Calendar No. 454

104TH CONGRESS

2D SESSION H. R. 3286

[Report No. 104–288][Report No. 104–279]

AN ACT

To help families defray adoption costs, and to

promote the adoption of minority children.

JUNE 24, 1996

Reported with an amendment
II

Calendar No. 454

104TH CONGRESS

2D SESSION H. R. 3286

[Report No. 104–279]

[Report No. 104–288]

IN THE SENATE OF THE UNITED STATES

MAY 13, 1996

Received; read twice and referred to the Committee on Finance

MAY 23, 1996

Ordered, if and when reported by the Committee on Finance the bill then be

referred to the Committee on Indian Affairs for the purpose of considering title 3, for a period of 10 days of session, to report or be discharged

JUNE 13, 1996

Reported by Mr. ROTH, with amendments; referred to the Committee on

Indian Affairs pursuant to the order of May 23, 1996

[Omit the part struck through and insert the part printed in italic]

JUNE 24, 1996

Reported by Mr. MCCAIN, with an amendment

[Omit the part enclosed in boldface brackets]

AN ACT

To help families defray adoption costs, and to promote the

adoption of minority children.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
2

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1 SECTION 1. SHORT TITLE.

2 This Act may be cited as the ‘‘Adoption Promotion

3 and Stability Act of 1996’’.

4 SEC. 2. TABLE OF CONTENTS.

5 The table of contents of this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.

TITLE I—CREDIT FOR ADOPTION EXPENSES

Sec. 101. Credit for adoption expenses.

TITLE II—INTERETHNIC ADOPTION

Sec. 201. Removal of barriers to interethnic adoption.

TITLE III—CHILD CUSTODY PROCEEDINGS AFFECTED BY THE

INDIAN CHILD WELFARE ACT OF 1978

Sec. 301. Inapplicability of the Indian Child Welfare Act of 1978 to child custody proceedings involving a child whose parents do not maintain affiliation with their Indian tribe.

Sec. 302. Membership and child custody proceedings.

Sec. 303. Effective date.

TITLE IV—REVENUE OFFSETS

Sec. 400. Amendment of 1986 Code.

Subtitle A—Exclusion for Energy Conservation Subsidies Limited to Subsidies

With Respect to Dwelling Units

Sec. 401. Exclusion for energy conservation subsidies limited to subsidies with

respect to dwelling units.

Subtitle B—Foreign Trust Tax Compliance

Sec. 411. Improved information reporting on foreign trusts.

Sec. 412. Comparable penalties for failure to file return relating to transfers to

foreign entities.

Sec. 413. Modifications of rules relating to foreign trusts having one or more

United States beneficiaries.

Sec. 414. Foreign persons not to be treated as owners under grantor trust

rules.

Sec. 415. Information reporting regarding foreign gifts.

Sec. 416. Modification of rules relating to foreign trusts which are not grantor

trusts.

Sec. 417. Residence of trusts, etc.

Sec. 401. Repeal of bad debt reserve method for thrift savings associations.

Sec. 402. Depreciation under income forecast method.
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1 TITLE I—CREDIT FOR ADOPTION

2 EXPENSES

3 SEC. 101. CREDIT FOR ADOPTION EXPENSES.

4 (a) IN GENERAL.—Subpart A of part IV of sub5 chapter A of chapter 1 of the Internal Revenue Code of

6 1986 (relating to nonrefundable personal credits) is

7 amended by inserting after section 22 the following new

8 section:

9 ‘‘SEC. 23. ADOPTION EXPENSES.

10 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in11 dividual, there shall be allowed as a credit against the tax

12 imposed by this chapter for the taxable year the amount

13 of the qualified adoption expenses paid or incurred by the

14 taxpayer during such taxable year.

15 ‘‘(b) LIMITATIONS.—

16 ‘‘(1) DOLLAR LIMITATION.—The aggregate

17 amount of qualified adoption expenses which may be

18 taken into account under subsection (a) for all tax19 able years with respect to the adoption of a child by

20 the taxpayer shall not exceed $5,000.

21 ‘‘(2) INCOME LIMITATION.—The amount allow22 able as a credit under subsection (a) for any taxable

23 year shall be reduced (but not below zero) by an

24 amount which bears the same ratio to the amount
4

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1 so allowable (determined without regard to this

2 paragraph but with regard to paragraph (1)) as—

3 ‘‘(A) the amount (if any) by which the tax4 payer’s adjusted gross income (determined

5 without regard to sections 911, 931, and 933)

6 exceeds $75,000, bears to

7 ‘‘(B) $40,000.

8 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

9 ‘‘(A) IN GENERAL.—No credit shall be al10 lowed under subsection (a) for any expense for

11 which a deduction or credit is allowable under

12 any other provision of this chapter.

13 ‘‘(B) GRANTS.—No credit shall be allowed

14 under subsection (a) for any expense to the ex15 tent that funds for such expense are received

16 under any Federal, State, or local program.

17 The preceding sentence shall not apply to ex18 penses for the adoption of a child with special

19 needs.

20 ‘‘(C) REIMBURSEMENT.—No credit shall

21 be allowed under subsection (a) for any expense

22 to the extent that such expense is reimbursed

23 and the reimbursement is excluded from gross

24 income under section 137.
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1 ‘‘(c) CARRYFORWARDS OF UNUSED CREDIT.—If the

2 credit allowable under subsection (a) for any taxable year

3 exceeds the limitation imposed by section 26(a) for such

4 taxable year reduced by the sum of the credits allowable

5 under this subpart (other than this section), such excess

6 shall be carried to the succeeding taxable year and added

7 to the credit allowable under subsection (a) for such tax8 able year. No credit may be carried forward under this

9 subsection to any taxable year following the fifth taxable

10 year after the taxable year in which the credit arose. For

11 purposes of the preceding sentence, credits shall be treated

12 as used on a first-in first-out basis.

13 ‘‘(d) DEFINITIONS.—For purposes of this section—

14 ‘‘(1) QUALIFIED ADOPTION EXPENSES.—The

15 term ‘qualified adoption expenses’ means reasonable

16 and necessary adoption fees, court costs, attorney

17 fees, and other expenses—

18 ‘‘(A) which are directly related to, and the

19 principal purpose of which is for, the legal

20 adoption of an eligible child by the taxpayer,

21 and

22 ‘‘(B) which are not incurred in violation of

23 State or Federal law or in carrying out any sur24 rogate parenting arrangement.
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1 ‘‘(2) EXPENSES FOR ADOPTION OF SPOUSE’S

2 CHILD NOT ELIGIBLE.—The term ‘qualified adoption

3 expenses’ shall not include any expenses in connec4 tion with the adoption by an individual of a child

5 who is the child of such individual’s spouse.

6 ‘‘(3) ELIGIBLE CHILD.—The term ‘eligible

7 child’ means any individual—

8 ‘‘(A) who has not attained age 18 as of the

9 time of the adoption, or

10 ‘‘(B) who is physically or mentally incapa11 ble of caring for himself.

12 ‘‘(4) CHILD WITH SPECIAL NEEDS.—The term

13 ‘child with special needs’ means any child if—

14 ‘‘(A) a State has determined that the child

15 cannot or should not be returned to the home

16 of his parents, and

17 ‘‘(B) such State has determined that there

18 exists with respect to the child a specific factor

19 or condition (such as his ethnic background,

20 age, or membership in a minority or sibling

21 group, or the presence of factors such as medi22 cal conditions or physical, mental, or emotional

23 handicaps) because of which it is reasonable to

24 conclude that such child cannot be placed with
7

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1 adoptive parents without providing adoption as2 sistance.

3 ‘‘(e) SPECIAL RULES FOR FOREIGN ADOPTIONS.—In

4 the case of a foreign adoption—

5 ‘‘(1) subsection (a) shall not apply to any quali6 fied adoption expense with respect to such adoption

7 unless such adoption becomes final, and

8 ‘‘(2) any such expense which is paid or incurred

9 before the taxable year in which such adoption be10 comes final shall be taken into account under this

11 section as if such expense were paid or incurred dur12 ing such year.

13 ‘‘(f) MARRIED COUPLES MUST FILE JOINT RE14 TURNS.—Rules similar to the rules of paragraphs (2), (3),

15 and (4) of section 21(e) shall apply for purposes of this

16 section.

17 ‘‘(g) BASIS ADJUSTMENTS.—For purposes of this

18 subtitle, if a credit is allowed under this section for any

19 expenditure with respect to any property, the increase in

20 the basis of such property which would (but for this sub21 section) result from such expenditure shall be reduced by

22 the amount of the credit so allowed.

23 ‘‘(h) REGULATIONS.—The Secretary shall prescribe

24 such regulations as may be appropriate to carry out this

25 section and section 137, including regulations which treat
8

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1 unmarried individuals who pay or incur qualified adoption

2 expenses with respect to the same child as 1 taxpayer for

3 purposes of applying the dollar limitation in subsection

4 (b)(1) of this section and in section 137(b)(1).’’.

5 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM6 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III

7 of subchapter B of chapter 1 of such Code (relating to

8 items specifically excluded from gross income) is amended

9 by redesignating section 137 as section 138 and by insert10 ing after section 136 the following new section:

11 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

12 ‘‘(a) IN GENERAL.—Gross income of an employee

13 does not include amounts paid or expenses incurred by the

14 employer for qualified adoption expenses in connection

15 with the adoption of a child by an employee if such

16 amounts are furnished pursuant to an adoption assistance

17 program.

18 ‘‘(b) LIMITATIONS.—

19 ‘‘(1) DOLLAR LIMITATION.—The aggregate

20 amount excludable from gross income under sub21 section (a) for all taxable years with respect to the

22 adoption of a child by the taxpayer shall not exceed

23 $5,000.

24 ‘‘(2) INCOME LIMITATION.—The amount ex25 cludable from gross income under subsection (a) for
9

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1 any taxable year shall be reduced (but not below

2 zero) by an amount which bears the same ratio to

3 the amount so excludable (determined without re4 gard to this paragraph but with regard to paragraph

5 (1)) as—

6 ‘‘(A) the amount (if any) by which the tax7 payer’s adjusted gross income exceeds $75,000,

8 bears to

9 ‘‘(B) $40,000.

10 ‘‘(3) DETERMINATION OF ADJUSTED GROSS IN11 COME.—For purposes of paragraph (2), adjusted

12 gross income shall be determined—

13 ‘‘(A) without regard to this section and

14 sections 911, 931, and 933, and

15 ‘‘(B) after the application of sections 86,

16 135, 219, and 469.

17 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For pur18 poses of this section, an adoption assistance program is

19 a plan of an employer—

20 ‘‘(1) under which the employer provides employ21 ees with adoption assistance, and

22 ‘‘(2) which meets requirements similar to the

23 requirements of paragraphs (2), (3), and (5) of sec24 tion 127(b).
10

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1 An adoption reimbursement program operated under sec2 tion 1052 of title 10, United States Code (relating to

3 armed forces) or section 514 of title 14, United States

4 Code (relating to members of the Coast Guard) shall be

5 treated as an adoption assistance program for purposes

6 of this section.

7 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For pur8 poses of this section, the term ‘qualified adoption ex9 penses’ has the meaning given such term by section 23(d).

10 ‘‘(e) CERTAIN RULES TO APPLY.—Rules similar to

11 the rules of subsections (e) and (g) of section 23 shall

12 apply for purposes of this section.’’.

13 (c) CONFORMING AMENDMENTS.—

14 (1) Sections 86(b)(2)(A) and 135(c)(4)(A) of

15 such Code are each amended by inserting ‘‘137,’’ be16 fore ‘‘911’’.

17 (2) Clause (i) of section 219(g)(3)(A) of such

18 Code is amended by inserting ‘‘, 137,’’ before ‘‘and

19 911’’.

20 (3) Clause (ii) of section 469(i)(3)(E) of such

21 Code is amended to read as follows:

22 ‘‘(ii) the amounts excludable from

23 gross income under sections 135 and

24 137,’’.
11

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1 (4) Subsection (a) of section 1016 of such Code

2 is amended by striking ‘‘and’’ at the end of para3 graph (24), by striking the period at the end of

4 paragraph (25) and inserting ‘‘, and’’, and by add5 ing at the end the following new paragraph:

6 ‘‘(26) to the extent provided in sections 23(g)

7 and 137(e).’’

8 (5) The table of sections for subpart A of part

9 IV of subchapter A of chapter 1 of such Code is

10 amended by inserting after the item relating to sec11 tion 22 the following new item:

‘‘Sec. 23. Adoption expenses.’’.

12 (6) The table of sections for part III of sub13 chapter B of chapter 1 of such Code is amended by

14 striking the item relating to section 137 and insert15 ing the following:

‘‘Sec. 137. Adoption assistance programs.

‘‘Sec. 138. Cross reference to other Acts.’’.

16 (d) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to taxable years beginning after

18 December 31, 1996.

19 TITLE I—CREDIT FOR ADOPTION

20 EXPENSES

21 SEC. 101. CREDIT FOR ADOPTION EXPENSES.

22 (a) IN GENERAL.—Subpart A of part IV of subchapter

23 A of chapter 1 of the Internal Revenue Code of 1986 (relat-
12

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1 ing to nonrefundable personal credits) is amended by insert2 ing after section 22 the following new section:

3 ‘‘SEC. 23. ADOPTION EXPENSES.

4 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an indi5 vidual, there shall be allowed as a credit against the tax

6 imposed by this chapter for the taxable year the amount

7 of the qualified adoption expenses paid or incurred by the

8 taxpayer during such taxable year.

9 ‘‘(b) LIMITATIONS.—

10 ‘‘(1) DOLLAR LIMITATION.—The aggregate

11 amount of qualified adoption expenses which may be

12 taken into account under subsection (a) for all taxable

13 years with respect to the adoption of a child by the

14 taxpayer shall not exceed $5,000 ($6,000, in the case

15 of a child with special needs).

16 ‘‘(2) INCOME LIMITATION.—

17 ‘‘(A) IN GENERAL.—The amount allowable

18 as a credit under subsection (a) for any taxable

19 year shall be reduced (but not below zero) by an

20 amount which bears the same ratio to the

21 amount so allowable (determined without regard

22 to this paragraph but with regard to paragraph

23 (1)) as—
13

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1 ‘‘(i) the amount (if any) by which the

2 taxpayer’s adjusted gross income exceeds

3 $75,000, bears to

4 ‘‘(ii) $40,000.

5 ‘‘(B) DETERMINATION OF ADJUSTED GROSS

6 INCOME.—For purposes of subparagraph (A), ad7 justed gross income shall be determined—

8 ‘‘(i) without regard to sections 911,

9 931, and 933, and

10 ‘‘(ii) after the application of sections

11 86, 135, 137, 219, and 469.

12 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

13 ‘‘(A) IN GENERAL.—No credit shall be al14 lowed under subsection (a) for any expense for

15 which a deduction or credit is allowed under any

16 other provision of this chapter.

17 ‘‘(B) GRANTS.—No credit shall be allowed

18 under subsection (a) for any expense to the ex19 tent that funds for such expense are received

20 under any Federal, State, or local program.

21 ‘‘(c) CARRYFORWARDS OF UNUSED CREDIT.—If the

22 credit allowable under subsection (a) for any taxable year

23 exceeds the limitation imposed by section 26(a) for such tax24 able year reduced by the sum of the credits allowable under

25 this subpart (other than this section), such excess shall be
14

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1 carried to the succeeding taxable year and added to the

2 credit allowable under subsection (a) for such taxable year.

3 No credit may be carried forward under this subsection to

4 any taxable year following the fifth taxable year after the

5 taxable year in which the credit arose. For purposes of the

6 preceding sentence, credits shall be treated as used on a

7 first-in first-out basis.

8 ‘‘(d) DEFINITIONS.—For purposes of this section—

9 ‘‘(1) QUALIFIED ADOPTION EXPENSES.—The

10 term ‘qualified adoption expenses’ means reasonable

11 and necessary adoption fees, court costs, attorney fees,

12 and other expenses—

13 ‘‘(A) which are directly related to, and the

14 principal purpose of which is for, the legal adop15 tion of an eligible child by the taxpayer,

16 ‘‘(B) which are not incurred in violation of

17 State or Federal law or in carrying out any sur18 rogate parenting arrangement,

19 ‘‘(C) which are not expenses in connection

20 with the adoption by an individual of a child

21 who is the child of such individual’s spouse, and

22 ‘‘(D) which are not reimbursed under an

23 employer program or otherwise.

24 ‘‘(2) ELIGIBLE CHILD.—The term ‘eligible child’

25 means any individual—
15

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1 ‘‘(A) who—

2 ‘‘(i) has not attained age 18, or

3 ‘‘(ii) is physically or mentally incapa4 ble of caring for himself, and

5 ‘‘(B) in the case of qualified adoption ex6 penses paid or incurred after December 31, 2000,

7 who is a child with special needs.

8 ‘‘(4) CHILD WITH SPECIAL NEEDS.—The term

9 ‘child with special needs’ means any child if—

10 ‘‘(A) a State has determined that the child

11 cannot or should not be returned to the home of

12 his parents, and

13 ‘‘(B) such State has determined that there

14 exists with respect to the child a specific factor

15 or condition (such as his ethnic background, age,

16 or membership in a minority or sibling group,

17 or the presence of factors such as medical condi18 tions or physical, mental, or emotional handi19 caps) because of which it is reasonable to con20 clude that such child cannot be placed with

21 adoptive parents without providing adoption as22 sistance.

23 ‘‘(e) SPECIAL RULES FOR FOREIGN ADOPTIONS.—In

24 the case of an adoption of a child who is not a citizen or
16

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1 resident of the United States (as defined in section

2 217(h)(3))—

3 ‘‘(1) subsection (a) shall not apply to any quali4 fied adoption expense with respect to such adoption

5 unless such adoption becomes final, and

6 ‘‘(2) any such expense which is paid or incurred

7 before the taxable year in which such adoption be8 comes final shall be taken into account under this sec9 tion as if such expense were paid or incurred during

10 such year.

11 ‘‘(f) MARRIED COUPLES MUST FILE JOINT RE12 TURNS.—Rules similar to the rules of paragraphs (2), (3),

13 and (4) of section 21(e) shall apply for purposes of this sec14 tion.

15 ‘‘(g) BASIS ADJUSTMENTS.—For purposes of this sub16 title, if a credit is allowed under this section for any ex17 penditure with respect to any property, the increase in the

18 basis of such property which would (but for this subsection)

19 result from such expenditure shall be reduced by the amount

20 of the credit so allowed.

21 ‘‘(h) REGULATIONS.—The Secretary shall prescribe

22 such regulations as may be appropriate to carry out this

23 section and section 137, including regulations which treat

24 unmarried individuals who pay or incur qualified adoption

25 expenses with respect to the same child as 1 taxpayer for
17

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1 purposes of applying the dollar limitation in subsection

2 (b)(1) of this section and in section 137(b)(1).’’

3 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM4 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III of

5 subchapter B of chapter 1 of such Code (relating to items

6 specifically excluded from gross income) is amended by re7 designating section 137 as section 138 and by inserting

8 after section 136 the following new section:

9 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

10 ‘‘(a) IN GENERAL.—Gross income of an employee does

11 not include amounts paid or expenses incurred by the em12 ployer for qualified adoption expenses in connection with

13 the adoption of a child by an employee if such amounts

14 are furnished pursuant to an adoption assistance program.

15 ‘‘(b) LIMITATIONS.—

16 ‘‘(1) DOLLAR LIMITATION.—The aggregate

17 amount excludable from gross income under sub18 section (a) for all taxable years with respect to the

19 adoption of a child by the taxpayer shall not exceed

20 $5,000 ($6,000, in the case of a child with special

21 needs).

22 ‘‘(2) INCOME LIMITATION.—The amount exclud23 able from gross income under subsection (a) for any

24 taxable year shall be reduced (but not below zero) by

25 an amount which bears the same ratio to the amount
18

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1 so excludable (determined without regard to this

2 paragraph but with regard to paragraph (1)) as—

3 ‘‘(A) the amount (if any) by which the tax4 payer’s adjusted gross income exceeds $75,000,

5 bears to

6 ‘‘(B) $40,000.

7 ‘‘(3) DETERMINATION OF ADJUSTED GROSS IN8 COME.—For purposes of paragraph (2), adjusted gross

9 income shall be determined—

10 ‘‘(A) without regard to this section and sec11 tions 911, 931, and 933, and

12 ‘‘(B) after the application of sections 86,

13 135, 219, and 469.

14 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For purposes

15 of this section, an adoption assistance program is a sepa16 rate written plan of an employer for the exclusive benefit

17 of such employer’s employees—

18 ‘‘(1) under which the employer provides such em19 ployees with adoption assistance, and

20 ‘‘(2) which meets requirements similar to the re21 quirements of paragraphs (2), (3), (5), and (6) of sec22 tion 127(b).

23 An adoption reimbursement program operated under sec24 tion 1052 of title 10, United States Code (relating to armed

25 forces) or section 514 of title 14, United States Code (relat-
19

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1 ing to members of the Coast Guard) shall be treated as an

2 adoption assistance program for purposes of this section.

3 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For purposes

4 of this section, the term ‘qualified adoption expenses’ has

5 the meaning given such term by section 23(d).

6 ‘‘(e) CERTAIN RULES TO APPLY.—Rules similar to the

7 rules of subsections (e), (f), and (g) of section 23 shall apply

8 for purposes of this section.

9 ‘‘(f) TERMINATION.—This section shall not apply to

10 amounts paid or expenses incurred after December 31,

11 2000.’’

12 (c) CONFORMING AMENDMENTS.—

13 (1) Subparagraph (C) of section 25(e)(1) of such

14 Code is amended by inserting ‘‘and section 23’’ after

15 ‘‘this section’’.

16 (2) Sections 86(b)(2)(A) and 135(c)(4)(A) of

17 such Code are each amended by inserting ‘‘137,’’ be18 fore ‘‘911’’.

19 (3) Clause (i) of section 219(g)(3)(A) of such

20 Code is amended by inserting ‘‘, 137,’’ before ‘‘and

21 911’’.

22 (4) Clause (ii) of section 469(i)(3)(E) of such

23 Code is amended to read as follows:

24 ‘‘(ii) the amounts excludable from gross

25 income under sections 135 and 137,’’.
20

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1 (5) Subsection (a) of section 1016 of such Code

2 is amended by striking ‘‘and’’ at the end of para3 graph (24), by striking the period at the end of para4 graph (25) and inserting ‘‘, and’’, and by adding at

5 the end the following new paragraph:

6 ‘‘(26) to the extent provided in sections 23(g)

7 and 137(e).’’

8 (6) The table of sections for subpart A of part IV

9 of subchapter A of chapter 1 of such Code is amended

10 by inserting after the item relating to section 22 the

11 following new item:

‘‘Sec. 23. Adoption expenses.’’

12 (7) The table of sections for part III of sub13 chapter B of chapter 1 of such Code is amended by

14 striking the item relating to section 137 and inserting

15 the following:

‘‘Sec. 137. Adoption assistance programs.

‘‘Sec. 138. Cross reference to other Acts.’’

16 (d) STUDY AND REPORT.—The Secretary of the Treas17 ury shall study the effect on adoptions of the tax credit and

18 gross income exclusion established by the amendments made

19 by this section and shall submit a report regarding the

20 study to the Committee on Finance of the Senate and the

21 Committee on Ways and Means of the House of Representa22 tives not later than January 1, 2000.
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1 (e) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to taxable years beginning after Decem3 ber 31, 1996.

4 TITLE II—INTERETHNIC

5 ADOPTION

6 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP7 TION.

8 (a) STATE PLAN REQUIREMENTS.—Section 471(a)

9 of the Social Security Act (42 U.S.C 671(a)) is amend10 ed—

11 (1) by striking ‘‘and’’ at the end of paragraph

12 (16);

13 (2) by striking the period at the end of para14 graph (17) and inserting ‘‘; and’’; and

15 (3) by adding at the end the following:

16 ‘‘(18) not later than January 1, 1997, provides

17 that neither the State nor any other entity in the

18 State that receives funds from the Federal Govern19 ment and is involved in adoption or foster care

20 placements may—

21 ‘‘(A) deny to any person the opportunity to

22 become an adoptive or a foster parent, on the

23 basis of the race, color, or national origin of the

24 person, or of the child, involved; or
22

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1 ‘‘(B) delay or deny the placement of a

2 child for adoption or into foster care, on the

3 basis of the race, color, or national origin of the

4 adoptive or foster parent, or the child, in5 volved.’’.

6 (b) ENFORCEMENT.—Section 474 of such Act (42

7 U.S.C. 674) is amended by adding at the end the follow8 ing:

9 ‘‘(d)(1) If a State’s program operated under this part

10 is found, as a result of a review conducted under section

11 1123, to have violated section 471(a)(18) during a quarter

12 with respect to any person, then, notwithstanding sub13 section (a) of this section and any regulations promulgated

14 under section 1123(b)(3), the Secretary shall reduce the

15 amount otherwise payable to the State under this part,

16 for the quarter and for each subsequent quarter before

17 the 1st quarter for which the State program is found, as

18 a result of such a review, not to have violated section

19 471(a)(18) with respect to any person, by—

20 ‘‘(A) 2 percent of such otherwise payable

21 amount, in the case of the 1st such finding with re22 spect to the State;

23 ‘‘(B) 5 percent of such otherwise payable

24 amount, in the case of the 2nd such finding with re25 spect to the State; or
23

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1 ‘‘(C) 10 percent of such otherwise payable

2 amount, in the case of the 3rd or subsequent such

3 finding with respect to the State.

4 ‘‘(2) Any other entity which is in a State that receives

5 funds under this part and which violates section

6 471(a)(18) during a quarter with respect to any person

7 shall remit to the Secretary all funds that were paid by

8 the State to the entity during the quarter from such funds.

9 ‘‘(3)(A) Any individual who is aggrieved by a viola10 tion of section 471(a)(18) by a State or other entity may

11 bring an action seeking relief from the State or other en12 tity in any United States district court.

13 ‘‘(B) An action under this paragraph may not be

14 brought more than 2 years after the date the alleged viola15 tion occurred.

16 ‘‘(4) This subsection shall not be construed to affect

17 the application of the Indian Child Welfare Act of 1978.’’.

18 (c) CIVIL RIGHTS.—

19 (1) PROHIBITED CONDUCT.—A person or gov20 ernment that is involved in adoption or foster care

21 placements may not—

22 (A) deny to any individual the opportunity

23 to become an adoptive or a foster parent, on the

24 basis of the race, color, or national origin of the

25 individual, or of the child, involved; or
24

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1 (B) delay or deny the placement of a child

2 for adoption or into foster care, on the basis of

3 the race, color, or national origin of the adop4 tive or foster parent, or the child, involved.

5 (2) ENFORCEMENT.—Noncompliance with para6 graph (1) is deemed a violation of title VI of the

7 Civil Rights Act of 1964.

8 (3) NO EFFECT ON THE INDIAN CHILD WEL9 FARE ACT OF 1978.—This subsection shall not be

10 construed to affect the application of the Indian

11 Child Welfare Act of 1978.

12 (d) CONFORMING REPEAL.—Section 553 of the How13 ard M. Metzenbaum Multiethnic Placement Act of 1994

14 (42 U.S.C. 5115a) is repealed.

15 TITLE II—INTERETHNIC

16 ADOPTION

17 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP18 TION.

19 (a) STATE PLAN REQUIREMENTS.—Section 471(a) of

20 the Social Security Act (42 U.S.C 671(a)) is amended—

21 (1) by striking ‘‘and’’ at the end of paragraph

22 (16);

23 (2) by striking the period at the end of para24 graph (17) and inserting ‘‘; and’’; and

25 (3) by adding at the end the following:
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1 ‘‘(18) not later than January 1, 1997, provides

2 that neither the State nor any other entity in the

3 State that receives funds from the Federal Govern4 ment and is involved in adoption or foster care place5 ments may—

6 ‘‘(A) deny to any person the opportunity to

7 become an adoptive or a foster parent, on the

8 basis of the race, color, or national origin of the

9 person, or of the child, involved; or

10 ‘‘(B) delay or deny the placement of a child

11 for adoption or into foster care, on the basis of

12 the race, color, or national origin of the adoptive

13 or foster parent, or the child, involved.’’.

14 (b) ENFORCEMENT.—Section 474 of such Act (42

15 U.S.C. 674) is amended by adding at the end the following:

16 ‘‘(d) PENALTIES FOR VIOLATIONS OF INTERETHNIC

17 ADOPTION REQUIREMENTS.—

18 ‘‘(1) STATE VIOLATIONS.—If, during a fiscal

19 year, a State’s program operated under this part is

20 found, as a result of a completed review under section

21 1123A, including the completion of any administra22 tive appeal or judicial review conducted under sub23 section (c) of such section, to have violated section

24 471(a)(18) during a quarter of such fiscal year with

25 respect to a person, then, notwithstanding subsection
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1 (a) of this section and any regulations promulgated

2 under section 1123A(b)(3), the Secretary shall reduce

3 the amount otherwise payable to the State under this

4 part, for that fiscal year quarter and for any subse5 quent quarter of such fiscal year, until the State pro6 gram is found, as a result of a subsequent review

7 under section 1123A, not to have violated section

8 471(a)(18) with respect to such person, or no penalty

9 remains to be carried forward under paragraph

10 (2)(B).

11 ‘‘(2) AMOUNT OF REDUCTION.—

12 ‘‘(A) IN GENERAL.—For purposes of para13 graph (1), the amount otherwise payable to a

14 State under this part shall be reduced as follows:

15 ‘‘(i) 2 percent of such otherwise pay16 able amount, in the case of the 1st such

17 finding for the fiscal year with respect to

18 the State.

19 ‘‘(ii) 5 percent of such otherwise pay20 able amount, in the case of the 2nd such

21 finding for the fiscal year with respect to

22 the State.

23 ‘‘(iii) 10 percent of such otherwise pay24 able amount, in the case of the 3rd or subse-
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1 quent such finding for the fiscal year with

2 respect to the State.

3 ‘‘(B) LIMITATION ON AMOUNT OF PEN4 ALTY.—

5 ‘‘(i) IN GENERAL.—In imposing the

6 penalties described in this subsection, the

7 Secretary shall not reduce any quarterly

8 payment to a State by more than 25 per9 cent.

10 ‘‘(ii) CARRYFORWARD OF UNRE11 COVERED PENALTIES.—To the extent that

12 clause (i) prevents the Secretary from recov13 ering during a fiscal year the full amount

14 of all penalties imposed on a State under

15 this subsection for such fiscal year, the Sec16 retary shall apply any remaining amount

17 of such penalties to the amount payable to

18 the State under this part for the imme19 diately succeeding fiscal year quarter.

20 ‘‘(3) PRIVATE VIOLATIONS.—Any other entity

21 which is in a State that receives funds under this

22 part and which violates section 471(a)(18) during a

23 fiscal year quarter with respect to any person shall

24 remit to the Secretary all funds that were paid by the
28

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1 State to the entity during such quarter from such

2 funds.

3 ‘‘(4) PRIVATE CAUSE OF ACTION.—

4 ‘‘(A) IN GENERAL.—Any individual who is

5 aggrieved by a violation of section 471(a)(18) by

6 a State or other entity may bring an action seek7 ing relief from the State or other entity in any

8 United States district court.

9 ‘‘(B) STATUTE OF LIMITATIONS.—An action

10 under this paragraph may not be brought more

11 than 2 years after the date the alleged violation

12 occurred.

13 ‘‘(5) RULE OF CONSTRUCTION.—This subsection

14 shall not be construed to affect the application of the

15 Indian Child Welfare Act of 1978.’’.

16 (c) CIVIL RIGHTS.—

17 (1) PROHIBITED CONDUCT.—A person or govern18 ment that is involved in adoption or foster care place19 ments may not—

20 (A) deny to any individual the opportunity

21 to become an adoptive or a foster parent, on the

22 basis of the race, color, or national origin of the

23 individual, or of the child, involved; or

24 (B) delay or deny the placement of a child

25 for adoption or into foster care, on the basis of
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1 the race, color, or national origin of the adoptive

2 or foster parent, or the child, involved.

3 (2) ENFORCEMENT.—Noncompliance with para4 graph (1) is deemed a violation of title VI of the Civil

5 Rights Act of 1964.

6 (3) NO EFFECT ON THE INDIAN CHILD WELFARE

7 ACT OF 1978.—This subsection shall not be construed

8 to affect the application of the Indian Child Welfare

9 Act of 1978.

10 (d) CONFORMING AMENDMENTS.—

11 (1) REPEAL.—Section 553 of the Howard M.

12 Metzenbaum Multiethnic Placement Act of 1994 (42

13 U.S.C. 5115a) is repealed.

14 (2) REDESIGNATION OF SECTION 1123.—The So15 cial Security Act is amended by redesignating section

16 1123, the second place it appears (42 U.S.C. 1320a–

17 1a), as section 1123A.
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1 øTITLE III—CHILD CUSTODY

2 PROCEEDINGS AFFECTED BY

3 THE INDIAN CHILD WELFARE

4 ACT OF 1978

5 øSEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WEL6 FARE ACT OF 1978 TO CHILD CUSTODY PRO7 CEEDINGS INVOLVING A CHILD WHOSE PAR8 ENTS DO NOT MAINTAIN AFFILIATION WITH

9 THEIR INDIAN TRIBE.

10 øTitle I of the Indian Child Welfare Act of 1978 (25

11 U.S.C. 1911 et seq.) is amended by adding at the end

12 the following:

13 ø‘‘SEC. 114. (a) This title does not apply to any child

14 custody proceeding involving a child who does not reside

15 or is not domiciled within a reservation unless—

16 ø‘‘(1) at least one of the child’s biological par17 ents is of Indian descent; and

18 ø‘‘(2) at least one of the child’s biological par19 ents maintains significant social, cultural, or politi20 cal affiliation with the Indian tribe of which either

21 parent is a member.

22 ø‘‘(b) The factual determination as to whether a bio23 logical parent maintains significant social, cultural, or po24 litical affiliation with the Indian tribe of which either par-
31

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1 ent is a member shall be based on such affiliation as of

2 the time of the child custody proceeding.

3 ø‘‘(c) The determination that this title does not apply

4 pursuant to subsection (a) is final, and, thereafter, this

5 title shall not be the basis for determining jurisdiction over

6 any child custody proceeding involving the child.’’.

7 øSEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEED8 INGS.

9 øTitle I of the Indian Child Welfare Act of 1978 (25

10 U.S.C. 1911 et seq.), as amended by section 301 of this

11 title, is further amended by adding at the end the follow12 ing:

13 ø‘‘SEC. 115. (a) A person who attains the age of 18

14 years before becoming a member of an Indian tribe may

15 become a member of an Indian tribe only upon the per16 son’s written consent.

17 ø‘‘(b) For the purposes of any child custody proceed18 ing involving an Indian child, membership in an Indian

19 tribe shall be effective from the actual date of admission

20 to membership in the Indian tribe and shall not be given

21 retroactive effect.’’.

22 øSEC. 303. EFFECTIVE DATE.

23 øThe amendments made by this title shall take effect

24 on the date of the enactment of this Act and shall apply
32

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1 with respect to any child custody proceeding in which a

2 final decree has not been entered as of such date.¿

3 TITLE IV—REVENUE OFFSETS

4 SEC. 400. AMENDMENT OF 1986 CODE.

5 Except as otherwise expressly provided, whenever in

6 this title an amendment or repeal is expressed in terms

7 of an amendment to, or repeal of, a section or other provi8 sion, the reference shall be considered to be made to a

9 section or other provision of the Internal Revenue Code

10 of 1986.

11 Subtitle A—Exclusion for Energy

12 Conservation Subsidies Limited

13 to Subsidies With Respect to

14 Dwelling Units

15 SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUB16 SIDIES LIMITED TO SUBSIDIES WITH RE17 SPECT TO DWELLING UNITS.

18 (a) IN GENERAL.—Paragraph (1) of section 136(c)

19 (defining energy conservation measure) is amended by

20 striking ‘‘energy demand—’’ and all that follows and in21 serting ‘‘energy demand with respect to a dwelling unit.’’

22 (b) CONFORMING AMENDMENTS.—

23 (1) Subsection (a) of section 136 is amended to

24 read as follows:
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1 ‘‘(a) EXCLUSION.—Gross income shall not include

2 the value of any subsidy provided (directly or indirectly)

3 by a public utility to a customer for the purchase or instal4 lation of any energy conservation measure.’’

5 (2) Paragraph (2) of section 136(c) is amend6 ed—

7 (A) by striking subparagraph (A) and by

8 redesignating subparagraphs (B) and (C) as

9 subparagraphs (A) and (B), respectively, and

10 (B) by striking ‘‘AND SPECIAL RULES’’ in

11 the paragraph heading.

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to amounts received after Decem14 ber 31, 1996, unless received pursuant to a written bind15 ing contract in effect on September 13, 1995, and at all

16 times thereafter.

17 Subtitle B—Foreign Trust Tax

18 Compliance

19 SEC. 411. IMPROVED INFORMATION REPORTING ON FOR20 EIGN TRUSTS.

21 (a) IN GENERAL.—Section 6048 (relating to returns

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

23 ‘‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN

24 FOREIGN TRUSTS.

25 ‘‘(a) NOTICE OF CERTAIN EVENTS.—
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1 ‘‘(1) GENERAL RULE.—On or before the 90th

2 day (or such later day as the Secretary may pre3 scribe) after any reportable event, the responsible

4 party shall provide written notice of such event to

5 the Secretary in accordance with paragraph (2).

6 ‘‘(2) CONTENTS OF NOTICE.—The notice re7 quired by paragraph (1) shall contain such informa8 tion as the Secretary may prescribe, including—

9 ‘‘(A) the amount of money or other prop10 erty (if any) transferred to the trust in connec11 tion with the reportable event, and

12 ‘‘(B) the identity of the trust and of each

13 trustee and beneficiary (or class of bene14 ficiaries) of the trust.

15 ‘‘(3) REPORTABLE EVENT.—For purposes of

16 this subsection—

17 ‘‘(A) IN GENERAL.—The term ‘reportable

18 event’ means—

19 ‘‘(i) the creation of any foreign trust

20 by a United States person,

21 ‘‘(ii) the transfer of any money or

22 property (directly or indirectly) to a for23 eign trust by a United States person, in24 cluding a transfer by reason of death, and
35

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1 ‘‘(iii) the death of a citizen or resident

2 of the United States if—

3 ‘‘(I) the decedent was treated as

4 the owner of any portion of a foreign

5 trust under the rules of subpart E of

6 part I of subchapter J of chapter 1,

7 or

8 ‘‘(II) any portion of a foreign

9 trust was included in the gross estate

10 of the decedent.

11 ‘‘(B) EXCEPTIONS.—

12 ‘‘(i) FAIR MARKET VALUE SALES.—

13 Subparagraph (A)(ii) shall not apply to

14 any transfer of property to a trust in ex15 change for consideration of at least the fair

16 market value of the transferred property.

17 For purposes of the preceding sentence,

18 consideration other than cash shall be

19 taken into account at its fair market value

20 and the rules of section 679(a)(3) shall

21 apply.

22 ‘‘(ii) DEFERRED COMPENSATION AND

23 CHARITABLE TRUSTS.—Subparagraph (A)

24 shall not apply with respect to a trust

25 which is—
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1 ‘‘(I) described in section 402(b),

2 404(a)(4), or 404A, or

3 ‘‘(II) determined by the Sec4 retary to be described in section

5 501(c)(3).

6 ‘‘(4) RESPONSIBLE PARTY.—For purposes of

7 this subsection, the term ‘responsible party’

8 means—

9 ‘‘(A) the grantor in the case of the cre10 ation of an inter vivos trust,

11 ‘‘(B) the transferor in the case of a report12 able event described in paragraph (3)(A)(ii)

13 other than a transfer by reason of death, and

14 ‘‘(C) the executor of the decedent’s estate

15 in any other case.

16 ‘‘(b) UNITED STATES GRANTOR OF FOREIGN

17 TRUST.—

18 ‘‘(1) IN GENERAL.—If, at any time during any

19 taxable year of a United States person, such person

20 is treated as the owner of any portion of a foreign

21 trust under the rules of subpart E of part I of sub22 chapter J of chapter 1, such person shall be respon23 sible to ensure that—

24 ‘‘(A) such trust makes a return for such

25 year which sets forth a full and complete ac-
37

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1 counting of all trust activities and operations

2 for the year, the name of the United States

3 agent for such trust, and such other informa4 tion as the Secretary may prescribe, and

5 ‘‘(B) such trust furnishes such information

6 as the Secretary may prescribe to each United

7 States person (i) who is treated as the owner of

8 any portion of such trust or (ii) who receives

9 (directly or indirectly) any distribution from the

10 trust.

11 ‘‘(2) TRUSTS NOT HAVING UNITED STATES

12 AGENT.—

13 ‘‘(A) IN GENERAL.—If the rules of this

14 paragraph apply to any foreign trust, the deter15 mination of amounts required to be taken into

16 account with respect to such trust by a United

17 States person under the rules of subpart E of

18 part I of subchapter J of chapter 1 shall be de19 termined by the Secretary.

20 ‘‘(B) UNITED STATES AGENT REQUIRED.—

21 The rules of this paragraph shall apply to any

22 foreign trust to which paragraph (1) applies un23 less such trust agrees (in such manner, subject

24 to such conditions, and at such time as the Sec25 retary shall prescribe) to authorize a United
38

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1 States person to act as such trust’s limited

2 agent solely for purposes of applying sections

3 7602, 7603, and 7604 with respect to—

4 ‘‘(i) any request by the Secretary to

5 examine records or produce testimony re6 lated to the proper treatment of amounts

7 required to be taken into account under

8 the rules referred to in subparagraph (A),

9 or

10 ‘‘(ii) any summons by the Secretary

11 for such records or testimony.

12 The appearance of persons or production of

13 records by reason of a United States person

14 being such an agent shall not subject such per15 sons or records to legal process for any purpose

16 other than determining the correct treatment

17 under this title of the amounts required to be

18 taken into account under the rules referred to

19 in subparagraph (A). A foreign trust which ap20 points an described in this subparagraph shall

21 not be considered to have an office or a perma22 nent establishment in the United States, or to

23 be engaged in a trade or business in the United

24 States, solely because of the activities of such

25 agent pursuant to this subsection.
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1 ‘‘(C) OTHER RULES TO APPLY.—Rules

2 similar to the rules of paragraphs (2) and (4)

3 of section 6038A(e) shall apply for purposes of

4 this paragraph.

5 ‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES

6 OF FOREIGN TRUSTS.—

7 ‘‘(1) IN GENERAL.—If any United States per8 son receives (directly or indirectly) during any tax9 able year of such person any distribution from a for10 eign trust, such person shall make a return with re11 spect to such trust for such year which includes—

12 ‘‘(A) the name of such trust,

13 ‘‘(B) the aggregate amount of the distribu14 tions so received from such trust during such

15 taxable year, and

16 ‘‘(C) such other information as the Sec17 retary may prescribe.

18 ‘‘(2) INCLUSION IN INCOME IF RECORDS NOT

19 PROVIDED.—

20 ‘‘(A) IN GENERAL.—If adequate records

21 are not provided to the Secretary to determine

22 the proper treatment of any distribution from a

23 foreign trust, such distribution shall be treated

24 as an accumulation distribution includible in

25 the gross income of the distributee under chap-
40

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1 ter 1. To the extent provided in regulations, the

2 preceding sentence shall not apply if the foreign

3 trust elects to be subject to rules similar to the

4 rules of subsection (b)(2)(B).

5 ‘‘(B) APPLICATION OF ACCUMULATION

6 DISTRIBUTION RULES.—For purposes of apply7 ing section 668 in a case to which subpara8 graph (A) applies, the applicable number of

years for purposes of section 668(a) shall be 1 9 ⁄2

10 of the number of years the trust has been in ex11 istence.

12 ‘‘(d) SPECIAL RULES.—

13 ‘‘(1) DETERMINATION OF WHETHER UNITED

14 STATES PERSON MAKES TRANSFER OR RECEIVES

15 DISTRIBUTION.—For purposes of this section, in de16 termining whether a United States person makes a

17 transfer to, or receives a distribution from, a foreign

18 trust, the fact that a portion of such trust is treated

19 as owned by another person under the rules of sub20 part E of part I of subchapter J of chapter 1 shall

21 be disregarded.

22 ‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI23 TIES.—To the extent provided in regulations, a trust

24 which is a United States person shall be treated as

25 a foreign trust for purposes of this section and sec-
41

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1 tion 6677 if such trust has substantial activities, or

2 holds substantial property, outside the United

3 States.

4 ‘‘(3) TIME AND MANNER OF FILING INFORMA5 TION.—Any notice or return required under this sec6 tion shall be made at such time and in such manner

7 as the Secretary shall prescribe.

8 ‘‘(4) MODIFICATION OF RETURN REQUIRE9 MENTS.—The Secretary is authorized to suspend or

10 modify any requirement of this section if the Sec11 retary determines that the United States has no sig12 nificant tax interest in obtaining the required infor13 mation.’’.

14 (b) INCREASED PENALTIES.—Section 6677 (relating

15 to failure to file information returns with respect to cer16 tain foreign trusts) is amended to read as follows:

17 ‘‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT

18 TO CERTAIN FOREIGN TRUSTS.

19 ‘‘(a) CIVIL PENALTY.—In addition to any criminal

20 penalty provided by law, if any notice or return required

21 to be filed by section 6048—

22 ‘‘(1) is not filed on or before the time provided

23 in such section, or
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1 ‘‘(2) does not include all the information re2 quired pursuant to such section or includes incorrect

3 information,

4 the person required to file such notice or return shall pay

5 a penalty equal to 35 percent of the gross reportable

6 amount. If any failure described in the preceding sentence

7 continues for more than 90 days after the day on which

8 the Secretary mails notice of such failure to the person

9 required to pay such penalty, such person shall pay a pen10 alty (in addition to the amount determined under the pre11 ceding sentence) of $10,000 for each 30-day period (or

12 fraction thereof) during which such failure continues after

13 the expiration of such 90-day period. In no event shall the

14 penalty under this subsection with respect to any failure

15 exceed the gross reportable amount.

16 ‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC17 TION 6048(b).—In the case of a return required under

18 section 6048(b)—

19 ‘‘(1) the United States person referred to in

20 such section shall be liable for the penalty imposed

21 by subsection (a), and

22 ‘‘(2) subsection (a) shall be applied by sub23 stituting ‘5 percent’ for ‘35 percent’.
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1 ‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes

2 of subsection (a), the term ‘gross reportable amount’

3 means—

4 ‘‘(1) the gross value of the property involved in

5 the event (determined as of the date of the event)

6 in the case of a failure relating to section 6048(a),

7 ‘‘(2) the gross value of the portion of the trust’s

8 assets at the close of the year treated as owned by

9 the United States person in the case of a failure re10 lating to section 6048(b)(1), and

11 ‘‘(3) the gross amount of the distributions in

12 the case of a failure relating to section 6048(c).

13 ‘‘(d) REASONABLE CAUSE EXCEPTION.—No penalty

14 shall be imposed by this section on any failure which is

15 shown to be due to reasonable cause and not due to willful

16 neglect. The fact that a foreign jurisdiction would impose

17 a civil or criminal penalty on the taxpayer (or any other

18 person) for disclosing the required information is not rea19 sonable cause.

20 ‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—

21 Subchapter B of chapter 63 (relating to deficiency proce22 dures for income, estate, gift, and certain excise taxes)

23 shall not apply in respect of the assessment or collection

24 of any penalty imposed by subsection (a).’’.

25 (c) CONFORMING AMENDMENTS.—
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1 (1) Paragraph (2) of section 6724(d) is amend2 ed by striking ‘‘or’’ at the end of subparagraph (S),

3 by striking the period at the end of subparagraph

4 (T) and inserting ‘‘, or’’, and by inserting after sub5 paragraph (T) the following new subparagraph:

6 ‘‘(U) section 6048(b)(1)(B) (relating to

7 foreign trust reporting requirements).’’.

8 (2) The table of sections for subpart B of part

9 III of subchapter A of chapter 61 is amended by

10 striking the item relating to section 6048 and insert11 ing the following new item:

‘‘Sec. 6048. Information with respect to certain foreign trusts.’’.

12 (3) The table of sections for part I of sub13 chapter B of chapter 68 is amended by striking the

14 item relating to section 6677 and inserting the fol15 lowing new item:

‘‘Sec. 6677. Failure to file information with respect to certain foreign trusts.’’.

16 (d) EFFECTIVE DATES.—

17 (1) REPORTABLE EVENTS.—To the extent re18 lated to subsection (a) of section 6048 of the Inter19 nal Revenue Code of 1986, as amended by this sec20 tion, the amendments made by this section shall

21 apply to reportable events (as defined in such section

22 6048) occurring after the date of the enactment of

23 this Act.
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1 (2) GRANTOR TRUST REPORTING.—To the ex2 tent related to subsection (b) of such section 6048,

3 the amendments made by this section shall apply to

4 taxable years of United States persons beginning

5 after December 31, 1995.

6 (3) REPORTING BY UNITED STATES BENE7 FICIARIES.—To the extent related to subsection (c)

8 of such section 6048, the amendments made by this

9 section shall apply to distributions received after the

10 date of the enactment of this Act.

11 SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE

12 RETURN RELATING TO TRANSFERS TO FOR13 EIGN ENTITIES.

14 (a) IN GENERAL.—Section 1494 is amended by add15 ing at the end the following new subsection:

16 ‘‘(c) PENALTY.—In the case of any failure to file a

17 return required by the Secretary with respect to any trans18 fer described in section 1491, the person required to file

19 such return shall be liable for the penalties provided in

20 section 6677 in the same manner as if such failure were

21 a failure to file a notice under section 6048(a).’’.

22 (b) EFFECTIVE DATE.—The amendment made by

23 subsection (a) shall apply to transfers after the date of

24 the enactment of this Act.
46

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1 SEC. 413. MODIFICATIONS OF RULES RELATING TO FOR2 EIGN TRUSTS HAVING ONE OR MORE UNITED

3 STATES BENEFICIARIES.

4 (a) TREATMENT OF TRUST OBLIGATIONS, ETC.—

5 (1) Paragraph (2) of section 679(a) is amended

6 by striking subparagraph (B) and inserting the fol7 lowing:

8 ‘‘(B) TRANSFERS AT FAIR MARKET

9 VALUE.—To any transfer of property to a trust

10 in exchange for consideration of at least the fair

11 market value of the transferred property. For

12 purposes of the preceding sentence, consider13 ation other than cash shall be taken into ac14 count at its fair market value.’’.

15 (2) Subsection (a) of section 679 (relating to

16 foreign trusts having one or more United States

17 beneficiaries) is amended by adding at the end the

18 following new paragraph:

19 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO

20 ACCOUNT UNDER FAIR MARKET VALUE EXCEP21 TION.—

22 ‘‘(A) IN GENERAL.—In determining wheth23 er paragraph (2)(B) applies to any transfer by

24 a person described in clause (ii) or (iii) of sub25 paragraph (C), there shall not be taken into ac26 count—
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1 ‘‘(i) except as provided in regulations,

2 any obligation of a person described in

3 subparagraph (C), and

4 ‘‘(ii) to the extent provided in regula5 tions, any obligation which is guaranteed

6 by a person described in subparagraph (C).

7 ‘‘(B) TREATMENT OF PRINCIPAL PAY8 MENTS ON OBLIGATION.—Principal payments

9 by the trust on any obligation referred to in

10 subparagraph (A) shall be taken into account

11 on and after the date of the payment in deter12 mining the portion of the trust attributable to

13 the property transferred.

14 ‘‘(C) PERSONS DESCRIBED.—The persons

15 described in this subparagraph are—

16 ‘‘(i) the trust,

17 ‘‘(ii) any grantor or beneficiary of the

18 trust, and

19 ‘‘(iii) any person who is related (with20 in the meaning of section 643(i)(2)(B)) to

21 any grantor or beneficiary of the trust.’’.

22 (b) EXEMPTION OF TRANSFERS TO CHARITABLE

23 TRUSTS.—Subsection (a) of section 679 is amended by

24 striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘sec25 tion 6048(a)(3)(B)(ii)’’.
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1 (c) OTHER MODIFICATIONS.—Subsection (a) of sec2 tion 679 is amended by adding at the end the following

3 new paragraphs:

4 ‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN

5 GRANTOR WHO LATER BECOMES A UNITED STATES

6 PERSON.—

7 ‘‘(A) IN GENERAL.—If a nonresident alien

8 individual has a residency starting date within

9 5 years after directly or indirectly transferring

10 property to a foreign trust, this section and sec11 tion 6048 shall be applied as if such individual

12 transferred to such trust on the residency start13 ing date an amount equal to the portion of such

14 trust attributable to the property transferred by

15 such individual to such trust in such transfer.

16 ‘‘(B) TREATMENT OF UNDISTRIBUTED IN17 COME.—For purposes of this section, undistrib18 uted net income for periods before such individ19 ual’s residency starting date shall be taken into

20 account in determining the portion of the trust

21 which is attributable to property transferred by

22 such individual to such trust but shall not oth23 erwise be taken into account.

24 ‘‘(C) RESIDENCY STARTING DATE.—For

25 purposes of this paragraph, an individual’s resi-
49

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1 dency starting date is the residency starting

2 date determined under section 7701(b)(2)(A).

3 ‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—

4 ‘‘(A) an individual who is a citizen or resi5 dent of the United States transferred property

6 to a trust which was not a foreign trust, and

7 ‘‘(B) such trust becomes a foreign trust

8 while such individual is alive,

9 then this section and section 6048 shall be applied

10 as if such individual transferred to such trust on the

11 date such trust becomes a foreign trust an amount

12 equal to the portion of such trust attributable to the

13 property previously transferred by such individual to

14 such trust. A rule similar to the rule of paragraph

15 (4)(B) shall apply for purposes of this paragraph.’’.

16 (d) MODIFICATIONS RELATING TO WHETHER TRUST

17 HAS UNITED STATES BENEFICIARIES.—Subsection (c) of

18 section 679 is amended by adding at the end the following

19 new paragraph:

20 ‘‘(3) CERTAIN UNITED STATES BENEFICIARIES

21 DISREGARDED.—A beneficiary shall not be treated

22 as a United States person in applying this section

23 with respect to any transfer of property to foreign

24 trust if such beneficiary first became a United
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1 States person more than 5 years after the date of

2 such transfer.’’.

3 (e) TECHNICAL AMENDMENT.—Subparagraph (A) of

4 section 679(c)(2) is amended to read as follows:

5 ‘‘(A) in the case of a foreign corporation,

6 such corporation is a controlled foreign corpora7 tion (as defined in section 957(a)),’’.

8 (f) REGULATIONS.—Section 679 is amended by add9 ing at the end the following new subsection:

10 ‘‘(d) REGULATIONS.—The Secretary shall prescribe

11 such regulations as may be necessary or appropriate to

12 carry out the purposes of this section.’’.

13 (g) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to transfers of property after Feb15 ruary 6, 1995.

16 SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWN17 ERS UNDER GRANTOR TRUST RULES.

18 (a) GENERAL RULE.—

19 (1) Subsection (f) of section 672 (relating to

20 special rule where grantor is foreign person) is

21 amended to read as follows:

22 ‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER23 SHIP.—

24 ‘‘(1) IN GENERAL.—Notwithstanding any other

25 provision of this subpart, this subpart shall apply
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1 only to the extent such application results in an

2 amount (if any) being currently taken into account

3 (directly or through 1 or more entities) under this

4 chapter in computing the income of a citizen or resi5 dent of the United States or a domestic corporation.

6 ‘‘(2) EXCEPTIONS.—

7 ‘‘(A) CERTAIN REVOCABLE AND IRREV8 OCABLE TRUSTS.—Paragraph (1) shall not

9 apply to any portion of a trust if—

10 ‘‘(i) the power to revest absolutely in

11 the grantor title to the trust property to

12 which such portion is attributable is exer13 cisable solely by the grantor without the

14 approval or consent of any other person or

15 with the consent of a related or subordi16 nate party who is subservient to the grant17 or, or

18 ‘‘(ii) the only amounts distributable

19 from such portion (whether income or cor20 pus) during the lifetime of the grantor are

21 amounts distributable to the grantor or the

22 spouse of the grantor.

23 ‘‘(B) COMPENSATORY TRUSTS.—Except as

24 provided in regulations, paragraph (1) shall not

25 apply to any portion of a trust distributions
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1 from which are taxable as compensation for

2 services rendered.

3 ‘‘(3) SPECIAL RULES.—Except as otherwise

4 provided in regulations prescribed by the Sec5 retary—

6 ‘‘(A) a controlled foreign corporation (as

7 defined in section 957) shall be treated as a do8 mestic corporation for purposes of paragraph

9 (1), and

10 ‘‘(B) paragraph (1) shall not apply for

11 purposes of applying section 1296.

12 ‘‘(4) RECHARACTERIZATION OF PURPORTED

13 GIFTS.—In the case of any transfer directly or indi14 rectly from a partnership or foreign corporation

15 which the transferee treats as a gift or bequest, the

16 Secretary may recharacterize such transfer in such

17 circumstances as the Secretary determines to be ap18 propriate to prevent the avoidance of the purposes of

19 this subsection.

20 ‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR21 EIGN PERSON.—If—

22 ‘‘(A) but for this subsection, a foreign per23 son would be treated as the owner of any por24 tion of a trust, and
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1 ‘‘(B) such trust has a beneficiary who is a

2 United States person,

3 such beneficiary shall be treated as the grantor of

4 such portion to the extent such beneficiary or any

5 member of such beneficiary’s family (within the

6 meaning of section 267(c)(4)) has made (directly or

7 indirectly) transfers of property (other than in a sale

8 for full and adequate consideration) to such foreign

9 person. For purposes of the preceding sentence, any

10 gift shall not be taken into account to the extent

11 such gift would be excluded from taxable gifts under

12 section 2503(b).

13 ‘‘(6) REGULATIONS.—The Secretary shall pre14 scribe such regulations as may be necessary or ap15 propriate to carry out the purposes of this sub16 section, including regulations providing that para17 graph (1) shall not apply in appropriate cases.’’.

18 (2) The last sentence of subsection (c) of sec19 tion 672 of such Code is amended by inserting ‘‘sub20 section (f) and’’ before ‘‘sections 674’’.

21 (b) CREDIT FOR CERTAIN TAXES.—

22 (1) Paragraph (2) of section 665(d) is amended

23 by adding at the end the following new sentence:

24 ‘‘Under rules or regulations prescribed by the Sec25 retary, in the case of any foreign trust of which the
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1 settlor or another person would be treated as owner

2 of any portion of the trust under subpart E but for

3 section 672(f), the term ‘taxes imposed on the trust’

4 includes the allocable amount of any income, war

5 profits, and excess profits taxes imposed by any for6 eign country or possession of the United States on

7 the settlor or such other person in respect of trust

8 income.’’.

9 (2) Paragraph (5) of section 901(b) is amended

10 by adding at the end the following new sentence:

11 ‘‘Under rules or regulations prescribed by the Sec12 retary, in the case of any foreign trust of which the

13 settlor or another person would be treated as owner

14 of any portion of the trust under subpart E but for

15 section 672(f), the allocable amount of any income,

16 war profits, and excess profits taxes imposed by any

17 foreign country or possession of the United States

18 on the settlor or such other person in respect of

19 trust income.’’.

20 (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

21 THROUGH NOMINEES.—

22 (1) Section 643 is amended by adding at the

23 end the following new subsection:

24 ‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

25 THROUGH NOMINEES.—For purposes of this part, any
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1 amount paid to a United States person which is derived

2 directly or indirectly from a foreign trust of which the

3 payor is not the grantor shall be deemed in the year of

4 payment to have been directly paid by the foreign trust

5 to such United States person.’’.

6 (2) Section 665 is amended by striking sub7 section (c).

8 (d) EFFECTIVE DATE.—

9 (1) IN GENERAL.—Except as provided by para10 graph (2), the amendments made by this section

11 shall take effect on the date of the enactment of this

12 Act.

13 (2) EXCEPTION FOR CERTAIN TRUSTS.—The

14 amendments made by this section shall not apply to

15 any trust—

16 (A) which is treated as owned by the

17 grantor under section 676 or 677 (other than

18 subsection (a)(3) thereof) of the Internal Reve19 nue Code of 1986, and

20 (B) which is in existence on September 19,

21 1995.

22 The preceding sentence shall not apply to the por23 tion of any such trust attributable to any transfer to

24 such trust after September 19, 1995.

25 (e) TRANSITIONAL RULE.—If—
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1 (1) by reason of the amendments made by this

2 section, any person other than a United States per3 son ceases to be treated as the owner of a portion

4 of a domestic trust, and

5 (2) before January 1, 1997, such trust becomes

6 a foreign trust, or the assets of such trust are trans7 ferred to a foreign trust,

8 no tax shall be imposed by section 1491 of the Internal

9 Revenue Code of 1986 by reason of such trust becoming

10 a foreign trust or the assets of such trust being trans11 ferred to a foreign trust.

12 SEC. 415. INFORMATION REPORTING REGARDING FOREIGN

13 GIFTS.

14 (a) IN GENERAL.—Subpart A of part III of sub15 chapter A of chapter 61 is amended by inserting after sec16 tion 6039E the following new section:

17 ‘‘SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM

18 FOREIGN PERSONS.

19 ‘‘(a) IN GENERAL.—If the value of the aggregate for20 eign gifts received by a United States person (other than

21 an organization described in section 501(c) and exempt

22 from tax under section 501(a)) during any taxable year

23 exceeds $10,000, such United States person shall furnish

24 (at such time and in such manner as the Secretary shall

25 prescribe) such information as the Secretary may pre-
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1 scribe regarding each foreign gift received during such

2 year.

3 ‘‘(b) FOREIGN GIFT.—For purposes of this section,

4 the term ‘foreign gift’ means any amount received from

5 a person other than a United States person which the re6 cipient treats as a gift or bequest. Such term shall not

7 include any qualified transfer (within the meaning of sec8 tion 2503(e)(2)) or any distribution properly disclosed in

9 a return under section 6048(c).

10 ‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA11 TION.—

12 ‘‘(1) IN GENERAL.—If a United States person

13 fails to furnish the information required by sub14 section (a) with respect to any foreign gift within

15 the time prescribed therefor (including extensions)—

16 ‘‘(A) the tax consequences of the receipt of

17 such gift shall be determined by the Secretary,

18 and

19 ‘‘(B) such United States person shall pay

20 (upon notice and demand by the Secretary and

21 in the same manner as tax) an amount equal to

22 5 percent of the amount of such foreign gift for

23 each month for which the failure continues (not

24 to exceed 25 percent of such amount in the ag25 gregate).
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1 ‘‘(2) REASONABLE CAUSE EXCEPTION.—Para2 graph (1) shall not apply to any failure to report a

3 foreign gift if the United States person shows that

4 the failure is due to reasonable cause and not due

5 to willful neglect.

6 ‘‘(d) COST-OF-LIVING ADJUSTMENT.—In the case of

7 any taxable year beginning after December 31, 1996, the

8 $10,000 amount under subsection (a) shall be increased

9 by an amount equal to the product of such amount and

10 the cost-of-living adjustment for such taxable year under

11 section 1(f)(3), except that subparagraph (B) thereof shall

12 be applied by substituting ‘1995’ for ‘1992’.

13 ‘‘(e) REGULATIONS.—The Secretary shall prescribe

14 such regulations as may be necessary or appropriate to

15 carry out the purposes of this section.’’.

16 (b) CLERICAL AMENDMENT.—The table of sections

17 for such subpart is amended by inserting after the item

18 relating to section 6039E the following new item:

‘‘Sec. 6039F. Notice of large gifts received from foreign persons.’’.

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to amounts received after the date

21 of the enactment of this Act in taxable years ending after

22 such date.
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1 SEC. 416. MODIFICATION OF RULES RELATING TO FOREIGN

2 TRUSTS WHICH ARE NOT GRANTOR TRUSTS.

3 (a) MODIFICATION OF INTEREST CHARGE ON ACCU4 MULATION DISTRIBUTIONS.—Subsection (a) of section

5 668 (relating to interest charge on accumulation distribu6 tions from foreign trusts) is amended to read as follows:

7 ‘‘(a) GENERAL RULE.—For purposes of the tax de8 termined under section 667(a)—

9 ‘‘(1) INTEREST DETERMINED USING UNDER10 PAYMENT RATES.—The interest charge determined

11 under this section with respect to any distribution is

12 the amount of interest which would be determined

13 on the partial tax computed under section 667(b) for

14 the period described in paragraph (2) using the

15 rates and the method under section 6621 applicable

16 to underpayments of tax.

17 ‘‘(2) PERIOD.—For purposes of paragraph (1),

18 the period described in this paragraph is the period

19 which begins on the date which is the applicable

20 number of years before the date of the distribution

21 and which ends on the date of the distribution.

22 ‘‘(3) APPLICABLE NUMBER OF YEARS.—For

23 purposes of paragraph (2)—

24 ‘‘(A) IN GENERAL.—The applicable num25 ber of years with respect to a distribution is the

26 number determined by dividing—
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1 ‘‘(i) the sum of the products described

2 in subparagraph (B) with respect to each

3 undistributed income year, by

4 ‘‘(ii) the aggregate undistributed net

5 income.

6 The quotient determined under the preceding

7 sentence shall be rounded under procedures

8 prescribed by the Secretary.

9 ‘‘(B) PRODUCT DESCRIBED.—For pur10 poses of subparagraph (A), the product de11 scribed in this subparagraph with respect to

12 any undistributed income year is the product

13 of—

14 ‘‘(i) the undistributed net income for

15 such year, and

16 ‘‘(ii) the sum of the number of taxable

17 years between such year and the taxable

18 year of the distribution (counting in each

19 case the undistributed income year but not

20 counting the taxable year of the distribu21 tion).

22 ‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur23 poses of this subsection, the term ‘undistributed in24 come year’ means any prior taxable year of the trust

25 for which there is undistributed net income, other
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1 than a taxable year during all of which the bene2 ficiary receiving the distribution was not a citizen or

3 resident of the United States.

4 ‘‘(5) DETERMINATION OF UNDISTRIBUTED NET

5 INCOME.—Notwithstanding section 666, for pur6 poses of this subsection, an accumulation distribu7 tion from the trust shall be treated as reducing pro8 portionately the undistributed net income for undis9 tributed income years.

10 ‘‘(6) PERIODS BEFORE 1996.—Interest for the

11 portion of the period described in paragraph (2)

12 which occurs before January 1, 1996, shall be deter13 mined—

14 ‘‘(A) by using an interest rate of 6 percent,

15 and

16 ‘‘(B) without compounding until January

17 1, 1996.’’.

18 (b) ABUSIVE TRANSACTIONS.—Section 643(a) is

19 amended by inserting after paragraph (6) the following

20 new paragraph:

21 ‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary

22 shall prescribe such regulations as may be necessary

23 or appropriate to carry out the purposes of this part,

24 including regulations to prevent avoidance of such

25 purposes.’’.
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1 (c) TREATMENT OF LOANS FROM TRUSTS.—

2 (1) IN GENERAL.—Section 643 (relating to

3 definitions applicable to subparts A, B, C, and D)

4 is amended by adding at the end the following new

5 subsection:

6 ‘‘(i) LOANS FROM FOREIGN TRUSTS.—For purposes

7 of subparts B, C, and D—

8 ‘‘(1) GENERAL RULE.—Except as provided in

9 regulations, if a foreign trust makes a loan of cash

10 or marketable securities directly or indirectly to—

11 ‘‘(A) any grantor or beneficiary of such

12 trust who is a United States person, or

13 ‘‘(B) any United States person not de14 scribed in subparagraph (A) who is related to

15 such grantor or beneficiary,

16 the amount of such loan shall be treated as a dis17 tribution by such trust to such grantor or bene18 ficiary (as the case may be).

19 ‘‘(2) DEFINITIONS AND SPECIAL RULES.—For

20 purposes of this subsection—

21 ‘‘(A) CASH.—The term ‘cash’ includes for22 eign currencies and cash equivalents.

23 ‘‘(B) RELATED PERSON.—

24 ‘‘(i) IN GENERAL.—A person is relat25 ed to another person if the relationship be-
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1 tween such persons would result in a dis2 allowance of losses under section 267 or

3 707(b). In applying section 267 for pur4 poses of the preceding sentence, section

5 267(c)(4) shall be applied as if the family

6 of an individual includes the spouses of the

7 members of the family.

8 ‘‘(ii) ALLOCATION.—If any person de9 scribed in paragraph (1)(B) is related to

10 more than one person, the grantor or bene11 ficiary to whom the treatment under this

12 subsection applies shall be determined

13 under regulations prescribed by the Sec14 retary.

15 ‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The

16 term ‘United States person’ does not include

17 any entity exempt from tax under this chapter.

18 ‘‘(D) TRUST NOT TREATED AS SIMPLE

19 TRUST.—Any trust which is treated under this

20 subsection as making a distribution shall be

21 treated as not described in section 651.

22 ‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING

23 LOAN PRINCIPAL.—If any loan is taken into account

24 under paragraph (1), any subsequent transaction be25 tween the trust and the original borrower regarding
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1 the principal of the loan (by way of complete or par2 tial repayment, satisfaction, cancellation, discharge,

3 or otherwise) shall be disregarded for purposes of

4 this title.’’.

5 (2) TECHNICAL AMENDMENT.—Paragraph (8)

6 of section 7872(f) is amended by inserting ‘‘,

7 643(i),’’ before ‘‘or 1274’’ each place it appears.

8 (d) EFFECTIVE DATES.—

9 (1) INTEREST CHARGE.—The amendment made

10 by subsection (a) shall apply to distributions after

11 the date of the enactment of this Act.

12 (2) ABUSIVE TRANSACTIONS.—The amendment

13 made by subsection (b) shall take effect on the date

14 of the enactment of this Act.

15 (3) LOANS FROM TRUSTS.—The amendment

16 made by subsection (c) shall apply to loans of cash

17 or marketable securities made after September 19,

18 1995.

19 SEC. 417. RESIDENCE OF TRUSTS, ETC.

20 (a) TREATMENT AS UNITED STATES PERSON.—

21 (1) IN GENERAL.—Paragraph (30) of section

22 7701(a) is amended by striking ‘‘and’’ at the end of

23 subparagraph (C) and by striking subparagraph (D)

24 and by inserting the following new subparagraphs:
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1 ‘‘(D) any estate (other than a foreign es2 tate, within the meaning of paragraph (31)),

3 and

4 ‘‘(E) any trust if—

5 ‘‘(i) a court within the United States

6 is able to exercise primary supervision over

7 the administration of the trust, and

8 ‘‘(ii) one or more United States fidu9 ciaries have the authority to control all

10 substantial decisions of the trust.’’.

11 (2) CONFORMING AMENDMENT.—Paragraph

12 (31) of section 7701(a) is amended to read as fol13 lows:

14 ‘‘(31) FOREIGN ESTATE OR TRUST.—

15 ‘‘(A) FOREIGN ESTATE.—The term ‘for16 eign estate’ means an estate the income of

17 which, from sources without the United States

18 which is not effectively connected with the con19 duct of a trade or business within the United

20 States, is not includible in gross income under

21 subtitle A.

22 ‘‘(B) FOREIGN TRUST.—The term ‘foreign

23 trust’ means any trust other than a trust de24 scribed in subparagraph (E) of paragraph

25 (30).’’.
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1 (3) EFFECTIVE DATE.—The amendments made

2 by this subsection shall apply—

3 (A) to taxable years beginning after De4 cember 31, 1996, or

5 (B) at the election of the trustee of a

6 trust, to taxable years ending after the date of

7 the enactment of this Act.

8 Such an election, once made, shall be irrevocable.

9 (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN

10 TRUSTS.—

11 (1) IN GENERAL.—Section 1491 (relating to

12 imposition of tax on transfers to avoid income tax)

13 is amended by adding at the end the following new

14 flush sentence:

15 ‘‘If a trust which is not a foreign trust becomes a foreign

16 trust, such trust shall be treated for purposes of this sec17 tion as having transferred, immediately before becoming

18 a foreign trust, all of its assets to a foreign trust.’’.

19 (2) EFFECTIVE DATE.—The amendment made

20 by this subsection shall take effect on the date of the

21 enactment of this Act.
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1 SEC. 401. REPEAL OF BAD DEBT RESERVE METHOD FOR

2 THRIFT SAVINGS ASSOCIATIONS.

3 (a) IN GENERAL.—Section 593 (relating to reserves for

4 losses on loans) is amended by adding at the end the follow5 ing new subsections:

6 ‘‘(f) TERMINATION OF RESERVE METHOD.—Sub7 sections (a), (b), (c), and (d) shall not apply to any taxable

8 year beginning after December 31, 1995.

9 ‘‘(g) 6-YEAR SPREAD OF ADJUSTMENTS.—

10 ‘‘(1) IN GENERAL.—In the case of any taxpayer

11 who is required by reason of subsection (f) to change

12 its method of computing reserves for bad debts—

13 ‘‘(A) such change shall be treated as a

14 change in a method of accounting,

15 ‘‘(B) such change shall be treated as initi16 ated by the taxpayer and as having been made

17 with the consent of the Secretary, and

18 ‘‘(C) the net amount of the adjustments re19 quired to be taken into account by the taxpayer

20 under section 481(a)—

21 ‘‘(i) shall be determined by taking into

22 account only applicable excess reserves, and

23 ‘‘(ii) as so determined, shall be taken

24 into account ratably over the 6-taxable year

25 period beginning with the first taxable year

26 beginning after December 31, 1995.
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1 ‘‘(2) APPLICABLE EXCESS RESERVES.—

2 ‘‘(A) IN GENERAL.—For purposes of para3 graph (1), the term ‘applicable excess reserves’

4 means the excess (if any) of—

5 ‘‘(i) the balance of the reserves de6 scribed in subsection (c)(1) (other than the

7 supplemental reserve) as of the close of the

8 taxpayer’s last taxable year beginning be9 fore January 1, 1996, over

10 ‘‘(ii) the lesser of—

11 ‘‘(I) the balance of such reserves

12 as of the close of the taxpayer’s last

13 taxable year beginning before January

14 1, 1988, or

15 ‘‘(II) the balance of the reserves

16 described in subclause (I), reduced in

17 the same manner as under section

18 585(b)(2)(B)(ii) on the basis of the tax19 able years described in clause (i) and

20 this clause.

21 ‘‘(B) SPECIAL RULE FOR THRIFTS WHICH

22 BECOME SMALL BANKS.—In the case of a bank

23 (as defined in section 581) which was not a large

24 bank (as defined in section 585(c)(2)) for its first
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1 taxable year beginning after December 31,

2 1995—

3 ‘‘(i) the balance taken into account

4 under subparagraph (A)(ii) shall not be less

5 than the amount which would be the bal6 ance of such reserves as of the close of its

7 last taxable year beginning before such date

8 if the additions to such reserves for all tax9 able years had been determined under sec10 tion 585(b)(2)(A), and

11 ‘‘(ii) the opening balance of the reserve

12 for bad debts as of the beginning of such

13 first taxable year shall be the balance taken

14 into account under subparagraph (A)(ii)

15 (determined after the application of clause

16 (i) of this subparagraph).

17 The preceding sentence shall not apply for pur18 poses of paragraphs (5) and (6) or subsection

19 (e)(1).

20 ‘‘(3) RECAPTURE OF PRE-1988 RESERVES WHERE

21 TAXPAYER CEASES TO BE BANK.—If, during any tax22 able year beginning after December 31, 1995, a tax23 payer to which paragraph (1) applied is not a bank

24 (as defined in section 581), paragraph (1) shall apply

25 to the reserves described in paragraph (2)(A)(ii) and
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1 the supplemental reserve; except that such reserves

2 shall be taken into account ratably over the 6-taxable

3 year period beginning with such taxable year.

4 ‘‘(4) SUSPENSION OF RECAPTURE IF RESIDEN5 TIAL LOAN REQUIREMENT MET.—

6 ‘‘(A) IN GENERAL.—In the case of a bank

7 which meets the residential loan requirement of

8 subparagraph (B) for the first taxable year be9 ginning after December 31, 1995, or for the fol10 lowing taxable year—

11 ‘‘(i) no adjustment shall be taken into

12 account under paragraph (1) for such tax13 able year, and

14 ‘‘(ii) such taxable year shall be dis15 regarded in determining—

16 ‘‘(I) whether any other taxable

17 year is a taxable year for which an ad18 justment is required to be taken into

19 account under paragraph (1), and

20 ‘‘(II) the amount of such adjust21 ment.

22 ‘‘(B) RESIDENTIAL LOAN REQUIREMENT.—

23 A taxpayer meets the residential loan require24 ment of this subparagraph for any taxable year

25 if the principal amount of the residential loans
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1 made by the taxpayer during such year is not

2 less than the base amount for such year.

3 ‘‘(C) RESIDENTIAL LOAN.—For purposes of

4 this paragraph, the term ‘residential loan’ means

5 any loan described in clause (v) of section

6 7701(a)(19)(C) but only if such loan is incurred

7 in acquiring, constructing, or improving the

8 property described in such clause.

9 ‘‘(D) BASE AMOUNT.—For purposes of sub10 paragraph (B), the base amount is the average

11 of the principal amounts of the residential loans

12 made by the taxpayer during the 6 most recent

13 taxable years beginning on or before December

14 31, 1995. At the election of the taxpayer who

15 made such loans during each of such 6 taxable

16 years, the preceding sentence shall be applied

17 without regard to the taxable year in which such

18 principal amount was the highest and the tax19 able year in such principal amount was the low20 est. Such an election may be made only for the

21 first taxable year beginning after such date, and,

22 if made for such taxable year, shall apply to the

23 succeeding taxable year unless revoked with the

24 consent of the Secretary.
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1 ‘‘(E) CONTROLLED GROUPS.—In the case of

2 a taxpayer which is a member of any controlled

3 group of corporations described in section

4 1563(a)(1), subparagraph (B) shall be applied

5 with respect to such group.

6 ‘‘(5) CONTINUED APPLICATION OF FRESH START

7 UNDER SECTION 585 TRANSITIONAL RULES.—In the

8 case of a taxpayer to which paragraph (1) applied

9 and which was not a large bank (as defined in section

10 585(c)(2)) for its first taxable year beginning after

11 December 31, 1995:

12 ‘‘(A) IN GENERAL.—For purposes of deter13 mining the net amount of adjustments referred to

14 in section 585(c)(3)(A)(iii), there shall be taken

15 into account only the excess (if any) of the re16 serve for bad debts as of the close of the last tax17 able year before the disqualification year over the

18 balance taken into account by such taxpayer

19 under paragraph (2)(A)(ii) of this subsection.

20 ‘‘(B) TREATMENT UNDER ELECTIVE CUT21 OFF METHOD.—For purposes of applying section

22 585(c)(4)—

23 ‘‘(i) the balance of the reserve taken

24 into account under subparagraph (B) there25 of shall be reduced by the balance taken into
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1 account by such taxpayer under paragraph

2 (2)(A)(ii) of this subsection, and

3 ‘‘(ii) no amount shall be includible in

4 gross income by reason of such reduction.

5 ‘‘(6) SUSPENDED RESERVE INCLUDED AS SEC6 TION 381(c) ITEMS.—The balance taken into account

7 by a taxpayer under paragraph (2)(A)(ii) of this sub8 section and the supplemental reserve shall be treated

9 as items described in section 381(c).

10 ‘‘(7) CONVERSIONS TO CREDIT UNIONS.—In the

11 case of a taxpayer to which paragraph (1) applied

12 which becomes a credit union described in section

13 501(c) and exempt from taxation under section

14 501(a)—

15 ‘‘(A) any amount required to be included in

16 the gross income of the credit union by reason of

17 this subsection shall be treated as derived from

18 an unrelated trade or business (as defined in sec19 tion 513), and

20 ‘‘(B) for purposes of paragraph (3), the

21 credit union shall not be treated as if it were a

22 bank.

23 ‘‘(8) REGULATIONS.—The Secretary shall pre24 scribe such regulations as may be necessary to carry

25 out this subsection and subsection (e), including regu-
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1 lations providing for the application of such sub2 sections in the case of acquisitions, mergers, spin-offs,

3 and other reorganizations.’’

4 (b) CONFORMING AMENDMENTS.—

5 (1) Subsection (d) of section 50 is amended by

6 adding at the end the following new sentence:

7 ‘‘Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) re8 ferred to in paragraph (1) of this subsection shall not apply

9 to any taxable year beginning after December 31, 1995.’’

10 (2) Subsection (e) of section 52 is amended by

11 striking paragraph (1) and by redesignating para12 graphs (2) and (3) as paragraphs (1) and (2), respec13 tively.

14 (3) Subsection (a) of section 57 is amended by

15 striking paragraph (4).

16 (4) Section 246 is amended by striking sub17 section (f).

18 (5) Clause (i) of section 291(e)(1)(B) is amended

19 by striking ‘‘or to which section 593 applies’’.

20 (6) Subparagraph (A) of section 585(a)(2) is

21 amended by striking ‘‘other than an organization to

22 which section 593 applies’’.

23 (7)(A) The material preceding subparagraph (A)

24 of section 593(e)(1) is amended by striking ‘‘by a do25 mestic building and loan association or an institu-
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1 tion that is treated as a mutual savings bank under

2 section 591(b)’’ and inserting ‘‘by a taxpayer having

3 a balance described in subsection (g)(2)(A)(ii)’’.

4 (B) Subparagraph (B) of section 593(e)(1) is

5 amended to read as follows:

6 ‘‘(B) then out of the balance taken into ac7 count under subsection (g)(2)(A)(ii) (properly

8 adjusted for amounts charged against such re9 serves for taxable years beginning after December

10 31, 1987),’’.

11 (C) The second sentence of section 593(e)(1) is

12 amended by striking ‘‘the association or an institu13 tion that is treated as a mutual savings bank under

14 section 591(b)’’ and inserting ‘‘a taxpayer having a

15 balance described in subsection (g)(2)(A)(ii)’’.

16 (D) The third sentence of section 593(e)(1) is

17 amended by striking ‘‘an association’’ and inserting

18 ‘‘a taxpayer having a balance described in subsection

19 (g)(2)(A)(ii)’’.

20 (E) Paragraph (1) of section 593(e) is amended

21 by adding at the end the following new sentence:

22 ‘‘This paragraph shall not apply to any distribution

23 of all of the stock of a bank (as defined in section 581)

24 to another corporation if, immediately after the dis25 tribution, such bank and such other corporation are
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1 members of the same affiliated group (as defined in

2 section 1504) and the provisions of section 5(e) of the

3 Federal Deposit Insurance Act (as in effect on Decem4 ber 31, 1995) or similar provisions are in effect.’’

5 (8) Section 595 is hereby repealed.

6 (9) Section 596 is hereby repealed.

7 (10) Subsection (a) of section 860E is amend8 ed—

9 (A) by striking ‘‘Except as provided in

10 paragraph (2), the’’ in paragraph (1) and in11 serting ‘‘The’’,

12 (B) by striking paragraphs (2) and (4) and

13 redesignating paragraphs (3) and (5) as para14 graphs (2) and (3), respectively, and

15 (C) by striking in paragraph (2) (as so re16 designated) all that follows ‘‘subsection’’ and in17 serting a period.

18 (11) Paragraph (3) of section 992(d) is amended

19 by striking ‘‘or 593’’.

20 (12) Section 1038 is amended by striking sub21 section (f).

22 (13) Clause (ii) of section 1042(c)(4)(B) is

23 amended by striking ‘‘or 593’’.

24 (14) Subsection (c) of section 1277 is amended

25 by striking ‘‘or to which section 593 applies’’.
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1 (15) Subparagraph (B) of section 1361(b)(2) is

2 amended by striking ‘‘or to which section 593 ap3 plies’’.

4 (16) The table of sections for part II of sub5 chapter H of chapter 1 is amended by striking the

6 items relating to sections 595 and 596.

7 (c) EFFECTIVE DATES.—

8 (1) IN GENERAL.—Except as otherwise provided

9 in this subsection, the amendments made by this sec10 tion shall apply to taxable years beginning after De11 cember 31, 1995.

12 (2) SUBSECTION (b)(7)(B).—The amendments

13 made by subsection (b)(7)(B) shall not apply to any

14 distribution with respect to preferred stock if—

15 (A) such stock is outstanding at all times

16 after October 31, 1995, and before the distribu17 tion, and

18 (B) such distribution is made before the

19 date which is 1 year after the date of the enact20 ment of this Act (or, in the case of stock which

21 may be redeemed, if later, the date which is 30

22 days after the earliest date that such stock may

23 be redeemed).
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1 (3) SUBSECTION (b)(8).—The amendment made

2 by subsection (b)(8) shall apply to property acquired

3 in taxable years beginning after December 31, 1995.

4 (4) SUBSECTION (b)(10).—The amendments

5 made by subsection (b)(10) shall not apply to any re6 sidual interest held by a taxpayer if such interest has

7 been held by such taxpayer at all times after October

8 31, 1995.

9 SEC. 402. DEPRECIATION UNDER INCOME FORECAST

10 METHOD.

11 (a) GENERAL RULE.—Section 167 (relating to depre12 ciation) is amended by redesignating subsection (g) as sub13 section (h) and by inserting after subsection (f) the follow14 ing new subsection:

15 ‘‘(g) DEPRECIATION UNDER INCOME FORECAST

16 METHOD.—

17 ‘‘(1) IN GENERAL.—If the depreciation deduction

18 allowable under this section to any taxpayer with re19 spect to any property is determined under the income

20 forecast method or any similar method—

21 ‘‘(A) the income from the property to be

22 taken into account in determining the deprecia23 tion deduction under such method shall be equal

24 to the amount of income earned in connection

25 with the property before the close of the 10th tax-
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1 able year following the taxable year in which the

2 property was placed in service,

3 ‘‘(B) the adjusted basis of the property shall

4 only include amounts with respect to which the

5 requirements of section 461(h) are satisfied,

6 ‘‘(C) the depreciation deduction under such

7 method for the 10th taxable year beginning after

8 the taxable year in which the property was

9 placed in service shall be equal to the adjusted

10 basis of such property as of the beginning of such

11 10th taxable year, and

12 ‘‘(D) such taxpayer shall pay (or be entitled

13 to receive) interest computed under the look-back

14 method of paragraph (2) for any recomputation

15 year.

16 ‘‘(2) LOOK-BACK METHOD.—The interest com17 puted under the look-back method of this paragraph

18 for any recomputation year shall be determined by—

19 ‘‘(A) first determining the depreciation de20 ductions under this section with respect to such

21 property which would have been allowable for

22 prior taxable years if the determination of the

23 amounts so allowable had been made on the basis

24 of the sum of the following (instead of the esti25 mated income from such property)—
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1 ‘‘(i) the actual income earned in con2 nection with such property for periods be3 fore the close of the recomputation year, and

4 ‘‘(ii) an estimate of the future income

5 to be earned in connection with such prop6 erty for periods after the recomputation

7 year and before the close of the 10th taxable

8 year following the taxable year in which the

9 property was placed in service,

10 ‘‘(B) second, determining (solely for pur11 poses of computing such interest) the overpay12 ment or underpayment of tax for each such prior

13 taxable year which would result solely from the

14 application of subparagraph (A), and

15 ‘‘(C) then using the adjusted overpayment

16 rate (as defined in section 460(b)(7)),

17 compounded daily, on the overpayment or under18 payment determined under subparagraph (B).

19 For purposes of the preceding sentence, any cost in20 curred after the property is placed in service (which

21 is not treated as a separate property under para22 graph (5)) shall be taken into account by discounting

23 (using the Federal mid-term rate determined under

24 section 1274(d) as of the time such cost is incurred)

25 such cost to its value as of the date the property is
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1 placed in service. The taxpayer may elect with respect

2 to any property to have the preceding sentence not

3 apply to such property.

4 ‘‘(3) EXCEPTION FROM LOOK-BACK METHOD.—

5 Paragraph (1)(D) shall not apply with respect to any

6 property which had a cost basis of $100,000 or less.

7 ‘‘(4) RECOMPUTATION YEAR.—For purposes of

8 this subsection, except as provided in regulations, the

9 term ‘recomputation year’ means, with respect to any

10 property, the 3d and the 10th taxable years beginning

11 after the taxable year in which the property was

12 placed in service, unless the actual income earned in

13 connection with the property for the period before the

14 close of such 3d or 10th taxable year is within 10 per15 cent of the income earned in connection with the

16 property for such period which was taken into ac17 count under paragraph (1)(A).

18 ‘‘(5) SPECIAL RULES.—

19 ‘‘(A) CERTAIN COSTS TREATED AS SEPA20 RATE PROPERTY.—For purposes of this sub21 section, the following costs shall be treated as

22 separate properties:

23 ‘‘(i) Any costs incurred with respect to

24 any property after the 10th taxable year be-
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1 ginning after the taxable year in which the

2 property was placed in service.

3 ‘‘(ii) Any costs incurred after the prop4 erty is placed in service and before the close

5 of such 10th taxable year if such costs are

6 significant and give rise to a significant in7 crease in the income from the property

8 which was not included in the estimated in9 come from the property.

10 ‘‘(B) SYNDICATION INCOME FROM TELE11 VISION SERIES.—In the case of property which is

12 1 or more episodes in a television series, income

13 from syndicating such series shall not be re14 quired to be taken into account under this sub15 section before the earlier of—

16 ‘‘(i) the 4th taxable year beginning

17 after the date the first episode in such series

18 is placed in service, or

19 ‘‘(ii) the earliest taxable year in which

20 the taxpayer has an arrangement relating

21 to the future syndication of such series.

22 ‘‘(C) SPECIAL RULES FOR FINANCIAL EX23 PLOITATION OF CHARACTERS, ETC.—For pur24 poses of this subsection, in the case of television

25 and motion picture films, the income from the
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1 property shall include income from the exploi2 tation of characters, designs, scripts, scores, and

3 other incidental income associated with such

4 films, but only to the extent that such income

5 is earned in connection with the ultimate use of

6 such items by, or the ultimate sale of merchan7 dise to, persons who are not related persons

8 (within the meaning of section 267(b)) to the

9 taxpayer.

10 ‘‘(D) COLLECTION OF INTEREST.—For pur11 poses of subtitle F (other than sections 6654 and

12 6655), any interest required to be paid by the

13 taxpayer under paragraph (1) for any recom14 putation year shall be treated as an increase in

15 the tax imposed by this chapter for such year.

16 ‘‘(E) DETERMINATIONS.—For purposes of

17 paragraph (2), determinations of the amount of

18 income earned in connection with any property

19 shall be made in the same manner as for pur20 poses of applying the income forecast method; ex21 cept that any income from the disposition of

22 such property shall be taken into account.

23 ‘‘(F) TREATMENT OF PASS-THRU ENTI24 TIES.—Rules similar to the rules of section
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1 460(b)(4) shall apply for purposes of this sub2 section.’’

3 (b) EFFECTIVE DATE.—

4 (1) IN GENERAL.—The amendment made by sub5 section (a) shall apply to property placed in service

6 after September 13, 1995.

7 (2) BINDING CONTRACTS.—The amendment

8 made by subsection (a) shall not apply to any prop9 erty produced or acquired by the taxpayer pursuant

10 to a written contract which was binding on Septem11 ber 13, 1995, and at all times thereafter before such

12 production or acquisition.

13 (3) UNDERPAYMENTS OF INCOME TAX.—No addi14 tion to tax shall be made under—

15 (A) section 6654 or 6655 of the Internal

16 Revenue Code of 1986 (relating to failure to pay

17 estimated tax) with respect to any underpay18 ment of an installment required to be paid before

19 the date of the enactment of this Act, or

20 (B) section 6662 of such Code as a result of

21 the application of subsection (d) of that section

22 (relating to substantial understatements of in23 come tax) with respect to any underpayment of

24 income tax for any taxable year ending before

25 such date of enactment,
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1 to the extent such underpayment was created or in2 creased by the amendments made by subsection (a).