 
                        reference to capital gain dividends 
                        only. The first sentence of this clause 
                        shall not apply to so much of the 
                        amount subject to tax under section 
                        852(b)(3)(A) as is designated by the 
                        company under section 852(b)(3)(D).
                          ``(ii) Other taxes.--This section 
                        shall not apply for purposes of 
                        determining the amount of any tax 
                        imposed by paragraph (4), (5), or (6) 
                        of section 857(b).
          ``(2) Adjustments to interests held in entity.--
                  ``(A) Regulated investment companies.--Stock 
                in a regulated investment company (within the 
                meaning of section 851) shall be an indexed 
                asset for any calendar quarter in the same 
                ratio as--
                          ``(i) the average of the fair market 
                        values of the indexed assets held by 
                        such company at the close of each month 
                        during such quarter, bears to
                          ``(ii) the average of the fair market 
                        values of all assets held by such 
                        company at the close of each such 
                        month.
                  ``(B) Real estate investment trusts.--Stock 
                in a real estate investment trust (within the 
                meaning of section 856) shall be an indexed 
                asset for any calendar quarter in the same 
                ratio as--
                          ``(i) the fair market value of the 
                        indexed assets held by such trust at 
                        the close of such quarter, bears to
                          ``(ii) the fair market value of all 
                        assets held by such trust at the close 
                        of such quarter.
                  ``(C) Ratio of 80 percent or more.--If the 
                ratio for any calendar quarter determined under 
                subparagraph (A) or (B) would (but for this 
                subparagraph) be 80 percent or more, such ratio 
                for such quarter shall be 100 percent.
                  ``(D) Ratio of 20 percent or less.--If the 
                ratio for any calendar quarter determined under 
                subparagraph (A) or (B) would (but for this 
                subparagraph) be 20 percent or less, such ratio 
                for such quarter shall be zero.
                  ``(E) Look-thru of partnerships.--For 
                purposes of this paragraph, a qualified 
                investment entity which holds a partnership 
                interest shall be treated (in lieu of holding a 
                partnership interest) as holding its 
                proportionate share of the assets held by the 
                partnership.
          ``(3) Treatment of return of capital distributions.--
        Except as otherwise provided by the Secretary, a 
        distribution with respect to stock in a qualified 
        investment entity which is not a dividend and which 
        results in a reduction in the adjusted basis of such 
        stock shall be treated asallocable to stock acquired by 
the taxpayer in the order in which such stock was acquired.
          ``(4) Qualified investment entity.--For purposes of 
        this subsection, the term `qualified investment entity' 
        means--
                  ``(A) a regulated investment company (within 
                the meaning of section 851), and
                  ``(B) a real estate investment trust (within 
                the meaning of section 856).
    ``(f) Other Pass-Thru Entities.--
          ``(1) Partnerships.--
                  ``(A) In general.--In the case of a 
                partnership, the adjustment made under 
                subsection (a) at the partnership level shall 
                be passed through to the partners.
                  ``(B) Special rule in the case of section 754 
                elections.--In the case of a transfer of an 
                interest in a partnership with respect to which 
                the election provided in section 754 is in 
                effect--
                          ``(i) the adjustment under section 
                        743(b)(1) shall, with respect to the 
                        transferor partner, be treated as a 
                        sale of the partnership assets for 
                        purposes of applying this section, and
                          ``(ii) with respect to the transferee 
                        partner, the partnership's holding 
                        period for purposes of this section in 
                        such assets shall be treated as 
                        beginning on the date of such 
                        adjustment.
          ``(2) S corporations.--In the case of an S 
        corporation, the adjustment made under subsection (a) 
        at the corporate level shall be passed through to the 
        shareholders. This section shall not apply for purposes 
        of determining the amount of any tax imposed by section 
        1374 or 1375.
          ``(3) Common trust funds.--In the case of a common 
        trust fund, the adjustment made under subsection (a) at 
        the trust level shall be passed through to the 
        participants.
          ``(4) Indexing adjustment disregarded in determining 
        loss on sale of interest in entity.--Notwithstanding 
        the preceding provisions of this subsection, for 
        purposes of determining the amount of any loss on a 
        sale or exchange of an interest in a partnership, S 
        corporation, or common trust fund, the adjustment made 
        under subsection (a) shall not be taken into account in 
        determining the adjusted basis of such interest.
    ``(g) Dispositions Between Related Persons.--
          ``(1) In general.--This section shall not apply to 
        any sale or other disposition of property between 
        related persons except to the extent that the basis of 
        such property in the hands of the transferee is a 
        substituted basis.
          ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                  ``(A) persons bearing a relationship set 
                forth in section 267(b), and
                  ``(B) persons treated as single employer 
                under subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any 
person transfers cash, debt, or any other property to another 
person and the principal purpose of such transfer is to secure 
or increase an adjustment under subsection (a), the Secretary 
may disallow part or all of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section--
          ``(1) Treatment of improvements, etc.--If there is an 
        addition to the adjusted basis of any tangible property 
        or of any stock in a corporation during the taxable 
        year by reason of an improvement to such property or a 
        contribution to capital of such corporation--
                  ``(A) such addition shall never be taken into 
                account under subsection (c)(1)(A) if the 
                aggregate amount thereof during the taxable 
                year with respect to such property or stock is 
                less than $1,000, and
                  ``(B) such addition shall be treated as a 
                separate asset acquired at the close of such 
                taxable year if the aggregate amount thereof 
                during the taxable year with respect to such 
                property or stock is $1,000 or more.
        A rule similar to the rule of the preceding sentence 
        shall apply to any other portion of an asset to the 
        extent that separate treatment of such portion is 
        appropriate to carry out the purposes of this section.
          ``(2) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation adjustment 
        shall be appropriately reduced for periods during which 
        the asset was not an indexed asset.
          ``(3) Treatment of certain distributions.--A 
        distribution with respect to stock in a corporation 
        which is not a dividend shall be treated as a 
        disposition.
          ``(4) Acquisition date where there has been prior 
        application of subsection (a)(1) with respect to the 
        taxpayer.--If there has been a prior application of 
        subsection (a)(1) to an asset while such asset was held 
        by the taxpayer, the date of acquisition of such asset 
        by the taxpayer shall be treated as not earlier than 
        the date of the most recent such prior application.
          ``(5) Collapsible corporations.--The application of 
        section 341(a) (relating to collapsible corporations) 
        shall be determined without regard to this section.
    ``(j) 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 part II 
of subchapter O of chapter 1 is amended by inserting after the 
item relating to section 1021 the following new item:

        ``Sec. 1022. Indexing of certain assets acquired after December 
                  31, 2000, for purposes of determining gain.''

    (c) Effective Dates.--
          (1) In general.--The amendments made by this section 
        shall apply to the disposition of any property the 
        holding period of which begins after December 31, 2000.
          (2) Certain transactions between related persons.--
        The amendments made by this section shall not apply to 
        the disposition of any property acquired after December 
        31, 2000, from a related person (as defined in section 
        1022(g)(2) of the Internal Revenue Code of 1986, as 
        added by this section) if--
                  (A) such property was so acquired for a price 
                less than the property's fair market value, and
                  (B) the amendments made by this section did 
                not apply to such property in the hands of such 
                related person.
    (d) Election To Recognize Gain on Assets Held on January 1, 
2001.--For purposes of the Internal Revenue Code of 1986--
          (1) In general.--A taxpayer other than a corporation 
        may elect to treat--
                  (A) any readily tradable stock (which is an 
                indexed asset) held by such taxpayer on January 
                1, 2001, and not sold before the next business 
                day after such date, as having been sold on 
                such next business day for an amount equal to 
                its closing market price on such next business 
                day (and as having been reacquired on such next 
                business day for an amount equal to such 
                closing market price), and
                  (B) any other indexed asset held by the 
                taxpayer on January 1, 2001, as having been 
                sold on such date for an amount equal to its 
                fair market value on such date (and as having 
                been reacquired on such date for an amount 
                equal to such fair market value).
          (2) Treatment of gain or loss.--
                  (A) Any gain resulting from an election under 
                paragraph (1) shall be treated as received or 
                accrued on the date the asset is treated as 
                sold under paragraph(1) and shall be recognized 
notwithstanding any provision of the Internal Revenue Code of 1986.
                  (B) Any loss resulting from an election under 
                paragraph (1) shall not be allowed for any 
                taxable year.
          (3) Election.--An election under paragraph (1) shall 
        be made in such manner as the Secretary of the Treasury 
        or his delegate may prescribe and shall specify the 
        assets for which such election is made. Such an 
        election, once made with respect to any asset, shall be 
        irrevocable.
          (4) Readily tradable stock.--For purposes of this 
        subsection, the term ``readily tradable stock'' means 
        any stock which, as of January 1, 2001, is readily 
        tradable on an established securities market or 
        otherwise.

SEC. 313. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.

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

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

    ``(a) Exclusion.--Gross income shall not include gain from 
the sale or exchange of property if, during the 5-year period 
ending on the date of the sale or exchange, such property has 
been owned and used by the taxpayer as the taxpayer's principal 
residence for periods aggregating 2 years or more.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount of gain excluded 
        from gross income under subsection (a) with respect to 
        any sale or exchange shall not exceed $250,000 
        ($500,000 in the case of a joint return where both 
        spouses meet the use requirement of subsection (a)).
          ``(2) Application to only 1 sale or exchange every 2 
        years.--
                  ``(A) In general.--Subsection (a) shall not 
                apply to any sale or exchange by the taxpayer 
                if, during the 2-year period ending on the date 
                of such sale or exchange, there was any other 
                sale or exchange by the taxpayer or his spouse 
                to which subsection (a) applied.
                  ``(B) Premarriage sales by spouse not taken 
                into account.--If, but for this subparagraph, 
                subsection (a) would not apply to a sale or 
                exchange by a married individual by reason of a 
                sale or exchange by such individual's spouse 
                before their marriage--
                          ``(i) subparagraph (A) shall be 
                        applied without regard to the sale or 
                        exchange by such individual's spouse, 
                        but
                          ``(ii) the amount of gain excluded 
                        from gross income under subsection (a) 
                        with respect to the sale or exchange by 
                        such individual shall not exceed 
                        $250,000.
                  ``(C) Pre-may 7, 1997, sales not taken into 
                account.--Subparagraph (A) shall be applied 
                without regard to any sale or exchange before 
                May 7, 1997.
    ``(c) Exclusion for Taxpayers Failing To Meet Certain 
Requirements.--
          ``(1) In general.--In the case of a sale or exchange 
        to which this subsection applies, the ownership and use 
        requirements of subsection (a) shall not apply and 
        subsection (b)(2) shall not apply; but the amount of 
        gain excluded from gross income under subsection (a) 
        with respect to such sale of exchange shall not 
        exceed--
                  ``(A) the amount which bears the same ratio 
                to the amount which would be so excluded if 
                such requirements had been met, as
                  ``(B) the shorter of--
                          ``(i) the aggregate periods, during 
                        the 5-year period ending on the date of 
                        such sale or exchange, such property 
                        has been owned and used by the taxpayer 
                        as the taxpayer's principal residence, 
                        or
                          ``(ii) the period after the date of 
                        the most recent prior sale or exchange 
                        by the taxpayer or his spouse to which 
                        subsection (a) applied and before the 
                        date of such sale or exchange,
                bears to 2 years.
          ``(2) Sales and exchanges to which subsection 
        applies.--This subsection shall apply to any sale or 
        exchange if--
                  ``(A) subsection (a) would not (but for this 
                subsection) apply to such sale or exchange by 
                reason of--
                          ``(i) a failure to meet the ownership 
                        and use requirements of subsection (a), 
                        or
                          ``(ii) subsection (b)(2), and
                  ``(B) such sale or exchange is by reason of a 
                change in place of employment, health, or, to 
                the extent provided in regulations, other 
                unforeseen circumstances.
    ``(d) Special Rules.--
          ``(1) Joint returns.--For purposes of this section, 
        if a husband and wife make a joint return for the 
        taxable year of the sale or exchange of the property, 
        subsection (a) shall, subject to the provisions of 
        subsection (b), apply if either spouse meets the 
        ownership and use requirements of subsection (a) with 
        respect to such property.
          ``(2) Property of deceased spouse.--For purposes of 
        this section, in the case of an unmarried individual 
        whose spouse is deceased on the date of the sale or 
        exchange of property, the period such unmarried 
        individual owned such property shall include the period 
        such deceased spouse held such property before death.
          ``(3) Property of divorced spouse.--For purposes of 
        this section, in the case of an individual holding 
        property transferred to such individual incident to 
        divorce (within the meaning of section 1041(c))--
                  ``(A) the period such individual owns such 
                property shall include the period the former 
                spouse owned the property, and
                  ``(B) the dollar limitation applicable under 
                paragraph (1) shall not be less than the amount 
                such limitation would have been had the sale or 
                exchange occurred on the date the divorce 
                became final.
          ``(4) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the 
        taxpayer holds stock as a tenant-stockholder (as 
        defined in section 216) in a cooperative housing 
        corporation (as defined in such section), then--
                  ``(A) the holding requirements of subsection 
                (a) shall be applied to the holding of such 
                stock, and
                  ``(B) the use requirements of subsection (a) 
                shall be applied to the house or apartment 
                which the taxpayer was entitled to occupy as 
                such stockholder.
          ``(5) Involuntary conversions.--
                  ``(A) In general.--For purposes of this 
                section, the destruction, theft, seizure, 
                requisition, or condemnation of property shall 
                be treated as the sale of such property.
                  ``(B) Application of section 1033.--In 
                applying section 1033 (relating to involuntary 
                conversions), the amount realized from the sale 
                or exchange of property shall be treated as 
                being the amount determined without regard to 
                this section, reduced by the amount of gain not 
                included in gross income pursuant to this 
                section.
                  ``(C) Property acquired after involuntary 
                conversion.--If the basis of the property sold 
                or exchanged is determined (in whole or in 
                part) under section 1033(b) (relating to basis 
                of property acquired through involuntary 
                conversion), then the holding and use by the 
                taxpayer of the converted property shall be 
                treated as holding and use by the taxpayer of 
                the property sold or exchanged.
          ``(6) Recognition of gain attributable to 
        depreciation.--Subsection (a) shall not apply to so 
        much ofthe gain from the sale of any property as does 
not exceed the portion of the depreciation adjustments (as defined in 
section 1250(b)(3)) attributable to periods after May 6, 1997, in 
respect of such property.
          ``(7) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                  ``(A) becomes physically or mentally 
                incapable of self-care, and
                  ``(B) owns property and uses such property as 
                the taxpayer's principal residence during the 
                5-year period described in subsection (a) for 
                periods aggregating at least 1 year,
        then the taxpayer shall be treated as using such 
        property as the taxpayer's principal residence during 
        any time during such 5-year period in which the 
        taxpayer owns the property and resides in any facility 
        (including a nursing home) licensed by a State or 
        political subdivision to care for an individual in the 
        taxpayer's condition.
          ``(8) Determination of marital status.--In the case 
        of any sale or exchange, for purposes of this section--
                  ``(A) the determination of whether an 
                individual is married shall be made as of the 
                date of the sale or exchange, and
                  ``(B) an individual legally separated from 
                his spouse under a decree of divorce or of 
                separate maintenance shall not be considered as 
                married.
          ``(9) Sales of life estates and remainder 
        interests.--For purposes of this section--
                  ``(A) In general.--This section shall not 
                fail to apply to the sale or exchange of an 
                interest in a principal residence by reason of 
                such interest being a life estate or a 
                remainder interest in such residence, but this 
                section shall apply only to one such interest 
                in such residence which is sold or exchanged 
                separately.
                  ``(B) Exception for sales to related 
                parties.--Subparagraph (A) shall not apply to 
                any sale to, or exchange with, any person who 
                bears a relationship to the taxpayer which is 
                described in section 267(b) or 707(b).
    ``(e) Denial of Exclusion for Expatriates.--This section 
shall not apply to any sale or exchange by an individual if the 
treatment provided by section 877(a)(1) applies to such 
individual.
    ``(f) Election To Have Section Not Apply.--This section 
shall not apply to any sale or exchange with respect to which 
the taxpayer elects not to have this section apply.
    ``(g) Residences Acquired in Rollovers Under Section 
1034.--For purposes of this section, in the case of property 
the acquisition of which by the taxpayer resulted under section 
1034 (as in effect on the day before the date of the enactment 
of this sentence) in the nonrecognition of any part of the gain 
realized on the sale or exchange of another residence, in 
determining the period for which the taxpayer has owned and 
used such property as the taxpayer's principal residence, there 
shall be included the aggregate periods for which such other 
residence (and each prior residence taken into account under 
section 1223(7) in determining the holding period of such 
property) had been so owned and used.''
    (b) Repeal of Nonrecognition of Gain on Rollover of 
Principal Residence.--Section 1034 (relating to rollover of 
gain on sale of principal residence) is hereby repealed.
    (c) Conforming Amendments.--
          (1) The following provisions of the Internal Revenue 
        Code of 1986 are each amended by striking ``section 
        1034'' and inserting ``section 121'': sections 
        25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i), 
        143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 
        464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 
        6334(a)(13), and 7872(f)(11)(A).
          (2) Paragraph (4) of section 32(c) is amended by 
        striking ``(as defined in section 1034(h)(3))'' and by 
        adding at the end the following new sentence: ``For 
        purposes of the preceding sentence, the term `extended 
        active duty' means any period of active duty pursuant 
        to a call or order to such duty for a period in excess 
        of 90 days or for an indefinite period.''
          (3) Subparagraph (A) of 143(m)(6) is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034(e)''.
          (4) Subsection (e) of section 216 is amended by 
        striking ``such exchange qualifies for nonrecognition 
        of gain under section 1034(f)'' and inserting ``such 
        dwelling unit is used as his principal residence 
        (within the meaning of section 121)''.
          (5) Section 512(a)(3)(D) is amended by inserting 
        ``(as in effect on the day before the date of the 
        enactment of the Revenue Reconciliation Act of 1997)'' 
        after ``1034''.
          (6) Paragraph (7) of section 1016(a) is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034'' and by inserting ``(as so in 
        effect)'' after ``1034(e)''.
          (7) Paragraph (3) of section 1033(k) is amended to 
        read as follows:
          ``(3) For exclusion from gross income of gain from 
        involuntary conversion of principal residence, see 
        section 121.''
          (8) Subsection (e) of section 1038 is amended to read 
        as follows:
    ``(e) Principal Residences.--If--
          ``(1) subsection (a) applies to a reacquisition of 
        real property with respect to the sale of which gain 
        was not recognized under section 121 (relating to gain 
        on sale of principal residence); and
          ``(2) within 1 year after the date of the 
        reacquisition of such property by the seller, such 
        property is resold by him,
then, under regulations prescribed by the Secretary, 
subsections (b), (c), and (d) of this section shall not apply 
to the reacquisition of such property and, for purposes of 
applying section 121, the resale of such property shall be 
treated as a part of the transaction constituting the original 
sale of such property.''
          (9) Paragraph (7) of section 1223 is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034''.
          (10) Paragraph (7) of section 1250(d) is amended to 
        read as follows:
          ``(7) Disposition of principal residence.--Subsection 
        (a) shall not apply to a disposition of property to the 
        extent used by the taxpayer as his principal residence 
        (within the meaning of section 121, relating to gain on 
        sale of principal residence).''
          (11) Subsection (c) of section 6012 is amended by 
        striking ``(relating to one-time exclusion of gain from 
        sale of principal residence by individual who has 
        attained age 55)'' and inserting ``(relating to gain 
        from sale of principal residence)''.
          (12) Paragraph (2) of section 6212(c) is amended by 
        striking subparagraph (C) and by redesignating the 
        succeeding subparagraphs accordingly.
          (13) Section 6504 is amended by striking paragraph 
        (4) and by redesignating the succeeding paragraphs 
        accordingly.
          (14) The item relating to section 121 in the table of 
        sections for part III of subchapter B of chapter 1 is 
        amended to read as follows:

        ``Sec. 121. Exclusion of gain from sale of principal 
                  residence.''

          (15) The table of sections for part III of subchapter 
        O of chapter 1 of such Code is amended by striking the 
        item relating to section 1034.
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to sales and exchanges after May 6, 1997.
          (2) Sales before date of enactment.--At the election 
        of the taxpayer, the amendments made by this section 
        shall not apply to any sale or exchange before the date 
        of the enactment of this Act.
          (3) Binding contracts.--At the election of the 
        taxpayer, the amendments made by this section shall not 
        apply to a sale or exchange after the date of the 
        enactment of this Act, if--
                  (A) such sale or exchange is pursuant to a 
                contract which was binding on such date, or
                  (B) without regard to such amendments, gain 
                would not be recognized under section 1034 of 
                the Internal Revenue Code of 1986 (as in effect 
                on the day before the date of the enactment of 
                this Act) on such sale or exchange by reason of 
                a new residence acquired on or before such date 
                or with respect to the acquisition of which by 
                the taxpayer a binding contract was in effect 
                on such date.
        This paragraph shall not apply to any sale or exchange 
        by an individual if the treatment provided by section 
        877(a)(1) of the Internal Revenue Code of 1986 applies 
        to such individual.

                    PART II--CORPORATE CAPITAL GAINS

SEC. 321. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.

    (a) In General.--Section 1201 is amended to read as 
follows:

``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

    ``(a) General Rule.--If for any taxable year a corporation 
has 8-year gain, then, in lieu of the tax imposed by sections 
11, 511, and 831 (a) and (b) (whichever is applicable), there 
is hereby imposed a tax (if such tax is less than the tax 
imposed by such sections) which shall consist of the sum of--
          ``(1) a tax computed on the taxable income reduced by 
        the amount of the 8-year gain, at the rates and in the 
        manner as if this subsection had not been enacted, plus
          ``(2) a tax of the applicable percentage of the 
        amount of the 8-year gain (or, if less, taxable 
        income).
    ``(b) Applicable Percentage.--For purposes of subsection 
(a)--
          ``(1) In general.--The term `applicable percentage' 
        means--
                  ``(A) 32 percent for the portion of any 
                taxable year within 1998,
                  ``(B) 31 percent for the portion of any 
                taxable year within 1999, and
                  ``(C) 30 percent for the portion of any 
                taxable year after 1999.
          ``(2) Fiscal year taxpayers.--
                  ``(A) Taxable years beginning in 1997.--In 
                applying this section to taxable years 
                beginning in 1997, 8-year gain shall not exceed 
                the 8-year gain determined by taking into 
                account only gains and losses properly taken 
                into account for the portion of the taxable 
                year after December 31, 1997.
                  ``(B) Taxable years beginning in 1998 or 
                1999.--In the case of a taxable year beginning 
                in 1998 or 1999 which includes portions of 2 
                calendar years, the applicable percentage shall 
                be applied separately to such portions by 
                taking into account--
                          ``(i) in the case of the first such 
                        portion, the lesser of--
                                  ``(I) the 8-year gain 
                                determined by taking into 
                                account only gains and losses 
                                properly taken into account for 
                                such portion, or
                                  ``(II) the 8-year gain 
                                determined for the entire 
                                taxable year, and
                          ``(ii) in the case of the second such 
                        portion, the 8-year gain (and the 
                        taxable income) determined for the 
                        entire taxable year reduced by the 
                        amount on which tax is determined under 
                        subsection (a)(2) for the first such 
                        portion determined under clause (i).
                  ``(C) Special rule for pass-thru entities.--
                Section 1(h)(8)(C) shall apply for purposes of 
                this paragraph.
    ``(c) 8-Year Gain.--For purposes of this section, the term 
`8-year gain' means the lesser of--
          ``(1) the amount of long-term capital gain which 
        would be computed for the taxable year if only gain 
        from the sale or exchange of property held by the 
        taxpayer for more than 8 years were taken into account, 
        or
          ``(2) net capital gain.
The determination under the preceding sentence shall be made 
without regard to collectibles gain (as defined in section 
1(h)(5)) or section 1250 gain (as defined in section 1(h)(7)).
    ``(d) Cross References.--

          ``For computation of the alternative tax--
          ``(1) in the case of life insurance companies, see section 
        801(a)(2),
          ``(2) in the case of regulated investment companies and their 
        shareholders, see section 852(b)(3)(A) and (D), and
          ``(3) in the case of real estate investment trusts, see 
        section 857(b)(3)(A).''

    (b) Technical Amendments.--
          (1) Subsection (d) of section 291 is amended by 
        striking ``subsection (a)(1) to such shareholder'' and 
        inserting ``subsection (a)(1) and section 1201 to such 
        shareholder''.
          (2) Clause (iii) of section 852(b)(3)(D) is amended 
        by striking ``65 percent'' and inserting ``the 
        applicable percentage'' and by inserting at the end the 
        following new sentence: ``For purposes of the preceding 
        sentence, the term `applicable percentage' means the 
        percentage equal to the excess of 100 percent over the 
        percentage applicable under section 1201(a).''
          (3)(A) Subparagraph (B) of section 852(b)(3) is 
        amended to read as follows:
                  ``(B) Treatment of capital gain dividends by 
                shareholders.--
                          ``(i) In general.--Except as provided 
                        in clause (ii), a capital gain dividend 
                        shall be treated by the shareholders as 
                        gain from the sale or exchange of a 
                        capital asset held for more than 1 
                        year.
                          ``(ii) Coordination with 8-year 
                        holding period for corporate net 
                        capital gain.--The portion of any 
                        capital gain dividend designated by the 
                        company as allocable to gain from the 
                        sale or exchange of property held by 
                        the company for more than 8 years shall 
                        be treated as gain from the sale or 
                        exchange of a capital asset held for 
                        more than 8 years. Rules similar to the 
                        rules of subparagraph (C) shall apply 
                        to any designation under the preceding 
                        sentence.''
          (B) Clause (i) of section 851(b)(3)(D) is amended by 
        adding at the end thereof the following new sentence: 
        ``Rules similar to the rules of subparagraph (B) shall 
        apply in determining character of the amount to be so 
        included by any such shareholder which is a 
        corporation.''
          (4) Subparagraph (B) of section 857(b)(3) is amended 
        to read as follows:
                  ``(B) Treatment of capital gain dividends by 
                shareholders.--
                          ``(i) In general.--Except as provided 
                        in clause (ii), a capital gain dividend 
                        shall be treated by the shareholders or 
                        holders of beneficial interests as gain 
                        from the sale or exchange of a capital 
                        asset held for more than 1 year.
                          ``(ii) Coordination with 8-year 
                        holding period for corporate net 
                        capital gain.--The portion of any 
                        capital gain dividend designated by the 
                        company as allocable to gain from the 
                        sale or exchange of property held by 
                        the company for more than 8 years shall 
                        be treated as gain from the sale or 
                        exchange of a capital asset held for 
                        more than 8 years. Rules similar to the 
                        rules of subparagraph (C) shall apply 
                        to any designation under the preceding 
                        sentence.''
          (5) Subsection (c) of section 584 is amended--
                  (A) by inserting ``but not more than 8 
                years'' after ``1 year'' each place it appears 
                in paragraph (2),
                  (B) by striking ``and'' at the end of 
                paragraph (2), and
                  (C) by redesignating paragraph (3) as 
                paragraph (4) and inserting after paragraph (2) 
                the following new paragraph:
          ``(3) as part of its gains and losses from sales or 
        exchanges of capital assets held for more than 8 years, 
        its proportionate share of the gains and losses of the 
        common trust fund from sales or exchanges of capital 
        assets held for more than 8 years, and''.
          (6) Subparagraph (E) of section 904(b)(3) is amended 
        by adding at the end the following new clause:
                          ``(iv) Regulations.--The Secretary 
                        shall prescribe regulations that adjust 
                        the limitation under subsection (a) to 
                        reflect the rate differential for 8-
                        year gain (as defined in section 
                        1201(c)) between the highest rate of 
                        tax specified in section 11(b) and the 
                        alternate rate of tax under section 
                        1201(a) and the limitation on the 
                        deduction for capital losses under 
                        section 1211.''
    (c) Effective Dates.--The amendments made by this section 
shall apply to taxable years ending after December 31, 1997.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

SEC. 401. ADJUSTMENT OF EXEMPTION AMOUNTS FOR TAXPAYERS OTHER THAN 
                    CORPORATIONS.

    (a) In General.--Subsection (d) of section 55 is amended by 
adding at the end the following new paragraph:
          ``(4) Adjustment of exemption amounts for taxpayers 
        other than corporations.--
                  ``(A) Taxable years beginning before january 
                1, 2008.--In the case of any taxable year 
                beginning in a calendar year after 1998 and 
                before 2008--
                          ``(i) In general.--The dollar amount 
                        applicable under paragraph (1)(A) for 
                        any odd-numbered calendar year--
                                  ``(I) shall be $1,000 greater 
                                than the dollar amount 
                                applicable under paragraph 
                                (1)(A) for the prior odd-
                                numbered calendar year, and
                                  ``(II) shall apply to taxable 
                                years beginning in such odd-
                                numbered calendar year and the 
                                succeeding calendar year.
                  ``(B) Taxable years beginning after december 
                31, 2007.--In the case of any taxable year 
                beginning in a calendar year after 2007, the 
                dollar amount applicable under paragraph (1)(A) 
                for taxable years beginning in 2007 shall be 
                increased by an amount equal to the product 
                of--
                          ``(i) such dollar amount, and
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 2006' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $100, such 
                increase shall be rounded to the next lowest 
                multiple of $100.
                  ``(C) Other amounts.--
                          ``(i) The dollar amount applicable 
                        under paragraph (1)(B) for any taxable 
                        year shall be an amount equal to 75 
                        percent of the dollar amount applicable 
                        under paragraph (1)(A) for such year.
                          ``(ii) The dollar amount applicable 
                        under paragraph (1)(C) for any taxable 
                        year shall be an amount equal to 50 
                        percent of the dollar amount applicable 
                        under paragraph (1)(A) for such year.''
    (b) Conforming Amendment.--The last sentence of section 
55(d)(3) is amended by striking ``$165,000 or (ii) $22,500'' 
and inserting ``the minimum amount of such income (as so 
determined) for which the exemption amount under paragraph 
(1)(C) is zero, or (ii) such exemption amount (determined 
without regard to this paragraph)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1998.

SEC. 402. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL 
                    CORPORATIONS.

    (a) In General.--Section 55 (relating to alternative 
minimum tax imposed) is amended by adding at the end the 
following new subsection:
    ``(e) Exemption for Small Corporations.--
          ``(1) In general.--The tentative minimum tax of a 
        corporation shall be zero for any taxable year if--
                  ``(A) such corporation met the $5,000,000 
                gross receipts test of section 448(c) for any 
                prior taxable year beginning after December 31, 
                1996, and
                  ``(B) such corporation would meet such test 
                for the taxable year and all prior taxable 
                years beginning after December 31, 1997, if 
                such test were applied by substituting 
                `$7,500,000' for `$5,000,000'.
          ``(2) Prospective application of minimum tax if small 
        corporation ceases to be small.--In the case of a 
        corporation whose tentative minimum tax is zero for any 
        prior taxable year by reason of paragraph (1), the 
        application of this part for taxable years beginning 
        with the first taxable year such corporation ceases to 
        be described in paragraph (1) shall be determined 
        without regard to transactions entered into or other 
        items arising in taxable years prior to such first 
        taxable year.
          ``(3) Limitation on use of credit for prior year 
        minimum tax liability.--In the case of a taxpayer whose 
        tentative minimum tax for any taxable year is zero by 
        reason of paragraph (1), the amount described in 
        paragraph (2) of section 53(b) shall not be less than 
        the greater of--
                  ``(A) the tentative minimum tax for the 
                taxable year, or
                  ``(B) 25 percent of so much of the regular 
                tax liability (reduced by the credit allowed by 
                section 27) as exceeds $25,000.
        Rules similar to the rules of section 38(c)(3)(B) shall 
        apply for purposes of the preceding sentence.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 403. REPEAL OF ADJUSTMENT FOR DEPRECIATION.

    Clause (i) of section 56(a)(1)(A) is amended by inserting 
``and before January 1, 1999,'' after ``December 31, 1986,''.

SEC. 404. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT SALES.

    (a) In General.--The last sentence of paragraph (6) of 
section 56(a) (relating to treatment of installment sales in 
computing alternative minimum taxable income) is amended to 
read as follows: ``This paragraph shall not apply to any 
disposition--
                  ``(A) in the case of a taxpayer using the 
                cash receipts and disbursements method of 
                accounting, described in section 453(l)(2)(A) 
                (relating to farm property), or
                  ``(B) with respect to which an election is in 
                effect under section 453(l)(2)(B) (relating to 
                timeshares and residential lots).''
    (b) Effective Dates.--
          (1) In general.--The amendment made by this section 
        shall apply to dispositions in taxable years beginning 
        after December 31, 1987.
          (2) Special rule for 1987.--In the case of taxable 
        years beginning in 1987, the last sentence of section 
        56(a)(6) of the Internal Revenue Code of 1986 (as in 
        effect for such taxable years) shall be applied by 
        inserting ``or in the case of a taxpayer using the cash 
        receipts and disbursements method of accounting, any 
        disposition described in section 453C(e)(1)(B)(ii)'' 
        after ``section 453C(e)(4)''.

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

               Subtitle A--Estate and Gift Tax Provisions

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

    (a) Increase in Unified Estate and Gift Tax Credit.--
          (1) Estate tax credit.--
                  (A) In general.--Subsection (a) of section 
                2010 (relating to unified credit against estate 
                tax) is amended by striking ``$192,800'' and 
                inserting ``the applicable credit amount''.
                  (B) Applicable credit amount.--Section 2010 
                is amended by redesignating subsection (c) as 
                subsection (d) and by inserting after 
                subsection (b) the following new subsection:
    ``(c) Applicable Credit Amount.--For purposes of this 
section--
          ``(1) In general.--For purposes of this section, the 
        applicable credit amount is the amount of the tentative 
        tax which would be determined under the rate schedule 
        set forth in section 2001(c) if the amount with respect 
        to which such tentative tax is to be computed were the 
        applicable exclusion amount determined in accordance 
        with the following table:

    ``In the case of estates of decedents                 The applicable
      dying, and gifts made, during:                exclusion amount is:
          1998..........................................      $ 650,000 
          1999..........................................      $ 750,000 
          2000..........................................      $ 765,000 
          2001 through 2004.............................      $ 775,000 
          2005..........................................      $ 800,000 
          2006..........................................     $  825,000 
          2007 or thereafter............................     $1,000,000.

          ``(2) Cost-of-living adjustment.--In the case of any 
        decedent dying, and gift made, in a calendar year after 
        2007, the $1,000,000 amount set forth in paragraph (1) 
        shall be increased by an amount equal to--
                  ``(A) $1,000,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                2006' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
                  (C) Estate tax returns.--Paragraph (1) of 
                section 6018(a) is amended by striking 
                ``$600,000'' and inserting ``the applicable 
                exclusion amount in effect under section 
                2010(c) for the calendar year which includes 
                the date of death''.
                  (D) Phaseout of graduated rates and unified 
                credit.--Paragraph (2) of section 2001(c) is 
                amended by striking ``$21,040,000'' and 
                inserting ``the amount at which the average tax 
                rate under this section is 55 percent''.
                  (E) Estates of nonresidents not citizens.--
                Subparagraph (A) of section 2102(c)(3) is 
                amended by striking ``$192,800'' and inserting 
                ``the applicable credit amount in effect under 
                section 2010(c) for the calendar year which 
                includes the date of death''.
          (2) Unified gift tax credit.--Paragraph (1) of 
        section 2505(a) is amended by striking ``$192,800'' and 
        inserting ``the applicable credit amount in effect 
        under section 2010(c) for such calendar year''.
    (b) Alternate Valuation of Certain Farm, Etc., Real 
Property.--Subsection (a) of section 2032A is amended by adding 
at the end the following new paragraph:
          ``(3) Inflation adjustment.--In the case of estates 
        of decedents dying in a calendar year after 1998, the 
        $750,000 amount contained in paragraph (2) shall be 
        increased by an amount equal to--
                  ``(A) $750,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
    (c) Annual Gift Tax Exclusion.--Subsection (b) of section 
2503 is amended--
          (1) by striking the subsection heading and inserting 
        the following:
    ``(b) Exclusions From Gifts.--
          ``(1) In general.--'',
          (2) by moving the text 2 ems to the right, and
          (3) by adding at the end the following new paragraph:
          ``(2) Inflation adjustment.--In the case of gifts 
        made in a calendar year after 1998, the $10,000 amount 
        contained in paragraph (1) shall be increased by an 
        amount equal to--
                  ``(A) $10,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $1,000, such amount shall be 
        rounded to the next lowest multiple of $1,000.''
    (d) Exemption From Generation-Skipping Tax.--Section 2631 
(relating to GST exemption) is amended by adding at the end the 
following new subsection:
    ``(c) Inflation Adjustment.--In the case of an individual 
who dies in any calendar year after 1998, the $1,000,000 amount 
contained in subsection (a) shall be increased by an amount 
equal to--
          ``(1) $1,000,000, multiplied by
          ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for such calendar year by substituting 
        `calendar year 1997' for `calendar year 1992' in 
        subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a 
multiple of $10,000, such amount shall be rounded to the next 
lowest multiple of $10,000.''
    (e) Amount Subject to Reduced Rate Where Extension of Time 
for Payment of Estate Tax on Closely Held Business.--Subsection 
(j) of section 6601 is amended by redesignating paragraph (3) 
as paragraph (4) and by inserting after paragraph (2) the 
following new paragraph:
          ``(3) Inflation adjustment.--In the case of estates 
        of decedents dying in a calendar year after 1998, the 
        $1,000,000 amount contained in paragraph (2)(A) shall 
        be increased by an amount equal to--
                  ``(A) $1,000,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
    (f) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying, and gifts made, 
after December 31, 1997.

SEC. 502. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE CONSISTS LARGELY OF 
                    INTEREST IN CLOSELY HELD BUSINESS.

    (a) In General.--Section 6166(a) (relating to extension of 
time for payment of estate tax where estate consists largely of 
interest in closely held business) is amended by striking 
``10'' in paragraph (1) and the heading thereof and inserting 
``20''.
    (b) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997.

SEC. 503. NO INTEREST ON CERTAIN PORTION OF ESTATE TAX EXTENDED UNDER 
                    SECTION 6166, REDUCED INTEREST ON REMAINING 
                    PORTION, AND NO DEDUCTION FOR SUCH REDUCED 
                    INTEREST.

    (a) No Interest and Reduced Interest.--
          (1) In general.--Paragraphs (1) and (2) of section 
        6601(j) (relating to 4-percent rate on certain portion 
        of estate tax extended under section 6166), as amended 
        by section 501(e), are amended to read as follows:
          ``(1) In general.--If the time for payment of an 
        amount of tax imposed by chapter 11 is extended as 
        provided in section 6166, then in lieu of the annual 
        rate provided by subsection (a)--
                  ``(A) no interest shall be paid on the no-
                interest portion of such amount, and
                  ``(B) interest on so much of such amount as 
                exceeds such no-interest portion shall be paid 
                at a rate equal to 45 percent of the annual 
                rate provided by subsection (a).
        For purposes of this subsection, the amount of any 
        deficiency which is prorated to installments payable 
        under section 6166 shall be treated as an amount of tax 
        payable in installments under such section.
          ``(2) No-interest portion.--For purposes of this 
        section, the term `no-interest portion' means the 
        lesser of--
                  ``(A)(i) the amount of the tentative tax 
                which would be determined under the rate 
                schedule set forth in section 2001(c) if the 
                amount with respect to which such tentative tax 
                is to be computed were the sum of $1,000,000 
                and the applicable exclusion amount in effect 
                under section 2010(c), reduced by
                  ``(ii) the applicable credit amount in effect 
                under section 2010(c), or
                  ``(B) the amount of the tax imposed by 
                chapter 11 which is extended as provided in 
                section 6166.''
          (2) Conforming amendments.--
                  (A) Section 6601(j), as amended by section 
                501, is amended--
                          (i) by striking ``4-percent'' each 
                        place it appears in paragraph (3) and 
                        inserting ``no-interest'', and
                          (ii) by striking ``4-Percent Rate on 
                        Certain Portion of'' in the heading and 
                        inserting ``Rate on''.
                  (B) Section 6166(b)(7)(A)(iii) is amended to 
                read as follows:
                          ``(iii) for purposes of applying 
                        section 6601(j) (relating to rate on 
                        estate tax extended under section 
                        6166), the no-interest portion shall be 
                        zero.''
                  (C) Section 6166(b)(8)(A)(iii) is amended to 
                read as follows:
                          ``(iii) No-interest portion not to 
                        apply.--For purposes of applying 
                        section 6601(j) (relating to rate on 
                        estate tax extended under section 
                        6166), the no-interest portion shall be 
                        zero.''
    (b) Disallowance of Interest Deduction.--
          (1) Estate tax.--Paragraph (1) of section 2053(c) is 
        amended by adding at the end the following new 
        subparagraph:
                  ``(D) Section 6166 interest.--No deduction 
                shall be allowed under this section for any 
                interest payable under section 6601 on any 
                unpaid portion of the tax imposed by section 
                2001 for the period during which an extension 
                of time for payment of such tax is in effect 
                under section 6166.''
          (2) Income tax.--Subparagraph (E) of section 
        163(h)(2) is amended by striking ``or 6166''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997.

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

    (a) General Rule.--Paragraph (7) of section 2032A(c) 
(relating to special rules for tax treatment of dispositions 
and failures to use for qualified use) is amended by adding at 
the end the following new subparagraph:
                  ``(E) Certain rents treated as qualified 
                use.--For purposes of this subsection, a 
                surviving spouse or lineal descendant of the 
                decedent shall not be treated as failing to use 
                qualified real property in a qualified use 
                solely because such spouse or descendant rents 
                such property to a member of the family of such 
                spouse or descendant on a net cash basis. For 
                purposes of the preceding sentence, a legally 
                adopted child of an individual shall be treated 
                as the child of such individual by blood.''
    (b) Conforming Amendment.--Section 2032A(b)(5)(A) is 
amended by striking the last sentence.
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to leases entered into after December 
31, 1976.

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

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

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

    (a) Creation of Remedy.--In a case of actual controversy 
involving a determination by the Secretary of (or a failure by 
the Secretary to make a determination with respect to)--
          ``(1) whether an election may be made under section 
        6166 (relating to extension of time for payment of 
        estate tax where estate consists largely of interest in 
        closely held business) with respect to an estate, or
          ``(2) whether the extension of time for payment of 
        tax provided in section 6166(a) has ceased to apply 
        with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court may 
make a declaration with respect to whether such election may be 
made, whether such extension has ceased to apply, or the amount 
of such installment payments. Any such declaration shall have 
the force and effect of a decision of the Tax Court and shall 
be reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section, with respect to any estate, only--
                  ``(A) by the executor of such estate, or
                  ``(B) by any person who has assumed an 
                obligation to make payments under section 6166 
                with respectto such estate (but only if each 
other such person is joined as a party).
          ``(2) Exhaustion of administrative remedies.--The 
        court shall not issue a declaratory judgment or decree 
        under this section in any proceeding unless it 
        determines that the petitioner has exhausted all 
        available administrative remedies within the Internal 
        Revenue Service. A petitioner shall be deemed to have 
        exhausted its administrative remedies with respect to a 
        failure of the Secretary to make a determination at the 
        expiration of 180 days after the date on which the 
        request for such determination was made if the 
        petitioner has taken, in a timely manner, all 
        reasonable steps to secure such determination.
          ``(3) Time for bringing action.--If the Secretary 
        sends by certified or registered mail notice of his 
        determination as described in subsection (a) to the 
        petitioner, no proceeding may be initiated under this 
        section unless the pleading is filed before the 91st 
        day after the date of such mailing.''
    (b) Clerical Amendment.--The table of sections for part IV 
of subchapter C of chapter 76 of such Code is amended by adding 
at the end the following new item:

        ``Sec. 7479. Declaratory judgments relating to eligibility of 
                  estate with respect to installment payments under 
                  section 6166.''

    (c) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

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

    (a) In General.--Section 2001 (relating to imposition and 
rate of estate tax) is amended by adding at the end the 
following new subsection:
    ``(f) Valuation of Gifts.--If--
          ``(1) the time has expired within which a tax may be 
        assessed under chapter 12 (or under corresponding 
        provisions of prior laws) on the transfer of property 
        by gift made during a preceding calendar period (as 
        defined in section 2502(b)), and
          ``(2) the value of such gift is shown on the return 
        for such preceding calendar period or is disclosed in 
        such return, or in a statement attached to the return, 
        in a manner adequate to apprise the Secretary of the 
        nature of such gift,
the value of such gift shall, for purposes of computing the tax 
under this chapter, be the value of such gift as finally 
determined for purposes of chapter 12.''
    (b) Modification of Application of Statute of 
Limitations.--Paragraph (9) of section 6501(c) is amended to 
read as follows:
          ``(9) Gift tax on certain gifts not shown on 
        return.--If any gift of property the value of which (or 
        any increase in taxable gifts required under section 
        2701(d) which) is required to be shown on a return of 
        tax imposed by chapter 12 (without regard to section 
        2503(b)), and is not shown on such return, any tax 
        imposed by chapter 12 on such gift may be assessed, or 
        a proceeding in court for the collection of such tax 
        may be begun without assessment, at any time. The 
        preceding sentence shall not apply to any item which is 
        disclosed in such return, or in a statement attached to 
        the return, in a manner adequate to apprise the 
        Secretary of the nature of such item. The value of any 
        item which is so disclosed may not be redetermined by 
        the Secretary after the expiration of the period under 
        subsection (a).''
    (c) Declaratory Judgment Procedure for Determining Value of 
Gift.--
          (1) In general.--Part IV of subchapter C of chapter 
        76 is amended by inserting after section 7476 the 
        following new section:

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

    ``(a) Creation of Remedy.--In a case of an actual 
controversy involving a determination by the Secretary of the 
value of any gift shown on the return of tax imposed by chapter 
12 or disclosed on such return or in any statement attached to 
such return, upon the filing of an appropriate pleading, the 
Tax Court may make a declaration of the value of such gift. Any 
such declaration shall have the force and effect of a decision 
of the Tax Court and shall be reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section only by the donor.
          ``(2) Exhaustion of administrative remedies.--The 
        court shall not issue a declaratory judgment or decree 
        under this section in any proceeding unless it 
        determines that the petitioner has exhausted all 
        available administrative remedies within the Internal 
        Revenue Service.
          ``(3) Time for bringing action.--If the Secretary 
        sends by certified or registered mail notice of his 
        determination as described in subsection (a) to the 
        petitioner, no proceeding may be initiated under this 
        section unless the pleading is filed before the 91st 
        day after the date of such mailing.''
          (2) Clerical amendment.--The table of sections for 
        such part IV is amended by inserting after the item 
        relating to section 7476 the following new item:

        ``Sec. 7477. Declaratory judgments relating to value of certain 
                  gifts.''

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

SEC. 507. TERMINATION OF THROWBACK RULES FOR DOMESTIC TRUSTS.

    (a) Accumulation Distributions.--
          (1) In general.--Section 665 is amended by adding at 
        the end the following new subsection:
    ``(f) Special Rule for United States Trusts.--For purposes 
of this subpart, in the case of a trust other than a foreign 
trust, any distribution in any taxable year beginning after the 
date of the enactment of this subsection shall be computed 
without regard to any undistributed net income.''
          (2) Conforming amendment.--Subsection (b) of section 
        665 is amended by inserting ``except as provided in 
        subsection (f),'' after ``subpart,''
    (b) Property Transferred to Trusts.--Subsection (e) of 
section 644 is amended by striking ``or'' at the end of 
paragraph (3), by striking the period at the end of paragraph 
(4) and inserting ``, or '', and by adding at the end the 
following new paragraph:
          ``(5) in the case of a trust other than a foreign 
        trust, any sale or exchange of property after the date 
        of the enactment of this paragraph.''
    (c) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        distributions in taxable years beginning after the date 
        of the enactment of this Act.
          (2) Transferred property.--The amendments made by 
        subsection (b) shall apply to sales or exchanges after 
        the date of the enactment of this Act.

SEC. 508. UNIFIED CREDIT OF DECEDENT INCREASED BY UNIFIED CREDIT OF 
                    SPOUSE USED ON SPLIT GIFT INCLUDED IN DECEDENT'S 
                    GROSS ESTATE.

    (a) In General.--Section 2010 (relating to unified credit 
against estate tax) is amended by adding at the end the 
following new subsection:
    ``(d) Treatment of Unified Credit Used By Spouse on Split-
Gift Included in Decedent's Gross Estate.--If--
          ``(1) the decedent was the donor of any gift one-half 
        of which was considered under section 2513 as made by 
        the decedent's spouse, and
          ``(2) the amount of such gift is includible in the 
        gross estate of the decedent by reason of section 2035, 
        2036, 2037, or 2038,
the amount of the credit allowable by subsection (a) to the 
estate of the decedent shall be increased by the amount of the 
unified credit allowed against the tax imposed by section 2501 
on the amount of such gift considered under section 2513 as 
made by such spouse.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to gifts made after the date of the enactment of 
this Act.

SEC. 509. REFORMATION OF DEFECTIVE BEQUESTS, ETC., TO SPOUSE OF 
                    DECEDENT.

    (a) In General.--Subsection (b) of section 2056 (relating 
to bequests, etc., to surviving spouse) is amended by adding at 
the end the following new paragraph:
          ``(11) Reformations permitted.--
                  ``(A) In general.--In the case of any 
                interest in property with respect to which a 
                deduction would be allowable under subsection 
                (a) but for a provision of this subsection, 
                if--
                          ``(i) the surviving spouse is 
                        entitled to all of the income from the 
                        property for life,
                          ``(ii) no person other than such 
                        spouse is entitled to any distribution 
                        of such property during such spouse's 
                        life, and
                          ``(iii) there is a change of a 
                        governing instrument (by reformation, 
                        amendment, construction, or otherwise) 
                        as of the applicable date which results 
                        in the satisfaction of the requirements 
                        of such provision as of the date of the 
                        decedent's death,
                the determination of whether such deduction is 
                allowable shall be made as of the applicable 
                date.
                  ``(B) Special rule where timely commencement 
                of reformation.--Clauses (i) and (ii) of 
                subparagraph (A) shall not apply to any 
                interest if, not later than the date described 
                in subparagraph (C)(i), a judicial proceeding 
                is commenced to change such interest into an 
                interest which satisfies the requirements of 
                the provision by reason of which (but for this 
                paragraph) a deduction would not be allowable 
                under subsection (a) for such interest.
                  ``(C) Applicable date.--For purposes of 
                subparagraph (A), the term `applicable date' 
                means--
                          ``(i) the last date (including 
                        extensions) for filing the return of 
                        tax imposed by this chapter, or
                          ``(ii) if a judicial proceeding is 
                        commenced to comply with such 
                        provision, the time when the changes 
                        pursuant to such proceeding are made.
                  ``(D) Special rule.--If the change referred 
                to in subparagraph (A)(iii) is to qualify the 
                passage of the interest under paragraph (7), 
                subparagraph (A) shall apply only if the 
                election under paragraph (7)(B) is made.
                  ``(E) Statute of limitations.--If a judicial 
                proceeding described in subparagraph (C)(ii) is 
                commenced with respect to any interest, the 
                period for assessing any deficiency of tax 
                attributable to such interest shall not expire 
                before the date 1 year after the date on which 
                the Secretary is notified that such provision 
                has been complied with or that such proceeding 
                has been terminated.''
    (b) Comparable Rule for Gift Tax.--Section 2523 (relating 
to gift to spouse) is amended by adding at the end the 
following new subsection:
    ``(j) Reformations permitted.--Rules similar to the rules 
of section 2056(b)(11) shall apply for purposes of this 
section.''
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying, and gifts made, 
after the date of the enactment of this Act.

             Subtitle B--Generation-Skipping Tax Provisions

SEC. 511. SEVERING OF TRUSTS HOLDING PROPERTY HAVING AN INCLUSION RATIO 
                    OF GREATER THAN ZERO.

    (a) In General.--Subsection (a) of section 2642 (relating 
to inclusion ratio) is amended by adding at the end the 
following new paragraph:
          ``(3) Severing of trusts holding property having an 
        inclusion ratio of greater than zero.--
                  ``(A) In general.--If a trust holding 
                property having an inclusion ratio of greater 
                than zero is severed in a qualified severance, 
                at the election of the trustee of such trust, 
                the trusts resulting from such severance shall 
                be treated as separate trusts for purposes of 
                this chapter and 1 such trust shall have an 
                inclusion ratio of 1 and the other such trust 
                shall have an inclusion ratio of zero.
                  ``(B) Qualified severance.--For purposes of 
                subparagraph (A), the term `qualified 
                severance' means the creation of 2 trusts from 
                a single trust if each property held by the 
                single trust was divided between the 2 created 
                trusts such that one trust received an interest 
                in each such property equal to the applicable 
                fraction of the single trust. Such term 
                includes any other severance permitted under 
                regulations prescribed by the Secretary.
                  ``(C) Election.--The election under this 
                paragraph shall be made at the time prescribed 
                by the Secretary. Such an election, once made, 
                shall be irrevocable.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to severances after the date of the enactment of 
this Act.

SEC. 512. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING TRANSFER TAX 
                    FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.

    (a) In General.--Section 2651 (relating to generation 
assignment) is amended by redesignating subsection (e) as 
subsection (f), and by inserting after subsection (d) the 
following new subsection:
    ``(e) Special Rule for Persons With a Deceased Parent.--
          ``(1) In general.--For purposes of determining 
        whether any transfer is a generation-skipping transfer, 
        if--
                  ``(A) an individual is a descendant of a 
                parent of the transferor (or the transferor's 
                spouse or former spouse), and
                  ``(B) such individual's parent who is a 
                lineal descendant of the parent of the 
                transferor (or the transferor's spouse or 
                former spouse) is dead at the time the transfer 
                (from which an interest of such individual is 
                established or derived) is subject to a tax 
                imposed by chapter 11 or 12 upon the transferor 
                (and if there shall be more than 1 such time, 
                then at the earliest such time),
        such individual shall be treated as if such individual 
        were a member of the generation which is 1 generation 
        below the lower of the transferor's generation or the 
        generation assignment of the youngest living ancestor 
        of such individual whois also a descendant of the 
parent of the transferor (or the transferor's spouse or former spouse), 
and the generation assignment of any descendant of such individual 
shall be adjusted accordingly.
          ``(2) Limited application of subsection to collateral 
        heirs.--This subsection shall not apply with respect to 
        a transfer to any individual who is not a lineal 
        descendant of the transferor (or the transferor's 
        spouse or former spouse) if, at the time of the 
        transfer, such transferor has any living lineal 
        descendant.''
    (b) Conforming Amendments.--
          (1) Section 2612(c) (defining direct skip) is amended 
        by striking paragraph (2) and by redesignating 
        paragraph (3) as paragraph (2).
          (2) Section 2612(c)(2) (as so redesignated) is 
        amended by striking ``section 2651(e)(2)'' and 
        inserting ``section 2651(f)(2)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to terminations, distributions, and transfers 
occurring after December 31, 1997.

                          TITLE VI--EXTENSIONS

SEC. 601. RESEARCH TAX CREDIT.

    (a) In General.--Paragraph (1) of section 41(h) (relating 
to termination) is amended--
          (1) by striking ``May 31, 1997'' and inserting 
        ``December 31, 1998'', and
          (2) by striking in the last sentence ``during the 
        first 11 months of such taxable year.'' and inserting 
        ``during the 30-month period beginning with the first 
        month of such year. The 30 months referred to in the 
        preceding sentence shall be reduced by the number of 
        full months after June 1996 (and before the first month 
        of such first taxable year) during which the taxpayer 
        paid or incurred any amount which is taken into account 
        in determining the credit under this section.''
    (b) Technical Amendments.--
          (1) Subparagraph (B) of section 41(c)(4) is amended 
        to read as follows:
                  ``(B) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary.''
          (2) Paragraph (1) of section 45C(b) is amended by 
        striking ``May 31, 1997'' and inserting ``December 31, 
        1998''.
    (c) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred after May 31, 1997.

SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

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

SEC. 603. WORK OPPORTUNITY TAX CREDIT.

    (a) Extension.--
          (1) In general.--Subparagraph (B) of section 51(c)(4) 
        (relating to termination) is amended by striking 
        ``September 30, 1997'' and inserting ``September 30, 
        1998''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to individuals who begin work for the 
        employer after September 30, 1997.
    (b) Work Opportunity Credit Allowed Against Minimum Tax.--
          (1) In General.--Subsection (c) of section 38 
        (relating to limitation based on amount of tax) is 
        amended by redesignating paragraph (3) as paragraph (4) 
        and by inserting after paragraph (2) the following new 
        paragraph:
          ``(3) Special rules for work opportunity credit.--
                  ``(A) In general.--In the case of the work 
                opportunity credit--
                          ``(i) this section and section 39 
                        shall be applied separately with 
                        respect to the credit, and
                          ``(ii) in applying paragraph (1) to 
                        the credit--
                                  ``(I) subparagraph (A) shall 
                                not apply, and
                                  ``(II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the work 
                                opportunity credit).
                  ``(B) Work opportunity credit.--For purposes 
                of this subsection, the term `work opportunity 
                credit' means the credit allowable under 
                subsection (a) by reason of section 51(a).''
          (2) Conforming amendment.--Subclause (II) of section 
        38(c)(2)(A)(ii) is amended by inserting ``or the work 
        opportunity credit'' after ``employment credit''.
          (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years beginning after 
        December 31, 1997.
    (c) Percentage of Wages Allowed as Credit.--
          (1) In general.--Subsection (a) of section 51 
        (relating to determination of amount) is amended by 
        striking ``35 percent'' and inserting ``40 percent''.
          (2) Application of credit for individuals performing 
        fewer than 400 hours of services.--Paragraph (3) of 
        section 51(i) is amended to read as follows:
          ``(3) Individuals not meeting minimum employment 
        periods.--
                  ``(A) Reduction of credit for individuals 
                performing fewer than 400 hours of services.--
                In the case of an individual who has completed 
                at least 120 hours, but less than 400 hours, of 
                services performed for the employer, subsection 
                (a) shall be applied by substituting `25 
                percent' for `40 percent'.
                  ``(B) Denial of credit for individuals 
                performing fewer than 120 hours of services.--
                No wages shall be taken into account under 
                subsection (a) with respect to any individual 
                unless such individual has completed at least 
                120 hours of services performed for the 
                employer.''
          (3) Effective date.--The amendments made by this 
        subsection shall apply to individuals who begin work 
        for the employer after September 30, 1997.
    (d) Modification of Eligibility Requirement Based on Period 
on Welfare.--
          (1) In general.--Subparagraph (A) of section 51(d)(2) 
        (defining qualified IV-A recipient) is amended by 
        striking all that follows ``a IV-A program'' and 
        inserting ``for any 9 months during the 18-month period 
        ending on the hiring date.''
          (2) Conforming amendment.--Subparagraph (A) of 
        section 51(d)(3) is amended to read as follows:
                  ``(A) In general.--The term `qualified 
                veteran' means any veteran who is certified by 
                the designated local agency as being a member 
                of a family receiving assistance under a food 
                stamp program under the Food Stamp Act of 1977 
                for at least a 3-month period ending during the 
                12-month period ending on the hiring date.''
          (3) Effective date.--The amendments made by this 
        subsection shall apply to individuals who begin work 
        for the employer after September 30, 1997.

SEC. 604. ORPHAN DRUG TAX CREDIT.

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

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

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

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

          ``Subchapter W--District of Columbia Enterprise Zone

        ``Sec. 1400.  Establishment of DC Zone.
        ``Sec. 1400A. Tax-exempt economic development bonds.
        ``Sec. 1400B. Credit for equity investments in and loans to 
                  District of Columbia businesses.
        ``Sec. 1400C. Zero percent capital gains rate.
        ``Sec. 1400D. Credit to provide equivalent of 10 percent rate 
                  bracket in lieu of 15 percent bracket.

``SEC. 1400. ESTABLISHMENT OF DC ZONE.

    ``(a) In General.--The applicable DC area is hereby 
designated as the District of Columbia Enterprise Zone. For 
purposes of this title (except as otherwise provided in this 
subchapter), the District of Columbia Enterprise Zone shall be 
treated as an empowerment zone designated under subchapter U.
    ``(b) Applicable DC Area.--For purposes of subsection (a), 
the term `applicable DC area' means the area consisting of--
          ``(1) the census tracts located in the District of 
        Columbia which are part of an enterprise community 
        designated under subchapter U before the date of the 
        enactment of this subchapter, and
          ``(2) all other census tracts--
                  ``(A) which are located in the District of 
                Columbia, and
                  ``(B) for which the poverty rate is not less 
                than 35 percent.
    ``(c) District of Columbia Enterprise Zone.--For purposes 
of this subchapter, the terms `District of Columbia Enterprise 
Zone' and `DC Zone' mean the District of Columbia Enterprise 
Zone designated by subsection (a).
    (d) Special Rule for Application of Employment Credit.--In 
the case of the DC Zone, section 1396 (relating to empowerment 
zone employment credit) shall be applied by substituting ``20'' 
for ``15'' in the table contained in section 1396(b). The 
preceding sentence shall apply only with respect to qualified 
zone employees, as defined in section 1396(d), determined by 
treating no area other than the DC Zone as an empowerment zone 
or enterprise community.
    ``(e) Time For Which Designation Applicable.--
          ``(1) In general.--The designation made by subsection 
        (a) shall apply for the period beginning on January 1, 
        1998, and ending on December 31, 2002.
          ``(2) Coordination with dc enterprise community 
        designated under subchapter u.--The designation as an 
        enterprise community, under subchapter U, of the census 
        tracts referred to in subsection (b)(1) shall terminate 
        on December 31, 2002.

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

    ``(a) In General.--In the case of the District of Columbia 
Enterprise Zone--
          ``(1) subsection (a) of section 1394 (relating to 
        tax-exempt facility bonds for empowerment zones and 
        enterprise communities) applies only with respect to 
        bonds issued by the Economic Development Corporation, 
        and
          ``(2) subparagraph (A) of section 1394(c)(1) 
        (relating to limitation on amount of bonds) shall be 
        applied by substituting `$15,000,000' for `$3,000,000'.
    ``(b) Economic Development Corporation.--For purposes of 
this section, the term `Economic Development Corporation' means 
an entity which is created by Federal law in 1997 as part of 
the District of Columbia government.
    ``(c) Period of Applicability.--This section shall apply to 
bonds issued during the period beginning on January 1, 1998, 
and ending on December 31, 2002.

``SEC. 1400B. CREDIT FOR EQUITY INVESTMENTS IN AND LOANS TO DISTRICT OF 
                    COLUMBIA BUSINESSES.

    ``(a) General Rule.--For purposes of section 38, the DC 
Zone investment credit determined under this section for any 
taxable year is--
          ``(1) the qualified lender credit for such year, and
          ``(2) the qualified equity investment credit for such 
        year.
    ``(b) Qualified Lender Credit.--For purposes of this 
section--
          ``(1) In general.--The qualified lender credit for 
        any taxable year is the amount of credit specified for 
        such year by the Economic Development Corporation with 
        respect to qualified District loans made by the 
        taxpayer.
          ``(2) Limitation.--In no event may the qualified 
        lender credit with respect to any loan exceed 25 
        percent of the cost of the property purchased with the 
        proceeds of the loan.
          ``(3) Qualified district loan.--For purposes of 
        paragraph (1), the term `qualified district loan' means 
        any loan for the purchase (as defined in section 
        179(d)(2)) of property to which section 168 applies (or 
        would apply but for section 179) (or land which is 
        functionally related and subordinate to such property) 
        and substantially all of the use of which is in the 
        District of Columbia and is in the active conduct of a 
        trade or business in the District of Columbia. A rule 
        similar to the rule of section 1397C(a)(2) shall apply 
        for purposes of the preceding sentence.
    ``(c) Qualified Equity Investment Credit.--
          ``(1) In general.--For purposes of this section, the 
        qualified equity investment credit determined under 
        this section for any taxable year is an amount equal to 
        the percentage specified by the Economic Development 
        Corporation (but not greater than 25 percent) of the 
        aggregate amount paid in cash by the taxpayer during 
        the taxable year for the purchase of District business 
        investments.
          ``(2) District business investment.--For purposes of 
        this subsection, the term `District business 
        investment' means--
                  ``(A) any District business stock, and
                  ``(B) any District partnership interest.
          ``(3) District business stock.--For purposes of this 
        subsection--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), the term `District business 
                stock' means any stock in a domestic 
                corporation if--
                          ``(i) such stock is acquired by the 
                        taxpayer at its original issue 
                        (directly or through an underwriter) 
                        solely in exchange for cash, and
                          ``(ii) as of the time such stock was 
                        issued, such corporation was engaged in 
                        a trade or business in the District of 
                        Columbia (or, in the case of a new 
                        corporation, such corporation was being 
                        organized for purposes of engaging in 
                        such a trade or business).
                  ``(B) Redemptions.--A rule similar to the 
                rule of section 1202(c)(3) shall apply for 
                purposes of this paragraph.
          ``(4) Qualified district partnership interest.--For 
        purposes of this subsection, the term `qualified 
        District partnership interest' means any interest in a 
        partnership if--
                  ``(A) such interest is acquired by the 
                taxpayer from the partnership solely in 
                exchange for cash, and
                  ``(B) as of the time such interest was 
                acquired, such partnership was engaging in a 
                trade or business in the District of Columbia 
                (or, in the case of a new partnership, such 
                partnership was being organized for purposes of 
                engaging in such a trade or business).
        A rule similar to the rule of paragraph (3)(B) shall 
        apply for purposes of this paragraph.
          ``(5) Recapture of credit upon certain dispositions 
        of district business investments.--
                  ``(A) In general.--If a taxpayer disposes of 
                any District business investment (or any other 
                property the basis of which is determined in 
                whole or in part by reference to the adjusted 
                basis of such investment) before the end of the 
                5-year period beginning on the date such 
                investment was acquired by the taxpayer, the 
                taxpayer's tax imposed by this chapter for the 
                taxable year in which such distribution occurs 
                shall be increased by the aggregate decrease in 
                the credits allowed under section 38 for all 
                prior taxable years which would have resulted 
                solely from reducing to zero any credit 
                determined under this section with respect to 
                such investment.
                  ``(B) Exceptions.--Subparagraph (A) shall not 
                apply to any gift, transfer, or transaction 
                described in paragraph (1), (2), or (3) of 
                section 1245(b).
                  ``(C) Special rule.--Any increase in tax 
                under subparagraph (A) shall not be treated as 
                a tax imposed by this chapter for purposes of--
                          ``(i) determining the amount of any 
                        credit allowable under this chapter, 
                        and
                          ``(ii) determining the amount of the 
                        tax imposed by section 55.
          ``(6) Basis reduction.--For purposes of this title, 
        the basis of any District business investment shall be 
        reduced by the amount of the credit determined under 
        this section with respect to such investment.
    ``(d) Limitation on Amount of Credit.--
          ``(1) In general.--The amount of the DC Zone 
        investment credit determined under this section with 
        respect to any taxpayer for any taxable year shall not 
        exceed the credit amount allocated to such taxpayer for 
        such taxable year by the Economic Development 
        Corporation.
          ``(2) Overall limitation.--The aggregate credit 
        amount which may be allocated by the Economic 
        Development Corporation under this section shall not 
        exceed $75,000,000.
          ``(3) Criteria for allocating credit amounts.--The 
        allocation of credit amounts under this section shall 
        be made in accordance with criteria established by the 
        Economic Development Corporation. In establishing such 
        criteria, such Corporation shall take into account--
                  ``(A) the degree to which the business 
                receiving the loan or investment will provide 
                job opportunities for low and moderate income 
                residents of the DC Zone, and
                  ``(B) whether such business is within the DC 
                Zone.
    ``(e) Economic Development Corporation.--For purposes of 
this section, the term `Economic Development Corporation' has 
the meaning given such term by section 1400A(b).
    ``(f) Regulations.--The Secretary shall prescribe such 
regulations as may be appropriate to carry out this section.
    ``(g) Application of Section.--This section shall apply to 
any credit amount allocated for taxable years beginning after 
December 31, 1997, and before January 1, 2003.

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

      ``(a) Exclusion.--Gross income shall not include 
qualified capital gain from the sale or exchange of any DC Zone 
asset held for more than 5 years.
    ``(b) DC Zone Asset.--For purposes of this section--
          ``(1) In general.--The term `DC Zone asset' means--
                  ``(A) any DC Zone business stock,
                  ``(B) any DC Zone partnership interest, and
                  ``(C) any DC Zone business property.
          ``(2) DC zone business stock.--
                  ``(A) In general.--The term `DC Zone business 
                stock' means any stock in a domestic 
                corporation which is originally issued after 
                December 31, 1997, if--
                          ``(i) such stock is acquired by the 
                        taxpayer, before January 1, 2003, at 
                        its original issue (directly or through 
                        an underwriter) solely in exchange for 
                        cash,
                          ``(ii) as of the time such stock was 
                        issued, such corporation was a DC Zone 
                        business (or, in the case of a new 
                        corporation, such corporation was being 
                        organized for purposes of being a DC 
                        Zone business), and
                          ``(iii) during substantially all of 
                        the taxpayer's holding period for such 
                        stock, such corporation qualified as a 
                        DC Zone business.
                  ``(B) Redemptions.--A rule similar to the 
                rule of section 1202(c)(3) shall apply for 
                purposes of this paragraph.
          ``(3) DC zone partnership interest.--The term `DC 
        Zone partnership interest' means any capital or profits 
        interest in a domestic partnership which is originally 
        issued after December 31, 1997, if--
                  ``(A) such interest is acquired by the 
                taxpayer, before January 1, 2003, from the 
                partnership solely in exchange for cash,
                  ``(B) as of the time such interest was 
                acquired, such partnership was a DC Zone 
                business (or, in the case of a new partnership, 
                such partnership was being organized for 
                purposes of being a DC Zone business), and
                  ``(C) during substantially all of the 
                taxpayer's holding period for such interest, 
                such partnership qualified as a DC Zone 
                business.
        A rule similar to the rule of paragraph (2)(B) shall 
        apply for purposes of this paragraph.
          ``(4) DC zone business property.--
                  ``(A) In general.--The term `DC Zone business 
                property' means tangible property if--
                          ``(i) such property was acquired by 
                        the taxpayer by purchase (as defined in 
                        section 179(d)(2)) after December 31, 
                        1997, and before January 1, 2003,
                          ``(ii) the original use of such 
                        property in the DC Zone commences with 
                        the taxpayer, and
                          ``(iii) during substantially all of 
                        the taxpayer's holding period for such 
                        property, substantially all of the use 
                        of such property was in a DC Zone 
                        business of the taxpayer.
                  ``(B) Special rule for buildings which are 
                substantially improved.--
                          ``(i) In general.--The requirements 
                        of clauses (i) and (ii) of subparagraph 
                        (A) shall be treated as met with 
                        respect to--
                                  ``(I) property which is 
                                substantially improved by the 
                                taxpayer before January 1, 
                                2003, and
                                  ``(II) any land on which such 
                                property is located.
                          ``(ii) Substantial improvement.--For 
                        purposes of clause (i), property shall 
                        be treated as substantially improved by 
                        the taxpayer only if, during any 24-
                        month period beginning after December 
                        31, 1997, additions to basis with 
                        respect to such property in the hands 
                        of the taxpayer exceed the greater of--
                                  ``(I) an amount equal to the 
                                adjusted basis of such property 
                                at the beginning of such 24-
                                month period in the hands of 
                                the taxpayer, or
                                  ``(II) $5,000.
          ``(6) Treatment of subsequent purchasers, etc.--The 
        term `DC Zone asset' includes any property which would 
        be a DC Zone asset but for paragraph (2)(A)(i), (3)(A), 
        or (4)(A)(ii) in the hands of the taxpayer if such 
        property was a DC Zone asset in the hands of a prior 
        holder.
          ``(7) 5-year safe harbor.--If any property ceases to 
        be a DC Zone asset by reason of paragraph (2)(A)(iii), 
        (3)(C), or (4)(A)(iii) after the 5-year period 
        beginning on the date the taxpayer acquired such 
        property, such property shall continue to be treated as 
        meeting the requirements of such paragraph; except that 
        the amount of gain to which subsection (a) applies on 
        any sale or exchange of such property shall not exceed 
        the amount which would be qualified capital gain had 
        such property been sold on the date of such cessation.
    ``(c) DC Zone Business.--For purposes of this section, the 
term `DC Zone business' means any entity which is an enterprise 
zone business (as defined in section 1397B), determined by 
treating no area other than the DC Zone as an empowerment zone 
or enterprise community.
    ``(d) Other Definitions and Special Rules.--For purposes of 
this section--
          ``(1) Qualified capital gain.--Except as otherwise 
        provided in this subsection, the term `qualified 
        capital gain' means any gain recognized on the sale or 
        exchange of--
                  ``(A) a capital asset, or
                  ``(B) property used in the trade or business 
                (as defined in section 1231(b)).
          ``(2) Gain before 1998 or after 2007 not qualified.--
        The term `qualified capital gain' shall not include any 
        gain attributable to periods before January 1, 1998, or 
        after December 31, 2007.
          ``(3) Certain gain on real property not qualified.--
        The term `qualified capital gain' shall not include any 
        gain which would be treated as ordinary income under 
        section 1250 if section 1250 applied to all 
        depreciation rather than the additional depreciation.
          ``(4) Intangibles and land not integral part of dc 
        zone business.--The term `qualified capital gain' shall 
        not include any gain which is attributable to real 
        property, or an intangible asset, which is not an 
        integral part of a DC Zone business.
          ``(5) Related party transactions.--The term 
        `qualified capital gain' shall not include any gain 
        attributable, directly or indirectly, in whole or in 
        part, to a transaction with a related person. For 
        purposes of this paragraph, persons are related to each 
        other if such persons are described in section 267(b) 
        or 707(b)(1).
    ``(e) Certain Other Rules To Apply.--Rules similar to the 
rules of subsections (g), (h), (i)(2), and (j) of section 1202 
shall apply for purposes of this section.
    ``(f) Sales and Exchanges of Interests in Partnerships and 
S Corporations Which Are DC Zone Businesses.--In the case of 
the sale or exchange of an interest in a partnership, or of 
stock in an S corporation, which was a DC Zone business during 
substantially all of the period the taxpayer held such interest 
or stock, the amount of qualified capital gain shall be 
determined without regard to--
          ``(1) any gain which is attributable to real 
        property, or an intangible asset, which is not an 
        integral part of a DC Zone business, and
          ``(2) any gain attributable to periods before January 
        1, 1998, or after December 31, 2007.

``SEC. 1400D. CREDIT TO PROVIDE EQUIVALENT OF 10 PERCENT RATE BRACKET 
                    IN LIEU OF 15 PERCENT BRACKET.

    ``(a) In General.--In the case of a DC Zone individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year an amount equal to 5 percent 
of so much of the taxpayer's taxable income for the year as 
does not exceed the highest amount of such income which is 
subject to the 15 percent rate under section 1.
    ``(b) DC Zone Individual.--For purposes of this section, 
the term `DC Zone individual' means an individual who has a 
principal place of abode in the District of Columbia Enterprise 
Zone for not less than 183 days of the taxable year.
    ``(c) Credit Not To Apply to Estate or Trust.--This section 
shall not apply to an estate or trust.
    ``(d) Coordination With Other Credits.--For purposes of 
this chapter, the credit under this section shall be treated as 
a credit under subpart A of part IV of subchapter A.
    ``(e) Termination.--This section shall not apply to any 
taxable year beginning after December 31, 2007.''
    (b) Credits Made Part of General Business Credit.--
          (1) Subsection (b) of section 38 is amended by 
        striking ``plus'' at the end of paragraph (11), by 
        striking the period at the end of paragraph (12) and 
        inserting ``, plus'', and by adding at the end the 
        following new paragraph:
          ``(13) the DC Zone investment credit determined under 
        section 1400B(a).''
          (2) Subsection (d) of section 39 is amended by adding 
        at the end the following new paragraph:
          ``(8) No carryback of dc zone credits before 
        effective date.--No portion of the unused business 
        credit for any taxable year which is attributable to 
        the credit under section 1400B, or to the credits under 
        subchapter U by reason of section 1400, may be carried 
        back to a taxable year ending before the date of the 
        enactment of sections 1400B and 1400.''
          (3) Subsection (c) of section 196 is amended by 
        striking ``and'' at the end of paragraph (6), by 
        striking the period at the end of paragraph (7) and 
        inserting ``, and'', and by adding at the end the 
        following new paragraph:
          ``(8) the DC Zone investment credit determined under 
        section 1400B(a).''
    (c) Clerical Amendment.--The table of subchapters for 
chapter 1 is amended by adding at the end the following new 
item:
        ``Subchapter W. District of Columbia Enterprise Zone.''
    (d) Effective Date.--This section shall take effect on the 
date of the enactment of this Act.

SEC. 702. INCENTIVES CONDITIONED ON OTHER DC REFORM.

    The amendments made by section 701 shall not take effect 
unless an entity known as the Economic Development Corporation 
is created by Federal law in 1997 as part of the District of 
Columbia government.

                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

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

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

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

    ``(a) Determination of Amount.--For purposes of section 38, 
the amount of the welfare-to-work credit determined under this 
section for the taxable year shall be equal to--
          ``(1) 35 percent of the qualified first-year wages 
        for such year, and
          ``(2) 50 percent of the qualified second-year wages 
        for such year.
    ``(b) Qualified Wages Defined.--For purposes of this 
section--
          ``(1) In general.--The term `qualified wages' means 
        the wages paid or incurred by the employer during the 
        taxable year to individuals who are long-term family 
        assistance recipients.
          ``(2) Qualified first-year wages.--The term 
        `qualified first-year wages' means, with respect to any 
        individual, qualified wages attributable to service 
        rendered during the 1-year period beginning with the 
        day the individual begins work for the employer.
          ``(3) Qualified second-year wages.--The term 
        `qualified second-year wages' means, with respect to 
        any individual, qualified wages attributable to service 
        rendered during the 1-year period beginning on the day 
        after the last day of the 1-year period with respect to 
        such individual determined under paragraph (2).
          ``(4) Only first $10,000 of wages per year taken into 
        account.--The amount of the qualified first-year wages, 
        and the amount of qualified second-year wages, which 
        may be taken into account with respect to any 
        individual shall not exceed $10,000 per year.
          ``(5) Wages.--
                  ``(A) In general.--The term `wages' has the 
                meaning given such term by section 51(c), 
                without regard to paragraph (4) thereof.
                  ``(B) Certain amounts treated as wages.--The 
                term `wages' includes amounts paid or incurred 
                by the employer which are excludable from such 
                recipient's gross income under--
                          ``(i) section 105 (relating to 
                        amounts received under accident and 
                        health plans),
                          ``(ii) section 106 (relating to 
                        contributions by employer to accident 
                        and health plans),
                          ``(iii) section 127 (relating to 
                        educational assistance programs) or 
                        would be so excludable but for section 
                        127(d), but only to the extent paid or 
                        incurred to a person not related to the 
                        employer, or
                          ``(iv) section 129 (relating to 
                        dependent care assistance programs).
                The amount treated as wages by clause (i) or 
                (ii) for any period shall be based on the 
                reasonable cost of coverage for the period, but 
                shall not exceed the applicable premium for the 
                period under section 4980B(f)(4).
                  ``(C) Special rules for agricultural and 
                railway labor.--If such recipient is an 
                employee to whom subparagraph (A) or (B) of 
                section 51(h)(1) applies, rules similar to the 
                rules of such subparagraphs shall apply except 
                that--
                          ``(i) such subparagraph (A) shall be 
                        applied by substituting `$10,000' for 
                        `$6,000', and
                          ``(ii) such subparagraph (B) shall be 
                        applied by substituting `$833.33' for 
                        `$500'.
    ``(c) Long-Term Family Assistance Recipients.--For purposes 
of this section--
          ``(1) In general.--The term `long-term family 
        assistance recipient' means any individual who is 
        certified by the designated local agency (as defined in 
        section 51(d)(10))--
                  ``(A) as being a member of a family receiving 
                assistance under a IV-A program (as defined in 
                section 51(d)(2)(B)) for at least the 18-month 
                period ending on the hiring date.
                  ``(B)(i) as being a member of a family 
                receiving such assistance for 18 months 
                beginning after the date of the enactment of 
                this section, and
                  ``(ii) as having a hiring date which is not 
                more than 2 years after the end of the earliest 
                such 18-month period, or
                  ``(C)(i) as being a member of a family which 
                ceased to be eligible after the date of the 
                enactment of this section for such assistance 
                by reason of any limitation imposed by Federal 
                or State law on the maximum period such 
                assistance is payable to a family, and
                  ``(ii) as having a hiring date which is not 
                more than 2 years after the date of such 
                cessation.
          ``(2) Hiring date.--The term `hiring date' has the 
        meaning given such term by section 51(d).
    ``(d) Certain Rules To Apply.--
          ``(1) In general.--Rules similar to the rules of 
        section 52, and subsections (d)(11), (f), (g), (i) (as 
        in effect on the day before the date of the enactment 
        of the Revenue Reconciliation Act of 1997), (j), and 
        (k) of section 51, shall apply for purposes of this 
        section.
          ``(2) Credit to be part of general business credit, 
        etc.--References to section 51 in section 38(b), 
        280C(a), and 1396(c)(3) shall be treated as including 
        references to this section.
    ``(e) Coordination With Work Opportunity Credit.--If a 
credit is allowed under this section to an employer with 
respect to an individual for any taxable year, then for 
purposes of applying section 51 to such employer, such 
individual shall not be treated as a member of a targeted group 
for such taxable year.
    ``(f) Termination.--This section shall not apply to 
individuals who begin work for the employer after April 30, 
1999.''
    (b) Clerical Amendment.--The table of sections for subpart 
F of part IV of subchapter A of chapter 1 is amended by 
inserting after the item relating to section 51 the following 
new item:

        ``Sec. 51A. Temporary incentives for employing long-term family 
                  assistance recipients.''

    (c) Effective Date.--The amendments made by this section 
shall apply to individuals who begin work for the employer 
after December 31, 1997.

                   TITLE IX--MISCELLANEOUS PROVISIONS

            Subtitle A--Provisions Relating to Excise Taxes

SEC. 901. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL BOATS.

    (a) In General.--Subparagraph (B) of section 6421(e)(2) 
(defining off-highway business use) is amended by striking 
clauses (iii) and (iv).
    (b) Conforming Amendments.--
          (1) Subparagraph (A) of section 4041(a)(1) is 
        amended--
                  (A) by striking ``, a diesel-powered train, 
                or a diesel-powered boat'' each place it 
                appears and inserting ``or a diesel-powered 
                train'', and
                  (B) by striking ``vehicle, train, or boat'' 
                and inserting ``vehicle or train''.
          (2) Paragraph (1) of section 4041(a) is amended by 
        striking subparagraph (D).
          (3) Paragraph (2) of section 9503(f) is amended by 
        striking subparagraph (C) and by redesignating 
        subparagraphs (D) and (E) as subparagraphs (C) and (D), 
        respectively.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 902. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON-1211.

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

SEC. 903. UNIFORM RATE OF TAX ON VACCINES.

    (a) In General.--Subsection (b) of section 4131 is amended 
to read as follows:
    ``(b) Amount of Tax.--
          ``(1) In general.--The amount of the tax imposed by 
        subsection (a) shall be 84 cents per dose of any 
        taxable vaccine.
          ``(2) Combinations of vaccines.--If any taxable 
        vaccine is described in more than 1 subparagraph of 
        section 4132(a)(1), the amount of the tax imposed by 
        subsection (a) on such vaccine shall be the sum of the 
        amounts for the vaccines which are so included.''
    (b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is 
amended to read as follows:
          ``(1) Taxable vaccine.--The term `taxable vaccine' 
        means any of the following vaccines which are 
        manufactured or produced in the United States or 
        entered into the United States for consumption, use, or 
        warehousing:
                  ``(A) Any vaccine containing diphtheria 
                toxoid.
                  ``(B) Any vaccine containing tetanus toxoid.
                  ``(C) Any vaccine containing pertussis 
                bacteria, extracted or partial cell bacteria, 
                or specific pertussis antigens.
                  ``(D) Any vaccine against measles.
                  ``(E) Any vaccine against mumps.
                  ``(F) Any vaccine against rubella.
                  ``(G) Any vaccine containing polio virus.
                  ``(H) Any HIB vaccine.
                  ``(I) Any vaccine against hepatitis B.
                  ``(J) Any vaccine against chicken pox.''
    (c) Conforming Amendment.--Subsection (a) of section 4132 
is amended by striking paragraphs (2), (3), and (4) and by 
redesignating paragraphs (5) through (8) as paragraphs (2) 
through (5), respectively.
    (d) Effective Date.--The amendments made by this section 
shall take effect on October 1, 1997.

SEC. 904. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS TREATED AS 
                    WHOLESALE DISTRIBUTOR FOR REFUND PURPOSES.

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

SEC. 905. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR VEHICLES 
                    FROM LUXURY AUTOMOBILE CLASSIFICATION.

    (a) In General.--Subsection (a) of section 4001 (relating 
to imposition of tax) is amended to read as follows:
    ``(a) Imposition of Tax.--
          ``(1) In general.--There is hereby imposed on the 1st 
        retail sale of any passenger vehicle a tax equal to 10 
        percent of the price for which so sold to the extent 
        such price exceeds the applicable amount.
          ``(2) Applicable amount.--
                  ``(A) In general.--Except as provided in 
                subparagraphs (B) and (C), the applicable 
                amount is $30,000.
                  ``(B) Qualified clean-fuel vehicle 
                property.--In the case of a passenger vehicle 
                which is propelled by a fuel which is not a 
                clean-burning fuel to which is installed 
                qualified clean-fuel vehicle property (as 
                defined in section 179A(c)(1)(A)) for purposes 
                of permitting such vehicle to be propelled by a 
                clean-burning fuel, the applicable amount is 
                equal to the sum of--
                          ``(i) $30,000, plus
                          ``(ii) the increase in the price for 
                        which the passenger vehicle was sold 
                        (within the meaning of section 4002) 
                        due to the installation of such 
                        property.
                  ``(C) Purpose built passenger vehicle.--
                          ``(i) In general.--In the case of a 
                        purpose built passenger vehicle, the 
                        applicable amount is equal to 150 
                        percent of $30,000.
                          ``(ii) Purpose built passenger 
                        vehicle.--For purposes of clause (i), 
                        the term `purpose built passenger 
                        vehicle' means a passenger vehicle 
                        produced by an original equipment 
                        manufacturer and designed so that the 
                        vehicle may be propelled primarily by 
                        electricity.''
    (b) Conforming Amendments.--
          (1) 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 
        subparagraphs (A), (B)(i), and (C)(i) of subsection 
        (a)(2) 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) Subsection (f) of section 4001 (relating to 
        phasedown) is amended by striking ``subsection (a)'' 
        and inserting ``subsection (a)(1)''.
          (3) Subparagraph (B) of section 4003(a)(2) is amended 
        to read as follows:
                  ``(B) the appropriate applicable amount as 
                determined under section 4001(a)(2).''
    (c) Effective Date.--The amendments made by this section 
shall apply to sales and installations occurring on or after 
the date of the enactment of this Act.

    Subtitle B--Provisions Relating to Pensions and Fringe Benefits

SEC. 911. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND DRAINAGE 
                    ENTITIES.

    (a) In General.--Subparagraph (B) of section 401(k)(7) 
(relating to rural cooperative plan) is amended--
          (1) by striking ``and'' at the end of clause (iii), 
        by redesignating clause (iv) as clause (v), and by 
        inserting after clause (iii) the following new clause:
                          ``(iv) any organization which--
                                  ``(I) is a mutual irrigation 
                                or ditch company described in 
                                section 501(c)(12) (without 
                                regard to the 85 percent 
                                requirement thereof), or
                                  ``(II) is a district 
                                organized under the laws of a 
                                State as a municipal 
                                corporation for the purpose of 
                                irrigation, water conservation, 
                                or drainage, and'', and
          (2) in clause (v), as so redesignated, by striking 
        ``or (iii)'' and inserting ``, (iii), or (iv)''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to years beginning after December 31, 1997.

SEC. 912. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN 
                    NONDISCRIMINATION RULES TO STATE AND LOCAL 
                    GOVERNMENTS.

    (a) General Nondiscrimination and Participation Rules.--
          (1) Nondiscrimination requirements.--Section 
        401(a)(5) (relating to qualified pension, profit-
        sharing, and stock bonus plans) is amended by adding at 
        the end the following:
                  ``(G) Governmental plans.--Paragraphs (3) and 
                (4) shall not apply to a governmental plan 
                (within the meaning of section 414(d)).''.
          (2) Additional participation requirements.--Section 
        401(a)(26)(H) (relating to additional participation 
        requirements) is amended to read as follows:
                  ``(H) Exception for governmental plans.--This 
                paragraph shall not apply to a governmental 
                plan (within the meaning of section 414(d)).''.
          (3) Minimum participation standards.--Section 
        410(c)(2) (relating to application of participation 
        standards to certain plans) is amended to read as 
        follows:
          ``(2) A plan described in paragraph (1) shall be 
        treated as meeting the requirements of this section for 
        purposes of section 401(a), except that in the case of 
        a plan described in subparagraph (B), (C), or (D) of 
        paragraph (1), this paragraph shall only apply if such 
        plan meets the requirements of section 401(a)(3) (as in 
        effect on September 1, 1974).''.
    (b) Participation Standards for Qualified Cash or Deferred 
Arrangements.--Section 401(k)(3) (relating to application of 
participation and discrimination standards) is amended by 
adding at the end the following:
                  ``(G)(i) The requirements of subparagraph 
                (A)(i) and (C) shall not apply to a 
                governmental plan (within the meaning of 
                section 414(d)).
                  ``(ii) The requirements of subsection (m)(2) 
                (without regard to subsection (a)(4)) shall 
                apply to any matching contribution of a 
                governmental plan (as so defined).''.
    (c) Nondiscrimination Rules for Section 403(b) Plans.--
Section 403(b)(12) (relating to nondiscrimination requirements) 
is amended by adding at the end the following:
                  ``(C) Governmental plans.--For purposes of 
                paragraph (1)(D), the requirements of 
                subparagraph (A)(i) shall not apply to a 
                governmental plan (within the meaning of 
                section 414(d)).''.
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        apply to taxable years beginning on or after the date 
        of enactment of this Act.
          (2) Treatment for years beginning before date of 
        enactment.--A governmental plan (within the meaning of 
        section 414(d) of the Internal Revenue Code of 1986) 
        shall be treated as satisfying the requirements of 
        sections 401(a)(3), 401(a)(4), 401(a)(26), 401(k), 
        401(m), 403 (b)(1)(D) and (b)(12), and 410 of such Code 
        for all taxable years beginning before the date of 
        enactment of this Act.

SEC. 913. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED BY FORMER 
                    POLICE OFFICERS OR FIREFIGHTERS.

    (a) General Rule.--For purposes of determining whether any 
amount to which this section applies is excludable from gross 
income under section 104(a)(1) of the Internal Revenue Code of 
1986, the following conditions shall be treated as personal 
injuries or sickness in the course of employment:
          (1) Heart disease.
          (2) Hypertension.
    (b) Amounts To Which Section Applies.--This section shall 
apply to any amount--
          (1) which is payable--
                  (A) to an individual (or to the survivors of 
                an individual) who was a full-time employee of 
                any police department or fire department which 
                is organized and operated by a State, by any 
                political subdivision thereof, or by any agency 
                or instrumentality of a State or political 
                subdivision thereof, and
                  (B) under a State law (as amended on May 19, 
                1992) which irrebuttably presumed that heart 
                disease and hypertension are work-related 
                illnesses but only for employees separating 
                from service before July 1, 1992; and
          (2) which was received in calendar year 1989, 1990, 
        or 1991.
    (c) Waiver of Statute of Limitations.--If, on the date of 
the enactment of this Act (or at any time within the 1-year 
period beginning on such date of enactment) credit or refund of 
any overpayment of tax resulting from the provisions of this 
section is barred by any law or rule of law, credit or refund 
of such overpayment shall, nevertheless, be allowed or made if 
claim therefore is filed before the date 1 year after such date 
of enactment.

SEC. 914. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER GOVERNMENTAL 
                    PENSION PLANS.

    (a) In General.--Section 415(b)(2) (relating to the 
limitation for defined benefit plans) is amended by adding at 
the end the following new subparagraph:
                  ``(J) Purchase of permissive service 
                credit.--
                          ``(i) Benefits treated as derived 
                        from employer contributions.--For 
                        purposes of this section, the term 
                        `annual benefit' shall include the 
                        accrued benefit derived from 
                        contributions to a governmental plan 
                        (within the meaning of section 414(d)) 
                        to purchase permissive service credit.
                          ``(ii) Definition of permissive 
                        service credit.--For purposes of this 
                        subparagraph, the term `permissive 
                        service credit' means credit--
                                  ``(I) for a period of service 
                                recognized by a governmental 
                                plan for purposes of 
                                calculating an employee's 
                                accrued benefit under such 
                                plan,
                                  ``(II) which such employee 
                                has not received (or has 
                                forfeited), and
                                  ``(III) which such employee 
                                may receive only by making a 
                                contribution, as determined 
                                under the governmental plan, 
                                which does not exceed the 
                                amount (actuarially determined 
                                under the terms of such 
                                governmental plan) necessary to 
                                fund the accrued benefit 
                                attributable to such period of 
                                service.
                          ``(iii) No effect on employer `pick-
                        up' contributions.--Nothing in this 
                        subparagraph shall be construed as 
                        preventing the application of section 
                        414(h) to contributions to purchase 
                        permissive service credit.''
    (b) Conforming Amendment.--Section 415(c)(2) is amended by 
adding at the end the following new sentence: ``The term 
`annual addition' shall not include contributions to purchase 
permissive service credit (within the meaning of subsection 
(b)(2)(J)).''
    (c) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 1997.

SEC. 915. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

    (a) In General.--Subparagraph (C) of section 664(d)(1) and 
subparagraph (C) of section 664(d)(2) are each amended by 
striking the period at the end thereof and inserting ``or, to 
the extent the remainder interest is in qualified employer 
securities (as defined in paragraph (3)(C)), is to be 
transferred to an employee stock ownership plan (as defined in 
section 4975(e)(7)) in a qualified gratuitous transfer (as 
defined by subsection (g)).''
    (b) Qualified Gratuitous Transfer Defined.--Section 664 is 
amended by adding at the end the following new subsection:
    ``(g) Qualified Gratuitous Transfer of Qualified Employer 
Securities.--
          ``(1) In general.--For purposes of this section, the 
        term `qualified gratuitous transfer' means a transfer 
        of qualified employer securities to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) but 
        only to the extent that--
                  ``(A) the securities transferred previously 
                passed from a decedent dying before January 1, 
                1999, to a trust described in paragraph (1) or 
                (2) of subsection (d),
                  ``(B) no deduction under section 404 is 
                allowable with respect to such transfer,
                  ``(C) such plan contains the provisions 
                required by paragraph (3),
                  ``(D) such plan treats such securities as 
                being attributable to employer contributions 
                but without regard to the limitations otherwise 
                applicable to such contributions under section 
                404, and
                  ``(E) the employer whose employees are 
                covered by the plan described in this paragraph 
                files with the Secretary a verified written 
                statement consenting to the application of 
                sections 4978 and 4979A with respect to such 
                employer.
          ``(2) Exception.--The term `qualified gratuitous 
        transfer' shall not include a transfer of qualified 
        employer securities to an employee stock ownership plan 
        unless--
                  ``(A) such plan was in existence on August 1, 
                1996,
                  ``(B) at the time of the transfer, the 
                decedent and members of the decedent's family 
                (within the meaning of section 267(c)(4)) own 
                (directly or through the application of section 
                318(a)) no more than 10 percent of the value of 
                the stock of the corporation referred to in 
                paragraph (4), and
                  ``(C) immediately after the transfer, such 
                plan owns (after the application of section 
                318(a)(4)) at least 60 percent of the value of 
                the outstanding stock of the corporation.
          ``(3) Plan requirements.--A plan contains the 
        provisions required by this paragraph if such plan 
        provides that--
                  ``(A) the qualified employer securities so 
                transferred are allocated to plan participants 
                in a manner consistent with section 401(a)(4),
                  ``(B) plan participants are entitled to 
                direct the plan as to the manner in which such 
                securities which are entitled to vote and are 
                allocated to the account of such participant 
                are to be voted,
                  ``(C) an independent trustee votes the 
                securities so transferred which are not 
                allocated to plan participants,
                  ``(D) each participant who is entitled to a 
                distribution from the plan has the rights 
                described in subparagraphs (A) and (B) of 
                section 409(h)(1),
                  ``(E) such securities are held in a suspense 
                account under the plan to be allocated each 
                year, up to the limitations under section 
                415(c), after first allocating all other annual 
                additions for the limitation year, up to the 
                limitations under sections 415 (c) and (e), and
                  ``(F) on termination of the plan, all 
                securities so transferred which are not 
                allocated to plan participants as of such 
                termination are to be transferred to, or for 
                the use of, an organization described in 
                section 170(c).
        For purposes of the preceding sentence, the term 
        `independent trustee' means any trustee who is not a 
        member of the family (within the meaning of section 
        267(c)(4)) of the decedent or a 5-percent shareholder. 
        A plan shall not fail to be treated as meeting the 
        requirements of section 401(a) by reason of meeting the 
        requirements of this subsection.
          ``(4) Qualified employer securities.--For purposes of 
        this section, the term `qualified employer securities' 
        means employer securities (as defined in section 
        409(l)) which are issued by a domestic corporation--
                  ``(A) which has no outstanding stock which is 
                readily tradable on an established securities 
                market, and
                  ``(B) which has only 1 class of stock.
          ``(5) Treatment of securities allocated by employee 
        stock ownership plan to persons related to decedent or 
        5-percent shareholders.--
                  ``(A) In general.--If any portion of the 
                assets of the plan attributable to securities 
                acquired by the plan in a qualified gratuitous 
                transfer are allocated to the account of--
                          ``(i) any person who is related to 
                        the decedent (within the meaning of 
                        section 267(b)), or
                          ``(ii) any person who, at the time of 
                        such allocation or at any time during 
                        the 1-year period ending on the date of 
                        the acquisition of qualified employer 
                        securities by the plan, is a 5-percent 
                        shareholder of the employer maintaining 
                        the plan,
                the plan shall be treated as having distributed 
                (at the time of such allocation) to such person 
                or shareholder the amount so allocated.
                  ``(B) 5-percent shareholder.--For purposes of 
                subparagraph (A), the term `5-percent 
                shareholder' means any person who owns 
                (directly or through the application of section 
                318(a)) more than 5 percent of the outstanding 
                stock of the corporation which issued such 
                qualified employer securities or of any 
                corporation which is a member of the same 
                controlled group of corporations (within the 
                meaning of section 409(l)(4)) as such 
                corporation. For purposes of the preceding 
                sentence, section 318(a) shall be applied 
                without regard to the exception in paragraph 
                (2)(B)(i) thereof.
                  ``(C) Cross reference.--
          ``For excise tax on allocations described in subparagraph (A), 
        see section 4979A.
          ``(6) Tax on failure to transfer unallocated 
        securities to charity on termination of plan.--If the 
        requirements of paragraph (3)(F) are not met with 
        respect to any securities, there is hereby imposed a 
        tax on the employer maintaining the plan in an amount 
        equal to the sum of--
                  ``(A) the amount of the increase in the tax 
                which would be imposed by chapter 11 if such 
                securities were not transferred as described in 
                paragraph (1), and
                  ``(B) interest on such amount at the 
                underpayment rate under section 6621 (and 
                compounded daily) from the due date for filing 
                the return of the tax imposed by chapter 11.''
    (c) Conforming Amendments.--
          (1) Section 401(a)(1) is amended by inserting ``or by 
        a charitable remainder trust pursuant to a qualified 
        gratuitous transfer (as defined in section 
        664(g)(1)),'' after ``stock bonus plans),''.
          (2) Section 404(a)(9) is amended by inserting after 
        subparagraph (B) the following new subparagraph:
                  ``(C) A qualified gratuitous transfer (as 
                defined in section 664(g)(1)) shall have no 
                effect on the amount or amounts otherwise 
                deductible under paragraph (3) or (7) or under 
                this paragraph.''
          (3) Section 415(c)(6) is amended by adding at the end 
        thereof the following new sentence:
        ``The amount of any qualified gratuitous transfer (as 
        defined in section 664(g)(1)) allocated to a 
        participant for any limitation year shall not exceed 
        the limitations imposed by this section, but such 
        amount shall not be taken into account in determining 
        whether any other amount exceeds the limitations 
        imposed by this section.''
          (4) Section 415(e) is amended--
                  (A) by redesignating paragraph (6) as 
                paragraph (7), and
                  (B) by inserting after paragraph (5) the 
                following new paragraph:
          ``(6) Special rule for qualified gratuitous 
        transfers.--Any qualified gratuitous transfer of 
        qualified employer securities (as defined by section 
        664(g)) shall not be taken into account in calculating, 
        and shall not be subject to, the limitations provided 
        in this subsection.''
          (5) Subparagraph (B) of section 664(d)(1) and 
        subparagraph (B) of section 664(d)(2) are each amended 
        by inserting ``and other than qualified gratuitous 
        transfers described in subparagraph (C)'' after 
        ``subparagraph (A)''.
          (6) Paragraph (4) of section 674(b) is amended by 
        inserting before the period ``or to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) in a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1))''.
          (7) Section 2055(a) is amended--
                  (i) by striking ``or'' at the end of 
                paragraph (3),
                  (ii) by striking the period at the end of 
                paragraph (4) and inserting ``; or'', and
                  (iii) by inserting after paragraph (4) the 
                following new paragraph:
          ``(5) to an employee stock ownership plan if such 
        transfer qualifies as a qualified gratuitous transfer 
        of qualified employer securities within the meaning of 
        section 664(g).''
          (8) Paragraph (8) of section 2056(b) is amended to 
        read as follows:
          ``(8) Special rule for charitable remainder trusts.--
                  ``(A) In general.--If the surviving spouse of 
                the decedent is the only beneficiary of a 
                qualified charitable remainder trust who is not 
                a charitable beneficiary nor an ESOP 
                beneficiary, paragraph (1) shall not apply to 
                any interest in such trust which passes or has 
                passed from the decedent to such surviving 
                spouse.
                  ``(B) Definitions.--For purposes of 
                subparagraph (A)--
                          ``(i) Charitable beneficiary.--The 
                        term `charitable beneficiary' means any 
                        beneficiary which is an organization 
                        described in section 170(c).
                          ``(ii) ESOP beneficiary.--The term 
                        `ESOP beneficiary' means any 
                        beneficiary which is an employee stock 
                        ownership plan (as defined in section 
                        4975(e)(7)) that holds a remainder 
                        interest in qualified employer 
                        securities (as defined in section 
                        664(g)(4)) to be transferred to such 
                        plan in a qualified gratuitous transfer 
                        (as defined in section 664(g)(1)).
                          ``(iii) Qualified charitable 
                        remainder trust.--The term `qualified 
                        charitable remainder trust' means a 
                        charitable remainder annuity trust or a 
                        charitable remainder unitrust 
                        (described in section 664).''
          (9) Section 4947(b) is amended by inserting after 
        paragraph (3) the following new paragraph:
          ``(4) Section 507.--The provisions of section 507(a) 
        shall not apply to a trust which is described in 
        subsection (a)(2) by reason of a distribution of 
        qualified employer securities (as defined in section 
        664(g)(4)) to an employee stock ownership plan (as 
        defined in section 4975(e)(7)) in a qualified 
        gratuitous transfer (as defined by section 664(g)).''
          (10) The last sentence of section 4975(e)(7) is 
        amended by inserting ``and section 664(g)'' after 
        ``section 409(n)''
          (11) Subsection (a) of section 4978 is amended--
                  (A) by inserting ``or acquired any qualified 
                employer securities in a qualified gratuitous 
                transfer to which section 664(g) applied'' 
                after ``section 1042 applied'', and
                  (B) by inserting before the period at the end 
                of subparagraph (B) ``60 percent of the total 
                value of all employer securities as of such 
                disposition in the case of any qualified 
                employer securities in a qualified gratuitous 
                transfer to which section 664(g) applied)''.
          (12) Paragraph (2) of section 4978(b) is amended--
                  (A) by inserting ``or acquired in the 
                qualified gratuitous transfer to which section 
                664(g) applied'' after ``section 1042 
                applied'', and
                  (B) by inserting ``or to which section 664(g) 
                applied'' after ``section 1042 applied'' in 
                subparagraph (C) thereof.
          (13) Subsection (c) of section 4978 is amended by 
        striking ``written statement'' and all that follows and 
        inserting ``written statement described in section 
        664(g)(1)(E) or in section 1042(b)(3) (as the case may 
        be).''
          (14) Paragraph (2) of section 4978(e) is amended by 
        striking the period and inserting ``; except that such 
        section shall be applied without regard to subparagraph 
        (B) thereof for purposes of applying this section and 
        section 4979A with respect to securities acquired in a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1)).''
          (15) Subsection (a) of section 4979A is amended to 
        read as follows:
    ``(a) Imposition of Tax.--If--
          ``(1) there is a prohibited allocation of qualified 
        securities by any employee stock ownership plan or 
        eligible worker-owned cooperative, or
          ``(2) there is an allocation described in section 
        664(g)(5)(A),
there is hereby imposed a tax on such allocation equal to 50 
percent of the amount involved.''
          (16) Subsection (c) of section 4979A is amended to 
        read as follows:
    ``(c) Liability for Tax.--The tax imposed by this section 
shall be paid by--
          ``(1) the employer sponsoring such plan, or
          ``(2) the eligible worker-owned cooperative,
which made the written statement described in section 
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may 
be).''
          (17) Section 4979A is amended by redesignating 
        subsection (d) as subsection (e) and by inserting after 
        subsection (c) the following new subsection:
    ``(d) Special Statute of Limitations for Tax Attributable 
to Certain Allocations.--The statutory period for the 
assessment of any tax imposed by this section on an allocation 
described in subsection (a)(2) of qualified employer securities 
shall not expire before the date which is 3 years from the 
later of--
          ``(1) the 1st allocation of such securities in 
        connection with a qualified gratuitous transfer (as 
        defined in section 664(g)(1)), or
          ``(2) the date on which the Secretary is notified of 
        the allocation described in subsection (a)(2).''
    (d) Effective Date.--The amendments made by this section 
shall apply to transfers made by trusts to, or for the use of, 
an employee stock ownership plan after the date of the 
enactment of this Act.

SEC. 916. TREATMENT OF CERTAIN TRANSPORTATION ON NON-COMMERCIALLY 
                    OPERATED AIRCRAFT AS A FRINGE BENEFIT EXCLUDABLE 
                    FROM GROSS INCOME.

    (a) In General.--Subsection (b) of section 132 (relating to 
no-additional-cost service defined) is amended to read as 
follows:
    ``(b) No-Additional-Cost Service Defined.--For purposes of 
this section, the term `no-additional-cost service'means any 
service provided by an employer to an employee for use by such employee 
if--
          ``(1) such service--
                  ``(A) is offered for sale to customers in the 
                ordinary course of the line of business of the 
                employer in which the employee is performing 
                services, or
                  ``(B) consists of transportation on an 
                aircraft, if--
                          ``(i) transportation on such aircraft 
                        is not offered for sale to customers,
                          ``(ii) such transportation for use by 
                        such employee is provided on a flight 
                        made in the ordinary course of the 
                        trade or business of an employer which 
                        owns or leases such aircraft for use in 
                        such trade or business, and
                          ``(iii) the flight on which the 
                        transportation is provided would have 
                        been made whether or not such employee 
                        was transported on the flight, and
          ``(2) the employer incurs no substantial additional 
        cost (including forgone revenue) in providing such 
        service to the employee (determined without regard to 
        any amount paid by the employee for such service).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to services provided after December 31, 1997.

SEC. 917. MINIMUM PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT CONSENT 
                    INCREASED TO $5,000.

    (a) In General.--Subparagraph (A) of section 411(a)(11) 
(relating to restrictions on certain mandatory distributions) 
is amended by striking ``$3,500'' and inserting ``the 
applicable limit''.
    (b) Applicable Limit.--Paragraph (11) of section 411(a) is 
amended by adding at the end the following new subparagraph:
                  ``(D) Applicable limit.--
                          ``(i) In general.--For purposes of 
                        subparagraph (A), the applicable limit 
                        is $5,000.
                          ``(ii) Inflation adjustment.--In the 
                        case of plan years beginning in a 
                        calendar year after 1998, the dollar 
                        amount contained in clause (i) shall be 
                        increased by an amount equal to--
                                  ``(I) such dollar amount, 
                                multiplied by
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year by substituting 
                                `calendar year 1997' for 
                                `calendar year 1992' in 
                                subparagraph (B) thereof.
                        If any amount as adjusted under the 
                        preceding sentence is not a multiple of 
                        $50, such amount shall be rounded to 
                        the next lowest multiple of $50.''
    (c) Conforming Amendments.--
          (1) Section 411(a)(7)(B), paragraphs (1) and (2) of 
        section 417(e), and section 457(e)(9) are each amended 
        by striking ``$3,500'' each place in appears (other 
        than the headings) and inserting ``the applicable limit 
        under section 411(a)(11)(D)''.
          (2) The headings for paragraphs (1) and (2) of 
        section 417(e) and subparagraph (A) of section 
        457(e)(9) are each amended by striking ``$3,500'' and 
        inserting ``applicable limit''.
    (d) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after the date of the 
enactment of this Act.

SEC. 918. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK 
                    OWNERSHIP PLANS OF S CORPORATIONS.

    (a) Certain Cash Distributions Permitted.--
          (1) Paragraph (2) of section 409(h) is amended by 
        adding at the end the following new subparagraph:
                  ``(B) Plan maintained by s corporation.--In 
                the case of a plan established and maintained 
                by an S corporation which otherwise meets the 
                requirements of this subsection or section 
                4975(e)(7), such plan shall not be treated as 
                failing to meet the requirements of this 
                subsection or section 401(a) merely because it 
                does not permit a participant to exercise the 
                right described in paragraph (1)(A) if such 
                plan provides that the participant entitled to 
                a distribution has a right to receive the 
                distribution in cash.''
          (2) Paragraph (2) of section 409(h) is amended--
                  (A) by striking ``a plan which'' in the first 
                sentence and inserting the following:
                  ``(A) In general.--A plan which'', and
                  (B) by moving the text before subparagraph 
                (B) 2 ems to the right.
    (b) Shareholder-Employees Not Treated as Owner-Employees 
Under Tax on Prohibited Transactions.--The last sentence of 
section 4975(d) is amended by striking all that follows 
``preceding sentence,'' through ``Revision Act of 1982,''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

              Subtitle C--Revisions Relating to Disasters

SEC. 921. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY REASON 
                    OF PRESIDENTIALLY DECLARED DISASTER.

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

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

    ``(a) In General.--In the case of a taxpayer determined by 
the Secretary to be affected by a Presidentially declared 
disaster (as defined by section 1033(h)(3)), the Secretary may 
prescribe regulations under which a period of up to 90 days may 
be disregarded in determining, under the internal revenue laws, 
in respect of any tax liability (including any penalty, 
additional amount, or addition to the tax) of such taxpayer--
          ``(1) whether any of the acts by the taxpayer 
        described in paragraph (1) of section 7508(a) were 
        performed within the time prescribed therefor, and
          ``(2) the amount of any credit or refund.
    ``(b) Interest on Overpayments and Underpayments.--
Subsection (a) shall not apply for the purpose of determining 
interest on any overpayment or underpayment.''
    (b) Clerical Amendment.--The table of sections for chapter 
77 is amended by inserting after the item relating to section 
7508 the following new item:
        ``Sec. 7508A. Authority to postpone certain tax-related 
                  deadlines by reason of presidentially declared 
                  disaster.''
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to any period for performing an act 
that has not expired before the date of the enactment of this 
Act.

SEC. 922. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF DISASTER 
                    LOSS.

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

SEC. 923. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED 
                    CONDITIONS.

    (a) Deferral of Income Inclusion.--Subsection (e) of 
section 451 (relating to special rules for proceeds from 
livestock sold on account of drought) is amended--
          (1) by striking ``drought conditions, and that these 
        drought conditions'' in paragraph (1) and inserting 
        ``drought, flood, or other weather-related conditions, 
        and that such conditions''; and
          (2) by inserting ``, Flood, or Other Weather-Related 
        Conditions'' after ``Drought'' in the subsection 
        heading.
    (b) Involuntary Conversions.--Subsection (e) of section 
1033 (relating to livestock sold on account of drought) is 
amended--
          (1) by inserting ``, flood, or other weather-related 
        conditions'' before the period at the end thereof; and
          (2) by inserting ``, Flood, or Other Weather-Related 
        Conditions'' after ``Drought'' in the subsection 
        heading.
    (c) Effective Date.--The amendments made by this section 
shall apply to sales and exchanges after December 31, 1996.

SEC. 924. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN DISASTER AREAS.

    Subsection (k) of section 143 (relating to mortgage revenue 
bonds; qualified mortgage bond and qualified veteran's mortgage 
bond) is amended by adding at the end the following new 
paragraph:
          ``(11) Special rules for residences located in 
        disaster areas.--In the case of a residence located in 
        an area determined by the President to warrant 
        assistance from the Federal Government under the 
        Disaster Relief and Emergency Assistance Act (as in 
        effect on the date of the enactment of the Revenue 
        Reconciliation Act of 1997), this section shall be 
        applied with the following modifications to financing 
        provided with respect to such residence within 1 year 
        after the date of the disaster declaration:
                  ``(A) Subsection (d) (relating to 3-year 
                requirement) shall not apply.
                  ``(B) Subsections (e) and (f) (relating to 
                purchase price requirement and income 
                requirement) shall be applied as if such 
                residence were a targeted area residence.
        The preceding sentence shall apply only with respect to 
        bonds issued after December 31, 1996, and before 
        January 1, 2000.''

          Subtitle D--Provisions Relating to Employment Taxes

SEC. 931. CLARIFICATION OF EMPLOYMENT TAX STATUS OF INDIVIDUALS 
                    DISTRIBUTING BAKERY PRODUCTS.

    (a) Internal Revenue Code.--Subparagraph (A) of section 
3121(d)(3) is amended by striking ``bakery products,''.
    (b) Social Security Act.--Subparagraph (A) of section 
210(j)(3) of the Social Security Act is amended by striking 
``bakery products,''.
    (c) Effective Date.--The amendments made by this section 
shall apply to services performed after December 31, 1997.

SEC. 932. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING 
                    EMPLOYMENT TAX STATUS OF SECURITIES BROKERS.

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

SEC. 933. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX FOR 
                    CERTAIN TERMINATION PAYMENTS RECEIVED BY FORMER 
                    INSURANCE SALESMEN.

    (a) Internal Revenue Code.--Section 1402 (relating to 
definitions) is amended by adding at the end the following new 
subsection:
    ``(k) Codification of Treatment of Certain Termination 
Payments Received by Former Insurance Salesmen.--Nothing in 
subsection (a) shall be construed as including in the net 
earnings from self-employment of an individual any amount 
received during the taxable year from an insurance company on 
account of services performed by such individual as an 
insurance salesman for such company if--
          ``(1) such amount is received after termination of 
        such individual's agreement to perform such services 
        for such company,
          ``(2) such individual performs no services for such 
        company after such termination and before the close of 
        such taxable year,
          ``(3) such individual enters into a covenant not to 
        compete against such company which applies to at least 
        the 1-year period beginning on the date of such 
        termination, and
          ``(4) the amount of such payment--
                  ``(A) depends solely on policies sold by such 
                individual during the last year of such 
                agreement and the extent to which such policies 
                remain in force for some period after such 
                termination, and
                  ``(B) does not depend to any extent on length 
                of service or overall earnings from services 
                performed for such company.''
    (b) Social Security Act.--Section 211 of the Social 
Security Act is amended by adding at the end the following new 
subsection:

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

    ``(j) Nothing in subsection (a) shall be construed as 
including in the net earnings from self-employment of an 
individual any amount received during the taxable year from an 
insurance company on account of services performed by such 
individual as an insurance salesman for such company if--
          ``(1) such amount is received after termination of 
        such individual's agreement to perform such services 
        for such company,
          ``(2) such individual performs no services for such 
        company after such termination and before the close of 
        such taxable year,
          ``(3) such individual enters into a covenant not to 
        compete against such company which applies to at least 
        the 1-year period beginning on the date of such 
        termination, and
          ``(4) the amount of such payment--
                  ``(A) depends solely on policies sold by such 
                individual during the last year of such 
                agreement and the extent to which such policies 
                remain in force for some period after such 
                termination, and
                  ``(B) does not depend to any extent on length 
                of service or overall earnings from services 
                performed for such company.''
    (c) Effective Date.--The amendments made by this section 
shall apply to payments after December 31, 1997.

SEC. 934. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE NOT 
                    EMPLOYEES.

    (a) In General.--Chapter 25 (general provisions relating to 
employment taxes) is amended by adding after section 3510 the 
following new section:

``SEC. 3511. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE NOT 
                    EMPLOYEES.

    ``(a) General Rule.--For purposes of this title, and 
notwithstanding any provision of this title to the contrary, if 
the requirements of subsections (b), (c), and (d) are met with 
respectto any service performed by any individual, then with 
respect to such service--
          ``(1) the service provider shall not be treated as an 
        employee,
          ``(2) the service recipient shall not be treated as 
        an employer, and
          ``(3) the payor shall not be treated as an employer.
    ``(b) Service Provider Requirements With Regard to Service 
Recipient.--For the purposes of subsection (a), the 
requirements of this subsection are met if the service 
provider, in connection with performing the service--
          ``(1) has a significant investment in assets and/or 
        training,
          ``(2) incurs significant unreimbursed expenses,
          ``(3) agrees to perform the service for a particular 
        amount of time or to complete a specific result and is 
        liable for damages for early termination without cause,
          ``(4) is paid primarily on a commissioned basis, or
          ``(5) purchases products for resale.
    ``(c) Additional Service Provider Requirements With Regard 
to Others.--For the purposes of subsection (a), the 
requirements of this subsection are met if--
          ``(1) the service provider--
                  ``(A) has a principal place of business,
                  ``(B) does not primarily provide the service 
                in the service recipient's place of business, 
                or
                  ``(C) pays a fair market rent for use of the 
                service recipient's place of business; or
          ``(2) the service provider--
                  ``(A) is not required to perform service 
                exclusively for the service recipient, and
                  ``(B) in the year involved, or in the 
                preceding or subsequent year--
                          ``(i) has performed a significant 
                        amount of service for other persons,
                          ``(ii) has offered to perform service 
                        for other persons through--
                                  ``(I) advertising,
                                  ``(II) individual written or 
                                oral solicitations,
                                  ``(III) listing with 
                                registries, agencies, brokers, 
                                and other persons in the 
                                business of providing referrals 
                                to other service recipients, or
                                  ``(IV) other similar 
                                activities, or
                          ``(iii) provides service under a 
                        business name which is registered with 
                        (or for which a license has been 
                        obtained from) a State, a political 
                        subdivision of a State, or any agency 
                        or instrumentality of 1 or more States 
                        or political subdivisions.
    ``(d) Written Document Requirements.--For purposes of 
subsection (a), the requirements of this subsection are met if 
the services performed by the individual are performed pursuant 
to a written contract between such individual and the person 
for whom the services are performed, or the payor, and such 
contract provides that the individual will not be treated as an 
employee with respect to such services for purposes of this 
subtitle or subtitle A.
    ``(e) Special Rules.--For purposes of this section--
          ``(1) If for any taxable year any service recipient 
        or payor fails to meet the applicable reporting 
        requirements of sections 6041(a), 6041A(a), or 6051 
        with respect to a service provider, then, unless such 
        failure is due to reasonable cause and not willful 
        neglect, this section shall not apply in determining 
        whether such service provider shall not be treated as 
        an employee of such service recipient or payor for such 
        year.
          ``(2) If the service provider is performing services 
        through an entity owned in whole or in part by such 
        service provider, then the references to `service 
        provider' in subsections (b) through (d) may include 
        such entity, provided that the written contract 
        referred to in paragraph (1) of subsection (d) may be 
        with either the service provider or such entity and 
        need not be with both.
    ``(f) Definitions.--For the purposes of this section--
          ``(1) Service provider.--The term `service provider' 
        means any individual who performs service for another 
        person.
          ``(2) Service recipient.--Except as provided in 
        paragraph (5), the term `service recipient' means the 
        person for whom the service provider performs such 
        service.
          ``(3) Payor.--Except as provided in paragraph (5), 
        the term `payor' means the person who pays the service 
        provider for the performance of such service in the 
        event that the service recipients do not pay the 
        service provider.
          ``(4) In connection with performing the service.--The 
        term `in connection with performing the service' means 
        in connection or related to--
                  ``(A) the actual service performed by the 
                service provider for the service recipients or 
                for other persons for whom the service provider 
                has performed similar service, or
                  ``(B) the operation of the service provider's 
                trade or business.
          ``(5) Exceptions.--The terms `service recipient' and 
        `payor' do not include any entity which is owned in 
        whole or in part by the service provider.''
    (b) Clerical Amendment.--The table of sections for chapter 
25 is amended by adding at the end the following new item:

        ``Sec. 3511. Standards for determining whether individuals are 
                  not employees.''

    (c) Effective Date.--The amendments made by this section 
shall apply to services performed after December 31, 1997.

          Subtitle E--Provisions Relating to Small Businesses

SEC. 941. WAIVER OF PENALTY THROUGH 1998 ON SMALL BUSINESSES FAILING TO 
                    MAKE ELECTRONIC FUND TRANSFERS OF TAXES.

    No penalty shall be imposed under the Internal Revenue Code 
of 1986 solely by reason of a failure by a person to use the 
electronic fund transfer system established under section 
6302(h) of such Code if--
          (1) such person is a member of a class of taxpayers 
        first required to use such system on or after July 1, 
        1997, and
          (2) such failure occurs before January 1, 1999.

SEC. 942. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR 
                    ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.

    (a) In General.--Paragraph (1) of section 280A(c) is 
amended by adding at the end the following new sentence: ``For 
purposes of subparagraph (A), the term `principal place of 
business' includes a place of business which is used by the 
taxpayer for the administrative or management activities of any 
trade or business of the taxpayer if there is no other fixed 
location of such trade or business where the taxpayer conducts 
substantial administrative or management activities of such 
trade or business.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

                      Subtitle F--Other Provisions

SEC. 951. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY ACCOUNTING.

    (a) In General.--Section 471 (relating to general rule for 
inventories) is amended by redesignating subsection (b) as 
subsection (c) and by inserting after subsection (a) the 
following new subsection:
    ``(b) Estimates of Inventory Shrinkage Permitted.--A method 
of determining inventories shall not be deemed not to clearly 
reflect income solely because it utilizes estimates of 
inventory shrinkage that are confirmed by a physical count only 
after the last day of the taxable year if--
          ``(1) the taxpayer normally does a physical count of 
        inventories at each location on a regular and 
        consistent basis, and
          ``(2) the taxpayer makes proper adjustments to such 
        inventories and to its estimating methods to the extent 
        such estimates are greater than or less than the actual 
        shrinkage.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years ending after the date of 
        the enactment of this Act.
          (2) Coordination with section 481.--In the case of 
        any taxpayer permitted by this section to change its 
        method of accounting to a permissible method for any 
        taxable year--
                  (A) such changes shall be treated as 
                initiated by the taxpayer,
                  (B) such changes shall be treated as made 
                with the consent of the Secretary, and
                  (C) the period for taking into account the 
                adjustments under section 481 by reason of such 
                change shall be 4 years.

SEC. 952. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY ELIGIBLE FOR 
                    EXCLUSION RELATING TO PERSONAL INJURY LIABILITY 
                    ASSIGNMENTS.

    (a) In General.--Subsection (c) of section 130 (relating to 
certain personal injury liability assignments) is amended--
          (1) by inserting ``, or as compensation under any 
        workmen's compensation act,'' after ``(whether by suit 
        or agreement)'' in the material preceding paragraph 
        (1),
          (2) by inserting ``or the workmen's compensation 
        claim,'' after ``agreement,'' in paragraph (1), and
          (3) by striking ``section 104(a)(2)'' in paragraph 
        (2)(D) and inserting ``paragraph (1) or (2) of section 
        104(a)''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to claims under workmen's compensation acts filed 
after the date of the enactment of this Act.

SEC. 953. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S COMPENSATION ACT 
                    COMPANIES.

    (a) In General.--Section 501(c)(27) (relating to membership 
organizations under workmen's compensation acts) is amended by 
adding at the end the following:
          ``(B) Any organization (including a mutual insurance 
        company) if--
                  ``(i) such organization is created by State 
                law and is organized and operated under State 
                law exclusively to--
                          ``(I) provide workmen's compensation 
                        insurance which is required by State 
                        law or with respect to which State law 
                        provides significant disincentives if 
                        such insurance is not purchased by an 
                        employer, and
                          ``(II) provide related coverage which 
                        is incidental to workmen's compensation 
                        insurance,
                  ``(ii) such organization must provide 
                workmen's compensation insurance to any 
                employer in the State (for employees in the 
                State or temporarily assigned out-of-State) 
                which seeks such insurance and meets other 
                reasonable requirements relating thereto,
                  ``(iii)(I) the State makes a financial 
                commitment with respect to such organization 
                either by extending the full faith and credit 
                of the State to debt of such organization or by 
                providing the initial operating capital of such 
                organization and (II) in the case of periods 
                after the date of enactment of this 
                subparagraph, the assets of such organization 
                revert to the State upon dissolution, and
                  ``(iv) the majority of the board of directors 
                or oversight body of such organization are 
                appointed by the chief executive officer or 
                other executive branch official of the State, 
                by the State legislature, or by both.''
    (b) Conforming Amendments.--Section 501(c)(27) of such Code 
is amended by inserting ``(A)'' after ``(27)'', by 
redesignating subparagraphs (A), (B), and (C) as clauses (i), 
(ii), and (iii), respectively, and by redesignating clauses (i) 
and (ii) of subparagraphs (B) and (C) (before redesignation) as 
subclauses (I) and (II), respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 954. ELECTION TO CONTINUE EXCEPTION FROM TREATMENT OF PUBLICLY 
                    TRADED PARTNERSHIPS AS CORPORATIONS.

    (a) In General.--Section 7704 is amended by adding at the 
end thereof the following new subsection:
    ``(g) Exception for Existing Publicly Traded 
Partnerships.--
          ``(1) In general.--Subsection (a) shall not apply to 
        an existing publicly traded partnership which elects 
        the application of this subsection and consents to the 
        application of the tax imposed by paragraph (3).
          ``(2) Existing publicly traded partnership.--For 
        purposes of this section, the term `existing publicly 
        traded partnership' means any publicly traded 
        partnership to which subsection (a) does not apply as 
        of the date of the enactment of this paragraph (other 
        than by reason of subsection (c)(1)).
          ``(3) Additional tax on electing publicly traded 
        partnerships.--
                  ``(A) Imposition of tax.--There is hereby 
                imposed for each taxable year on the income of 
                every electing publicly traded partnership a 
                tax equal to 15 percent of the gross income for 
                such taxable year from the active conduct of 
                trades and businesses by the partnership.
                  ``(B) Electing publicly traded partnership.--
                For purposes of this paragraph, the term 
                `electing publicly traded partnership' means 
                any partnership for which the consent under 
                paragraph (1) is in effect.
                  ``(C) Adjustments in the case of tiered 
                partnerships.--For purposes of this paragraph, 
                if the income of the partnership includes its 
                distributive share of income from another 
                partnership for any taxable year, the gross 
                income referred to in subparagraph (A) shall 
                include the gross income of such other 
                partnership from the active conduct of trades 
                and businesses of such other partnership (in 
                lieu of such distributive share). A similar 
                rule shall apply in the case of lower-tiered 
                partnerships.
                  ``(D) Treatment of tax.--For purposes of this 
                title, the tax imposed by this paragraph shall 
                be treated as imposed by chapter 1 other than 
                for purposes of determining the amount of any 
                credit allowable under chapter 1.
          ``(4) Election.--An election and consent under this 
        subsection shall apply to the taxable year for which 
        made and all subsequent taxable years unless revoked by 
        the partnership. Such revocation may be made without 
        the consent of the Secretary, but, once so revoked, may 
        not be reinstated.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 955. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME FOR CERTAIN 
                    SPONSORSHIP PAYMENTS.

    (a) In General.--Section 513 (relating to unrelated trade 
or business income) is amended by adding at the end the 
following new subsection:
    ``(i) Treatment of Certain Sponsorship Payments.--
          ``(1) In general.--The term `unrelated trade or 
        business' does not include the activity of soliciting 
        and receiving qualified sponsorship payments.
          ``(2) Qualified sponsorship payments.--For purposes 
        of this subsection--
                  ``(A) In general.--The term `qualified 
                sponsorship payment' means any payment made by 
                any person engaged in a trade or business with 
                respect to which there is no arrangement or 
                expectation that such person will receive any 
                substantial return benefit other than the use 
                or acknowledgement of the name or logo (or 
                product lines) of such person's trade or 
                business in connection with the activities of 
                the organization that receives such payment. 
                Such a use or acknowledgement does not include 
                advertising such person's products or services 
                (including messages containing qualitative or 
                comparative language, price information or 
                other indications of savings or value, an 
                endorsement, or an inducement to purchase, 
                sell, or use such products or services).
                  ``(B) Limitations.--
                          ``(i) Contingent payments.--The term 
                        `qualified sponsorship payment' does 
                        not include any payment if the amount 
                        of such payment is contingent upon the 
                        level of attendance at one or more 
                        events, broadcast ratings, or other 
                        factors indicating the degree of public 
                        exposure to one or more events.
                          ``(ii) Acknowledgements or 
                        advertising in periodicals.--The term 
                        `qualified sponsorship payment' does 
                        not include any payment which entitles 
                        the payor to an acknowledgement or 
                        advertising in regularly scheduled and 
                        printed material published by or on 
                        behalf of the payee organization that 
                        is not related to and primarily 
                        distributed in connection with a 
                        specific event conducted by the payee 
                        organization.
          ``(3) Allocation of portions of single payment.--For 
        purposes of this subsection, to the extent that a 
        portion of a payment would (if made as a separate 
        payment) be a qualified sponsorship payment, such 
        portion of such payment and the other portion of such 
        payment shall be treated as separate payments.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to payments solicited or received after December 
31, 1997.

SEC. 956. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO BE TAXED 
                    LIKE OTHER HOMEOWNERS ASSOCIATIONS.

    (a) Timeshare Associations Included as Homeowner 
Associations.--
          (1) In general.--Paragraph (1) of section 528(c) 
        (defining homeowners association) is amended--
                  (A) by striking ``or a residential real 
                estate management association'' and inserting 
                ``, a residential real estate management 
                association, or a timeshare association'' in 
                the material preceding subparagraph (A),
                  (B) by striking ``or'' at the end of clause 
                (i) of subparagraph (B), by striking the period 
                at the end of clause (ii) of subparagraph (B) 
                and inserting ``, or'', and by adding at the 
                end of subparagraph (B) the following new 
                clause:
                          ``(iii) owners of timeshare rights to 
                        use, or timeshare ownership interests 
                        in, association property in the case of 
                        a timeshare association,'', and
                  (C) by inserting ``and, in the case of a 
                timeshare association, for activities provided 
                to or on behalf of members of the association'' 
                before the comma at the end of subparagraph 
                (C).
          (2) Timeshare association defined.--Subsection (c) of 
        section 528 is amended by redesignating paragraph (4) 
        as paragraph (5) and by inserting after paragraph (3) 
        the following new paragraph:
          ``(4) Timeshare association.--The term `timeshare 
        association' means any organization (other than a 
        condominium management association) meeting the 
        requirement of subparagraph (A) of paragraph (1) if any 
        member thereof holds a timeshare right to use, or a 
        timeshare ownership interest in, real property 
        constituting association property.''
    (b) Exempt Function Income.--Paragraph (3) of section 
528(d) is amended by striking ``or'' at the end of subparagraph 
(A), by striking the period at the end of subparagraph (B) and 
inserting ``, or'', and by adding at the end the following new 
subparagraph:
                  ``(C) owners of timeshare rights to use, or 
                timeshare ownership interests in, real property 
                in the case of a timeshare association.''
    (c) Rate of Tax.--Subsection (b) of section 528 (relating 
to certain homeowners associations) is amended by inserting 
before the period ``(32 percent of such income in the case of a 
timeshare association)''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 957. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN ISLAND BONDS.

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

SEC. 958. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS' 
                    COOPERATIVES.

    (a) In General.--Section 1042 (relating to sales of stock 
to employee stock ownership plans or certain cooperatives) is 
amended by adding at the end the following new subsection:
    ``(g) Application of Section to Sales of Stock in 
Agricultural Refiners and Processors to Eligible Farm 
Cooperatives.--
          ``(1) In general.--This section shall apply to the 
        sale of stock of a qualified refiner or processor to an 
        eligible farmers' cooperative.
          ``(2) Qualified refiner or processor.--For purposes 
        of this subsection, the term `qualified refiner or 
        processor' means a domestic corporation--
                  ``(A) substantially all of the activities of 
                which consist of the active conduct of the 
                trade or business of refining or processing 
                agricultural or horticultural products, and
                  ``(B) which purchases more than one-half of 
                such products to be refined or processed from--
                          ``(i) farmers who make up the 
                        eligible farmers' cooperative which is 
                        purchasing stock in the corporation in 
                        a transaction to which this subsection 
                        is to apply, and
                          ``(ii) such cooperative.
          ``(3) Eligible farmers' cooperative.--For purposes of 
        this section, the term `eligible farmers' cooperative' 
        means an organization to which part I of subchapter T 
        applies which is engaged in the marketing of 
        agricultural or horticultural products.
          ``(4) Special rules.--In applying this section to a 
        sale to which paragraph (1) applies--
                  ``(A) the eligible farmers' cooperative shall 
                be treated in the same manner as a cooperative 
                described in subsection (b)(1)(B),
                  ``(B) subsection (b)(2) shall be applied by 
                substituting `100 percent' for `30 percent' 
                each place it appears,
                  ``(C) the determination as to whether any 
                stock in the domestic corporation is a 
                qualified security shall be made without regard 
                to whether the stock is an employer security or 
                to subsection (c)(1)(A), and
                  ``(D) paragraphs (2)(D) and (7) of subsection 
                (c) shall not apply.''
    (b) Effective Date.--The amendment made by this section 
shall apply to sales after December 31, 1997.

SEC. 959. EXCEPTION FROM REPORTING OF REAL ESTATE TRANSACTIONS FOR 
                    SALES AND EXCHANGES OF CERTAIN PRINCIPAL 
                    RESIDENCES.

    (a) In General.--Subsection (e) of section 6045 (relating 
to return required in the case of real estate transactions) is 
amended by adding at the end the following new paragraph:
          ``(5) Exception for sales or exchanges of certain 
        principal residences.--
                  ``(A) In general.--Paragraph (1) shall not 
                apply to any sale or exchange of a residence 
                for $250,000 or less if the person referred to 
                in paragraph (2)(A) receives written assurance 
                in a form acceptable to the Secretary from the 
                seller that--
                          ``(i) such residence is the principal 
                        residence (within the meaning of 
                        section 121) of the seller,
                          ``(ii) there is no federally 
                        subsidized mortgage financing 
                        assistance with respect to the mortgage 
                        on such residence, and
                          ``(iii) the seller meets the 
                        requirements of section 121(a) with 
                        respect to such sale or exchange.
                If such assurance includes an assurance that 
                the seller is married, the preceding sentence 
                shall be applied by substituting `$500,000' for 
                `$250,000'.
                  ``(B) Seller.--For purposes of this 
                paragraph, the term `seller' includes the 
                person relinquishing the residence in an 
                exchange.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to sales and exchanges after the date of the 
enactment of this Act.

SEC. 960. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES FOR 
                    INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.

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

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

    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 961. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM 
                    LEASES.

    (a) In General.--Part III of subchapter B of chapter 1 is 
amended by inserting after section 109 the following new 
section:

``SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM 
                    LEASES.

    ``(a) In General.--Gross income of a lessee does not 
include any amount received in cash (or treated as a rent 
reduction) by a lessee from a lessor--
          ``(1) under a short-term lease of retail space, and
          ``(2) for the purpose of such lessee's constructing 
        or improving qualified long-term real property for use 
        in such lessee's trade or business at such retail 
        space,
but only to the extent that such amount does not exceed the 
amount expended by the lessee for such construction or 
improvement.
    ``(b) Consistent Treatment by Lessor.--Qualified long-term 
real property constructed or improved in connection with any 
amount excluded from a lessee's income by reason of subsection 
(a) shall be treated as nonresidential real property by the 
lessor.
    ``(c) Definitions.--For purposes of this section--
          ``(1) Qualified long-term real property.--The term 
        `qualified long-term real property' means 
        nonresidential real property which is part of, or 
        otherwise present at, the retail space referred to in 
        subsection (a) and which reverts to the lessor at the 
        termination of the lease.
          ``(2) Short-term lease.--The term `short-term lease' 
        means a lease (or other agreement for occupancy or use) 
        of retail space for 15 years or less (as determined 
        under the rules of section 168(i)(3)).
          ``(3) Retail space.--The term `retail space' means 
        real property leased, occupied, or otherwise used by a 
        lessee in its trade or business of selling tangible 
        personal property or services to the general public.
    ``(d) Information Required To Be Furnished to Secretary.--
Under regulations, the lessee and lessor described in 
subsection (a) shall, at such times and in such manner as may 
be provided in such regulations, furnish to the Secretary--
          ``(1) information concerning the amounts received (or 
        treated as a rent reduction) and expended as described 
        in subsection (a), and
          ``(2) any other information which the Secretary deems 
        necessary to carry out the provisions of this 
        section.''
    (b) Treatment as Information Return.--Subparagraph (A) of 
section 6724(d)(1)(A) is amended by striking ``or'' at the end 
of clause (vii), by adding ``or'' at the end of clause (viii), 
and by adding at the end the following new clause:
                          ``(ix) section 110(d) (relating to 
                        qualified lessee construction 
                        allowances for short-term leases),''.
    (c) Cross Reference.--Paragraph (8) of section 168(i) 
(relating to treatment of leasehold improvements) is amended by 
adding at the end the following new subparagraph:
                  ``(C) Cross reference.--

          ``For treatment of qualified long-term real property 
        constructed or improved in connection with cash or rent 
        reduction from lessor to lessee, see section 110(b).''

    (d) Clerical Amendment.--The table of sections for part III 
of subchapter B of chapter 1 is amended by inserting after the 
item relating to section 109 the following new item:

        ``Sec. 110. Qualified lessee construction allowances for short-
                  term leases.''

    (e) Effective Date.--The amendments made by this section 
shall apply to leases entered into after the date of the 
enactment of this Act.

SEC. 962. TAX TREATMENT OF CONSOLIDATIONS OF LIFE INSURANCE DEPARTMENTS 
                    OF MUTUAL SAVINGS BANKS.

    (a) General Rule.--Section 594 (relating to alternative tax 
for mutual savings banks conducting life insurance business) is 
amended by adding at the end thereof the following new 
subsection:
    ``(c) Treatment of Consolidations.--If 2 or more life 
insurance departments to which subsection (a) applied are 
consolidated into a single life insurance company pursuant to a 
requirement of State law--
          ``(1) such consolidation shall be treated as a 
        reorganization described in section 368(a)(1)(E), and
          ``(2) any payments required to be made to 
        policyholders in connection with such consolidation 
        shall be treated as policyholder dividends deductible 
        under section 808 but only if--
                  ``(A) such payments are only with respect to 
                policies in effect immediately before such 
                consolidation,
                  ``(B) such payments are only with respect to 
                policies which are participating before and 
                after such consolidation,
                  ``(C) such payments shall cease with respect 
                to any policy if such policy lapses after such 
                consolidation,
                  ``(D) the policyholders before such 
                consolidation had no divisible right to the 
                surplus of any such department and had no right 
                to vote, and
                  ``(E) the approval of such policyholders was 
                not required for such consolidation.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on December 31, 1991.

SEC. 963. OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE STATE TAX OBLIGATIONS 
                    AGAINST OVERPAYMENTS.

    (a) In General.--Section 6402 is amended by redesignating 
subsections (e) through (i) as subsections (f) through (j), 
respectively, and by inserting after subsection (d) the 
following new subsection:
    ``(e) Collection of Past-Due, Legally Enforceable State Tax 
Obligations.--
          ``(1) In general.--Upon receiving notice from any 
        State that a named person owes a past-due, legally 
        enforceable State tax obligation to such State, the 
        Secretary shall, under such conditions as may be 
        prescribed by the Secretary--
                  ``(A) reduce the amount of any overpayment 
                payable to such person by the amount of such 
                State tax obligation;
                  ``(B) pay the amount by which such 
                overpayment is reduced under subparagraph (A) 
                to such State and notify such State of such 
                person's name, taxpayer identification number, 
                address, and the amount collected; and
                  ``(C) notify the person making such 
                overpayment that the overpayment has been 
                reduced by an amount necessary to satisfy a 
                past-due, legally enforceable State tax 
                obligation.
        If an offset is made pursuant to a joint return, the 
        notice under subparagraph (B) shall include the names, 
        taxpayer identification numbers, and addresses of each 
        person filing such return.
          ``(2) Offset permitted only against residents of 
        state seeking offset.--Paragraph (1) shall apply to an 
        overpayment by any person for a taxable year only if 
        the address shown on the return for such taxable year 
        is an address within the State seeking the offset.
          ``(3) Priorities for offset.--Any overpayment by a 
        person shall be reduced pursuant to this subsection--
                  ``(A) after such overpayment is reduced 
                pursuant to--
                          ``(i) subsection (a) with respect to 
                        any liability for any internal revenue 
                        tax on the part of the person who made 
                        the overpayment,
                          ``(ii) subsection (c) with respect to 
                        past-due support, and
                          ``(iii) subsection (d) with respect 
                        to any past-due, legally enforceable 
                        debt owed to a Federal agency, and
                  ``(B) before such overpayment is credited to 
                the future liability for any Federal internal 
                revenue tax of such person pursuant to 
                subsection (b).
        If the Secretary receives notice from 1 or more 
        agencies of the State of more than 1 debt subject to 
        paragraph (1) that is owed by such person to such an 
        agency, any overpayment by such person shall be applied 
        against such debts in the order in which such debts 
        accrued.
          ``(4) Notice; consideration of evidence.--No State 
        may take action under this subsection until such 
        State--
                  ``(A) notifies the person owing the past-due 
                State tax liability that the State proposes to 
                take action pursuant to this section,
                  ``(B) gives such person at least 60 days to 
                present evidence that all or part of such 
                liability is not past-due or not legally 
                enforceable,
                  ``(C) considers any evidence presented by 
                such person and determines that an amount of 
                such debt is past-due and legally enforceable, 
                and
                  ``(D) satisfies such other conditions as the 
                Secretary may prescribe to ensure that the 
                determination made under subparagraph (C) is 
                valid and that the State has made reasonable 
                efforts to obtain payment of such State tax 
                obligation.
          ``(5) Past-due, legally enforceable state tax 
        obligation.--For purposes of this subsection, the term 
        `past-due, legally enforceable State tax obligation' 
        means a debt--
                  ``(A)(i) which resulted from--
                          ``(I) a judgment rendered by a court 
                        of competent jurisdiction which has 
                        determined an amount of State tax to be 
                        due, or
                          ``(II) a determination after an 
                        administrative hearing which has 
                        determined an amount of State tax to be 
                        due, and
                  ``(ii) which is no longer subject to judicial 
                review, or
                  ``(B) which resulted from a State tax which 
                has been assessed but not collected, the time 
                for redetermination of which has expired, and 
                which has not been delinquent for more than 10 
                years.
        For purposes of this paragraph, the term `State tax' 
        includes any local tax administered by the chief tax 
        administration agency of the State.
          ``(6) Regulations.--The Secretary shall issue 
        regulations prescribing the time and manner in which 
        States must submit notices of past-due, legally 
        enforceable State tax obligations and the necessary 
        information that must be contained in or accompany such 
        notices. The regulations shall specify the types of 
        State taxes and the minimum amount of debt to which the 
        reduction procedure established by paragraph (1) may be 
        applied. The regulations may require States to pay a 
        fee to reimburse the Secretary for the cost of applying 
        such procedure. Any fee paid to the Secretary pursuant 
        to the preceding sentence shall be used to reimburse 
        appropriations which bore all or part of the cost of 
        applying such procedure.
          ``(7) Erroneous payment to state.--Any State 
        receiving notice from the Secretary that an erroneous 
        payment has been made to such State under paragraph (1) 
        shall pay promptly to the Secretary, in accordance with 
        such regulations as the Secretary may prescribe, an 
        amount equal to the amount of such erroneous payment 
        (without regard to whether any other amounts payable to 
        such State under such paragraph have been paid to such 
        State).''
    (b) Disclosure of Certain Information to States Requesting 
Refund Offsets for Past-Due, Legally Enforceable State Tax 
Obligations.--
          (1) Paragraph (10) of section 6103(l) is amended by 
        striking ``(c) or (d)'' each place it appears and 
        inserting ``(c), (d), or (e)''.
          (2) The paragraph heading for such paragraph (10) is 
        amended by striking ``section 6402(c) or 6402(d)'' and 
        inserting ``subsection (c), (d), or (e) of section 
        6402''.
    (c) Conforming Amendments.--
          (1) Subsection (a) of section 6402 is amended by 
        striking ``(c) and (d)'' and inserting ``(c), (d), and 
        (e)''.
          (2) Paragraph (2) of section 6402(d) is amended by 
        striking ``and before such overpayment'' and inserting 
        ``and before such overpayment is reduced pursuant to 
        subsection (e) and before such overpayment''.
          (3) Subsection (f) of section 6402, as redesignated 
        by subsection (a), is amended--
                  (A) by striking ``(c) or (d)'' and inserting 
                ``(c), (d), or (e)'', and
                  (B) by striking ``Federal agency'' and 
                inserting ``Federal agency or State''.
          (4) Subsection (h) of section 6402, as redesignated 
        by subsection (a), is amended by striking ``subsection 
        (c)'' and inserting ``subsection (c) or (e)''.
    (d) Amendments Applied After Technical Corrections to 
Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996.--
          (1) Section 110(l) of the Personal Responsibility and 
        Work Opportunity Reconciliation Act of 1996 is 
amendedby striking paragraphs (4), (5), and (7) (and the amendments 
made by such paragraphs), and the Internal Revenue Code of 1986 shall 
be applied as if such paragraphs (and amendments) had never been 
enacted.
          (2) For purposes of applying the amendments made by 
        this section other than this subsection, the provisions 
        of this subsection shall be treated as having been 
        enacted immediately before the other provisions of this 
        section.
    (e) Effective Date.--The amendments made by this section 
(other than subsection (d)) shall apply to refunds payable 
under section 6402 of the Internal Revenue Code of 1986 after 
December 31, 1998.

SEC. 964. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL VEHICLE 
                    FROM THE LIMITS ON DEPRECIATION FOR VEHICLES.

    (a) In General.--Section 280F(a)(1) (relating to limiting 
depreciation on luxury automobiles) is amended by adding at the 
end the following new subparagraph:
                  ``(C) Special rule for certain clean-fuel 
                passenger automobiles.--
                          ``(i) Modified automobiles.--In the 
                        case of a passenger automobile which is 
                        propelled by a fuel which is not a 
                        clean-burning fuel to which is 
                        installed qualified clean-fuel vehicle 
                        property (as defined in section 
                        179A(c)(1)(A)) for purposes of 
                        permitting such vehicle to be propelled 
                        by a clean burning fuel (as defined in 
                        section 179A(e)(1)), subparagraph (A) 
                        shall not apply to the cost of the 
                        installed qualified clean burning 
                        vehicle property as depreciated 
                        pursuant to section 168 by applying the 
                        rules under subsections (b)(1), (d)(1), 
                        and (e)(3)(B) thereof.
                          ``(ii) Purpose built passenger 
                        vehicles.--In the case of a purpose 
                        built passenger vehicle (as defined in 
                        section 4001(a)(2)(C)(ii)), each of the 
                        annual limitations specified in 
                        subparagraph (A) shall be tripled.''
    (b) Effective Date.--The amendments made by this section 
shall apply to property placed in service on or after the date 
of enactment of this Act and before January 1, 2005.

SEC. 965. TAX BENEFITS FOR LAW ENFORCEMENT OFFICERS KILLED IN THE LINE 
                    OF DUTY.

    (a) In General.--Part III of subchapter B of chapter 1 
(relating to items specifically excluded from gross income) is 
amended by redesignating section 138 as section 139 and by 
inserting after section 137 the following new section:

``SEC. 138. SURVIVOR BENEFITS ATTRIBUTABLE TO SERVICE BY A LAW 
                    ENFORCEMENT OFFICER WHO IS KILLED IN THE LINE OF 
                    DUTY.

    ``(a) In General.--Gross income shall not include any 
amount paid as a survivor annuity on account of the death of a 
law enforcement officer killed in the line of duty--
          ``(1) if such annuity is provided under a 
        governmental plan which meets the requirements of 
        section 401(a) to the spouse (or a former spouse) of 
        the law enforcement officer or to a child of such 
        officer, and
          ``(2) to the extent such annuity is attributable to 
        such officer's service as a law enforcement officer.
    ``(b) Exceptions.--
          ``(1) In general.--Subsection (a) shall not apply 
        with respect to the death of any law enforcement 
        officer if--
                  ``(A) the death was caused by the intentional 
                misconduct of the officer or by such officer's 
                intention to bring about such officer's death,
                  ``(B) the officer was voluntarily intoxicated 
                (as defined in section 1204 of the Omnibus 
                Crime Control and Safe Streets Act of 1968) at 
                the time of death, or
                  ``(C) the officer was performing such 
                officer's duties in a grossly negligent manner 
                at the time of death.
          ``(2) Exception for benefits paid to certain 
        individuals.--Subsection (a) shall not apply to any 
        payment to an individual whose actions were a 
        substantial contributing factor to the death of the 
        officer.
    ``(c) Law Enforcement Officer.--For purposes of this 
section, the term `law enforcement officer' means an individual 
serving a public agency (as defined in section 1204 of the 
Omnibus Crime Control and Safe Streets Act of 1968) in an 
official capacity, with or without compensation, as a law 
enforcement officer (as defined in such section).''
    (b) Clerical Amendment.--The table of sections for part III 
of subchapter B of chapter 1 is amended by striking the last 
item and inserting the following new items:

        ``Sec. 138. Survivor benefits attributable to service by a law 
                  enforcement officer who is killed in the line of duty.
        ``Sec. 139. Cross references to other Acts.''

    (c) Effective Date.--The amendments made by this subsection 
shall apply to amounts received in taxable years beginning 
after December 31, 1996, with respect to individuals dying 
after such date.

SEC. 966. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON PERCENTAGE 
                    DEPLETION FOR MARGINAL PRODUCTION.

    In the case of taxable years beginning after December 31, 
1997, and before January 1, 2000, paragraph (1) of section 
613A(d) of the Internal Revenue Code of 1986 shall not apply to 
so much of the allowance for depletion computed under section 
613A(c) of such Code as is attributable to paragraph (6) 
thereof.

 Subtitle G--Extension of Duty-Free Treatment Under Generalized System 
  of Preferences; Tariff Treatment of Certain Equipment and Repair of 
                                Vessels

SEC. 971. GENERALIZED SYSTEM OF PREFERENCES.

    (a) Extension of Duty-Free Treatment Under System.--Section 
505 of the Trade Act of 1974 (19 U.S.C. 2465) is amended by 
striking ``May 31, 1997'' and inserting ``May 31, 1999''.
    (b) Retroactive Application for Certain Liquidations and 
Reliquidations.--
          (1) In general.--Notwithstanding section 514 of the 
        Tariff Act of 1930 or any other provision of law and 
        subject to paragraph (2), the entry--
                  (A) of any article to which duty-free 
                treatment under title V of the Trade Act of 
                1974 would have applied if the entry had been 
                made on May 31, 1997, and
                  (B) that was made after May 31, 1997, and 
                before the date of the enactment of this Act,
        shall be liquidated or reliquidated as free of duty, 
        and the Secretary of the Treasury shall refund any duty 
        paid with respect to such entry. As used in this 
        subsection, the term ``entry'' includes a withdrawal 
        from warehouse for consumption.
          (2) Requests.--Liquidation or reliquidation may be 
        made under paragraph (1) with respect to an entry only 
        if a request therefor is filed with the Customs 
        Service, within 180 days after the date of the 
        enactment of this Act, that contains sufficient 
        information to enable the Customs Service--
                  (A) to locate the entry; or
                  (B) to reconstruct the entry if it cannot be 
                located.

SEC. 972. EQUIPMENT AND REPAIR OF VESSELS.

    (a) Tariff Treatment.--Section 466 of the Tariff Act of 
1930 (19 U.S.C. 1466), is amended by adding at the end the 
following new subsection:
    ``(i)(1) The duty imposed by subsection (a) shall not apply 
with respect to activities occurring in a Shipbuilding 
Agreement Party, with respect to--
          ``(A) self-propelled seagoing vessels of 100 gross 
        tons or more that are used for transportation of goods 
        or persons or for performance of a specialized service 
        (including, but not limited to, ice breakers and 
        dredges), and
          ``(B) tugs of 365 kilowatts or more.
A vessel shall be considered `self-propelled seagoing' if its 
permanent propulsion and steering provide it all the 
characteristics of self-navigability in the high seas.
    ``(2) As used in this subsection--
          ``(A) the term `Shipbuilding Agreement Party' means a 
        state or separate customs territory that is a signatory 
        to the Shipbuilding Agreement; and
          ``(B) the term `Shipbuilding Agreement' means The 
        Agreement Respecting Normal Competitive Conditions in 
        the Commercial Shipbuilding and Repair Industry, 
        resulting from negotiations under the auspices of the 
        Organization for Economic Cooperation and Development, 
        and entered into on December 21, 1994.''.
    (b) Applicability.--The amendment made by subsection (a) 
applies only with respect to activities occurring in a 
Shipbuilding Agreement Party (as defined in section 466(i) of 
the Tariff Act of 1930) during the 1-year period beginning on 
the date of the enactment of this Act.

    Subtitle H--United States-Caribbean Basin Trade Partnership Act

SEC. 981. SHORT TITLE.

    This subtitle may be cited as the ``United States-Caribbean 
Basin Trade Partnership Act''.

SEC. 982. FINDINGS AND POLICY.

    (a) Findings.--The Congress makes the following findings:
          (1) The United States apparel industry is a major 
        component of the United States manufacturing sector of 
        the United States, employing nearly 825,000 people who 
        are located in every State in the country. The United 
        States apparel industry consumes 42 percent of the 
        fabric produced by United States textile mills, which 
        employ more than 650,000 people.
          (2) In 1973 the United States apparel industry 
        supplied 88 percent of the garments consumed by 
        Americans, and in 1995 that share fell to less than 50 
        percent.
          (3) Countries in the Western Hemisphere offer the 
        greatest opportunities for increased exports of United 
        States textile and apparel products.
          (4) Given the greater propensity of countries located 
        in the Western Hemisphere to use United States 
        components and to purchase United States products 
        compared to other countries, increased trade and 
        economic activity between the United States and 
        countries in the Western Hemisphere will create new 
        jobs in the United States as a result of expanding 
        export opportunities.
          (5) The Caribbean Basin Economic Recovery Act 
        represents a permanent commitment by the United States 
        to encourage the development of strong democratic 
        governments and revitalized economies in neighboring 
        countries in the Caribbean Basin.
          (6) The economic security of the countries in the 
        Caribbean Basin is potentially threatened by the 
        diversion of investment to Mexico as a result of the 
        North American Free Trade Agreement.
          (7) Offering NAFTA equivalent benefits to Caribbean 
        Basin beneficiary countries, pending their eventual 
        accession to the NAFTA or a free trade agreement 
        comparable to the NAFTA, will promote the growth of 
        free enterprise and economic opportunity in the region, 
        and thereby enhance the national security interests of 
        the United States.
    (b) Policy.--It is the policy of the United States--
          (1) to assure that the domestic textile and apparel 
        industry remains competitive in the global marketplace 
        by encouraging the formation and expansion of 
        ``partnerships'' between the textile and apparel 
        industry of the United States and the textile and 
        apparel industry of various countries located in the 
        Western Hemisphere; and
          (2) to offer to the products of Caribbean Basin 
        partnership countries tariffs and quota treatment 
        equivalent to that accorded to products of NAFTA 
        countries, and to seek the accession of these 
        partnership countries to the NAFTA or a free trade 
        agreement comparable to the NAFTA at the earliest 
        possible date, with the goal of achieving full 
        participation in the NAFTA or in a free trade agreement 
        comparable to the NAFTA by all partnership countries by 
        not later than January 1, 2005.

SEC. 983. DEFINITIONS.

    As used in this Act:
          (1) Partnership country.--The term ``partnership 
        country'' means a beneficiary country as defined in 
        section 212(a)(1)(A) of the Caribbean Basin Economic 
        Recovery Act (19 U.S.C. 2702(a)(1)(A)).
          (2) NAFTA.--The term ``NAFTA'' means the North 
        American Free Trade Agreement entered into between the 
        United States, Mexico, and Canada on December 17, 1992.
          (3) Trade representative.--The term ``Trade 
        Representative'' means the United States Trade 
        Representative.
          (4) WTO and wto member.--The terms ``WTO'' and ``WTO 
        member'' have the meanings given those terms in section 
        2 of the Uruguay Round Agreements Act (19 U.S.C. 3501).

SEC. 984. TEMPORARY PROVISIONS TO PROVIDE NAFTA PARITY TO PARTNERSHIP 
                    COUNTRIES.

    (a) Temporary Provisions.--Section 213(b) of the Caribbean 
Basin Economic Recovery Act (19 U.S.C. 2703(b)) is amended to 
read as follows:
    ``(b) Import-Sensitive Articles.--
          ``(1) In general.--Subject to paragraphs (2) through 
        (5), the duty-free treatment provided under this title 
        does not apply to--
                  ``(A) textile and apparel articles which are 
                subject to textile agreements;
                  ``(B) footwear not designated at the time of 
                the effective date of this title as eligible 
                articles for the purpose of the generalized 
                system of preferences under title V of the 
                Trade Act of 1974;
                  ``(C) tuna, prepared or preserved in any 
                manner, in airtight containers;
                  ``(D) petroleum, or any product derived from 
                petroleum, provided for in headings 2709 and 
                2710 of the HTS;
                  ``(E) watches and watch parts (including 
                cases, bracelets and straps), of whatever type 
                including, but not limited to, mechanical, 
                quartz digital, or quartz analog, if such 
                watches or watch parts contain any material 
                which is the product of any country with 
                respect to which HTS column 2 rates of duty 
                apply; or
                  ``(F) articles to which reduced rates of duty 
                apply under subsection (h).
          ``(2) NAFTA transition period treatment of certain 
        textile and apparel articles.--
                  ``(A) Equivalent tariff and quota 
                treatment.--During the transition period--
                          ``(i) the tariff treatment accorded 
                        at any time to any textile or apparel 
                        article that originates in the 
                        territory of a partnership country 
                        shall be identical to the tariff 
                        treatment that is accorded at such time 
                        under section 2 of the Annex to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is an 
                        originating good of Mexico and is 
                        imported into the United States;
                          ``(ii) duty-free treatment under this 
                        title shall apply to any textile or 
                        apparel article that is imported into 
                        the United States from a partnership 
                        country and that--
                                  ``(I) is assembled in a 
                                partnership country, from 
                                fabrics wholly formed and cut 
                                in the United States from yarns 
                                formed in the United States, 
                                and is entered--
                                          ``(aa) under 
                                        subheading 9802.00.80 
                                        of the HTS; or
                                          ``(bb) under chapter 
                                        61 or 62 of the HTS if, 
                                        after such assembly, 
                                        the article would have 
                                        qualified for treatment 
                                        under subheading 
                                        9802.00.80 of the HTS, 
                                        but for the fact the 
                                        article was subjected 
                                        to bleaching, dyeing, 
                                        stone-washing, enzyme-
                                        washing, acid-washing, 
                                        perma-pressing, or 
                                        similar processes or 
                                        embroidery; or
                                  ``(II) is knit-to-shape in a 
                                partnership country from yarns 
                                wholly formed in the United 
                                States;
                                  ``(III) is made from fabric 
                                knit in a partnership country 
                                from yarns wholly formed in the 
                                United States;
                                  ``(IV) is cut and assembled 
                                in a partnership country from 
                                yarns wholly formed in the 
                                United States; or
                                  ``(V) is identified under 
                                subparagraph (C) as a 
                                handloomed, handmade, or 
                                folklore article of such 
                                country and is certified as 
                                such by the competent authority 
                                of such country; and
                          ``(iii) no quantitative restriction 
                        under any bilateral textile agreement 
                        may be applied to the importation into 
                        the United States of any textile or 
                        apparel article that--
                                  ``(I) originates in the 
                                territory of a partnership 
                                country, or
                                  ``(II) qualifies for duty-
                                free treatment under subclause 
                                (I), (II), (III), (IV), or (V) 
                                of clause (ii).
                  ``(B) NAFTA transition period treatment of 
                nonoriginating textile and apparel articles.--
                          ``(i) Preferential tariff 
                        treatment.--Subject to clause (ii), the 
                        President may place in effect at any 
                        time during the transition period with 
                        respect to any textile or apparel 
                        article that--
                                  ``(I) is a product of a 
                                partnership country, but
                                  ``(II) does not qualify as a 
                                good that originates in the 
                                territory of a partnership 
                                country,
                        tariff treatment that is identical to 
                        the in-preference-level tariff 
                        treatment accorded at such time under 
                        Appendix 6.B of the Annex to an article 
                        described in the same 8-digit 
                        subheading of the HTS that is a product 
                        of Mexico and is imported into the 
                        United States. For purposes of this 
                        clause, the `in-preference-level tariff 
                        treatment' accorded to an article that 
                        is a product of Mexico is the rate of 
                        duty applied to that article when 
                        imported in quantities less than or 
                        equal to the quantities specified in 
                        Schedule 6.B.1, 6.B.2., or 6.B.3. of 
                        the Annex for imports of that article 
                        from Mexico into the United States.
                          ``(ii) Limitations on certain 
                        articles.--(I) Tariff treatment under 
                        clause (i) may be extended, during any 
                        calendar year, to not more than 
                        45,000,000 square meter equivalents of 
                        cotton or man-made fiber apparel, to 
                        not more than 1,500,000 square meter 
                        equivalents of wool apparel, and to not 
                        more than 25,000,000 square meter 
                        equivalents of goods entered under 
                        subheading 9802.00.80 of the HTS.
                          ``(II) Except as provided in 
                        subclause (III), the amounts set forth 
                        in subclause (I) shall be allocated 
                        among the 7 partnership countries with 
                        the largest volume of exports to the 
                        United States of textile and apparel 
                        goods in calendar year 1996, based upon 
                        a pro rata share of the volume of 
                        textile and apparel goods of each of 
                        those 7 countries that entered the 
                        United States under subheading 
                        9802.00.80 of the HTS during the first 
                        12 months of the 14-month period ending 
                        on the date of the enactment of the 
                        United States-Caribbean Basin Trade 
                        Partnership Act.
                          ``(III) Five percent of the amounts 
                        set forth in subclause (I) shall be 
                        allocated among the partnership 
                        countries, other than those to which 
                        subclause (II) applies, based upon a 
                        pro rata share of the exports to the 
                        United States of textile and apparel 
                        goods of each of those countries during 
                        the first 12 months of the 14-month 
                        period ending on the date of the 
                        enactment of the United States-
                        Caribbean Basin Trade Partnership Act.
                          ``(iii) Prior consultation.--The 
                        President may implement the 
                        preferential tariff treatment described 
                        in clause (i) only after consultation 
                        with representatives of the United 
                        States textile and apparel industry and 
                        other interested parties regarding--
                                  ``(I) the specific articles 
                                to which such treatment will be 
                                extended,
                                  ``(II) the annual quantities 
                                of such articles that may be 
                                imported at the preferential 
                                duty rates described in clause 
                                (i), and
                                  ``(III) the allocation of 
                                such annual quantities among 
                                beneficiary countries.
                  ``(C) Handloomed, handmade, and folklore 
                articles.--For purposes of subparagraph (A), 
                the Trade Representative shall consult with 
                representatives of the partnership country for 
                the purpose of identifying particular textile 
                and apparel goods that are mutually agreed upon 
                as being handloomed, handmade, or folklore 
                goods of a kind described in section 2.3 (a), 
                (b), or (c) or Appendix 3.1.B.11 of the Annex.
                  ``(D) Bilateral emergency actions.--(i) The 
                President may take--
                          ``(I) bilateral emergency tariff 
                        actions of a kind described in section 
                        4 of the Annex with respect to any 
                        textile or apparel article imported 
                        from a partnership country if the 
                        application of tariff treatment under 
                        subparagraph (A) to such article 
                        results in conditions that would be 
                        cause for the taking of such actions 
                        under such section 4 with respect to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is imported 
                        from Mexico; or
                          ``(II) bilateral emergency 
                        quantitative restriction actions of a 
                        kind described in section 5 of the 
                        Annex with respect to imports of any 
                        textile or apparel article described in 
                        subparagraph (B)(i) (I) and (II) if the 
                        importation of such article into the 
                        United States results in conditions 
                        that would be cause for the taking of 
                        such actions under such section 5 with 
                        respect to a like article that is a 
                        product of Mexico.
                  ``(ii) The requirement in paragraph (5) of 
                section 4 of the Annex (relating to providing 
                compensation) shall not be deemed to apply to a 
                bilateral emergency action taken under this 
                subparagraph.
                  ``(iii) For purposes of applying bilateral 
                emergency action under this subparagraph--
                          ``(I) the term `transition period' in 
                        sections 4 and 5 of the Annex shall be 
                        deemed to be the period defined in 
                        paragraph (5)(D); and
                          ``(II) any requirements to consult 
                        specified in section 4 or 5 of the 
                        Annex are deemed to be satisfied if the 
                        President requests consultations with 
                        the partnership country in question and 
                        the country does not agree to consult 
                        within the time period specified in 
                        such section.
          ``(3) NAFTA transition period treatment of certain 
        other articles originating in beneficiary countries.--
                  ``(A) Equivalent tariff treatment.--
                          ``(i) In general.--Subject to clause 
                        (ii), the tariff treatment accorded at 
                        any time during the transition period 
                        to any article referred to in any of 
                        subparagraphs (B) through (F) of 
                        paragraph (1) that originates in the 
                        territory of a partnership country 
                        shall be identical to the tariff 
                        treatment that is accorded at such time 
                        under Annex 302.2 of the NAFTA to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is an 
                        originating good of Mexico and is 
                        imported into the United States.
                          ``(ii) Exception.--Clause (i) does 
                        not apply to any article accorded duty-
                        free treatment under U.S. Note 2(b) to 
                        subchapter II of chapter 98 of the HTS.
                  ``(B) Relationship to subsection (h) duty 
                reductions.--If at any time during the 
                transition period the rate of duty that would 
                (but for action taken under subparagraph (A)(i) 
                in regard to such period) apply with respect to 
                any article under subsection (h) is a rate of 
                duty that is lower than the rate of duty 
                resulting from such action, then such lower 
                rate of duty shall be applied for the purposes 
                of implementing such action.
          ``(4) Customs procedures.--
                  ``(A) In general.--
                          ``(i) The obligations under chapter 5 
                        of the NAFTA regarding customs 
                        procedures, as such obligations apply 
                        to the exporting country, shall applyto 
importations under paragraphs (2) and (3) of articles from partnership 
countries.
                          ``(ii) The Secretary of the Treasury 
                        shall prescribe regulations that 
                        require, as a condition of entry, that 
                        any importer of record that claims 
                        preferential treatment under paragraph 
                        (2) or (3) must comply with 
                        requirements similar in all material 
                        respects to the requirements of article 
                        502.1 of the NAFTA. The certificate of 
                        origin that otherwise would be required 
                        under this subparagraph shall not be 
                        required in the case of an article 
                        imported under paragraph (2) or (3) if 
                        such certificate of origin would not be 
                        required under article 503 of the NAFTA 
                        for a similar importation from Mexico.
                  ``(B) Penalties for engaging in transshipment 
                or other customs fraud.--If an exporter is 
                determined under the laws of the United States 
                to have engaged in illegal transshipment of 
                textile or apparel products from a partnership 
                country, then the President shall deny all 
                benefits under this title to such exporter, and 
                any successors of such exporter, for a period 
                of 2 years.
                  ``(C) Study by USTR on Cooperation of Other 
                Countries Concerning Circumvention.--The Trade 
                Representative, in consultation with the United 
                States Commissioner of Customs, shall conduct a 
                study analyzing the extent to which each 
                partnership country--
                          ``(i) has cooperated fully with the 
                        United States, consistent with its 
                        domestic laws and procedures, in 
                        instances of circumvention or alleged 
                        circumvention of existing quotas on 
                        imports of textile and apparel goods, 
                        to establish necessary relevant facts 
                        in the places of import, export, and, 
                        where applicable, transshipment, 
                        including investigation of 
                        circumvention practices, exchanges of 
                        documents, correspondence, reports, and 
                        other relevant information, to the 
                        extent such information is available;
                          ``(ii) has taken appropriate 
                        measures, consistent with its domestic 
                        laws and procedures, against exporters 
                        and importers involved in instances of 
                        false declaration concerning fiber 
                        content, quantities, description, 
                        classification, or origin of textile 
                        and apparel goods; and
                          ``(iii) has penalized the individuals 
                        and entities involved in any such 
                        circumvention, consistent with its 
                        domestic laws and procedures, and has 
                        worked closely to seek the cooperation 
                        of any third country to prevent such 
                        circumvention from taking place in that 
                        third country.
                The Trade Representative shall submit to the 
                Congress, not later than October 1, 1998, a 
                report on the study conducted under this 
                subparagraph.
          ``(5) Definitions.--For purposes of this subsection--
                  ``(A) The term `the Annex' means Annex 300-B 
                of the NAFTA.
                  ``(B) The term `NAFTA' means the North 
                American Free Trade Agreement entered into 
                between the United States, Mexico, and Canada 
                on December 17, 1992.
                  ``(C) The term `partnership country' means a 
                beneficiary country.
                  ``(D) The term `textile or apparel article' 
                means any article referred to in paragraph 
                (1)(A) that is a good listed in Appendix 1.1 of 
                the Annex.
                  ``(E) The term `transition period' means, 
                with respect to a partnership country, the 
                period that begins on January 1, 1998, and ends 
                on the earlier of--
                          ``(i) December 31, 1998; or
                          ``(ii) the date on which--
                                  ``(I) the United States first 
                                applies the NAFTA to the 
                                partnership country upon its 
                                accession to the NAFTA, or
                                  ``(II) there enters into 
                                force with respect to the 
                                United States and the 
                                partnership country a free 
                                trade agreement comparable to 
                                the NAFTA that makes 
                                substantial progress in 
                                achieving the negotiating 
                                objectives set forth in section 
                                108(b)(5) of the North American 
                                Free Trade Agreement 
                                Implementation Act (19 U.S.C. 
                                3317(b)(5)).
                  ``(F) An article shall be deemed as 
                originating in the territory of a partnership 
                country if the article meets the rules of 
                origin for a good set forth in chapter 4 of the 
                NAFTA, and, in the case of an article described 
                in Appendix 6.A of the Annex, the requirements 
                stated in such Appendix 6.A for such article to 
                be treated as if it were an originating good. 
                In applying such chapter 4 or Appendix 6.A with 
                respect to a partnership country for purposes 
                of this subsection--
                          ``(i) no countries other than the 
                        United States and partnership countries 
                        may be treated as being Parties to the 
                        NAFTA,
                          ``(ii) references to trade between 
                        the United States and Mexico shall be 
                        deemed to refer to trade between the 
                        United States and partnership 
                        countries, and
                          ``(iii) references to a Party shall 
                        be deemed to refer to the United States 
                        or a partnership country, and 
                        references to the Parties shall be 
                        deemed to refer to any combination of 
                        partnership countries or the United 
                        States.''.
    (b) Determination Regarding Retention of Designation.--
Section 212(e)(1) of the Caribbean Basin Economic Recovery Act 
(19 U.S.C. 2702(e)) is amended--
          (1) by inserting ``(A)'' after ``(1)'';
          (2) by redesignating subparagraphs (A) and (B) as 
        clauses (i) and (ii), respectively;
          (3) by adding at the end the following:
          ``(B)(i) Based on the President's review and analysis 
        described in subsection (f), the President may 
        determine if the preferential treatment under section 
        213(b) (2) and (3) should be withdrawn, suspended, or 
        limited with respect to any article of a partnership 
        country. Such determination shall be included in the 
        report required by subsection (f).
          ``(ii) Withdrawal, suspension, or limitation of the 
        preferential treatment under section 213(b) (2) and (3) 
        with respect to a partnership country shall be taken 
        only after the requirements of subsection (a)(2) and 
        paragraph (2) of this subsection have been met.''.
    (c) Reporting Requirements.--Section 212(f) of the 
Caribbean Basin Economic Recovery Act (19 U.S.C. 2702(f)) is 
amended to read as follows:
    ``(f) Reporting Requirements.--Not later than 1 year after 
the date of the enactment of the United States-Caribbean Basin 
Trade Partnership Act and at the close of each 3-year period 
thereafter, the President shall submit to the Congress a 
complete report regarding the operation of this title, 
including--
          ``(1) with respect to subsections (b) and (c) of this 
        section, the results of a general review of beneficiary 
        countries based on the considerations described in such 
        subsections;
          ``(2) with respect to subsection (c)(4), the degree 
        to which a country follows accepted rules of 
        international trade provided for under the General 
        Agreement on Tariffs and Trade and the World Trade 
        Organization;
          ``(3) with respect to subsection (c)(9), the extent 
        to which beneficiary countries are providing or taking 
        steps to provide protection of intellectual property 
        rights comparable to the protection provided to the 
        United States in bilateral intellectual property rights 
        agreements;
          ``(4) with respect to subsection (b)(2) and 
        subsection (c)(5), the extent that beneficiary 
        countries are providing or taking steps to provide 
        protection of investment and investors comparable to 
        the protection provided to the United States in 
        bilateral investment treaties;
          ``(5) with respect to subsection (c)(3), the extent 
        that beneficiary countries are providing the United 
        States with equitable and reasonable market access in 
        the product sectors for which benefits are provided 
        under this title;
          ``(6) with respect to subsection (c)(11), the extent 
        that beneficiary countries are cooperating with the 
        United States in administering the provisions of 
        section 213(b); and
          ``(7) with respect to subsection (c)(8), the extent 
        that beneficiary countries are meeting the 
        internationally recognized worker rights criteria under 
        such subsection.
In the first report under this subsection, the President shall 
include a review of the implementation of section 213(b), and 
his analysis of whether the benefits under paragraphs (2) and 
(3) of such section further the objectives of this title and 
whether such benefits should be continued.''.
    (d) Conforming Amendment.--Section 213(a)(1) of the 
Caribbean Basin Economic Recovery Act is amended by inserting 
``and except as provided in section 213(b)(2) and (3),'' after 
``Tax Reform Act of 1986,''.

SEC. 985. EFFECT OF NAFTA ON SUGAR IMPORTS FROM BENEFICIARY COUNTRIES.

    The President shall monitor the effects, if any, that the 
implementation of the NAFTA has on the access of beneficiary 
countries under the Caribbean Basin Economic Recovery Act to 
the United States market for sugars, syrups, and molasses. If 
the President considers that the implementation of the NAFTA is 
affecting, or will likely affect, in an adverse manner the 
access of such countries to the United States market, the 
President shall promptly--
          (1) take such actions, after consulting with 
        interested parties and with the appropriate committees 
        of the House of Representatives and the Senate, or
          (2) propose to the Congress such legislative actions,
as may be necessary or appropriate to ameliorate such adverse 
effect.

SEC. 986. DUTY-FREE TREATMENT FOR CERTAIN BEVERAGES MADE WITH CARIBBEAN 
                    RUM.

    Section 213(a) of the Caribbean Basin Economic Recovery Act 
(19 U.S.C. 2703(a)) is amended--
          (1) in paragraph (5), by striking ``chapter'' and 
        inserting ``title''; and
          (2) by adding at the end the following new paragraph:
    ``(6) Notwithstanding paragraph (1), the duty-free 
treatment provided under this title shall apply to liqueurs and 
spirituous beverages produced in the territory of Canada from 
rum if--
          ``(A) such rum is the growth, product, or manufacture 
        of a beneficiary country or of the Virgin Islands of 
        the United States;
          ``(B) such rum is imported directly from a 
        beneficiary country or the Virgin Islands of the United 
        States into the territory of Canada, and such liqueurs 
        and spirituous beverages are imported directly from the 
        territory of Canada into the customs territory of the 
        United States;
          ``(C) when imported into the customs territory of the 
        United States, such liqueurs and spirituous beverages 
        are classified in subheading 2208.90 or 2208.40 of the 
        HTS; and
          ``(D) such rum accounts for at least 90 percent by 
        volume of the alcoholic content of such liqueurs and 
        spiritous beverages.''.

SEC. 987. MEETINGS OF TRADE MINISTERS AND USTR.

    (a) Schedule of Meetings.--The President shall take the 
necessary steps to convene a meeting with the trade ministers 
of the partnership countries in order to establish a schedule 
of regular meetings, to commence as soon as is practicable, of 
the trade ministers and the Trade Representative, for the 
purpose set forth in subsection (b).
    (b) Purpose.--The purpose of the meetings scheduled under 
subsection (a) is to reach agreement between the United States 
and partnership countries on the likely timing and procedures 
for initiating negotiations for partnership to accede to the 
NAFTA, or to enter into mutually advantageous free trade 
agreements with the United States that contain provisions 
comparable to those in the NAFTA and would make substantial 
progress in achieving the negotiating objectives set forth in 
section 108(b)(5) of the North American Free Trade Agreement 
Implementation Act (19 U.S.C. 3317(b)(5)).

SEC. 988. REPORT ON ECONOMIC DEVELOPMENT AND MARKET ORIENTED REFORMS IN 
                    THE CARIBBEAN.

    (a) In General.--The Trade Representative shall make an 
assessment of the economic development efforts and market 
oriented reforms in each partnership country and the ability of 
each such country, on the basis of such efforts and reforms, to 
undertake the obligations of the NAFTA. The Trade 
Representative shall, not later than July 1, 1998, submit to 
the President and to the Committee on Finance of the Senate and 
the Committee on Ways and Means of the House of Representatives 
a report on that assessment.
    (b) Accession to NAFTA.--
          (1) Ability of countries to implement nafta.--The 
        Trade Representative shall include in the report under 
        subsection (a) a discussion of possible timetables and 
        procedures pursuant to which partnership countries can 
        complete the economic reforms necessary to enable them 
        to negotiate accession to the NAFTA. The Trade 
        Representative shall also include an assessment of the 
        potential phase-in periods that may be necessary for 
        those partnership countries with less developed 
        economies to implement the obligations of the NAFTA.
          (2) Factors in assessing ability to implement 
        nafta.--In assessing the ability of each partnership 
        country to undertake the obligations of the NAFTA, the 
        Trade Representative should consider, among other 
        factors--
                  (A) whether the country has joined the WTO;
                  (B) the extent to which the country provides 
                equitable access to the markets of that 
                country;
                  (C) the degree to which the country uses 
                export subsidies or imposes export performance 
                requirements or local content requirements;
                  (D) macroeconomic reforms in the country such 
                as the abolition of price controls on traded 
                goods and fiscal discipline;
                  (E) progress the country has made in the 
                protection of intellectual property rights;
                  (F) progress the country has made in the 
                elimination of barriers to trade in services;
                  (G) whether the country provides national 
                treatment to foreign direct investment;
                  (H) the level of tariffs bound by the country 
                under the WTO (if the country is a WTO member);
                  (I) the extent to which the country has taken 
                other trade liberalization measures; and
                  (J) the extent which the country works to 
                accommodate market access objectives of the 
                United States.
    (c) Parity Review in the Event a New Country Accedes to 
NAFTA.--If--
          (1) a country or group of countries accedes to the 
        NAFTA, or
          (2) the United States negotiates a comparable free 
        trade agreement with another country or group of 
        countries,
the Trade Representative shall provide to the committees 
referred to in subsection (a) a separate report on the economic 
impact of the new trade relationship on partnership countries. 
The report shall include any measures the Trade Representative 
proposes to minimize the potential for the diversion of 
investment from partnership countries to the new NAFTA member 
or free trade agreement partner.

                           TITLE X--REVENUES

                     Subtitle A--Financial Products

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

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

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

    ``(a) In General.--If there is a constructive sale of an 
appreciated financial position--
          ``(1) the taxpayer shall recognize gain as if such 
        position were sold, assigned, or otherwise terminated 
        at its fair market value on the date of such 
        constructive sale (and any gain shall be taken into 
        account for the taxable year which includes such date), 
        and
          ``(2) for purposes of applying this title for periods 
        after the constructive sale--
                  ``(A) proper adjustment shall be made in the 
                amount of any gain or loss subsequently 
                realized with respect to such position for any 
                gain taken into account by reason of paragraph 
                (1), and
                  ``(B) the holding period of such position 
                shall be determined as if such position were 
                originally acquired on the date of such 
                constructive sale.
    ``(b) Appreciated Financial Position.--For purposes of this 
section--
          ``(1) In general.--Except as provided in paragraph 
        (2), the term `appreciated financial position' means 
        any position with respect to any stock, debt 
        instrument, or partnership interest if there would be 
        gain were such position sold, assigned, or otherwise 
        terminated at its fair market value.
          ``(2) Exceptions.--The term `appreciated financial 
        position' shall not include--
                  ``(A) any position with respect to straight 
                debt (as defined in section 1361(c)(5)(B) 
                without regard to clause (iii) thereof), and
                  ``(B) any position which is marked to market 
                under any provision of this title or the 
                regulations thereunder.
          ``(3) Position.--The term `position' means an 
        interest, including a futures or forward contract, 
        short sale, or option.
    ``(c) Constructive Sale.--For purposes of this section--
          ``(1) In general.--A taxpayer shall be treated as 
        having made a constructive sale of an appreciated 
        financial position if the taxpayer (or a related 
        person)--
                  ``(A) enters into a short sale of the same or 
                substantially identical property,
                  ``(B) enters into an offsetting notional 
                principal contract with respect to the same or 
                substantially identical property,
                  ``(C) enters into a futures or forward 
                contract to deliver the same or substantially 
                identical property,
                  ``(D) in the case of an appreciated financial 
                position that is a short sale or a contract 
                described in subparagraph (B) or (C) with 
                respect to any property, acquires the same or 
                substantially identical property, or
                  ``(E) to the extent prescribed by the 
                Secretary in regulations, enters into 1 or more 
                other transactions (or acquires 1 or more 
                positions) that have substantially the same 
                effect as a transaction described in any of the 
                preceding subparagraphs.
          ``(2) Exception for sales of nonpublicly traded 
        property.--The term `constructive sale' shall not 
        include any contract for sale of any stock, debt 
        instrument, or partnership interest which is not a 
        marketable security (as defined in section 453(f)) if 
        the contract settles within 1 year after the date such 
        contract is entered into.
          ``(3) Exception for certain closed transactions.--In 
        applying this section, there shall be disregarded any 
        transaction (which would otherwise be treated as a 
        constructive sale) during the taxable year if--
                  ``(A) such transaction is closed before the 
                end of the 30th day after the close of such 
                taxable year, and
                  ``(B) in the case of a transaction which is 
                closed during the 90-day period ending on such 
                30th day--
                          ``(i) the taxpayer holds the 
                        appreciated financial position 
                        throughout the 60-day period beginning 
                        on the date such transaction is closed, 
                        and
                          ``(ii) at no time during such 60-day 
                        period is the taxpayer's risk of loss 
                        with respect to such position reduced 
                        by reason of a circumstance which would 
                        be described in section 246(c)(4) if 
                        references to stock included references 
                        to such position.
          ``(4) Related person.--A person is related to another 
        person with respect to a transaction if--
                  ``(A) the relationship is described in 
                section 267 or 707(b), and
                  ``(B) such transaction is entered into with a 
                view toward avoiding the purposes of this 
                section.
    ``(d) Other Definitions.--For purposes of this section--
          ``(1) Forward contract.--The term `forward contract' 
        means a contract to deliver a substantially fixed 
        amount of property for a substantially fixed price.
          ``(2) Offsetting notional principal contract.--The 
        term `offsetting notional principal contract' means, 
        with respect to any property, an agreement which 
        includes--
                  ``(A) a requirement to pay (or provide credit 
                for) all or substantially all of the investment 
                yield (including appreciation) on such property 
                for a specified period, and
                  ``(B) a right to be reimbursed for (or 
                receive credit for) all or substantially all of 
                any decline in the value of such property.
    ``(e) Special Rules.--
          ``(1) Treatment of subsequent sale of position which 
        was deemed sold.--If--
                  ``(A) there is a constructive sale of any 
                appreciated financial position,
                  ``(B) such position is subsequently disposed 
                of, and
                  ``(C) at the time of such disposition, the 
                transaction resulting in the constructive sale 
                of such position is open with respect to the 
                taxpayer or any related person,
        solely for purposes of determining whether the taxpayer 
        has entered into a constructive sale of any other 
        appreciated financial position held by the taxpayer, 
        the taxpayer shall be treated as entering into such 
        transaction immediately after such disposition. For 
        purposes of the preceding sentence, an assignment or 
        other termination shall be treated as a disposition.
          ``(2) Certain trust instruments treated as stock.--
        For purposes of this section, an interest in a trust 
        which is actively traded (within the meaning of section 
        1092(d)(1)) shall be treated as stock.
          ``(3) Multiple positions in property.--If a taxpayer 
        holds multiple positions in property, the determination 
        of whether a specific transaction is a constructive 
        sale and, if so, which appreciated financial position 
        is deemed sold shall be made in the same manner as 
        actual sales.
    ``(f) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.''
    (b) Election of Mark to Market for Securities Traders and 
for Traders and Dealers in Commodities.--Subsection (d) of 
section 475 (relating to mark to market accounting method for 
dealers in securities) is amended by adding at the end the 
following new paragraph:
          ``(4) Election of mark to market for securities 
        traders and for traders and dealers in commodities.--
                  ``(A) In general.--In the case of a person--
                          ``(i) who is engaged in a trade or 
                        business to which this paragraph 
                        applies, and
                          ``(ii) who elects to be treated as a 
                        dealer in securities for purposes of 
                        this section with respect to such trade 
                        or business,
                subsections (a), (b)(3), (c)(3), and (e) and 
                the preceding provisions of this subsection 
                (or, in the case of a dealer in commodities, 
                this section) shall apply to all commodities 
                and securities held by such person in any trade 
                or business with respect to which such election 
                is in effect in the same manner as if such 
                person were a dealer in securities and all 
                references to securities included references to 
                commodities.
                  ``(B) Application of paragraph.--This 
                paragraph shall apply to any active trade or 
                business--
                          ``(i) as a trader in securities, or
                          ``(ii) as a trader or dealer in 
                        commodities.
                  ``(C) Exception for certain holdings of 
                traders.--In the case of a trader in securities 
                or commodities, subsection (a) shall not apply 
                to any security or commodity (to which 
                subsection (a) would otherwise apply solely by 
                reason of this paragraph) if such security or 
                commodity is clearly identified in the trader's 
                records (before the close of the day applicable 
                under subsection (b)(2)) as being held other 
                than in a trade or business to which the 
                election under subparagraph(A) is in effect. A 
security or commodity so identified shall be treated as described in 
subsection (b)(1).
                  ``(D) Commodity.--For purposes of this 
                paragraph, the term `commodities' includes only 
                commodities of a kind customarily dealt in on 
                an organized commodity exchange.
                  ``(E) Election.--An election under this 
                paragraph may be made separately for each trade 
                or business and without the consent of the 
                Secretary. Such an election, once made, shall 
                apply to the taxable year for which made and 
                all subsequent taxable years unless revoked 
                with the consent of the Secretary.''
    (c) Clerical Amendment.--The table of sections for part IV 
of subchapter P of chapter 1 is amended by adding at the end 
the following new item:

        ``Sec. 1259. Constructive sales treatment for appreciated 
                  financial positions.''

    (d) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall 
        apply to any constructive sale after June 8, 1997.
          (2) Exception for sales of positions, etc. held 
        before june 9, 1997.--A constructive sale before June 
        9, 1997, and the property to which the position 
        involved in the transaction relates, shall not be taken 
        into account in determining whether any other 
        constructive sale after June 8, 1997, has occurred if, 
        within before the close of the 30-day period beginning 
        on the date of the enactment of this Act, such position 
        and property are clearly identified in the taxpayer's 
        records as offsetting. The preceding sentence shall 
        cease to apply as of the date the taxpayer ceases to 
        hold such position or property.
          (3) Special rule.--In the case of a decedent dying 
        after June 8, 1997, if--
                  (A) there was a constructive sale on or 
                before such date of any appreciated financial 
                position,
                  (B) the transaction resulting in such 
                constructive sale of such position remains open 
                (with respect to the decedent or any related 
                person) for not less than 2 years after the 
                date of such transaction (whether such period 
                is before or after such date), and
                  (C) such transaction is not closed within the 
                30-day period beginning on the date of the 
                enactment of this Act,
        then, for purposes of such Code, such position (and any 
        property related thereto, as determined under the 
        principles of section 1259(d)(1) of such Code (as so 
        added)) shall be treated as property constituting 
        rights to receive an item of income in respect of a 
        decedent under section 691 of such Code.
          (4) Election of securities traders, and for traders 
        and dealers in commodities, to be treated as dealers in 
        securities.--
                  (A) In general.--The amendment made by 
                subsection (b) shall apply to taxable years 
                ending after the date of the enactment of this 
                Act.
                  (B) 4-year spread of adjustments.--In the 
                case of a taxpayer who elects under section 
                475(d)(4) of the Internal Revenue Code of 1986 
                (as added by this section) to change its method 
                of accounting for its first taxable year ending 
                after the date of the enactment of this Act, 
                the net amount of the adjustments required to 
                be taken into account by the taxpayer under 
                section 481 of the Internal Revenue Code of 
                1986 shall be taken into account ratably over 
                the 4-taxable year period beginning with such 
                first taxable year.

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

    (a) In General.--Paragraph (1) of section 351(e) (relating 
to exceptions) is amended by adding at the end the following: 
``For purposes of the preceding sentence, the determination of 
whether a company is an investment company shall be made--
                  ``(A) by taking into account all stock and 
                securities held by the company, whether or not 
                readily marketable, and
                  ``(B) by treating all of the following as 
                securities:
                          ``(i) Money.
                          ``(ii) Any financial instrument (as 
                        defined in section 731(c)(2)(C)).
                          ``(iii) Any foreign currency.
                          ``(iv) Any interest in a real estate 
                        investment trust, a common trust fund, 
                        a regulated investment company, or a 
                        publicly traded partnership (as defined 
                        in section 7704(b)).
                          ``(v) Any interest described in 
                        clause (iv), (v), or (vi) of section 
                        731(c)(2)(B) (or which would be so 
                        described without regard to any 
                        reference to active trading or 
                        marketability).
                          ``(vi) Any other asset specified in 
                        regulations prescribed by the 
                        Secretary.''
    (b) Effective Date.--
          (1) In general.--The amendment made by subsection (a) 
        shall apply to transfers after June 8, 1997, in taxable 
        years ending after such date.
          (2) Binding contracts.--The amendment made by 
        subsection (a) shall not apply to any transfer pursuant 
        to a written binding contract in effect on June 8, 
        1997, that provides for the transfer of a fixed amount 
        of property, and at all times thereafter before such 
        transfer.

SEC. 1003. MODIFICATION OF RULES FOR ALLOCATING INTEREST EXPENSE TO 
                    TAX-EXEMPT INTEREST.

    (a) Pro Rata Allocation Rules Applicable to Corporations.--
          (1) In general.--Paragraph (1) of section 265(b) is 
        amended by striking ``In the case of a financial 
        institution'' and inserting ``In the case of a 
        corporation''.
          (2) Only obligations acquired after june 8, 1997, 
        taken into account.--Subparagraph (A) of section 
        265(b)(2) is amended by striking ``August 7, 1986'' and 
        inserting ``June 8, 1997 (August 7, 1986, in the case 
        of a financial institution)''.
          (3) Small issuer exception not to apply.--
        Subparagraph (A) of section 265(b)(3) is amended by 
        striking ``Any qualified'' and inserting ``In the case 
        of a financial institution, any qualified''.
          (4) Exception for certain bonds acquired on sale of 
        goods or services.--Subparagraph (B) of section 
        265(b)(4) is amended by adding at the end the following 
        new sentence: ``In the case of a taxpayer other than a 
        financial institution, such term shall not include a 
        nonsalable obligation acquired by such taxpayer in the 
        ordinary course of business as payment for goods or 
        services provided by such taxpayer to any State or 
        local government.''
          (5) Look-thru rules for partnerships.--Paragraph (6) 
        of section 265(b) is amended by adding at the end the 
        following new subparagraph:
                  ``(C) Look-thru rules for partnerships.--In 
                the case of a corporation which is a partner in 
                a partnership, such corporation shall be 
                treated for purposes of this subsection as 
                holding directly its allocable share of the 
                assets of the partnership.''
          (6) Application of pro rata disallowance on 
        affiliated group basis.--Subsection (b) of section 265 
        is amended by adding at the end the following new 
        paragraph:
          ``(7) Application of disallowance on affiliated group 
        basis.--
                  ``(A) In general.--For purposes of this 
                subsection, all members of an affiliated group 
                filing a consolidated return under section 1501 
                shall be treated as 1 taxpayer.
                  ``(B) Treatment of insurance companies.--This 
                subsection shall not apply to an insurance 
                company, and subparagraph (A) shall be applied 
                without regard to any member of an affiliated 
                group which is an insurance company.''
          (6) De minimis exception for nonfinancial 
        institutions.--Subsection (b) of section 265 is amended 
        by adding at the end the following new paragraph:
          ``(8) De minimis exception for nonfinancial 
        institutions.--In the case of a corporation, paragraph 
        (1) shall not apply for any taxable year if the amount 
        described in paragraph (2)(A) with respect to such 
        corporation does not exceed the lesser of--
                  ``(A) 2 percent of the amount described in 
                paragraph (2)(B), or
                  ``(B) $1,000,000.
        The preceding sentence shall not apply to a financial 
        institution or to a dealer in tax-exempt obligations.''
          (7) Clerical amendment.--The subsection heading for 
        section 265(b) is amended by striking ``Financial 
        Institutions'' and inserting ``Corporations''.
    (b) Application of Section 265(a)(2) With Respect to 
Controlled Groups.--Paragraph (2) of section 265(a) is amended 
after ``obligations'' by inserting ``held by the taxpayer (or 
any corporation which is a member of a controlled group (as 
defined in section 267(f)(1)) which includes the taxpayer)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1004. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH RESPECT TO 
                    PROPERTY.

    (a) Application of Capital Treatment to Property Other Than 
Personal Property.--
          (1) In general.--Paragraph (1) of section 1234A 
        (relating to gains and losses from certain 
        terminations) is amended by striking ``personal 
        property (as defined in section 1092(d)(1))'' and 
        inserting ``property''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to terminations more than 30 days after 
        the date of the enactment of this Act.
    (b) Application of Capital Treatment, Etc. to Obligations 
Issued by Natural Persons.--
          (1) In general.--Section 1271(b) is amended to read 
        as follows:
    ``(b) Exception for Certain Obligations.--
          ``(1) In general.--This section shall not apply to--
                  ``(A) any obligation issued by a natural 
                person before June 9, 1997, and
                  ``(B) any obligation issued before July 2, 
                1982, by an issuer which is not a corporation 
                and is not a government or political 
                subdivision thereof.
          ``(2) Termination.--Paragraph (1) shall not apply to 
        any obligation purchased (within the meaning of section 
        179(d)(2)) after June 8, 1997.''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall take effect on the date of enactment of this 
        Act.

SEC. 1005. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE POOLED DEBT 
                    OBLIGATIONS SUBJECT TO ACCELERATION.

    (a) In General.--Subparagraph (C) of section 1272(a)(6) 
(relating to debt instruments to which the paragraph applies) 
is amended by striking ``or'' at the end of clause (i), by 
striking the period at the end of clause (ii) and inserting ``, 
or'', and by inserting after clause (i) the following:
                          ``(iii) any pool of debt instruments 
                        the yield on which may be reduced by 
                        reason of prepayments (or to the extent 
                        provided in regulations, by reason of 
                        other events).
                To the extent provided in regulations 
                prescribed by the Secretary, in the case of a 
                small business engaged in the trade or business 
                of selling tangible personal property at 
                retail, clause (iii) shall not apply to debt 
                instruments incurred in the ordinary course of 
                such trade or business while held by such 
                business.''
    (b) Effective Dates.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years beginning after the date 
        of the enactment of this Act.
          (2) Change in method of accounting.--In the case of 
        any taxpayer required by this section to change its 
        method of accounting for its first taxable year 
        beginning after the date of the enactment of this Act--
                  (A) such change shall be treated as initiated 
                by the taxpayer,
                  (B) such change shall be treated as made with 
                the consent of the Secretary, and
                  (C) the net amount of the adjustments 
                required to be taken into account by the 
                taxpayer under section 481 of the Internal 
                Revenue Code of 1986 shall be taken into 
                account ratably over the 4-taxable year period 
                beginning with such first taxable year.

SEC. 1006. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.

    (a) In General.--Section 163 (relating to deduction for 
interest) is amended by redesignating subsection (k) as 
subsection (l) and by inserting after subsection (j) the 
following new subsection:
    ``(k) Disallowance of Deduction on Certain Debt Instruments 
of Corporations.--
          ``(1) In general.--No deduction shall be allowed 
        under this chapter for any interest paid or accrued on 
        a disqualified debt instrument.
          ``(2) Disqualified debt instrument.--For purposes of 
        this subsection, the term `disqualified debt 
        instrument' means any indebtedness of a corporation 
        which is payable in equity of the issuer or a related 
        party.
          ``(3) Special rules for amounts payable in equity.--
        For purposes of paragraph (2), indebtedness shall be 
        treated as payable in equity of the issuer or a related 
        party only if--
                  ``(A) a substantial amount of the principal 
                or interest is required to be paid or 
                converted, or at the option of the issuer or a 
                related party is payable in, or convertible 
                into, such equity,
                  ``(B) a substantial amount of the principal 
                or interest is required to be determined, or at 
                the option of the issuer or a related party is 
                determined, by reference to the value of such 
                equity, or
                  ``(C) the indebtedness is part of an 
                arrangement which is reasonably expected to 
                result in a transaction described in 
                subparagraph (A) or (B).
        For purposes of subparagraphs (A) and (B), principal or 
        interest shall be treated as required to be so paid, 
        converted, or determined if it may be required at the 
        option of the holder or a related party and there is a 
        substantial certainty the option will be exercised.
          ``(4) Related party.--For purposes of this 
        subsection, a person is a related party with respect to 
        another person if such person bears a relationship to 
        such other person described in section 267(b) or 
        707(b).
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        carry out the purposes of this subsection, including 
        regulations preventing avoidance of this subsection 
        through the use of an issuer other than a 
        corporation.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to disqualified debt instruments issued 
        after June 8, 1997.
          (2) Transition rule.--The amendment made by this 
        section shall not apply to any instrument issued after 
        June 8, 1997, if such instrument is--
                  (A) issued pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.

        Subtitle B--Corporate Organizations and Reorganizations

SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.

    (a) Treatment of Extraordinary Dividends in Excess of 
Basis.--Paragraph (2) of section 1059(a) (relating to corporate 
shareholder's recognition of gain attributable to nontaxed 
portion of extraordinary dividends) is amended to read as 
follows:
          ``(2) Amounts in excess of basis.--If the nontaxed 
        portion of such dividends exceeds such basis, such 
        excess shall be treated as gain from the sale or 
        exchange of such stock for the taxable year in which 
        the extraordinary dividend is received.''
    (b) Treatment of Redemptions Where Options Involved.--
Paragraph (1) of section 1059(e) (relating to treatment of 
partial liquidations and non-pro rata redemptions) is amended 
to read as follows:
          ``(1) Treatment of partial liquidations and certain 
        redemptions.--Except as otherwise provided in 
        regulations--
                  ``(A) Redemptions.--In the case of any 
                redemption of stock--
                          ``(i) which is part of a partial 
                        liquidation (within the meaning of 
                        section 302(e)) of the redeeming 
                        corporation,
                          ``(ii) which is not pro rata as to 
                        all shareholders, or
                          ``(iii) which would not have been 
                        treated (in whole or in part) as a 
                        dividend if any options had not been 
                        taken into account under section 
                        318(a)(4),
                any amount treated as a dividend with respect 
                to such redemption shall be treated as an 
                extraordinary dividend to which paragraphs (1) 
                and (2) of subsection (a) apply without regard 
                to the period the taxpayer held such stock. In 
                the case of a redemption described in clause 
                (iii), only the basis in the stock redeemed 
                shall be taken into account under subsection 
                (a).
                  ``(B) Reorganizations, etc.--An exchange 
                described in section 356 which is treated as a 
                dividend shall be treated as a redemption of 
                stock for purposes of applying subparagraph 
                (A).''
    (c) Time for Reduction.--Paragraph (1) of section 1059(d) 
is amended to read as follows:
          ``(1) Time for reduction.--Any reduction in basis 
        under subsection (a)(1) shall be treated as occurring 
        at the beginning of the ex-dividend date of the 
        extraordinary dividend to which the reduction 
        relates.''
    (d) Effective Dates.--
          (1) In general.--The amendments made by this section 
        shall apply to distributions after May 3, 1995.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any distribution made 
        pursuant to the terms of--
                  (A) a written binding contract in effect on 
                May 3, 1995, and at all times thereafter before 
                such distribution, or
                  (B) a tender offer outstanding on May 3, 
                1995.
          (3) Certain dividends not pursuant to certain 
        redemptions.--In determining whether the amendment made 
        by subsection (a) applies to any extraordinary dividend 
        other than a dividend treated as an extraordinary 
        dividend under section 1059(e)(1) of the Internal 
        Revenue Code of 1986 (as amended by this Act), 
        paragraphs (1) and (2) shall be applied by substituting 
        ``September 13, 1995'' for ``May 3, 1995''.

SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS FOLLOWED BY 
                    ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.

    (a) Distributions Followed by Acquisitions.--Section 355 
(relating to distribution of stock and securities of a 
controlled corporation) is amended by adding at the end the 
following new subsection:
    ``(e) Recognition of Gain Where Certain Distributions of 
Stock or Securities Are Followed by Acquisition.--
          ``(1) General rule.--If there is a distribution to 
        which this subsection applies, the following rules 
        shall apply:
                  ``(A) Acquisition of controlled 
                corporation.--If there is an acquisition 
                described in paragraph (2)(A)(ii) with respect 
                to any controlled corporation, any stock or 
                securities in the controlled corporation shall 
                not be treated as qualified property for 
                purposes of subsection (c)(2) of this section 
                or section 361(c)(2).
                  ``(B) Acquisition of distributing 
                corporation.--If there is an acquisition 
                described in paragraph (2)(A)(ii) with respect 
                to the distributing corporation, the controlled 
                corporation shall recognize gain in an amount 
                equal to the amount of net gain which would be 
                recognized if all the assets of the 
                distributing corporation (immediately after the 
                distribution) were sold (at such time) for fair 
                market value. Any gain recognized under the 
                preceding sentence shall be treated as long-
                term capital gain and shall be taken into 
                account for the taxable year which includes the 
                day after the date of such distribution.
          ``(2) Distributions to which subsection applies.--
                  ``(A) In general.--This subsection shall 
                apply to any distribution--
                          ``(i) to which this section (or so 
                        much of section 356 as relates to this 
                        section) applies, and
                          ``(ii) which is part of a plan (or 
                        series of related transactions) 
                        pursuant to which 1 or more persons 
                        acquire directly or indirectly stock 
                        representing a 50-percent or greater 
                        interest in the distributing 
                        corporation or any controlled 
                        corporation.
                  ``(B) Plan presumed to exist in certain 
                cases.--If 1 or more persons acquire directly 
                or indirectly stock representing a 50-percent 
                or greater interest in the distributing 
                corporation or any controlled corporation 
                during the 4-year period beginning on the date 
                which is 2 years before the date of the 
                distribution, such acquisition shall be treated 
                as pursuant to a plan described in subparagraph 
                (A)(ii) unless it is established that the 
                distribution and the acquisition are not 
                pursuant to a plan or series of related 
                transactions.
                  ``(C) Coordination with subsection (d).--This 
                subsection shall not apply to any distribution 
                to which subsection (d) applies.
          ``(3) Special rules relating to acquisitions.--
                  ``(A) Certain acquisitions not taken into 
                account.--Except as provided in regulations, 
                the following acquisitions shall not be treated 
                as described in paragraph (2)(A)(ii):
                          ``(i) The acquisition of stock in any 
                        controlled corporation by the 
                        distributing corporation.
                          ``(ii) The acquisition by a person of 
                        stock in any controlled corporation by 
                        reason of holding stock in the 
                        distributing corporation.
                          ``(iii) The acquisition by a person 
                        of stock in any successor corporation 
                        of the distributing corporation or any 
                        controlled corporation by reason of 
                        holding stock in such distributing or 
                        controlled corporation.
                          ``(iv) The acquisition of stock in a 
                        corporation if shareholders owning 
                        directly or indirectly a 50-percent or 
                        greater interest in the distributing 
                        corporation or any controlled 
                        corporation before such acquisition own 
                        indirectly a 50-percent or greater 
                        interest in such distributing or 
                        controlled corporation after such 
                        acquisition.
                This subparagraph shall not apply to any 
                acquisition if the stock held before the 
                acquisition was acquired pursuant to a plan 
                described in subparagraph (A)(ii).
                  ``(B) Asset acquisitions.--Except as provided 
                in regulations, for purposes of this 
                subsection, if the assets of the distributing 
                corporation or any controlled corporation are 
                acquired by a successor corporation in a 
                transaction described in subparagraph (A), (C), 
                or (D) of section 368(a)(1) or any other 
                transaction specified in regulations by the 
                Secretary, the shareholders (immediately before 
                the acquisition) of the corporation acquiring 
                such assets shall be treated as acquiring stock 
                in the corporation from which the assets were 
                acquired.
          ``(4) Definition and special rules.--For purposes of 
        this subsection--
                  ``(A) 50-percent or greater interest.--The 
                term `50-percent or greater interest' has the 
                meaning given such term by subsection (d)(4).
                  ``(B) Distributions in title 11 or similar 
                case.--Paragraph (1) shall not apply to any 
                distribution made in a title 11 or similar case 
                (as defined in section 368(a)(3)).
                  ``(C) Aggregation and attribution rules.--
                          ``(i) Aggregation.--The rules of 
                        paragraph (7)(A) of subsection (d) 
                        shall apply.
                          ``(ii) Attribution.--Section 
                        355(d)(8)(A) shall apply in determining 
                        whether a person holds stock or 
                        securities in any corporation.
                  ``(D) Successors and predecessors.--For 
                purposes of this subsection, any reference to a 
                controlled corporation or a distributing 
                corporation shall include a reference to any 
                predecessor or successor of such corporation.
                  ``(E) Statute of limitations.--If there is an 
                acquisition to which paragraph (1) (A) or (B) 
                applies--
                          ``(i) the statutory period for the 
                        assessment of any deficiency 
                        attributable to any part of the gain 
                        recognized under this subsection by 
                        reason of such acquisition 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 by regulations prescribe) 
                        that such acquisition occurred, and
                          ``(ii) such deficiency may be 
                        assessed before the expiration of such 
                        3-year period notwithstanding the 
                        provisions of any other law or rule of 
                        law which would otherwise prevent such 
                        assessment.
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out the 
        purposes of this subsection, including regulations--
                  ``(A) providing for the application of this 
                subsection where there is more than 1 
                controlled corporation,
                  ``(B) treating 2 or more distributions as 1 
                distribution where necessary to prevent the 
                avoidance of such purposes, and
                  ``(C) providing for the application of rules 
                similar to the rules of subsection (d)(6) where 
                appropriate for purposes of paragraph (2)(B).''
    (b) Section 355 Not To Apply to Certain Intragroup 
Transactions.--Section 355, as amended by subsection (a), is 
amended by adding at the end the following new subsection:
    ``(f) Section Not To Apply to Certain Intragroup 
Transactions.--Except as provided in regulations, this section 
shall not apply to the distribution of stock from 1 member of 
an affiliated group filing a consolidated return to another 
member of such group, and the Secretary shall provide proper 
adjustments for the treatment of such distribution, including 
(if necessary) adjustments to--
          ``(1) the adjusted basis of any stock which--
                  ``(A) is in a corporation which is a member 
                of such group, and
                  ``(B) is held by another member of such 
                group, and
          ``(2) the earnings and profits of any member of such 
        group.''
    (c) Determination of Control in Certain Divisive 
Transactions.--
          (1) Section 351 transactions.--Section 351(c) 
        (relating to special rule) is amended to read as 
        follows:
    ``(c) Special Rules Where Distribution to Shareholders.--
          ``(1) In general.--In determining control for 
        purposes of this section--
                  ``(A) the fact that any corporate transferor 
                distributes part or all of the stock in the 
                corporation which it receives in the exchange 
                to its shareholders shall not be taken into 
                account, and
                  ``(B) if the requirements of section 355 are 
                met with respect to such distribution, the 
                shareholders shall be treated as in control of 
                such corporation immediately after the exchange 
                if the shareholders hold at least a 50-percent 
                interest in such corporation immediately after 
                the distribution.
          ``(2) 50-percent interest.--For purposes of this 
        subsection, the term `50-percent interest' means stock 
        possessing 50 percent of the total combined voting 
        power of all classes of stock entitled to vote and 50 
        percent of the total value of shares of all classes of 
        stock.''
          (2) D reorganizations.--Section 368(a)(2)(H) 
        (relating to special rule for determining whether 
        certain transactions are qualified under paragraph 
        (1)(D)) is amended to read as follows:
                  ``(H) Special rules for determining whether 
                certain transactions are qualified under 
                paragraph (1)(d).--For purposes of determining 
                whether a transaction qualifies under paragraph 
                (1)(D)--
                          ``(i) in the case of a transaction 
                        with respect to which the requirements 
                        of subparagraphs (A) and (B) of section 
                        354(b)(1) are met, the term `control' 
                        has the meaning given such term by 
                        section 304(c), and
                          ``(ii) in the case of a transaction 
                        with respect to which the requirements 
                        of section 355 are met, the 
                        shareholders described in paragraph 
                        (1)(D) shall be treated as having 
                        control of the corporation to which the 
                        assets are transferred if such 
                        shareholders hold a 50-percent or 
                        greater interest (as defined in section 
                        351(c)(2)) in such corporation 
                        immediately after the transfer.''
    (d) Effective Dates.--
          (1) Section 355 rules.--The amendments made by 
        subsections (a) and (b) shall apply to distributions 
        after April 16, 1997.
          (2) Divisive transactions.--The amendments made by 
        subsection (c) shall apply to transfers after the date 
        of the enactment of this Act.
          (3) Transition rule.--The amendments made by this 
        section shall not apply to any distribution after April 
        16, 1997, if such distribution is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.
        This paragraph shall not apply to any written 
        agreement, ruling request, or public announcement or 
        filing unless it identifies the unrelated acquirer of 
        the distributing corporation or of any controlled 
        corporation, whichever is applicable.

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

    (a) Stock Purchases by Related Corporations.--The last 
sentence of section 304(a)(1) (relating to acquisition by 
related corporation other than subsidiary) is amended to read 
as follows: ``To the extent that such distribution is treated 
as a distribution to which section 301 applies, the transferor 
and the acquiring corporation shall be treated in the same 
manner as if the transferor had transferred the stock so 
acquired to the acquiring corporation in exchange for stock of 
the acquiring corporation in a transaction to which section 
351(a) applies, and then the acquiring corporation had redeemed 
the stock it was treated as issuing in such transaction.''
    (b) Coordination With Section 1059.--Clause (iii) of 
section 1059(e)(1)(A), as amended by this title, is amended to 
read as follows:
                          ``(iii) which would not have been 
                        treated (in whole or in part) as a 
                        dividend if--
                                  ``(I) any options had not 
                                been taken into account under 
                                section 318(a)(4), or
                                  ``(II) section 304(a) had not 
                                applied,''.
    (c) Special Rule for Acquisitions by Foreign 
Corporations.--Section 304(b) (relating to special rules for 
application of subsection (a)) is amended by adding at the end 
the following new paragraph:
          ``(5) Acquisitions by foreign corporations.--
                  ``(A) In general.--In the case of any 
                acquisition to which subsection (a) applies in 
                which the acquiring corporation is a foreign 
                corporation, the only earnings and profits 
                taken into account under paragraph (2)(A) shall 
                be those earnings and profits--
                          ``(i) which are attributable (under 
                        regulations prescribed by the 
                        Secretary) to stock of the acquiring 
                        corporation owned (within the meaning 
                        of section 958(a)) by a corporation or 
                        individual which is--
                                  ``(I) a United States 
                                shareholder (within the meaning 
                                of section 951(b)) of the 
                                acquiring corporation, and
                                  ``(II) the transferor or a 
                                person who bears a relationship 
                                to the transferor described in 
                                section 267(b) or 707(b), and
                          ``(ii) which were accumulated during 
                        the period or periods such stock was 
                        owned by such person while the 
                        acquiring corporation was a controlled 
                        foreign corporation.
                  ``(B) Application of section 1248.--For 
                purposes of subparagraph (A), the rules of 
                section 1248(d) shall apply except to the 
                extent otherwise provided by the Secretary.
                  ``(C) Regulations.--The Secretary shall 
                prescribe such regulations as are appropriate 
                to carry out the purposes of this paragraph.''
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to distributions and acquisitions after 
        June 8, 1997.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any distribution or 
        acquisition after June 8, 1997, if such distribution or 
        acquisition is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described in a public announcement or 
                filing with the Securities and Exchange 
                Commission on or before such date.

SEC. 1014. MODIFICATION OF HOLDING PERIOD APPLICABLE TO DIVIDENDS 
                    RECEIVED DEDUCTION.

    (a) In General.--Subparagraph (A) of section 246(c)(1) is 
amended to read as follows:
                  ``(A) which is held by the taxpayer for 45 
                days or less during the 90-day period beginning 
                on the date which is 45 days before the date on 
                which such share becomes ex-dividend with 
                respect to such dividend, or''.
    (b) Conforming Amendments.--
          (1) Paragraph (2) of section 246(c) is amended to 
        read as follows:
          ``(2) 90-day rule in the case of certain preference 
        dividends.--In the case of stock having preference in 
        dividends, if the taxpayer receives dividends with 
        respect to such stock which are attributable to a 
        period or periods aggregating in excess of 366 days, 
        paragraph (1)(A) shall be applied--
                  ``(A) by substituting `90 days' for `45 days' 
                each place it appears, and
                  ``(B) by substituting `180-day period' for 
                `90-day period'.''
          (2) Paragraph (3) of section 246(c) is amended by 
        adding ``and'' at the end of subparagraph (A), by 
        striking subparagraph (B), and by redesignating 
        subparagraph (C) as subparagraph (B).
    (c) Effective Date.--The amendments made by this section 
shall apply to dividends received or accrued after the 30th day 
after the date of the enactment of this Act.

                 Subtitle C--Other Corporate Provisions

SEC. 1021. REGISTRATION AND OTHER PROVISIONS RELATING TO CONFIDENTIAL 
                    CORPORATE TAX SHELTERS.

    (a) In General.--Section 6111 (relating to registration of 
tax shelters) is amended by redesignating subsections (d) and 
(e) as subsections (e) and (f), respectively, and by inserting 
after subsection (c) the following new subsection:
    ``(d) Certain Confidential Arrangements Treated as Tax 
Shelters.--
          ``(1) In general.--For purposes of this section, the 
        term `tax shelter' includes any entity, plan, 
        arrangement, or transaction--
                  ``(A) a significant purpose of the structure 
                of which is the avoidance or evasion of Federal 
                income tax for a direct or indirect participant 
                which is a corporation,
                  ``(B) which is offered to any potential 
                participant under conditions of 
                confidentiality, and
                  ``(C) for which the tax shelter promoters may 
                receive fees in excess of $100,000 in the 
                aggregate.
          ``(2) Conditions of confidentiality.--For purposes of 
        paragraph (1)(B), an offer is under conditions of 
        confidentiality if--
                  ``(A) the potential participant to whom the 
                offer is made (or any other person acting on 
                behalf of such participant) has an 
                understanding or agreement with or for the 
                benefit of any promoter of the tax shelter that 
                such participant (or such other person) will 
                limit disclosure of the tax shelter or any 
                significant tax features of the tax shelter, or
                  ``(B) any promoter of the tax shelter--
                          ``(i) claims, knows, or has reason to 
                        know,
                          ``(ii) knows or has reason to know 
                        that any other person (other than the 
                        potential participant) claims, or
                          ``(iii) causes another person to 
                        claim,
                that the tax shelter (or any aspect thereof) is 
                proprietary to any person other than the 
                potential participant or is otherwise protected 
                from disclosure to or use by others.
        For purposes of this subsection, the term `promoter' 
        means any person or any related person (within the 
        meaning of section 267 or 707) who participates in the 
        organization, management, or sale of the tax shelter.
          ``(3) Persons other than promoter required to 
        register in certain cases.--
                  ``(A) In general.--If--
                          ``(i) the requirements of subsection 
                        (a) are not met with respect to any tax 
                        shelter (as defined in paragraph (1)) 
                        by any tax shelter promoter, and
                          ``(ii) no tax shelter promoter is a 
                        United States person,
                then each United States person who discussed 
                participation in such shelter shall register 
                such shelter under subsection (a).
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to a United States person who discussed 
                participation in a tax shelter if--
                          ``(i) such person notified the 
                        promoter in writing (not later than the 
                        close of the 90th day after the day on 
                        which such discussions began) that such 
                        person would not participate in such 
                        shelter, and
                          ``(ii) such person does not 
                        participate in such shelter.
          ``(4) Offer to participate treated as offer for 
        sale.--For purposes of subsections (a) and (b), an 
        offer to participate in a tax shelter (as defined in 
        paragraph (1)) shall be treated as an offer for sale.''
    (b) Penalty.--Subsection (a) of section 6707 (relating to 
failure to furnish information regarding tax shelters) is 
amended by adding at the end the following new paragraph:
          ``(3) Confidential arrangements.--
                  ``(A) In general.--In the case of a tax 
                shelter (as defined in section 6111(d)), the 
                penalty imposed under paragraph (1) shall be an 
                amount equal to the greater of--
                          ``(i) 50 percent of the fees paid to 
                        all promoters of the tax shelter with 
                        respect to offerings made before the 
                        date such shelter is registered under 
                        section 6111, or
                          ``(ii) $10,000.
                Clause (i) shall be applied by substituting `75 
                percent' for `50 percent' in the case of an 
                intentional failure or act described in 
                paragraph (1).
                  ``(B) Special rule for participants required 
                to register shelter.--In the case of a person 
                required to register such a tax shelter by 
                reason of section 6111(d)(3)--
                          ``(i) such person shall be required 
                        to pay the penalty under paragraph (1) 
                        only if such person actually 
                        participated in such shelter,
                          ``(ii) the amount of such penalty 
                        shall be determined by taking into 
                        account under subparagraph (A)(i) only 
                        the fees paid by such person, and
                          ``(iii) such penalty shall be in 
                        addition to the penalty imposed on any 
                        other person for failing to register 
                        such shelter.''
    (c) Modifications to Substantial Understatement Penalty.--
          (1) Restriction on reasonable basis for corporate 
        understatement of income tax.--Subparagraph (B) of 
        section 6662(d)(2) is amended by adding at the end the 
        following new flush sentence:
                ``For purposes of clause (ii)(II), in no event 
                shall a corporation be treated as having a 
                reasonable basis for its tax treatment of an 
                item attributable to a multiple-party financing 
                transaction if such treatment does not clearly 
                reflect the income of the corporation.''
          (2) Modification to definition of tax shelter.--
        Clause (iii) of section 6662(d)(2)(C) is amended by 
        striking ``the principal purpose'' and inserting ``a 
        significant purpose''.
    (d) Conforming Amendments.--
          (1) Paragraph (2) of section 6707(a) is amended by 
        striking ``The penalty'' and inserting ``Except as 
        provided in paragraph (3), the penalty''.
          (2) Subparagraph (A) of section 6707(a)(1) is amended 
        by striking ``paragraph (2)'' and inserting ``paragraph 
        (2) or (3), as the case may be''.
    (e) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to any 
        tax shelter (as defined in section 6111(d) of the 
        Internal Revenue Code of 1986, as amended by this 
        section) interests in which are offered to potential 
        participants after the Secretary of the Treasury 
        prescribes guidance with respect to meeting 
        requirements added by such amendments.
          (2) Modifications to substantial understatement 
        penalty.--The amendments made by subsection (c) shall 
        apply to items with respect to transactions entered 
        into after the date of the enactment of this Act.

SEC. 1022. CERTAIN PREFERRED STOCK TREATED AS BOOT.

    (a) Section 351.--Section 351 (relating to transfer to 
corporation controlled by transferor) is amended by 
redesignating subsection (g) as subsection (h) and by inserting 
after subsection (f) the following new subsection:
    ``(g) Nonqualified Preferred Stock Not Treated as Stock.--
          ``(1) In general.--For purposes of subsections (a) 
        and (b), the term `stock' shall not include 
        nonqualified preferred stock.
          ``(2) Nonqualified preferred stock.--For purposes of 
        paragraph (1)--
                  ``(A) In general.--The term `nonqualified 
                preferred stock' means preferred stock if--
                          ``(i) the holder of such stock has 
                        the right to require the issuer or a 
                        related person to redeem or purchase 
                        the stock,
                          ``(ii) the issuer or a related person 
                        is required to redeem or purchase such 
                        stock,
                          ``(iii) the issuer or a related 
                        person has the right to redeem or 
                        purchase the stock and, as of the issue 
                        date, it is more likely than not that 
                        such right will be exercised, or
                          ``(iv) the dividend rate on such 
                        stock varies in whole or in part 
                        (directly or indirectly) with reference 
                        to interest rates, commodity prices, or 
                        other similar indices.
                  ``(B) Limitations.--Clauses (i), (ii), and 
                (iii) of subparagraph (A) shall apply only if 
                the right or obligation referred to therein may 
                be exercised within the 20-year period 
                beginning on the issue date of such stock and 
                such right or obligation is not subject to a 
                contingency which, as of the issue date, makes 
                remote the likelihood of the redemption or 
                purchase.
                  ``(C) Exceptions for certain rights or 
                obligations.--
                          ``(i) In general.--A right or 
                        obligation shall not be treated as 
                        described in clause (i), (ii), or (iii) 
                        of subparagraph (A) if--
                                  ``(I) it may be exercised 
                                only upon the death, 
                                disability, or mental 
                                incompetency of the holder, or
                                  ``(II) in the case of a right 
                                or obligation to redeem or 
                                purchase stock transferred in 
                                connection with the performance 
                                of services for the issuer or a 
                                related person (and which 
                                represents reasonable 
                                compensation), it may be 
                                exercised only upon the 
                                holder's separation from 
                                service from the issuer or a 
                                related person.
                          ``(ii) Exception.--Clause (i)(I) 
                        shall not apply if the stock 
                        relinquished in the exchange, or the 
                        stock acquired in the exchange is in--
                                  ``(I) a corporation if any 
                                class of stock in such 
                                corporation or a related party 
                                is readily tradable on an 
                                established securities market 
                                or otherwise, or
                                  ``(II) any other corporation 
                                if such exchange is part of a 
                                transaction or series of 
                                transactions in which such 
                                corporation is to become a 
                                corporation described in 
                                subclause (I).
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Preferred stock.--The term `preferred 
                stock' means stock which is limited and 
                preferred as to dividends and does not 
                participate (including through a conversion 
                privilege) in corporate growth to any 
                significant extent.
                  ``(B) Related person.--A person shall be 
                treated as related to another person if they 
                bear a relationship to such other person 
                described in section 267(b) or 707(b).
          ``(4) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection and sections 
        354(a)(2)(C), 355(a)(3)(D), and 356(e). The Secretary 
        may also prescribe regulations, consistent with the 
        treatment under this subsection and such sections, for 
        the treatment of nonqualified preferred stock under 
        other provisions of this title.''
    (b) Section 354.--Paragraph (2) of section 354(a) (relating 
to exchanges of stock and securities in certain 
reorganizations) is amended by adding at the end the following 
new subparagraph:
                  ``(C) Nonqualified preferred stock.--
                          ``(i) In general.--Nonqualified 
                        preferred stock (as defined in section 
                        351(g)(2)) received in exchange for 
                        stock other than nonqualified preferred 
                        stock (as so defined) shall not be 
                        treated as stock or securities.
                          ``(ii) Recapitalizations of family-
                        owned corporations.--
                                  ``(I) In general.--Clause (i) 
                                shall not apply in the case of 
                                a recapitalization under 
                                section 368(a)(1)(E) of a 
                                family-owned corporation.
                                  ``(II) Family-owned 
                                corporation.--For purposes of 
                                this clause, except as provided 
                                in regulations, the term 
                                `family-owned corporation' 
                                means any corporation which is 
                                described in clause (i) of 
                                section 447(d)(2)(C) throughout 
                                the 8-year period beginning on 
                                the date which is 5 years 
                                before the date of the 
                                recapitalization. For purposes 
                                of the preceding sentence,stock 
shall not be treated as owned by a family member during any period 
described in section 355(d)(6)(B).''
    (c) Section 355.--Paragraph (3) of section 355(a) is 
amended by adding at the end the following new subparagraph:
                  ``(D) Nonqualified preferred stock.--
                Nonqualified preferred stock (as defined in 
                section 351(g)(2)) received in a distribution 
                with respect to stock other than nonqualified 
                preferred stock (as so defined) shall not be 
                treated as stock or securities.''
    (d) Section 356.--Section 356 is amended by redesignating 
subsections (e) and (f) as subsections (f) and (g), 
respectively, and by inserting after subsection (d) the 
following new subsection:
    ``(e) Nonqualified Preferred Stock Treated as Other 
Property.--For purposes of this section--
          ``(1) In general.--Except as provided in paragraph 
        (2), the term `other property' includes nonqualified 
        preferred stock (as defined in section 351(g)(2)).
          ``(2) Exception.--The term `other property' does not 
        include nonqualified preferred stock (as so defined) to 
        the extent that, under section 354 or 355, such 
        preferred stock would be permitted to be received 
        without the recognition of gain.''
    (e) Conforming Amendments.--
          (1) Subparagraph (B) of section 354(a)(2) and 
        subparagraph (C) of section 355(a)(3)(C) are each 
        amended by inserting ``(including nonqualified 
        preferred stock, as defined in section 351(g)(2))'' 
        after ``stock''.
          (2) Subparagraph (A) of section 354(a)(3) and 
        subparagraph (A) of section 355(a)(4) are each amended 
        by inserting ``nonqualified preferred stock and'' after 
        ``including''.
          (3) Section 1036 is amended by redesignating 
        subsection (b) as subsection (c) and by inserting after 
        subsection (a) the following new subsection:
    ``(b) Nonqualified Preferred Stock Not Treated as Stock.--
For purposes of this section, nonqualified preferred stock (as 
defined in section 351(g)(2)) shall be treated as property 
other than stock.''
    (f) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to transactions after June 8, 1997.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any transaction after June 
        8, 1997, if such transaction is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.

                 Subtitle D--Administrative Provisions

SEC. 1031. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.

    (a) In General.--Section 6045 (relating to returns of 
brokers) is amended by adding at the end the following new 
subsection:
    ``(f) Return Required in the Case of Payments to 
Attorneys.--
          ``(1) In general.--Any person engaged in a trade or 
        business and making a payment (in the course of such 
        trade or business) to which this subsection applies 
        shall file a return under subsection (a) and a 
        statement under subsection (b) with respect to such 
        payment.
          ``(2) Application of subsection.--
                  ``(A) In general.--This subsection shall 
                apply to any payment to an attorney in 
                connection with legal services (whether or not 
                such services are performed for the payor).
                  ``(B) Exception.--This subsection shall not 
                apply to the portion of any payment which is 
                required to be reported under section 6041(a) 
                (or would be so required but for the dollar 
                limitation contained therein) or section 
                6051.''
    (b) Reporting of Attorneys' Fees Payable to Corporations.--
The regulations providing an exception under section 6041 of 
the Internal Revenue Code of 1986 for payments made to 
corporations shall not apply to payments of attorneys' fees.
    (c) Effective Date.--The amendment made by this section 
shall apply to payments made after December 31, 1997.

SEC. 1032. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO CORPORATIONS 
                    PERFORMING SERVICES FOR FEDERAL AGENCIES.

    (a) In General.--Subsection (d) of section 6041A (relating 
to returns regarding payments of remuneration for services and 
direct sales) is amended by adding at the end the following new 
paragraph:
          ``(3) Payments to corporations by federal executive 
        agencies.--
                  ``(A) In general.--Notwithstanding any 
                regulation prescribed by the Secretary before 
                the date of the enactment of this paragraph, 
                subsection (a) shall apply to remuneration paid 
                to a corporation by any Federal executive 
                agency (as defined in section 6050M(b)).
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to--
                          ``(i) services under contracts 
                        described in section 6050M(e)(3) with 
                        respect to which the requirements of 
                        section 6050M(e)(2) are met, and
                          ``(ii) such other services as the 
                        Secretary may specify in regulations 
                        prescribed after the date of the 
                        enactment of this paragraph.''
    (b) Effective Date.--The amendment made by this section 
shall apply to returns the due date for which (determined 
without regard to any extension) is more than 90 days after the 
date of the enactment of this Act.

SEC. 1033. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRATION OF 
                    CERTAIN VETERANS PROGRAMS.

    (a) General Rule.--Subparagraph (D) of section 6103(l)(7) 
(relating to disclosure of return information to Federal, 
State, and local agencies administering certain programs) is 
amended by striking ``Clause (viii) shall not apply after 
September 30, 1998.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 1034. CONTINUOUS LEVY ON CERTAIN PAYMENTS.

    (a) In General.--Section 6331 (relating to levy and 
distraint) is amended--
          (1) by redesignating subsection (h) as subsection 
        (i), and
          (2) by inserting after subsection (g) the following 
        new subsection:
    ``(h) Continuing Levy on Certain Payments.--
          ``(1) In general.--The effect of a levy on specified 
        payments to or received by a taxpayer shall be 
        continuous from the date such levy is first made until 
        such levy is released. Notwithstanding section 6334, 
        such continuous levy shall attach to up to 15 percent 
        of any specified payment due to the taxpayer.
          ``(2) Specified payment.--For the purposes of 
        paragraph (1), the term `specified payment' means--
                  ``(A) any Federal payment other than a 
                payment for which eligibility is based on the 
                income or assets (or both) of a payee,
                  ``(B) any payment described in paragraph (4), 
                (7), (9), or (11) of section 6334(a), and
                  ``(C) any annuity or pension payment under 
                the Railroad Retirement Act or benefit under 
                the Railroad Unemployment Insurance Act 
                described in subsection (a)(6) of this 
                section.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1035. MODIFICATION OF LEVY EXEMPTION.

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

SEC. 1036. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN 
                    INFORMATION.

    (a) In General.--Subsection (k) of section 6103 is amended 
by adding at the end the following new paragraph:
          ``(8) Levies on certain government payments.--
                  ``(A) Disclosure of return information in 
                levies on financial management service.--In 
                serving a notice of levy, or release of such 
                levy, with respect to any applicable government 
                payment, the Secretary may disclose to officers 
                and employees of the Financial Management 
                Service--
                          ``(i) return information, including 
                        taxpayer identity information,
                          ``(ii) the amount of any unpaid 
                        liability under this title (including 
                        penalties and interest), and
                          ``(iii) the type of tax and tax 
                        period to which such unpaid liability 
                        relates.
                  ``(B) Restriction on use of disclosed 
                information.--Return information disclosed 
                under subparagraph (A) may be used by officers 
                and employees of the Financial Management 
                Service only for the purpose of, and to the 
                extent necessary in, transferring levied funds 
                in satisfaction of the levy, maintaining 
                appropriate agency records in regard to such 
                levy or the release thereof, notifying the 
                taxpayer and the agency certifying such payment 
                that the levy has been honored, or in the 
                defense of any litigation ensuing from the 
                honor of such levy.
                  ``(C) Applicable government payment.--For 
                purposes of this paragraph, the term 
                `applicable government payment' means--
                          ``(i) any Federal payment (other than 
                        a payment for which eligibility is 
                        based on the income or assets (or both) 
                        of a payee) certified to the Financial 
                        Management Service for disbursement, 
                        and
                          ``(ii) any other payment which is 
                        certified to the Financial Management 
                        Service for disbursement and which the 
                        Secretary designates by published 
                        notice.''.
    (b) Conforming Amendments.--
          (1) Section 6301(p) is amended--
                  (A) in paragraph (3)(A), by striking ``(2), 
                or (6)'' and inserting ``(2), (6), or (8), and
                  (B) in paragraph (4), by inserting 
                ``(k)(8),'' after ``(j) (1) or (2),'' each 
                place it appears.
          (2) Section 552a(a)(8)(B) of title 5, United States 
        Code, is amended by striking ``or'' at the end of 
        clause (v), by adding ``or'' at the end of clause (vi), 
        and by adding at the end the following new clause:
                          ``(vii) matches performed incident to 
                        a levy described in section 6103(k)(8) 
                        of the Internal Revenue Code of 
                        1986;''.
    (c) Effective Date.--The amendments made by this section 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1037. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS REQUIRED TO 
                    FILE RETURNS CONSISTENT WITH ESTATE OR TRUST RETURN 
                    OR TO NOTIFY SECRETARY OF INCONSISTENCY.

    (a) Domestic Estates and Trusts.--Section 6034A (relating 
to information to beneficiaries of estates and trusts) is 
amended by adding at the end the following new subsection:
    ``(c) Beneficiary's Return Must be Consistent with Estate 
or Trust Return or Secretary Notified of Inconsistency.--
          ``(1) In general.--A beneficiary of any estate or 
        trust to which subsection (a) applies shall, on such 
        beneficiary's return, treat any reported item in a 
        manner which is consistent with the treatment of such 
        item on the applicable entity's return.
          ``(2) Notification of inconsistent treatment.--
                  ``(A) In general.--In the case of any 
                reported item, if--
                          ``(i)(I) the applicable entity has 
                        filed a return but the beneficiary's 
                        treatment on such beneficiary's return 
                        is (or may be) inconsistent with the 
                        treatment of the item on the applicable 
                        entity's return, or
                          ``(II) the applicable entity has not 
                        filed a return, and
                          ``(ii) the beneficiary files with the 
                        Secretary a statement identifying the 
                        inconsistency,
                paragraph (1) shall not apply to such item.
                  ``(B) Beneficiary receiving incorrect 
                information.--A beneficiary shall be treated as 
                having complied with clause (ii) of 
                subparagraph (A) with respect to a reported 
                item if the beneficiary--
                          ``(i) demonstrates to the 
                        satisfaction of the Secretary that the 
                        treatment of the reported item on the 
                        beneficiary's return is consistent with 
                        the treatment of the item on the 
                        statement furnished under subsection 
                        (a) to the beneficiary by the 
                        applicable entity, and
                          ``(ii) elects to have this paragraph 
                        apply with respect to that item.
          ``(3) Effect of failure to notify.--In any case--
                  ``(A) described in subparagraph (A)(i)(I) of 
                paragraph (2), and
                  ``(B) in which the beneficiary does not 
                comply with subparagraph (A)(ii) of paragraph 
                (2),
        any adjustment required to make the treatment of the 
        items by such beneficiary consistent with the treatment 
        of the items on the applicable entity's return shall be 
        treated as arising out of mathematical or clerical 
        errors and assessed according to section 6213(b)(1). 
        Paragraph (2) of section 6213(b) shall not apply to any 
        assessment referred to in the preceding sentence.
          ``(4) Definitions.--For purposes of this subsection--
                  ``(A) Reported item.--The term `reported 
                item' means any item for which information is 
                required to be furnished under subsection (a).
                  ``(B) Applicable entity.--The term 
                `applicable entity' means the estate or trust 
                of which the taxpayer is the beneficiary.
          ``(5) Addition to tax for failure to comply with 
        section.--For addition to tax in the case of a 
        beneficiary's negligence in connection with, or 
        disregard of, the requirements of this section, see 
        part II of subchapter A of chapter 68.''
    (b) Foreign Trusts.--Subsection (d) of section 6048 
(relating to information with respect to certain foreign 
trusts) is amended by adding at the end the following new 
paragraph:
          ``(5) United states person's return must be 
        consistent with trust return or secretary notified of 
        inconsistency.--Rules similar to the rules of section 
        6034A(c) shall apply to items reported by a trust under 
        subsection (b)(1)(B) and to United States persons 
        referred to in such subsection.''
    (c) Effective Date.--The amendments made by this section 
shall apply to returns of beneficiaries and owners filed after 
the date of the enactment of this Act.

                   Subtitle E--Excise Tax Provisions

SEC. 1041. EXTENSION AND MODIFICATION OF AIRPORT AND AIRWAY TRUST FUND 
                    TAXES.

    (a) Fuel Taxes.--
          (1) Aviation fuel.--Clause (ii) of section 
        4091(b)(3)(A) is amended by striking ``September 30, 
        1997'' and inserting ``September 30, 2007''.
          (2) Aviation gasoline.--Subparagraph (B) of section 
        4081(d)(2) is amended by striking ``September 30, 
        1997'' and inserting ``September 30, 2007''.
          (3) Noncommercial aviation.--Subparagraph (B) of 
        section 4041(c)(3) is amended by striking ``September 
        30, 1997'' and inserting ``September 30, 2007''.
    (b) Ticket Taxes.--
          (1) Persons.--Clause (ii) of section 4261(g)(1)(A) is 
        amended by striking ``September 30, 1997'' and 
        inserting ``September 30, 2007''.
          (2) Property.--Clause (ii) of section 4271(d)(1)(A) 
        is amended by striking ``September 30, 1997'' and 
        inserting ``September 30, 2007''.
    (c) Modifications to Tax on Transportation of Persons by 
Air.--
          (1) In general.--Section 4261 (relating to imposition 
        of tax) is amended by striking subsections (a), (b), 
        and (c) and inserting the following new subsections:
    ``(a) In General.--There is hereby imposed on the amount 
paid for taxable transportation of any person a tax equal to 
7.5 percent of the amount so paid.
    ``(b) Domestic Segments of Taxable Transportation.--
          ``(1) In general.--There is hereby imposed on the 
        amount paid for each domestic segment of taxable 
        transportation by air a tax in the amount determined in 
        accordance with the following table for the calendar 
        year in which the segment begins:

        In the case of segments
          beginning during:                                  The tax is:
          1997 or 1998..................................           $2.00
          1999..........................................           $2.25
          2000..........................................           $2.50
          2001..........................................           $2.75
          2002 or thereafter............................           $3.00

          ``(2) Domestic segment.--For purposes of this 
        section, the term `domestic segment' means any segment 
        which is taxable transportation described in section 
        4262(a)(1).
          ``(3) Changes in segments by reason of rerouting.--
        If--
                  ``(A) a ticket is purchased for 
                transportation between 2 locations on specified 
                flights, and
                  ``(B) at the initiation of the air carrier 
                after such purchase, there is a change in the 
                route taken which changes the number of 
                domestic segments, but there is no change in 
                the amount charged for such transportation,
        the tax imposed by paragraph (1) shall be determined 
        without regard to such change in route.
    ``(c) Use of International Travel Facilities.--
          ``(1) In general.--There is hereby imposed a tax of 
        $15.50 on any amount paid (whether within or without 
        the United States) for any transportation of any person 
        by air, if such transportation begins or ends in the 
        United States.
          ``(2) Exception for transportation entirely taxable 
        under subsection (a).--This subsection shall not apply 
        to any transportation all of which is taxable under 
        subsection (a) (determined without regard to sections 
        4281 and 4282).
          ``(3) Special rule for alaska and hawaii.--In any 
        case in which the tax imposed by paragraph (1) applies 
        to a domestic segment, such tax shall apply only on 
        departure.''
          (2) Special rules.--Section 4261 is amended by 
        redesignating subsections (e), (f), and (g), as 
        subsections (f), (g), and (h), respectively, and by 
        inserting after subsection (d) the following new 
        subsection:
    ``(e) Special Rules.--
          ``(1) Amounts paid outside the united states.--In the 
        case of amounts paid outside the United States for 
        taxable transportation, the taxes imposed by 
        subsections (a) and (b) shall apply only to segments of 
        such transportation which begin and end in the United 
        States.
          ``(2) Amounts paid for right to award free or reduced 
        rate air transportation.--Any amount paid (and the 
        value of any other benefit provided) to an air carrier 
        (or any related person) for the right to provide 
        mileage awards for (or other reductions in the cost of) 
        any transportation of persons by air shall be treated 
        for purposes of subsection (a) as an amount paid for 
        taxable transportation, and such amount shall be 
        taxable under subsection (a) without regard to any 
        other provision of this subchapter. The Secretary shall 
        prescribe rules which reallocate items of income, 
        deduction, credit, exclusion, or other allowance to the 
        extent necessary to prevent the avoidance of tax 
        imposed by reason of this paragraph.
          ``(3) Inflation adjustment of dollar rates of tax.--
                  ``(A) In general.--In the case of taxable 
                events in a calendar year after the last 
                nonindexed year, the dollar amount contained in 
                subsection (b) and the dollar amount contained 
                in subsection (c) shall each be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting the 
                        year before the last nonindexed year 
                        for `calendar year 1992' in 
                        subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of 10 cents, such 
                increase shall be rounded to the nearest 
                multiple of 10 cents.
                  ``(B) Last nonindexed year.--For purposes of 
                subparagraph (A), the last nonindexed year is--
                          ``(i) 2002 in the case of a dollar 
                        amount contained in subsection (b), and
                          ``(ii) 1998 in the case of a dollar 
                        amount contained in subsection (c).
                  ``(C) Taxable event.--For purposes of 
                subparagraph (A), in the case of the tax 
                imposed subsection (b), the beginning of the 
                domestic segment shall be treated as the 
                taxable event.''
          (3) Secondary liability of carrier for unpaid tax.--
        Subsection (c) of section 4263 is amended by striking 
        ``subchapter--'' and all that follows and inserting ``, 
        such tax shall be paid by the carrier providing the 
        initial segment of such transportation which begins or 
        ends in the United States.''
    (d) Modification of Rules on Airline Fare Advertising.--
Subsection (b) of section 7275 (relating to advertising) is 
amended by striking ``shall--'' and all that follows and 
inserting ``shall--
          ``(1) separately state--
                  ``(A) the amount to be paid for such 
                transportation, and
                  ``(B) the amount of the taxes imposed by 
                subsections (a), (b), and (c) of section 4261 
                at a location proximate to (and in a type size 
                not less than half the type size of) the 
                statement of the amount described in 
                subparagraph (A), and
          ``(2) describe such taxes substantially as: `user 
        taxes to pay for airport construction and airway safety 
        and operations'.''
    (e) Increased Airport and Airway Trust Fund Deposits.--
          (1) Paragraph (1) of section 9502(b) is amended--
                  (A) by striking ``(to the extent that the 
                rate of the tax on such gasoline exceeds 4.3 
                cents per gallon)'' in subparagraph (C), and
                  (B) by striking ``to the extent attributable 
                to the Airport and Airway Trust Fund financing 
                rate'' in subparagraph (C).
          (2) Section 9502 is amended by striking subsection 
        (f).
    (f) Effective Dates.--
          (1) Fuel taxes.--The amendments made by subsection 
        (a) shall apply take effect on October 1, 1997.
          (2) Ticket taxes.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the amendments made by 
                subsections (b) and (c) shall apply to 
                transportation beginning on or after October 1, 
                1997.
                  (B) Treatment of amounts paid for tickets 
                purchased before date of enactment.--The 
                amendments made by subsection (c) shall not 
                apply to amounts paid for a ticket purchased 
                before the date of the enactment of this Act 
                for a specified flight beginning on or after 
                October 1, 1997.
                  (C) Amounts paid for right to award mileage 
                awards.--
                          (i) In general.--Paragraph (2) of 
                        section 4261(e) of the Internal Revenue 
                        Code of 1986 (as added by the amendment 
                        made by subsection (c)) shall apply to 
                        amounts paid after September 30, 1997.
                          (ii) Payments within controlled 
                        group.--For purposes of clause (i), any 
                        amount paid after June 11, 1997, and 
                        before October 1, 1997, by 1 member of 
                        a controlled group for a right which is 
                        described in such section 4261(e)(2) 
                        and is furnished by another member of 
                        such group after September 30, 1997, 
                        shall be treated as paid after 
                        September 30, 1997. For purposes of the 
                        preceding sentence, all persons treated 
                        as a single employer under subsection 
                        (a) or (b) of section 52 of such Code 
                        shall be treated as members of a 
                        controlled group.
          (3) Advertising.--The amendment made by subsection 
        (d) shall take effect on October 1, 1997.
          (4) Increased deposits into airport and airway trust 
        fund.--The amendments made by subsection (e) shall 
        apply with respect to taxes received in the Treasury on 
        and after October 1, 1997.
    (g) Delayed Deposits of Airline Ticket Tax Revenues.--In 
the case of deposits of taxes imposed by section 4261 of the 
Internal Revenue Code of 1986, the due date for any such 
deposit which would (but for this subsection) be required to be 
made after August 14, 1997, and before October 1, 1997, shall 
be October 10, 1997.

SEC. 1042. KEROSENE TAXED AS DIESEL FUEL.

    (a) In General.--Subsection (a) of section 4083 (defining 
taxable fuel) is amended by striking ``and'' at the end of 
subparagraph (A), by striking the period at the end of 
subparagraph (B) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                  ``(C) kerosene.''
    (b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is 
amended by inserting ``or kerosene'' after ``diesel fuel''.
    (c) Exemptions From Tax; Refunds to Vendors.--
          (1) In general.--Section 4082 (relating to exemptions 
        for diesel fuel) is amended by striking ``diesel fuel'' 
        each place it appears in subsections (a) and (c) and 
        inserting ``diesel fuel and kerosene''.
          (2) Certain kerosene exempt from dyeing 
        requirement.--Section 4082 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) Exceptions to Dyeing Requirements.--
          ``(1) Aviation-grade kerosene.--Subsection (a)(2) 
        shall not apply to a removal, entry, or sale of 
        aviation-grade kerosene (as determined under 
        regulations prescribed by the Secretary) if the person 
        receiving the kerosene is registered under section 4101 
        with respect to the tax imposed by section 4091.
          ``(2) Use for non-fuel feedstock purposes.--
        Subsection (a)(2) shall not apply to kerosene--
                  ``(A) received by pipeline or barge for use 
                by the person receiving the kerosene in the 
                manufacture or production of any substance 
                (other than gasoline, diesel fuel, or special 
                fuels referred to in section 4041), or
                  ``(B) to the extent provided in regulations, 
                removed or entered--
                          ``(i) for such a use by the person 
                        removing or entering the kerosene, or
                          ``(ii) for resale by such person for 
                        such a use by the purchaser,
        but only if the person receiving, removing, or entering 
        the kerosene and such purchaser (if any) are registered 
        under section 4101 with respect to the tax imposed by 
        section 4081.''
          (3) Refunds.--
                  (A) Subsection (l) of section 6427 is amended 
                by inserting ``or kerosene'' after ``diesel 
                fuel'' each place it appears in paragraphs (1), 
                (2), and (5) (including the heading for 
                paragraph (5)).
                  (B) Paragraph (5) of section 6427(l) is 
                amended by redesignating subparagraph (B) as 
                subparagraph (C) and by inserting after 
                subparagraph (A) the following new 
                subparagraph:
                  ``(B) Sales of kerosene not for use in motor 
                fuel.--Paragraph (1)(A) shall not apply to 
                kerosene sold by a vendor--
                          ``(i) for any use if such sale is 
                        from a pump which (as determined under 
                        regulations prescribed by the 
                        Secretary) is not suitable for use in 
                        fueling any diesel-powered highway 
                        vehicle or train, or
                          ``(ii) to the extent provided by the 
                        Secretary, for blending with heating 
                        oil to be used during periods of 
                        extreme or unseasonable cold.''
                  (C) Subparagraph (C) of section 6427(l)(5), 
                as redesignated by subparagraph (B) of this 
                paragraph, is amended by striking 
                ``subparagraph (A)'' and inserting 
                ``subparagraph (A) or (B)''.
                  (D) The heading for subsection (l) of section 
                6427 is amended by inserting ``, Kerosene,'' 
                after ``Diesel Fuel''.
    (d) Conforming Amendments.--
          (1) Paragraph (2) of section 4041(a) is amended by 
        striking ``kerosene, gas oil, or fuel oil'' and 
        inserting ``gas oil, fuel oil''.
          (2) Paragraph (1) of section 4041(c) is amended by 
        striking ``any liquid'' and inserting ``kerosene and 
        any other liquid''.
          (3)(A) The heading for section 4082 is amended by 
        inserting ``AND KEROSENE'' after ``DIESEL FUEL''.
          (B) The table of sections for subpart A of part III 
        of subchapter A of chapter 32 is amended by inserting 
        ``and kerosene'' after ``diesel fuel'' in the item 
        relating to section 4082.
          (4) Subsection (b) of section 4083 is amended by 
        striking ``gasoline, diesel fuel,'' and inserting 
        ``taxable fuels''.
          (5) Subsection (a) of section 4093 is amended by 
        striking ``any liquid'' and inserting ``kerosene and 
        any other liquid''.
          (6) The material following subparagraph (F) of 
        section 6416(b)(2) is amended by inserting ``or 
        kerosene'' after ``diesel fuel''.
          (7) Paragraphs (1) and (3) of section 6427(f), and 
        the heading for section 6427(f), are each amended by 
        inserting ``kerosene,'' after ``diesel fuel,''.
          (8) Paragraph (2) of section 6427(f) is amended by 
        striking ``or diesel fuel'' each place it appears and 
        inserting ``, diesel fuel, or kerosene''.
          (9) Subparagraph (A) of section 6427(i)(3) is amended 
        by striking ``or diesel fuel'' and inserting ``, diesel 
        fuel, or kerosene''.
          (10) The heading for paragraph (4) of section 6427(i) 
        is amended to read as follows:
          ``(4) Special rule for refunds under subsection 
        (l).--''
          (11) Paragraph (1) of section 6715(c) is amended by 
        inserting ``or kerosene'' after ``diesel fuel''.
          (12)(A) The text of section 7232 is amended by 
        striking ``gasoline, lubricating oil, diesel fuel'' and 
        inserting ``any taxable fuel (as defined in section 
        4083)''.
          (B) The section heading for section 7232 is amended 
        to read as follows:

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

          (C) The table of sections for part II of subchapter A 
        of chapter 75 is amended by striking the item relating 
        to section 7232 and inserting the following:

        ``Sec. 7232. Failure to register under section 4101, false 
                  representations of registration status, etc.''

          (13) Sections 9503(b)(1)(E) and 9508(b)(2) are each 
        amended by striking ``and diesel fuel'' and inserting 
        ``, diesel fuel, and kerosene''.
          (14) Subparagraph (B) of section 9503(b)(5) is 
        amended by striking ``or diesel fuel'' and inserting 
        ``, diesel fuel, or kerosene''.
          (15) Paragraphs (1)(B) and (2) of section 9503(f) are 
        each amended by inserting ``or kerosene'' after 
        ``diesel fuel'' each place it appears.
    (e) Effective Date.--The amendments made by this section 
shall take effect on July 1, 1998.
    (f) Floor Stock Taxes.--
          (1) Imposition of tax.--In the case of kerosene which 
        is held on July 1, 1998, by any person, there is hereby 
        imposed a floor stocks tax of 24.3 cents per gallon.
          (2) Liability for tax and method of payment.--
                  (A) Liability for tax.--A person holding 
                kerosene on July 1, 1998, to which the tax 
                imposed by paragraph (1) applies shall be 
                liable for such tax.
                  (B) Method of payment.--The tax imposed by 
                paragraph (1) shall be paid in such manner as 
                the Secretary shall prescribe.
                  (C) Time for payment.--The tax imposed by 
                paragraph (1) shall be paid on or before August 
                31, 1998.
          (3) Definitions.--For purposes of this subsection--
                  (A) Held by a person.--Kerosene shall be 
                considered as ``held by a person'' if title 
                thereto has passed to such person (whether or 
                not delivery to the person has been made).
                  (B) Secretary.--The term ``Secretary'' means 
                the Secretary of the Treasury or his delegate.
          (4) Exception for exempt uses.--The tax imposed by 
        paragraph (1) shall not apply to kerosene held by any 
        person exclusively for any use to the extent a credit 
        or refund of the tax imposed by section 4081 of the 
        Internal Revenue Code of 1986 is allowable for such 
        use.
          (5) Exception for fuel held in vehicle tank.--No tax 
        shall be imposed by paragraph (1) on kerosene held in 
        the tank of a motor vehicle or motorboat.
          (6) Exception for certain amounts of fuel.--
                  (A) In general.--No tax shall be imposed by 
                paragraph (1) on kerosene held on July 1, 1998, 
                by any person if the aggregate amount of 
                kerosene held by such person on such date does 
                not exceed 2,000 gallons. The preceding 
                sentence shall apply only if such person 
                submits to the Secretary (at the time and in 
                the manner required by the Secretary) such 
                information as the Secretary shall require for 
                purposes of this paragraph.
                  (B) Exempt fuel.--For purposes of 
                subparagraph (A), there shall not be taken into 
                account fuel held by any person which is exempt 
                from the tax imposed by paragraph (1) by reason 
                of paragraph (4) or (5).
                  (C) Controlled groups.--For purposes of this 
                paragraph--
                          (i) Corporations.--
                                  (I) In general.--All persons 
                                treated as a controlled group 
                                shall be treated as 1 person.
                                  (II) Controlled group.--The 
                                term ``controlled group'' has 
                                the meaning given to such term 
                                by subsection (a) of section 
                                1563 of such Code; except that 
                                for such purposes the phrase 
                                ``more than 50 percent'' shall 
                                be substituted for the phrase 
                                ``at least 80 percent'' each 
                                place it appears in such 
                                subsection.
                          (ii) Nonincorporated persons under 
                        common control.--Under regulations 
                        prescribed by the Secretary, principles 
                        similar to the principles of clause (i) 
                        shall apply to a group of persons under 
                        common control where 1 or more of such 
                        persons is not a corporation.
          (7) Coordination with section 4081.--No tax shall be 
        imposed by paragraph (1) on kerosene to the extent that 
        tax has been (or will be) imposed on such kerosene 
        under section 4081 or 4091 of such Code.
          (8) Other laws applicable.--All provisions of law, 
        including penalties, applicable with respect to the 
        taxes imposed by section 4081 of such Code shall, 
        insofar as applicable and not inconsistent with the 
        provisions of this subsection, apply with respect to 
        the floor stock taxes imposed by paragraph (1) to the 
        same extent as if such taxes were imposed by such 
        section 4081.

SEC. 1043. REDUCTION OF INCENTIVES FOR ALCOHOL FUELS.

    (a) Denial of Credit for Alcohol Used To Produce Ether.--
Subsection (b) of section 40 is amended by adding at the end 
the following new paragraph:
          ``(6) Denial of credit for alcohol used to produce 
        ether.--No credit shall be allowed under this section 
        for alcohol used to produce any ether.''
    (b) Limitation on Alcohol Eligible for Credit for Alcohol 
Used as Fuel--
          (1) In general.--Subparagraph (A) of section 40(d)(1) 
        (defining alcohol) is amended by striking ``or'' at the 
        end of clause (i), by striking the period at the end of 
        clause (ii) and inserting ``, or'', and by adding at 
        the end the following new clause:
                          ``(iii) alcohol produced by a still 
                        (or other distilling apparatus) placed 
                        in service after June 8, 1997.''
          (2) Future credit limited to average historical 
        production.--Section 40 is amended by adding at the end 
        the following new subsection:
    ``(i) Expanded Production Ineligible for Credit.--
          ``(1) In general.--Subsection (a) shall apply to 
        alcohol produced after December 31, 1997, only if the 
        alcohol is designated under this subsection by a 
        producer who is registered under section 4101.
          ``(2) Designation based on historical production.--
                  ``(A) In general.--The amount of alcohol 
                produced by a producer during any calendar year 
                which may be designated under this subsection 
                by any producer other than an eligible small 
                ethanol producer is the amount equal to the 
                average annual amount of alcohol (as defined in 
                subsection (d)(1)(A) without regard to clause 
                (iii))--
                          ``(i) which was produced by such 
                        producer (other than casual off-farm 
                        production) during each of the base 
                        period years, and
                          ``(ii) which was sold or used by such 
                        producer for any purpose described in 
                        clause (i) of subsection (b)(4)(B).
                For purposes of the preceding sentence, a rule 
                similar to the rule of subsection (b)(4)(D) 
                shall apply.
                  ``(B) Base period year.--For purposes of 
                subparagraph (A), the term `base period year' 
                means each of 3 years which are among the 5-
                year period ending on May 31, 1997, determined 
                by disregarding--
                          ``(i) one year for which the 
                        production described in subparagraph 
                        (A)(i) was the largest, and
                          ``(ii) one year for which the 
                        production described in subparagraph 
                        (A)(i) was the smallest.
          ``(3) Production for less than entire base period.--
        If alcohol is produced by a producer for less than 3 
        base period years, the average referred to in paragraph 
        (2) shall be treated as being not less than 50 percent 
        of the annual productive capacity of such producer as 
        of June 8, 1997.
          ``(4) 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.''
          (3) Conforming amendment.--Paragraph (1) of section 
        40(g) is amended by striking ``clauses (i) and (ii)'' 
        and inserting ``clauses (i), (ii), and (iii)''.
    (c) Reduction of Credit For Ethanol By Reason of Carbon 
Dioxide Byproduct Benefit.--
          (1) Subsection (h) of section 40 is amended--
                  (A) by striking ``54 cents'' each place it 
                appears and inserting ``51 cents'', and
                  (B) by striking ``40 cents'' each place it 
                appears and inserting ``38.25 cents''.
          (2) Subparagraph (A) of section 4041(b)(2) is amended 
        by striking ``5.4 cents'' and inserting ``5.1 cents''.
          (3) Paragraphs (4)(A) and (5) of section 4081(c) are 
        each amended by striking ``5.4 cents'' each place it 
        appears and inserting ``5.1 cents''.
          (4) Paragraph (1) of section 4091(c) is amended by 
        striking ``13.4 cents'' and inserting ``13.1 cents''.
    (d) Excise Tax on Excess Production of Fuel Alcohol.--
          (1) In general.--Chapter 36 (relating to certain 
        other excise taxes) is amended by inserting after 
        subchapter B the following new subchapter:

           ``Subchapter C--Excess Production of Fuel Alcohol

        ``Sec. 4476. Imposition of tax.

``SEC. 4476. IMPOSITION OF TAX.

    ``(a) General Rule.--There is hereby imposed a tax of 51 
cents for each gallon of excess fuel alcohol produced, 
imported, or brought into the United States.
    ``(b) Liability for Tax.--The tax imposed by subsection (a) 
shall be paid by the person who would be liable for the tax 
imposed by section 5001 on the alcohol but for paragraph (1)(C) 
or (12) of section 5214(a).
    ``(c) Excess Fuel Alcohol.--For purposes of this section--
          ``(1) Domestic production.--In the case of alcohol 
        produced in the United States, the term `excess fuel 
        alcohol' means any alcohol--
                  ``(A) which is withdrawn free of tax under 
                paragraph (1)(C) or (12) of section 5214(a) 
                during any calendar year, and
                  ``(B) which is not designated under section 
                40(i).
          ``(2) Other production.--In the case of alcohol 
        imported or brought into the United States--
                  ``(A) In general.--The term `excess fuel 
                alcohol' means, with respect to the person 
                importing or bringing such alcohol into the 
                United States, the excess of--
                          ``(i) the amount of alcohol so 
                        imported or brought into the United 
                        States by such person during any year, 
                        over
                          ``(ii) such person's historical 
                        average determined under rules similar 
                        to the rules of section 40(i)(2).
                  ``(B) Exception.--Such term shall not include 
                any alcohol which the person importing or 
                bringing such alcohol into the United States 
                establishes to the satisfaction of the 
                Secretary that such alcohol is not to be used 
                as a fuel or in a mixture to be used as a fuel.
          ``(3) Alcohol.--The term `alcohol' includes methanol 
        and ethanol but does not include alcohol produced from 
        petroleum, natural gas, or coal (including lignite).
    ``(d) Special Rules.--
          ``(1) Exception for casual off-farm production.--The 
        tax imposed by this section shall not apply to casual 
        off-farm production (within the meaning of section 40).
          ``(2) Alcohol must be withdrawn for fuel use.--
        Alcohol withdrawn free of tax under section 
        5214(a)(1)(C) shall be taken into account under this 
        section only if withdrawn for fuel use.
          ``(3) Certain rules to apply.--The tax imposed by 
        this section shall attach, and be determined and paid, 
        as if it were tax imposed by section 5001.
    ``(e) Application of Tax Dependent on Availability of Other 
Fuel Alcohol Subsidies.--
          ``(1) Application if fuel alcohol subsidies 
        continue.--Paragraphs (1)(B) and (2)(A)(ii) of 
        subsection (c) shall not apply after December 31, 2000, 
        if this section is in effect after such date.
          ``(2) Application if fuel alcohol subsidies 
        terminate.--This section shall not apply after December 
        31, 2000, if none of the fuel alcohol subsidies apply 
        to any sale or use after such date. For purposes of the 
        preceding sentence, the fuel alcohol subsidies are 
        sections 40, 4041(b)(2), 4081(c), 4091(c), 6427(f), and 
        6427(q).''
          (2) Tax to be nondeductible.--Subsection (a) of 
        section 275 is amended by adding at the end the 
        following new paragraph:
          ``(7) Taxes imposed by section 4476 (relating to 
        excess production of fuel alcohol).''
          (3) Tax to be deposited into highway trust fund.--
        Paragraph (1) of section 9503(b) is amended by striking 
        ``and'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and 
        by inserting after subparagraph (E) the following new 
        subparagraph:
                  ``(F) section 4476 (relating to excess 
                production of fuel alcohol), and''.
          (4) Clerical amendment.--The table of subchapters for 
        chapter 36 is amended by inserting after the item 
        relating to subchapter B the following new item:
        ``Subchapter C. Excess production of fuel alcohol.''
    (e) Increase in Small Ethanol Producer Credit.--
Subparagraph (A) of section 40(b)(4) is amended by striking 
``10 cents'' and inserting ``13 cents''.
    (f) Effective Date.--
          (1) Amendments relating to credit.--The amendments 
        made by subsections (a), (b), (c)(1), and (e) shall 
        apply to alcohol produced after December 31, 1997, in 
        taxable years ending after such date.
          (2) Amendments relating to excise taxes.--The 
        amendments made by subsections (c)(2) and (d) shall 
        take effect on January 1, 1998.
          (3) Stills placed in service pursuant to binding 
        contracts.--For purposes of subsections (d)(1)(A)(iii) 
        and (i)(3) of section 40 of the Internal Revenue Code 
        of 1986, as amended by this section, a still (or other 
        distilling apparatus) shall be treated as placed in 
        service before June 9, 1997, if such still (or other 
        apparatus) is constructed or acquired by the taxpayer 
        pursuant to a written contract which was binding on 
        June 8, 1997, and at all times thereafter before such 
        construction or acquisition.

SEC. 1044. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK TRUST FUND 
                    TAXES.

    Paragraph (3) of section 4081(d) is amended by striking 
``shall not apply after December 31, 1995'' and inserting 
``shall apply after the date of the enactment of the Revenue 
Reconciliation Act of 1997 and before October 1, 2002''.

SEC. 1045. APPLICATION OF COMMUNICATIONS TAX TO LONG-DISTANCE PREPAID 
                    TELEPHONE CARDS.

    (a) In General.--Subsection (b) of section 4251 is 
amended--
          (1) by adding at the end the following new paragraph:
          ``(3) Long-distance prepaid telephone cards and 
        similar arrangements.--Any amount paid (and the value 
        of any other benefit provided) to a provider of 
        communications services (or any related person) for the 
        right to award, sell, or otherwise make available 
        telephone service (or reductions in the cost of such 
        service) other than local telephone service through 
        prepaid telephone cards or any similar arrangement 
        shall be treated as an amount paid for communications 
        services. The Secretary shall prescribe rules which 
        reallocate items of income, deduction, credit, 
        exclusion, or other allowance to the extent necessary 
        to prevent the avoidance of tax imposed by reason of 
        this paragraph.'', and
          (2) by inserting ``And Special Rule'' after 
        ``Definitions'' in the heading.
    (b) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to amounts paid on or after the date of the 
        enactment of this Act.
          (2) Payments within controlled group.--For purposes 
        of paragraph (1), any amount paid after June 11, 1997, 
        and before the date of the enactment of this Act by 1 
        member of a controlled group for a right which is 
        described in section 4251(b)(3) of the Internal Revenue 
        Code of 1986 (as added by this section) and is 
        furnished by another member of such group shall be 
        treated as paid on the date of the enactment of this 
        Act. For purposes of the preceding sentence, all 
        persons treated as a single employer under subsection 
        (a) or (b) of section 52 of such Code shall be treated 
        as members of a controlled group.

         Subtitle F--Provisions Relating to Tax-Exempt Entities

SEC. 1051. EXPANSION OF LOOK-THRU RULE FOR INTEREST, ANNUITIES, 
                    ROYALTIES, AND RENTS DERIVED BY SUBSIDIARIES OF 
                    TAX-EXEMPT ORGANIZATIONS.

    (a) In General.--Paragraph (13) of section 512(b) is 
amended to read as follows:
          ``(13) Special rules for certain amounts received 
        from controlled entities.--
                  ``(A) In general.--If an organization (in 
                this paragraph referred to as the `controlling 
                organization') receives (directly or 
                indirectly) a specified payment from another 
                entity which it controls (in this paragraph 
                referred to as the `controlled entity'), 
                notwithstanding paragraphs (1), (2), and (3), 
                the controlling organization shall include such 
                payment as an item of gross income derived from 
                an unrelated trade or business to the extent 
                such payment reduces the net unrelated income 
                of the controlled entity (or increases any net 
                unrelated loss of the controlled entity). There 
                shall be allowed all deductions of the 
                controlling organization directly connected 
                with amounts treated as derived from an 
                unrelated trade or business under the preceding 
                sentence.
                  ``(B) Net unrelated income or loss.--For 
                purposes of this paragraph--
                          ``(i) Net unrelated income.--The term 
                        `net unrelated income' means--
                                  ``(I) in the case of a 
                                controlled entity which is not 
                                exempt from tax under section 
                                501(a), the portion of such 
                                entity's taxable income which 
                                would be unrelated business 
                                taxable income if such entity 
                                were exempt from tax under 
                                section 501(a) and had the same 
                                exempt purposes (as defined in 
                                section 513A(a)(5)(A)) as the 
                                controlling organization, or
                                  ``(II) in the case of a 
                                controlled entity which is 
                                exempt from tax under section 
                                501(a), the amount of the 
                                unrelated business taxable 
                                income of the controlled 
                                entity.
                          ``(ii) Net unrelated loss.--The term 
                        `net unrelated loss' means the net 
                        operating loss adjusted under rules 
                        similar to the rules of clause (i).
                  ``(C) Specified payment.--For purposes of 
                this paragraph, the term `specified payment' 
                means any interest, annuity, royalty, or rent.
                  ``(D) Definition of control.--For purposes of 
                this paragraph--
                          ``(i) Control.--The term `control' 
                        means--
                                  ``(I) in the case of a 
                                corporation, ownership (by vote 
                                or value) of more than 50 
                                percent of the stock in such 
                                corporation,
                                  ``(II) in the case of a 
                                partnership, ownership of more 
                                than 50 percent of the profits 
                                interests or capital interests 
                                in such partnership, or
                                  ``(III) in any other case, 
                                ownership of more than 50 
                                percent of the beneficial 
                                interests in the entity.
                          ``(ii) Constructive ownership.--
                        Section 318 (relating to constructive 
                        ownership of stock) shall apply for 
                        purposes of determining ownership of 
                        stock in a corporation. Similar 
                        principles shall apply for purposes of 
                        determining ownership of interests in 
                        any other entity.
                  ``(E) Related persons.--The Secretary shall 
                prescribe such rules as may be necessary or 
                appropriate to prevent avoidance of the 
                purposes of this paragraph through the use of 
                related persons.''
    (b) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        taxable years beginning after the date of the enactment 
        of this Act.
          (2) Control test.--In the case of taxable years 
        beginning before January 1, 1999, an organization shall 
        be treated as controlling another organization for 
        purposes of section 512(b)(13) of the Internal Revenue 
        Code of 1986 (as amended by this section) only if it 
        controls such organization within the meaning of such 
        section, determined by substituting ``80 percent'' for 
        ``50 percent'' each place it appears in subparagraph 
        (D) thereof.

SEC. 1052. LIMITATION ON INCREASE IN BASIS OF PROPERTY RESULTING FROM 
                    SALE BY TAX-EXEMPT ENTITY TO A RELATED PERSON.

    (a) In General.--Part IV of subchapter O of chapter 1 
(relating to special rules for gain or loss on disposition of 
property) is amended by redesignating section 1061 as section 
1062 and by inserting after section 1060 the following new 
section:

``SEC. 1061. BASIS LIMITATION FOR SALE OR EXCHANGE OF PROPERTY BY TAX-
                    EXEMPT ENTITY TO RELATED PERSON.

    ``(a) General Rule.--In the case of a sale or exchange of 
property directly or indirectly between a tax-exempt entity and 
a related person, the basis of the related person in the 
property acquired shall not exceed the adjusted basis of such 
property (immediately before the exchange) in the hands of the 
tax-exempt entity, increased by the amount of gain recognized 
to the tax-exempt entity on the transfer which is subject to 
tax under section 511.
    ``(b) Definitions.--For purposes of this section--
          ``(1) Tax-exempt entity.--The term `tax-exempt 
        entity' means any entity which is exempt from the tax 
        imposed by this chapter.
          ``(2) Related person.--The term `related person' 
        means any person bearing a relationship to the tax-
        exempt entity which is described in section 267(b) or 
        707(b)(1).For purposes of applying section 267(b)(2) 
under the preceding sentence, such an entity shall be treated as if it 
were an individual.''
    (b) Clerical Amendment.--The table of sections for part IV 
of subchapter O of chapter 1 is amended by striking the last 
item and inserting the following:

        ``Sec. 1061. Basis limitation for sale or exchange of property 
                  by tax-exempt entity to related person.
        ``Sec. 1062. Cross references.''

    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to sales and exchanges after June 8, 1997.
          (2) Binding contracts.--The amendments made by this 
        section shall not apply to any sale or exchange 
        pursuant to a written contract which was binding on 
        June 8, 1997, and at all times thereafter before the 
        sale or exchange.

SEC. 1053. MODIFICATIONS TO EXCEPTION FROM REPORTING, ETC. OF LOBBYING 
                    ACTIVITIES.

    (a) In General.--Paragraph (3) of section 6033(e) (relating 
to exception where dues generally nondeductible) is amended to 
read as follows:
          ``(3) Exception where dues generally nondeductible.--
                  ``(A) In general.--Paragraph (1)(A) shall not 
                apply to an organization if more than 90 
                percent of the amount of the aggregate annual 
                dues (or similar payments) paid to such 
                organization are paid--
                          ``(i) by individuals or families 
                        whose annual dues (or similar amounts) 
                        are less than $100, or
                          ``(ii) by organizations which are 
                        exempt from tax.
                For purposes of the preceding sentence, all 
                organizations sharing a name, charter, historic 
                affiliation, or similar characteristics and 
                coordinating their lobbying activities shall be 
                treated as 1 organization.
                  ``(B) Inflation adjustment.--In the case of 
                dues for annual periods beginning in any 
                calendar year after 1998, the dollar amount 
                contained in subparagraph (A)(i) shall be 
                increased by an amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $5, such increase 
                shall be rounded to the nearest multiple of 
                $5.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1054. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES RELATING TO 
                    EXEMPT ORGANIZATIONS WHICH PROVIDE COMMERCIAL-TYPE 
                    INSURANCE.

    (a) In General.--Subparagraphs (A) and (B) of section 
1012(c)(4) of the Tax Reform Act of 1986 shall not apply to any 
taxable year beginning after December 31, 1997.
    (b) Special Rules.--In the case of an organization to which 
section 501(m) of the Internal Revenue Code of 1986 applies 
solely by reason of the amendment made by subsection (a)--
          (1) no adjustment shall be made under section 481 (or 
        any other provision) of such Code on account of a 
        change in its method of accounting for its first 
        taxable year beginning after December 31, 1997, and
          (2) for purposes of determining gain or loss, the 
        adjusted basis of any asset held on the 1st day of such 
        taxable year shall be treated as equal to its fair 
        market value as of such day.
    (c) Reserve Weakening after June 8, 1997.--Any reserve 
weakening after June 8, 1997, by an organization described in 
subsection (b) shall be treated as occurring in such 
organizations 1st taxable year beginning after December 31, 
1997.
    (d) Regulations.--The Secretary of the Treasury or his 
delegate may prescribe rules for providing proper adjustments 
for organizations described in subsection (b) with respect to 
short taxable years which begin during 1998 by reason of 
section 843 of the Internal Revenue Code of 1986.

                  Subtitle G--Other Revenue Provisions

SEC. 1061. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY CORPORATIONS 
                    REQUIRED TO USE ACCRUAL METHOD OF ACCOUNTING.

    (a) In General.--Subsection (i) of section 447 (relating to 
method of accounting for corporations engaged in farming) is 
amended by adding at the end the following new paragraph:
          ``(7) Termination.--
                  ``(A) In general.--No suspense account may be 
                established under this subsection by any 
                corporation required by this section to change 
                its method of accounting for any taxable year 
                ending after June 8, 1997.
                  ``(B) Phaseout of existing suspense 
                accounts.--
                          ``(i) In general.--Each suspense 
                        account under this subsection shall be 
                        reduced (but not below zero) for each 
                        taxable year beginning after June 8, 
                        1997, by an amount equal to the lesser 
                        of--
                                  ``(I) the applicable portion 
                                of such account, or
                                  ``(II) 50 percent of the 
                                taxable income of the 
                                corporation for the taxable 
                                year, or, if the corporation 
                                has no taxable income for such 
                                year, the amount of any net 
                                operating loss (as defined in 
                                section 172(c)) for such 
                                taxable year.
                        For purposes of the preceding sentence, 
                        the amount of taxable income and net 
                        operating loss shall be determined 
                        without regard to this paragraph.
                          ``(ii) Coordination with other 
                        reductions.--The amount of the 
                        applicable portion for any taxable year 
                        shall be reduced (but not below zero) 
                        by the amount of any reduction required 
                        for such taxable year under any other 
                        provision of this subsection.
                          ``(iv) Inclusion in income.--Any 
                        reduction in a suspense account under 
                        this paragraph shall be included in 
                        gross income for the taxable year of 
                        the reduction.
                  ``(C) Applicable portion.--For purposes of 
                subparagraph (B), the term `applicable portion' 
                means, for any taxable year, the amount which 
                would ratably reduce the amount in the account 
                (after taking into account prior reductions) to 
                zero over the period consisting of such taxable 
                year and the remaining taxable years in such 
                first 20 taxable years.
                  ``(D) Amounts after 20th year.--Any amount in 
                the account as of the close of the 20th year 
                referred to in subparagraph (C) shall be 
                treated as the applicable portion for each 
                succeeding year thereafter to the extent not 
                reduced under this paragraph for any prior 
                taxable year after such 20th year.''
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after June 8, 1997.

SEC. 1062. MODIFICATION OF TAXABLE YEARS TO WHICH NET OPERATING LOSSES 
                    MAY BE CARRIED.

    (a) In General.--Subparagraph (A) of section 172(b)(1) 
(relating to years to which loss may be carried) is amended--
          (1) by striking ``3'' in clause (i) and inserting 
        ``2'', and
          (2) by striking ``15'' in clause (ii) and inserting 
        ``20''.
    (b) Retention of 3-Year Carryback for Casualty Losses of 
Individuals.--Paragraph (1) of section 172(b) is amended by 
adding at the end the following new subparagraph:
                  ``(F) Casualty losses of individuals.--
                Subparagraph (A)(i) shall be applied by 
                substituting `3 years' for `2 years' with 
                respect to the portion of the net operating 
                loss of an individual for the taxable year 
                which is attributable to losses of property 
                arising from fire, storm, shipwreck, or other 
                casualty, or from theft.''
    (c) Effective Date.--The amendments made by this section 
shall apply to net operating losses for taxable years beginning 
after the date of the enactment of this Act.

SEC. 1063. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN AMOUNTS PAID IN 
                    CONNECTION WITH INSURANCE.

    (a) Denial of Deduction for Premiums.--Paragraph (1) of 
section 264(a) is amended to read as follows:
          ``(1) Premiums on any life insurance policy, or 
        endowment or annuity contract, if the taxpayer is 
        directly or indirectly a beneficiary under the policy 
        or contract.''
    (b) Interest on Policy Loans.--Paragraph (4) of section 
264(a) is amended by striking ``individual, who'' and all that 
follows and inserting ``individual.''
    (c) Pro Rata Allocation of Interest Expense to Policy Cash 
Values.--Section 264 is amended by adding at the end the 
following new subsection:
    ``(e) Pro Rata Allocation of Interest Expense to Policy 
Cash Values.--
          ``(1) In general.--No deduction shall be allowed for 
        that portion of the taxpayer's interest expense which 
        is allocable to unborrowed policy cash values.
          ``(2)  Allocation.--For purposes of paragraph (1), 
        the portion of the taxpayer's interest expense which is 
        allocable to unborrowed policy cash values is an amount 
        which bears the same ratio to such interest expense 
        as--
                  ``(A) the taxpayer's average unborrowed 
                policy cash values of life insurance policies, 
                and annuity and endowment contracts, issued 
                after June 8, 1997, bears to
                  ``(B) the average adjusted bases (within the 
                meaning of section 1016) for all assets of the 
                taxpayer.
          ``(3) Unborrowed policy cash values.--The term 
        `unborrowed policy cash value' means, with respect to 
        any life insurance policy or annuity or endowment 
        contract, the excess of--
                  ``(A) the cash surrender value of such policy 
                or contract determined without regard to any 
                surrender charge, over
                  ``(B) the amount of any loan in respect of 
                such policy or contract.
          ``(4) Exception for certain policies and contracts 
        covering officers, directors, and employees.--Paragraph 
        (1) shall not apply to any policy or contract owned by 
        an entity engaged in a trade or business which covers 
        any individual who is an officer, director, or employee 
        of such trade or business at the time first covered by 
        the policy or contract, and such policies and contracts 
        shall not be taken into account under paragraph (2).
          ``(5) Exception for policies and contracts held by 
        natural persons; treatment of partnerships and s 
        corporations.--
                  ``(A) Policies and contracts held by natural 
                persons.--
                          ``(i) In general.--This subsection 
                        shall not apply to any policy or 
                        contract held by a natural person.
                          ``(ii) Exception where business is 
                        beneficiary.--If a trade or business is 
                        directly or indirectly the beneficiary 
                        under any policy or contract, to the 
                        extent of the unborrowed cash value of 
                        such policy or contract, such policy or 
                        contract shall be treated as held by 
                        such trade or business and not by a 
                        natural person.
                          ``(iii) Special rules.--
                                  ``(I) Certain trades or 
                                businesses not taken into 
                                account.--Clause (ii) shall not 
                                apply to any trade or business 
                                carried on as a sole 
                                proprietorship and to any trade 
                                or business performing services 
                                as an employee.
                                  ``(II) Limitation on 
                                unborrowed cash value.--The 
                                amount of the unborrowed cash 
                                value of any policy or contract 
                                which is taken into account by 
                                reason of clause (ii) shall not 
                                exceed the benefit to which the 
                                trade or business is entitled 
                                under the policy or contract.
                          ``(iv) Reporting.--The Secretary 
                        shall require such reporting from 
                        policyholders and issuers as is 
                        necessary to carry out clause (ii). Any 
                        report required under the preceding 
                        sentence shall be treated as a 
                        statement referred to in section 
                        6724(d)(1).
                  ``(B) Treatment of partnerships and s 
                corporations.--In the case of a partnership or 
                S corporation, this subsection shall be applied 
                at the partnership and corporate levels.
          ``(6) Special rules.--
                  ``(A) Coordination with subsection (a) and 
                section 265.--If interest on any indebtedness 
                is disallowed under subsection (a) or section 
                265--
                          ``(i) such disallowed interest shall 
                        not be taken into account for purposes 
                        of applying this subsection, and
                          ``(ii) for purposes of applying 
                        paragraph (2)(B), the adjusted bases 
                        otherwise taken into account shall be 
                        reduced (but not below zero) by the 
                        amount of such indebtedness.
                  ``(B) Coordination with section 263a.--This 
                subsection shall be applied before the 
                application of section 263A (relating to 
                capitalization of certain expenses where 
                taxpayer produces property).''
          ``(7) Interest expense.--The term `interest expense' 
        means the aggregate amount allowable to the taxpayer as 
        a deduction for interest (within the meaning of section 
        265(b)(4)) for the taxable year (determined without 
        regard to this subsection, section 265(b), and section 
        291).
          ``(8) Aggregation rules.--
                  ``(A) In general.--All members of a 
                controlled group (within the meaning of 
                subsection (d)(5)(B)) shall be treated as 1 
                taxpayer for purposes of this subsection.
                  ``(B) Treatment of insurance companies.--This 
                subsection shall not apply to an insurance 
                company, and subparagraph (A) shall be applied 
                without regard to any insurance company.''
    (b) Treatment of Insurance Companies.--
          (1) Clause (ii) of section 805(a)(4)(C) is amended by 
        inserting ``, or out of the increase for the taxable 
        year in policy cash values (within the meaning of 
        section 264(e)(3)(A)) of life insurance policies and 
        annuity and endowment contracts to which section 264(e) 
        applies'' after ``tax-exempt interest''.
          (2) Clause (iii) of section 805(a)(4)(D) is amended 
        by striking ``and'' and inserting ``, the increase for 
        the taxable year in policy cash values (within the 
        meaning of section 264(e)(3)(A)) of life insurance 
        policies and annuity and endowment contracts to which 
        section 264(e) applies, and''.
          (3) Subparagraph (B) of section 807(a)(2) is amended 
        by striking ``interest,'' and inserting ``interest and 
        the amount of the policyholder's share of the increase 
        for the taxable year in policy cash values (within the 
        meaning ofsection 264(e)(3)(A)) of life insurance 
policies and annuity and endowment contracts to which section 264(e) 
applies,''.
          (4) Subparagraph (B) of section 807(b)(1) is amended 
        by striking ``interest,'' and inserting ``interest and 
        the amount of the policyholder's share of the increase 
        for the taxable year in policy cash values (within the 
        meaning of section 264(e)(3)(A)) of life insurance 
        policies and annuity and endowment contracts to which 
        section 264(e) applies,''.
          (5) Paragraph (1) of section 812(d) is amended by 
        striking ``and'' at the end of subparagraph (B), by 
        striking the period at the end of subparagraph (C) and 
        inserting ``, and'', and by adding at the end the 
        following new subparagraph:
                  ``(D) the increase for any taxable year in 
                the policy cash values (within the meaning of 
                section 264(e)(3)(A)) of life insurance 
                policies and annuity and endowment contracts to 
                which section 264(e) applies.''
          (6) Subparagraph (B) of section 832(b)(5) is amended 
        by striking ``and'' at the end of clause (i), by 
        striking the period at the end of clause (ii) and 
        inserting ``, and'', and by adding at the end the 
        following new clause:
                          ``(iii) the increase for the taxable 
                        year in policy cash values (within the 
                        meaning of section 264(e)(3)(A)) of 
                        life insurance policies and annuity and 
                        endowment contracts to which section 
                        264(e) applies.''
    (c) Conforming Amendment.--Subparagraph (A) of section 
265(b)(4) is amended by inserting ``, section 264,'' before 
``and section 291''.
    (d) Effective Date.--The amendments made by this section 
shall apply to contracts issued after June 8, 1997, in taxable 
years ending after such date. For purposes of the preceding 
sentence, any material increase in the death benefit or other 
material change in the contract shall be treated as a new 
contract but the addition of covered lives shall be treated as 
a new contract only with respect to such additional covered 
lives. For purposes of this subsection, an increase in the 
death benefit under a policy or contract issued in connection 
with a lapse described in section 501(d)(2) of the Health 
Insurance Portability and Accountability Act of 1996 shall not 
be treated as a new contract.

SEC. 1064. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED BY 
                    PARTNERSHIP.

    (a) In General.--Subsection (c) of section 732 is amended 
to read as follows:
    ``(c) Allocation of Basis.--
          ``(1) In general.--The basis of distributed 
        properties to which subsection (a)(2) or (b) is 
        applicable shall be allocated--
                  ``(A)(i) first to any unrealized receivables 
                (as defined in section 751(c)) and inventory 
                items (as defined in section 751(d)(2)) in an 
                amount equal to the adjusted basis of each such 
                property to the partnership, and
                  ``(ii) if the basis to be allocated is less 
                than the sum of the adjusted bases of such 
                properties to the partnership, then, to the 
                extent any decrease is required in order to 
                have the adjusted bases of such properties 
                equal the basis to be allocated, in the manner 
                provided in paragraph (3), and
                  ``(B) to the extent of any basis not 
                allocated under subparagraph (A), to other 
                distributed properties--
                          ``(i) first by assigning to each such 
                        other property such other property's 
                        adjusted basis to the partnership, and
                          ``(ii) then, to the extent any 
                        increase or decrease in basis is 
                        required in order to have the adjusted 
                        bases of such other distributed 
                        properties equal such remaining basis, 
                        in the manner provided in paragraph (2) 
                        or (3), whichever is appropriate.
          ``(2) Method of allocating increase.--Any increase 
        required under paragraph (1)(B) shall be allocated 
        among the properties--
                  ``(A) first to properties with unrealized 
                appreciation in proportion to their respective 
                amounts of unrealized appreciation before such 
                increase (but only to the extent of each 
                property's unrealized appreciation), and
                  ``(B) then, to the extent such increase is 
                not allocated under subparagraph (A), in 
                proportion to their respective fair market 
                values.
          ``(3) Method of allocating decrease.--Any decrease 
        required under paragraph (1)(A) or (1)(B) shall be 
        allocated--
                  ``(A) first to properties with unrealized 
                depreciation in proportion to their respective 
                amounts of unrealized depreciation before such 
                decrease (but only to the extent of each 
                property's unrealized depreciation), and
                  ``(B) then, to the extent such decrease is 
                not allocated under subparagraph (A), in 
                proportion to their respective adjusted bases 
                (as adjusted under subparagraph (A)).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to distributions after the date of the enactment of 
this Act.

SEC. 1065. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY 
                    APPRECIATED.

    (a) In General.--Paragraph (2) of section 751(a) is amended 
to read as follows:
          ``(2) inventory items of the partnership,''.
    (b) Conforming Amendments.--
          (1) Subsection (d) of section 751 is amended to read 
        as follows:
    ``(d) Inventory Items.--For purposes of this subchapter, 
the term `inventory items' means--
          ``(1) property of the partnership of the kind 
        described in section 1221(1),
          ``(2) any other property of the partnership which, on 
        sale or exchange by the partnership, would be 
        considered property other than a capital asset and 
        other than property described in section 1231,
          ``(3) any other property of the partnership which, if 
        sold or exchanged by the partnership, would result in a 
        gain taxable under subsection (a) of section 1246 
        (relating to gain on foreign investment company stock), 
        and
          ``(4) any other property held by the partnership 
        which, if held by the selling or distributee partner, 
        would be considered property of the type described in 
        paragraph (1), (2), or (3).''
          (2) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6), 
        732(c)(1)(A) (as amended by the preceding section), 
        735(a)(2), and 735(c)(1) are each amended by striking 
        ``section 751(d)(2)'' and inserting ``section 751(d)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to sales, exchanges, and distributions after the 
date of the enactment of this Act.

SEC. 1066. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.

    (a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are 
each amended by striking ``5 years'' and inserting ``10 
years''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to property contributed to a partnership after June 
8, 1997.

SEC. 1067. RESTRICTIONS ON AVAILABILITY OF EARNED INCOME CREDIT FOR 
                    TAXPAYERS WHO IMPROPERLY CLAIMED CREDIT IN PRIOR 
                    YEAR.

    (a) In General.--Section 32 is amended by redesignating 
subsections (k) and (l) as subsections (l) and (m), 
respectively, and by inserting after subsection (j) the 
following new subsection:
    ``(k) Restrictions on Taxpayers Who Improperly Claimed 
Credit in Prior Year.--
          ``(1) Taxpayers making prior fraudulent or reckless 
        claims.--
                  ``(A) In general.--No credit shall be allowed 
                under this section for any taxable year in the 
                disallowance period.
                  ``(B) Disallowance period.--For purposes of 
                paragraph (1), the disallowance period is--
                          ``(i) the period of 10 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to fraud, 
                        and
                          ``(ii) the period of 2 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to reckless 
                        or intentional disregard of rules and 
                        regulations (but not due to fraud).
          ``(2) Taxpayers making improper prior claims.--In the 
        case of a taxpayer who is denied credit under this 
        section for any taxable year as a result of the 
        deficiency procedures under subchapter B of chapter 63, 
        no credit shall be allowed under this section for any 
        subsequent taxable year unless the taxpayer provides 
        such information as the Secretary may require to 
        demonstrate eligibility for such credit.''
    (b) Due Diligence Requirement on Income Tax Return 
Preparers.--Section 6695 is amended by adding at the end the 
following new subsection:
    ``(g) Failure To Be Diligent in Determining Eligibility for 
Earned Income Credit.--Any person who is an income tax preparer 
with respect to any return or claim for refund who fails to 
comply with due diligence requirements imposed by the Secretary 
by regulations with respect to determining eligibility for, or 
the amount of, the credit allowable by section 32 shall pay a 
penalty of $100 for each such failure.''
    (c) Extension Procedures Applicable to Mathematical or 
Clerical Errors.--Paragraph (2) of section 6213(g) (relating to 
the definition of mathematical or clerical errors) is amended 
by striking ``and'' at the end of subparagraph (H), by striking 
the period at the end of subparagraph (I) and inserting ``, 
and'', and by inserting after subparagraph (I) the following 
new subparagraph:
                  ``(J) an omission of information required by 
                section 32(k)(2) (relating to taxpayers making 
                improper prior claims of earned income 
                credit).''
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 1068. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST METHOD MAY 
                    BE USED.

    (a) Limitation.--Subsection (g) of section 167 is amended 
by adding at the end the following new paragraph:
          ``(6) Limitation on property for which income 
        forecast method may be used.--The depreciation 
        deduction allowable under this section may be 
        determined under the income forecast method or any 
        similar method only with respect to--
                  ``(A) property described in paragraph (3) or 
                (4) of section 168(f),
                  ``(B) copyrights,
                  ``(C) books,
                  ``(D) patents, and
                  ``(E) other property specified in 
                regulations.
        Such methods may not be used with respect to any 
        amortizable section 197 intangible (as defined in 
        section 197(c)).''
    (b) Depreciation Period for Rent-To-Own Property.--
          (1) In general.--Subparagraph (A) of section 
        168(e)(3) (relating to 3-year property) is amended by 
        striking ``and'' at the end of clause (i), by striking 
        the period at the end of clause (ii) and inserting ``, 
        and'', and by adding at the end the following new 
        clause:
                          ``(iii) any qualified rent-to-own 
                        property.''
          (2) 4-year class life.--The table contained in 
        section 168(g)(3)(B) is amended by inserting before the 
        first item the following new item:

  ``(A)(iii)............................................         4''    

          (3) Definition of qualified rent-to-own property.--
        Subsection (i) of section 168 is amended by adding at 
        the end the following new paragraph:
          ``(14) Qualified rent-to-own property.--
                  ``(A) In general.--The term `qualified rent-
                to-own property' means property held by a rent-
                to-own dealer for purposes of being subject to 
                a rent-to-own contract.
                  ``(B) Rent-to-own dealer.--The term `rent-to-
                own dealer' means a person that, in the 
                ordinary course of business, regularly enters 
                into rent-to-own contracts with customers for 
                the use of consumer property, if a substantial 
                portion of those contracts terminate and the 
                property is returned to such person before the 
                receipt of all payments required to transfer 
                ownership of the property from such person to 
                the customer.
                  ``(C) Consumer property.--The term `consumer 
                property' means tangible personal property of a 
                type generally used within the home. Such term 
                shall not include cellular telephones and any 
                computer or peripheral equipment (as defined in 
                section 168(i)).
                  ``(D) Rent-to-own contract.--The term `rent-
                to-own contract' means any lease for the use of 
                consumer property between a rent-to-own dealer 
                and a customer who is an individual which--
                          ``(i) is titled `Rent-to-Own 
                        Agreement' or `Lease Agreement with 
                        Ownership Option,' or uses other 
                        similar language,
                          ``(ii) provides for level, regular 
                        periodic payments (for a payment period 
                        which is a week or month),
                          ``(iii) provides that legal title to 
                        such property remains with the rent-to-
                        own dealer until the customer makes all 
                        the payments described in clause (ii) 
                        or early purchase payments required 
                        under the contract to acquire legal 
                        title to the item of property,
                          ``(iv) provides a beginning date and 
                        a maximum period of time for which the 
                        contract may be in effect that does not 
                        exceed 156 weeks or 36 months from such 
                        beginning date (including renewals or 
                        options to extend),
                          ``(v) provides for level payments 
                        within the 156-week or 36-month period 
                        that, in the aggregate, generally 
                        exceed the normal retail price of the 
                        consumer property plus interest,
                          ``(vi) provides for payments under 
                        the contract that, in the aggregate, do 
                        not exceed $10,000 per item of consumer 
                        property,
                          ``(vii) provides that the customer 
                        does not have any legal obligation to 
                        make all the payments referred to in 
                        clause (ii) set forth under the 
                        contract, and that at the end of each 
                        payment period the customer may either 
                        continue to use the consumer property 
                        by making the payment for the next 
                        payment period or return such property 
                        to the rent-to-own dealer in good 
                        working order, in which case the 
                        customer does not incur any further 
                        obligations under the contract and is 
                        not entitled to a return of any 
                        payments previously made under the 
                        contract, and
                          ``(viii) provides that the customer 
                        has no right to sell, sublease, 
                        mortgage, pawn, pledge, encumber, or 
                        otherwise dispose of the consumer 
                        property until all the payments stated 
                        in the contract have been made.''
    (c) Effective Date.--The amendment made by this section 
shall apply to property placed in service after the date of the 
enactment of this Act.

SEC. 1069. REPEAL OF SPECIAL RULE FOR RENTAL USE OF VACATION HOMES, 
                    ETC., FOR LESS THAN 15 DAYS.

    (a) In General.--Section 280A (relating to disallowance of 
certain expenses in connection with business use of home, 
rental of vacation homes, etc.) is amended by striking 
subsection (g).
    (b) No Basis Reduction Unless Depreciation Claimed.--
Section 1016 is amended by redesignating subsection (e) as 
subsection (f) and by inserting after subsection (d) the 
following new subsection:
    ``(e) Special Rule Where Rental Use of Vacation Home, Etc., 
for Less Than 15 Days.--If a dwelling unit is used during the 
taxable year by the taxpayer as a residence and such dwelling 
unit is actually rented for less than 15 days during the 
taxable year, the reduction under subsection (a)(2) by reason 
of such rental use in any taxable year beginning after December 
31, 1997, shall not exceed the depreciation deduction allowed 
for such rental use.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1070. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY CONVERTED 
                    PROPERTY BE REPLACED WITH PROPERTY ACQUIRED FROM AN 
                    UNRELATED PERSON.

    (a) In General.--Subsection (i) of section 1033 is amended 
to read as follows:
    ``(i) Replacement Property Must Be Acquired From Unrelated 
Person in Certain Cases.--
          ``(1) In general.--If the property which is 
        involuntarily converted is held by a taxpayer to which 
        this subsection applies, subsection (a) shall not apply 
        if the replacement property or stock is acquired from a 
        related person. The preceding sentence shall not apply 
        to the extent that the related person acquired the 
        replacement property or stock from an unrelated person 
        during the period applicable under subsection 
        (a)(2)(B).
          ``(2) Taxpayers to which subsection applies.--This 
        subsection shall apply to--
                  ``(A) a C corporation,
                  ``(B) a partnership in which 1 or more C 
                corporations own, directly or indirectly 
                (determined in accordance with section 
                707(b)(3)), more than 50 percent of the capital 
                interest, or profits interest, in such 
                partnership at the time of the involuntary 
                conversion, and
                  ``(C) any other taxpayer if, with respect to 
                property which is involuntarily converted 
                during the taxable year, the aggregate of the 
                amount of realized gain on such property on 
                which there is realized gain exceeds $100,000.
        In the case of a partnership, subparagraph (C) shall 
        apply with respect to the partnership and with respect 
        to each partner. A similar rule shall apply in the case 
        of an S corporation and its shareholders.
          ``(3) Related person.--For purposes of this 
        subsection, a person is related to another person if 
        the person bears a relationship to the other person 
        described in section 267(b) or 707(b)(1).''
    (b) Effective Date.--The amendment made by this section 
shall apply to involuntary conversions occurring after June 8, 
1997.

SEC. 1071. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES RULES FOR 
                    SALES OF PROPERTY BY A MANUFACTURER TO A DEALER.

    (a) In General.--Paragraph (2) of section 811(c) of the Tax 
Reform Act of 1986 is hereby repealed.
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years beginning after the date 
        of the enactment of this Act.
          (2) Coordination with section 481.--In the case of 
        any taxpayer required by this section to change its 
        method of accounting for any taxable year--
                  (A) such changes shall be treated as 
                initiated by the taxpayer,
                  (B) such changes shall be treated as made 
                with the consent of the Secretary, and
                  (C) the net amount of the adjustments 
                required to be taken into account under section 
                481(a) of the Internal Revenue Code of 1986 
                shall be taken into account ratably over the 4 
                taxable year period beginning with the first 
                taxable year beginning after the date of the 
                enactment of this Act.

     TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

SEC. 1101. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT PROPERTY.

    (a) In General.--Subparagraph (B) of section 927(a)(2) 
(relating to property excluded from eligibility as FSC export 
property) is amended by inserting ``, and other than computer 
software (whether or not patented)'' before ``, for commercial 
or home use''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to gross receipts attributable to periods after 
December 31, 1997, in taxable years ending after such date.
    (c) Phasein of Treatment.--For purposes of the Internal 
Revenue Code of 1986--
          (1) 1998.--In the case of gross receipts attributable 
        to calendar year 1998, the amendment made by subsection 
        (a) shall apply to only \1/3\ of such gross receipts.
          (2) 1999.--In the case of gross receipts attributable 
        to calendar year 1999, the amendment made by subsection 
        (a) shall apply to only \2/3\ of such gross receipts.

SEC. 1102. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 EXCLUSION.

    (a) General Rule.--Paragraph (2) of section 911(b) is 
amended by--
          (1) by striking ``of $70,000'' in subparagraph (A) 
        and inserting ``equal to the exclusion amount for the 
        calendar year in which such taxable year begins'', and
          (2) by adding at the end the following new 
        subparagraph:
                  ``(D) Exclusion amount.--
                          ``(i) In general.--The exclusion 
                        amount for any calendar year is the 
                        exclusion amount determined in 
                        accordance with the following table (as 
                        adjusted by clause (ii)):

``For calendar year--                          The exclusion amount is--
    1998......................................................  $72,000 
    1999......................................................   74,000 
    2000......................................................   76,000 
    2001......................................................   78,000 
    2002 and thereafter.......................................   80,000.

                          ``(ii) Inflation adjustment.--In the 
                        case of any taxable year beginning in a 
                        calendar year after 2007, the $80,000 
                        amount in clause (i) shall be increased 
                        by an amount equal to the product of--
                                  ``(I) such dollar amount, and
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `2006' for 
                                `1992' in subparagraph (B) 
                                thereof.
                        If any increase determined under the 
                        preceding sentence is not a multiple of 
                        $100, such increase shall be rounded to 
                        the next lowest multiple of $100.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1103. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT 
                    LIMITATION.

    (a) General Rule.--Section 904 (relating to limitations on 
foreign tax credit) is amended by redesignating subsection (j) 
as subsection (k) and by inserting after subsection (i) the 
following new subsection:
    ``(j) Certain Individuals Exempt.--
          ``(1) In general.--In the case of an individual to 
        whom this subsection applies for any taxable year--
                  ``(A) the limitation of subsection (a) shall 
                not apply,
                  ``(B) no taxes paid or accrued by the 
                individual during such taxable year may be 
                deemed paid or accrued under subsection (c) in 
                any other taxable year, and
                  ``(C) no taxes paid or accrued by the 
                individual during any other taxable year may be 
                deemed paid or accrued under subsection (c) in 
                such taxable year.
          ``(2) Individuals to whom subsection applies.--This 
        subsection shall apply to an individual for any taxable 
        year if--
                  ``(A) the entire amount of such individual's 
                gross income for the taxable year from sources 
                without the United States consists of qualified 
                passive income,
                  ``(B) the amount of the creditable foreign 
                taxes paid or accrued by the individual during 
                the taxableyear does not exceed $300 ($600 in 
the case of a joint return), and
                  ``(C) such individual elects to have this 
                subsection apply for the taxable year.
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Qualified passive income.--The term 
                `qualified passive income' means any item of 
                gross income if--
                          ``(i) such item of income is passive 
                        income (as defined in subsection 
                        (d)(2)(A) without regard to clause 
                        (iii) thereof), and
                          ``(ii) such item of income is shown 
                        on a payee statement furnished to the 
                        individual.
                  ``(B) Creditable foreign taxes.--The term 
                `creditable foreign taxes' means any taxes for 
                which a credit is allowable under section 901; 
                except that such term shall not include any tax 
                unless such tax is shown on a payee statement 
                furnished to such individual.
                  ``(C) Payee statement.--The term `payee 
                statement' has the meaning given to such term 
                by section 6724(d)(2).
                  ``(D) Estates and trusts not eligible.--This 
                subsection shall not apply to any estate or 
                trust.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1104. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

    (a) Accrued Taxes Translated by Using Average Rate for Year 
to Which Taxes Relate.--
          (1) In general.--Subsection (a) of section 986 
        (relating to translation of foreign taxes) is amended 
        to read as follows:
    ``(a) Foreign Income Taxes.--
          ``(1) Translation of accrued taxes.--
                  ``(A) In general.--For purposes of 
                determining the amount of the foreign tax 
                credit, in the case of a taxpayer who takes 
                foreign income taxes into account when accrued, 
                the amount of any foreign income taxes (and any 
                adjustment thereto) shall be translated into 
                dollars by using the average exchange rate for 
                the taxable year to which such taxes relate.
                  ``(B) Exception for certain taxes.--
                Subparagraph (A) shall not apply to any foreign 
                income taxes--
                          ``(i) paid after the date 2 years 
                        after the close of the taxable year to 
                        which such taxes relate, or
                          ``(ii) paid before the beginning of 
                        the taxable year to which such taxes 
                        relate.
                  ``(C) Exception for inflationary 
                currencies.--Subparagraph (A) shall not apply 
                to any foreign income taxes the liability for 
                which is denominated in any inflationary 
                currency (as determined under regulations).
                  ``(D) Cross reference.--

          ``For adjustments where tax is not paid within 2 years, see 
        section 905(c).

          ``(2) Translation of taxes to which paragraph (1) 
        does not apply.--For purposes of determining the amount 
        of the foreign tax credit, in the case of any foreign 
        income taxes to which subparagraph (A) of paragraph (1) 
        does not apply--
                  ``(A) such taxes shall be translated into 
                dollars using the exchange rates as of the time 
                such taxes were paid to the foreign country or 
                possession of the United States, and
                  ``(B) any adjustment to the amount of such 
                taxes shall be translated into dollars using--
                          ``(i) except as provided in clause 
                        (ii), the exchange rate as of the time 
                        when such adjustment is paid to the 
                        foreign country or possession, or
                          ``(ii) in the case of any refund or 
                        credit of foreign income taxes, using 
                        the exchange rate as of the time of the 
                        original payment of such foreign income 
                        taxes.
          ``(3) Foreign income taxes.--For purposes of this 
        subsection, the term `foreign income taxes' means any 
        income, war profits, or excess profits taxes paid or 
        accrued to any foreign country or to any possession of 
        the United States.''
          (2) Adjustment when not paid within 2 years after 
        year to which taxes relate.--Subsection (c) of section 
        905 is amended to read as follows:
    ``(c) Adjustments to Accrued Taxes.--
          ``(1) In general.--If--
                  ``(A) accrued taxes when paid differ from the 
                amounts claimed as credits by the taxpayer,
                  ``(B) accrued taxes are not paid before the 
                date 2 years after the close of the taxable 
                year to which such taxes relate, or
                  ``(C) any tax paid is refunded in whole or in 
                part,
        the taxpayer shall notify the Secretary, who shall 
        redetermine the amount of the tax for the year or years 
        affected. The Secretary may prescribe adjustments to 
        tax pools under sections 902 and 960 in lieu of the 
        redetermination under the preceding sentence.
          ``(2) Special rule for taxes not paid within 2 
        years.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), in making the redetermination 
                under paragraph (1), no credit shall be allowed 
                for accrued taxes not paid before the date 
                referred to in subparagraph (B) of paragraph 
                (1).
                  ``(B) Taxes subsequently paid.--Any such 
                taxes if subsequently paid shall be taken into 
                account for the taxable year to which such 
                taxes relate (and translated as provided in 
                section 986(a)(2)(A)).
          ``(3) Adjustments.--The amount of tax (if any) due on 
        any redetermination under paragraph (1) shall be paid 
        by the taxpayer on notice and demand by the Secretary, 
        and the amount of tax overpaid (if any) shall be 
        credited or refunded to the taxpayer in accordance with 
        subchapter B of chapter 66 (section 6511 et seq.).
          ``(4) Bond requirements.--In the case of any tax 
        accrued but not paid, the Secretary, as a condition 
        precedent to the allowance of the credit provided in 
        this subpart, may require the taxpayer to give a bond, 
        with sureties satisfactory to and approved by the 
        Secretary, in such sum as the Secretary may require, 
        conditioned on the payment by the taxpayer of any 
        amount of tax found due on any such redetermination. 
        Any such bond shall contain such further conditions as 
        the Secretary may require.
          ``(5) Other special rules.--In any redetermination 
        under paragraph (1) by the Secretary of the amount of 
        tax due from the taxpayer for the year or years 
        affected by a refund, the amount of the taxes refunded 
        for which credit has been allowed under this section 
        shall be reduced by the amount of any tax described in 
        section 901 imposed by the foreign country or 
        possession of the United States with respect to such 
        refund; but no credit under this subpart, or deduction 
        under section 164, shall be allowed for any taxable 
        year with respect to any such tax imposed on the 
        refund. No interest shall be assessed or collected on 
        any amount of tax due on any redetermination by the 
        Secretary, resulting from a refund to the taxpayer, for 
        any period before the receipt of such refund, except to 
        the extent interest was paid by the foreign country or 
        possession of the United States on such refund for such 
        period.''
    (b) Authority To Use Average Rates.--
          (1) In general.--Subsection (a) of section 986 (as 
        amended by subsection (a)) is amended by redesignating 
        paragraph (3) as paragraph (4) and inserting after 
        paragraph (2) the following new paragraph:
          ``(3) Authority to permit use of average rates.--To 
        the extent prescribed in regulations, the average 
        exchange rate for the period (specified in such 
        regulations) during which the taxes or adjustment is 
        paid may be used instead of the exchange rate as of the 
        time of such payment.''
          (2) Determination of average rates.--Subsection (c) 
        of section 989 is amended by striking ``and'' at the 
        end of paragraph (4), by striking the period at the end 
        of paragraph (5) and inserting ``, and'', and by adding 
        at the end thereof the following new paragraph:
          ``(6) setting forth procedures for determining the 
        average exchange rate for any period.''
          (3) Conforming amendments.--Subsection (b) of section 
        989 is amended by striking ``weighted'' each place it 
        appears.
    (c) Effective Dates.--
          (1) In general.--The amendments made by subsections 
        (a)(1) and (b) shall apply to taxes paid or accrued in 
        taxable years beginning after December 31, 1997.
          (2) Subsection (a)(2).--The amendment made by 
        subsection (a)(2) shall apply to taxes which relate to 
        taxable years beginning after December 31, 1997.

SEC. 1105. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR 
                    ALTERNATIVE MINIMUM TAX.

    (a) General Rule.--Subsection (a) of section 59 (relating 
to alternative minimum tax foreign tax credit) is amended by 
adding at the end thereof the following new paragraph:
          ``(3) Election to use simplified section 904 
        limitation.--
                  ``(A) In general.--In determining the 
                alternative minimum tax foreign tax credit for 
                any taxable year to which an election under 
                this paragraph applies--
                          ``(i) subparagraph (B) of paragraph 
                        (1) shall not apply, and
                          ``(ii) the limitation of section 904 
                        shall be based on the proportion 
                        which--
                                  ``(I) the taxpayer's taxable 
                                income (as determined for 
                                purposes of the regular tax) 
                                from sources without the United 
                                States (but not in excess of 
                                the taxpayer's entire 
                                alternative minimum taxable 
                                income), bears to
                                  ``(II) the taxpayer's entire 
                                alternative minimum taxable 
                                income for the taxable year.
                  ``(B) Election.--
                          ``(i) In general.--An election under 
                        this paragraph may be made only for the 
                        taxpayer's first taxable year which 
                        begins after December 31, 1997, and for 
                        which the taxpayer claims an 
                        alternative minimum tax foreign tax 
                        credit.
                          ``(ii) Election revocable only with 
                        consent.--An election under this 
                        paragraph, once made, shall apply to 
                        the taxable year for which made and all 
                        subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1106. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS UNDER 
                    FOREIGN CURRENCY RULES.

    (a) General Rule.--Subsection (e) of section 988 (relating 
to application to individuals) is amended to read as follows:
    ``(e) Application to Individuals.--
          ``(1) In general.--The preceding provisions of this 
        section shall not apply to any section 988 transaction 
        entered into by an individual which is a personal 
        transaction.
          ``(2) Exclusion for certain personal transactions.--
        If--
                  ``(A) nonfunctional currency is disposed of 
                by an individual in any transaction, and
                  ``(B) such transaction is a personal 
                transaction,
        no gain shall be recognized for purposes of this 
        subtitle by reason of changes in exchange rates after 
        such currency was acquired by such individual and 
        before such disposition. The preceding sentence shall 
        not apply if the gain which would otherwise be 
        recognized on the transaction exceeds $200.
          ``(3) Personal transactions.--For purposes of this 
        subsection, the term `personal transaction' means any 
        transaction entered into by an individual, except that 
        such term shall not include any transaction to the 
        extent that expenses properly allocable to such 
        transaction meet the requirements of section 162 or 212 
        (other than that part of section 212 dealing with 
        expenses incurred in connection with taxes).''
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1107. ALL NONCONTROLLED SECTION 902 CORPORATIONS WHICH ARE NOT 
                    PASSIVE FOREIGN INVESTMENT COMPANIES IN ONE FOREIGN 
                    TAX LIMITATION BASKET.

    (a) In General.--Subparagraph (E) of section 904(d)(2) 
(relating to noncontrolled section 902 corporations) is amended 
by adding at the end the following new clause:
                          ``(iv) All non-pfic's treated as 
                        one.--All noncontrolled section 902 
                        corporations which are not passive 
                        foreign investment companies (as 
                        defined in section 1297) shall be 
                        treated as one noncontrolled section 
                        902 corporation for purposes of 
                        paragraph (1). The Secretary may 
                        prescribe regulations regarding the 
                        treatment of distributions out of 
                        earnings and profits for periods prior 
                        to the taxpayer's acquisition of such 
                        stock.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 2001.

        Subtitle B--Treatment of Controlled Foreign Corporations

SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
                    CORPORATIONS TREATED AS DIVIDENDS.

    (a) General Rule.--Section 964 (relating to miscellaneous 
provisions) is amended by adding at the end thereof the 
following new subsection:
    ``(e) Gain on Certain Stock Sales by Controlled Foreign 
Corporations Treated as Dividends.--
          ``(1) In general.--If a controlled foreign 
        corporation sells or exchanges stock in any other 
        foreign corporation, gain recognized on such sale or 
        exchange shall be included in the gross income of such 
        controlled foreign corporation as a dividend to the 
        same extent that it would have been so included under 
        section 1248(a) if such controlled foreign corporation 
        were a United States person. For purposes of 
        determining the amount which would have been so 
        includible, the determination of whether such other 
        foreign corporation was a controlled foreign 
        corporation shall be made without regard to the 
        preceding sentence.
          ``(2) Same country exception not applicable.--Clause 
        (i) of section 954(c)(3)(A) shall not apply to any 
        amount treated as a dividend by reason of paragraph 
        (1).
          ``(3) Clarification of deemed sales.--For purposes of 
        this subsection, a controlled foreign corporation shall 
        be treated as having sold or exchanged any stock if, 
        under any provision of this subtitle, such controlled 
        foreign corporation is treated as having gain from the 
        sale or exchange of such stock.''
    (b) Amendment of Section 904(d).--Clause (i) of section 
904(d)(2)(E) is amended by striking ``and except as provided in 
regulations, the taxpayer was a United States shareholder in 
such corporation''.
    (c) Effective Dates.--
          (1) The amendment made by subsection (a) shall apply 
        to gain recognized on transactions occurring after the 
        date of the enactment of this Act.
          (2) The amendment made by subsection (b) shall apply 
        to distributions after the date of the enactment of 
        this Act.

SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

    (a) Section 1248 Gain Taken Into Account in Determining Pro 
Rata Share.--
          (1) In general.--Paragraph (2) of section 951(a) 
        (defining pro rata share of subpart F income) is 
        amended by adding at the end thereof the following new 
        sentence: ``For purposes of subparagraph (B), any gain 
        included in the gross income of any person as a 
        dividend under section 1248 shall be treated as a 
        distribution received by such person with respect to 
        the stock involved.''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to dispositions after the date of the 
        enactment of this Act.
    (b) Basis Adjustments in Stock Held by Foreign 
Corporation.--
          (1) In general.--Section 961 (relating to adjustments 
        to basis of stock in controlled foreign corporations 
        and of other property) is amended by adding at the end 
        thereof the following new subsection:
    ``(c) Basis Adjustments in Stock Held by Foreign 
Corporation.--Under regulations prescribed by the Secretary, if 
a United States shareholder is treated under section 958(a)(2) 
as owning any stock in a controlled foreign corporation which 
is actually owned by another controlled foreign corporation, 
adjustments similar to the adjustments provided by subsections 
(a) and (b) shall be made to the basis of such stock in the 
hands of such other controlled foreign corporation, but only 
for the purposes of determining the amount included under 
section 951 in the gross income of such United States 
shareholder (or any other United States shareholder who 
acquires from any person any portion of the interest of such 
United States shareholder by reason of which such shareholder 
was treated as owning such stock, but only to the extent of 
such portion, and subject to such proof of identity of such 
interest as the Secretary may prescribe by regulations).''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply for purposes of determining inclusions 
        for taxable years of United States shareholders 
        beginning after December 31, 1997.
    (c) Clarification of Treatment of Branch Tax Exemptions or 
Reductions.--
          (1) In general.--Subsection (b) of section 952 is 
        amended by adding at the end thereof the following new 
        sentence: ``For purposes of this subsection, any 
        exemption (or reduction) with respect to the tax 
        imposed by section 884 shall not be taken into 
        account.''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to taxable years beginning after 
        December 31, 1986.

SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN LOWER TIER 
                    COMPANIES.

    (a) Section 902 Credit.--
          (1) In general.--Subsection (b) of section 902 
        (relating to deemed taxes increased in case of certain 
        2nd and 3rd tier foreign corporations) is amended to 
        read as follows:
    ``(b) Deemed Taxes Increased in Case of Certain Lower Tier 
Corporations.--
          ``(1) In general.--If--
                  ``(A) any foreign corporation is a member of 
                a qualified group, and
                  ``(B) such foreign corporation owns 10 
                percent or more of the voting stock of another 
                member of such group from which it receives 
                dividends in any taxable year,
        such foreign corporation shall be deemed to have paid 
        the same proportion of such other member's post-1986 
        foreign income taxes as would be determined under 
        subsection (a) if such foreign corporation were a 
        domestic corporation.
          ``(2) Qualified group.--For purposes of paragraph 
        (1), the term `qualified group' means--
                  ``(A) the foreign corporation described in 
                subsection (a), and
                  ``(B) any other foreign corporation if--
                          ``(i) the domestic corporation owns 
                        at least 5 percent of the voting stock 
                        of such other foreign corporation 
                        indirectly through a chain of foreign 
                        corporations connected through stock 
                        ownership of at least 10 percent of 
                        their voting stock,
                          ``(ii) the foreign corporation 
                        described in subsection (a) is the 
                        first tier corporation in such chain, 
                        and
                          ``(iii) such other corporation is not 
                        below the sixth tier in such chain.
        The term `qualified group' shall not include any 
        foreign corporation below the third tier in the chain 
        referred to in clause (i) unless such foreign 
        corporation is a controlled foreign corporation (as 
        defined in section 957) and the domestic corporation is 
        a United States shareholder (as defined in section 
        951(b)) in such foreign corporation. Paragraph (1) 
        shall apply to those taxes paid by a member of the 
        qualified group below the third tier only with respect 
        to periods during which it was a controlled foreign 
        corporation.''
          (2) Conforming amendments.--
                  (A) Subparagraph (B) of section 902(c)(3) is 
                amended by adding ``or'' at the end of clause 
                (i) and by striking clauses (ii) and (iii) and 
                inserting the following new clause:
                          ``(ii) the requirements of subsection 
                        (b)(2) are met with respect to such 
                        foreign corporation.''
                  (B) Subparagraph (B) of section 902(c)(4) is 
                amended by striking ``3rd foreign corporation'' 
                and inserting ``sixth tier foreign 
                corporation''.
                  (C) The heading for paragraph (3) of section 
                902(c) is amended by striking ``where domestic 
                corporation acquires 10 percent of foreign 
                corporation'' and inserting ``where foreign 
                corporation first qualifies''.
                  (D) Paragraph (3) of section 902(c) is 
                amended by striking ``ownership'' each place it 
                appears.
    (b) Section 960 Credit.--Paragraph (1) of section 960(a) 
(relating to special rules for foreign tax credits) is amended 
to read as follows:
          ``(1) Deemed paid credit.--For purposes of subpart A 
        of this part, if there is included under section 951(a) 
        in the gross income of a domestic corporation any 
        amount attributable to earnings and profits of a 
        foreign corporation which is a member of a qualified 
        group (as defined in section 902(b)) with respect to 
        the domestic corporation, then, except to the extent 
        provided in regulations, section 902 shall be applied 
        as if the amount so included were a dividend paid by 
        such foreign corporation (determined by applying 
        section 902(c) in accordance with section 
        904(d)(3)(B)).''
    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to taxes of foreign corporations for 
        taxable years of such corporations beginning after the 
        date of enactment of this Act.
          (2) Special rule.--In the case of any chain of 
        foreign corporations described in clauses (i) and (ii) 
        of section 902(b)(2)(B) of the Internal Revenue Code of 
        1986 (as amended by this section), no liquidation, 
        reorganization, or similar transaction in a taxable 
        year beginning after the date of the enactment of this 
        Act shall have the effect of permitting taxes to be 
        taken into account under section902 of the Internal 
Revenue Code of 1986 which could not have been taken into account under 
such section but for such transaction.

     Subtitle C--Treatment of Passive Foreign Investment Companies

SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN 
                    CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.

    Section 1296 is amended by adding at the end the following 
new subsection:
    ``(e) Exception for United States Shareholders of 
Controlled Foreign Corporations.--
          ``(1) In general.--For purposes of this part, a 
        corporation shall not be treated with respect to a 
        shareholder as a passive foreign investment company 
        during the qualified portion of such shareholder's 
        holding period with respect to stock in such 
        corporation.
          ``(2) Qualified portion.--For purposes of this 
        subsection, the term `qualified portion' means the 
        portion of the shareholder's holding period--
                  ``(A) which is after December 31, 1997, and
                  ``(B) during which the shareholder is a 
                United States shareholder (as defined in 
                section 951(b)) of the corporation and the 
                corporation is a controlled foreign 
                corporation.
          ``(3) New holding period if qualified portion ends.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), if the qualified portion of a 
                shareholder's holding period with respect to 
                any stock ends after December 31, 1997, solely 
                for purposes of this part, the shareholder's 
                holding period with respect to such stock shall 
                be treated as beginning as of the first day 
                following such period.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply if such stock was, with respect to such 
                shareholder, stock in a passive foreign 
                investment company at any time before the 
                qualified portion of the shareholder's holding 
                period with respect to such stock and no 
                election under section 1298(b)(1) is made.''

SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN PASSIVE 
                    FOREIGN INVESTMENT COMPANY.

    (a) In General.--Part VI of subchapter P of chapter 1 is 
amended by redesignating subpart C as subpart D, by 
redesignating sections 1296 and 1297 as sections 1297 and 1298, 
respectively, and by inserting after subpart B the following 
new subpart:

      ``Subpart C--Election of Mark to Market For Marketable Stock

        ``Sec. 1296. Election of mark to market for marketable stock.

``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.

    ``(a) General Rule.--In the case of marketable stock in a 
passive foreign investment company which is owned (or treated 
under subsection (g) as owned) by a United States person at the 
close of any taxable year of such person, at the election of 
such person--
          ``(1) If the fair market value of such stock as of 
        the close of such taxable year exceeds its adjusted 
        basis, such United States person shall include in gross 
        income for such taxable year an amount equal to the 
        amount of such excess.
          ``(2) If the adjusted basis of such stock exceeds the 
        fair market value of such stock as of the close of such 
        taxable year, such United States person shall be 
        allowed a deduction for such taxable year equal to the 
        lesser of--
                  ``(A) the amount of such excess, or
                  ``(B) the unreversed inclusions with respect 
                to such stock.
    ``(b) Basis Adjustments.--
          ``(1) In general.--The adjusted basis of stock in a 
        passive foreign investment company--
                  ``(A) shall be increased by the amount 
                included in the gross income of the United 
                States person under subsection (a)(1) with 
                respect to such stock, and
                  ``(B) shall be decreased by the amount 
                allowed as a deduction to the United States 
                person under subsection (a)(2) with respect to 
                such stock.
          ``(2) Special rule for stock constructively owned.--
        In the case of stock in a passive foreign investment 
        company which the United States person is treated as 
        owning under subsection (g)--
                  ``(A) the adjustments under paragraph (1) 
                shall apply to such stock in the hands of the 
                person actually holding such stock but only for 
                purposes of determining the subsequent 
                treatment under this chapter of the United 
                States person with respect to such stock, and
                  ``(B) similar adjustments shall be made to 
                the adjusted basis of the property by reason of 
                which the United States person is treated as 
                owning such stock.
    ``(c) Character and Source Rules.--
          ``(1) Ordinary treatment.--
                  ``(A) Gain.--Any amount included in gross 
                income under subsection (a)(1), and any gain on 
                the sale or other disposition of marketable 
                stock in a passive foreign investment company 
                (with respect to which an election under this 
                section is in effect), shall be treated as 
                ordinary income.
                  ``(B) Loss.--Any--
                          ``(i) amount allowed as a deduction 
                        under subsection (a)(2), and
                          ``(ii) loss on the sale or other 
                        disposition of marketable stock in a 
                        passive foreign investment company 
                        (with respect to which an election 
                        under this section is in effect) to the 
                        extent that the amount of such loss 
                        does not exceed the unreversed 
                        inclusions with respect to such stock,
                shall be treated as an ordinary loss. The 
                amount so treated shall be treated as a 
                deduction allowable in computing adjusted gross 
                income.
          ``(2) Source.--The source of any amount included in 
        gross income under subsection (a)(1) (or allowed as a 
        deduction under subsection (a)(2)) shall be determined 
        in the same manner as if such amount were gain or loss 
        (as the case may be) from the sale of stock in the 
        passive foreign investment company.
    ``(d) Unreversed Inclusions.--For purposes of this section, 
the term `unreversed inclusions' means, with respect to any 
stock in a passive foreign investment company, the excess (if 
any) of--
          ``(1) the amount included in gross income of the 
        taxpayer under subsection (a)(1) with respect to such 
        stock for prior taxable years, over
          ``(2) the amount allowed as a deduction under 
        subsection (a)(2) with respect to such stock for prior 
        taxable years.
The amount referred to in paragraph (1) shall include any 
amount which would have been included in gross income under 
subsection (a)(1) with respect to such stock for any prior 
taxable year but for section 1291.
    ``(e) Marketable Stock.--For purposes of this section--
          ``(1) In general.--The term `marketable stock' 
        means--
                  ``(A) any stock which is regularly traded 
                on--
                          ``(i) a national securities exchange 
                        which is registered with the Securities 
                        and Exchange Commission or the national 
                        market system established pursuant to 
                        section 11A of the Securities and 
                        Exchange Act of 1934, or
                          ``(ii) any exchange or other market 
                        which the Secretary determines has 
                        rules adequate to carry out the 
                        purposes of this part,
                  ``(B) to the extent provided in regulations, 
                stock in any foreign corporation which is 
                comparable to a regulated investment company 
                and which offers for sale or has outstanding 
                any stock of which it is the issuer and which 
                is redeemable at its net asset value, and
                  ``(C) to the extent provided in regulations, 
                any option on stock described in subparagraph 
                (A) or (B).
          ``(2) Special rule for regulated investment 
        companies.--In the case of any regulated investment 
        company which is offering for sale or has outstanding 
        any stock of which it is the issuer and which is 
        redeemable at its net asset value, all stock in a 
        passive foreign investment company which it owns 
        directly or indirectly shall be treated as marketable 
        stock for purposes of this section. Except as provided 
        in regulations, similar treatment as marketable stock 
        shall apply in the case of any other regulated 
        investment company which publishes net asset valuations 
        at least annually.
    ``(f) Treatment of Controlled Foreign Corporations Which 
are Shareholders in Passive Foreign Investment Companies.--In 
the case of a foreign corporation which is a controlled foreign 
corporation and which owns (or is treated under subsection (g) 
as owning) stock in a passive foreign investment company--
          ``(1) this section (other than subsection (c)(2)) 
        shall apply to such foreign corporation in the same 
        manner as if such corporation were a United States 
        person, and
          ``(2) for purposes of subpart F of part III of 
        subchapter N--
                  ``(A) any amount included in gross income 
                under subsection (a)(1) shall be treated as 
                foreign personal holding company income 
                described in section 954(c)(1)(A), and
                  ``(B) any amount allowed as a deduction under 
                subsection (a)(2) shall be treated as a 
                deduction allocable to foreign personal holding 
                company income so described.
    ``(g) Stock Owned Through Certain Foreign Entities.--Except 
as provided in regulations--
          ``(1) In general.--For purposes of this section, 
        stock owned, directly or indirectly, by or for a 
        foreign partnership or foreign trust or foreign estate 
        shall be considered as being owned proportionately by 
        its partners or beneficiaries. Stock considered to be 
        owned by a person by reason of the application of the 
        preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person.
          ``(2) Treatment of certain dispositions.--In any case 
        in which a United States person is treated as owning 
        stock in a passive foreign investment company by reason 
        of paragraph (1)--
                  ``(A) any disposition by the United States 
                person or by any other person which results in 
                the United States person being treated as no 
                longer owning such stock, and
                  ``(B) any disposition by the person owning 
                such stock,
        shall be treated as a disposition by the United States 
        person of the stock in the passive foreign investment 
        company.
    ``(h) Coordination With Section 851(b).--For purposes of 
paragraphs (2) and (3) of section 851(b), any amount included 
in gross income under subsection (a) shall be treated as a 
dividend.
    ``(i) Stock Acquired From a Decedent.--In the case of stock 
of a passive foreign investment company which is acquired by 
bequest, devise, or inheritance (or by the decedent's estate) 
and with respect to which an election under this section was in 
effect as of the date of the decedent's death, notwithstanding 
section 1014, the basis of such stock in the hands of the 
person so acquiring it shall be the adjusted basis of such 
stock in the hands of the decedent immediately before his death 
(or, if lesser, the basis which would have been determined 
under section 1014 without regard to this subsection).
    ``(j) Coordination With Section 1291 for First Year of 
Election.--
          ``(1) Taxpayers other than regulated investment 
        companies.--
                  ``(A) In general.--If the taxpayer elects the 
                application of this section with respect to any 
                marketable stock in a corporation after the 
                beginning of the taxpayer's holding period in 
                such stock, and if the requirements of 
                subparagraph (B) are not satisfied, section 
                1291 shall apply to--
                          ``(i) any distributions with respect 
                        to, or disposition of, such stock in 
                        the first taxable year of the taxpayer 
                        for which such election is made, and
                          ``(ii) any amount which, but for 
                        section 1291, would have been included 
                        in gross income under subsection (a) 
                        with respect to such stock for such 
                        taxable year in the same manner as if 
                        such amount were gain on the 
                        disposition of such stock.
                  ``(B) Requirements.--The requirements of this 
                subparagraph are met if, with respect to each 
                of such corporation's taxable years for which 
                such corporation was a passive foreign 
                investment company and which begin after 
                December 31, 1986, and included any portion of 
                the taxpayer's holding period in such stock, 
                such corporation was treated as a qualified 
                electing fund under this part with respect to 
                the taxpayer.
          ``(2) Special rules for regulated investment 
        companies.--
                  ``(A) In general.--If a regulated investment 
                company elects the application of this section 
                with respect to any marketable stock in a 
                corporation after the beginning of the 
                taxpayer's holding period in such stock, then, 
                with respect to such company's first taxable 
                year for which such company elects the 
                application of this section with respect to 
                such stock--
                          ``(i) section 1291 shall not apply to 
                        such stock with respect to any 
                        distribution or disposition during, or 
                        amount included in gross income under 
                        this section for, such first taxable 
                        year, but
                          ``(ii) such regulated investment 
                        company's tax under this chapter for 
                        such first taxable year shall be 
                        increased by the aggregate amount of 
                        interest which would have been 
                        determined under section 1291(c)(3) if 
                        section 1291 were applied without 
                        regard to this subparagraph.
                Clause (ii) shall not apply if for the 
                preceding taxable year the company elected to 
                mark to market the stock held by such company 
                as of the last day of such preceding taxable 
                year.
                  ``(B) Disallowance of deduction.--No 
                deduction shall be allowed to any regulated 
                investment company for the increase in tax 
                under subparagraph (A)(ii).
    ``(k) Election.--This section shall apply to marketable 
stock in a passive foreign investment company which is held by 
a United States person only if such person elects to apply this 
section with respect to such stock. Such an election shall 
apply to the taxable year for which made and all subsequent 
taxable years unless--
          ``(1) such stock ceases to be marketable stock, or
          ``(2) the Secretary consents to the revocation of 
        such election.
    ``(l) Transition Rule for Individuals Becoming Subject to 
United States Tax.--If any individual becomes a United States 
person in a taxable year beginning after December 31, 1997, 
solely for purposes of this section, the adjusted basis (before 
adjustments under subsection (b)) of any marketable stock in a 
passive foreign investment company owned by such individual on 
the first day of such taxable yearshall be treated as being the 
greater of its fair market value on such first day or its adjusted 
basis on such first day.''
    (b) Coordination With Interest Charge, Etc.--
          (1) Paragraph (1) of section 1291(d) is amended by 
        adding at the end the following new flush sentence:
        ``Except as provided in section 1296(j), this section 
        also shall not apply if an election under section 
        1296(k) is in effect for the taxpayer's taxable year.''
          (2) The subsection heading for subsection (d) of 
        section 1291 is amended by striking ``Subpart B'' and 
        inserting ``Subparts B and C''.
          (3) Subparagraph (A) of section 1291(a)(3) is amended 
        to read as follows:
                  ``(A) Holding period.--The taxpayer's holding 
                period shall be determined under section 1223; 
                except that--
                          ``(i) for purposes of applying this 
                        section to an excess distribution, such 
                        holding period shall be treated as 
                        ending on the date of such 
                        distribution, and
                          ``(ii) if section 1296 applied to 
                        such stock with respect to the taxpayer 
                        for any prior taxable year, such 
                        holding period shall be treated as 
                        beginning on the first day of the first 
                        taxable year beginning after the last 
                        taxable year for which section 1296 so 
                        applied.''
    (c) Treatment of Mark-to-Market Gain Under Section 4982.--
          (1) Subsection (e) of section 4982 is amended by 
        adding at the end thereof the following new paragraph:
          ``(6) Treatment of gain recognized under section 
        1296.--For purposes of determining a regulated 
        investment company's ordinary income--
                  ``(A) notwithstanding paragraph (1)(C), 
                section 1296 shall be applied as if such 
                company's taxable year ended on October 31, and
                  ``(B) any ordinary gain or loss from an 
                actual disposition of stock in a passive 
                foreign investment company during the portion 
                of the calendar year after October 31 shall be 
                taken into account in determining such 
                regulated investment company's ordinary income 
                for the following calendar year.
        In the case of a company making an election under 
        paragraph (4), the preceding sentence shall be applied 
        by substituting the last day of the company's taxable 
        year for October 31.''
          (2) Subsection (b) of section 852 is amended by 
        adding at the end thereof the following new paragraph:
          ``(10) Special rule for certain losses on stock in 
        passive foreign investment company.--To the extent 
        provided in regulations, the taxable income of a 
        regulated investment company (other than a company to 
        which an election under section 4982(e)(4) applies) 
        shall be computed without regard to any net reduction 
        in the value of any stock of a passive foreign 
        investment company with respect to which an election 
        under section 1296(k) is in effect occurring after 
        October 31 of the taxable year, and any such reduction 
        shall be treated as occurring on the first day of the 
        following taxable year.''
          (3) Subsection (c) of section 852 is amended by 
        inserting after ``October 31 of such year'' the 
        following: ``, without regard to any net reduction in 
        the value of any stock of a passive foreign investment 
        company with respect to which an election under section 
        1296(k) is in effect occurring after October 31 of such 
        year,''.
    (d) Conforming Amendments.--
          (1) Sections 532(b)(4) and 542(c)(10) are each 
        amended by striking ``section 1296'' and inserting 
        ``section 1297''.
          (2) Subsection (f) of section 551 is amended by 
        striking ``section 1297(b)(5)'' and inserting ``section 
        1298(b)(5)''
          (3) Subsections (a)(1) and (d) of section 1293 are 
        each amended by striking ``section 1297(a)'' and 
        inserting ``section 1298(a)''.
          (4) Paragraph (3) of section 1297(b), as redesignated 
        by subsection (a), is hereby repealed.
          (5) The table of sections for subpart D of part VI of 
        subchapter P of chapter 1, as redesignated by 
        subsection (a), is amended to read as follows:

        ``Sec. 1297. Passive foreign investment company.
        ``Sec. 1298. Special rules.''

          (6) The table of subparts for part VI of subchapter P 
        of chapter 1 is amended by striking the last item and 
        inserting the following new items:

        ``Subpart C. Election of mark to market for marketable stock.
        ``Subpart D. General provisions.''

    (e) Clarification of Gain Recognition Election.--The last 
sentence of section 1298(b)(1), as so redesignated, is amended 
by inserting ``(determined without regard to the preceding 
sentence)'' after ``investment company''.

SEC. 1123. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to--
          (1) taxable years of United States persons beginning 
        after December 31, 1997, and
          (2) taxable years of foreign corporations ending with 
        or within such taxable years of United States persons.

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

SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN ENTITIES; 
                    RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO FOREIGN 
                    TRUSTS AND ESTATES.

    (a) Repeal of Excise Tax.--Chapter 5 (relating to transfers 
to avoid income tax) is hereby repealed.
    (b) Recognition of Gain on Certain Transfers to Foreign 
Trusts and Estates.--Subpart F of part I of subchapter J of 
chapter 1 is amended by adding at the end the following new 
section:

``SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN 
                    TRUSTS AND ESTATES.

    ``(a) In general.--In the case of any transfer of property 
by a United States person to a foreign estate or trust, for 
purposes of this subtitle, such transfer shall be treated as a 
sale or exchange for an amount equal to the fair market value 
of the property transferred, and the transferor shall recognize 
as gain the excess of--
          ``(1) the fair market value of the property so 
        transferred, over
          ``(2) the adjusted basis (for purposes of determining 
        gain) of such property in the hands of the transferor.
    ``(b) Exception.--Subsection (a) shall not apply to a 
transfer to a trust by a United States person if such person is 
treated as the owner of such trust under section 671.''
    (c) Other Anti-Avoidance Provisions Replacing Repealed 
Excise Tax.--
          (1) Gain recognition on exchanges involving foreign 
        persons.--Section 1035 is amended by redesignating 
        subsection (c) as subsection (d) and by inserting after 
        subsection (b) the following new subsection:
    ``(c) Exchanges Involving Foreign Persons.--To the extent 
provided in regulations, subsection (a) shall not apply to any 
exchange having the effect of transferring property to any 
person other than a United States person.''
          (2) Transfers to foreign corporations.--Section 367 
        is amended by adding at the end the following new 
        subsection:
    ``(f) Other Transfers.--To the extent provided in 
regulations, if a United States person transfers property to a 
foreign corporation as paid-in surplus or as a contribution to 
capital (in a transaction not otherwise described in this 
section), such foreign corporation shall not, for purposes of 
determiningthe extent to which gain shall be recognized on such 
transfer, be considered to be a corporation.''
          (3) Certain transfers to partnerships.--Section 721 
        is amended by adding at the end the following new 
        subsection:
    ``(c) Regulations Relating to Transfers to Foreign 
Persons.--The Secretary may provide by regulations that 
subsection (a) shall not apply to gain realized on the transfer 
of property to a partnership if such gain, when recognized, 
will be includible in the gross income of a person other than a 
United States person.''
          (4) Repeal of u.s. source treatment of deemed 
        royalties.--Subparagraph (C) of section 367(d)(2) is 
        amended to read as follows:
                  ``(C) Amounts received treated as ordinary 
                income.--For purposes of this chapter, any 
                amount included in gross income by reason of 
                this subsection shall be treated as ordinary 
                income.''
          (5) Transfers of intangibles to partnerships.--
                  (A) Subsection (d) of section 367 is amended 
                by adding at the end the following new 
                paragraph:
          ``(3) Regulations relating to transfers of 
        intangibles to partnerships.--The Secretary may provide 
        by regulations that the rules of paragraph (2) also 
        apply to the transfer of intangible property by a 
        United States person to a partnership in circumstances 
        consistent with the purposes of this subsection.''
                  (B) Section 721 is amended by adding at the 
                end the following new subsection:
    ``(d) Transfers of Intangibles.--

          ``For regulatory authority to treat intangibles transferred to 
        a partnership as sold, see section 367(d)(3).''

    (d) Technical and Conforming Amendments.--
          (1) Subsection (h) of section 814 is amended by 
        striking ``or 1491''.
          (2) Section 1057 (relating to election to treat 
        transfer to foreign trust, etc., as taxable exchange) 
        is hereby repealed.
          (3) Section 6422 is amended by striking paragraph (5) 
        and by redesignating paragraphs (6) through (13) as 
        paragraphs (5) through (12), respectively.
          (4) The table of chapters for subtitle A is amended 
        by striking the item relating to chapter 5.
          (5) The table of sections for part IV of subchapter O 
        of chapter 1 is amended by striking the item relating 
        to section 1057.
          (6) The table of sections for subpart F of part I of 
        subchapter J of chapter 1 is amended by adding at the 
        end the following new item:

        ``Sec. 684. Recognition of gain on certain transfers to certain 
                  foreign trusts and estates.''

    (e) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

                   Subtitle E--Information Reporting

SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIREMENT TO 
                    FOREIGN PARTNERSHIPS.

    (a) In General.--Section 6031 (relating to return of 
partnership income) is amended by adding at the end the 
following new subsection:
    ``(e) Foreign Partnerships.--
          ``(1) Exception for foreign partnership.--Except as 
        provided in paragraph (2), the preceding provisions of 
        this section shall not apply to a foreign partnership.
          ``(2) Certain foreign partnerships required to file 
        return.--Except as provided in regulations prescribed 
        by the Secretary, this section shall apply to a foreign 
        partnership for any taxable year if for such year, such 
        partnership has--
                  ``(A) gross income derived from sources 
                within the United States, or
                  ``(B) gross income which is effectively 
                connected with the conduct of a trade or 
                business within the United States.
        The Secretary may provide simplified filing procedures 
        for foreign partnerships to which this section 
        applies.''
    (b) Sanction for Failure by Foreign Partnership To Comply 
With Section 6031 To Include Denial of Deductions.--Subsection 
(f) of section 6231 is amended--
          (1) by striking ``Losses and'' in the heading and 
        inserting ``Deductions, Losses, and'', and
          (2) by striking ``loss or'' each place it appears and 
        inserting ``deduction, loss, or''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT TO INFORMATION 
                    REPORTING COMPARABLE TO INFORMATION REPORTING FOR 
                    CONTROLLED FOREIGN CORPORATIONS.

    (a) In General.--So much of section 6038 (relating to 
information with respect to certain foreign corporations) as 
precedes paragraph (2) of subsection (a) is amended to read as 
follows:

``SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN FOREIGN 
                    CORPORATIONS AND PARTNERSHIPS.

    ``(a) Requirement.--
          ``(1) In general.--Every United States person shall 
        furnish, with respect to any foreign business entity 
        which such person controls, such information as the 
        Secretary may prescribe relating to--
                  ``(A) the name, the principal place of 
                business, and the nature of business of such 
                entity, and the country under whose laws such 
                entity is incorporated (or organized in the 
                case of a partnership);
                  ``(B) in the case of a foreign corporation, 
                its post-1986 undistributed earnings (as 
                defined in section 902(c));
                  ``(C) a balance sheet for such entity listing 
                assets, liabilities, and capital;
                  ``(D) transactions between such entity and--
                          ``(i) such person,
                          ``(ii) any corporation or partnership 
                        which such person controls, and
                          ``(iii) any United States person 
                        owning, at the time the transaction 
                        takes place--
                                  ``(I) in the case of a 
                                foreign corporation, 10 percent 
                                or more of the value of any 
                                class of stock outstanding of 
                                such corporation, and
                                  ``(II) in the case of a 
                                foreign partnership, at least a 
                                10-percent interest in such 
                                partnership; and
                  ``(E)(i) in the case of a foreign 
                corporation, a description of the various 
                classes of stock outstanding, and a list 
                showing the name and address of, and number of 
                shares held by, each United States person who 
                is a shareholder of record owning at any time 
                during the annual accounting period 5 percent 
                or more in value of any class of stock 
                outstanding of such foreign corporation, and
                  ``(ii) information comparable to the 
                information described in clause (i) in the case 
                of a foreign partnership.
        The Secretary may also require the furnishing of any 
        other information which is similar or related in nature 
        to that specified in the preceding sentence or which 
        the Secretary determines to be appropriate to carry out 
        the provisions of this title.''
    (b) Definitions.--
          (1) In general.--Subsection (e) of section 6038 
        (relating to definitions) is amended--
                  (A) by redesignating paragraphs (1) and (2) 
                as paragraphs (2) and (4), respectively,
                  (B) by inserting before paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(1) Foreign business entity.--The term `foreign 
        business entity' means a foreign corporation and a 
        foreign partnership.'', and
                  (C) by inserting after paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(3) Partnership-related definitions.--
                  ``(A) Control.--A person is in control of a 
                partnership if such person owns directly or 
                indirectly more than a 50 percent interest in 
                such partnership.
                  ``(B) 50-percent interest.--For purposes of 
                subparagraph (A), a 50-percent interest in a 
                partnership is--
                          ``(i) an interest equal to 50 percent 
                        of the capital interest, or 50 percent 
                        of the profits interest, in such 
                        partnership, or
                          ``(ii) to the extent provided in 
                        regulations, an interest to which 50 
                        percent of the deductions or losses of 
                        such partnership are allocated.
                For purposes of the preceding sentence, rules 
                similar to the rules of section 267(c) (other 
                than paragraph (3)) shall apply, except so as 
                to consider a United States person as owning 
                such an interest which is owned by a person 
                which is not a United States person.
                  ``(C) 10-percent interest.--A 10-percent 
                interest in a partnership is an interest which 
                would be described in subparagraph (B) if `10 
                percent' were substituted for `50 percent' each 
                place it appears.''
          (2) Clerical amendment.--The paragraph heading for 
        paragraph (2) of section 6038(e) (as so redesignated) 
        is amended by inserting ``of corporation'' after 
        ``Control''.
    (c) Modification of Sanctions on Partnerships and 
Corporations for Failure To Furnish Information.--
          (1) In general.--Subsection (b) of section 6038 is 
        amended--
                  (A) by striking ``$1,000'' each place it 
                appears and inserting ``$10,000'', and
                  (B) by striking ``$24,000'' in paragraph (2) 
                and inserting ``$50,000''.
    (d) Reporting by 10-Percent Partners.--Subsection (a) of 
section 6038 is amended by adding at the end the following new 
paragraph:
          ``(5) Information required from 10-percent partner of 
        controlled foreign partnership.--In the case of a 
        foreign partnership which is controlled by United 
        States persons holding at least 10-percent interests 
        (but not by any one United States person), the 
        Secretary may require each United States person who 
        holds a 10-percent interest in such partnership to 
        furnish information relating to such partnership, 
        including information relating to such partner's 
        ownership interests in the partnership and allocations 
        to such partner of partnership items.''
    (e) Technical Amendments.--
          (1) The following provisions of section 6038 are each 
        amended by striking ``foreign corporation'' each place 
        it appears and inserting ``foreign business entity'':
                  (A) Paragraphs (2) and (3) of subsection (a).
                  (B) Subsection (b).
                  (C) Subsection (c) other than paragraph 
                (1)(B) thereof.
                  (D) Subsection (d).
                  (E) Subsection (e)(4) (as redesignated by 
                subsection (b)).
          (2) Subparagraph (B) of section 6038(c)(1) is amended 
        by inserting ``in the case of a foreign business entity 
        which is a foreign corporation,'' after ``(B)''.
          (3) Paragraph (8) of section 318(b) is amended by 
        striking ``6038(d)(1)'' and inserting ``6038(d)(2)''.
          (4) Paragraph (4) of section 901(k) is amended by 
        striking ``foreign corporation'' and inserting 
        ``foreign corporation or partnership''.
          (5) The table of sections for subpart A of part III 
        of subchapter A of chapter 61 is amended by striking 
        the item relating to section 6038 and inserting the 
        following new item:

        ``Sec. 6038. Information reporting with respect to certain 
                  foreign corporations and partnerships.''

    (f) Effective Date.--The amendments made by this section 
shall apply to annual accounting periods of foreign 
partnerships beginning after the date of the enactment of this 
Act.

SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE FILED BY 
                    REASON OF CHANGES IN OWNERSHIP INTERESTS IN FOREIGN 
                    PARTNERSHIP.

    (a) No Return Required Unless Changes Involve 10-Percent 
Interest in Partnership.--
          (1) In general.--Subsection (a) of section 6046A 
        (relating to returns as to interests in foreign 
        partnerships) is amended by adding at the end the 
        following new sentence: ``Paragraphs (1) and (2) shall 
        apply to any acquisition or disposition only if the 
        United States person directly or indirectly holds at 
        least a 10-percent interest in such partnership either 
        before or after such acquisition or disposition, and 
        paragraph (3) shall apply to any change only if the 
        change is equivalent to at least a 10-interest in such 
        partnership.''
          (2) 10-percent interest.--Section 6046A is amended by 
        redesignating subsection (d) as subsection (e) and by 
        inserting after subsection (c) the following new 
        subsection:
    ``(d) 10-Percent Interest.--For purposes of subsection (a), 
a 10-percent interest in a partnership is an interest described 
in section 6038(e)(3)(C).''
    (b) Modification of Penalty on Failure to Report Changes in 
Ownership Interests in Foreign Corporations and Partnerships.--
Subsection (a) of section 6679 (relating to failure to file 
returns, etc., with respect to foreign corporations or foreign 
partnerships) is amended to read as follows:
    ``(a) Civil Penalty.--
          ``(1) In general.--In addition to any criminal 
        penalty provided by law, any person required to file a 
        return under section 6035, 6046, or 6046A who fails to 
        file such return at the time provided in such section, 
        or who files a return which does not show the 
        information required pursuant to such section, shall 
        pay a penalty of $10,000, unless it is shown that such 
        failure is due to reasonable cause.
          ``(2) Increase in penalty where failure continues 
        after notification.--If any failure described in 
        paragraph (1) continues for more than 90 days after the 
        day on which the Secretary mails notice of such failure 
        to the United States person, such person shall pay a 
        penalty (in addition to the amount required under 
        paragraph (1)) of $10,000 for each 30-day period (or 
        fraction thereof) during which such failure continues 
        after the expiration of such 90-day period. The 
        increase in any penalty under this paragraph shall not 
        exceed $50,000.
          ``(3) Reduced penalty for returns relating to foreign 
        personal holding companies.--In the case of a return 
        required under section 6035, paragraph (1) shall be 
        applied by substituting `$1,000' for `$10,000', and 
        paragraph (2) shall not apply.''
    (c) Effective Date.--The amendments made by this section 
shall apply to transfers and changes after the date of the 
enactment of this Act.

SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS SUBJECT TO 
                    INFORMATION REPORTING COMPARABLE TO INFORMATION 
                    REPORTING FOR SUCH TRANSFERS TO FOREIGN 
                    CORPORATIONS.

    (a) In General.--Paragraph (1) of section 6038B(a) 
(relating to notice of certain transfers to foreign 
corporations) is amended to read as follows:
          ``(1) transfers property to--
                  ``(A) a foreign corporation in an exchange 
                described in section 332, 351, 354, 355, 356, 
                or 361, or
                  ``(B) a foreign partnership in a contribution 
                described in section 721 or in any other 
                contribution described in regulations 
                prescribed by the Secretary,''.
    (b) Exceptions.--Section 6038B is amended by redesignating 
subsection (b) as subsection (c) and by inserting after 
subsection (a) the following new subsection:
    ``(b) Exceptions for Certain Transfers to Foreign 
Partnerships; Special Rule.--
          ``(1) Exceptions.--Subsection (a)(1)(B) shall apply 
        to a transfer by a United States person to a foreign 
        partnership only if--
                  ``(A) the United States person holds 
                (immediately after the transfer) directly or 
                indirectly at least a 10-percent interest (as 
                defined in section 6046A(d)) in the 
                partnership, or
                  ``(B) the value of the property transferred 
                (when added to the value of the property 
                transferred by such person or any related 
                person to such partnership or a related 
                partnership during the 12-month period ending 
                on the date of the transfer) exceeds $100,000.
        For purposes of the preceding sentence, the value of 
        any transferred property is its fair market value at 
        the time of its transfer.
          ``(2) Special rule.--If by reason of an adjustment 
        under section 482 or otherwise, a contribution 
        described in subsection (a)(1) is deemed to have been 
        made, such contribution shall be treated for purposes 
        of this section as having been made not earlier than 
        the date specified by the Secretary.''
     (c) Modification of Penalty Applicable to Foreign 
Corporations and Partnerships.--Paragraph (1) of section 
6038B(b) is amended by striking ``equal to'' and all that 
follows and inserting ``equal to 10 percent of the fair market 
value of the property at the time of the exchange (and, in the 
case of a contribution described in subsection (a)(1)(B), such 
person shall recognize gain as if the contributed property had 
been sold for such value at the time of such contribution).''
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to transfers made after the date of the 
        enactment of this Act.
          (2) Election of retroactive effect.--Section 1494(c) 
        of the Internal Revenue Code of 1986 shall not apply to 
        any transfer after August 20, 1996, if the person 
        otherwise required to file a return with respect to 
        such transfer elects to apply the amendments made by 
        this section to transfers after August 20, 1996. The 
        Secretary of the Treasury or his delegate may prescribe 
        simplified reporting under the preceding sentence.

SEC. 1145. EXTENSION OF STATUTE OF LIMITATION FOR FOREIGN TRANSFERS.

    (a) In General.--Paragraph (8) of section 6501(c) (relating 
to failure to notify Secretary under section 6038B) is amended 
to read as follows:
          ``(8) Failure to notify secretary of certain foreign 
        transfers.--In the case of any information which is 
        required to be reported to the Secretary under section 
        6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for 
        assessment of any tax imposed by this title with 
        respect to any event or period to which such 
        information relates shall not expire before the date 
        which is 3 years after the date on which the Secretary 
        is furnished the information required to be reported 
        under such section.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to information the due date for the reporting of 
which is after the date of the enactment of this Act.

SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO ORGANIZATION 
                    OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK 
                    IN SUCH CORPORATIONS.

    (a) In General.--Subsection (a) of section 6046 (relating 
to returns as to organization or reorganization of foreign 
corporations and as to acquisitions of their stock) is amended 
to read as follows:
    ``(a) Requirement of Return.--
          ``(1) In general.--A return complying with the 
        requirements of subsection (b) shall be made by--
                  ``(A) each United States citizen or resident 
                who becomes an officer or director of a foreign 
                corporation if a United States person (as 
                defined in section 7701(a)(30)) meets the stock 
                ownership requirements of paragraph (2) with 
                respect to such corporation,
                  ``(B) each United States person--
                          ``(i) who acquires stock which, when 
                        added to any stock owned on the date of 
                        such acquisition, meets the stock 
                        ownership requirements of paragraph (2) 
                        with respect to a foreign corporation, 
                        or
                          ``(ii) who acquires stock which, 
                        without regard to stock owned on the 
                        date of such acquisition, meets the 
                        stock ownership requirements of 
                        paragraph (2) with respect to a foreign 
                        corporation,
                  ``(C) each person (not described in 
                subparagraph (B)) who is treated as a United 
                States shareholder under section 953(c) with 
                respect to a foreign corporation, and
                  ``(D) each person who becomes a United States 
                person while meeting the stock ownership 
                requirements of paragraph (2) with respect to 
                stock of a foreign corporation.
        In the case of a foreign corporation with respect to 
        which any person is treated as a United States 
        shareholder under section 953(c), subparagraph (A) 
        shall be treated as including a reference to each 
        United States person who is an officer or director of 
        such corporation.
          ``(2) Stock ownership requirements.--A person meets 
        the stock ownership requirements of this paragraph with 
        respect to any corporation if such person owns 10 
        percent or more of--
                  ``(A) the total combined voting power of all 
                classes of stock of such corporation entitled 
                to vote, or
                  ``(B) the total value of the stock of such 
                corporation.''
    (b) Effective Date.--The amendment made by this section 
shall take effect on January 1, 1998.

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

SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF PARTNERSHIPS.

    (a) In General.--Paragraph (4) of section 7701(a) is 
amended by inserting before the period ``unless, in the case of 
a partnership, the partnership is more properly treated as a 
foreign partnership under regulations prescribed by the 
Secretary''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

              Subtitle G--Other Simplification Provisions

SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.

    (a) In General.--Paragraph (3) of section 1907(a) of the 
Small Business Job Protection Act of 1996 is amended by adding 
at the end the following flush sentence:
        ``To the extent prescribed in regulations by the 
        Secretary of the Treasury or his delegate, a trust 
        which was in existence on August 20, 1996 (other than a 
        trust treated as owned by the grantor under subpart E 
        of part I of subchapter J of chapter 1 of the Internal 
        Revenue Code of 1986), and which was treated as a 
        United States person on the day before the date of the 
        enactment of this Act may elect to continue to be 
        treated as a United States person notwithstanding 
        section 7701(a)(30)(E) of such Code.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect as if included in the amendments made by 
section 1907(a) of the Small Business Job Protection Act of 
1996.

SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR REQUIREMENT THAT 
                    PRINCIPAL OFFICE BE OUTSIDE THE UNITED STATES.

    (a) In General.--The last sentence of clause (ii) of 
section 864(b)(2)(A) (relating to stock or securities) is 
amended by striking ``, or in the case of a corporation'' and 
all that follows and inserting a period.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

                      Subtitle H--Other Provisions

SEC. 1171. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY INCOME.

    (a) Income From Notional Principal Contracts and Payments 
in Lieu of Dividends.--
          (1) In general.--Paragraph (1) of section 954(c) 
        (defining foreign personal holding company income) is 
        amended by adding at the end the following new 
        subparagraphs:
                  ``(F) Income from notional principal 
                contracts.--Net income from notional principal 
                contracts. Any item of income, gain, deduction, 
                or loss from a notional principal contract 
                entered into for purposes of hedging any item 
                described in any preceding subparagraph shall 
                not be taken into account for purposes of this 
                subparagraph but shall be taken into account 
                under such other subparagraph.
                  ``(G) Payments in lieu of dividends.--
                Payments in lieu of dividends which are made 
                pursuant to an agreement to which section 1058 
                applies.''
          (2) Conforming amendment.--Subparagraph (B) of 
        section 954(c)(1) is amended--
                  (A) by striking the second sentence, and
                  (B) by striking ``also'' in the last 
                sentence.
    (b) Exception for Dealers.--Paragraph (2) of section 954(c) 
is amended by adding at the end the following new subparagraph:
                  ``(C) Exception for dealers.--Except as 
                provided in subparagraph (A), (E), or (G) of 
                paragraph (1) or by regulations, in the case of 
                a regular dealer in property (within the 
                meaning of paragraph (1)(B)), forward 
                contracts, option contracts, or similar 
                financial instruments (including notional 
                principal contracts and all instruments 
                referenced to commodities), there shall not be 
                taken into account in computing foreign 
                personal holding income any item of income, 
                gain, deduction, or loss from any transaction 
                (including hedging transactions) entered into 
                in the ordinary course of such dealer's trade 
                or business as such a dealer.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1172. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED STATES 
                    TREATED AS NOT PROPERTY OF A LIKE KIND WITH RESPECT 
                    TO PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED 
                    STATES.

    (a) In General.--Subsection (h) of section 1031 (relating 
to exchange of property held for productive use or investment) 
is amended to read as follows:
    ``(h) Special Rules for Foreign Real and Personal 
Property.--For purposes of this section--
          ``(1) Real property.--Real property located in the 
        United States and real property located outside the 
        United States are not property of a like kind.
          ``(2) Personal property.--
                  ``(A) In general.--Personal property used 
                predominantly within the United States and 
                personal property used predominantly outside 
                the United States are not property of a like 
                kind.
                  ``(B) Predominant use.--Except as provided in 
                subparagraph (C) and (D), the predominant use 
                of any property shall be determined based on--
                          ``(i) in the case of the property 
                        relinquished in the exchange, the 2-
                        year period ending on the date of such 
                        relinquishment, and
                          ``(ii) in the case of the property 
                        acquired in the exchange, the 2-year 
                        period beginning on the date of such 
                        acquisition.
                  ``(C) Property held for less than 2 years.--
                Except in the case of an exchange which is part 
                of a transaction (or series of transactions) 
                structured to avoid the purposes of this 
                subsection--
                          ``(i) only the periods the property 
                        was held by the person relinquishing 
                        the property (or any related person) 
                        shall be taken into account under 
                        subparagraph (B)(i), and
                          ``(ii) only the periods the property 
                        was held by the person acquiring the 
                        property (or any related person) shall 
                        be taken into account under 
                        subparagraph (B)(ii).
                  ``(D) Special rule for certain property.--
                Property described in any subparagraph of 
                section 168(g)(4) shall be treated as used 
                predominantly in the United States.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to transfers after June 8, 1997, in taxable 
        years ending after such date.
          (2) Binding contracts.--The amendment made by this 
        section shall not apply to any transfer pursuant to a 
        written binding contract in effect on June 8, 1997, and 
        at all times thereafter before the disposition of 
        property. A contract shall not fail to meet the 
        requirements of the preceding sentence solely because--
                  (A) it provides for a sale in lieu of an 
                exchange, or
                  (B) the property to be acquired as 
                replacement property was not identified under 
                such contract before June 9, 1997.

SEC. 1173. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN TAXES.

    (a) In General.--Section 901 is amended by redesignating 
subsection (k) as subsection (l) and by inserting after 
subsection (j) the following new subsection:
    ``(k) Minimum Holding Period for Certain Taxes.--
          ``(1) Withholding taxes.--
                  ``(A) In general.--In no event shall a credit 
                be allowed under subsection (a) for any 
                withholding tax on a dividend with respect to 
                stock in a corporation if--
                          ``(i) such stock is held by the 
                        recipient of the dividend for 15 days 
                        or less during the 30-day period 
                        beginning on the date which is 15 days 
                        before the date on which such share 
                        becomes ex-dividend with respect to 
                        such dividend, or
                          ``(ii) to the extent that the 
                        recipient of the dividend is under an 
                        obligation (whether pursuant to a short 
                        sale or otherwise) to make related 
                        payments with respect to positions in 
                        substantially similar or related 
                        property.
                  ``(B) Withholding tax.--For purposes of this 
                paragraph, the term `withholding tax' includes 
                any taxdetermined on a gross basis; but does 
not include any tax which is in the nature of a prepayment of a tax 
imposed on a net basis.
          ``(2) Deemed paid taxes.--In the case of income, war 
        profits, or excess profits taxes deemed paid under 
        section 853, 902, or 960 through a chain of ownership 
        of stock in 1 or more corporations, no credit shall be 
        allowed under subsection (a) for such taxes if--
                  ``(A) any stock of any corporation in such 
                chain (the ownership of which is required to 
                obtain credit under subsection (a) for such 
                taxes) is held for less than the period 
                described in paragraph (1)(A)(i), or
                  ``(B) the corporation holding the stock is 
                under an obligation referred to in paragraph 
                (1)(A)(ii).
          ``(3) 45-day rule in the case of certain preference 
        dividends.--In the case of stock having preference in 
        dividends and dividends with respect to such stock 
        which are attributable to a period or periods 
        aggregating in excess of 366 days, paragraph (1)(A)(i) 
        shall be applied--
                  ``(A) by substituting `45 days' for `15 days' 
                each place it appears, and
                  ``(B) by substituting `90-day period' for 
                `30-day period'.
          ``(4) Exception for certain taxes paid by securities 
        dealers.--
                  ``(A) In general.--Paragraphs (1) and (2) 
                shall not apply to any qualified tax with 
                respect to any security held in the active 
                conduct in a foreign country of a securities 
                business of any person--
                          ``(i) who is registered as a 
                        securities broker or dealer under 
                        section 15(a) of the Securities 
                        Exchange Act of 1934,
                          ``(ii) who is registered as a 
                        Government securities broker or dealer 
                        under section 15C(a) of such Act, or
                          ``(iii) who is licensed or authorized 
                        in such foreign country to conduct 
                        securities activities in such country 
                        and is subject to bona fide regulation 
                        by a securities regulating authority of 
                        such country.
                  ``(B) Qualified tax.--For purposes of 
                subparagraph (A), the term `qualified tax' 
                means a tax paid to a foreign country (other 
                than the foreign country referred to in 
                subparagraph (A)) if--
                          ``(i) the dividend to which such tax 
                        is attributable is subject to taxation 
                        on a net basis by the country referred 
                        to in subparagraph (A), and
                          ``(ii) such country allows a credit 
                        against its net basis tax for the full 
                        amount of the tax paid to such other 
                        foreign country.
                  ``(C) Regulations.--The Secretary may 
                prescribe such regulations as may be 
                appropriate to prevent the abuse of the 
                exception provided by this paragraph.
          ``(5) Certain rules to apply.--For purposes of this 
        subsection, the rules of paragraphs (3) and (4) of 
        section 246(c) shall apply.
          ``(6) Treatment of bona fide sales.--If a person's 
        holding period is reduced by reason of the application 
        of the rules of section 246(c)(4) to any contract for 
        the bona fide sale of stock, the determination of 
        whether such person's holding period meets the 
        requirements of paragraph (2) shall be made as of the 
        date such contract is entered into.
          ``(7) Taxes allowed as deduction, etc.--Sections 275 
        and 78 shall not apply to any tax which is not 
        allowable as a credit under subsection (a) by reason of 
        this subsection.''
    (b) Notice of Withholding Taxes Paid by Regulated 
Investment Company.--Subsection (c) of section 853 (relating to 
foreign tax credit allowed to shareholders) is amended by 
adding at the end the following new sentence: ``Such notice 
shall also include the amount of such taxes which (without 
regard to the election under this section) would not be 
allowable as a credit under section 901(a) to the regulated 
investment company by reason of section 901(k).''
    (c) Effective Date.--The amendments made by this section 
shall apply to dividends paid or accrued more than 30 days 
after the date of the enactment of this Act.

SEC. 1174. PENALTIES FOR FAILURE TO DISCLOSE POSITION THAT CERTAIN 
                    INTERNATIONAL TRANSPORTATION INCOME IS NOT 
                    INCLUDIBLE IN GROSS INCOME.

    (a) In General.--Section 883 is amended by adding at the 
end the following new subsection:
    ``(d) Penalties for Failure to Disclose Position That 
Certain International Transportation Income Is Not Includible 
in Gross Income.--
          ``(1) In general.--A taxpayer who, with respect to 
        any tax imposed by this title, takes the position that 
        any of its gross income derived from the international 
        operation of 1 or more ships or aircraft is not 
        includible in gross income by reason of paragraph (1) 
        or (2) of subsection (a) or paragraph (1) or (2) of 
        section 872(b) (or by reason of any applicable treaty) 
        shall be entitled to such treatment only if such 
        position is disclosed (in such manner as the Secretary 
        may prescribe) on the return of tax for such tax (or 
        any statement attached to such return).
          ``(2) Additional penalties for failing to disclose 
        position.--If a taxpayer fails to meet the requirement 
        of paragraph (1) for any taxable year with respect to 
        the international operation of 1 or more ships or 1 or 
        more aircraft--
                  ``(A) the amount of the income from the 
                international operation to which such failure 
                relates--
                          ``(i) which is from sources without 
                        the United States, and
                          ``(ii) which is attributable to a 
                        fixed place of business in the United 
                        States,
                shall be treated for purposes of this title as 
                effectively connected with the conduct of a 
                trade or business within the United States, and
                  ``(B) no deductions or credits shall be 
                allowed which are attributable to income from 
                the international operation to which the 
                failure relates.
          ``(3) Reasonable cause exception.--This subsection 
        shall not apply to a failure to disclose a position if 
        it is shown that such failure is due to reasonable 
        cause and not due to willful neglect.''
    (b) Conforming Amendments.--Paragraphs (1) and (2) of 
section 872(b), and paragraphs (1) and (2) of section 883(a), 
are each amended by striking ``Gross income'' each place it 
appears and inserting ``Except as provided in section 883(d), 
gross income''.
    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to taxable years beginning after December 
        31, 1997.
          (2) Coordination with treaties.--The amendments made 
        by this section shall not apply in any case where their 
        application would be contrary to any treaty obligation 
        of the United States.
    (d) Information To Be Provided by Customs Service.--The 
United States Custom Service shall provide the Secretary of the 
Treasury or his delegate with such information as may be 
specified by such Secretary in order to enable such Secretary 
to determine whether ships which are not registered in the 
United States are engaged in transportation to or from the 
United States.

SEC. 1175. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS THROUGH 
                    HYBRID ENTITIES.

    A foreign person shall be entitled under any income tax 
treaty of the United States with a foreign country to any 
reduced rate of any withholding tax imposed by the Internal 
Revenue Code of 1986 on an item of income derived through 
anypartnership or other pass-thru entity only to the extent that such 
item is treated for purposes of the taxation laws of such foreign 
country as an item of income of such person. The preceding sentence 
shall not apply if--
          (1) the treaty contains a provision addressing the 
        applicability of the treaty in the case of an item of 
        income derived through a partnership, or
          (2) the foreign country imposes tax on a distribution 
        of such item of income from such partnership to such 
        person.

SEC. 1176. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN TAX CREDIT 
                    CARRYBACKS.

    (a) In General.--Subsection (d) of section 6601 is amended 
by redesignating paragraphs (2) and (3) as paragraphs (3) and 
(4), respectively, and by inserting after paragraph (1) the 
following new paragraph:
          ``(2) Foreign tax credit carrybacks.--If any credit 
        allowed for any taxable year is increased by reason of 
        a carryback of tax paid or accrued to foreign countries 
        or possessions of the United States, such increase 
        shall not affect the computation of interest under this 
        section for the period ending with the filing date for 
        the taxable year in which such taxes were in fact paid 
        or accrued, or, with respect to any portion of such 
        credit carryback from a taxable year attributable to a 
        net operating loss carryback or a capital loss 
        carryback from a subsequent taxable year, such increase 
        shall not affect the computation of interest under this 
        section for the period ending with the filing date for 
        such subsequent taxable year.''
    (b) Conforming Amendment to Refunds Attributable to Foreign 
Tax Credit Carrybacks.--
          (1) In general.--Subsection (f) of section 6611 is 
        amended by redesignating paragraphs (2) and (3) as 
        paragraphs (3) and (4), respectively, and by inserting 
        after paragraph (1) the following new paragraph:
          ``(2) Foreign tax credit carrybacks.--For purposes of 
        subsection (a), if any overpayment of tax imposed by 
        subtitle A results from a carryback of tax paid or 
        accrued to foreign countries or possessions of the 
        United States, such overpayment shall be deemed not to 
        have been made before the filing date for the taxable 
        year in which such taxes were in fact paid or accrued, 
        or, with respect to any portion of such credit 
        carryback from a taxable year attributable to a net 
        operating loss carryback or a capital loss carryback 
        from a subsequent taxable year, such overpayment shall 
        be deemed not to have been made before the filing date 
        for such subsequent taxable year.''
          (2) Conforming amendments.--
                  (A) Paragraph (4) of section 6611(f) (as so 
                redesignated) is amended--
                          (i) by striking ``paragraphs (1) and 
                        (2)'' and inserting ``paragraphs (1), 
                        (2), and (3)'', and
                          (ii) by striking ``paragraph (1) or 
                        (2)'' each place it appears and 
                        inserting ``paragraph (1), (2), or 
                        (3)''.
                  (B) Clause (ii) of section 6611(f)(4)(B) (as 
                so redesignated) is amended by striking ``and'' 
                at the end of subclause (I), by redesignating 
                subclause (II) as subclause (III), and by 
                inserting after subclause (I) the following new 
                subclause:
                                  ``(II) in the case of a 
                                carryback of taxes paid or 
                                accrued to foreign countries or 
                                possessions of the United 
                                States, the taxable year in 
                                which such taxes were in fact 
                                paid or accrued (or, with 
                                respect to any portion of such 
                                carryback from a taxable year 
                                attributable to a net operating 
                                loss carryback or a capital 
                                loss carryback from a 
                                subsequent taxable year, such 
                                subsequent taxable year), 
                                and''.
                  (C) Subclause (III) of section 
                6611(f)(4)(B)(ii) (as so redesignated) is 
                amended by inserting ``(as defined in paragraph 
                (3)(B))'' after ``credit carryback'' the first 
                place it appears.
                  (D) Section 6611 is amended by striking 
                subsection (g) and by redesignating subsections 
                (h) and (i) as subsections (g) and (h), 
                respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to carrybacks arising in taxable years beginning 
after the date of the enactment of this Act.

SEC. 1177. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM FOR CREDIT 
                    OR REFUND ATTRIBUTABLE TO FOREIGN TAX CREDIT 
                    CARRYFORWARD.

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

SEC. 1178. MISCELLANEOUS CLARIFICATIONS.

    (a) Attribution of Deemed Paid Foreign Taxes to Prior 
Distributions.--Subparagraph (B) of section 902(c)(2) is 
amended by striking ``deemed paid with respect to'' and 
inserting ``attributable to''.
    (b) Financial Services Income Determined Without Regard to 
High-Taxed Income.--Subclause (II) of section 904(d)(2)(C)(i) 
is amended by striking ``subclause (I)'' and inserting 
``subclauses (I) and (III)''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

   TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES

             Subtitle A--Provisions Relating to Individuals

SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMPTION AMOUNT 
                    FOR CERTAIN DEPENDENTS.

    (a) Basic Standard Deduction.--
          (1) In general.--Paragraph (5) of section 63(c) 
        (relating to limitation on basic standard deduction in 
        the case of certain dependents) is amended by striking 
        ``shall not exceed'' and all that follows and inserting 
        ``shall not exceed the greater of--
                  ``(A) $500, or
                  ``(B) the sum of $250 and such individual's 
                earned income.''
          (2) Conforming amendment.--Paragraph (4) of section 
        63(c) is amended--
                  (A) by striking ``(5)(A)'' in the material 
                preceding subparagraph (A) and inserting 
                ``(5)'', and
                  (B) by striking ``by substituting'' and all 
                that follows in subparagraph (B) and inserting 
                ``by substituting for `calendar year 1992' in 
                subparagraph (B) thereof--
                          ``(i) `calendar year 1987' in the 
                        case of the dollar amounts contained in 
                        paragraph (2) or (5)(A) or subsection 
                        (f), and
                          ``(ii) `calendar year 1997' in the 
                        case of the dollar amount contained in 
                        paragraph (5)(B).''
    (b) Minimum Tax Exemption Amount.--Subsection (j) of 
section 59 is amended to read as follows:
    ``(j) Treatment of Unearned Income of Minor Children.--
          ``(1) In general.--In the case of a child to whom 
        section 1(g) applies, the exemption amount for purposes 
        of section 55 shall not exceed the sum of--
                  ``(A) such child's earned income (as defined 
                in section 911(d)(2)) for the taxable year, 
                plus
                  ``(B) $5,000.
          ``(2) Inflation adjustment.--In the case of any 
        taxable year beginning in a calendar year after 1998, 
        the dollar amount in paragraph (1)(B) shall be 
        increased by an amount equal to the product of--
                  ``(A) such dollar amount, and
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                determined by substituting `1997' for `1992' in 
                subparagraph (B) thereof.
        If any increase determined under the preceding sentence 
        is not a multiple of $50, such increase shall be 
        rounded to the nearest multiple of $50.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED TAX 
                    REQUIREMENTS.

    (a) In General.--Paragraph (1) of section 6654(e) (relating 
to exception where tax is small amount) is amended by striking 
``$500'' and inserting ``$1,000''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1203. OPTIONAL METHODS FOR COMPUTING SECA TAX COMBINED.

    (a) Internal Revenue Code.--
          (1) In general.--Subsection (h) of section 1402 is 
        amended to read as follows:
    ``(h) Optional Method for Computing Self-Employment 
Income.--
          ``(1) Individuals.--In the case of any trade or 
        business which is carried on by an individual--
                  ``(A) if the gross income derived by him from 
                such trade or business is not more than the 
                upper limit for the taxable year, the net 
                earnings from self-employment derived by him 
                from such trade or business may, at his option, 
                be deemed to be 66\2/3\ percent of such gross 
                income, or
                  ``(B) if the gross income derived by him from 
                such trade or business is more than the upper 
                limit for the taxable year and the net earnings 
                from self-employment derived by him from such 
                trade or business (computed under subsection 
                (a) without regard to this sentence) are less 
                than the lower limit for the taxable year, the 
                net earnings from self-employment derived by 
                him from such trade or business may, at his 
                option, be deemed to be the lower limit for the 
                taxable year.
          ``(2) Member of a partnership.--In the case of a 
        member of a partnership carrying on any trade or 
        business--
                  ``(A) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) applies) is not more than 
                the upper limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) derived from such trade or 
                business may, at his option, be deemed to be an 
                amount equal to 66\2/3\ percent of his 
                distributive share of such gross income (after 
                such gross income has been so reduced), or
                  ``(B) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) applies) is more than the 
                upper limit for the taxable year and his 
                distributive share (whether or not distributed) 
                of income described in section 702(a)(8) 
                derived from such trade or business (computed 
                under this subsection without regard to this 
                sentence) is less than the lower limit for the 
                taxable year, his distributive share of income 
                described in section 702(a)(8) derived from 
                such trade or business may, at his option, be 
                deemed to be the lower limit for the taxable 
                year.
          ``(3) Upper and lower limits.--For purposes of this 
        subsection--
                  ``(A) Lower limit.--The lower limit for any 
                taxable year is the sum of the amounts 
                applicable under section 213(d) of the Social 
                Security Act for calendar quarters ending with 
                or within such taxable year.
                  ``(B) Upper limit.--The upper limit for any 
                taxable year is the amount equal to 150 percent 
                of the lower limit for such taxable year.
          ``(4) Determination of gross income.--For purposes of 
        this subsection, the term `gross income' means--
                  ``(A) in the case of any such trade or 
                business in which the income is computed under 
                a cash receipts and disbursements method, the 
                gross receipts from such trade or business 
                reduced by the cost or other basis of property 
                which was purchased and sold in carrying on 
                such trade or business, adjusted (after such 
                reduction) in accordance with the provisions of 
                paragraphs (1) through (7) and paragraph (9) of 
                subsection (a), and
                  ``(B) in the case of any such trade or 
                business in which the income is computed under 
                an accrual method, the gross income from such 
                trade or business, adjusted in accordance with 
                the provisions of paragraphs (1) through (7) 
                and paragraph (9) of subsection (a).
          ``(5) Income derived from more than 1 trade or 
        business.--For purposes of this subsection, if an 
        individual (including a member of a partnership) 
        derives gross income from more than 1 such trade or 
        business, such gross income (including his distributive 
        share of the gross income of any partnership derived 
        from any such trade or business) shall be deemed to 
        have been derived from one trade or business.
          ``(6) Election.--The option under this subsection 
        shall be allowed for any taxable year only if elected 
        on the first return filed for such taxable year.''
          (2) Conforming amendment.--Subsection (a) of section 
        1402 is amended by striking all that follows the first 
        sentence following paragraph (15) and inserting ``For 
        optional method of determining net earnings from self-
        employment, see subsection (h).''
    (b) Social Security Act.--Subsection (g) of section 211 of 
the Social Security Act is amended to read as follows:
    ``(g) Optional Method for Computing Self-Employment 
Income.--
          ``(1) Individuals.--In the case of any trade or 
        business which is carried on by an individual--
                  ``(A) if the gross income derived by him from 
                such trade or business is not more than the 
                upper limit for the taxable year, the net 
                earnings from self-employment derived by him 
                from such trade or business may, at his option, 
                be deemed to be 66\2/3\ percent of such gross 
                income, or
                  ``(B) if the gross income derived by him from 
                such trade or business is more than the upper 
                limit for the taxable year and the net earnings 
                from self-employment derived by him from such 
                trade or business (computed under subsection 
                (a) without regard to this sentence) are less 
                than the lower limit for the taxable year, the 
                net earnings from self-employment derived by 
                him from such trade or business may, at his 
                option, be deemed to be the lower limit for the 
                taxable year.
          ``(2) Member of a partnership.--In the case of a 
        member of a partnership carrying on any trade or 
        business--
                  ``(A) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) of the Internal Revenue 
                Code of 1986 applies) is not more than the 
                upper limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) of such Code derived from 
                such trade or business may, at his option, be 
                deemed to be an amount equal to 66\2/3\ percent 
                of his distributive share of such gross income 
                (after such gross income has been so reduced), 
                or
                  ``(B) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) of such Code applies) is 
                more than the upper limit for the taxable year 
                and his distributive share (whether or not 
                distributed) of income described in section 
                702(a)(8) of such Code derived from such trade 
                or business (computed under this subsection 
                without regard to this sentence) is less than 
                the lower limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) of such Code derived from 
                such trade or business may, at his option, be 
                deemed to be the lower limit for the taxable 
                year.
          ``(3) Upper and lower limits.--For purposes of this 
        subsection--
                  ``(A) Lower limit.--The lower limit for any 
                taxable year is the sum of the amounts 
                applicable under section 213(d) for calendar 
                quarters ending with or within such taxable 
                year.
                  ``(B) Upper limit.--The upper limit for any 
                taxable year is the amount equal to 150 percent 
                of the lower limit for such taxable year.
          ``(4) Determination of gross income.--For purposes of 
        this subsection, the term `gross income' means--
                  ``(A) in the case of any such trade or 
                business in which the income is computed under 
                a cash receipts and disbursements method, the 
                gross receipts from such trade or business 
                reduced by the cost or other basis of property 
                which was purchased and sold in carrying on 
                such trade or business, adjusted (after such 
                reduction) in accordance with the provisions of 
                paragraphs (1) through (6) and paragraph (8) of 
                subsection (a), and
                  ``(B) in the case of any such trade or 
                business in which the income is computed under 
                an accrual method, the gross income from such 
                trade or business, adjusted in accordance with 
                the provisions of paragraphs (1) through (6) 
                and paragraph (8) of subsection (a).
          ``(5) Income derived from more than 1 trade or 
        business.--For purposes of this subsection, if an 
        individual (including a member of a partnership) 
        derives gross income from more than 1 such trade or 
        business, such gross income (including his distributive 
        share of the gross income of any partnership derived 
        from any such trade or business) shall be deemed to 
        have been derived from one trade or business.
          ``(6) Election.--The option under this subsection 
        shall be allowed for any taxable year only if elected 
        on the first return filed for such taxable year.''
          (2) Conforming amendment.--Subsection (a) of section 
        211 of the Social Security Act is amended by striking 
        all that follows the first sentence following paragraph 
        (15) and inserting ``For optional method of determining 
        net earnings from self-employment, see subsection 
        (g).''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1204. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL MAIL 
                    CARRIERS.

    (a) In General.--Section 162 (relating to trade or business 
expenses) is amended by redesignating subsection (o) as 
subsection (p) and by inserting after subsection (n) the 
following new subsection:
    ``(o) Treatment of Certain Reimbursed Expenses of Rural 
Mail Carriers.--
          ``(1) General rule.--In the case of any employee of 
        the United States Postal Service who performs services 
        involving the collection and delivery of mail on a 
        rural route and who receives qualified reimbursements 
        for the expenses incurred by such employee for the use 
        of a vehicle in performing such services--
                  ``(A) the amount allowable as a deduction 
                under this chapter for the use of a vehicle in 
                performing such services shall be equal to the 
                amount of such qualified reimbursements; and
                  ``(B) such qualified reimbursements shall be 
                treated as paid under a reimbursement or other 
                expense allowance arrangement for purposes of 
                section 62(a)(2)(A) (and section 62(c) shall 
                not apply to such qualified reimbursements).
          ``(2) Definition of qualified reimbursements.--For 
        purposes of this subsection, the term `qualified 
        reimbursements' means the amounts paid by the United 
        States Postal Service to employees as an equipment 
        maintenance allowance under the 1991 collective 
        bargaining agreement between the United States Postal 
        Service and the National Rural Letter Carriers' 
        Association. Amounts paid as an equipment maintenance 
        allowance by such Postal Service under later collective 
        bargaining agreements that supersede the 1991 agreement 
        shall be considered qualified reimbursements if such 
        amounts do not exceed the amounts that would have been 
        paid under the 1991 agreement, adjusted for changes in 
        the Consumer Price Index (as defined in section 
        1(f)(5)) since 1991.''
    (b) Technical Amendment.--Section 6008 of the Technical and 
Miscellaneous Revenue Act of 1988 is hereby repealed.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1205. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL EMPLOYEES 
                    ENGAGED IN CRIMINAL INVESTIGATIONS.

    (a) In General.--Subsection (a) of section 162 is amended 
by adding at the end the following new sentence: ``The 
preceding sentence shall not apply to any Federal employee 
during any period for which such employee is certified by the 
Attorney General (or the designee thereof) as traveling on 
behalf of the United States in temporary duty status to 
investigate, or provide support services for the investigation 
of, a Federal crime.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to amounts paid or incurred with respect to taxable 
years ending after the date of the enactment of this Act.

SEC. 1206. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

    (a) General Rule.--Section 6311 is amended to read as 
follows:

``SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

    ``(a) Authority To Receive.--It shall be lawful for the 
Secretary to receive for internal revenue taxes (or in payment 
for internal revenue stamps) any commercially acceptable means 
that the Secretary deems appropriate to the extent and under 
the conditions provided in regulations prescribed by the 
Secretary.
    ``(b) Ultimate Liability.--If a check, money order, or 
other method of payment, including payment by credit card, 
debit card, or charge card so received is not duly paid, or is 
paid and subsequently charged back to the Secretary, the person 
by whom such check, or money order, or other method of payment 
has been tendered shall remain liable for the payment of the 
tax or for the stamps, and for all legal penalties and 
additions, to the same extent as if such check, money order, or 
other method of payment had not been tendered.
    ``(c) Liability of Banks and Others.--If any certified, 
treasurer's, or cashier's check (or other guaranteed draft), or 
any money order, or any other means of payment that has been 
guaranteed by a financial institution (such as a credit card, 
debit card, or charge card transaction which has been 
guaranteed expressly by a financial institution) so received is 
not duly paid, the United States shall, in addition to its 
right to exact payment from the party originally indebted 
therefor, have a lien for--
          ``(1) the amount of such check (or draft) upon all 
        assets of the financial institution on which drawn,
          ``(2) the amount of such money order upon all the 
        assets of the issuer thereof, or
          ``(3) the guaranteed amount of any other transaction 
        upon all the assets of the institution making such 
        guarantee,
and such amount shall be paid out of such assets in preference 
to any other claims whatsoever against such financial 
institution, issuer, or guaranteeing institution, except the 
necessary costs and expenses of administration and the 
reimbursement of the United States for the amount expended in 
the redemption of the circulating notes of such financial 
institution.
    ``(d) Payment by Other Means.--
          ``(1) Authority to prescribe regulations.--The 
        Secretary shall prescribe such regulations as the 
        Secretary deems necessary to receive payment by 
        commercially acceptable means, including regulations 
        that--
                  ``(A) specify which methods of payment by 
                commercially acceptable means will be 
                acceptable,
                  ``(B) specify when payment by such means will 
                be considered received,
                  ``(C) identify types of nontax matters 
                related to payment by such means that are to be 
                resolved by persons ultimately liable for 
                payment and financial intermediaries, without 
                the involvement of the Secretary, and
                  ``(D) ensure that tax matters will be 
                resolved by the Secretary, without the 
                involvement of financial intermediaries.
          ``(2) Authority to enter into contracts.--
        Notwithstanding section 3718(f) of title 31, United 
        States Code, the Secretary is authorized to enter into 
        contracts to obtain services related to receiving 
        payment by other means where cost beneficial to the 
        Government.
          ``(3) Special provisions for use of credit cards.--If 
        use of credit cards is accepted as a method of payment 
        of taxes pursuant to subsection (a)--
                  ``(A) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) by a 
                person by use of a credit card shall not be 
                subject to section 161 of the Truth-in-Lending 
                Act (15 U.S.C. 1666), or to any similar 
                provisions of State law, if the error alleged 
                by the person is an error relating to the 
                underlying tax liability, rather than an error 
                relating to the credit card account such as a 
                computational error or numerical transposition 
                in the credit card transaction or an issue as 
                to whether the person authorized payment by use 
                of the credit card,
                  ``(B) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) shall 
                not be subject to section 170 of the Truth-in-
                Lending Act (15 U.S.C. 1666i), or to any 
                similar provisions of State law,
                  ``(C) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) by a 
                person by use of a debit card shall not be 
                subject to section 908 of the Electronic Fund 
                Transfer Act (15 U.S.C. 1693f), or to any 
                similar provisions of State law, if the error 
                alleged by the person is an error relating to 
                the underlying tax liability, rather than an 
                error relating to the debit card account such 
                as a computational error or numerical 
                transposition in the debit card transaction or 
                an issue as to whether the person authorized 
                payment by use of the debit card,
                  ``(D) the term `creditor' under section 
                103(f) of the Truth-in-Lending Act (15 U.S.C. 
                1602(f)) shall not include the Secretary with 
                respect to credit card transactions in payment 
                of internal revenue taxes (or payment for 
                internal revenue stamps), and
                  ``(E) notwithstanding any other provision of 
                law to the contrary, in the case of payment 
                made by credit card or debit card transaction 
                of an amount owed to a person as the result of 
                the correction of an error under section 161 of 
                the Truth-in-Lending Act (15 U.S.C. 1666) or 
                section 908 of the Electronic Fund Transfer Act 
                (15 U.S.C. 1693f), the Secretary is authorized 
                to provide such amount to such person as a 
                credit to that person's credit card or debit 
                cardaccount through the applicable credit card 
or debit card system.
    ``(e) Confidentiality of Information.--
          ``(1) In general.--Except as otherwise authorized by 
        this subsection, no person may use or disclose any 
        information relating to credit or debit card 
        transactions obtained pursuant to section 6103(k)(8) 
        other than for purposes directly related to the 
        processing of such transactions, or the billing or 
        collection of amounts charged or debited pursuant 
        thereto.
          ``(2) Exceptions.--
                  ``(A) Debit or credit card issuers or others 
                acting on behalf of such issuers may also use 
                and disclose such information for purposes 
                directly related to servicing an issuer's 
                accounts.
                  ``(B) Debit or credit card issuers or others 
                directly involved in the processing of credit 
                or debit card transactions or the billing or 
                collection of amounts charged or debited 
                thereto may also use and disclose such 
                information for purposes directly related to--
                          ``(i) statistical risk and 
                        profitability assessment;
                          ``(ii) transferring receivables, 
                        accounts, or interest therein;
                          ``(iii) auditing the account 
                        information;
                          ``(iv) complying with Federal, State, 
                        or local law; and
                          ``(v) properly authorized civil, 
                        criminal, or regulatory investigation 
                        by Federal, State, or local 
                        authorities.
          ``(3) Procedures.--Use and disclosure of information 
        under this paragraph shall be made only to the extent 
        authorized by written procedures promulgated by the 
        Secretary.
          ``(4) Cross reference.--

          ``For provision providing for civil damages for violation of 
        paragraph (1), see section 7431.''

    (b) Separate Appropriation Required for Payment of Credit 
Card Fees.--No amount may be paid by the United States to a 
credit card issuer for the right to receive payments of 
internal revenue taxes by credit card without a separate 
appropriation therefor.
    (c) Clerical Amendment.--The table of sections for 
subchapter B of chapter 64 is amended by striking the item 
relating to section 6311 and inserting the following:

        ``Sec. 6311. Payment of tax by commercially acceptable means.''

    (d) Amendments to Sections 6103 and 7431 With Respect to 
Disclosure Authorization.--
          (1) Subsection (k) of section 6103 (relating to 
        confidentiality and disclosure of returns and return 
        information) is amended by adding at the end the 
        following new paragraph:
          ``(8) Disclosure of information to administer section 
        6311.--The Secretary may disclose returns or return 
        information to financial institutions and others to the 
        extent the Secretary deems necessary for the 
        administration of section 6311. Disclosures of 
        information for purposes other than to accept payments 
        by checks or money orders shall be made only to the 
        extent authorized by written procedures promulgated by 
        the Secretary.''
          (2) Section 7431 (relating to civil damages for 
        unauthorized disclosure of returns and return 
        information) is amended by adding at the end the 
        following new subsection:
    ``(g) Special Rule for Information Obtained Under Section 
6103(k)(8).--For purposes of this section, any reference to 
section 6103 shall be treated as including a reference to 
section 6311(e).''
          (3) Section 6103(p)(3)(A) is amended by striking ``or 
        (6)'' and inserting ``(6), or (8)''.
    (e) Effective Date.--The amendments made by this section 
shall take effect on the day 9 months after the date of the 
enactment of this Act.

        Subtitle B--Provisions Relating to Businesses Generally

SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM CONTRACTS.

    (a) Look-Back Method Not To Apply in Certain Cases.--
Subsection (b) of section 460 (relating to percentage of 
completion method) is amended by adding at the end the 
following new paragraph:
          ``(6) Election to have look-back method not apply in 
        de minimis cases.--
                  ``(A) Amounts taken into account after 
                completion of contract.--Paragraph (1)(B) shall 
                not apply with respect to any taxable year 
                (beginning after the taxable year in which the 
                contract is completed) if--
                          ``(i) the cumulative taxable income 
                        (or loss) under the contract as of the 
                        close of such taxable year, is within
                          ``(ii) 10 percent of the cumulative 
                        look-back taxable income (or loss) 
                        under the contract as of the close of 
                        the most recent taxable year to which 
                        paragraph (1)(B) applied (or would have 
                        applied but for subparagraph (B)).
                  ``(B) De minimis discrepancies.--Paragraph 
                (1)(B) shall not apply in any case to which it 
                would otherwise apply if--
                          ``(i) the cumulative taxable income 
                        (or loss) under the contract as of the 
                        close of each prior contract year, is 
                        within
                          ``(ii) 10 percent of the cumulative 
                        look-back income (or loss) under the 
                        contract as of the close of such prior 
                        contract year.
                  ``(C) Definitions.--For purposes of this 
                paragraph--
                          ``(i) Contract year.--The term 
                        `contract year' means any taxable year 
                        for which income is taken into account 
                        under the contract.
                          ``(ii) Look-back income or loss.--The 
                        look-back income (or loss) is the 
                        amount which would be the taxable 
                        income (or loss) under the contract if 
                        the allocation method set forth in 
                        paragraph (2)(A) were used in 
                        determining taxable income.
                          ``(iii) Discounting not applicable.--
                        The amounts taken into account after 
                        the completion of the contract shall be 
                        determined without regard to any 
                        discounting under the 2nd sentence of 
                        paragraph (2).
                  ``(D) Contracts to which paragraph applies.--
                This paragraph shall only apply if the taxpayer 
                makes an election under this subparagraph. 
                Unless revoked with the consent of the 
                Secretary, such an election shall apply to all 
                long-term contracts completed during the 
                taxable year for which election is made or 
                during any subsequent taxable year.''
    (b) Modification of Interest Rate.--
          (1) In general.--Subparagraph (C) of section 
        460(b)(2) is amended by striking ``the overpayment rate 
        established by section 6621'' and inserting ``the 
        adjusted overpayment rate (as defined in paragraph 
        (7))''.
          (2) Adjusted overpayment rate.--Subsection (b) of 
        section 460 is amended by adding at the end the 
        following new paragraph:
          ``(7) Adjusted overpayment rate.--
                  ``(A) In general.--The adjusted overpayment 
                rate for any interest accrual period is the 
                overpayment rate in effect under section 6621 
                for the calendar quarter in which such interest 
                accrual period begins.
                  ``(B) Interest accrual period.--For purposes 
                of subparagraph (A), the term `interest accrual 
                period' means the period--
                          ``(i) beginning on the day after the 
                        return due date for any taxable year of 
                        the taxpayer, and
                          ``(ii) ending on the return due date 
                        for the following taxable year.
                For purposes of the preceding sentence, the 
                term `return due date' means the date 
                prescribed for filing the return of the tax 
                imposed by this chapter (determined without 
                regard to extensions).''
    (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        contracts completed in taxable years ending after the 
        date of the enactment of this Act.
          (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply for purposes of section 
        167(g) of the Internal Revenue Code of 1986 to property 
        placed in service after September 13, 1995.

SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

    (a) In General.--Clause (i) of section 56(g)(4)(B) 
(relating to inclusion of items included for purposes of 
computing earnings and profits) is amended by adding at the end 
the following new sentence: ``In the case of any insurance 
company taxable under section 831(b), this clause shall not 
apply to any amount not described in section 834(b).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

   Subtitle C--Simplification Relating to Electing Large Partnerships

                       PART I--GENERAL PROVISIONS

SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PARTNERSHIPS.

    (a) General Rule.--Subchapter K (relating to partners and 
partnerships) is amended by adding at the end the following new 
part:

        ``PART IV--SPECIAL RULES FOR ELECTING LARGE PARTNERSHIPS

        ``Sec. 771. Application of subchapter to electing large 
                  partnerships.
        ``Sec. 772. Simplified flow-through.
        ``Sec. 773. Computations at partnership level.
        ``Sec. 774. Other modifications.
        ``Sec. 775. Electing large partnership defined.
        ``Sec. 776. Special rules for partnerships holding oil and gas 
                  properties.
        ``Sec. 777. Regulations.

``SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PARTNERSHIPS.

    ``The preceding provisions of this subchapter to the extent 
inconsistent with the provisions of this part shall not apply 
to an electing large partnership and its partners.

``SEC. 772. SIMPLIFIED FLOW-THROUGH.

    ``(a) General Rule.--In determining the income tax of a 
partner of an electing large partnership, such partner shall 
take into account separately such partner's distributive share 
of the partnership's--
          ``(1) taxable income or loss from passive loss 
        limitation activities,
          ``(2) taxable income or loss from other activities,
          ``(3) net capital gain (or net capital loss)--
                  ``(A) to the extent allocable to passive loss 
                limitation activities, and
                  ``(B) to the extent allocable to other 
                activities,
          ``(4) tax-exempt interest,
          ``(5) applicable net AMT adjustment separately 
        computed for--
                  ``(A) passive loss limitation activities, and
                  ``(B) other activities,
          ``(6) general credits,
          ``(7) low-income housing credit determined under 
        section 42,
          ``(8) rehabilitation credit determined under section 
        47,
          ``(9) foreign income taxes,
          ``(10) the credit allowable under section 29, and
          ``(11) other items to the extent that the Secretary 
        determines that the separate treatment of such items is 
        appropriate.
    ``(b) Separate Computations.--In determining the amounts 
required under subsection (a) to be separately takeninto 
account by any partner, this section and section 773 shall be applied 
separately with respect to such partner by taking into account such 
partner's distributive share of the items of income, gain, loss, 
deduction, or credit of the partnership.
    ``(c) Treatment at Partner Level.--
          ``(1) In general.--Except as provided in this 
        subsection, rules similar to the rules of section 
        702(b) shall apply to any partner's distributive share 
        of the amounts referred to in subsection (a).
          ``(2) Income or loss from passive loss limitation 
        activities.--For purposes of this chapter, any 
        partner's distributive share of any income or loss 
        described in subsection (a)(1) shall be treated as an 
        item of income or loss (as the case may be) from the 
        conduct of a trade or business which is a single 
        passive activity (as defined in section 469). A similar 
        rule shall apply to a partner's distributive share of 
        amounts referred to in paragraphs (3)(A) and (5)(A) of 
        subsection (a).
          ``(3) Income or loss from other activities.--
                  ``(A) In general.--For purposes of this 
                chapter, any partner's distributive share of 
                any income or loss described in subsection 
                (a)(2) shall be treated as an item of income or 
                expense (as the case may be) with respect to 
                property held for investment.
                  ``(B) Deductions for loss not subject to 
                section 67.--The deduction under section 212 
                for any loss described in subparagraph (A) 
                shall not be treated as a miscellaneous 
                itemized deduction for purposes of section 67.
          ``(4) Treatment of net capital gain or loss.--For 
        purposes of this chapter, any partner's distributive 
        share of any gain or loss described in subsection 
        (a)(3) shall be treated as a long-term capital gain or 
        loss, as the case may be.
          ``(5) Minimum tax treatment.--In determining the 
        alternative minimum taxable income of any partner, such 
        partner's distributive share of any applicable net AMT 
        adjustment shall be taken into account in lieu of 
        making the separate adjustments provided in sections 
        56, 57, and 58 with respect to the items of the 
        partnership. Except as provided in regulations, the 
        applicable net AMT adjustment shall be treated, for 
        purposes of section 53, as an adjustment or item of tax 
        preference not specified in section 53(d)(1)(B)(ii).
          ``(6) General credits.--A partner's distributive 
        share of the amount referred to in paragraph (6) of 
        subsection (a) shall be taken into account as a current 
        year business credit.
    ``(d) Operating Rules.--For purposes of this section--
          ``(1) Passive loss limitation activity.--The term 
        `passive loss limitation activity' means--
                  ``(A) any activity which involves the conduct 
                of a trade or business, and
                  ``(B) any rental activity.
        For purposes of the preceding sentence, the term `trade 
        or business' includes any activity treated as a trade 
        or business under paragraph (5) or (6) of section 
        469(c).
          ``(2) Tax-exempt interest.--The term `tax-exempt 
        interest' means interest excludable from gross income 
        under section 103.
          ``(3) Applicable net amt adjustment.--
                  ``(A) In general.--The applicable net AMT 
                adjustment is--
                          ``(i) with respect to taxpayers other 
                        than corporations, the net adjustment 
                        determined by using the adjustments 
                        applicable to individuals, and
                          ``(ii) with respect to corporations, 
                        the net adjustment determined by using 
                        the adjustments applicable to 
                        corporations.
                  ``(B) Net adjustment.--The term `net 
                adjustment' means the net adjustment in the 
                items attributable to passive loss activities 
                or other activities (as the case may be) which 
                would result if such items were determined with 
                the adjustments of sections 56, 57, and 58.
          ``(4) Treatment of certain separately stated items.--
                  ``(A) Exclusion for certain purposes.--In 
                determining the amounts referred to in 
                paragraphs (1) and (2) of subsection (a), any 
                net capital gain or net capital loss (as the 
                case may be), and any item referred to in 
                subsection (a)(11), shall be excluded.
                  ``(B) Allocation rules.--The net capital gain 
                shall be treated--
                          ``(i) as allocable to passive loss 
                        limitation activities to the extent the 
                        net capital gain does not exceed the 
                        net capital gain determined by only 
                        taking into account gains and losses 
                        from sales and exchanges of property 
                        used in connection with such 
                        activities, and
                          ``(ii) as allocable to other 
                        activities to the extent such gain 
                        exceeds the amount allocated under 
                        clause (i).
                A similar rule shall apply for purposes of 
                allocating any net capital loss.
                  ``(C) Net capital loss.--The term `net 
                capital loss' means the excess of the losses 
                from sales or exchanges of capital assets over 
                the gains from sales or exchange of capital 
                assets.
          ``(5) General credits.--The term `general credits' 
        means any credit other than the low-income housing 
        credit, the rehabilitation credit, the foreign tax 
        credit, and the credit allowable under section 29.
          ``(6) Foreign income taxes.--The term `foreign income 
        taxes' means taxes described in section 901 which are 
        paid or accrued to foreign countries and to possessions 
        of the United States.
    ``(e) Special Rule for Unrelated Business Tax.--In the case 
of a partner which is an organization subject to tax under 
section 511, such partner's distributive share of any items 
shall be taken into account separately to the extent necessary 
to comply with the provisions of section 512(c)(1).
    ``(f) Special Rules for Applying Passive Loss 
Limitations.--If any person holds an interest in an electing 
large partnership other than as a limited partner--
          ``(1) paragraph (2) of subsection (c) shall not apply 
        to such partner, and
          ``(2) such partner's distributive share of the 
        partnership items allocable to passive loss limitation 
        activities shall be taken into account separately to 
        the extent necessary to comply with the provisions of 
        section 469.
The preceding sentence shall not apply to any items allocable 
to an interest held as a limited partner.

``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.

    ``(a) General Rule.--
          ``(1) Taxable income.--The taxable income of an 
        electing large partnership shall be computed in the 
        same manner as in the case of an individual except 
        that--
                  ``(A) the items described in section 772(a) 
                shall be separately stated, and
                  ``(B) the modifications of subsection (b) 
                shall apply.
          ``(2) Elections.--All elections affecting the 
        computation of the taxable income of an electing large 
        partnership or the computation of any credit of an 
        electing large partnership shall be made by the 
        partnership; except that the election under section 
        901, and any election under section 108, shall be made 
        by each partner separately.
          ``(3) Limitations, etc.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), all limitations and other 
                provisions affecting the computation of the 
                taxable income of an electing large partnership 
                or the computation of anycredit of an electing 
large partnership shall be applied at the partnership level (and not at 
the partner level).
                  ``(B) Certain limitations applied at partner 
                level.--The following provisions shall be 
                applied at the partner level (and not at the 
                partnership level):
                          ``(i) Section 68 (relating to overall 
                        limitation on itemized deductions).
                          ``(ii) Sections 49 and 465 (relating 
                        to at risk limitations).
                          ``(iii) Section 469 (relating to 
                        limitation on passive activity losses 
                        and credits).
                          ``(iv) Any other provision specified 
                        in regulations.
          ``(4) Coordination with other provisions.--Paragraphs 
        (2) and (3) shall apply notwithstanding any other 
        provision of this chapter other than this part.
    ``(b) Modifications to Determination of Taxable Income.--In 
determining the taxable income of an electing large 
partnership--
          ``(1) Certain deductions not allowed.--The following 
        deductions shall not be allowed:
                  ``(A) The deduction for personal exemptions 
                provided in section 151.
                  ``(B) The net operating loss deduction 
                provided in section 172.
                  ``(C) The additional itemized deductions for 
                individuals provided in part VII of subchapter 
                B (other than section 212 thereof).
          ``(2) Charitable deductions.--In determining the 
        amount allowable under section 170, the limitation of 
        section 170(b)(2) shall apply.
          ``(3) Coordination with section 67.--In lieu of 
        applying section 67, 70 percent of the amount of the 
        miscellaneous itemized deductions shall be disallowed.
    ``(c) Special Rules for Income From Discharge of 
Indebtedness.--If an electing large partnership has income from 
the discharge of any indebtedness--
          ``(1) such income shall be excluded in determining 
        the amounts referred to in section 772(a), and
          ``(2) in determining the income tax of any partner of 
        such partnership--
                  ``(A) such income shall be treated as an item 
                required to be separately taken into account 
                under section 772(a), and
                  ``(B) the provisions of section 108 shall be 
                applied without regard to this part.

``SEC. 774. OTHER MODIFICATIONS.

    ``(a) Treatment of Certain Optional Adjustments, Etc.--In 
the case of an electing large partnership--
          ``(1) computations under section 773 shall be made 
        without regard to any adjustment under section 743(b) 
        or 108(b), but
          ``(2) a partner's distributive share of any amount 
        referred to in section 772(a) shall be appropriately 
        adjusted to take into account any adjustment under 
        section 743(b) or 108(b) with respect to such partner.
    ``(b) Credit Recapture Determined at Partnership Level.--
          ``(1) In general.--In the case of an electing large 
        partnership--
                  ``(A) any credit recapture shall be taken 
                into account by the partnership, and
                  ``(B) the amount of such recapture shall be 
                determined as if the credit with respect to 
                which the recapture is made had been fully 
                utilized to reduce tax.
          ``(2) Method of taking recapture into account.--An 
        electing large partnership shall take into account a 
        credit recapture by reducing the amount of the 
        appropriate current year credit to the extent thereof, 
        and if such recapture exceeds the amount of such 
        current year credit, the partnership shall be liable to 
        pay such excess.
          ``(3) Dispositions not to trigger recapture.--No 
        credit recapture shall be required by reason of any 
        transfer of an interest in an electing large 
        partnership.
          ``(4) Credit recapture.--For purposes of this 
        subsection, the term `credit recapture' means any 
        increase in tax under section 42(j) or 50(a).
    ``(c) Partnership Not Terminated by Reason of Change in 
Ownership.--Subparagraph (B) of section 708(b)(1) shall not 
apply to an electing large partnership.
    ``(d) Partnership Entitled to Certain Credits.--The 
following shall be allowed to an electing large partnership and 
shall not be taken into account by the partners of such 
partnership:
          ``(1) The credit provided by section 34.
          ``(2) Any credit or refund under section 
        852(b)(3)(D).
    ``(e) Treatment of REMIC Residuals.--For purposes of 
applying section 860E(e)(6) to any electing large partnership--
          ``(1) all interests in such partnership shall be 
        treated as held by disqualified organizations,
          ``(2) in lieu of applying subparagraph (C) of section 
        860E(e)(6), the amount subject to tax under section 
        860E(e)(6) shall be excluded from the gross income of 
        such partnership, and
          ``(3) subparagraph (D) of section 860E(e)(6) shall 
        not apply.
    ``(f) Special Rules for Applying Certain Installment Sale 
Rules.--In the case of an electing large partnership--
          ``(1) the provisions of sections 453(l)(3) and 453A 
        shall be applied at the partnership level, and
          ``(2) in determining the amount of interest payable 
        under such sections, such partnership shall be treated 
        as subject to tax under this chapter at the highest 
        rate of tax in effect under section 1 or 11.

``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.

    ``(a) General Rule.--For purposes of this part--
          ``(1) In general.--The term `electing large 
        partnership' means, with respect to any partnership 
        taxable year, any partnership if--
                  ``(A) the number of persons who were partners 
                in such partnership in the preceding 
                partnership taxable year equaled or exceeded 
                100, and
                  ``(B) such partnership elects the application 
                of this part.
        To the extent provided in regulations, a partnership 
        shall cease to be treated as an electing large 
        partnership for any partnership taxable year if in such 
        taxable year fewer than 100 persons were partners in 
        such partnership.
          ``(2) Election.--The election under this subsection 
        shall apply to the taxable year for which made and all 
        subsequent taxable years unless revoked with the 
        consent of the Secretary.
    ``(b) Special Rules for Certain Service Partnerships.--
          ``(1) Certain partners not counted.--For purposes of 
        this section, the term `partner' does not include any 
        individual performing substantial services in 
        connection with the activities of the partnership and 
        holding an interest in such partnership, or an 
        individual who formerly performed substantial services 
        in connection with such activities and who held an 
        interest in such partnership at the time the individual 
        performed such services.
          ``(2) Exclusion.--For purposes of this part, an 
        election under subsection (a) shall not be effective 
        with respect to any partnership if substantially all 
        the partners of such partnership--
                  ``(A) are individuals performing substantial 
                services in connection with the activities of 
                such partnership or are personal service 
                corporations (as defined in section 269A(b)) 
                the owner-employees (as defined in section 
                269A(b)) of which perform such substantial 
                services,
                  ``(B) are retired partners who had performed 
                such substantial services, or
                  ``(C) are spouses of partners who are 
                performing (or had previously performed) such 
                substantial services.
          ``(3) Special rule for lower tier partnerships.--For 
        purposes of this subsection, the activities of a 
        partnership shall include the activities of any other 
        partnership in which the partnership owns directly an 
        interest in the capital and profits of at least 80 
        percent.
    ``(c) Exclusion of Commodity Pools.--For purposes of this 
part, an election under subsection (a) shall not be effective 
with respect to any partnership the principal activity of which 
is the buying and selling of commodities (not described in 
section 1221(1)), or options, futures, or forwards with respect 
to such commodities.
    ``(d) Secretary May Rely on Treatment on Return.--If, on 
the partnership return of any partnership, such partnership is 
treated as an electing large partnership, such treatment shall 
be binding on such partnership and all partners of such 
partnership but not on the Secretary.

``SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND GAS 
                    PROPERTIES.

    ``(a) Computation of Percentage Depletion.--In the case of 
an electing large partnership, except as provided in subsection 
(b)--
          ``(1) the allowance for depletion under section 611 
        with respect to any partnership oil or gas property 
        shall be computed at the partnership level without 
        regard to any provision of section 613A requiring such 
        allowance to be computed separately by each partner,
          ``(2) such allowance shall be determined without 
        regard to the provisions of section 613A(c) limiting 
        theamount of production for which percentage depletion 
is allowable and without regard to paragraph (1) of section 613A(d), 
and
          ``(3) paragraph (3) of section 705(a) shall not 
        apply.
    ``(b) Treatment of Certain Partners.--
          ``(1) In general.--In the case of a disqualified 
        person, the treatment under this chapter of such 
        person's distributive share of any item of income, 
        gain, loss, deduction, or credit attributable to any 
        partnership oil or gas property shall be determined 
        without regard to this part. Such person's distributive 
        share of any such items shall be excluded for purposes 
        of making determinations under sections 772 and 773.
          ``(2) Disqualified person.--For purposes of paragraph 
        (1), the term `disqualified person' means, with respect 
        to any partnership taxable year--
                  ``(A) any person referred to in paragraph (2) 
                or (4) of section 613A(d) for such person's 
                taxable year in which such partnership taxable 
                year ends, and
                  ``(B) any other person if such person's 
                average daily production of domestic crude oil 
                and natural gas for such person's taxable year 
                in which such partnership taxable year ends 
                exceeds 500 barrels.
          ``(3) Average daily production.--For purposes of 
        paragraph (2), a person's average daily production of 
        domestic crude oil and natural gas for any taxable year 
        shall be computed as provided in section 613A(c)(2)--
                  ``(A) by taking into account all production 
                of domestic crude oil and natural gas 
                (including such person's proportionate share of 
                any production of a partnership),
                  ``(B) by treating 6,000 cubic feet of natural 
                gas as a barrel of crude oil, and
                  ``(C) by treating as 1 person all persons 
                treated as 1 taxpayer under section 613A(c)(8) 
                or among whom allocations are required under 
                such section.

``SEC. 777. REGULATIONS.

    ``The Secretary shall prescribe such regulations as may be 
appropriate to carry out the purposes of this part.''
    (b) Clerical Amendment.--The table of parts for subchapter 
K of chapter 1 is amended by adding at the end the following 
new item:

        ``Part IV. Special rules for electing large partnerships.''

    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 1997.

SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE PARTNERSHIPS.

    (a) General Rule.--Chapter 63 is amended by adding at the 
end thereof the following new subchapter:

        ``Subchapter D--Treatment of electing large partnerships

        ``Part I. Treatment of partnership items and adjustments.
        ``Part II. Partnership level adjustments.
        ``Part III. Definitions and special rules.

        ``PART I--TREATMENT OF PARTNERSHIP ITEMS AND ADJUSTMENTS

        ``Sec. 6240. Application of subchapter.
        ``Sec. 6241. Partner's return must be consistent with 
                  partnership return.
        ``Sec. 6242. Procedures for taking partnership adjustments into 
                  account.

``SEC. 6240. APPLICATION OF SUBCHAPTER.

    ``(a) General Rule.--This subchapter shall only apply to 
electing large partnerships and partners in such partnerships.
    ``(b) Coordination With Other Partnership Audit 
Procedures.--
          ``(1) In general.--Subchapter C of this chapter shall 
        not apply to any electing large partnership other than 
        in its capacity as a partner in another partnership 
        which is not an electing large partnership.
          ``(2) Treatment where partner in other partnership.--
        If an electing large partnership is a partner in 
        another partnership which is not an electing large 
        partnership--
                  ``(A) subchapter C of this chapter shall 
                apply to items of such electing large 
                partnership which are partnership items with 
                respect to such other partnership, but
                  ``(B) any adjustment under such subchapter C 
                shall be taken into account in the manner 
                provided by section 6242.

``SEC. 6241. PARTNER'S RETURN MUST BE CONSISTENT WITH PARTNERSHIP 
                    RETURN.

    ``(a) General Rule.--A partner of any electing large 
partnership shall, on the partner's return, treat each 
partnership item attributable to such partnership in a manner 
which is consistent with the treatment of such partnership item 
on the partnership return.
    ``(b) Underpayment Due to Inconsistent Treatment Assessed 
as Math Error.--Any underpayment of tax by a partner by reason 
of failing to comply with the requirements of subsection (a) 
shall be assessed and collected in the same manner as if such 
underpayment were on account of a mathematical or clerical 
error appearing on the partner's return. Paragraph (2) of 
section 6213(b) shall not apply to any assessment of an 
underpayment referred to in the preceding sentence.
    ``(c) Adjustments Not To Affect Prior Year of Partners.--
          ``(1) In general.--Except as provided in paragraph 
        (2), subsections (a) and (b) shall apply without regard 
        to any adjustment to the partnership item under part 
        II.
          ``(2) Certain changes in distributive share taken 
        into account by partner.--
                  ``(A) In general.--To the extent that any 
                adjustment under part II involves a change 
                under section 704 in a partner's distributive 
                share of the amount of any partnership item 
                shown on the partnership return, such 
                adjustment shall be taken into account in 
                applying this title to such partner for the 
                partner's taxable year for which such item was 
                required to be taken into account.
                  ``(B) Coordination with deficiency 
                procedures.--
                          ``(i) In general.--Subchapter B shall 
                        not apply to the assessment or 
                        collection of any underpayment of tax 
                        attributable to an adjustment referred 
                        to in subparagraph (A).
                          ``(ii) Adjustment not precluded.--
                        Notwithstanding any other law or rule 
                        of law, nothing in subchapter B (or in 
                        any proceeding under subchapter B) 
                        shall preclude the assessment or 
                        collection of any underpayment of tax 
                        (or the allowance of any credit or 
                        refund of any overpayment of tax) 
                        attributable to an adjustment referred 
                        to in subparagraph (A) and such 
                        assessment or collection or allowance 
                        (or any notice thereof) shall not 
                        preclude any notice, proceeding, or 
                        determination under subchapter B.
                  ``(C) Period of limitations.--The period 
                for--
                          ``(i) assessing any underpayment of 
                        tax, or
                          ``(ii) filing a claim for credit or 
                        refund of any overpayment of tax,
                attributable to an adjustment referred to in 
                subparagraph (A) shall not expire before the 
                close of the period prescribed by section 6248 
                for making adjustments with respect to the 
                partnership taxable year involved.
                  ``(D) Tiered structures.--If the partner 
                referred to in subparagraph (A) is another 
                partnership or an S corporation, the rules of 
                this paragraph shall also apply to persons 
                holding interests in such partnership or S 
                corporation (as the case may be); except that, 
                if such partner is an electing large 
                partnership, the adjustment referred to in 
                subparagraph (A) shall betaken into account in 
the manner provided by section 6242.
    ``(d) Addition to Tax for Failure to Comply With Section.--

          ``For addition to tax in case of partner's disregard of 
        requirements of this section, see part II of subchapter A of 
        chapter 68.

``SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS INTO 
                    ACCOUNT.

    ``(a) Adjustments Flow Through To Partners for Year in 
Which Adjustment Takes Effect.--
          ``(1) In general.--If any partnership adjustment with 
        respect to any partnership item takes effect (within 
        the meaning of subsection (d)(2)) during any 
        partnership taxable year and if an election under 
        paragraph (2) does not apply to such adjustment, such 
        adjustment shall be taken into account in determining 
        the amount of such item for the partnership taxable 
        year in which such adjustment takes effect. In applying 
        this title to any person who is (directly or 
        indirectly) a partner in such partnership during such 
        partnership taxable year, such adjustment shall be 
        treated as an item actually arising during such taxable 
        year.
          ``(2) Partnership liable in certain cases.--If--
                  ``(A) a partnership elects under this 
                paragraph to not take an adjustment into 
                account under paragraph (1),
                  ``(B) a partnership does not make such an 
                election but in filing its return for any 
                partnership taxable year fails to take fully 
                into account any partnership adjustment as 
                required under paragraph (1), or
                  ``(C) any partnership adjustment involves a 
                reduction in a credit which exceeds the amount 
                of such credit determined for the partnership 
                taxable year in which the adjustment takes 
                effect,
        the partnership shall pay to the Secretary an amount 
        determined by applying the rules of subsection (b)(4) 
        to the adjustments not so taken into account and any 
        excess referred to in subparagraph (C).
          ``(3) Offsetting adjustments taken into account.--If 
        a partnership adjustment requires another adjustment in 
        a taxable year after the adjusted year and before the 
        partnership taxable year in which such partnership 
        adjustment takes effect, such other adjustment shall be 
        taken into account under this subsection for the 
        partnership taxable year in which such partnership 
        adjustment takes effect.
          ``(4) Coordination with part ii.--Amounts taken into 
        account under this subsection for any partnership 
        taxable year shall continue to be treated as 
        adjustments for the adjusted year for purposes of 
        determining whether such amounts may be readjusted 
        under part II.
    ``(b) Partnership Liable for Interest and Penalties.--
          ``(1) In general.--If a partnership adjustment takes 
        effect during any partnership taxable year and such 
        adjustment results in an imputed underpayment for the 
        adjusted year, the partnership--
                  ``(A) shall pay to the Secretary interest 
                computed under paragraph (2), and
                  ``(B) shall be liable for any penalty, 
                addition to tax, or additional amount as 
                provided in paragraph (3).
          ``(2) Determination of amount of interest.--The 
        interest computed under this paragraph with respect to 
        any partnership adjustment is the interest which would 
        be determined under chapter 67--
                  ``(A) on the imputed underpayment determined 
                under paragraph (4) with respect to such 
                adjustment,
                  ``(B) for the period beginning on the day 
                after the return due date for the adjusted year 
                and ending on the return due date for the 
                partnership taxable year in which such 
                adjustment takes effect (or, if earlier, in the 
                case of any adjustment to which subsection 
                (a)(2) applies, the date on which the payment 
                under subsection (a)(2) is made).
        Proper adjustments in the amount determined under the 
        preceding sentence shall be made for adjustments 
        required for partnership taxable years after the 
        adjusted year and before the year in which the 
        partnership adjustment takes effect by reason of such 
        partnership adjustment.
          ``(3) Penalties.--A partnership shall be liable for 
        any penalty, addition to tax, or additional amount for 
        which it would have been liable if such partnership had 
        been an individual subject to tax under chapter 1 for 
        the adjusted year and the imputed underpayment 
        determined under paragraph (4) were an actual 
        underpayment (or understatement) for such year.
          ``(4) Imputed underpayment.--For purposes of this 
        subsection, the imputed underpayment determined under 
        this paragraph with respect to any partnership 
        adjustment is the underpayment (if any) which would 
        result--
                  ``(A) by netting all adjustments to items of 
                income, gain, loss, or deduction and by 
                treating any net increase in income as an 
                underpayment equal to the amount of such net 
                increase multiplied by the highest rate of tax 
                in effect under section 1 or 11 for the 
                adjusted year, and
                  ``(B) by taking adjustments to credits into 
                account as increases or decreases (whichever is 
                appropriate) in the amount of tax.
        For purposes of the preceding sentence, any net 
        decrease in a loss shall be treated as an increase in 
        income and a similar rule shall apply to a net increase 
        in a loss.
    ``(c) Administrative Provisions.--
          ``(1) In general.--Any payment required by subsection 
        (a)(2) or (b)(1)(A)--
                  ``(A) shall be assessed and collected in the 
                same manner as if it were a tax imposed by 
                subtitle C, and
                  ``(B) shall be paid on or before the return 
                due date for the partnership taxable year in 
                which the partnership adjustment takes effect.
          ``(2) Interest.--For purposes of determining 
        interest, any payment required by subsection (a)(2) or 
        (b)(1)(A) shall be treated as an underpayment of tax.
          ``(3) Penalties.--
                  ``(A) In general.--In the case of any failure 
                by any partnership to pay on the date 
                prescribed therefor any amount required by 
                subsection (a)(2) or (b)(1)(A), there is hereby 
                imposed on such partnership a penalty of 10 
                percent of the underpayment. For purposes of 
                the preceding sentence, the term `underpayment' 
                means the excess of any payment required under 
                this section over the amount (if any) paid on 
                or before the date prescribed therefor.
                  ``(B) Accuracy-related and fraud penalties 
                made applicable.--For purposes of part II of 
                subchapter A of chapter 68, any payment 
                required by subsection (a)(2) shall be treated 
                as an underpayment of tax.
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
          ``(1) Partnership adjustment.--The term `partnership 
        adjustment' means any adjustment in the amount of any 
        partnership item of an electing large partnership.
          ``(2) When adjustment takes effect.--A partnership 
        adjustment takes effect--
                  ``(A) in the case of an adjustment pursuant 
                to the decision of a court in a proceeding 
                brought under part II, when such decision 
                becomes final,
                  ``(B) in the case of an adjustment pursuant 
                to any administrative adjustment request under 
                section 6251, when such adjustment is allowed 
                by the Secretary, or
                  ``(C) in any other case, when such adjustment 
                is made.
          ``(3) Adjusted year.--The term `adjusted year' means 
        the partnership taxable year to which the item being 
        adjusted relates.
          ``(4) Return due date.--The term `return due date' 
        means, with respect to any taxable year, the date 
        prescribed for filing the partnership return for such 
        taxable year (determined without regard to extensions).
          ``(5) Adjustments involving changes in character.--
        Under regulations, appropriate adjustments in the 
        application of this section shall be made for purposes 
        of taking into account partnership adjustments which 
        involve a change in the character of any item of 
        income, gain, loss, or deduction.
    ``(e) Payments Nondeductible.--No deduction shall be 
allowed under subtitle A for any payment required to be made by 
an electing large partnership under this section.

                ``PART II--PARTNERSHIP LEVEL ADJUSTMENTS

        ``Subpart A. Adjustments by Secretary.
        ``Subpart B. Claims for adjustments by partnership.

                 ``Subpart A--Adjustments by Secretary

        ``Sec. 6245. Secretarial authority.
        ``Sec. 6246. Restrictions on partnership adjustments.
        ``Sec. 6247. Judicial review of partnership adjustment.
        ``Sec. 6248. Period of limitations for making adjustments.

``SEC. 6245. SECRETARIAL AUTHORITY.

    ``(a) General Rule.--The Secretary is authorized and 
directed to make adjustments at the partnership level in any 
partnership item to the extent necessary to have such item be 
treated in the manner required.
    ``(b) Notice of Partnership Adjustment.--
          ``(1) In general.--If the Secretary determines that a 
        partnership adjustment is required, the Secretary is 
        authorized to send notice of such adjustment to the 
        partnership by certified mail or registered mail. Such 
        notice shall be sufficient if mailed to the partnership 
        at its last known address even if the partnership has 
        terminated its existence.
          ``(2) Further notices restricted.--If the Secretary 
        mails a notice of a partnership adjustment to any 
        partnership for any partnership taxable year and the 
        partnership files a petition under section 6247 with 
        respect to such notice, in the absence of a showing of 
        fraud, malfeasance, or misrepresentation of a material 
        fact, the Secretary shall not mail another such notice 
        to such partnership with respect to such taxable year.
          ``(3) Authority to rescind notice with partnership 
        consent.--The Secretary may, with the consent of the 
        partnership, rescind any notice of a partnership 
        adjustment mailed to such partnership. Any notice so 
        rescinded shall not be treated as a notice of a 
        partnership adjustment, for purposes of this section, 
        section 6246, and section 6247, and the taxpayer shall 
        have no right to bring a proceeding under section 6247 
        with respect to such notice. Nothing in this subsection 
        shall affect any suspension of the running of any 
        period of limitations during any period during which 
        the rescinded notice was outstanding.

``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.

    ``(a) General Rule.--Except as otherwise provided in this 
chapter, no adjustment to any partnership item may be made (and 
no levy or proceeding in any court for the collection of any 
amount resulting from such adjustment may be made, begun or 
prosecuted) before--
          ``(1) the close of the 90th day after the day on 
        which a notice of a partnership adjustment was mailed 
        to the partnership, and
          ``(2) if a petition is filed under section 6247 with 
        respect to such notice, the decision of the court has 
        become final.
    ``(b) Premature Action May Be Enjoined.--Notwithstanding 
section 7421(a), any action which violates subsection (a) may 
be enjoined in the proper court, including the Tax Court. The 
Tax Court shall have no jurisdiction to enjoin any action under 
this subsection unless a timely petition has been filed under 
section 6247 and then only in respect of the adjustments that 
are the subject of such petition.
    ``(c) Exceptions to Restrictions on Adjustments.--
          ``(1) Adjustments arising out of math or clerical 
        errors.--
                  ``(A) In general.--If the partnership is 
                notified that, on account of a mathematical or 
                clerical error appearing on the partnership 
                return, an adjustment to a partnership item is 
                required, rules similar to the rules of 
                paragraphs (1) and (2) of section 6213(b) shall 
                apply to such adjustment.
                  ``(B) Special rule.--If an electing large 
                partnership is a partner in another electing 
                large partnership, any adjustment on account of 
                such partnership's failure to comply with the 
                requirements of section 6241(a) with respect to 
                its interest in such other partnership shall be 
                treated as an adjustment referred to in 
                subparagraph (A), except that paragraph (2) of 
                section 6213(b) shall not apply to such 
                adjustment.
          ``(2) Partnership may waive restrictions.--The 
        partnership shall at any time (whether or not a notice 
        of partnership adjustment has been issued) have the 
        right, by a signed notice in writing filed with the 
        Secretary, to waive the restrictions provided in 
        subsection (a) on the making of any partnership 
        adjustment.
    ``(d) Limit Where No Proceeding Begun.--If no proceeding 
under section 6247 is begun with respect to any notice of a 
partnership adjustment during the 90-day period described in 
subsection (a), the amount for which the partnership is liable 
under section 6242 (and any increase in any partner's liability 
for tax under chapter 1 by reason of any adjustment under 
section 6242(a)) shall not exceed the amount determined in 
accordance with such notice.

``SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT.

    ``(a) General Rule.--Within 90 days after the date on which 
a notice of a partnership adjustment is mailed to the 
partnership with respect to any partnership taxable year, the 
partnership may file a petition for a readjustment of the 
partnership items for such taxable year with--
          ``(1) the Tax Court,
          ``(2) the district court of the United States for the 
        district in which the partnership's principal place of 
        business is located, or
          ``(3) the Claims Court.
    ``(b) Jurisdictional Requirement for Bringing Action in 
District Court or Claims Court.--
          ``(1) In general.--A readjustment petition under this 
        section may be filed in a district court of the United 
        States or the Claims Court only if the partnership 
        filing the petition deposits with the Secretary, on or 
        before the date the petition is filed, the amount for 
        which the partnership would be liable under section 
        6242(b) (as of the date of the filing of the petition) 
        if the partnership items were adjusted as provided by 
        the notice of partnership adjustment. The court may by 
        order provide that the jurisdictional requirements of 
        this paragraph are satisfied where there has been a 
        good faith attempt to satisfy such requirement and any 
        shortfall of the amount required to be deposited is 
        timely corrected.
          ``(2) Interest payable.--Any amount deposited under 
        paragraph (1), while deposited, shall not be treated as 
        a payment of tax for purposes of this title (other than 
        chapter 67).
    ``(c) Scope of Judicial Review.--A court with which a 
petition is filed in accordance with this section shall have 
jurisdiction to determine all partnership items of the 
partnership for the partnership taxable year to which the 
notice of partnership adjustment relates and the proper 
allocation of suchitems among the partners (and the 
applicability of any penalty, addition to tax, or additional amount for 
which the partnership may be liable under section 6242(b)).
    ``(d) Determination of Court Reviewable.--Any determination 
by a court under this section shall have the force and effect 
of a decision of the Tax Court or a final judgment or decree of 
the district court or the Claims Court, as the case may be, and 
shall be reviewable as such. The date of any such determination 
shall be treated as being the date of the court's order 
entering the decision.
    ``(e) Effect of Decision Dismissing Action.--If an action 
brought under this section is dismissed other than by reason of 
a rescission under section 6245(b)(3), the decision of the 
court dismissing the action shall be considered as its decision 
that the notice of partnership adjustment is correct, and an 
appropriate order shall be entered in the records of the court.

``SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.

    ``(a) General Rule.--Except as otherwise provided in this 
section, no adjustment under this subpart to any partnership 
item for any partnership taxable year may be made after the 
date which is 3 years after the later of--
          ``(1) the date on which the partnership return for 
        such taxable year was filed, or
          ``(2) the last day for filing such return for such 
        year (determined without regard to extensions).
    ``(b) Extension by Agreement.--The period described in 
subsection (a) (including an extension period under this 
subsection) may be extended by an agreement entered into by the 
Secretary and the partnership before the expiration of such 
period.
    ``(c) Special Rule in Case of Fraud, Etc.--
          ``(1) False return.--In the case of a false or 
        fraudulent partnership return with intent to evade tax, 
        the adjustment may be made at any time.
          ``(2) Substantial omission of income.--If any 
        partnership omits from gross income an amount properly 
        includible therein which is in excess of 25 percent of 
        the amount of gross income stated in its return, 
        subsection (a) shall be applied by substituting `6 
        years' for `3 years'.
          ``(3) No return.--In the case of a failure by a 
        partnership to file a return for any taxable year, the 
        adjustment may be made at any time.
          ``(4) Return filed by secretary.--For purposes of 
        this section, a return executed by the Secretary under 
        subsection (b) of section 6020 on behalf of the 
        partnership shall not be treated as a return of the 
        partnership.
    ``(d) Suspension When Secretary Mails Notice of 
Adjustment.--If notice of a partnership adjustment with respect 
to any taxable year is mailed to the partnership, the running 
of the period specified in subsection (a) (as modified by the 
other provisions of this section) shall be suspended--
          ``(1) for the period during which an action may be 
        brought under section 6247 (and, if a petition is filed 
        under section 6247 with respect to such notice, until 
        the decision of the court becomes final), and
          ``(2) for 1 year thereafter.

           ``Subpart B--Claims for Adjustments by Partnership

        ``Sec. 6251. Administrative adjustment requests.
        ``Sec. 6252. Judicial review where administrative adjustment 
                  request is not allowed in full.

``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.

    ``(a) General Rule.--A partnership may file a request for 
an administrative adjustment of partnership items for any 
partnership taxable year at any time which is--
          ``(1) within 3 years after the later of--
                  ``(A) the date on which the partnership 
                return for such year is filed, or
                  ``(B) the last day for filing the partnership 
                return for such year (determined without regard 
                to extensions), and
          ``(2) before the mailing to the partnership of a 
        notice of a partnership adjustment with respect to such 
        taxable year.
    ``(b) Secretarial Action.--If a partnership files an 
administrative adjustment request under subsection (a), the 
Secretary may allow any part of the requested adjustments.
    ``(c) Special Rule in Case of Extension Under Section 
6248.--If the period described in section 6248(a) is extended 
pursuant to an agreement under section 6248(b), the period 
prescribed by subsection (a)(1) shall not expire before the 
date 6 months after the expiration of the extension under 
section 6248(b).

``SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT REQUEST IS 
                    NOT ALLOWED IN FULL.

    ``(a) In General.--If any part of an administrative 
adjustment request filed under section 6251 is not allowed by 
the Secretary, the partnership may file a petition for an 
adjustment with respect to the partnership items to which such 
part of the request relates with--
          ``(1) the Tax Court,
          ``(2) the district court of the United States for the 
        district in which the principal place of business of 
        the partnership is located, or
          ``(3) the Claims Court.
    ``(b) Period for Filing Petition.--A petition may be filed 
under subsection (a) with respect to partnership items for a 
partnership taxable year only--
          ``(1) after the expiration of 6 months from the date 
        of filing of the request under section 6251, and
          ``(2) before the date which is 2 years after the date 
        of such request.
The 2-year period set forth in paragraph (2) shall be extended 
for such period as may be agreed upon in writing by the 
partnership and the Secretary.
    ``(c) Coordination With Subpart A.--
          ``(1) Notice of partnership adjustment before filing 
        of petition.--No petition may be filed under this 
        section after the Secretary mails to the partnership a 
        notice of a partnership adjustment for the partnership 
        taxable year to which the request under section 6251 
        relates.
          ``(2) Notice of partnership adjustment after filing 
        but before hearing of petition.--If the Secretary mails 
        to the partnership a notice of a partnership adjustment 
        for the partnership taxable year to which the request 
        under section 6251 relates after the filing of a 
        petition under this subsection but before the hearing 
        of such petition, such petition shall be treated as an 
        action brought under section 6247 with respect to such 
        notice, except that subsection (b) of section 6247 
        shall not apply.
          ``(3) Notice must be before expiration of statute of 
        limitations.--A notice of a partnership adjustment for 
        the partnership taxable year shall be taken into 
        account under paragraphs (1) and (2) only if such 
        notice is mailed before the expiration of the period 
        prescribed by section 6248 for making adjustments to 
        partnership items for such taxable year.
    ``(d) Scope of Judicial Review.--Except in the case 
described in paragraph (2) of subsection (c), a court with 
which a petition is filed in accordance with this section shall 
have jurisdiction to determine only those partnership items to 
which the part of the request under section 6251 not allowed by 
the Secretary relates and those items with respect to which the 
Secretary asserts adjustments as offsets to the adjustments 
requested by the partnership.
    ``(e) Determination of Court Reviewable.--Any determination 
by a court under this subsection shall have the force and 
effect of a decision of the Tax Court or a final judgment or 
decree of the district court or the Claims Court, as the case 
may be, and shall be reviewable as such. The date of any such 
determination shall be treated as being the date of the court's 
order entering the decision.

               ``PART III--DEFINITIONS AND SPECIAL RULES

        ``Sec. 6255. Definitions and special rules.

``SEC. 6255. DEFINITIONS AND SPECIAL RULES.

    ``(a) Definitions.--For purposes of this subchapter--
          ``(1) Electing large partnership.--The term `electing 
        large partnership' has the meaning given to such term 
        by section 775.
          ``(2) Partnership item.--The term `partnership item' 
        has the meaning given to such term by section 
        6231(a)(3).
    ``(b) Partners Bound by Actions of Partnership, Etc.--
          ``(1) Designation of partner.--Each electing large 
        partnership shall designate (in the manner prescribed 
        by the Secretary) a partner (or other person) who shall 
        have the sole authority to act on behalf of such 
        partnership under this subchapter. In any case in which 
        such a designation is not in effect, the Secretary may 
        select any partner as the partner with such authority.
          ``(2) Binding effect.--An electing large partnership 
        and all partners of such partnership shall be bound--
                  ``(A) by actions taken under this subchapter 
                by the partnership, and
                  ``(B) by any decision in a proceeding brought 
                under this subchapter.
    ``(c) Partnerships Having Principal Place of Business 
Outside the United States.--For purposes of sections 6247 and 
6252, a principal place of business located outside the United 
States shall be treated as located in the District of Columbia.
    ``(d) Treatment Where Partnership Ceases To Exist.--If a 
partnership ceases to exist before a partnership adjustment 
under this subchapter takes effect, such adjustment shall be 
taken into account by the former partners of such partnership 
under regulations prescribed by the Secretary.
    ``(e) Date Decision Becomes Final.--For purposes of this 
subchapter, the principles of section 7481(a) shall be applied 
in determining the date on which a decision of a district court 
or the Claims Court becomes final.
    ``(f) Partnerships in Cases Under Title 11 of the United 
States Code.--The running of any period of limitations provided 
in this subchapter on making a partnership adjustment (or 
provided by section 6501 or 6502 on the assessment or 
collection of any amount required to be paid under section 
6242) shall, in a case under title 11 of the United States 
Code, be suspended during the period during which the Secretary 
is prohibited by reason of such case from making the adjustment 
(or assessment or collection) and--
          ``(1) for adjustment or assessment, 60 days 
        thereafter, and
          ``(2) for collection, 6 months thereafter.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this subchapter, including regulations--
          ``(1) to prevent abuse through manipulation of the 
        provisions of this subchapter, and
          ``(2) providing that this subchapter shall not apply 
        to any case described in section 6231(c)(1) (or the 
        regulations prescribed thereunder) where the 
        application of this subchapter to such a case would 
        interfere with the effective and efficient enforcement 
        of this title.
In any case to which this subchapter does not apply by reason 
of paragraph (2), rules similar to the rules of sections 
6229(f) and 6255(f) shall apply.''
    (b) Clerical Amendment.--The table of subchapters for 
chapter 63 is amended by adding at the end thereof the 
following new item:

       ``Subchapter D. Treatment of electing large partnerships.''

SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS OF ELECTING 
                    LARGE PARTNERSHIPS.

    (a) General Rule.--Subsection (b) of section 6031 (relating 
to copies to partners) is amended by adding at the end the 
following new sentence: ``In the case of an electing large 
partnership (as defined in section 775), such information shall 
be furnished on or before the first March 15 following the 
close of such taxable year.''
    (b) Treatment as Information Return.--Section 6724 is 
amended by adding at the end the following new subsection:
    ``(e) Special Rule for Certain Partnership Returns.--If any 
partnership return under section 6031(a) is required under 
section 6011(e) to be filed on magnetic media or in other 
machine-readable form, for purposes of this part, each schedule 
required to be included with such return with respect to each 
partner shall be treated as a separate information return.''

SEC. 1224. RETURNS MAY BE REQUIRED ON MAGNETIC MEDIA.

    Paragraph (2) of section 6011(e) (relating to returns on 
magnetic media) is amended by adding at the end thereof the 
following new sentence:
        ``Notwithstanding the preceding sentence, the Secretary 
        shall require partnerships having more than 100 
        partners to file returns on magnetic media.''

SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL RETIREMENT 
                    ACCOUNTS.

    Subsection (b) of section 6012 is amended by adding at the 
end thereof the following new paragraph:
          ``(6) IRA share of partnership income.--In the case 
        of a trust which is exempt from taxation under section 
        408(e), for purposes of this section, the trust's 
        distributive share of items of gross income and gain of 
        any partnership to which subchapter C or D of chapter 
        63 applies shall be treated as equal to the trust's 
        distributive share of the taxable income of such 
        partnership.''

SEC. 1226. EFFECTIVE DATE.

    The amendments made by this part shall apply to partnership 
taxable years ending on or after December 31, 1997.

      PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS

SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY PROCEEDINGS.

    (a) In General.--Subchapter C of chapter 63 is amended by 
adding at the end the following new section:

``SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF ITEMS OTHER 
                    THAN PARTNERSHIP ITEMS WITH RESPECT TO AN 
                    OVERSHELTERED RETURN.

    ``(a) General Rule.--If--
          ``(1) a taxpayer files an oversheltered return for a 
        taxable year,
          ``(2) the Secretary makes a determination with 
        respect to the treatment of items (other than 
        partnership items) of such taxpayer for such taxable 
        year, and
          ``(3) the adjustments resulting from such 
        determination do not give rise to a deficiency (as 
        defined in section 6211) but would give rise to a 
        deficiency if there were no net loss from partnership 
        items,
the Secretary is authorized to send a notice of adjustment 
reflecting such determination to the taxpayer by certified or 
registered mail.
    ``(b) Oversheltered Return.--For purposes of this section, 
the term `oversheltered return' means an income tax return 
which--
          ``(1) shows no taxable income for the taxable year, 
        and
          ``(2) shows a net loss from partnership items.
    ``(c) Judicial Review in the Tax Court.--Within 90 days, or 
150 days if the notice is addressed to a person outside the 
United States, after the day on which the notice of adjustment 
authorized in subsection (a) is mailed to the taxpayer, 
thetaxpayer may file a petition with the Tax Court for redetermination 
of the adjustments. Upon the filing of such a petition, the Tax Court 
shall have jurisdiction to make a declaration with respect to all items 
(other than partnership items and affected items which require partner 
level determinations as described in section 6230(a)(2)(A)(i)) for the 
taxable year to which the notice of adjustment relates, in accordance 
with the principles of section 6214(a). Any such declaration shall have 
the force and effect of a decision of the Tax Court and shall be 
reviewable as such.
    ``(d) Failure To File Petition.--
          ``(1) In general.--Except as provided in paragraph 
        (2), if the taxpayer does not file a petition with the 
        Tax Court within the time prescribed in subsection (c), 
        the determination of the Secretary set forth in the 
        notice of adjustment that was mailed to the taxpayer 
        shall be deemed to be correct.
          ``(2) Exception.--Paragraph (1) shall not apply after 
        the date that the taxpayer--
                  ``(A) files a petition with the Tax Court 
                within the time prescribed in subsection (c) 
                with respect to a subsequent notice of 
                adjustment relating to the same taxable year, 
                or
                  ``(B) files a claim for refund of an 
                overpayment of tax under section 6511 for the 
                taxable year involved.
        If a claim for refund is filed by the taxpayer, then 
        solely for purposes of determining (for the taxable 
        year involved) the amount of any computational 
        adjustment in connection with a partnership proceeding 
        under this subchapter (other than under this section) 
        or the amount of any deficiency attributable to 
        affected items in a proceeding under section 
        6230(a)(2), the items that are the subject of the 
        notice of adjustment shall be presumed to have been 
        correctly reported on the taxpayer's return during the 
        pendency of the refund claim (and, if within the time 
        prescribed by section 6532 the taxpayer commences a 
        civil action for refund under section 7422, until the 
        decision in the refund action becomes final).
    ``(e) Limitations Period.--
          ``(1) In general.--Any notice to a taxpayer under 
        subsection (a) shall be mailed before the expiration of 
        the period prescribed by section 6501 (relating to the 
        period of limitations on assessment).
          ``(2) Suspension when secretary mails notice of 
        adjustment.--If the Secretary mails a notice of 
        adjustment to the taxpayer for a taxable year, the 
        period of limitations on the making of assessments 
        shall be suspended for the period during which the 
        Secretary is prohibited from making the assessment 
        (and, in any event, if a proceeding in respect of the 
        notice of adjustment is placed on the docket of the Tax 
        Court, until the decision of the Tax Court becomes 
        final), and for 60 days thereafter.
          ``(3) Restrictions on assessment.--Except as 
        otherwise provided in section 6851, 6852, or 6861, no 
        assessment of a deficiency with respect to any tax 
        imposed by subtitle A attributable to any item (other 
        than a partnership item or any item affected by a 
        partnership item) shall be made--
                  ``(A) until the expiration of the applicable 
                90-day or 150-day period set forth in 
                subsection (c) for filing a petition with the 
                Tax Court, or
                  ``(B) if a petition has been filed with the 
                Tax Court, until the decision of the Tax Court 
                has become final.
    ``(f) Further Notices of Adjustment Restricted.--If the 
Secretary mails a notice of adjustment to the taxpayer for a 
taxable year and the taxpayer files a petition with the Tax 
Court within the time prescribed in subsection (c), the 
Secretary may not mail another such notice to the taxpayer with 
respect to the same taxable year in the absence of a showing of 
fraud, malfeasance, or misrepresentation of a material fact.
    ``(g) Coordination With Other Proceedings Under This 
Subchapter.--
          ``(1) In general.--The treatment of any item that has 
        been determined pursuant to subsection (c) or (d) shall 
        be taken into account in determining the amount of any 
        computational adjustment that is made in connection 
        with a partnership proceeding under this subchapter 
        (other than under this section), or the amount of any 
        deficiency attributable to affected items in a 
        proceeding under section 6230(a)(2), for the taxable 
        year involved. Notwithstanding any other law or rule of 
        law pertaining to the period of limitations on the 
        making of assessments, for purposes of the preceding 
        sentence, any adjustment made in accordance with this 
        section shall be taken into account regardless of 
        whether any assessment has been made with respect to 
        such adjustment.
          ``(2) Special rule in case of computational 
        adjustment.--In the case of a computational adjustment 
        that is made in connection with a partnership 
        proceeding under this subchapter (other than under this 
        section), the provisions of paragraph (1) shall apply 
        only if the computational adjustment is made within the 
        period prescribed by section 6229 for assessing any tax 
        under subtitle A which is attributable to any 
        partnership item or affected item for the taxable year 
        involved.
          ``(3) Conversion to deficiency proceeding.--If--
                  ``(A) after the notice referred to in 
                subsection (a) is mailed to a taxpayer for a 
                taxable year but before the expiration of the 
                period for filing a petition with the Tax Court 
                under subsection (c) (or, if a petition is 
                filed with the Tax Court, before the Tax Court 
                makes a declaration for that taxable year), the 
                treatment of any partnership item for the 
                taxable year is finally determined, or any such 
                item ceases to be a partnership item pursuant 
                to section 6231(b), and
                  ``(B) as a result of that final determination 
                or cessation, a deficiency can be determined 
                with respect to the items that are the subject 
                of the notice of adjustment,
        the notice of adjustment shall be treated as a notice 
        of deficiency under section 6212 and any petition filed 
        in respect of the notice shall be treated as an action 
        brought under section 6213.
          ``(4) Finally determined.--For purposes of this 
        subsection, the treatment of partnership items shall be 
        treated as finally determined if--
                  ``(A) the Secretary enters into a settlement 
                agreement (within the meaning of section 6224) 
                with the taxpayer regarding such items,
                  ``(B) a notice of final partnership 
                administrative adjustment has been issued and--
                          ``(i) no petition has been filed 
                        under section 6226 and the time for 
                        doing so has expired, or
                          ``(ii) a petition has been filed 
                        under section 6226 and the decision of 
                        the court has become final, or
                  ``(C) the period within which any tax 
                attributable to such items may be assessed 
                against the taxpayer has expired.
    ``(h) Special Rules if Secretary Incorrectly Determines 
Applicable Procedure.--
          ``(1) Special rule if secretary erroneously mails 
        notice of adjustment.--If the Secretary erroneously 
        determines that subchapter B does not apply to a 
        taxable year of a taxpayer and consistent with that 
        determination timely mails a notice of adjustment to 
        the taxpayer pursuant to subsection (a) of this 
        section, the notice of adjustment shall be treated as a 
        notice of deficiency under section 6212 and any 
        petition that is filed in respect of the notice shall 
        be treated as an action brought under section 6213.
          ``(2) Special rule if secretary erroneously mails 
        notice of deficiency.--If the Secretary erroneously 
        determines that subchapter B applies to a taxable year 
        of a taxpayer and consistent with that determination 
        timely mails a notice of deficiency to the taxpayer 
        pursuant to section 6212, the notice of deficiency 
        shall be treated as a notice of adjustment under 
        subsection (a) and any petition that is filed in 
        respect of the notice shall be treated as an action 
        brought under subsection (c).''
    (b) Treatment of Partnership Items in Deficiency 
Proceedings.--Section 6211 (defining deficiency) is amended by 
adding at the end the following new subsection:
    ``(c) Coordination With Subchapter C.--In determining the 
amount of any deficiency for purposes of this subchapter, 
adjustments to partnership items shall be made only as provided 
in subchapter C.''
    (c) Clerical Amendment.--The table of sections for 
subchapter C of chapter 63 is amended by adding at the end the 
following new item:

``Sec. 6234. Declaratory judgment relating to treatment of items other 
          than partnership items with respect to an oversheltered 
          return.''

    (d) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT PROCEDURES 
                    TO BE FOLLOWED.

    (a) In General.--Section 6231 (relating to definitions and 
special rules) is amended by adding at the end the following 
new subsection:
    ``(g) Partnership Return To Be Determinative of Whether 
Subchapter Applies.--
          ``(1) Determination that subchapter applies.--If, on 
        the basis of a partnership return for a taxable year, 
        the Secretary reasonably determines that this 
        subchapter applies to such partnership for such year 
        but such determination is erroneous, then the 
        provisions of this subchapter are hereby extended to 
        such partnership (and its items) for such taxable year 
        and to partners of such partnership.
          ``(2) Determination that subchapter does not apply.--
        If, on the basis of a partnership return for a taxable 
        year, the Secretary reasonably determines that this 
        subchapter does not apply to such partnership for such 
        year but such determination is erroneous, then the 
        provisions of this subchapter shall not apply to such 
        partnership (and its items) for such taxable year or to 
        partners of such partnership.''
    (b) Effective Date.--The amendment made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.

    (a) Suspension of Statute Where Untimely Petition Filed.--
Paragraph (1) of section 6229(d) (relating to suspension where 
Secretary makes administrative adjustment) is amended by 
striking all that follows ``section 6226'' and inserting the 
following: ``(and, if a petition is filed under section 6226 
with respect to such administrative adjustment, until the 
decision of the court becomes final), and''.
    (b) Suspension of Statute During Bankruptcy Proceeding.--
Section 6229 is amended by adding at the end the following new 
subsection:
    ``(h) Suspension During Pendency of Bankruptcy 
Proceeding.--If a petition is filed naming a partner as a 
debtor in a bankruptcy proceeding under title 11 of the United 
States Code, the running of the period of limitations provided 
in this section with respect to such partner shall be 
suspended--
          ``(1) for the period during which the Secretary is 
        prohibited by reason of such bankruptcy proceeding from 
        making an assessment, and
          ``(2) for 60 days thereafter.''
    (c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is 
amended by redesignating paragraph (2) as paragraph (3) and by 
inserting after paragraph (1) the following new paragraph:
          ``(2) Special rule with respect to debtors in title 
        11 cases.--Notwithstanding any other law or rule of 
        law, if an agreement is entered into under paragraph 
        (1)(B) and the agreement is signed by a person who 
        would be the tax matters partner but for the fact that, 
        at the time that the agreement is executed, the person 
        is a debtor in a bankruptcy proceeding under title 11 
        of the United States Code, such agreement shall be 
        binding on all partners in the partnership unless the 
        Secretary has been notified of the bankruptcy 
        proceeding in accordance with regulations prescribed by 
        the Secretary.''
    (d) Effective Dates.--
          (1) Subsections (a) and (b).--The amendments made by 
        subsections (a) and (b) shall apply to partnership 
        taxable years with respect to which the period under 
        section 6229 of the Internal Revenue Code of 1986 for 
        assessing tax has not expired on or before the date of 
        the enactment of this Act.
          (2) Subsection (c).--The amendment made by subsection 
        (c) shall apply to agreements entered into after the 
        date of the enactment of this Act.

SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.

    (a) In General.--Clause (i) of section 6231(a)(1)(B) 
(relating to exception for small partnerships) is amended to 
read as follows:
                          ``(i) In general.--The term 
                        `partnership' shall not include any 
                        partnership having 10 or fewer partners 
                        each of whom is an individual (other 
                        than a nonresident alien), a C 
                        corporation, or an estate of a deceased 
                        partner. For purposes of the preceding 
                        sentence, a husband and wife (and their 
                        estates) shall be treated as 1 
                        partner.''
    (b) Effective Date.--The amendment made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR LIMITATION ON 
                    ASSESSMENT.

    (a) In General.--Subsection (f) of section 6229 (relating 
to items becoming nonpartnership items) is amended--
          (1) by striking ``(f) Items Becoming Nonpartnership 
        Items.--If'' and inserting the following:
    ``(f) Special Rules.--
          ``(1) Items becoming nonpartnership items.--If'',
          (2) by moving the text of such subsection 2 ems to 
        the right, and
          (3) by adding at the end the following new paragraph:
          ``(2) Special rule for partial settlement 
        agreements.--If a partner enters into a settlement 
        agreement with the Secretary with respect to the 
        treatment of some of the partnership items in dispute 
        for a partnership taxable year but other partnership 
        items for such year remain in dispute, the period of 
        limitations for assessing any tax attributable to the 
        settled items shall be determined as if such agreement 
        had not been entered into.''
    (b) Effective Date.--The amendment made by this section 
shall apply to settlements entered into after the date of the 
enactment of this Act.

SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR ADMINISTRATIVE 
                    ADJUSTMENT.

    (a) In General.--Section 6227 (relating to administrative 
adjustment requests) is amended by redesignating subsections 
(b) and (c) as subsections (c) and (d), respectively, and by 
inserting after subsection (a) the following new subsection:
    ``(b) Special Rule in Case of Extension of Period of 
Limitations Under Section 6229.--The period prescribed by 
subsection (a)(1) for filing of a request for an administrative 
adjustment shall be extended--
          ``(1) for the period within which an assessment may 
        be made pursuant to an agreement (or any extension 
        thereof) under section 6229(b), and
          ``(2) for 6 months thereafter.''
    (b) Effective Date.--The amendment made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT OF 
                    PARTNERSHIP PROCEEDINGS.

    (a) In General.--Subsection (a) of section 6230 is amended 
by adding at the end the following new paragraph:
          ``(3) Special rule in case of assertion by partner's 
        spouse of innocent spouse relief.--
                  ``(A) Notwithstanding section 6404(b), if the 
                spouse of a partner asserts that section 
                6013(e) applies with respect to a liability 
                that is attributable to any adjustment to a 
                partnership item, then such spouse may file 
                with the Secretary within 60 days after the 
                notice of computational adjustment is mailed to 
                the spouse a request for abatement of the 
                assessment specified in such notice. Upon 
                receipt of such request, the Secretary shall 
                abate the assessment. Any reassessment of the 
                tax with respect to which an abatement is made 
                under this subparagraph shall be subject to the 
                deficiency procedures prescribed by subchapter 
                B. The period for making any such reassessment 
                shall not expire before the expiration of 60 
                days after the date of such abatement.
                  ``(B) If the spouse files a petition with the 
                Tax Court pursuant to section 6213 with respect 
                to the request for abatement described in 
                subparagraph (A), the Tax Court shall only have 
                jurisdiction pursuant to thissection to 
determine whether the requirements of section 6013(e) have been 
satisfied. For purposes of such determination, the treatment of 
partnership items under the settlement, the final partnership 
administrative adjustment, or the decision of the court (whichever is 
appropriate) that gave rise to the liability in question shall be 
conclusive.
                  ``(C) Rules similar to the rules contained in 
                subparagraphs (B) and (C) of paragraph (2) 
                shall apply for purposes of this paragraph.''
    (b) Claims for Refund.--Subsection (c) of section 6230 is 
amended by adding at the end the following new paragraph:
          ``(5) Rules for seeking innocent spouse relief.--
                  ``(A) In general.--The spouse of a partner 
                may file a claim for refund on the ground that 
                the Secretary failed to relieve the spouse 
                under section 6013(e) from a liability that is 
                attributable to an adjustment to a partnership 
                item.
                  ``(B) Time for filing claim.--Any claim under 
                subparagraph (A) shall be filed within 6 months 
                after the day on which the Secretary mails to 
                the spouse the notice of computational 
                adjustment referred to in subsection (a)(3)(A).
                  ``(C) Suit if claim not allowed.--If the 
                claim under subparagraph (B) is not allowed, 
                the spouse may bring suit with respect to the 
                claim within the period specified in paragraph 
                (3).
                  ``(D) Prior determinations are binding.--For 
                purposes of any claim or suit under this 
                paragraph, the treatment of partnership items 
                under the settlement, the final partnership 
                administrative adjustment, or the decision of 
                the court (whichever is appropriate) that gave 
                rise to the liability in question shall be 
                conclusive.''
    (c) Technical Amendments.--
          (1) Paragraph (1) of section 6230(a) is amended by 
        striking ``paragraph (2)'' and inserting ``paragraph 
        (2) or (3)''.
          (2) Subsection (a) of section 6503 is amended by 
        striking ``section 6230(a)(2)(A)'' and inserting 
        ``paragraph (2)(A) or (3) of section 6230(a)''.
    (d) Effective Date.--The amendments made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.

    (a) In General.--Section 6221 (relating to tax treatment 
determined at partnership level) is amended by striking 
``item'' and inserting ``item (and the applicability of any 
penalty, addition to tax, or additional amount which relates to 
an adjustment to a partnership item)''.
    (b) Conforming Amendments.--
          (1) Subsection (f) of section 6226 is amended--
                  (A) by striking ``relates and'' and inserting 
                ``relates,'', and
                  (B) by inserting before the period ``, and 
                the applicability of any penalty, addition to 
                tax, or additional amount which relates to an 
                adjustment to a partnership item''.
          (2) Clause (i) of section 6230(a)(2)(A) is amended to 
        read as follows:
                          ``(i) affected items which require 
                        partner level determinations (other 
                        than penalties, additions to tax, and 
                        additional amounts that relate to 
                        adjustments to partnership items), 
                        or''.
          (3)(A) Subparagraph (A) of section 6230(a)(3), as 
        added by section 14317, is amended by inserting 
        ``(including any liability for any penalty, addition to 
        tax, or additional amount relating to such 
        adjustment)'' after ``partnership item''.
          (B) Subparagraph (B) of such section is amended by 
        inserting ``(and the applicability of any penalties, 
        additions to tax, or additional amounts)'' after 
        ``partnership items''.
          (C) Subparagraph (A) of section 6230(c)(5), as added 
        by section 14317, is amended by inserting before the 
        period ``(including any liability for any penalties, 
        additions to tax, or additional amounts relating to 
        such adjustment)''.
          (D) Subparagraph (D) of section 6230(c)(5), as added 
        by section 14317, is amended by inserting ``(and the 
        applicability of any penalties, additions to tax, or 
        additional amounts)'' after ``partnership items''.
          (4) Paragraph (1) of section 6230(c) is amended by 
        striking ``or'' at the end of subparagraph (A), by 
        striking the period at the end of subparagraph (B) and 
        inserting ``, or'', and by adding at the end the 
        following new subparagraph:
                  ``(C) the Secretary erroneously imposed any 
                penalty, addition to tax, or additional amount 
                which relates to an adjustment to a partnership 
                item.''
          (5) So much of subparagraph (A) of section 6230(c)(2) 
        as precedes ``shall be filed'' is amended to read as 
        follows:
                  ``(A) Under paragraph (1) (a) or (c).--Any 
                claim under subparagraph (A) or (C) of 
                paragraph (1)''.
          (6) Paragraph (4) of section 6230(c) is amended by 
        adding at the end the following: ``In addition, the 
        determination under the final partnership 
        administrative adjustment or under the decision of the 
        court (whichever is appropriate) concerning the 
        applicability of any penalty, addition to tax, or 
        additional amount which relates to an adjustment to a 
        partnership item shall also be conclusive. 
        Notwithstanding the preceding sentence, the partner 
        shall be allowed to assert any partner level defenses 
        that may apply or to challenge the amount of the 
        computational adjustment.''
    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC.

    (a) Tax Court Jurisdiction To Enjoin Premature Assessments 
of Deficiencies Attributable to Partnership Items.--Subsection 
(b) of section 6225 is amended by striking ``the proper 
court.'' and inserting ``the proper court, including the Tax 
Court. The Tax Court shall have no jurisdiction to enjoin any 
action or proceeding under this subsection unless a timely 
petition for a readjustment of the partnership items for the 
taxable year has been filed and then only in respect of the 
adjustments that are the subject of such petition.''
    (b) Jurisdiction To Consider Statute of Limitations With 
Respect to Partners.--Paragraph (1) of section 6226(d) is 
amended by adding at the end the following new sentence:
        ``Notwithstanding subparagraph (B), any person treated 
        under subsection (c) as a party to an action shall be 
        permitted to participate in such action (or file a 
        readjustment petition under subsection (b) or paragraph 
        (2) of this subsection) solely for the purpose of 
        asserting that the period of limitations for assessing 
        any tax attributable to partnership items has expired 
        with respect to such person, and the court having 
        jurisdiction of such action shall have jurisdiction to 
        consider such assertion.''
    (c) Tax Court Jurisdiction To Determine Overpayments 
Attributable to Affected Items.--
          (1) Paragraph (6) of section 6230(d) is amended by 
        striking ``(or an affected item)''.
          (2) Paragraph (3) of section 6512(b) is amended by 
        adding at the end the following new sentence:
        ``In the case of a credit or refund relating to an 
        affected item (within the meaning of section 
        6231(a)(5)), the preceding sentence shall be applied by 
        substituting the periodsunder sections 6229 and 6230(d) 
for the periods under section 6511(b)(2), (c), and (d).''
    (d) Venue on Appeal.--
          (1) Paragraph (1) of section 7482(b) is amended by 
        striking ``or'' at the end of subparagraph (D), by 
        striking the period at the end of subparagraph (E) and 
        inserting ``, or'', and by inserting after subparagraph 
        (E) the following new subparagraph:
                  ``(F) in the case of a petition under section 
                6234(c)--
                          ``(i) the legal residence of the 
                        petitioner if the petitioner is not a 
                        corporation, and
                          ``(ii) the place or office applicable 
                        under subparagraph (B) if the 
                        petitioner is a corporation.''
          (2) The last sentence of section 7482(b)(1) is 
        amended by striking ``or 6228(a)'' and inserting ``, 
        6228(a), or 6234(c)''.
    (e) Other Provisions.--
          (1) Subsection (c) of section 7459 is amended by 
        striking ``or section 6228(a)'' and inserting ``, 
        6228(a), or 6234(c)''.
          (2) Subsection (o) of section 6501 is amended by 
        adding at the end the following new paragraph:
          ``(3) For declaratory judgment relating to treatment 
        of items other than partnership items with respect to 
        an oversheltered return, see section 6234.''
    (f) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE PARTNERS OR 
                    5-PERCENT GROUPS.

    (a) In General.--Subsection (b) of section 6226 (relating 
to judicial review of final partnership administrative 
adjustments) is amended by redesignating paragraph (5) as 
paragraph (6) and by inserting after paragraph (4) the 
following new paragraph:
          ``(5) Treatment of premature petitions.--If--
                  ``(A) a petition for a readjustment of 
                partnership items for the taxable year involved 
                is filed by a notice partner (or a 5-percent 
                group) during the 90-day period described in 
                subsection (a), and
                  ``(B) no action is brought under paragraph 
                (1) during the 60-day period described therein 
                with respect to such taxable year which is not 
                dismissed,
        such petition shall be treated for purposes of 
        paragraph (1) as filed on the last day of such 60-day 
        period.''
    (b) Effective Date.--The amendment made by this section 
shall apply to petitions filed after the date of the enactment 
of this Act.

SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING.

    (a) In General.--Subsection (b) of section 7485 (relating 
to bonds to stay assessment of collection) is amended--
          (1) by inserting ``penalties,'' after ``any 
        interest,'', and
          (2) by striking ``aggregate of such deficiencies'' 
        and inserting ``aggregate liability of the parties to 
        the action''.
    (b) Effective Date.--The amendment made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN COMPUTATIONAL 
                    ADJUSTMENT RESULTING FROM CERTAIN SETTLEMENTS.

    (a) In General.--Subsection (c) of section 6601 (relating 
to interest on underpayment, nonpayment, or extension of time 
for payment, of tax) is amended by adding at the end the 
following new sentence: ``In the case of a settlement under 
section 6224(c) which results in the conversion of partnership 
items to nonpartnership items pursuant to section 
6231(b)(1)(C), the preceding sentence shall apply to a 
computational adjustment resulting from such settlement in the 
same manner as if such adjustment were a deficiency and such 
settlement were a waiver referred to in the preceding 
sentence.''
    (b) Effective Date.--The amendment made by this section 
shall apply to adjustments with respect to partnership taxable 
years beginning after the date of the enactment of this Act.

SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT REQUESTS WITH 
                    RESPECT TO BAD DEBTS OR WORTHLESS SECURITIES.

    (a) General Rule.--Section 6227 (relating to administrative 
adjustment requests) is amended by adding at the end the 
following new subsection:
    ``(e) Requests With Respect to Bad Debts or Worthless 
Securities.--In the case of that portion of any request for an 
administrative adjustment which relates to the deductibility by 
the partnership under section 166 of a debt as a debt which 
became worthless, or under section 165(g) of a loss from 
worthlessness of a security, the period prescribed in 
subsection (a)(1) shall be 7 years from the last day for filing 
the partnership return for the year with respect to which such 
request is made (determined without regard to extensions).''
    (b) Effective Date.--
          (1) In general.--The amendment made by subsection (a) 
        shall take effect as if included in the amendments made 
        by section 402 of the Tax Equity and Fiscal 
        Responsibility Act of 1982.
          (2) Treatment of requests filed before date of 
        enactment.--In the case of that portion of any request 
        (filed before the date of the enactment of this Act) 
        for an administrative adjustment which relates to the 
        deductibility of a debt as a debt which became 
        worthless or the deductibility of a loss from the 
        worthlessness of a security--
                  (A) paragraph (2) of section 6227(a) of the 
                Internal Revenue Code of 1986 shall not apply,
                  (B) the period for filing a petition under 
                section 6228 of the Internal Revenue Code of 
                1986 with respect to such request shall not 
                expire before the date 6 months after the date 
                of the enactment of this Act, and
                  (C) such a petition may be filed without 
                regard to whether there was a notice of the 
                beginning of an administrative proceeding or a 
                final partnership administrative adjustment.

  PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR 
                 WITH RESPECT TO DECEASED PARTNER, ETC.

SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT TO DECEASED 
                    PARTNER, ETC.

    (a) General Rule.--Subparagraph (A) of section 706(c)(2) 
(relating to disposition of entire interest) is amended to read 
as follows:
                  ``(A) Disposition of entire interest.--The 
                taxable year of a partnership shall close with 
                respect to a partner whose entire interest in 
                the partnership terminates (whether by reason 
                of death, liquidation, or otherwise).''
    (b) Clerical Amendment.--The paragraph heading for 
paragraph (2) of section 706(c) is amended to read as follows:
          ``(2) Treatment of dispositions.--''.
    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 1997.

    Subtitle D--Provisions Relating to Real Estate Investment Trusts

SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF 
                    SHAREHOLDERS.

    (a) Rules Relating to Determination of Ownership.--
          (1) Failure to issue shareholder demand letter not to 
        disqualify reit.--Section 857(a) (relating to 
        requirements applicable to real estate investment 
        trusts) is amended by striking paragraph (2) and by 
        redesignating paragraph (3) as paragraph (2).
          (2) Shareholder demand letter requirement; penalty.--
        Section 857 (relating to taxation of real estate 
        investment trusts and their beneficiaries) is amended 
        by redesignating subsection (f) as subsection (g) and 
        by inserting after subsection (e) the following new 
        subsection:
    ``(f) Real Estate Investment Trusts To Ascertain 
Ownership.--
          ``(1) In general.--Each real estate investment trust 
        shall each taxable year comply with regulations 
        prescribed by the Secretary for the purposes of 
        ascertaining the actual ownership of the outstanding 
        shares, or certificates of beneficial interest, of such 
        trust.
          ``(2) Failure to comply.--
                  ``(A) In general.--If a real estate 
                investment trust fails to comply with the 
                requirements of paragraph (1) for a taxable 
                year, such trust shall pay (on notice and 
                demand by the Secretary and in the same manner 
                as tax) a penalty of $25,000.
                  ``(B) Intentional disregard.--If any failure 
                under paragraph (1) is due to intentional 
                disregard of the requirement under paragraph 
                (1), the penalty under subparagraph (A) shall 
                be $50,000.
                  ``(C) Failure to comply after notice.--The 
                Secretary may require a real estate investment 
                trust to take such actions as the Secretary 
                determines appropriate to ascertain actual 
                ownership if the trust fails to meet the 
                requirements of paragraph (1). If the trust 
                fails to take such actions, the trust shall pay 
                (on notice and demand by the Secretary and in 
                the same manner as tax) an additional penalty 
                equal to the penalty determined under 
                subparagraph (A) or (B), whichever is 
                applicable.
                  ``(D) Reasonable cause.--No penalty shall be 
                imposed under this paragraph with respect to 
                any failure if it is shown that such failure is 
                due to reasonable cause and not to willful 
                neglect.''
    (b) Compliance With Closely Held Prohibition.--
          (1) In general.--Section 856 (defining real estate 
        investment trust) is amended by adding at the end the 
        following new subsection:
    ``(k) Requirement That Entity Not Be Closely Held Treated 
as Met in Certain Cases.--A corporation, trust, or 
association--
          ``(1) which for a taxable year meets the requirements 
        of section 857(f)(1), and
          ``(2) which does not know, or exercising reasonable 
        diligence would not have known, whether the entity 
        failed to meet the requirement of subsection (a)(6),
shall be treated as having met the requirement of subsection 
(a)(6) for the taxable year.''
          (2) Conforming amendment.--Paragraph (6) of section 
        856(a) is amended by inserting ``subject to the 
        provisions of subsection (k),'' before ``which is 
        not''.

SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.

    (a) In General.--Paragraph (2) of section 856(d) (defining 
rents from real property) is amended by striking subparagraph 
(C) and the last sentence and inserting:
                  ``(C) any impermissible tenant service income 
                (as defined in paragraph (7)).''
    (b) Impermissible Tenant Service Income.--Section 856(d) is 
amended by adding at the end the following new paragraph:
          ``(7) Impermissible tenant service income.--For 
        purposes of paragraph (2)(C)--
                  ``(A) In general.--The term `impermissible 
                tenant service income' means, with respect to 
                any real or personal property, any amount 
                received or accrued directly or indirectly by 
                the real estate investment trust for--
                          ``(i) services furnished or rendered 
                        by the trust to the tenants of such 
                        property, or
                          ``(ii) managing or operating such 
                        property.
                  ``(B) Disqualification of all amounts where 
                more than de minimis amount.--If the amount 
                described in subparagraph (A) with respect to a 
                property for any taxable year exceeds 1 percent 
                of all amounts received or accrued during such 
                taxable year directly or indirectly by the real 
                estate investment trust with respect to such 
                property, the impermissible tenant service 
                income of the trust with respect to the 
                property shall include all such amounts.
                  ``(C) Exceptions.--For purposes of 
                subparagraph (A)--
                          ``(i) services furnished or rendered, 
                        or management or operation provided, 
                        through an independent contractor from 
                        whom the trust itself does not derive 
                        or receive any income shall not be 
                        treated as furnished, rendered, or 
                        provided by the trust, and
                          ``(ii) there shall not be taken into 
                        account any amount which would be 
                        excluded from unrelated business 
                        taxable income under section 512(b)(3) 
                        if received by an organization 
                        described in section 511(a)(2).
                  ``(D) Amount attributable to impermissible 
                services.--For purposes of subparagraph (A), 
                the amount treated as received for any service 
                (or management or operation) shall not be less 
                than 150 percent of the direct cost of the 
                trust in furnishing or rendering the service 
                (or providing the management or operation).
                  ``(E) Coordination with limitations.--For 
                purposes of paragraphs (2) and (3) of 
                subsection (c), amounts described in 
                subparagraph (A) shall be included in the gross 
                income of the corporation, trust, or 
                association.''

SEC. 1253. ATTRIBUTION RULES APPLICABLE TO TENANT OWNERSHIP.

    Section 856(d)(5) (relating to constructive ownership of 
stock) is amended by adding at the end the following: ``For 
purposes of paragraph (2)(B), section 318(a)(3)(A) shall be 
applied under the preceding sentence in the case of a 
partnership by taking into account only partners who own 
(directly or indirectly) 25 percent or more of the capital 
interest, or the profits interest, in the partnership.''

SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.

    (a) General Rule.--Paragraph (3) of section 857(b) 
(relating to capital gains) is amended by redesignating 
subparagraph (D) as subparagraph (E) and by inserting after 
subparagraph (C) the following new subparagraph:
                  ``(D) Treatment by shareholders of 
                undistributed capital gains.--
                          ``(i) Every shareholder of a real 
                        estate investment trust at the close of 
                        the trust's taxable year shall include, 
                        in computing his long-term capital 
                        gains in his return for his taxable 
                        year in which the last day of the 
                        trust's taxable year falls, such amount 
                        as the trust shall designate in respect 
                        of such shares in a written notice 
                        mailed to its shareholders at any time 
                        prior to the expiration of 60 days 
                        after the close of its taxable year (or 
                        mailed to its shareholders or holders 
                        of beneficial interests with its annual 
                        report for the taxable year), but the 
                        amount so includible by any shareholder 
                        shall not exceed that part of the 
                        amount subjected to tax in subparagraph 
                        (A)(ii) which he would have receivedif 
all of such amount had been distributed as capital gain dividends by 
the trust to the holders of such shares at the close of its taxable 
year.
                          ``(ii) For purposes of this title, 
                        every such shareholder shall be deemed 
                        to have paid, for his taxable year 
                        under clause (i), the tax imposed by 
                        subparagraph (A)(ii) on the amounts 
                        required by this subparagraph to be 
                        included in respect of such shares in 
                        computing his long-term capital gains 
                        for that year; and such shareholders 
                        shall be allowed credit or refund as 
                        the case may be, for the tax so deemed 
                        to have been paid by him.
                          ``(iii) The adjusted basis of such 
                        shares in the hands of the holder shall 
                        be increased with respect to the 
                        amounts required by this subparagraph 
                        to be included in computing his long-
                        term capital gains, by the difference 
                        between the amount of such includible 
                        gains and the tax deemed paid by such 
                        shareholder in respect of such shares 
                        under clause (ii).
                          ``(iv) In the event of such 
                        designation, the tax imposed by 
                        subparagraph (A)(ii) shall be paid by 
                        the real estate investment trust within 
                        30 days after the close of its taxable 
                        year.
                          ``(v) The earnings and profits of 
                        such real estate investment trust, and 
                        the earnings and profits of any such 
                        shareholder which is a corporation, 
                        shall be appropriately adjusted in 
                        accordance with regulations prescribed 
                        by the Secretary.
                          ``(vi) As used in this subparagraph, 
                        the terms `shares' and `shareholders' 
                        shall include beneficial interests and 
                        holders of beneficial interests, 
                        respectively.''
    (b) Conforming Amendments.--
          (1) Clause (i) of section 857(b)(7)(A) is amended by 
        striking ``subparagraph (B)'' and inserting 
        ``subparagraph (B) or (D)''.
          (2) Clause (iii) of section 852(b)(3)(D) is amended 
        by striking ``by 65 percent'' and all that follows and 
        inserting ``by the difference between the amount of 
        such includible gains and the tax deemed paid by such 
        shareholder in respect of such shares under clause 
        (ii).''

SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.

    (a) General Rule.--Subsection (c) of section 856 (relating 
to limitations) is amended--
          (1) by adding ``and'' at the end of paragraph (3),
          (2) by striking paragraphs (4) and (8), and
          (3) by redesignating paragraphs (5), (6), and (7) as 
        paragraphs (4), (5), and (6), respectively.
    (b) Conforming Amendments.--
          (1) Subparagraph (G) of section 856(c)(5), as 
        redesignated by subsection (a), is amended by striking 
        ``and such agreement shall be treated as a security for 
        purposes of paragraph (4)(A)''.
          (2) Paragraph (5) of section 857(b) is amended by 
        striking ``section 856(c)(7)'' and inserting ``section 
        856(c)(6)''.
          (3) Subparagraph (C) of section 857(b)(6) is amended 
        by striking ``section 856(c)(6)(B)'' and inserting 
        ``section 856(c)(5)(B)''.

SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR DETERMINING 
                    WHETHER REIT HAS EARNINGS AND PROFITS FROM NON-REIT 
                    YEAR.

    Subsection (d) of section 857 is amended by adding at the 
end the following new paragraph:
          ``(3) Distributions to meet requirements of 
        subsection (a)(2)(B).--Any distribution which is made 
        in order to comply with the requirements of subsection 
        (a)(2)(B)--
                  ``(A) shall be treated for purposes of this 
                subsection and subsection (a)(2)(B) as made 
                from the earliest accumulated earnings and 
                profits (other than earnings and profits to 
                which subsection (a)(2)(A) applies) rather than 
                the most recently accumulated earnings and 
                profits, and
                  ``(B) to the extent treated under 
                subparagraph (A) as made from accumulated 
                earnings and profits, shall not be treated as a 
                distribution for purposes of subsection 
                (b)(2)(B).''

SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.

    (a) Grace Periods.--
          (1) Initial period.--Paragraph (2) of section 856(e) 
        (relating to special rules for foreclosure property) is 
        amended by striking ``on the date which is 2 years 
        after the date the trust acquired such property'' and 
        inserting ``as of the close of the 3d taxable year 
        following the taxable year in which the trust acquired 
        such property''.
          (2) Extension.--Paragraph (3) of section 856(e) is 
        amended--
                  (A) by striking ``or more extensions'' and 
                inserting ``extension'', and
                  (B) by striking the last sentence and 
                inserting: ``Any such extension shall not 
                extend the grace period beyond the close of the 
                3d taxable year following the last taxable year 
                in the period under paragraph (2).''
    (b) Revocation of Election.--Paragraph (5) of section 
856(e) is amended by striking the last sentence and inserting: 
``A real estate investment trust may revoke any such election 
for a taxable year by filing the revocation (in the manner 
provided by the Secretary) on or before the due date (including 
any extension of time) for filing its return of tax under this 
chapter for the taxable year. If a trust revokes an election 
for any property, no election may be made by the trust under 
this paragraph with respect to the property for any subsequent 
taxable year.''
    (c) Certain Activities Not To Disqualify Property.--
Paragraph (4) of section 856(e) is amended by adding at the end 
the following new flush sentence:
        ``For purposes of subparagraph (C), property shall not 
        be treated as used in a trade or business by reason of 
        any activities of the real estate investment trust with 
        respect to such property to the extent that such 
        activities would not result in amounts received or 
        accrued, directly or indirectly, with respect to such 
        property being treated as other than rents from real 
        property.''

SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.

    Section 856(c)(5)(G) (relating to treatment of certain 
interest rate agreements), as redesignated by section 1255, is 
amended to read as follows:
                  ``(G) Treatment of certain hedging 
                instruments.--Except to the extent provided by 
                regulations, any--
                          ``(i) payment to a real estate 
                        investment trust under an interest rate 
                        swap or cap agreement, option, futures 
                        contract, forward rate agreement, or 
                        any similar financial instrument, 
                        entered into by the trust in a 
                        transaction to reduce the interest rate 
                        risks with respect to any indebtedness 
                        incurred or to be incurred by the trust 
                        to acquire or carry real estate assets, 
                        and
                          ``(ii) gain from the sale or other 
                        disposition of any such investment,
                shall be treated as income qualifying under 
                paragraph (2).''

SEC. 1259. EXCESS NONCASH INCOME.

    Section 857(e)(2) (relating to determination of amount of 
excess noncash income) is amended--
          (1) by striking subparagraph (B),
          (2) by striking the period at the end of subparagraph 
        (C) and inserting a comma,
          (3) by redesignating subparagraph (C) (as amended by 
        paragraph (2)) as subparagraph (B), and
          (4) by adding at the end the following new 
        subparagraphs:
                  ``(C) the amount (if any) by which--
                          ``(i) the amounts includible in gross 
                        income with respect to instruments to 
                        which section 860E(a) or 1272 applies, 
                        exceed
                          ``(ii) the amount of money and the 
                        fair market value of other property 
                        received during the taxable year under 
                        such instruments, and
                  ``(D) amounts includible in income by reason 
                of cancellation of indebtedness.''

SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.

    Clause (iii) of section 857(b)(6)(C) (relating to certain 
sales not to constitute prohibited transactions) is amended by 
striking ``(other than foreclosure property)'' in subclauses 
(I) and (II) and inserting ``(other than sales of foreclosure 
property or sales to which section 1033 applies)''.

SEC. 1261. SHARED APPRECIATION MORTGAGES.

    (a) Bankruptcy Safe Harbor.--Section 856(j) (relating to 
treatment of shared appreciation mortgages) is amended by 
redesignating paragraph (4) as paragraph (5) and by inserting 
after paragraph (3) the following new paragraph:
          ``(4) Coordination with 4-year holding period.--
                  ``(A) In general.--For purposes of section 
                857(b)(6)(C), if a real estate investment trust 
                is treated as having sold secured property 
                under paragraph (3)(A), the trust shall be 
                treated as having held such property for at 
                least 4 years if--
                          ``(i) the secured property is sold or 
                        otherwise disposed of pursuant to a 
                        case under title 11 of the United 
                        States Code,
                          ``(ii) the seller is under the 
                        jurisdiction of the court in such case, 
                        and
                          ``(iii) the disposition is required 
                        by the court or is pursuant to a plan 
                        approved by the court.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply if--
                          ``(i) the secured property was 
                        acquired by the trust with the intent 
                        to evict or foreclose, or
                          ``(ii) the trust knew or had reason 
                        to know that default on the obligation 
                        described in paragraph (5)(A) would 
                        occur.''
    (b) Clarification of Definition of Shared Appreciation 
Provision.--Clause (ii) of section 856(j)(5)(A) is amended by 
inserting before the period ``or appreciation in value as of 
any specified date''.

SEC. 1262. WHOLLY OWNED SUBSIDIARIES.

    Section 856(i)(2) (defining qualified REIT subsidiary) is 
amended by striking ``at all times during the period such 
corporation was in existence''.

SEC. 1263. EFFECTIVE DATE.

    The amendments made by this part shall apply to taxable 
years beginning after the date of the enactment of this Act.

   Subtitle E--Provisions Relating to Regulated Investment Companies

SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION.

    (a) General Rule.--Subsection (b) of section 851 (relating 
to limitations) is amended by striking paragraph (3), by adding 
``and'' at the end of paragraph (2), and by redesignating 
paragraph (4) as paragraph (3).
    (b) Technical Amendments.--
          (1) The material following paragraph (3) of section 
        851(b) (as redesignated by subsection (a)) is amended--
                  (A) by striking out ``paragraphs (2) and 
                (3)'' and inserting ``paragraph (2)'', and
                  (B) by striking out the last sentence 
                thereof.
          (2) Subsection (c) of section 851 is amended by 
        striking ``subsection (b)(4)'' each place it appears 
        (including the heading) and inserting ``subsection 
        (b)(3)''.
          (3) Subsection (d) of section 851 is amended by 
        striking ``subsections (b)(4)'' and inserting 
        ``subsections (b)(3)''.
          (4) Paragraph (1) of section 851(e) is amended by 
        striking ``subsection (b)(4)'' and inserting 
        ``subsection (b)(3)''.
          (5) Paragraph (4) of section 851(e) is amended by 
        striking ``subsections (b)(4)'' and inserting 
        ``subsections (b)(3)''.
          (6) Section 851 is amended by striking subsection (g) 
        and redesignating subsection (h) as subsection (g).
          (7) Subsection (g) of section 851 (as redesignated by 
        paragraph (6)) is amended by striking paragraph (3).
          (8) Section 817(h)(2) is amended--
                  (A) by striking ``851(b)(4)'' in subparagraph 
                (A) and inserting ``851(b)(3)'', and
                  (B) by striking ``851(b)(4)(A)(i)'' in 
                subparagraph (B) and inserting 
                ``851(b)(3)(A)(i)''.
          (9) Section 1092(f)(2) is amended by striking 
        ``Except for purposes of section 851(b)(3), the'' and 
        inserting ``The''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act.

                    Subtitle F--Taxpayer Protections

SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.

    (a) Information on Deductible Employee Contributions.--
Subsection (g) of section 6652 (relating to information 
required in connection with deductible employee contributions) 
is amended by adding at the end the following new sentence: 
``No penalty shall be imposed under this subsection on any 
failure which is shown to be due to reasonable cause and not 
willful neglect.''
    (b) Reports on Status as Qualified Small Business.--
Subsection (k) of section 6652 (relating to failure to make 
reports required under section 1202) is amended by adding at 
the end the following new sentence: ``No penalty shall be 
imposed under this subsection on any failure which is shown to 
be due to reasonable cause and not willful neglect.''
    (c) Returns of Personal Holding Company Tax by Foreign 
Corporations.--Section 6683 (relating to failure of foreign 
corporation to file return of personal holding company tax) is 
amended by adding at the end the following new sentence: ``No 
penalty shall be imposed under this section on any failure 
which is shown to be due to reasonable cause and not willful 
neglect.''
    (d) Failure To Make Required Payments.--Subparagraph (A) of 
section 7519(f)(4) is amended by adding at the end the 
following new sentence: ``No penalty shall be imposed under 
this subparagraph on any failure which is shown to be due to 
reasonable cause and not willful neglect.''
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR REFUNDS.

    (a) In General.--Paragraph (3) of section 6512(b) (relating 
to overpayment determined by Tax Court) is amended by adding at 
the end the following flush sentence:
        ``In a case described in subparagraph (B) where the 
        date of the mailing of the notice of deficiency is 
        during the third year after the due date (with 
        extensions) for filing the return of tax and no return 
        was filed before such date, the applicable period under 
        subsections (a) and (b)(2) of section 6511 shall be 3 
        years.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to claims for credit or refund for taxable years 
ending after the date of the enactment of this Act.

SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER PROSPECTIVE JUROR 
                    HAS BEEN AUDITED.

    (a) In General.--Subsection (h) of section 6103 (relating 
to disclosure to certain Federal officers and employees for 
purposes of tax administration, etc.) is amended by striking 
paragraph (5) and by redesignating paragraph (6) as paragraph 
(5).
    (b) Conforming Amendment.--Paragraph (4) of section 6103(p) 
is amended by striking ``(h)(6)'' each place it appears and 
inserting ``(h)(5)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to judicial proceedings commenced after the date of 
the enactment of this Act.

SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.

    (a) In General.--Subsection (a) of section 6501 (relating 
to limitations on assessment and collection) is amended by 
adding at the end thereof the following new sentence: ``For 
purposes of this chapter, the term `return' means the return 
required to be filed by the taxpayer (and does not include a 
return of any person from whom the taxpayer has received an 
item of income, gain, loss, deduction, or credit).''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.

    (a) Right to Appeal Tax Court Decision.--Subsection (f) of 
section 7430 (relating to right of appeal) is amended by adding 
at the end the following new paragraph:
          ``(3) Appeal of tax court decision.--An order of the 
        Tax Court disposing of a petition under paragraph (2) 
        shall be reviewable in the same manner as a decision of 
        the Tax Court, but only with respect to the matters 
        determined in such order.''
    (b) Period for Applying to IRS for Costs.--Subsection (b) 
of section 7430 (relating to limitations) is amended by adding 
at the end the following new paragraph:
          ``(5) Period for applying to irs for administrative 
        costs.--An award may be made under subsection (a) by 
        the Internal Revenue Service for reasonable 
        administrative costs only if the prevailing party files 
        an application with the Internal Revenue Service for 
        such costs before the 91st day after the date on which 
        the final decision of the Internal Revenue Service as 
        to the determination of the tax, interest, or penalty 
        is mailed to such party.''
    (c) Period for Petitioning of Tax Court for Review of 
Denial of Costs.--Paragraph (2) of section 7430(f) (relating to 
right of appeal) is amended--
          (1) by striking ``appeal to'' and inserting ``the 
        filing of a petition for review with'', and
          (2) by adding at the end the following new sentence: 
        ``If the Secretary sends by certified or registered 
        mail a notice of such decision to the petitioner, no 
        proceeding in the Tax Court may be initiated under this 
        paragraph unless such petition is filed before the 91st 
        day after the date of such mailing.''
    (d) Effective Date.--The amendments made by this section 
shall apply to civil actions or proceedings commenced after the 
date of the enactment of this Act.

SEC. 1286. PENALTY FOR UNAUTHORIZED INSPECTION OF TAX RETURNS OR TAX 
                    RETURN INFORMATION.

    (a) In General.--Part I of subchapter A of chapter 75 
(relating to crimes, other offenses, and forfeitures) is 
amended by adding after section 7213 the following new section:

``SEC. 7213A. UNAUTHORIZED INSPECTION OF RETURNS OR RETURN INFORMATION.

    ``(a) Prohibitions.--
          ``(1) Federal employees and other persons.--It shall 
        be unlawful for--
                  ``(A) any officer or employee of the United 
                States, or
                  ``(B) any person described in section 6103(n) 
                or an officer or employee of any such person,
        willfully to inspect, except as authorized in this 
        title, any return or return information.
          ``(2) State and other employees.--It shall be 
        unlawful for any person (not described in paragraph 
        (1)) willfully to inspect, except as authorized in this 
        title, any return or return information acquired by 
        such person or another person under a provision of 
        section 6103 referred to in section 7213(a)(2).
    ``(b) Penalty.--
          ``(1)  In general.--Any violation of subsection (a) 
        shall be punishable upon conviction by a fine in any 
        amount not exceeding $1,000, or imprisonment of not 
        more than 1 year, or both, together with the costs of 
        prosecution.
          ``(2) Federal officers or employees.--An officer or 
        employee of the United States who is convicted of any 
        violation of subsection (a) shall, in addition to any 
        other punishment, be dismissed from office or 
        discharged from employment.
    ``(c) Definitions.--For purposes of this section, the terms 
`inspect', `return', and `return information' have the 
respective meanings given such terms by section 6103(b).''
    (b) Technical Amendments.--
          (1) Paragraph (2) of section 7213(a) is amended by 
        inserting ``(5),'' after ``(m)(2), (4),''.
          (2) The table of sections for part I of subchapter A 
        of chapter 75 is amended by inserting after the item 
        relating to section 7213 the following new item:

        ``Sec. 7213A. Unauthorized inspection of returns or return 
                  information.''

    (c) Effective Date.--The amendments made by this section 
shall apply to violations occurring on and after the date of 
the enactment of this Act.

SEC. 1287. CIVIL DAMAGES FOR UNAUTHORIZED INSPECTION OF RETURNS AND 
                    RETURN INFORMATION; NOTIFICATION OF UNLAWFUL 
                    INSPECTION OR DISCLOSURE.

    (a) Civil Damages for Unauthorized Inspection.--Subsection 
(a) of section 7431 is amended--
          (1) by striking ``Disclosure'' in the headings for 
        paragraphs (1) and (2) and inserting ``Inspection or 
        disclosure'', and
          (2) by striking ``discloses'' in paragraphs (1) and 
        (2) and inserting ``inspects or discloses''.
    (b) Notification of Unlawful Inspection or Disclosure.--
Section 7431 is amended by redesignating subsections (e) and 
(f) as subsections (f) and (g), respectively, and by inserting 
after subsection (d) the following new subsection:
    ``(e) Notification of Unlawful Inspection and Disclosure.--
If any person is criminally charged by indictment or 
information with inspection or disclosure of a taxpayer's 
return or return information in violation of--
          ``(1) paragraph (1) or (2) of section 7213(a),
          ``(2) section 7213A(a), or
          ``(3) subparagraph (B) of section 1030(a)(2) of title 
        18, United States Code,
the Secretary shall notify such taxpayer as soon as practicable 
of such inspection or disclosure.''
    (c) No Damages for Inspection Requested by Taxpayer.--
Subsection (b) of section 7431 is amended to read as follows:
    ``(b) Exceptions.--No liability shall arise under this 
section with respect to any inspection or disclosure--
          ``(1) which results from a good faith, but erroneous, 
        interpretation of section 6103, or
          ``(2) which is requested by the taxpayer.''
    (d) Conforming Amendments.--
          (1) Subsections (c)(1)(A), (c)(1)(B)(i), and (d) of 
        section 7431 are each amended by inserting ``inspection 
        or'' before ``disclosure''.
          (2) Clause (ii) of section 7431(c)(1)(B) is amended 
        by striking ``willful disclosure or a disclosure'' and 
        inserting ``willful inspection or disclosure or an 
        inspection or disclosure''.
          (3) Subsection (f) of section 7431, as redesignated 
        by subsection (b), is amended to read as follows:
    ``(f) Definitions.--For purposes of this section, the terms 
`inspect', `inspection', `return', and `return information' 
have the respective meanings given such terms by section 
6103(b).''
          (4) The section heading for section 7431 is amended 
        by inserting ``inspection or'' before ``disclosure''.
          (5) The table of sections for subchapter B of chapter 
        76 is amended by inserting ``inspection or'' before 
        ``disclosure'' in the item relating to section 7431.
          (6) Paragraph (2) of section 7431(g), as redesignated 
        by subsection (b), is amended by striking ``any use'' 
        and inserting ``any inspection or use''.
    (e) Effective Date.--The amendments made by this section 
shall apply to inspections and disclosures occurring on and 
after the date of the enactment of this Act.

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

SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING REQUIREMENTS.

    (a) In General.--Section 6019 is amended by striking ``or'' 
at the end of paragraph (1), by adding ``or'' at the end of 
paragraph (2), and by inserting after paragraph (2) the 
following new paragraph:
          ``(3) a transfer with respect to which a deduction is 
        allowed under section 2522, except that this paragraph 
        shall apply with respect to a transfer of property 
        (other than a transfer described in section 2522(d)) 
        only if the entire value of such property is allowed as 
        a deduction under section 2522,''.
    (b) Effective Date.--The amendment made by this section 
shall apply to gifts made after the date of the enactment of 
this Act.

SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOVERY.

    (a) Amendment to Section 2207A.--Paragraph (2) of section 
2207A(a) (relating to right of recovery in the case of certain 
marital deduction property) is amended to read as follows:
          ``(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.''
    (b) Amendment to Section 2207B.--Paragraph (2) of section 
2207B(a) (relating to right of recovery where decedent retained 
interest) is amended to read as follows:
          ``(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.''
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to the estates of decedents dying 
after the date of the enactment of this Act.

SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A.

    (a) General Rule.--In the case of any trust created under 
an instrument executed before the date of the enactment of the 
Revenue Reconciliation Act of 1990, such trust shall be treated 
as meeting the requirements of paragraph (1) of section 
2056A(a) of the Internal Revenue Code of 1986 if the trust 
instrument requires that all trustees of the trust be 
individual citizens of the United States or domestic 
corporations.
    (b) Effective Date.--The provisions of subsection (a) shall 
take effect as if included in the provisions of section 
11702(g) of the Revenue Reconciliation Act of 1990.

SEC. 1304. CLARIFICATIONS RELATING TO DISCLAIMERS.

    (a) Partial Transfer-Type Disclaimers Permitted.--Paragraph 
(3) of section 2518(c) (relating to certain transfers treated 
as disclaimers) is amended by inserting ``(or an undivided 
portion of such interest)'' after ``entire interest in the 
property''.
    (b) Retention of Interest by Decedent's Spouse Permitted in 
Transfer-Type Disclaimers.--Paragraph (3) of section 2518(c) is 
amended by adding at the end the following new flush sentence:
        ``For purposes of the preceding sentence, a written 
        transfer by the spouse of the decedent of property to a 
        trust shall not fail to be treated as a transfer of 
        such spouse's interest in such property by reason of 
        such spouse having an interest in such trust.''
    (c) Disclaimers Are Effective For Income Tax Purposes.--
Subsection (a) of section 2518 is amended by inserting ``and 
subtitle A'' after ``this subtitle'' each place it appears.
    (d) Effective Date.--The amendments made by this section 
shall apply to transfers creating an interest in the person 
disclaiming, and disclaimers, made after the date of the 
enactment of this Act.

SEC. 1305. INCREASE OF AMOUNT OF LAPSE OF GENERAL POWER OF APPOINTMENT 
                    NOT TREATED AS RELEASE FOR PURPOSES OF ESTATE AND 
                    GIFT TAX (5 OR 5 POWER).

    (a) Estate Tax.--Subparagraph (A) of section 2041(b)(2) 
(relating to lapse of power) is amended by striking ``$5,000'' 
and inserting ``$10,000''.
    (b) Gift Tax.--Paragraph (1) of section 2514(e) (relating 
to lapse of power) is amended by striking ``$5,000'' and 
inserting ``$10,000''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1306. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM OBLIGATIONS 
                    HELD BY NONRESIDENT ALIENS.

    (a) In General.--Subsection (b) of section 2105 is amended 
by striking ``and'' at the end of paragraph (2), by striking 
the period at the end of paragraph (3) and inserting ``, and'', 
and by inserting after paragraph (3) the following new 
paragraph:
          ``(4) obligations which would be original issue 
        discount obligations as defined in section 871(g)(1) 
        but for subparagraph (B)(i) thereof, if any interest 
        thereon (were such interest received by the decedent at 
        the time of his death) would not be effectively 
        connected with the conduct of a trade or business 
        within the United States.''
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1307. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.

    (a) In General.--Subpart A of part I of subchapter J 
(relating to estates, trusts, beneficiaries, and decedents) is 
amended by adding at the end the following new section:

``SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.

    ``(a) General Rule.--For purposes of this subtitle, if both 
the executor (if any) of an estate and the trustee of a 
qualified revocable trust elect the treatment provided in this 
section, such trust shall be treated and taxed as part of such 
estate (and not as a separate trust) for all taxable years of 
the estate ending after the date of the decedent's death and 
before the applicable date.
    ``(b) Definitions.--For purposes of subsection (a)--
          ``(1) Qualified revocable trust.--The term `qualified 
        revocable trust' means any trust (or portion thereof) 
        which was treated under section 676 as owned by the 
        decedent of the estate referred to in subsection (a) by 
        reason of a power in the grantor (determined without 
        regard to section 672(e)).
          ``(2) Applicable date.--The term `applicable date' 
        means--
                  ``(A) if no return of tax imposed by chapter 
                11 is required to be filed, the date which is 2 
                years after the date of the decedent's death, 
                and
                  ``(B) if such a return is required to be 
                filed, the date which is 6 months after the 
                date of the final determination of the 
                liability for tax imposed by chapter 11.
    ``(c) Election.--The election under subsection (a) shall be 
made not later than the time prescribed for filing the return 
of tax imposed by this chapter for the first taxable year of 
the estate (determined with regard to extensions) and, once 
made, shall be irrevocable.''
    (b) Comparable Treatment Under Generation-Skipping Tax.--
Paragraph (1) of section 2652(b) is amended by adding at the 
end the following new sentence: ``Such term shall not include 
any trust during any period the trust is treated as part of an 
estate under section 646.''
    (c) Clerical Amendment.--The table of sections for such 
subpart A is amended by adding at the end the following new 
item:

        ``Sec. 646. Certain revocable trusts treated as part of 
                  estate.''

    (d) Effective Date.--The amendments made by this section 
shall apply with respect to estates of decedents dying after 
the date of the enactment of this Act.

SEC. 1308. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF 
                    ESTATE.

    (a) In General.--Subsection (b) of section 663 (relating to 
distributions in first 65 days of taxable year) is amended by 
inserting ``an estate or'' before ``a trust'' each place it 
appears.
    (b) Conforming Amendment.--Paragraph (2) of section 663(b) 
is amended by striking ``the fiduciary of such trust'' and 
inserting ``the executor of such estate or the fiduciary of 
such trust (as the case may be)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1309. SEPARATE SHARE RULES AVAILABLE TO ESTATES.

    (a) In General.--Subsection (c) of section 663 (relating to 
separate shares treated as separate trusts) is amended--
          (1) by inserting before the last sentence the 
        following new sentence: ``Rules similar to the rules of 
        the preceding provisions of this subsection shall apply 
        to treat substantially separate and independent shares 
        of different beneficiaries in an estate having more 
        than 1 beneficiary as separate estates.'', and
          (2) by inserting ``or estates'' after ``trusts'' in 
        the last sentence.
    (b) Conforming Amendment.--The subsection heading of 
section 663(c) is amended by inserting ``Estates or'' before 
``Trusts''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1310. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS RELATED 
                    PERSONS FOR DISALLOWANCE OF LOSSES, ETC.

    (a) Disallowance of Losses.--Subsection (b) of section 267 
(relating to losses, expenses, and interest with respect to 
transactions between related taxpayers) is amended by striking 
``or'' at the end of paragraph (11), by striking the period at 
the end of paragraph (12) and inserting ``; or'', and by adding 
at the end the following new paragraph:
          ``(13) Except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.''
    (b) Ordinary Income From Gain From Sale of Depreciable 
Property.--Subsection (b) of section 1239 is amended by 
striking the period at the end of paragraph (2) and inserting 
``, and'' and by adding at the end the following new paragraph:
          ``(3) except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1311. LIMITATION ON TAXABLE YEAR OF ESTATES.

    (a) In General.--Section 645 (relating to taxable year of 
trusts) is amended to read as follows:

``SEC. 645. TAXABLE YEAR OF ESTATES AND TRUSTS.

    ``(a) Estates.--For purposes of this subtitle, the taxable 
year of an estate shall be a year ending on October 31, 
November 30, or December 31.
    ``(b) Trusts.--
          ``(1) In general.--For purposes of this subtitle, the 
        taxable year of any trust shall be the calendar year.
          ``(2) Exception for trusts exempt from tax and 
        charitable trusts.--Paragraph (1) shall not apply to a 
        trust exempt from taxation under section 501(a) or to a 
        trust described in section 4947(a)(1).''
    (b) Clerical Amendment.--The table of sections for subpart 
A of part I of subchapter J of chapter 1 is amended by striking 
the item relating to section 645 and inserting the following 
new item:

        ``Sec. 645. Taxable year of estates and trusts.''

    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1312. TREATMENT OF FUNERAL TRUSTS.

    (a) In General.--Subpart F of part I of subchapter J of 
chapter 1 is amended by adding at the end the following new 
section:

``SEC. 684. TREATMENT OF FUNERAL TRUSTS.

    ``(a) In General.--In the case of a qualified funeral 
trust--
          ``(1) subparts B, C, D, and E shall not apply, and
          ``(2) no deduction shall be allowed by section 
        642(b).
    ``(b) Qualified Funeral Trust.--For purposes of this 
subsection, the term `qualified funeral trust' means any trust 
(other than a foreign trust) if--
          ``(1) the trust arises as a result of a contract with 
        a person engaged in the trade or business of providing 
        funeral or burial services or property necessary to 
        provide such services,
          ``(2) the sole purpose of the trust is to hold, 
        invest, and reinvest funds in the trust and to use such 
        funds solely to make payments for such services or 
        property for the benefit of the beneficiaries of the 
        trust,
          ``(3) the only beneficiaries of such trust are 
        individuals who have entered into contracts described 
        in paragraph (1) to have such services or property 
        provided at their death,
          ``(4) the only contributions to the trust are 
        contributions by or for the benefit of such 
        beneficiaries,
          ``(5) the trustee elects the application of this 
        subsection, and
          ``(6) the trust would (but for the election described 
        in paragraph (5)) be treated as owned by the 
        beneficiaries under subpart E.
    ``(c) Dollar Limitation on Contributions.--
          ``(1) In general.--The term `qualified funeral trust' 
        shall not include any trust which accepts aggregate 
        contributions by or for the benefit of an individual in 
        excess of $7,000.
          ``(2) Related trusts.--For purposes of paragraph (1), 
        all trusts having trustees which are related persons 
        shall be treated as 1 trust. For purposes of the 
        preceding sentence, persons are related if--
                  ``(A) the relationship between such persons 
                is described in section 267 or 707(b),
                  ``(B) such persons are treated as a single 
                employer under subsection (a) or (b) of section 
                52, or
                  ``(C) the Secretary determines that treating 
                such persons as related is necessary to prevent 
                avoidance of the purposes of this section.
          ``(3) Inflation adjustment.--In the case of any 
        contract referred to in subsection (b)(1) which is 
        entered into during any calendar year after 1998, the 
        dollar amount referred to paragraph (1) shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year, by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any dollar amount after being increased under the 
        preceding sentence is not a multiple of $100, such 
        dollar amount shall be rounded to the nearest multiple 
        of $100.
    ``(d) Application of Rate Schedule.--Section 1(e) shall be 
applied to each qualified funeral trust by treating each 
beneficiary's interest in each such trust as a separate trust.
    ``(e) Treatment of Amounts Refunded to Beneficiary on 
Cancellation.--No gain or loss shall be recognized to a 
beneficiary described in subsection (b)(3) of any qualified 
funeral trust by reason of any payment from such trust to such 
beneficiary by reason of cancellation of a contract referred to 
in subsection (b)(1). If any payment referred to inthe 
preceding sentence consists of property other than money, the basis of 
such property in the hands of such beneficiary shall be the same as the 
trust's basis in such property immediately before the payment.
    ``(f) Simplified Reporting.--The Secretary may prescribe 
rules for simplified reporting of all trusts having a single 
trustee.''
    (b) Clerical Amendment.--The table of sections for subpart 
F of part I of subchapter J of chapter 1 is amended by adding 
at the end the following new item:

        ``Sec. 684. Treatment of funeral trusts.''

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

SEC. 1313. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S DEATH.

    (a) General Rule.--Section 2035 is amended to read as 
follows:

``SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF 
                    DECEDENT'S DEATH.

    ``(a) Inclusion of Certain Property in Gross Estate.--If--
          ``(1) the decedent made a transfer (by trust or 
        otherwise) of an interest in any property, or 
        relinquished a power with respect to any property, 
        during the 3-year period ending on the date of the 
        decedent's death, and
          ``(2) the value of such property (or an interest 
        therein) would have been included in the decedent's 
        gross estate under section 2036, 2037, 2038, or 2042 if 
        such transferred interest or relinquished power had 
        been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any 
property (or interest therein) which would have been so 
included.
    ``(b) Inclusion of Gift Tax on Gifts Made During 3 Years 
Before Decedent's Death.--The amount of the gross estate 
(determined without regard to this subsection) shall be 
increased by the amount of any tax paid under chapter 12 by the 
decedent or his estate on any gift made by the decedent or his 
spouse during the 3-year period ending on the date of the 
decedent's death.
    ``(c) Other Rules Relating to Transfers Within 3 Years of 
Death.--
          ``(1) In general.--For purposes of--
                  ``(A) section 303(b) (relating to 
                distributions in redemption of stock to pay 
                death taxes),
                  ``(B) section 2032A (relating to special 
                valuation of certain farms, etc., real 
                property), and
                  ``(C) subchapter C of chapter 64 (relating to 
                lien for taxes),
        the value of the gross estate shall include the value 
        of all property to the extent of any interest therein 
        of which the decedent has at any time made a transfer, 
        by trust or otherwise, during the 3-year period ending 
        on the date of the decedent's death.
          ``(2) Coordination with section 6166.--An estate 
        shall be treated as meeting the 35 percent of adjusted 
        gross estate requirement of section 6166(a)(1) only if 
        the estate meets such requirement both with and without 
        the application of paragraph (1).
          ``(3) Marital and small transfers.--Paragraph (1) 
        shall not apply to any transfer (other than a transfer 
        with respect to a life insurance policy) made during a 
        calendar year to any donee if the decedent was not 
        required by section 6019 (other than by reason of 
        section 6019(2)) to file any gift tax return for such 
        year with respect to transfers to such donee.
    ``(d) Exception.--Subsection (a) shall not apply to any 
bona fide sale for an adequate and full consideration in money 
or money's worth.
    ``(e) Treatment of Certain Transfers From Revocable 
Trusts.--For purposes of this section and section 2038, any 
transfer from any portion of a trust during any period that 
such portion was treated under section 676 as owned by the 
decedent by reason of a power in the grantor (determined 
without regard to section 672(e)) shall be treated as a 
transfer made directly by the decedent.''
    (b) Clerical Amendment.--The table of sections for part III 
of subchapter A of chapter 11 is amended by striking ``gifts'' 
in the item relating to section 2035 and inserting ``certain 
gifts''.
    (c) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

SEC. 1314. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES UNDER 
                    QUALIFIED TERMINABLE INTEREST RULES.

    (a) In General.--Subparagraph (C) of section 2056(b)(7) is 
amended by inserting ``(or, in the case of an interest in an 
annuity arising under the community property laws of a State, 
included in the gross estate of the decedent under section 
2033)'' after ``section 2039''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1315. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF FORMS OF 
                    OWNERSHIP WHICH ARE NOT TRUSTS.

    (a) In General.--Subsection (c) of section 2056A (defining 
qualified domestic trust) is amended by adding at the end the 
following new paragraph:
          ``(3) Trust.--To the extent provided in regulations 
        prescribed by the Secretary, the term `trust' includes 
        other arrangements which have substantially the same 
        effect as a trust.''
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1316. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A.

    (a) General Rule.--Paragraph (3) of section 2032A(d) 
(relating to modification of election and agreement to be 
permitted) is amended to read as follows:
          ``(3) Modification of election and agreement to be 
        permitted.--The Secretary shall prescribe procedures 
        which provide that in any case in which the executor 
        makes an election under paragraph (1) (and submits the 
        agreement referred to in paragraph (2)) within the time 
        prescribed therefor, but--
                  ``(A) the notice of election, as filed, does 
                not contain all required information, or
                  ``(B) signatures of 1 or more persons 
                required to enter into the agreement described 
                in paragraph (2) are not included on the 
                agreement as filed, or the agreement does not 
                contain all required information,
        the executor will have a reasonable period of time (not 
        exceeding 90 days) after notification of such failures 
        to provide such information or signatures.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

SEC. 1317. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES TRUSTEE FOR 
                    QUALIFIED DOMESTIC TRUSTS.

    (a) In General.--Subparagraph (A) of section 2056A(a)(1) is 
amended by inserting ``except as provided in regulations 
prescribed by the Secretary,'' before ``requires''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

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

                 Subtitle A--Excise Tax Simplification

          PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS

SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET ALTERATIONS 
                    FOR HEAVY TRUCKS AND LUXURY CARS.

    (a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B) 
(relating to exceptions) are each amended by striking ``$200'' 
and inserting ``$1,000''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to installations on vehicles sold after the date of 
the enactment of this Act.

SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE OF TIRES 
                    IN COMPUTING PRICE.

    (a) In General.--Subsection (e) of section 4051 is amended 
to read as follows:
    ``(e) Credit Against Tax for Tire Tax.--If--
          ``(1) tires are sold on or in connection with the 
        sale of any article, and
          ``(2) tax is imposed by this subchapter on the sale 
        of such tires,
there shall be allowed as a credit against the tax imposed by 
this subchapter an amount equal to the tax (if any) imposed by 
section 4071 on such tires.''
    (b) Conforming Amendment.--Subparagraph (B) of section 
4052(b)(1) is amended by striking clause (iii), by adding 
``and'' at the end of clause (ii), and by redesignating clause 
(iv) as clause (iii).
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

   PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER

SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED SPIRITS 
                    RETURNED TO DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5008(c)(1) (relating to distilled 
spirits returned to bonded premises) is amended by striking 
``withdrawn from bonded premises on payment or determination of 
tax'' and inserting ``on which tax has been determined or 
paid''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITHOUT 
                    SUBMISSION OF RECORDS.

    (a) In General.--Section 5175(c) (relating to cancellation 
of credit of export bonds) is amended by striking ``on the 
submission of'' and all that follows and inserting ``if there 
is such proof of exportation as the Secretary may by 
regulations require.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON PREMISES OF 
                    DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5207(c) (relating to preservation 
and inspection) is amended by striking ``shall be kept on the 
premises where the operations covered by the record are carried 
on and''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE RECEIVED AT A 
                    DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5222(b)(2) (relating to receipt) 
is amended to read as follows:
          ``(2) beer conveyed without payment of tax from 
        brewery premises, beer which has been lawfully removed 
        from brewery premises upon determination of tax, or''.
    (b) Clarification of Authority To Permit Removal of Beer 
Without Payment of Tax for Use as Distilling Material.--Section 
5053 (relating to exemptions) is amended by redesignating 
subsection (f) as subsection (i) and by inserting after 
subsection (e) the following new subsection:
    ``(f) Removal for Use as Distilling Material.--Subject to 
such regulations as the Secretary may prescribe, beer may be 
removed from a brewery without payment of tax to any distilled 
spirits plant for use as distilling material.''
    (c) Clarification of Refund and Credit of Tax.--Section 
5056 (relating to refund and credit of tax, or relief from 
liability) is amended--
          (1) by redesignating subsection (c) as subsection (d) 
        and by inserting after subsection (b) the following new 
        subsection:
    ``(c) Beer Received at a Distilled Spirits Plant.--Any tax 
paid by any brewer on beer produced in the United States may be 
refunded or credited to the brewer, without interest, or if the 
tax has not been paid, the brewer may be relieved of liability 
therefor, under regulations as the Secretary may prescribe, if 
such beer is received on the bonded premises of a distilled 
spirits plant pursuant to the provisions of section 5222(b)(2), 
for use in the production of distilled spirits.'', and
          (2) by striking ``or rendering unmerchantable'' in 
        subsection (d) (as so redesignated) and inserting 
        ``rendering unmerchantable, or receipt on the bonded 
        premises of a distilled spirits plant''.
    (d) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN LIQUORS TO 
                    POST SIGN.

    (a) In General.--Section 5115 (relating to sign required on 
premises) is hereby repealed.
    (b) Conforming Amendments.--
          (1) Section 5681(a) is amended by striking ``, and 
        every wholesale dealer in liquors,'' and by striking 
        ``section 5115(a) or''.
          (2) Section 5681(c) is amended--
                  (A) by striking ``or wholesale liquor 
                establishment, on which no sign required by 
                section 5115(a) or'' and inserting ``on which 
                no sign required by'', and
                  (B) by striking ``or wholesale liquor 
                establishment, or who'' and inserting ``or 
                who''.
          (3) The table of sections for subpart D of part II of 
        subchapter A of chapter 51 is amended by striking the 
        item relating to section 5115.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED TO 
                    UNMERCHANTABLE WINE.

    (a) In General.--Section 5044(a) (relating to refund of tax 
on unmerchantable wine) is amended by striking ``as 
unmerchantable''.
    (b) Conforming Amendments.--
          (1) Section 5361 is amended by striking 
        ``unmerchantable''.
          (2) The section heading for section 5044 is amended 
        by striking ``unmerchantable''.
          (3) The item relating to section 5044 in the table of 
        sections for subpart C of part I of subchapter A of 
        chapter 51 is amended by striking ``unmerchantable''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN WINES.

    (a) In General.--Section 5384(b)(2)(D) (relating to 
ameliorated fruit and berry wines) is amended by striking 
``loganberries, currants, or gooseberries,'' and inserting 
``any fruit or berry with a natural fixed acid of 20 parts per 
thousand or more (before any correction of such fruit or 
berry)''.
    (b) Effective Date.--The amendment made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN FREE OF TAX FOR 
                    USE OF FOREIGN EMBASSIES, LEGATIONS, ETC.

    (a) In General.--Section 5053 (relating to exemptions), as 
amended by section 1414(b), is amended by inserting after 
subsection (f) the following new subsection:
    ``(g) Removals for Use of Foreign Embassies, Legations, 
Etc.--
          ``(1) In general.--Subject to such regulations as the 
        Secretary may prescribe--
                  ``(A) beer may be withdrawn from the brewery 
                without payment of tax for transfer to any 
                customs bonded warehouse for entry pending 
                withdrawal therefrom as provided in 
                subparagraph (B), and
                  ``(B) beer entered into any customs bonded 
                warehouse under subparagraph (A) may be 
                withdrawn for consumption in the United States 
                by, and for the official and family use of, 
                such foreign governments, organizations, and 
                individuals as are entitled to withdraw 
                imported beer from such warehouses free of tax.
        Beer transferred to any customs bonded warehouse under 
        subparagraph (A) shall be entered, stored, and 
        accounted for in such warehouse under such regulations 
        and bonds as the Secretary may prescribe, and may be 
        withdrawn therefrom by such governments, organizations, 
        and individuals free of tax under the same conditions 
        and procedures as imported beer.
          ``(2) Other rules to apply.--Rules similar to the 
        rules of paragraphs (2) and (3) of section 5362(e) 
        shall apply for purposes of this subsection.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUCTION.

    (a) In General.--Section 5053 (relating to exemptions), as 
amended by section 1418(a), is amended by inserting after 
subsection (g) the following new subsection:
    ``(h) Removals for Destruction.--Subject to such 
regulations as the Secretary may prescribe, beer may be removed 
from the brewery without payment of tax for destruction.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER WITHOUT 
                    SUBMISSION OF RECORDS.

    (a) In General.--The first sentence of section 5055 
(relating to drawback of tax on beer) is amended by striking 
``found to have been paid'' and all that follows and inserting 
``paid on such beer if there is such proof of exportation as 
the Secretary may by regulations require.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK WITHOUT PAYMENT 
                    OF TAX.

    (a) In General.--Part II of subchapter G of chapter 51 is 
amended by adding at the end the following new section:

``SEC. 5418. BEER IMPORTED IN BULK.

    ``Beer imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may 
prescribe, be withdrawn from customs custody and transferred in 
such bulk containers to the premises of a brewery without 
payment of the internal revenue tax imposed on such beer. The 
proprietor of a brewery to which such beer is transferred shall 
become liable for the tax on the beer withdrawn from customs 
custody under this section upon release of the beer from 
customs custody, and the importer, or the person bringing such 
beer into the United States, shall thereupon be relieved of the 
liability for such tax.''
    (b) Clerical Amendment.--The table of sections for such 
part II is amended by adding at the end the following new item:

        ``Sec. 5418. Beer imported in bulk.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED IN BULK 
                    WITHOUT PAYMENT OF TAX.

    (a) In General.--Part II of subchapter F of chapter 51 is 
amended by inserting after section 5363 the following new 
section:

``SEC. 5364. WINE IMPORTED IN BULK.

    ``Wine imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may 
prescribe, be withdrawn from customs custody and transferred in 
such bulk containers to the premises of a bonded wine cellar 
without payment of the internal revenue tax imposed on such 
wine. The proprietor of a bonded wine cellar to which such wine 
is transferred shall become liable for the tax on the wine 
withdrawn from customs custody under this section upon release 
of the wine from customs custody, and the importer, or the 
person bringing such wine into the United States, shall 
thereupon be relieved of the liability for such tax.''
    (b) Clerical Amendment.--The table of sections for such 
part II is amended by inserting after the item relating to 
section 5363 the following new item:

        ``Sec. 5364. Wine imported in bulk.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

                 PART III--OTHER EXCISE TAX PROVISIONS

SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION 
                    REQUIREMENTS.

    (a) In General.--Section 4222(b)(2) (relating to export) is 
amended--
          (1) by striking ``in the case of any sale or resale 
        for export,'', and
          (2) by striking ``Export'' and inserting ``Under 
        regulations''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 1432. REPEAL OF EXPIRED PROVISIONS.

    (a) Piggy-Back Trailers.--Section 4051 (relating to 
imposition of tax on heavy trucks and trailers sold at retail) 
is amended by striking subsection (d) and by redesignating 
subsection (e) as subsection (d).
    (b) Deep Seabed Mining.--
          (1) In general.--Subchapter F of chapter 36 (relating 
        to tax on removal of hard mineral resources from deep 
        seabed) is hereby repealed.
          (2) Conforming amendment.--The table of subchapters 
        for chapter 36 is amended by striking the item relating 
        to subchapter F.
    (c) Ozone-Depleting Chemicals.--
          (1) Paragraph (1) of section 4681(b) is amended by 
        striking subparagraphs (B) and (C) and inserting the 
        following new subparagraph:
                  ``(B) Base tax amount.--The base tax amount 
                for purposes of subparagraph (A) with respect 
                to any sale or use during any calendar year 
                after 1995 shall be $5.35 increased by 45 cents 
                for each year after 1995.''
          (2) Subsection (g) of section 4682 is amended to read 
        as follows:
    ``(g) Chemicals Used as Propellants in Metered-Dose 
Inhalers.--
          ``(1) Exemption from tax.--
                  ``(A) In general.--No tax shall be imposed by 
                section 4681 on--
                          ``(i) any use of any substance as a 
                        propellant in metered-dose inhalers, or
                          ``(ii) any qualified sale by the 
                        manufacturer, producer, or importer of 
                        any substance.
                  ``(B) Qualified sale.--For purposes of 
                subparagraph (A), the term `qualified sale' 
                means any sale by the manufacturer, producer, 
                or importer of any substance--
                          ``(i) for use by the purchaser as a 
                        propellant in metered dose inhalers, or
                          ``(ii) for resale by the purchaser to 
                        a 2d purchaser for such use by the 2d 
                        purchaser.
                The preceding sentence shall apply only if the 
                manufacturer, producer, and importer, and the 
                1st and 2d purchasers (if any) meet such 
                registration requirements as may be prescribed 
                by the Secretary.
          ``(2) Overpayments.--If any substance on which tax 
        was paid under this subchapter is used by any person as 
        a propellant in metered-dose inhalers, credit or refund 
        without interest shall be allowed to such person in an 
        amount equal to the tax so paid. Amounts payable under 
        the preceding sentence with respect to uses during the 
        taxable year shall be treated as described in section 
        34(a) for such year unless claim thereof has been 
        timely filed under this paragraph.''

                 Subtitle B--Tax-Exempt Bond Provisions

SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS UNDER 1-
                    YEAR EXCEPTION FROM REBATE.

    Subclause (I) of section 148(f)(4)(B)(ii) (relating to 
additional period for certain bonds) is amended by striking 
``the lesser of 5 percent of the proceeds of the issue or 
$100,000'' and inserting ``5 percent of the proceeds of the 
issue''.

SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE DEBT SERVICE 
                    FUND UNDER CONSTRUCTION BOND RULES.

    Subparagraph (C) of section 148(f)(4) is amended by adding 
at the end the following new clause:
                          ``(xvii) Treatment of bona fide debt 
                        service funds.--If the spending 
                        requirements of clause (ii) are met 
                        with respect to the available 
                        construction proceeds of a construction 
                        issue, then paragraph (2) shall not 
                        apply to earnings on a bona fide debt 
                        service fund for such issue.''

SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON INVESTMENT IN 
                    CERTAIN NONPURPOSE INVESTMENTS.

    Subsection (d) of section 148 (relating to special rules 
for reasonably required reserve or replacement fund) is amended 
by striking paragraph (3).

SEC. 1444. REPEAL OF EXPIRED PROVISIONS.

    (a) Paragraph (2) of section 148(c) is amended by striking 
subparagraph (B) and by redesignating subparagraphs (C), (D), 
and (E) as subparagraphs (B), (C), and (D), respectively.
    (b) Paragraph (4) of section 148(f) is amended by striking 
subparagraph (E).

SEC. 1445. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to bonds 
issued after the date of the enactment of this Act.

                    Subtitle C--Tax Court Procedures

SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.

    (a) Appeal of Order.--Paragraph (2) of section 6512(b) 
(relating to jurisdiction to enforce) is amended by adding at 
the end the following new sentence: ``An order of the Tax Court 
disposing of a motion under this paragraph shall be reviewable 
in the same manner as a decision of the Tax Court, but only 
with respect to the matters determined in such order.''
    (b) Denial of Jurisdiction Regarding Certain Credits and 
Reductions.--Subsection (b) of section 6512 (relating to 
overpayment determined by Tax Court) is amended by adding at 
the end the following new paragraph:
          ``(4) Denial of jurisdiction regarding certain 
        credits and reductions.--The Tax Court shall have no 
        jurisdiction under this subsection to restrain or 
        review any credit or reduction made by the Secretary 
        under section 6402.''
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.

    (a) In General.--Subsection (c) of section 7481 (relating 
to jurisdiction over interest determinations) is amended to 
read as follows:
    ``(c) Jurisdiction Over Interest Determinations.--
          ``(1) In general.--Notwithstanding subsection (a), 
        if, within 1 year after the date the decision of the 
        Tax Court becomes final under subsection (a) in a case 
        to which this subsection applies, the taxpayer files a 
        motion in the Tax Court for a redetermination of the 
        amount of interest involved, then the Tax Court may 
        reopen the case solely to determine whether the 
        taxpayer has made an overpayment of such interest or 
        the Secretary has made an underpayment of such interest 
        and the amount thereof.
          ``(2) Cases to which this subsection applies.--This 
        subsection shall apply where--
                  ``(A)(i) an assessment has been made by the 
                Secretary under section 6215 which includes 
                interest as imposed by this title, and
                  ``(ii) the taxpayer has paid the entire 
                amount of the deficiency plus interest claimed 
                by the Secretary, and
                  ``(B) the Tax Court finds under section 
                6512(b) that the taxpayer has made an 
                overpayment.
          ``(3) Special rules.--If the Tax Court determines 
        under this subsection that the taxpayer has made an 
        overpayment of interest or that the Secretary has made 
        an underpayment of interest, then that determination 
        shall be treated under section 6512(b)(1) as a 
        determination of an overpayment of tax. An order of the 
        Tax Court redetermining interest, when entered upon the 
        records of the court, shall be reviewable in the same 
        manner as a decision of the Tax Court.''
    (b) Effective Date.--The amendment made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF 
                    LITIGATION COSTS.

    (a) In General.--Paragraph (4) of section 7430(c) (defining 
prevailing party) is amended by adding at the end thereof the 
following new subparagraph:
                  ``(D) Special rules for applying net worth 
                requirement.--In applying the requirements of 
                section 2412(d)(2)(B) of title 28, United 
                States Code, for purposes of subparagraph 
                (A)(iii) of this paragraph--
                          ``(i) the net worth limitation in 
                        clause (i) of such section shall apply 
                        to--
                                  ``(I) an estate but shall be 
                                determined as of the date of 
                                the decedent's death, and
                                  ``(II) a trust but shall be 
                                determined as of the last day 
                                of the taxable year involved in 
                                the proceeding, and
                          ``(ii) individuals filing a joint 
                        return shall be treated as 1 individual 
                        for purposes of clause (i) of such 
                        section, except in the case of a spouse 
                        relieved of liability under section 
                        6013(e).''
    (b) Effective Date.--The amendment made by this section 
shall apply to proceedings commenced after the date of the 
enactment of this Act.

SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

    (a) In General.--Subchapter B of chapter 76 (relating to 
proceedings by taxpayers and third parties) is amended by 
redesignating section 7435 as section 7436 and by inserting 
after section 7434 the following new section:

``SEC. 7435. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

    ``(a) Creation of Remedy.--If, in connection with an audit 
of any person, there is an actual controversy involving a 
determination by the Secretary as part of an examination that--
          ``(1) one or more individuals performing services for 
        such person are employees of such person for purposes 
        of subtitle C, or
          ``(2) such person is not entitled to the treatment 
        under subsection (a) of section 530 of the Revenue Act 
        of 1978 with respect to such an individual,
upon the filing of an appropriate pleading, the Tax Court may 
determine whether such a determination by the Secretary is 
correct. Any such determination by the Tax Court shall have the 
force and effect of a decision of the Tax Court and shall be 
reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section only by the person for whom the services are 
        performed.
          ``(2) Time for filing action.--If the Secretary sends 
        by certified or registered mail notice to the 
        petitioner of a determination by the Secretary 
        described in subsection (a), no proceeding may be 
        initiated under this section with respect to such 
        determination unless the pleading is filed before the 
        91st day after the date of such mailing.
          ``(3) No adverse inference from treatment while 
        action is pending.--If, during the pendency of any 
        proceeding brought under this section, the petitioner 
        changes his treatment for employment tax purposes of 
        any individual whose employment status as an employee 
        is involved in such proceeding (or of any individual 
        holding a substantially similar position) to treatment 
        as an employee, such change shall not be taken into 
        account in the Tax Court's determination under this 
        section.
    ``(c) Small Case Procedures.--
          ``(1) In general.--At the option of the petitioner, 
        concurred in by the Tax Court or a division thereof 
        before the hearing of the case, proceedings under this 
        section may (notwithstanding the provisions of section 
        7453) be conducted subject to the rules of evidence, 
        practice, and procedure applicable under section 7463 
        if the amount of employment taxes placed in dispute is 
        $10,000 or less for each calendar quarter involved.
          ``(2) Finality of decisions.--A decision entered in 
        any proceeding conducted under this subsection shall 
        not be reviewed in any other court and shall not be 
        treated as a precedent for any other case not involving 
        the same petitioner and the same determinations.
          ``(3) Certain rules to apply.--Rules similar to the 
        rules of the last sentence of subsection (a), and 
        subsections (c), (d), and (e), of section 7463 shall 
        apply to proceedings conducted under this subsection.
    ``(d) Special Rules.--
          ``(1) Restrictions on assessment and collection 
        pending action, etc.--The principles of subsections 
        (a), (b), and (d) of section 6213, section 6214(a), 
        section 6503(a), and section 6512 shall apply to 
        proceedings brought under this section in the same 
        manner as if the Secretary's determination described in 
        subsection (a) were a notice of deficiency.
          ``(2) Awarding of costs and certain fees.--Section 
        7430 shall apply to proceedings brought under this 
        section.
    ``(e) Employment Tax.--The term `employment tax' means any 
tax imposed by subtitle C.''
    (b) Conforming Amendments.--
          (1) Subsection (d) of section 6511 is amended by 
        adding at the end the following new paragraph:
          ``(7) Special period of limitation with respect to 
        self-employment tax in certain cases.--If--
                  ``(A) the claim for credit or refund relates 
                to an overpayment of the tax imposed by chapter 
                2 (relating to the tax on self-employment 
                income) attributable to Tax Court determination 
                in a proceeding under section 7435, and
                  ``(B) the allowance of a credit or refund of 
                such overpayment is otherwise prevented by the 
                operation of any law or rule of law other than 
                section 7122 (relating to compromises),
        such credit or refund may be allowed or made if claim 
        therefor is filed on or before the last day of the 
        second year after the calendar year in which such 
        determination becomes final.''
          (2) Sections 7453 and 7481(b) are each amended by 
        striking ``section 7463'' and inserting ``section 
        7435(c) or 7463''.
          (3) The table of sections for subchapter B of chapter 
        76 is amended by striking the last item and inserting 
        the following:

        ``Sec. 7435. Proceedings for determination of employment status.
        ``Sec. 7436. Cross references.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

                      Subtitle D--Other Provisions

SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED TAX PAYMENT 
                    BY PRIVATE FOUNDATIONS.

    (a) In General.--Paragraph (3) of section 6655(g) is 
amended by adding at the end the following new sentence: ``In 
the case of a private foundation, subsection (c)(2) shall be 
applied by substituting `May 15' for `April 15'.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply for purposes of determining underpayments of 
estimated tax for taxable years beginning after the date of the 
enactment of this Act.

SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO RICO INCOME 
                    TAXES FROM SALARIES OF FEDERAL EMPLOYEES.

    (a) In General.--Subsection (c) of section 5517 of title 5, 
United States Code, is amended by striking ``or territory or 
possession'' and inserting ``, territory, possession, or 
commonwealth''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on January 1, 1998.

SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION INCREASING 
                    INTEREST RATE ON LARGE CORPORATE UNDERPAYMENTS.

    (a) General Rule.--Subparagraph (B) of section 6621(c)(2) 
(defining applicable date) is amended by adding at the end the 
following new clause:
                          ``(iii) Exception for letters or 
                        notices involving small amounts.--For 
                        purposes of this paragraph, any letter 
                        or notice shall be disregarded if the 
                        amount of the deficiency or proposed 
                        deficiency (or the assessment or 
                        proposed assessment) set forth in such 
                        letter or notice is not greater than 
                        $100,000 (determined by not taking into 
                        account any interest, penalties, or 
                        additions to tax).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply for purposes of determining interest for periods 
after December 31, 1997.

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

SEC. 1501. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION ACT OF 
                    1996.

    (a) Amendments Related to Subtitle A.--
          (1) Amendment related to section 1116.--Paragraph (1) 
        of section 6050R(c) is amended by striking ``name and 
        address'' and inserting ``name, address, and phone 
        number of the information contact''.
          (2) Amendment to section 1116.--Paragraphs (1) and 
        (2)(C) of section 1116(b) of the Small Business Job 
        Protection Act of 1996 shall each be applied as if the 
        reference to chapter 68 were a reference to chapter 61.
    (b) Amendment Related to Subtitle B.--Subsection (c) of 
section 52 is amended by striking ``targeted jobs credit'' and 
inserting ``work opportunity credit''.
    (c) Amendments Related to Subtitle C.--
          (1) Amendment related to section 1302.--Subparagraph 
        (B) of section 1361(e)(1) is amended by striking 
        ``and'' at the end of clause (i), striking the period 
        at the end of clause (ii) and inserting ``, and'', and 
        adding at the end the following new clause:
                          ``(iii) any charitable remainder 
                        annuity trust or charitable remainder 
                        unitrust (as defined in section 
                        664(d)).''
          (2) Effective date for section 1307.--
                  (A) Notwithstanding section 1317 of the Small 
                Business Job Protection Act of 1996, the 
                amendments made by subsections (a) and (b) of 
                section 1307 of such Act shall apply to 
                determinations made after December 31, 1996.
                  (B) In no event shall the 120-day period 
                referred to in section 1377(b)(1)(B) of the 
                Internal Revenue Code of 1986 (as added by such 
                section 1307) expire before the end of the 120-
                day period beginning on the date of the 
                enactment of this Act.
          (3) Amendment related to section 1308.--Subparagraph 
        (A) of section 1361(b)(3) is amended by striking ``For 
        purposes of this title'' and inserting ``Except as 
        provided in regulations prescribed by the Secretary, 
        for purposes of this title''.
          (4) Amendments related to section 1316.--
                  (A) Paragraph (2) of section 512(e) is 
                amended by striking ``within the meaning of 
                section 1012'' and inserting ``as defined in 
                section 1361(e)(1)(C)''.
                  (B) Paragraph (7) of section 1361(c) is 
                redesignated as paragraph (6).
                  (C) Subparagraph (B) of section 1361(b)(1) is 
                amended by striking ``subsection (c)(7)'' and 
                inserting ``subsection (c)(6)''.
                  (D) Paragraph (1) of section 512(e) is 
                amended by striking ``section 1361(c)(7)'' and 
                inserting ``section 1361(e)(6)''.
    (d) Amendments Related to Subtitle D.--
          (1) Amendments related to section 1421.--
                  (A) Subsection (i) of section 408 is amended 
                in the last sentence by striking ``30 days'' 
                and inserting ``31 days''.
                  (B) Subparagraph (H) of section 408(k)(6) is 
                amended by striking ``if the terms of such 
                pension'' and inserting ``of an employer if the 
                terms of simplified employee pensions of such 
                employer''.
                  (C)(i) Subparagraph (B) of section 408(l)(2) 
                is amended--
                          (I) by inserting ``and the issuer of 
                        an annuity established under such an 
                        arrangement'' after ``under subsection 
                        (p)'', and
                          (II) in clause (i), by inserting ``or 
                        issuer'' after ``trustee''.
                  (ii) Paragraph (2) of section 6693(c) is 
                amended--
                          (I) by inserting ``or issuer'' after 
                        ``trustee'', and
                          (II) in the heading, by inserting 
                        ``and issuer'' after ``trustee''.
                  (D) Subsection (p) of section 408 is amended 
                by adding at the end the following new 
                paragraph:
          ``(8) Coordination with maximum limitation under 
        subsection (a).--In the case of any simple retirement 
        account, subsections (a)(1) and (b)(2) shall be applied 
        by substituting `the sum of the dollar amount in effect 
        under paragraph (2)(A)(ii) of this subsection and the 
        employer contribution required under subparagraph 
        (A)(iii) or (B)(i) of paragraph (2) of this subsection, 
        whichever is applicable' for `$2,000'.''
                  (E) Clause (i) of section 408(p)(2)(D) is 
                amended by adding at the end the following new 
                sentence: ``If only individuals other than 
                employees described in subparagraph (A) or (B) 
                of section 410(b)(3) are eligible to 
                participate in such arrangement, then the 
                preceding sentence shall be applied without 
                regard to any qualified plan in which only 
                employees so described are eligible to 
                participate.''
                  (F) Subparagraph (D) of section 408(p)(2) is 
                amended by adding at the end the following new 
                clause:
                          ``(iii) Grace period.--In the case of 
                        an employer who establishes and 
                        maintains a plan under this subsection 
                        for 1 or more years and who fails to 
                        meet the requirements of this 
                        subparagraph for any subsequent year 
                        due to any acquisition, disposition, or 
                        similar transaction involving another 
                        such employer, rules similar to the 
                        rules of section 410(b)(6)(C) shall 
                        apply for purposes of this 
                        subparagraph.''
                  (G) Paragraph (5) of section 408(p) is 
                amended in the text preceding subparagraph (A) 
                by striking ``simplified'' and inserting 
                ``simple''.
          (2) Amendments related to section 1422.--
                  (A) Clause (ii) of section 401(k)(11)(D) is 
                amended by striking the period and inserting 
                ``if such plan allows only contributions 
                required under this paragraph.''
                  (B) Paragraph (11) of section 401(k) is 
                amended by adding at the end the following new 
                subparagraph:
                  ``(E) Cost-of-living adjustment.--The 
                Secretary shall adjust the $6,000 amount under 
                subparagraph (B)(i)(I) at the same time and in 
                the same manner as under section 
                408(p)(2)(E).''
                  (C) Subparagraph (A) of section 404(a)(3) is 
                amended--
                          (i) in clause (i), by striking ``not 
                        in excess of'' and all that follows and 
                        inserting the following: ``not in 
                        excess of the greater of--
                                  ``(I) 15 percent of the 
                                compensation otherwise paid or 
                                accrued during the taxable year 
                                to the beneficiaries under the 
                                stock bonus or profit-sharing 
                                plan, or
                                  ``(II) the amount such 
                                employer is required to 
                                contribute to such trust under 
                                section 401(k)(11) for such 
                                year.'', and
                          (ii) in clause (ii), by striking ``15 
                        percent'' and all that follows and 
                        inserting the following ``the amount 
                        described in subclause (I) or (II) of 
                        clause (i), whichever is greater, with 
                        respect to such taxable year.''
                  (D) Subparagraph (B) of section 401(k)(11) is 
                amended by adding at the end the following new 
                clause:
                          ``(iii) Administrative 
                        requirements.--
                                  ``(I) In general.--Rules 
                                similar to the rules of 
                                subparagraphs (B) and (C) of 
                                section 408(p)(5) shall apply 
                                for purposes of this 
                                subparagraph.
                                  ``(II) Notice of election 
                                period.--The requirements of 
                                this subparagraph shall not be 
                                treated as met with respect to 
                                any year unless the employer 
                                notifies each employee eligible 
                                to participate, within a 
                                reasonable period of time 
                                before the 60th day before the 
                                beginning of such year (and, 
                                for the first year the employee 
                                is so eligible, the 60th day 
                                before the first day such 
                                employee is so eligible), of 
                                the rules similar to the rules 
                                of section 408(p)(5)(C) which 
                                apply by reason of subclause 
                                (I).''
          (3) Amendment related to section 1433.--The heading 
        of paragraph (11) of section 401(m) is amended by 
        striking ``Alternative'' and inserting ``Additional 
        alternative''.
          (4) Amendment related to section 1462.--The paragraph 
        (7) of section 414(q) added by section 1462 of the 
        Small Business Job Protection Act of 1996 is 
        redesignated as paragraph (9).
          (5) Clarification of section 1450.--
                  (A) Section 403(b)(11) of the Internal 
                Revenue Code of 1986 shall not apply with 
                respect to a distribution from a contract 
                described in section 1450(b)(1) of such Act to 
                the extent that such distribution is not 
                includible in income by reason of section 
                403(b)(8) of such Code (determined after the 
                application of section 1450(b)(2) of such Act).
                  (B) This paragraph shall apply as if included 
                in section 1450 of the Small Business Job 
                Protection Act of 1996.
    (e) Amendment Related to Subtitle E.--Subparagraph (A) of 
section 956(b)(1) is amended by inserting ``to the extent such 
amount was accumulated in prior taxable years'' after ``section 
316(a)(1)''.
    (f) Amendments Related to Subtitle F.--
          (1) Amendments related to section 1601.--
                  (A) The heading of section 30A is amended to 
                read as follows:

``SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.''

                  (B) The table of sections for subpart B of 
                part IV of subchapter A of chapter 1 is amended 
                in the item relating to section 30A by striking 
                ``Puerto Rican'' and inserting ``Puerto Rico''.
                  (C) Paragraph (1) of section 55(c) is amended 
                by striking ``Puerto Rican'' and inserting 
                ``Puerto Rico''.
          (2) Amendments related to section 1606.--
                  (A) Clause (ii) of section 9503(c)(2)(A) is 
                amended by striking ``(or with respect to 
                qualified diesel-powered highway vehicles 
                purchased before January 1, 1999)''.
                  (B) Subparagraph (A) of section 9503(e)(5) is 
                amended by striking ``; except that'' and all 
                that follows and inserting a period.
          (3) Amendments related to section 1607.--
                  (A) Subsection (f) of section 4001 (relating 
                to phasedown of tax on luxury passenger 
                automobiles) is amended--
                          (i) by inserting ``and section 
                        4003(a)'' after ``subsection (a)'', and
                          (ii) by inserting ``, each place it 
                        appears,'' before ``the percentage''.
                  (B) Subsection (g) of section 4001 (relating 
                to termination) is amended by striking ``tax 
                imposed by this section'' and inserting ``taxes 
                imposed by this section and section 4003'' and 
                by striking ``or use'' and inserting ``, use, 
                or installation''.
          (4) Amendments related to section 1609.--
                  (A) Subsection (l) of section 4041 is 
                amended--
                          (i) by inserting ``or a fixed-wing 
                        aircraft'' after ``helicopter'', and
                          (ii) in the heading, by striking 
                        ``Helicopter''.
                  (B) The last sentence of section 4041(a)(2) 
                is amended by striking ``section 
                4081(a)(2)(A)'' and inserting ``section 
                4081(a)(2)(A)(i)''.
                  (C) Subsection (b) of section 4092 is amended 
                by striking ``section 4041(c)(4)'' and 
                inserting ``section 4041(c)(2)''.
                  (D) Subsection (g) of section 4261 (as 
                redesignated by title X) is amended by 
                inserting ``on that flight'' after 
                ``dedicated''.
                  (E) Paragraph (1) of section 1609(h) of such 
                Act is amended by striking ``paragraph 
                (3)(A)(i)'' and inserting ``paragraph (3)(A)''.
                  (F) Paragraph (4) of section 1609(h) of such 
                Act is amended by inserting before the period 
                ``or exclusively for the use described in 
                section 4092(b) of such Code''.
          (5) Amendments related to section 1616.--
                  (A) Subparagraph (A) of section 593(e)(1) is 
                amended by inserting ``(and, in the case of an 
                S corporation, the accumulated adjustments 
                account, as defined in section 1368(e)(1))'' 
                after ``1951,''.
                  (B) Paragraph (7) of section 1374(d) is 
                amended by adding at the end the following new 
                sentence: ``For purposes of applying this 
                section to any amount includible in income by 
                reason of section 593(e), the preceding 
                sentence shall be applied without regard to the 
                phrase `10-year'.''
          (6) Amendments related to section 1621.--
                  (A) Subparagraph (A) of section 860L(b)(1) is 
                amended in the text preceding clause (i) by 
                striking ``after the startup date'' and 
                inserting ``on or after the startup date''.
                  (B) Paragraph (2) of section 860L(d) is 
                amended by striking ``section 860I(c)(2)'' and 
                inserting ``section 860I(b)(2)''.
                  (C) Subparagraph (B) of section 860L(e)(2) is 
                amended by inserting ``other than foreclosure 
                property'' after ``any permitted asset''.
                  (D) Subparagraph (A) of section 860L(e)(3) is 
                amended by striking ``if the FASIT'' and all 
                that follows and inserting the following new 
                flush text after clause (ii):
                ``if the FASIT were treated as a REMIC and 
                permitted assets (other than cash or cash 
                equivalents) were treated as qualified 
                mortgages.''
                  (E)(i) Paragraph (3) of section 860L(e) is 
                amended by adding at the end the following new 
                subparagraph:
                  ``(D) Income from dispositions of former 
                hedge assets.--Paragraph (2)(A) shall not apply 
                to income derived from the disposition of--
                          ``(i) an asset which was described in 
                        subsection (c)(1)(D) when first 
                        acquired by the FASIT but on the date 
                        of such disposition was no longer 
                        described in subsection (c)(1)(D)(ii), 
                        or
                          ``(ii) a contract right to acquire an 
                        asset described in clause (i).''
                  (ii) Subparagraph (A) of section 860L(e)(2) 
                is amended by inserting ``except as provided in 
                paragraph (3),'' before ``the receipt''.
    (g) Amendments Related to Subtitle G.--
          (1) Extension of period for claiming refunds for 
        alcohol fuels.--Notwithstanding section 6427(i)(3)(C) 
        of the Internal Revenue Code of 1986, a claim filed 
        under section 6427(f) of such Code for any period after 
        September 30, 1995, and before October 1, 1996, shall 
        be treated as timely filed if filed before the 60th day 
        after the date of the enactment of this Act.
          (2) Amendments to sections 1703 and 1704.--Sections 
        1703(n)(8) and 1704(j)(4)(B) of the Small Business Job 
        Protection Act of 1996 shall each be applied as if such 
        sections referred to section 1702 instead of section 
        1602.
    (h) Amendments Related to Subtitle H.--
          (1) Amendments related to section 1806.--
                  (A) Subparagraph (B) of section 529(e)(1) is 
                amended by striking ``subsection (c)(2)(C)'' 
                and inserting ``subsection (c)(3)(C)''.
                  (B) Subparagraph (C) of section 529(e)(1) is 
                amended by inserting ``(or agency or 
                instrumentality thereof)'' after ``local 
                government''.
                  (C) Paragraph (2) of section 1806(c) of the 
                Small Business Job Protection Act of 1996 is 
                amended by striking so much of the first 
                sentence as follows subparagraph (B)(ii) and 
                inserting the following:
        ``then such program (as in effect on August 20, 1996) 
        shall be treated as a qualified State tuition program 
        with respect to contributions (and earnings allocable 
        thereto) pursuant to contracts entered into under such 
        program before the first date on which such program 
        meets such requirements (determined without regard to 
        this paragraph) and the provisions of such program (as 
        so in effect) shall apply in lieu of section 529(b) of 
        the Internal Revenue Code of 1986 with respect to such 
        contributions and earnings.''
          (2) Amendments related to section 1807.--
                  (A) Paragraph (2) of section 23(a) is amended 
                to read as follows:
          ``(2) Year credit allowed.--The credit under 
        paragraph (1) with respect to any expense shall be 
        allowed--
                  ``(A) in the case of any expense paid or 
                incurred before the taxable year in which such 
                adoption becomes final, for the taxable year 
                following the taxable year during which such 
                expense is paid or incurred, and
                  ``(B) in the case of an expense paid or 
                incurred during or after the taxable year in 
                which such adoption becomes final, for the 
                taxable year in which such expense is paid or 
                incurred.''
                  (B) Subparagraph (B) of section 23(b)(2) is 
                amended by striking ``determined--'' and all 
                that follows and inserting the following: 
                ``determined without regard to sections 911, 
                931, and 933.''
                  (C) Paragraph (1) of section 137(b) (relating 
                to adoption assistance programs) is amended by 
                striking ``amount excludable from gross 
                income'' and inserting ``of the amounts paid or 
                expenses incurred which may be taken into 
                account''.
                  (D)(i) Subparagraph (C) of section 414(n)(3) 
                is amended by inserting ``137,'' after 
                ``132,''.
                  (ii) Paragraph (2) of section 414(t) is 
                amended by inserting ``137,'' after ``132,''.
                  (iii) Paragraph (1) of section 6039D(d) is 
                amended by striking ``or 129'' and inserting 
                ``129, or 137''.
    (i) Amendments Related to Subtitle I.--
          (1) Amendment related to section 1901.--Subsection 
        (b) of section 6048 is amended in the heading by 
        striking ``Grantor'' and inserting ``Owner''.
          (2) Amendments related to section 1903.--
                  Clauses (ii) and (iii) of section 
                679(a)(3)(C) are each amended by inserting ``, 
                owner,'' after ``grantor''.
          (3) Amendments related to section 1907.--
                  (A) Clause (ii) of section 7701(a)(30)(E) is 
                amended by striking ``fiduciaries'' and 
                inserting ``persons''.
                  (B) Subsection (b) of section 641 is amended 
                by adding at the end the following new 
                sentence: ``For purposes of this subsection, a 
                foreign trust or foreign estate shall be 
                treated as a nonresident alien individual who 
                is not present in the United States at any 
                time.''
          (4) Effective Date Related to Subtitle I.--The 
        Secretary of the Treasury may by regulations or other 
        administrative guidance provide that the amendments 
        made by section 1907(a) of the Small Business Job 
        Protection Act of 1996 shall not apply to a trust with 
        respect to a reasonable period beginning on the date of 
        the enactment of such Act, if--
                  (A) such trust is in existence on August 20, 
                1996, and is a United States person for 
                purposes of the Internal Revenue Code of 1986 
                on such date (determined without regard to such 
                amendments),
                  (B) no election is in effect under section 
                1907(a)(3)(B) of such Act with respect to such 
                trust,
                  (C) before the expiration of such reasonable 
                period, such trust makes the modifications 
                necessary to be treated as a United States 
                person for purposes of such Code (determined 
                with regard to such amendments), and
                  (D) such trust meets such other conditions as 
                the Secretary may require.
    (j) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall take effect 
        as if included in the provisions of the Small Business 
        Job Protection Act of 1996 to which they relate.
          (2) Certain administrative requirements with respect 
        to certain pension plans.--The amendment made by 
        subsection (d)(2)(D) shall apply to calendar years 
        beginning after the date of the enactment of this Act.

SEC. 1502. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY AND 
                    ACCOUNTABILITY ACT OF 1996.

    (a) Amendments Related to Section 301.--
          (1) Paragraph (2) of section 26(b) is amended by 
        striking ``and'' at the end of subparagraph (N), by 
        striking the period at the end of subparagraph (O) and 
        inserting ``, and'', and by adding at the end the 
        following new subparagraph:
                  ``(P) section 220(f)(4) (relating to 
                additional tax on medical savings account 
                distributions not used for qualified medical 
                expenses).''
          (2) Paragraph (3) of section 220(c) is amended by 
        striking subparagraph (A) and redesignating 
        subparagraphs (B) through (D) as subparagraphs (A) 
        through (C), respectively.
          (3) Subparagraph (C) of section 220(d)(2) is amended 
        by striking ``an eligible individual'' and inserting 
        ``described in clauses (i) and (ii) of subsection 
        (c)(1)(A)''.
          (4) Subsection (a) of section 6693 is amended by 
        adding at the end the following new sentence:
``This subsection shall not apply to any report which is an 
information return described in section 6724(d)(1)(C)(i) or a 
payee statement described in section 6724(d)(2)(X).''
          (5) Paragraph (4) of section 4975(d) is amended by 
        striking ``if, with respect to such transaction'' and 
        all that follows and inserting the following: ``if 
        section 220(e)(2) applies to such transaction.''
    (b) Amendment Related to Section 321.--Subparagraph (B) of 
section 7702B(c)(2) is amended in the last sentence by 
inserting ``described in subparagraph (A)(i)'' after 
``chronically ill individual''.
    (c) Amendment Related to Section 322.--Subparagraph (B) of 
section 162(l)(2) is amended by adding at the end the following 
new sentence: ``The preceding sentence shall be applied 
separately with respect to--
                          ``(i) plans which include coverage 
                        for qualified long-term care services 
                        (as defined in section 7702B(c)) or are 
                        qualified long-term care insurance 
                        contracts (as defined in section 
                        7702B(b)), and
                          ``(ii) plans which do not include 
                        such coverage and are not such 
                        contracts.''
    (d) Amendments Related to Section 323.--
          (1) Paragraph (1) of section 6050Q(b) is amended by 
        inserting ``, address, and phone number of the 
        information contact'' after ``name''.
          (2)(A) Paragraph (2) of section 6724(d) is amended by 
        striking so much as follows subparagraph (Q) and 
        precedes the last sentence, and inserting the following 
        new subparagraphs:
                  ``(R) section 6050R(c) (relating to returns 
                relating to certain purchases of fish),
                  ``(S) section 6051 (relating to receipts for 
                employees),
                  ``(T) section 6052(b) (relating to returns 
                regarding payment of wages in the form of 
                group-term life insurance),
                  ``(U) section 6053(b) or (c) (relating to 
                reports of tips),
                  ``(V) section 6048(b)(1)(B) (relating to 
                foreign trust reporting requirements),
                  ``(W) section 4093(c)(4)(B) (relating to 
                certain purchasers of diesel and aviation 
                fuels),
                  ``(X) section 408(i) (relating to reports 
                with respect to individual retirement plans) to 
                any person other than the Secretary with 
                respect to the amount of payments made to such 
                person, or
                  ``(Y) section 6047(d) (relating to reports by 
                plan administrators) to any person other than 
                the Secretary with respect to the amount of 
                payments made to such person.''
          (B) Subsection (e) of section 6652 is amended in the 
        last sentence by striking ``section 6724(d)(2)(X)'' and 
        inserting ``section 6724(d)(2)(Y)''.
    (e) Amendment Related to Section 325.--Clauses (ii) and 
(iii) of section 7702B(g)(4)(B) are each amended by striking 
``Secretary'' and inserting ``appropriate State regulatory 
agency''.
    (f) Amendments Related to Section 501.--
          (1) Paragraph (4) of section 264(a) is amended by 
        striking subparagraph (A) and all that follows through 
        ``by the taxpayer.'' and inserting the following:
                  ``(A) is or was an officer or employee, or
                  ``(B) is or was financially interested in,
        any trade or business carried on (currently or 
        formerly) by the taxpayer.''
          (2) The last 2 sentences of section 264(d)(2)(B)(ii) 
        are amended to read as follows:
                        ``For purposes of subclause (II), the 
                        term `applicable period' means the 12-
                        month period beginning on the date the 
                        policy is issued (and each successive 
                        12-month period thereafter) unless the 
                        taxpayer elects a number of months (not 
                        greater than 12) other than such 12-
                        month period to be its applicable 
                        period. Such an election shall be made 
                        not later than the 90th day after the 
                        date of the enactment of this sentence 
                        and, if made, shall apply to the 
                        taxpayer's first taxable year ending on 
                        or after October 13, 1995, and all 
                        subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
          (3) Subparagraph (B) of section 264(d)(4) is amended 
        by striking ``the employer'' and inserting ``the 
        taxpayer''.
          (4) Subsection (c) of section 501 of the Health 
        Insurance Portability and Accountability Act of 1996 is 
        amended by striking paragraph (3).
          (5) Paragraph (2) of section 501(d) of such Act is 
        amended by striking ``no additional premiums'' and all 
        that follows and inserting the following: ``a lapse 
        occurring by reason of no additional premiums being 
        received under the contract after October 13, 1995.''
    (g) Amendments Related to Section 511.--
          (1) Subparagraph (B) of section 877(d)(2) is amended 
        by striking ``the 10-year period described in 
        subsection (a)'' and inserting ``the 10-year period 
        beginning on the date the individual loses United 
        States citizenship''.
          (2) Subparagraph (D) of section 877(d)(2) is amended 
        by adding at the end the following new sentence: ``In 
        the case of any exchange occurring during such 5 years, 
        any gain recognized under this subparagraph shall be 
        recognized immediately after such loss of 
        citizenship.''
          (3) Paragraph (3) of section 877(d) is amended by 
        inserting ``and the period applicable under paragraph 
        (2)'' after ``subsection (a)''.
          (4) Subparagraph (A) of section 877(d)(4) is 
        amended--
                  (A) by inserting ``during the 10-year period 
                beginning on the date the individual loses 
                United States citizenship'' after ``contributes 
                property'' in clause (i),
                  (B) by inserting ``immediately before such 
                contribution'' after ``from such property'', 
                and
                  (C) by striking ``during the 10-year period 
                referred to in subsection (a),''.
          (5) Subparagraph (C) of section 2501(a)(3) is amended 
        by striking ``decedent'' and inserting ``donor''.
          (6)(A) Clause (i) of section 2107(c)(2)(A) is amended 
        by striking ``such foreign country in respect of 
        property included in the gross estate'' and inserting 
        ``such foreign country''.
          (B) Subparagraph (C) of section 2107(c)(2) is amended 
        to read as follows:
                  ``(C) Proportionate share.--In the case of 
                property which is included in the gross estate 
                solely by reason of subsection (b), such 
                property's proportionate share is the 
                percentage which the value of such property 
                bears to the total value of all property 
                included in the gross estate solely by reason 
                of subsection (b).''.
    (h) Amendments Related to Section 512.--
          (1) Subpart A of part III of subchapter A of chapter 
        61 is amended by redesignating the section 6039F added 
        by section 512 of the Health Insurance Portability and 
        Accountability Act of 1996 as section 6039G and by 
        moving such section 6039G to immediately after the 
        section 6039F added by section 1905 of the Small 
        Business Job Protection Act of 1996.
          (2) The table of sections for subpart A of part III 
        of subchapter A of chapter 61 is amended by striking 
        the item relating to the section 6039F related to 
        information on individuals losing United States 
        citizenship and inserting after the item relating to 
        the section 6039F related to notice of large gifts 
        received from foreign persons the following new item:

        ``Sec. 6039G. Information on individuals losing United States 
                  citizenship.''

          (3) Paragraph (1) of section 877(e) is amended by 
        striking ``6039F'' and inserting ``6039G''.
    (i) Effective Date.--The amendments made by this section 
shall take effect as if included in the provisions of the 
Health Insurance Portability and Accountability Act of 1996 to 
which such amendments relate.

SEC. 1503. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.

    (a) Amendment Related to Section 1311.--Subsection (b) of 
section 4962 is amended by striking ``subchapter A or C'' and 
inserting ``subchapter A, C, or D''.
    (b) Amendments Related to Section 1312.--
          (1)(A) Paragraph (10) of section 6033(b) is amended 
        by striking all that precedes subparagraph (A) and 
        inserting the following:
          ``(10) the respective amounts (if any) of the taxes 
        imposed on the organization, or any organization 
        manager of the organization, during the taxable year 
        under any of the following provisions (and the 
        respective amounts (if any) of reimbursements paid by 
        the organization during the taxable year with respect 
        to taxes imposed on any such organization manager under 
        any of such provisions):''.
          (B) Subparagraph (C) of section 6033(b)(10) is 
        amended by adding at the end the following: ``except to 
        the extent that, by reason of section 4962, the taxes 
        imposed under such section are not required to be paid 
        or are credited or refunded,''.
          (2) Paragraph (11) of section 6033(b) is amended to 
        read as follows:
          ``(11) the respective amounts (if any) of--
                  ``(A) the taxes imposed with respect to the 
                organization on any organization manager, or 
                any disqualified person, during the taxable 
                year under section 4958 (relating to taxes on 
                private excess benefit from certain charitable 
                organizations), and
                  ``(B) reimbursements paid by the organization 
                during the taxable year with respect to taxes 
                imposed under such section,
        except to the extent that, by reason of section 4962, 
        the taxes imposed under such section are not required 
        to be paid or are credited or refunded,''.
    (c) Effective Date.--The amendments made by this section 
shall take effect as if included in the provisions of the 
Taxpayer Bill of Rights 2 to which such amendments relate.

SEC. 1504. MISCELLANEOUS PROVISIONS.

    (a) Amendments Related to Energy Policy Act of 1992.--
          (1) Paragraph (1) of section 263(a) is amended by 
        striking ``or'' at the end of subparagraph (F), by 
        striking the period at the end of subparagraph (G) and 
        inserting ``; or'', and by adding at the end the 
        following new subparagraph:
                  ``(H) expenditures for which a deduction is 
                allowed under section 179A.''
          (2) Subparagraph (B) of section 312(k)(3) is 
        amended--
                  (A) by striking ``179'' in the heading and 
                the first place it appears in the text and 
                inserting ``179 or 179A'', and
                  (B) by striking ``179'' the last place it 
                appears and inserting ``179 or 179A, as the 
                case may be''.
          (3) Paragraphs (2)(C) and (3)(C) of section 1245(a) 
        are each amended by inserting ``179A,'' after ``179,''.
          (4) The amendments made by this subsection shall take 
        effect as if included in the amendments made by section 
        1913 of the Energy Policy Act of 1992.
    (b) Amendments Related to Uruguay Round Agreements Act.--
          (1) Paragraph (1) of section 6621(a) is amended in 
        the last sentence by striking ``subsection (c)(3))'' 
        and inserting ``subsection (c)(3), applied by 
        substituting `overpayment' for `underpayment')''.
          (2) Subclause (II) of section 412(m)(5)(E)(ii) is 
        amended by striking ``clause (i)'' and inserting 
        ``subclause (I)''.
          (3) Subparagraph (A) of section 767(d)(3) of the 
        Uruguay Round Agreements Act is amended in the last 
        sentence by striking ``(except that'' and all that 
        follows through ``into account)''.
          (4) The amendments made by this subsection shall take 
        effect as if included in the sections of the Uruguay 
        Round Agreements Act to which they relate.
    (c) Amendment Related to Omnibus Budget Reconciliation Act 
of 1993.--
          (1) Paragraph (6) of section 168(j) (defining Indian 
        reservation) is amended by adding at the end the 
        following new flush sentence:
        ``For purposes of the preceding sentence, such section 
        3(d) shall be applied by treating the term `former 
        Indian reservations in Oklahoma' as including only 
        lands which are within the jurisdictional area of an 
        Oklahoma Indian tribe (as determined by the Secretary 
        of the Interior) and are recognized by such Secretary 
        as eligible for trust land status under 25 CFR Part 151 
        (as in effect on the date of the enactment of this 
        sentence).''
          (2) The amendment made by paragraph (1) shall apply 
        as if included in the amendments made by section 13321 
        of the Omnibus Budget Reconciliation Act of 1993, 
        except that such amendment shall not apply--
                  (A) with respect to property (with an 
                applicable recovery period under section 168(j) 
                of the Internal Revenue Code of 1986 of 6 years 
                or less) held by the taxpayer if the taxpayer 
                claimed the benefits of section 168(j) of such 
                Code with respect to such property on a return 
                filed before March 18, 1997, but only if such 
                return is the first return of tax filed for the 
                taxable year in which such property was placed 
                in service, or
                  (B) with respect to wages for which the 
                taxpayer claimed the benefits of section 45A of 
                such Code for a taxable year on a return filed 
                before March 18, 1997, but only if such return 
                was the first return of tax filed for such 
                taxable year.
    (d) Amendment Related to Tax Reform Act of 1986.--Paragraph 
(3) of section 1059(d) is amended by striking ``subsection 
(a)(2)'' and inserting ``subsection (a)''.
    (e) Amendment Related to Tax Reform Act of 1984.--
          (1) Section 267(f) is amended by adding at the end 
        the following new paragraph:
          ``(4) Determination of relationship resulting in 
        disallowance of loss, for purposes of other 
        provisions.--For purposes of any other section of this 
        title which refers to a relationship which would result 
        in a disallowance of losses under this section, 
        deferral under paragraph (2) shall be treated as 
        disallowance.''
          (2) Effective Date.--The amendment made by paragraph 
        (1) shall take effect as if included in section 174(b) 
        of the Tax Reform Act of 1984.
    (f) Clerical Amendments.--
          (1) Clause (iii) of section 163(j)(2)(B) is amended 
        by striking ``clause (i)'' and inserting ``clause 
        (ii)''.
          (2) Paragraph (1) of section 665(d) is amended in the 
        last sentence by striking ``or 669(d) and (e)''.
          (3) Subsection (g) of section 1441 (relating to cross 
        reference) is amended by striking ``one-half'' and 
        inserting ``85 percent''.
          (4) Paragraph (1) of section 2523(g) is amended by 
        striking ``qualified remainder trust'' and inserting 
        ``qualified charitable remainder trust''.
          (5) Subsection (d) of section 9502 is amended by 
        redesignating the paragraph added by section 806 of the 
        Federal Aviation Reauthorization Act of 1996 as 
        paragraph (6).
             Statement of the House Committee on the Budget

               ON THE REVENUE RECONCILIATION ACT OF 1997

                                ------                                


    To serve the American people, balancing the Federal budget 
is only half the job. Congress and the administration must, at 
the same time, let Americans keep more of their own money--to 
save, to invest, and to make their own choices about how best 
to use the resources they have earned.
    That is the principle behind this legislation, the Revenue 
Reconciliation Act of 1997. This bill and its twin measure, the 
Balanced Budget Act of 1997, seek jointly to fulfill the 
reconciliation directives of the Concurrent Resolution on the 
Budget for Fiscal Year 1997. That resolution embraced the 
Bipartisan Budget Agreement, between the Congressional 
leadership and the administration, to balance the Federal 
budget by 2002 and provide much-needed tax relief for America's 
middle-income working families.
    Key components of this tax package include the following:


  - A total of $85 billion in net tax relief over the next 5 
        years and $250 billion over the next 10 years.

  - A tax credit, reaching $500 per child, that will benefit 41 
        million children of America's families.

  - Roughly $35 billion over 5 years in post-secondary 
        education tax incentives.

  - Broad-based relief from capital gains taxes to promote 
        capital formation and, most important, job creation.

  - Expansion of individual retirement accounts [IRA's] to 
        encourage personal saving.

  - Significant reductions in death taxes.

  - Reform of corporate taxes through the repeal of roughly $14 
        billion over 5 years in inappropriate corporate tax 
        benefits.

    This tax package represents a good faith effort to meet the 
terms of the Bipartisan Budget Agreement. Most important, 
though, it meets the needs of American taxpayers. It also 
proceeds from an unalterable truth: the people who know best 
how to spend their money are the people themselves.
                       Committee on Ways and Means,
                                  House of Representatives,
                                     Washington, DC, June 14, 1997.
Hon. John R. Kasich,
Chairman, Committee on the Budget, Washington, DC.
    Dear Mr. Chairman: On June 13, 1997, the Committee on Ways 
and Means, pursuant to H. Con. Res. 84, the Concurrent 
Resolution on the Budget for Fiscal Year 1998, ordered 
favorably reported, as amended, its budget reconciliation 
revenue recommendations, to the Committee on Budget by a 
recorded vote of 22-16. Accordingly, I am now transmitting 
these recommendations to you.
    Enclosed are the legislative language, explanatory report 
language, estimates of the Congressional Budget Office and the 
Joint Committee on Taxation.
    Please feel free to contact me or Pete Singleton if you 
have any questions. With best personal regards,
            Sincerely,
                                               Bill Archer,
                                                          Chairman.
    Enclosures.
                            I. INTRODUCTION

                         A. Purpose and Summary

                                Purpose

    The revenue reconciliation provisions included in the 
Committee's budget reconciliation recommendations provide 
income and estate and gift tax relief to America's families, 
educational tax benefits, savings and investment incentives, 
estate and gift tax relief to closely-held businesses, 
extension of certain expiring tax provisions, District of 
Columbia tax incentives, welfare-to-work tax credit, various 
miscellaneous tax provisions, revenue-offset provisions 
(including a 10-year extension of financing of the Airport and 
Airway Trust Fund and corporate and other tax reforms), 
numerous tax simplification provisions (most of which have been 
previously approved by the Committee and the Congress in the 
Balanced Budget Act of 1995 in the 104th Congress, but not 
enacted), needed technical corrections to recently-passed tax 
legislation, and an increase in the public debt limit as 
projected under the Balanced Budget Agreement and the Fiscal 
Year 1998 Budget Resolution.

                                Summary

    The following is a brief summary of the revenue 
reconciliation provisions of the bill.
Title I--Child and Dependent Care Tax Credits; Health Care for Children
    Child tax credit for children under the age of 17--The bill 
allows taxpayers a maximum nonrefundable tax credit of $500 
($400 for taxable year 1998) for each qualifying child under 
the age of 17. For taxpayers with modified AGI in excess of 
certain thresholds, the sum of the otherwise allowable child 
credit and the otherwise allowable dependent care credit is 
phased out. Beginning after 2001, the otherwise allowable child 
credit is reduced by one-half of the amount of the taxpayer's 
dependent care credit. Generally, the child tax credit is 
effective for taxable years beginning after December 31, 1997.
    Dependent care credit--The present-law credit is indexed 
for inflation. The credit is also phased out in conjunction 
with the child tax credit for high-income taxpayers. The 
provision is effective for taxable years beginning after 
December 31, 1997.
    Expand definition of high-risk individuals with respect to 
tax-exempt State-sponsored organizations providing health 
coverage--The bill expands the definition of high-risk 
individuals to include a child of an individual who meets the 
present-law definition of a high-risk individual, subject to 
certain requirements. The provision is effective for taxable 
years beginning after December 31, 1997.
Title II--Education Tax Incentives
    HOPE credit for higher education tuition expenses--
Individual taxpayers are allowed to claim a nonrefundable HOPE 
credit against Federal income taxes up to $1,500 per student 
for 50 percent of qualified tuition and related expenses (i.e., 
tuition, fees, and books but not room and board) paid for the 
first two years of post-secondary education for the taxpayer, 
the taxpayer's spouse, or a dependent. The credit is phased out 
for taxpayers with modified AGI between $40,000 and $50,000 
($80,000 and $100,000 for joint returns). Eligible students 
must be enrolled on at least a half-time basis at a college, 
university, or certain vocational schools, but need not 
maintain any specific grade point average. The credit is not 
available with respect to a student if a taxpayer elects to 
claim the proposed deduction for qualified higher education 
expenses (described below) with respect to that student for the 
taxable year. The provision is effective for expenses paid 
after December 31, 1997, for education furnished in academic 
periods beginning after such date.
    Deduction for qualified higher education expenses and tax 
treatment of qualified tuition programs and education 
investment accounts--Individual taxpayers are allowed a 
deduction of up to $10,000 per student per year for qualified 
higher education expenses (i.e., tuition, fees, books, 
supplies, and room and board) paid by the taxpayer during the 
taxable year for education furnished to the taxpayer, the 
taxpayer's spouse, or a dependent. The deduction is allowed 
only to the extent that the taxpayer is required to include in 
gross income for the taxable year earnings distributed from a 
qualified tuition program (which is a tax-exempt prepaid 
tuition program maintained by a State or one or more private 
colleges) or an education investment account (which is a tax-
exempt trust established exclusively for the purpose of paying 
qualified higher education expenses of the account holder). The 
deduction is allowed regardless of whether or not the taxpayer 
otherwise itemizes deductions or claims the standard deduction. 
The deduction is not available, however, with respect to a 
student if the proposed HOPE credit (described above) is 
claimed with respect to that student for the taxable year. 
Aggregate deductions allowed for a student for all taxable 
years are limited to $40,000. The deduction is not available 
for graduate-level courses. Contributions to education 
investment accounts and qualified tuition programs not operated 
by a State may not exceed $5,000 per beneficiary per year (with 
an aggregate contribution limit of $50,000 per beneficiary for 
all years). The deduction is available for qualified higher 
education expenses paid after December 31, 1997, for education 
furnished in academic periods beginning after such date.
    Phase out qualified tuition reduction exclusion--The bill 
phases out the special rule in section 117(d) that excludes a 
qualified tuition reduction provided to an employee of an 
educational organization from gross income. The excludable 
percentage is 80 percent in 1998 and is reduced by 20 percent 
each year thereafter; no exclusion is permitted after 2001.
    Penalty free IRA withdrawals for education expenses--The 
bill provides that individuals may make penalty-free 
withdrawals from their IRAs to pay for the undergraduate and 
graduate higher education expenses of themselves, their 
spouses, theirchildren and grandchildren or the children or 
grandchildren of their spouses.
    Tax credit for certain tutoring expenses--The bill provides 
a nonrefundable tax credit equal to the lesser of (1) $150 or 
(2) 50 percent of the costs of supplementary educational 
assistance provided to elementary or secondary school students. 
The credit is phased out for taxpayers with adjusted gross 
income in excess of certain limits The credit is available for 
taxable years beginning after December 31, 1997.
    Exclusion for employer-provided educational assistance--The 
bill extends the exclusion for employer-provided educational 
assistance to courses beginning before January 1, 1998.
    Modification of $150 million limit on qualified 510(c)(3) 
non-hospital bonds--The $150 million limit is increased 
annually in $10 million increments until it reaches $200 
million.
    Enhanced deduction for corporate contributions of computer 
technology and equipment--The bill provides that corporate 
contributions of computer technology and equipment to be used 
for educational purposes in any of grades K-12 qualifies for 
the augmented contribution deduction currently available under 
Code sections 170(e)(3) and 170(e)(4). The provision is 
effective for contributions made in taxable years beginning 
after 1997.
    Treatment of cancellation of certain student loans--The 
bill expands present-law section 108(f) so that an individual's 
gross income does not include forgiveness of loans made by tax-
exempt charitable organizations provided the loan recipient's 
work satisfies a community benefit requirement. Section 108(f) 
also is expanded to cover forgiveness of certain Federal direct 
student loans for which an income-contingent repayment option 
has been selected.

Title III--Savings and Investment Tax Incentives

    American Dream IRAs--The bill replaces present-law 
nondeductible IRAs with new American Dream IRAs (``AD IRAs'') 
to which all individuals may make nondeductible contributions 
of up to $2,000 annually. Contributions to an AD IRA are in 
addition to any contributions that can be made to a deductible 
IRA under the present-law rules. No income limitations apply to 
AD IRAs. Withdrawals from an AD IRA are not includible in 
income if the withdrawal (1) is made after the 5-taxable year 
period beginning with the first taxable year in which the 
individual made a contribution to an AD IRA, and (2) is (a) 
made on or after the date on which the individual attains age 
59\1/2\, (b) made to a beneficiary (or to the individual's 
estate) on or after the death of the individual, (c) 
attributable to the individual's being disabled, or (d) for 
first-time homebuyer expenses.
    Capital gains provisions--The bill reduces the maximum rate 
of capital gains of individuals from 28 percent to 20 percent 
(10 percent for gains otherwise taxed at the 15-percent rate), 
effective May 7, 1997. This maximum rate applies both for the 
regular tax and the alternative minimum tax. A 26-percent 
maximum rate is provided for gain attributable to real estate 
depreciation. The maximum rate for gain attributable to 
collectibles remains at 28 percent. For certain assets acquired 
after December 31, 2000, and held 3 years or more, the cost 
basis may be indexed for inflation. The bill generally provides 
that $250,000 ($500,000 in the case of a married couple) of 
gain from the sale of a principal residence is exempt from tax, 
for sales after May 6, 1997. The bill reduces the corporate 
capital gains tax on assets held more than 8 years to 30 
percent (32 percent in 1998 and 31 percent in 1999). The bill 
modifies the ``110 percent of last year's liability'' safe 
harbor of the individual estimated tax to a ``109 percent of 
last year's liability'' safe harbor for 1997 estimated tax 
payments.

Title IV--Alternative Minimum Tax Provisions

    Modifications to the alternative minimum tax (``AMT'')--The 
bill (1) increases and indexes (after 2007) the AMT exemption 
amounts applicable to individuals, (2) repeals the depreciation 
adjustment for property placed in service after 1998, and (3) 
repeals the corporate AMT for small business for taxable years 
beginning after 1997.
     Minimum tax installment sales of farmers--The bill repeals 
the minimum tax on installment sales of farmers, effective for 
dispositions after 1987.

Title V--Estate and Gift Tax Provisions

    Increase in estate and gift tax unified credit--The bill 
increases the present-law unified credit as follows: the 
effective exemption is $650,000 for decedents dying and gifts 
made in 1998; $750,000 in 1999; $765,000 in 2000; $775,000 in 
2001 through 2004; $800,000 in 2005; $825,000 in 2006; $1 
million in 2007. After 2007, the effective exemption is indexed 
annually for inflation.
    Indexing of certain other estate and gift tax provisions--
The bill provides that, after 1998, the $10,000 annual 
exclusion for gifts, the $750,000 ceiling on special use 
valuation, the $1,000,000 generation-skipping transfer tax 
exemption, and the $1,000,000 ceiling on the value of a 
closely-held business eligible for the special low interest 
rate (as modified below), are indexed annually for inflation.
    Installment payments of estate tax attributable to closely 
held businesses--The bill extends the period for which Federal 
estate tax installments can be made under section 6166 to a 
maximum period of 24 years. In addition, the bill provides that 
no interest is imposed on the amount of deferred estate tax 
attributable to the first $1,000,000 in taxable value of the 
closely held business (i.e., the first $1,000,000 in value in 
excess of the effective exemption provided by the unified 
credit). For businesses with a taxablevalue in excess of 
$1,000,000, the bill also eliminates the deductibility of interest paid 
on estate taxes deferred under section 6166, and reduces the interest 
rate accordingly.
    Estate tax recapture from cash leases of specially-valued 
property--The bill provides that the cash lease of specially-
valued real property by a lineal descendant of the decedent to 
a member of the lineal descendant's family, who continues to 
operate the farm or closely held business, does not cause the 
qualified use of such property to cease for purposes of 
imposing the additional estate tax under section 2032A(c).
    Clarify eligibility for extension of time for payment of 
estate tax--The bill gives taxpayers access to the courts to 
resolve disputes over an estate's eligibility for the section 
6166 election by authorizing the U.S. Tax Court to provide 
declaratory judgments regarding initial or continuing 
eligibility for deferral under section 6166.
    Gifts may not be revalued for estate tax purposes after 
expiration of statute of limitations--The bill provides that a 
gift for which the limitations period has passed cannot be 
revalued for purposes of determining the applicable estate tax 
bracket and available unified credit.
    Repeal of throwback rules applicable to domestic trusts--
The bill exempts from the throwback rules amounts distributed 
by a domestic trust after December 31, 1995. The provision also 
provides that precontribution gain on property sold by a 
domestic trust no longer is subject to section 644.
    Unified credit of decedent increased by unified credit of 
spouse used on split gift included in decedent's gross estate--
With respect to any split-gift property that is subsequently 
includible in both spouses' estates, the bill increases the 
unified credit allowable to the decedent's estate by the amount 
of the unified credit previously allowed to the decedent's 
spouse with respect to the split gift.
    Reformation of defective bequests to spouse of decedent--
The bill allows the marital deduction with respect to a 
defective power of appointment or QTIP trust if a reformation 
(meeting certain criteria) is made to correct the defect.
    Generation-skipping tax provisions--The bill provides that 
if a trust with an inclusion ratio of greater than zero is 
severed into two separate trusts, the bill allows the trustee 
to elect to treat one of the separate trusts as having an 
inclusion ratio of zero and the other separate trust as having 
an inclusion ratio of one. In addition, the bill extends the 
predeceased parent exception to transfers to collateral heirs, 
provided that the decedent has no living lineal descendants at 
the time of the transfer. The predeceased parent exception (as 
modified) also is extended to taxable terminations and taxable 
distributions.

Title VI--Extension of Certain Expiring Tax Provisions

    Research tax credit--The research tax credit is extended 
for the period June 1, 1997, through December 31, 1998 (with a 
special rule providing a similar, 19-month extension for 
taxpayers which elect the alternative incremental research 
credit regime).
    Contributions of stock to private foundations--The bill 
extends the special rule contained in section 170(e)(5) that 
allows a deduction equal to fair market value for contributions 
of qualified appreciated stock made to private foundations 
during the period June 1, 1997, through December 31, 1998.
    Work opportunity tax credit--The bill extends the work 
opportunity tax credit for one year and makes other 
modifications. The provisions generally are effective for wages 
paid or incurred to qualified individuals who begin work for 
the employer after September 30, 1997, and before October 1, 
1998.
    Orphan drug tax credit--The bill permanently extends the 
orphan drug tax credit, effective for qualified clinical 
testing expenses paid or incurred after May 31, 1997.

Title VII--District of Columbia Tax Incentives

    D.C. Enterprise Zone--The bill designates certain 
economically depressed census tracts within the District of 
Columbia as the ``D.C. Enterprise Zone,'' within which business 
and individual residents are eligible for special tax 
incentives. All of the tax incentives take effect only if, 
prior to January 1, 1998, a Federal law is enacted creating a 
District of Columbia economic development corporation. In 
general, tax incentives that are available under present law 
for certain businesses located in empowerment zones are 
available in the D.C. Enterprise Zone. These are: (1) a 20-
percent wage credit for the first $15,000 of wages paid to D.C. 
Enterprise Zone residents who work in the D.C. Enterprise Zone; 
(2) an additional $20,000 of expensing under Code section 179 
for qualified Zone property; and (3) special tax-exempt 
financing for certain Zone facilities. In addition, the bill 
provides $75 million in tax credits to be allocated by the 
newly created economic development corporation to taxpayers 
that make equity investments in, or loans to, businesses 
engaged in an active trade or business anywhere in the District 
of Columbia. The bill also provides a zero percent capital 
gains rate for capital gains from the sale of certain qualified 
D.C. Enterprise Zone business assets held for more than 5 
years. Finally, the bill provides that residents of the D.C. 
Enterprise Zone are entitled to a 10-percent tax rate on all 
taxable income that currently is subject to a 15-percent 
Federal income tax rate.

Title VIII--Welfare-to-Work Tax Credit

    The bill provides employers a credit on the first $20,000 
of eligible wages paid to qualified long-term family assistance 
recipients. Qualified long-term family assistance recipients 
include members of a family receiving family assistance for 
specified periods of time and members of family no longer on 
family assistance because of either Federalor State time 
limits. The maximum credit is $8,500 per employee. The provision is 
effective for wages paid or incurred to qualified individuals who begin 
work for an employer on or after January 1, 1998 and before May 1, 
1999.

Title IX--Miscellaneous Provisions

    Repeal excise tax on diesel fuel used in recreational 
boats--The bill repeals the tax on diesel fuel used in 
recreational boats.
    Modify excise tax on ozone-depleting chemicals--The bill 
repeals the present-law exemption for imported recycled halon-
1211.
    Modify rate structure of vaccine excise tax--The bill 
modifies the excise tax on vaccines to provide a uniform rate 
of tax of $0.84 per dose for all vaccines. In addition, the 
bill adds the HIB (hemophilus influenza type B) vaccine, the 
Hepatitis B vaccine, and the varicella (chickenpox) vaccine to 
the list of taxable vaccines.
    Treat certain ``chain retailers'' as wholesale distributors 
under the gasoline tax refund rules--Chain retailers, defined 
as owner-operators having 10 or more retail outlets, are 
permitted to claim gasoline tax refunds for fuel sold to States 
and local governments and certain others under the provisions 
that currently apply to wholesale distributors.
    Application of luxury excise tax to clean fuel vehicles--
The bill increases the threshold at which the luxury excise tax 
on automobiles applies in the case of clean-burning fuel 
vehicles and electric cars.
    Provisions relating to pensions and other benefits--The 
bill (1) provides that certain irrigation or ditch companies or 
districts may maintain cash or deferred arrangements (``section 
401(k) plans''); (2) provides that the current moratorium on 
the application of certain discrimination rules to State and 
local government plans is permanent; (3) provides that certain 
disability payments made on behalf of full-time employees of a 
police or fire department are excludable from income; (4) 
provides that contributions made by government employees to 
purchase certain permissive service credit under a governmental 
pension plan are not to be taken into account in determining 
annual additions; (5) provides a deduction from the taxable 
estate for the value of certain stock transferred to an 
employee stock ownership plan; (6) increases the maximum 
benefit that can be distributed from a qualified pension plan 
without the participant's consent from $3,500 to $5,000 
(indexed); (7) clarifies certain rules relating to employee 
stock ownership plans of S corporations; and (8) provides that 
the value of certain air transportation on employer-provided 
noncommercial flights is excludable from income.
    Disaster relief provisions--The bill provides the Secretary 
of the Treasury with the authority to extend additional 
taxpayer deadlines for up to 90 days for certain taxpayers 
affected by Presidentially declared disasters. The bill also 
contains a provision relating to the use of certain appraisals 
to establish the amount of a disaster loss. In addition, the 
bill extends the deferral provisions of present law applicable 
to livestock sold on account of drought to livestock sold on 
account of floods and other weather-related conditions. 
Finally, the bill modifies the mortgage revenue bond rules to 
extend them to Presidentially declared disaster areas. 
Specifically, the bill waives the first-time homebuyer 
requirement, the income limits and the purchase price limits 
during the one-year period following the date of the disaster 
declaration. The provision is effective for loans financed with 
bonds issued after December 31, 1996, and before January 1, 
2000.
    Provisions relating to employment taxes--The bill (1) 
provides a safe harbor under which, if certain requirements are 
satisfied, a worker is classified as an independent contractor 
for Federal tax purposes; (2) removes the statutory rule 
treating bakery drivers as employees, so that the generally 
applicable rules for determining worker status apply to bakery 
drivers; (3) provides that certain instructions of a service 
recipient provided pursuant to Federal or State law are not 
taken into account in determining whether a retail securities 
broker is an employee or independent contractor; and (4) 
provides that certain termination payments received by former 
insurance salesmen are not subject to self-employment taxes.
    Provisions relating to small businesses--The bill provides 
for an 18-month delay in the imposition of penalties for 
specified failures to make payments electronically through 
EFPTS. In addition, the bill provides that a home office 
qualifies as the ``principal place of business''--such that 
certain expenses with respect to such office may be deductible 
as a trade or business expense--if (1) the office is used by 
the taxpayer to conduct administrative or management activities 
of a trade or business and (2) there is no other fixed location 
of the trade or business where the taxpayer conducts 
substantial administrative or management activities of the 
trade or business. As under present law, deductions are allowed 
for a home office meeting this two-part test only if the office 
is exclusively used on a regular basis as a place of business 
by the taxpayer and, in the case of an employee, only if such 
exclusive use is for the convenience of the employer. The 
provision applies to taxable years beginning after December 31, 
1997.
            Other provisions--
    Inventory shrinkage--The bill provides that a method of 
keeping inventories will not be considered unsound, or to fail 
to clearly reflect income, solely because it includes an 
adjustment for the shrinkage estimated to occur through year-
end, based on inventories taken other than at year-end.
    Treatment of workmen's compensation liability under rules 
for certain personal injury liability assignments--The 
provision extends the exclusion for qualified assignments under 
section 130 to amounts assigned for assuming a liability to pay 
compensation under any workmen's compensation act, effective 
for workmen's compensation claims filed after the date of 
enactment.
    Treatment of State workmen's compensation funds--The 
provision clarifies the tax-exempt status of any organization 
that is created by State law, and organized and operated 
exclusively to provide workmen's compensation insurance and 
related coverage that is incidental to workmen's compensation 
insurance, and that meets certain additional requirements. The 
provision is effective for taxable years beginning after 
December 31, 1997. No inference is intended as to the status of 
such organizations under present law.
    Treatment of certain publicly traded partnerships--In the 
case of an existing publicly traded partnership that elects 
under the provision to be subject to a tax on gross income from 
the active conduct of a trade or business, the rule of present 
law treating a publicly traded partnership as a corporation 
does not apply. The provision is effective for taxable years 
beginning after December 31, 1997.
    Exclusion from UBIT for certain corporate sponsorship 
payments--The bill provides that ``qualified sponsorship 
payments'' received by tax-exempt organizations are exempt from 
taxation under the unrelated business income tax (``UBIT''). 
``Qualified sponsorship payments'' are defined as any payment 
made by a person engaged in a trade or business with respect to 
which that person receives from the tax-exempt organization no 
substantial return benefit other than the use or acknowledgment 
of the name or logo (or product lines) of the person's trade or 
business in connection with the organization's activities. The 
provision applies to qualified sponsorship payments solicited 
or received after December 31, 1997.
    Timeshare associations--The bill generally extends the 
rules for taxation of homeowners associations to timeshare 
associations. However, the rate of tax applicable to timeshare 
associations is 32 percent, rather than 30 percent. The 
provision is effective for taxable years beginning after 
December 31, 1996.
    Modification of advance refunding rules for certain tax-
exempt bonds issued by the Virgin Islands--One additional 
advance refunding is allowed for governmental bonds issued by 
the Virgin Islands that were advance refunded before June 9, 
1997, if the Virgin Islands debt provisions are changed to 
modify their lien requirement.
    Farm co-ops--The bill provides that gain may be deferred on 
the sale of refiners and processors to a farm cooperative.
    Information reporting on sales of principal residences--
Reports to the IRS are not be required for most sales of 
primary residences with a sales price of $500,000 or less 
($250,000 or less if the seller is not married), provided the 
person settling the sale obtains representations that any gain 
on the sale is eligible to be excluded.
    Increased deduction for certain business meals--The 
deductible percentage of the cost of food and beverages 
consumed while away from home by an individual during, or 
incident to, a period of duty subject to the hours of service 
limitations of the Department of Transportation is increased 
from 50 percent to 80 percent in stages, over an eleven year 
period beginning in 1998.
    Treatment of construction allowances provided to lessees 
with respect to short-term leases--The bill provides an 
exclusion from income for a retail tenant that receives 
construction allowances from a landlord to the extent the 
tenant uses the allowances to construct or improve 
nonresidential real property that reverts to the landlord at 
the end of a short-term lease.
    Mutual savings banks--The provision provides that the 
consolidation of two or more life insurance departments of 
mutual savings banks into a single life insurance company by 
requirement of State law is treated as a recapitalization. Any 
payments required to be made to policyholders in connection 
with the consolidation are treated as policyholder dividends 
deductible by the company under section 808, provided that 
certain requirements are met. The provision takes effect on 
December 31, 1991.
    Allow refunds to be offset for State tax obligations-- 
Subject to certain limitations, an overpayment of Federal tax 
could be offset by the amount of any past-due, legally 
enforceable State tax obligation of a resident of the State 
seeking the offset.,
    Clean fuel vehicles--The bill increases the limitation on 
depreciation permitted to be claimed by the taxpayer on 
automobiles in the case of clean-burning fuel vehicles and 
electric cars.
    Tax benefits for law enforcement officers killed in the 
line of duty--The bill provides that certain death benefits 
received with respect to a police officer killed in the line of 
duty are excludable from income.
    Two-year suspension of oil and gas income net income limit 
for production from marginal wells--The bill suspends the 65-
percent-of-net-income limitation on percentage depletion 
deductions for domestic oil and gas production from marginal 
properties for taxable years beginning in 1998 and 1999.

Extension of duty-free treatment under Generalized System of 
        Preferences; Tariff treatment of certain equipment and repair 
        of vehicles

    Generalized System of Preferences--The bill reauthorizes 
Title V of the Trade Act of 1974, (the Generalized System of 
Preferences), as amended, for two years through May 31, 1999. 
Refunds would be authorized, upon request of the importer, for 
any duty paid between May 31, 1997 and the date of enactment.
    Temporary suspension of vessel repair duty (shipbuilding)--
The bill suspends, for a one-year period beginning on date of 
enactment, the current 50-percent duty, established under 
section 466 of the Tariff Act of 1930, on repairs to U.S. flag 
vessels made in countries that are signatories to the OECD 
Shipbuilding Agreement.

United States-Caribbean Basin Trade Partnership Program

    The bill amends section 213(b) of the Caribbean Basin 
Economic Recovery Act to provide tariff and quota treatment on 
imports from CBI beneficiary countries of currently excluded 
articles (such as textiles, apparel, tuna, petroleum and 
petroleum products, and footwear) that is similar to tariff and 
quota treatment accorded to like articles imported from Mexico 
under the NAFTA, during a temporary period of one year.

Title X--Revenue-Increase Provisions

            Financial Products
    Require recognition of gain on certain appreciated 
positions in financial property--The bill requires a taxpayer 
with an appreciated position in stock, a partnership interest 
or certain trust interests or debt instruments to recognize 
gain as if the taxpayer had sold the position if the taxpayer 
enters into one of several transactions. The transactions 
covered are a ``short sale against the box'', a forward or 
futures contract to deliver the same property, an offsetting 
notional principal contract, and, as provided in Treasury 
regulations, other transactions with substantially the same 
effect. An exception is provided for certain transactions that 
are closed prior to the end of the taxable year in which they 
are entered into, or within 30 days thereafter. The bill also 
extends the present law ``mark-to-market'' regime for 
securities dealers to securities traders and commodities 
traders and dealers on an elective basis.
    Limitation on exception for investment companies under 
section 351--The bill expands the definition of an investment 
company for purposes of the present-law rule that property 
contributed to a partnership or corporation meeting this 
definition does not qualify for non-recognition treatment. 
Under the bill, an investment company generally includes any 
corporation or partnership if more than 80 percent of its 
assets (by value) consist of money, financial instruments, 
foreign currency and certain interests in precious metals and 
entities that hold passive-type assets.
    Disallowance of interest on indebtedness allocable to tax-
exempt obligations--The bill extends to all corporations (other 
than insurance companies) the rule that applies to financial 
institutions that disallows interest deductions of a taxpayer 
(that are not otherwise disallowed as allocable under present 
law to tax-exempt obligations) in the same proportion as the 
average basis of its tax-exempt obligations (other than 
nonsalable tax-exempt debt acquired by a corporation in the 
ordinary course of business in payment for goods or services 
sold to a State or local government) bears to the average basis 
of all of the taxpayer's assets. The bill does not extend the 
small-issuer exception to taxpayers which are not financial 
institutions, but does provide a de minimis exception if the 
average adjusted basis of tax exempt obligation is less than 
the lesser of $1 million or 2 percent of the basis of all of 
the corporation's assets.
    Gains and losses from certain terminations with respect to 
property--The bill extends the rule which treats gain or loss 
from the cancellation, lapse, expiration, or other termination 
of a right or obligation which is (or on acquisition would be) 
a capital asset in the hands of the taxpayer to all types of 
property. The bill also repeals the provision that exempts debt 
obligations issued by natural persons from the rule which 
treats gain realized on retirement of the debt as exchanges.
    Determination of original issue discount where pooled debt 
obligations subject to acceleration--The bill requires credit 
card issuers and other holders of pools of debt instruments to 
accrue interest income on such pools using reasonable 
prepayment assumptions.
    Deny interest deduction on certain debt instruments--The 
bill denies interest deductions on corporate instruments where 
a substantial amount of interest or principal is mandatorily 
payable in stock of the issuer or a related party, or is so 
payable at the option of the issuer or a related party. The 
provision also applies to instruments that are part of an 
arrangement designed to result in such payment. The provision 
is effective for instruments issued after June 8, 1997, unless 
issued pursuant to a binding written agreement in effect on 
that date or described in an IRS ruling request or a public 
announcement or SEC filing on or before such date.
            Corporate Organizations and Reorganizations
    Require gain recognition for certain extraordinary 
dividends--Under the bill, except as provided in regulations, a 
corporate shareholder recognizes gain immediately with respect 
to any redemption treated as a dividend (in whole or in part) 
where the nontaxed portion of the dividend (under the dividends 
received deduction) exceeds the basis of the shares 
surrendered, if the redemption is treated as a dividend due to 
options being counted as stock ownership. In addition, the bill 
requires immediate gain recognition whenever the basis of stock 
with respect to which any extraordinary dividend was received 
is reduced below zero. The bill is effective for distributions 
after May 3, 1995, unless made pursuant to the terms of a 
written binding contract in effect on May 3, 1995 or a tender 
offer outstanding on that date. In applying the new gain rules 
to any distribution that is not a partial liquidation, a non 
pro rata redemption, or a redemption that is treated as a 
dividend by reason of options, September 13, 1995, is 
substituted for May 3, 1995.
    Require gain recognition on certain distributions of 
controlled corporation stock--If, pursuant to a plan or 
arrangement in existence on the date of distribution, either 
the controlled or distributing corporation in a section 355 
distribution is acquired, gain is recognized by the other 
corporation as of the date of the distribution. An acquisition 
occurs if a person or persons acquire 50 percent or more of the 
vote or value of the stock of the controlled or distributing 
corporation pursuant to a plan. Except as provided in 
regulations, in the case of distributions within an affiliated 
group of corporations filing aconsolidated return, section 355 
would not apply to any distribution from one member of the group to 
another. The bill also modifies certain rules for determining control 
immediately after a distribution in the case of certain divisive 
transactions, reducing the present-law test from 80 percent of vote and 
of all other classes of stock to a 50 percent of vote and value test. 
This part of the provision is generally effective for distributions 
after the date of enactment. The rest of the provision generally is 
effective for distributions after April 16, 1997. No part of the bill 
applies to a distribution that is pursuant to a written binding 
contract, IRS ruling request, or an SEC filing or a public announcement 
on or before April 16, 1997, in which the unrelated acquiror is 
identified.
    Reform tax treatment of certain corporate stock transfers--
Purchases of stock between related corporations that are 
treated as dividends under section 304 is treated as if the 
transferor had acquired the stock in exchange for stock of the 
acquiror and that stock deemed issued had then been redeemed. 
Basis reduction rules apply. The bill also limits the earnings 
and profits of an acquiring foreign corporation that would be 
taken into account in applying section 304. The provision is 
effective for distributions or acquisitions after June 8, 1997 
except that it will not apply to any such distribution made 
pursuant to a written agreement that was binding on that date, 
or that was described in an IRS ruling request or SEC filing or 
public announcement on of before that date.
    Modify holding period for dividends-received deduction--A 
corporation will not be eligible for the dividends received 
deduction unless it satisfies a holding period requirement with 
respect to each dividend. The provision is effective for 
dividends paid or accrued after the 30th day after the date of 
enactment.
    Registration of confidential tax shelters and substantial 
understatement penalty--The bill requires the registration with 
the Treasury Department of certain confidential tax shelters 
and modifies the substantial understatement penalty.
    Treat certain preferred stock as ``boot''--Certain 
preferred stock is treated as taxable consideration if received 
in an otherwise tax-free reorganization or contribution to a 
corporation. This is preferred stock that does not participate 
in corporate growth and that includes certain rights to put or 
redeem the stock within 20 years. Also, stock the dividend rate 
on which varies with reference to interest rates or certain 
other indices is within the provision. The provision applies to 
transactions after June 8, 1997, unless pursuant to a binding 
written contract in effect on that date or described in an IRS 
ruling request, SEC filing, or public announcement on or before 
that date.
            Administrative Provisions
    Administrative Provisions--The bill provides for 
information reporting of certain payments made to attorneys, a 
decrease in the threshold for reporting payments to 
corporations performing services for Federal agencies, 
permanently extends the rules relating to disclosure of return 
information for administration of certain veterans programs, 
provides for modifications of the lien and levy rules 
(including the extension of the continuous levy rules to 
additional types of payments).
    Consistency rule for beneficiaries of trusts and estates--
The bill requires a beneficiary of an estate or trust to file 
its return in a manner that is consistent with the information 
received from the estate or trust, unless the beneficiary 
identifies the inconsistency.
            Excise Tax Provisions
    Extension and modification of aviation excise taxes--The 
bill extends the Airport and Airway Trust Fund excise taxes in 
passenger and freight transportation for ten years, through 
September 30, 2007. The bill also modifies the structure of the 
commercial air passenger tax from 10 percent of the amount paid 
to a tax equal to the aggregate of 7.5 percent plus $2 per 
flight segment (phasing up until the pre flight segment reaches 
$3.00 in 2002). The international departure tax is increased to 
$15.50 per passenger, and the tax is extended to 
internationally arriving passengers. The 7.5 percent tax is 
extended to amounts paid by credit card companies and other 
companies under marketing arrangements whereby they offer 
frequent flyer or other reduced airfare provisions to customers 
and others. The 4.3-cents-per-gallon deficit reduction tax 
imposed on aviation fuel is transferred to the Airport and 
Airway Trust Fund, and modifications are made in certain tax 
deposits. The modifications generally apply to transportation 
beginning after September 30, 1997.
    Extend diesel fuel excise tax rules to kerosene--The bill 
extends the current diesel fuel excise tax rules to kerosene, 
subject to limited modifications allowing non-tax-paid sales to 
registered aviation dealers and certain industrial feedstock 
users.
    Modify tax benefits for ethanol and renewable source 
methanol--The bill provides for the phase-out of the current 
tax benefits for ethanol and renewable source methanol through 
the currently scheduled expiration dates. The phase-out is 
accomplished through a restriction on production from new 
facilities, production caps (enforced by an excess production 
penalty equal to the tax benefits), a reduction in the general 
54-cents-per-gallon tax benefit level, and reversal of the 
Treasury Department regulation providing that ETBE and similar 
ethers qualify for the tax benefits.
    Reinstate Leaking Underground Storage Tank Trust Fund 
excise tax--The bill extends the pre-1996 excise tax of 0.1 
cent per gallon on gasoline, diesel fuel, special motor fuels, 
aviation fuels, and inland waterway fuels for five years from 
the date of enactment. Revenues from the reinstated tax will go 
to the Leaking Underground Storage Tank Trust Fund as under 
prior law.
    Application of communications tax to long-distance prepaid 
telephone cards--The bill clarifies that payments from persons 
to communications companies for prepaid telephone cards which 
are subsequently distributed or resold to the ultimate user of 
theprepaid telephone card constitute payments for communication 
services that are subject to the 3-percent communications excise tax.
            Tax-Exempt Organizations
    Extend UBIT rules to second-tier subsidiaries and amend 
control test--The bill modifies the test for determining 
control for purposes of the unrelated business income tax rules 
contained in section 512(b)(13). Generally, ``control'' means 
ownership by vote or value of more than 50 percent of the 
ownership interests. In addition, the bill applies the 
constructive ownership rules of section 318 for purposes of 
section 512(b)(13). The provision generally applies to taxable 
years beginning after the date of enactment.
    Limit increase in basis of property on sale by tax-exempt 
entity to related person--The bill requires a carryover basis 
in property transferred by a tax exempt entity to a related 
party in a sale or exchange, except to the extent of any gain 
recognized to the seller as unrelated business taxable income. 
The provision is effective for sales or exchanges after June 8, 
1997, unless pursuant to a binding written contract in effect 
on that date.
    Reporting and proxy tax requirements for political and 
lobbying expenditures--The bill provides that an exemption from 
the general disclosure requirements and proxy tax of section 
6033(e) is available to a tax-exempt organization if more than 
90 percent of the amount of aggregate annual dues (or similar 
payments) received by the organization are paid by (1) 
individuals or families whose annual dues (or similar amounts) 
are less than $100, or (2) tax-exempt entities. The provision 
is effective for taxable years beginning after December 31, 
1997.
    Repeal grandfather rule with respect to pension business of 
certain insurers--The provision repeals the grandfather rules 
applicable to that portion of the business of the Teachers 
Insurance Annuity Association--College Retirement Equities Fund 
which is attributable to pension business and to that portion 
of the business of Mutual of America which is attributable to 
pension business. The provision is effective for taxable years 
beginning after December 31, 1997.
            Other Provisions
    Phase-out suspense accounts for certain large farm 
corporations--The bill (1) repeals the ability of family farm 
corporations with average gross receipts over $25 million to 
defer income from the required switch from the cash method to 
an accrual method of accounting by establishing suspense 
accounts and (2) requires previously-created suspense accounts 
generally to be restored to income over a period of 20 years.
    Modify net operating loss carryback and carryforward 
rules--The bill reduces the carryback period for net operating 
losses from three to two years and extends the carryforward 
period from 15 to 20 years.
    Expand the limitations on deductibility of interest and 
premiums with respect to life insurance, endowment, and annuity 
contracts--The present-law premium deduction limitation is 
modified to provide that no deduction is permitted for premiums 
paid on any life insurance, annuity or endowment contract 
covering the life of any individual, when the taxpayer is 
directly or indirectly a beneficiary under the contract. Also, 
no deduction is allowed for any amount paid or accrued on debt 
incurred or continued to purchase or carry a life insurance, 
endowment, or annuity contract covering the life of any 
individual. In addition, in the case of a taxpayer other than a 
natural person, no deduction is allowed for the portion of the 
taxpayer's interest expense that is allocable to unborrowed 
policy cash surrender values with respect to any life insurance 
policy or annuity or endowment contract issued after June 8, 
1997. The provisions apply generally with respect to contracts 
issued after June 8, 1997.
    Allocation of basis of properties distributed to a partner 
by a partnership--The provision modifies the basis allocation 
rules for distributee partners, generally requiring allocation 
of basis increases in accordance with the fair market value of 
the distributed properties rather than in accordance with their 
basis to the partnership, effective for partnership 
distributions after the date of enactment.
    Treatment of inventory items of a partnership--The 
provision eliminates the requirement that inventory be 
substantially appreciated in order to give rise to ordinary 
income under the rules relating to sales and exchanges of 
partnership interests and certain partnership distributions. 
The provision is effective for sales, exchanges, and 
distributions after the date of enactment.
    Treatment of appreciated property contributed to a 
partnership--The provision extends the 5-year limit on taxation 
of partners' pre-contribution gain to 10 years, effective for 
property contributed to a partnership after June 8, 1997.
    Earned income credit (``EIC'') compliance provisions--In 
addition to the establishment of IRS continuous levy and the 
modifications of levy exemptions (described elsewhere) which 
also apply to the EIC, the bill provides three compliance 
measures to address the EIC compliance problem. First, 
taxpayers who fraudulently claim the EIC are made EIC 
ineligible for 10 years thereafter. Taxpayers who erroneously 
claim the EIC due to reckless or intentional disregard of rules 
or regulations are ineligible to claim the EIC for two years 
thereafter. Second, taxpayers who are denied the EIC as a 
result of deficiency procedures are ineligible in subsequent 
years to claim the EIC unless they provide evidence of 
eligibility as required by the Secretary of the Treasury. 
Finally, return preparers are subject to a $100 penalty for 
each return claiming an EIC with respect to which certain due 
diligence requirements are notsatisfied. These provisions are 
effective for taxable years beginning after December 31, 1996.
     Restrict eligibility for income forecast method--The bill 
limits the availability of the income forecast method of 
depreciation to movies, sound recordings, videotapes, books, 
patents, copyrights, and other similar items. The bill also 
provides a 3-year recovery period for consumer durable goods 
leased by rent-to-own businesses.
     Require taxpayers to include the rental value of residence 
in income without regard to period of rental--Gross income for 
income tax purposes generally includes all income including 
rents. However, gross income does not include rental income 
where a dwelling unit is used by the taxpayer as a residence 
and is actually rented for less than 15 days during the taxable 
year. Also, no deductions relating to such rental are allowed. 
The bill repeals the 15-day rules.
     Modify the exception to the related party rule of section 
1033 for individuals to only provide an exception for de 
minimis amounts-- The bill provides that in order for the 
nonrecognition rules of section 1033 (relating to involuntary 
conversions) to apply, an individual must acquire replacement 
property from a unrelated party, subject to a $100,000 de 
minimis rule.
     Repeal of exception for certain sales by manufacturers to 
dealer--The bill repeals the exception that permits the use of 
the installment method of accounting for certain sales by 
manufacturers to dealers.

Title XI--Foreign Tax Provisions

            General Provisions
     Eligibility of licenses of computer software for foreign 
sales corporation benefits--The bill provides that computer 
software licensed for reproduction abroad is not excluded from 
the definition of export property for purposes of the foreign 
sales corporation provisions. Accordingly, computer software 
that is exported with a right to reproduce is eligible for the 
benefits of the foreign sales corporation provisions.
     Increase dollar limitation on section 911 exclusion--Under 
the bill, the $70,000 limitation on the exclusion for foreign 
earned income is increased to $80,000, in increments of $2,000 
each year beginning in 1998, and is indexed for inflation 
beginning in 2008.
     Simplify foreign tax credit limitation for individuals--
The bill exempts individuals with no more than $300 ($600 in 
the case of married persons filing jointly) of creditable 
foreign taxes, and no foreign source income other than passive 
income, from the foreign tax credit limitation rules.
     Simplify translation of foreign taxes--The bill generally 
provides for accrual-basis taxpayers to translate foreign taxes 
at the average exchange rate for the taxable year to which such 
taxes relate. The bill also generally provides that, in cases 
where the foreign taxes actually are paid more than two years 
after such accrual, such taxes are to be taken into account for 
the year to which they relate, but are to be translated at the 
exchange rate for the time of payment.
    Election to use simplified foreign tax credit limitation 
for alternative minimum tax purposes--The bill permits 
taxpayers to elect to use as their AMT foreign tax credit 
limitation fraction the ratio of foreign source regular taxable 
income to entire alternative minimum taxable income, rather 
than the ratio of foreign source alternative minimum taxable 
income to entire alternative minimum taxable income.
    Simplify treatment of personal transactions in foreign 
currency--The bill applies nonrecognition treatment to any 
exchange gain that results from an individual's acquisition of 
foreign currency and disposition of it in a personal 
transaction, provided that such gain does not exceed $200.
    Simplify foreign tax credit limitation for dividends from 
10/50 companies--Under the bill, a single foreign tax credit 
limitation generally applies to dividends received by the 
taxpayer from all so-called 10/50 companies (other than any 10/
50 company that qualifies as a passive foreign investment 
company).
            General Provisions Affecting Treatment of Controlled 
                    Foreign Corporations
    The bill makes several modifications to the treatment of 
controlled foreign corporations and lower-tier controlled 
foreign corporations. In addition, the bill extends the 
application of the indirect foreign tax credit to taxes paid or 
accrued by fourth- through sixth-tier controlled foreign 
corporations.
            Modification of Passive Foreign Investment Company 
                    Provisions to Eliminate Overlap with Subpart F and 
                    to Allow Mark-to-Market Election
    Under the bill, a shareholder that is subject to the 
subpart F rules with respect to stock of a passive foreign 
investment company that is also a controlled foreign 
corporation is not subject also to the passive foreign 
investment company provisions with respect to the same stock. 
The bill also allows a shareholder of a passive foreign 
investment company to make a mark-to-market election with 
respect to the stock of the passive foreign investment company, 
provided that such stock is marketable.
            Simplify Formation and Operation of International Joint 
                    Ventures
     The bill repeals the excise tax that applies to transfers 
of appreciated property by U.S. persons to certain foreign 
entities. The bill requires enhanced information reporting by 
U.S. persons with respect to their interests in foreign 
partnerships.
            Modification of Reporting Threshold for Stock Ownership of 
                    a Foreign Corporation
     The bill increases the stock ownership threshold that 
results in an information reporting obligation with respect to 
a foreign corporation from 5 percent to 10 percent.
            Other Foreign Simplification Provisions
     Transition rule for certain trusts--The bill grants 
regulatory authority to allow nongrantor trusts that had been 
treated as U.S. trusts prior to the enactment of the Small 
Business Job Protection Act of 1996 to elect to continue to be 
treated as U.S. trusts.
     Repeal of stock and securities safe harbor requirement 
that principal office be outside the United States--The bill 
modifies the present-law safe harbor that treats foreign 
persons that trade stock or securities for their own accounts 
as not engaged in a U.S. trade or business. For purposes of the 
safe harbor, the bill eliminates the present-law requirement 
that the principal office not be within the United States.
            Other Foreign Provisions
     Inclusion of income from notional principal contracts and 
stock lending transactions under subpart F--The bill adds to 
the definition of foreign personal holding company income for 
subpart F purposes net income from all types of notional 
principal contracts and payments in lieu of dividends derived 
from equity securities lending transactions. The bill provides 
an expanded dealer exception from the definition of foreign 
personal holding company income.
     Restrict like-kind exchange rules for certain property--
The bill provides that for the nonrecognition rules of section 
1031 (relating to like-kind exchanges) to apply, the property 
surrendered in the exchange and the party received in the 
exchange must be both predominantly used either in (or outside) 
the United States.
     Holding period requirement for certain foreign taxes--The 
bill denies a shareholder the foreign tax credits normally 
available with respect to a dividend on stock of a foreign 
corporation or regulated investment company if the shareholder 
has not held the stock for 16 days, in the case of common 
stock, or 46 days in the case of preferred stock. An exception 
is provided for dividends on certain stock held by a foreign 
securities dealer.
     Penalties for failure to file disclosure of exemption for 
income from the international operation of ships or aircraft by 
foreign persons--The bill imposes penalties on foreign persons 
that do not satisfy the filing requirements for claiming 
exemption from U.S. tax for income from the international 
operation of ships or aircraft.
     Limitation on treaty benefits for payments to hybrid 
entities--The bill limits the availability of a reduced rate of 
withholding tax under an income tax treaty in the case of 
income derived through a hybrid entity, in order to prevent tax 
avoidance.
     Clarification of determination of foreign taxes deemed 
paid--The bill clarifies that, for purposes of the indirect 
foreign tax credit, a foreign corporation's foreign tax pool 
does not include any taxes that are attributable to dividends 
distributed by the foreign corporation in prior taxable years.
     Clarification of foreign tax credit limitation for 
financial services income--The bill clarifies that the 
exclusion from passive income for income that is treated as 
high-taxed income does not apply for purposes of the separate 
foreign tax credit limitation applicable to financial services 
income.
     Interest on underpayment reduced by foreign tax credit 
carryback--The bill provides that, if an underpayment for a 
taxable year is reduced or eliminated by a foreign tax credit 
carryback from a subsequent taxable year, such carryback does 
not affect the computation of interest on the underpayment for 
the period ending with the filing date for such subsequent 
taxable year in which the foreign taxes were paid or accrued.
     Determination of period of limitations relating to foreign 
tax credits--The bill provides that, in the case of a claim 
relating to an overpayment attributable to foreign tax credits, 
the limitations period is determined by reference to the year 
in which the foreign taxes were paid or accrued.

Title XII--Simplification Provisions Relating to Individuals and 
        Businesses

            Individual Simplification Provisions
    Modifications to standard deduction of dependents; AMT 
treatment of certain minor children--The bill increases the 
standard deduction for a taxpayer with respect to whom a 
dependency exemption is allowed on another taxpayer's return to 
the lesser of (1) the standard deduction for individual 
taxpayers or (2) the greater of: (a) $500 (indexed for 
inflation as under present law), or (b) the individual's earned 
income plus $250. The bill increases the AMT exemption amount 
for a child under age 14 to the lesser of (1) $33,750 or (2) 
the sum of the child's earned income plus $5,000.
     Increase estimated tax de minimis threshold--The bill 
increases the individual estimated tax de minimis threshold 
from $500 to $1,000.
     Optional methods for computing SECA tax combined--The bill 
simplifies the reporting of self-employment income by combining 
the optional methods for reporting farm and non farm self-
employment income. The provision also ensures that persons 
reporting self-employment income by the optional method have 
enough self-employment income to provide four quarters of 
coverage under the Social Security Act.
     Treatment of certain reimbursed expenses of rural mail 
carriers--The bill simplifies the treatment of certain 
reimbursed expenses of rural mail carriers.
     Travel expenses of Federal criminal investigators--The 
bill provides for special rules relating to the travel expenses 
of certain Federal criminal investigators.
     Payment of taxes by commercially acceptable means--The 
bill generally provides for the payment of taxes by any 
commercially acceptable means.
            Provisions Relating to Businesses Generally
     Simplification to the look-back method applicable to long-
term contracts--The bill simplifies the look-back method 
applicable to long-term contracts by providing that the method 
need not be applied to de minimis changes to estimated income 
and by stream lining the calculation of applicable interest 
rates used in the look-back calculation.
     Minimum tax treatment of certain property and casualty 
insurance companies--The bill provides that a property and 
casualty insurance company that elects for regular tax purposes 
to be taxed only on taxable investment income determines its 
adjusted current earnings under the alternative minimum tax 
without regard to any amount not taken into account in 
determining its gross investment income.
            Partnership Simplification Provisions
     The bill makes simplifying changes to reporting and audit 
rules in the case of electing large partnerships, which are 
generally those that elect to come within the provisions and 
that have 100 or more partners for the partnership's preceding 
taxable year. The bill also provides that electing large 
partnerships must report to partners by March 15 following the 
close of the partnership's taxable year. The bill also provides 
for reporting on magnetic media to the IRS for all 
partnerships, and modifies the filing threshold for an IRA with 
an interest in an electing large partnership. In addition, the 
bill provides modifications and clarifications to the present-
law rules governing partnership proceedings that were enacted 
in 1982 as part of TEFRA.
            Modifications of Rules for Real Estate Investment Trusts
     Clarification of limitation on maximum number of 
shareholders-- The bill replaces the rule that disqualifies a 
REIT for any year in which the REIT failed to comply with 
Treasury regulations to ascertain its ownership, with an 
intermediate penalty of $25,000 ($50,000 for intentional 
violations) for failing to do so. In addition, a REIT that 
complied with the Treasury regulations for ascertaining its 
ownership, and which did not know, or have reason to know, that 
it was so closely held as to be classified as a personal 
holding company, is treated as meeting the requirement that it 
not be a personal holding company.
     De minimis rule for tenant service income--The bill 
permits a REIT to render a de minimis amount (one percent of 
rents) of impermissible services to tenants, or in connection 
with the management of property, and still treat amounts 
received with respect to that property as rent.
     Attribution rules applicable to tenant ownership--The bill 
modifies the application of section 318(a)(3)(A) (attribution 
to partnerships) for purposes of defining rent in section 
856(d)(2), so that attribution occurs only when a partner owns 
a 25 percent or greater interest in the partnership.
     Credit for tax paid by REIT on retained capital gains--The 
bill permits a REIT to elect to retain and pay income tax on 
net long-term capital gains it received during the tax year, 
just as a RIC is permitted under present law.
     Repeal of 30-percent gross income requirement--The bill 
repeals the rule that requires less than 30 percent of a REIT's 
gross income be derived from gain from the sale or other 
disposition of stock or securities held for less than one year, 
certain real property held less than four years, and property 
that is sold or disposed of in a prohibited transaction.
     Modification of earnings and profits for determining 
whether REIT has earnings and profits from non-REIT year--The 
bill changes the ordering rule for purposes of the requirement 
that newly-electing REITs distribute earnings and profits that 
were accumulated in non-REIT years such that distributions of 
accumulated earnings and profits generally are treated as made 
from the entity's earliest a