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[104th Congress Public Law 188]
[From the U.S. Government Printing Office]

<DOC>
[DOCID: f:publ188.104]

[[Page 110 STAT. 1755]]

Public Law 104-188
104th Congress

                                 An Act

 
 To provide tax relief for small businesses, to protect jobs, to create 
 opportunities, to increase the take home pay of workers, to amend the 
    Portal-to-Portal Act of 1947 relating to the payment of wages to 
 employees who use employer owned vehicles, and to amend the Fair Labor 
 Standards Act of 1938 to increase the minimum wage rate and to prevent 
job loss by providing flexibility to employers in complying with minimum 
    wage and overtime requirements under that Act. <<NOTE: Aug. 20, 
                         1996 -  [H.R. 3448]>> 

    Be it enacted by the Senate and House of Representatives of the 
United States of America <<NOTE: Small Business Job Protection Act of 
1996.>>  in Congress assembled,

SECTION 1. SHORT TITLE; <<NOTE: 26 USC 1 note.>>  TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Small Business Job 
Protection Act of 1996''.
    (b) Table of Contents.--

Sec. 1. Short title; table of contents.

            TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS

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

                       Subtitle A--Expensing; Etc.

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

          Subtitle B--Extension of Certain Expiring Provisions

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

            Subtitle C--Provisions Relating to S Corporations

Sec. 1301. S corporations permitted to have 75 shareholders.
Sec. 1302. Electing small business trusts.

[[Page 110 STAT. 1756]]

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

                   Subtitle D--Pension Simplification

                Chapter 1--Simplified Distribution Rules

Sec. 1401. Repeal of 5-year income averaging for lump-sum distributions.
Sec. 1402. Repeal of $5,000 exclusion of employees' death benefits.
Sec. 1403. Simplified method for taxing annuity distributions under 
                      certain employer plans.
Sec. 1404. Required distributions.

             Chapter 2--Increased Access to Retirement Plans

                   subchapter a--simple savings plans

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

                     subchapter b--other provisions

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

                 Chapter 3--Nondiscrimination Provisions

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

                   Chapter 4--Miscellaneous Provisions

Sec. 1441. Plans covering self-employed individuals.
Sec. 1442. Elimination of special vesting rule for multiemployer plans.
Sec. 1443. Distributions under rural cooperative plans.
Sec. 1444. Treatment of governmental plans under section 415.
Sec. 1445. Uniform retirement age.
Sec. 1446. Contributions on behalf of disabled employees.
Sec. 1447. Treatment of deferred compensation plans of State and local 
                      governments and tax-exempt organizations.
Sec. 1448. Trust requirement for deferred compensation plans of State 
                      and local governments.
Sec. 1449. Transition rule for computing maximum benefits under section 
                      415 limitations.
Sec. 1450. Modifications of section 403(b).
Sec. 1451. Special rules relating to joint and survivor annuity 
                      explanations.
Sec. 1452. Repeal of limitation in case of defined benefit plan and 
                      defined contribution plan for same employee; 
                      excess distributions.
Sec. 1453. Tax on prohibited transactions.
Sec. 1454. Treatment of leased employees.
Sec. 1455. Uniform penalty provisions to apply to certain pension 
                      reporting requirements.
Sec. 1456. Retirement benefits of ministers not subject to tax on net 
                      earnings from self-employment.
Sec. 1457. Sample language for spousal consent and qualified domestic 
                      relations forms.

[[Page 110 STAT. 1757]]

Sec. 1458. Treatment of length of service awards to volunteers 
                      performing fire fighting or prevention services, 
                      emergency medical services, or ambulance services.
Sec. 1459. Alternative nondiscrimination rules for certain plans that 
                      provide for early participation.
Sec. 1460. Clarification of application of ERISA to insurance company 
                      general accounts.
Sec. 1461. Special rules for chaplains and self-employed ministers.
Sec. 1462. Definition of highly compensated employee for pre-ERISA rules 
                      for church plans.
Sec. 1463. Rule relating to investment in contract not to apply to 
                      foreign missionaries.
Sec. 1464. Waiver of excise tax on failure to pay liquidity shortfall.
Sec. 1465. Date for adoption of plan amendments.

                   Subtitle E--Foreign Simplification

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

                       Subtitle F--Revenue Offsets

                       Part I--General Provisions

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

           Part II--Financial Asset Securitization Investments

Sec. 1621. Financial Asset Securitization Investment Trusts.

                    Subtitle G--Technical Corrections

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

                      Subtitle H--Other Provisions

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

                Subtitle I--Foreign Trust Tax Compliance

Sec. 1901. Improved information reporting on foreign trusts.

[[Page 110 STAT. 1758]]

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

              Subtitle J--Generalized System of Preferences

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

                       TITLE II--PAYMENT OF WAGES

Sec. 2101. Short title.
Sec. 2102. Proper compensation for use of employer vehicles.
Sec. 2103. Effective date.
Sec. 2104. Minimum wage increase.
Sec. 2105. Fair Labor Standards Act Amendments.

            TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS

SEC. 1101. AMENDMENT OF 1986 CODE.

    Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

SEC. 1102. UNDERPAYMENTS <<NOTE: 26 USC 6654 note.>>  OF ESTIMATED TAX.

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

                       Subtitle A--Expensing; Etc.

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

    (a) General <<NOTE: 26 USC 179.>>  Rule.--Paragraph (1) of section 
179(b) (relating to dollar limitation) is amended to read as follows:
            ``(1) Dollar limitation.--The aggregate cost which may be 
        taken into account under subsection (a) for any taxable year 
        shall not exceed the following applicable amount:

        ``If the taxable year                             The applicable
          begins in:                                          amount is:
                  1997........................................   18,000 
                  1998........................................   18,500 
                  1999........................................   19,000 
                  2000........................................   20,000 
                  2001 or 2002................................   24,000 
                  2003 or thereafter......................... 25,000.''.

    (b) Effective Date.--The <<NOTE: 26 USC 179 note.>>  amendment made 
by subsection (a) shall apply to taxable years beginning after December 
31, 1996.

[[Page 110 STAT. 1759]]

SEC. 1112. TREATMENT OF EMPLOYEE TIPS.

    (a) Employee Cash Tips.--
            (1) Reporting requirement not considered.--Subparagraph (A) 
        of section 45B(b)(1) (relating to excess employer social 
        security tax) is amended by inserting ``(without regard to 
        whether such tips are reported under section 6053)'' after 
        ``section 3121(q)''.
            (2) Taxes paid.--Subsection <<NOTE: 26 USC 38 note.>>  (d) 
        of section 13443 of the Revenue Reconciliation Act of 1993 is 
        amended by inserting ``, with respect to services performed 
        before, on, or after such date'' after ``1993''.
            (3) Effective <<NOTE: 26 USC 45B note.>>  date.--The 
        amendments made by this subsection shall take effect as if 
        included in the amendments made by, and the provisions of, 
        section 13443 of the Revenue Reconciliation Act of 1993.

    (b) Tips for Employees Delivering Food or Beverages.--
            (1) In general.--Paragraph (2) of section 45B(b) is 
        amended to read as follows:
            ``(2) Only tips received for food or beverages taken into 
        account.--In applying paragraph (1), there shall be taken into 
        account only tips received from customers in connection with the 
        providing, delivering, or serving of food or beverages for 
        consumption if the tipping of employees delivering or serving 
        food or beverages by customers is customary.''.
            (2) Effective <<NOTE: 26 USC 45B note.>>  date.--The 
        amendment made by paragraph (1) shall apply to tips received for 
        services performed after December 31, 1996.

SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES.

    (a) In General.--Paragraph (2) of section 280A(c) is amended by 
striking ``inventory'' and inserting ``inventory or product samples''.
    (b) Effective <<NOTE: 26 USC 280A note.>>  Date.--The amendment made 
by subsection (a) shall apply to taxable years beginning after December 
31, 1995.

SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS.

    (a) General Rule.--Section 501 (relating to exemption from tax on 
corporations, certain trusts, etc.) is amended by redesignating 
subsection (n) as subsection (o) and by inserting after subsection (m) 
the following new subsection:
    ``(n) Charitable Risk Pools.--
            ``(1) In general.--For purposes of this title--
                    ``(A) a qualified charitable risk pool shall be 
                treated as an organization organized and operated 
                exclusively for charitable purposes, and
                    ``(B) subsection (m) shall not apply to a qualified 
                charitable risk pool.
            ``(2) Qualified charitable risk pool.--For purposes of this 
        subsection, the term `qualified charitable risk pool' means any 
        organization--
                    ``(A) which is organized and operated solely to pool 
                insurable risks of its members (other than risks related 
                to medical malpractice) and to provide information to 
                its members with respect to loss control and risk 
                management,
                    ``(B) which is comprised solely of members that are 
                organizations described in subsection (c)(3) and exempt 
                from tax under subsection (a), and

[[Page 110 STAT. 1760]]

                    ``(C) which meets the organizational requirements of 
                paragraph (3).
            ``(3) Organizational requirements.--An organization 
        (hereinafter in this subsection referred to as the `risk pool') 
        meets the organizational requirements of this paragraph if--
                    ``(A) such risk pool is organized as a nonprofit 
                organization under State law provisions authorizing risk 
                pooling arrangements for charitable organizations,
                    ``(B) such risk pool is exempt from any income tax 
                imposed by the State (or will be so exempt after such 
                pool qualifies as an organization exempt from tax under 
                this title),
                    ``(C) such risk pool has obtained at least 
                $1,000,000 in startup capital from nonmember charitable 
                organizations,
                    ``(D) such risk pool is controlled by a board of 
                directors elected by its members, and
                    ``(E) the organizational documents of such risk pool 
                require that--
                          ``(i) each member of such pool shall at all 
                      times be an organization described in subsection 
                      (c)(3) and exempt from tax under subsection (a),
                          ``(ii) any member which receives a final 
                      determination that it no longer qualifies as an 
                      organization described in subsection (c)(3) shall 
                      immediately notify the pool of such determination 
                      and the effective date of such determination, and
                          ``(iii) each policy of insurance issued by the 
                      risk pool shall provide that such policy will not 
                      cover the insured with respect to events occurring 
                      after the date such final determination was issued 
                      to the insured.
        An organization shall not cease to qualify as a qualified 
        charitable risk pool solely by reason of the failure of any of 
        its members to continue to be an organization described in 
        subsection (c)(3) if, within a reasonable period of time after 
        such pool is notified as required under subparagraph (C)(ii), 
        such pool takes such action as may be reasonably necessary to 
        remove such member from such pool.
            ``(4) Other definitions.--For purposes of this subsection--
                    ``(A) Startup capital.--The term `startup capital' 
                means any capital contributed to, and any program-
                related investments (within the meaning of section 
                4944(c)) made in, the risk pool before such pool 
                commences operations.
                    ``(B) Nonmember charitable organization.--The term 
                `nonmember charitable organization' means any 
                organization which is described in subsection (c)(3) and 
                exempt from tax under subsection (a) and which is not a 
                member of the risk pool and does not benefit (directly 
                or indirectly) from the insurance coverage provided by 
                the pool to its members.''.

    (b) Effective <<NOTE: 26 USC 501 note.>> Date.--The amendment made 
by subsection (a) shall apply to taxable years beginning after the date 
of the enactment of this Act.

[[Page 110 STAT. 1761]]

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

    (a) General Rule.--Section 512 (defining unrelated business taxable 
income) is amended by adding at the end the following new subsection:
    ``(d) Treatment of Dues of Agricultural or Horticultural 
Organizations.--
            ``(1) In general.--If--
                    ``(A) an agricultural or horticultural organization 
                described in section 501(c)(5) requires annual dues to 
                be paid in order to be a member of such organization, 
                and
                    ``(B) the amount of such required annual dues does 
                not exceed $100,
        in no event shall any portion of such dues be treated as derived 
        by such organization from an unrelated trade or business by 
        reason of any benefits or privileges to which members of such 
        organization are entitled.
            ``(2) Indexation of $100 amount.--In the case of any taxable 
        year beginning in a calendar year after 1995, the $100 amount in 
        paragraph (1) shall be increased by an amount equal to--
                    ``(A) $100, multiplied by
                    ``(B) the cost-of-living adjustment determined under 
                section 1(f)(3) for the calendar year in which the 
                taxable year begins, by substituting `calendar year 
                1994' for `calendar year 1992' in subparagraph (B) 
                thereof.
            ``(3) Dues.--For purposes of this subsection, the term 
        `dues' means any payment (whether or not designated as dues) 
        which is required to be made in order to be recognized by the 
        organization as a member of the organization.''.

    (b) Effective <<NOTE: 26 USC 512 note.>>  Dates.--
            (1) In general.--The amendment made by this section shall 
        apply to taxable years beginning after December 31, 1986.
            (2) Transitional rule.--If--
                    (A) for purposes of applying part III of subchapter 
                F of chapter 1 of the Internal Revenue Code of 1986 to 
                any taxable year beginning before January 1, 1987, an 
                agricultural or horticultural organization did not treat 
                any portion of membership dues received by it as income 
                derived in an unrelated trade or business, and
                    (B) such organization had a reasonable basis for not 
                treating such dues as income derived in an unrelated 
                trade or business,
        then, for purposes of applying such part III to any such taxable 
        year, in no event shall any portion of such dues be treated as 
        derived in an unrelated trade or business.
            (3) Reasonable basis.--For purposes of paragraph (2), an 
        organization shall be treated as having a reasonable basis for 
        not treating membership dues as income derived in an unrelated 
        trade or business if the taxpayer's treatment of such dues was 
        in reasonable reliance on any of the following:
                    (A) Judicial precedent, published rulings, technical 
                advice with respect to the organization, or a letter 
                ruling to the organization.
                    (B) A past Internal Revenue Service audit of the 
                organization in which there was no assessment 
                attributable

[[Page 110 STAT. 1762]]

                to the reclassification of membership dues for purposes 
                of the tax on unrelated business income.
                    (C) Long-standing recognized practice of 
                agricultural or horticultural organizations.
SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CERTAIN 
                          FISHERMEN.

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

``For purposes of paragraph (20), the operating crew of a boat shall be 
treated as normally made up of fewer than 10 individuals if the average 
size of the operating crew on trips made during the preceding 4 calendar 
quarters consisted of fewer than 10 indi-
viduals.''.
                    (B) Certain cash remuneration permitted.--
                Subparagraph (A) of section 3121(b)(20) is amended to 
                read as follows:
                    ``(A) such individual does not receive any cash 
                remuneration other than as provided in subparagraph (B) 
                and other than cash remuneration--
                          ``(i) which does not exceed $100 per trip;
                          ``(ii) which is contingent on a minimum catch; 
                      and
                          ``(iii) which is paid solely for additional 
                      duties (such as mate, engineer, or cook) for which 
                      additional cash remuneration is traditional in the 
                      industry,''.
                    (C) Conforming amendment.--Section 6050A(a) is 
                amended by striking ``and'' at the end of paragraph (3), 
                by striking the period at the end of paragraph (4) and 
                inserting ``; and'', and by adding at the end the 
                following new paragraph:
            ``(5) any cash remuneration described in section 
        3121(b)(20)(A).''.
            (2) Amendment of social security act.--
                    (A) Determination of size of crew.--Subsection (a) 
                of section 210 of the Social <<NOTE: 42 USC 410.>>  
                Security Act is amended by adding at the end the 
                following new sentence:

``For purposes of paragraph (20), the operating crew of a boat shall be 
treated as normally made up of fewer than 10 individuals if the average 
size of the operating crew on trips made during the preceding 4 calendar 
quarters consisted of fewer than 10 indi-
viduals.''.
                    (B) Certain cash remuneration permitted.--
                Subparagraph (A) of section 210(a)(20) of such Act is 
                amended to read as follows:
                    ``(A) such individual does not receive any 
                additional compensation other than as provided in 
                subparagraph (B) and other than cash remuneration--
                          ``(i) which does not exceed $100 per trip;
                          ``(ii) which is contingent on a minimum catch; 
                      and
                          ``(iii) which is paid solely for additional 
                      duties (such as mate, engineer, or cook) for which 
                      additional cash remuneration is traditional in the 
                      industry,''.
            (3) Effective <<NOTE: 26 USC 3121 note.>>  Dates.--

[[Page 110 STAT. 1763]]

                    (A) In general.--The amendments made by this 
                subsection shall apply to remuneration paid--
                          (i) after December 31, 1994, and
                          (ii) after December 31, 1984, and before 
                      January 1, 1995, unless the payor treated such 
                      remuneration (when paid) as being subject to tax 
                      under chapter 21 of the Internal Revenue Code of 
                      1986.
                    (B) Reporting requirement.--The amendment made by 
                paragraph (1)(C) shall apply to remuneration paid after 
                December 31, 1996.

    (b) Information Reporting.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 68 (relating to information concerning transactions with 
        other persons) is amended by inserting after section 6050Q the 
        following new section:

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

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

shall make a return (at such times as the Secretary may prescribe) 
described in subsection (b) with respect to each person to whom such a 
payment was made during such calendar year.
    ``(b) Return.--A return is described in this subsection if such 
return--
            ``(1) is in such form as the Secretary may prescribe, and
            ``(2) contains--
                    ``(A) the name, address, and TIN of each person to 
                whom a payment described in subsection (a)(2) was made 
                during the calendar year;
                    ``(B) the aggregate amount of such payments made to 
                such person during such calendar year and the date and 
                amount of each such payment, and
                    ``(C) such other information as the Secretary may 
                require.

    ``(c) Statement To Be Furnished With Respect to Whom Information Is 
Required.--Every person required to make a return under subsection (a) 
shall furnish to each person whose name is required to be set forth in 
such return a written statement showing--
            ``(1) the name and address of the person required to make 
        such a return, and
            ``(2) the aggregate amount of payments to the person 
        required to be shown on the return.

The written statement required under the preceding sentence shall be 
furnished to the person on or before January 31 of the year following 
the calendar year for which the return under subsection (a) is required 
to be made.
    ``(d) Definitions.--For purposes of this section:
            ``(1) Cash.--The term `cash' has the meaning given such term 
        by section 6050I(d).
            ``(2) Fish.--The term `fish' includes other forms of aquatic 
        life.''.

[[Page 110 STAT. 1764]]

            (2) Technical amendments.--
                    (A) Subparagraph (A) of section 6724(d)(1) is 
                amended by striking ``or'' at the end of clause (vi), by 
                striking ``and'' at the end of clause (vii) and 
                inserting ``or'', and by adding at the end the following 
                new clause:
                          ``(viii) section 6050R (relating to returns 
                      relating to certain purchases of fish), and''.
                    (B) Paragraph (2) of section 6724(d) is amended by 
                redesignating subparagraphs (R) through (U) as 
                subparagraphs (S) through (V), respectively, and by 
                inserting after subparagraph (Q) the following new 
                subparagraph:
                    ``(R) section 6050R(c) (relating to returns relating 
                to certain purchases of fish),''.
                    (C) The table of sections for subpart B of part III 
                of subchapter A of chapter 68 is amended by inserting 
                after the item relating to 6050Q the following new item:

``Sec. 6050R. Returns relating to certain purchases of fish.''.

            (3) Effective <<NOTE: 26 USC 6050R note.>>  date.--The 
        amendments made by this subsection shall apply to payments made 
        after December 31, 1997.
SEC. 1117. MODIFICATIONS OF TAX-EXEMPT BOND RULES FOR FIRST-TIME 
                          FARMERS.

    (a) Acquisition From Related Person Allowed.--Section 147(c)(2) 
(relating to exception for first-time farmers) is amended by adding at 
the end the following new subparagraph:
                    ``(G) Acquisition from related person.--For purposes 
                of this paragraph and section 144(a), the acquisition by 
                a first-time farmer of land or personal property from a 
                related person (within the meaning of section 144(a)(3)) 
                shall not be treated as an acquisition from a related 
                person, if--
                          ``(i) the acquisition price is for the fair 
                      market value of such land or property, and
                          ``(ii) subsequent to such acquisition, the 
                      related person does not have a financial interest 
                      in the farming operation with respect to which the 
                      bond proceeds are to be used.''.

    (b) Substantial Farmland Amount Doubled.--Clause (i) of section 
147(c)(2)(E) (defining substantial farmland) is amended by striking ``15 
percent'' and inserting ``30 percent''.
    (c) Effective Date.--The <<NOTE: 26 USC 147 note.>>  amendments made 
by this section shall apply to bonds issued after the date of the 
enactment of this Act.

SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.

    (a) In General.--Section 3508(b)(2)(A) is amended by striking ``or'' 
at the end of clause (i), by inserting ``or'' at the end of clause (ii), 
and by inserting after clause (ii) the following new clause:
                          ``(iii) is engaged in the trade or business of 
                      the delivering or distribution of newspapers or 
                      shopping news (including any services directly 
                      related to such trade or business),''.

    (b) Effective <<NOTE: 26 USC 3508 note.>>  Date.--The amendments 
made by this section shall apply to services performed after December 
31, 1995.

[[Page 110 STAT. 1765]]

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

    (a) In General.--Section 1033(h) is amended by redesignating 
paragraphs (2) and (3) as paragraphs (3) and (4), respectively, and by 
inserting after paragraph (1) the following new paragraph:
            ``(2) Trade or business and investment property.--If a 
        taxpayer's property held for productive use in a trade or 
        business or for investment is compulsorily or involuntarily 
        converted as a result of a Presidentially declared disaster, 
        tangible property of a type held for productive use in a trade 
        or business shall be treated for purposes of subsection (a) as 
        property similar or related in service or use to the property so 
        converted.''.

    (b) Conforming Amendments.--Section 1033(h) is amended--
            (1) by striking ``residence'' in paragraph (3) (as 
        redesignated by subsection (a)) and inserting ``property'',
            (2) by striking ``Principal Residences'' in the heading and 
        inserting ``Property'', and
            (3) by striking ``(1) In general.--'' and inserting ``(1) 
        Principal residences.--''.

    (c) Expansion of Oklahoma City Enterprise Community.--
Notwithstanding sections 1391 and 1392(a)(3)(D) of the Internal Revenue 
Code of 1986, the boundaries of the enterprise community for Oklahoma 
City, Oklahoma, designated by the Secretary of Housing and Urban 
Development on December 21, 1994, may be extended with respect to census 
tracts located in the area damaged due to the bombing of the Alfred P. 
Murrah Federal Building in Oklahoma City on April 19, 1995, primarily in 
the area bounded on the south by Robert S. Kerr Avenue, on the north by 
North 13th Street, on the east by Oklahoma Avenue, and on the west by 
Shartel Avenue.
    (d) Effective <<NOTE: 26 USC 1033 note.>>  Date.--
            (1) In general.--The amendments made by this section shall 
        apply to disasters declared after December 31, 1994, in taxable 
        years ending after such date.
            (2) Subsection (c).--Subsection (c) shall take effect on the 
        date of the enactment of this Act.
SEC. 1120. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND 
                          SIMILAR STRUCTURES.

    (a) In General.--Section 168(e)(3)(E) (classifying certain property 
as 15-year property) is amended by striking ``and'' at the end of clause 
(i), by striking the period at the end of clause (ii) and inserting ``, 
and'', and by adding at the end the following new clause:
                          ``(iii) any section 1250 property which is a 
                      retail motor fuels outlet (whether or not food or 
                      other convenience items are sold at the 
                      outlet).''.

    (b) Conforming Amendment.--Subparagraph (B) of section 168(g)(3) is 
amended by inserting after the item relating to subparagraph (E)(ii) in 
the table contained therein the following new item:
                ``(E)(iii) . . . . . . . . . . . . . . . . . 20''.

    (c) Effective <<NOTE: 26 USC 168 note.>>  Date.--The amendments made 
by this section shall apply to property which is placed in service on or 
after the date of the enactment of this Act and to which section 168 of 
the Internal Revenue Code of 1986 applies after the amendment made by 
section 201 of the Tax Reform Act of 1986. A taxpayer

[[Page 110 STAT. 1766]]

may elect (in such form and manner as the Secretary of the Treasury may 
prescribe) to have such amendments apply with respect to any property 
placed in service before such date and to which such section so applies.
SEC. 1121. TREATMENT OF ABANDONMENT OF LESSOR IMPROVEMENTS AT 
                          TERMINATION OF LEASE.

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

    (b) Effective Date.--Subparagraph <<NOTE: 26 USC 168 note.>>  (B) of 
section 168(i)(8) of the Internal Revenue Code of 1986, as added by the 
amendment made by subsection (a), shall apply to improvements disposed 
of or abandoned after June 12, 1996.
SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER 
                          INDIVIDUALS ARE EMPLOYEES FOR PURPOSES 
                          OF EMPLOYMENT TAXES.

    (a) In <<NOTE: 26 USC 3401 note.>>  General.--Section 530 of the 
Revenue Act of 1978 is amended by adding at the end the following new 
subsection:

    ``(e) Special Rules for Application of Section.--
            ``(1) Notice of availability of section.--An officer or 
        employee of the Internal Revenue Service shall, before or at the 
        commencement of any audit inquiry relating to the employment 
        status of one or more individuals who perform services for the 
        taxpayer, provide the taxpayer with a written notice of the 
        provisions of this section.
            ``(2) Rules relating to statutory standards.--For purposes 
        of subsection (a)(2)--
                    ``(A) a taxpayer may not rely on an audit commenced 
                after December 31, 1996, for purposes of subparagraph 
                (B) thereof unless such audit included an examination 
                for employment tax purposes of whether the individual 
                involved (or any individual holding a position 
                substantially similar to the position held by the 
                individual involved) should be treated as an employee of 
                the taxpayer,
                    ``(B) in no event shall the significant segment 
                requirement of subparagraph (C) thereof be construed to 
                require a reasonable showing of the practice of more 
                than 25 percent of the industry (determined by not 
                taking into account the taxpayer), and
                    ``(C) in applying the long-standing recognized 
                practice requirement of subparagraph (C) thereof--

[[Page 110 STAT. 1767]]

                          ``(i) such requirement shall not be construed 
                      as requiring the practice to have continued for 
                      more than 10 years, and
                          ``(ii) a practice shall not fail to be treated 
                      as long-standing merely because such practice 
                      began after 1978.
            ``(3) Availability of safe harbors.--Nothing in this section 
        shall be construed to provide that subsection (a) only applies 
        where the individual involved is otherwise an employee of the 
        taxpayer.
            ``(4) Burden of proof.--
                    ``(A) In general.--If--
                          ``(i) a taxpayer establishes a prima facie 
                      case that it was reasonable not to treat an 
                      individual as an employee for purposes of this 
                      section, and
                          ``(ii) the taxpayer has fully cooperated with 
                      reasonable requests from the Secretary of the 
                      Treasury or his delegate,
                then the burden of proof with respect to such treatment 
                shall be on the Secretary.
                    ``(B) Exception for other reasonable basis.--In the 
                case of any issue involving whether the taxpayer had a 
                reasonable basis not to treat an individual as an 
                employee for purposes of this section, subparagraph (A) 
                shall only apply for purposes of determining whether the 
                taxpayer meets the requirements of subparagraph (A), 
                (B), or (C) of subsection (a)(2).
            ``(5) Preservation of prior period safe harbor.--If--
                    ``(A) an individual would (but for the treatment 
                referred to in subparagraph (B)) be deemed not to be an 
                employee of the taxpayer under subsection (a) for any 
                prior period, and
                    ``(B) such individual is treated by the taxpayer as 
                an employee for employment tax purposes for any 
                subsequent period,
        then, for purposes of applying such taxes for such prior period 
        with respect to the taxpayer, the individual shall be deemed not 
        to be an employee.
            ``(6) Substantially similar position.--For purposes of this 
        section, the determination as to whether an individual holds a 
        position substantially similar to a position held by another 
        individual shall include consideration of the relationship 
        between the taxpayer and such individuals.''.

    (b) Effective <<NOTE: 26 USC 3401 note.>>  Dates.--
            (1) In general.--The amendment made by this section shall 
        apply to periods after December 31, 1996.
            (2) Notice by internal revenue service.--Section 530(e)(1) 
        of the Revenue Act of 1978 (as added by subsection (a)) shall 
        apply to audits which commence after December 31, 1996.
            (3) Burden of proof.--
                    (A) In general.--Section 530(e)(4) of the Revenue 
                Act of 1978 (as added by subsection (a)) shall apply to 
                disputes involving periods after December 31, 1996.
                    (B) No inference.--Nothing in the amendments made by 
                this section shall be construed to infer the proper 
                treat

[[Page 110 STAT. 1768]]

                ment of the burden of proof with respect to disputes 
                involving periods before January 1, 1997.
SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EMPLOYEES BY ACADEMIC 
                          HEALTH CENTERS.

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

    (b) Effective <<NOTE: 26 USC 119 note.>> Date.--The amendment made 
by this section shall apply to taxable years beginning after December 
31, 1995.

          Subtitle B--Extension of Certain Expiring Provisions

SEC. 1201. WORK OPPORTUNITY TAX CREDIT.

    (a) Amount of Credit.--Subsection (a) of section 51 (relating to 
amount of credit) is amended by striking ``40 percent'' and inserting 
``35 percent''.
    (b) Members of Targeted Groups.--Subsection (d) of section 51 is 
amended to read as follows:
    ``(d) Members of Targeted Groups.--For purposes of this subpart--
            ``(1) In general.--An individual is a member of a targeted 
        group if such individual is--
                    ``(A) a qualified IV-A recipient,
                    ``(B) a qualified veteran,
                    ``(C) a qualified ex-felon,
                    ``(D) a high-risk youth,
                    ``(E) a vocational rehabilitation referral,
                    ``(F) a qualified summer youth employee, or
                    ``(G) a qualified food stamp recipient.
            ``(2) Qualified iv-a recipient.--
                    ``(A) In general.--The term `qualified IV-A 
                recipient' means any individual who is certified by the 
                designated local agency as being a member of a family 
                receiving assist

[[Page 110 STAT. 1769]]

                ance under a IV-A program for at least a 9-month period 
                ending during the 9-month period ending on the hiring 
                date.
                    ``(B) IV-A program.--For purposes of this paragraph, 
                the term `IV-A program' means any program providing 
                assistance under a State plan approved under part A of 
                title IV of the Social Security Act (relating to 
                assistance for needy families with minor children) and 
                any successor of such program.
            ``(3) Qualified veteran.--
                    ``(A) In general.--The term `qualified veteran' 
                means any veteran who is certified by the designated 
                local agency as being--
                          ``(i) a member of a family receiving 
                      assistance under a IV-A program (as defined in 
                      paragraph (2)(B)) for at least a 9-month period 
                      ending during the 12-month period ending on the 
                      hiring date, or
                          ``(ii) a member of a family receiving 
                      assistance under a food stamp program under the 
                      Food Stamp Act of 1977 for at least a 3-month 
                      period ending during the 12-month period ending on 
                      the hiring date.
                    ``(B) Veteran.--For purposes of subparagraph (A), 
                the term `veteran' means any individual who is certified 
                by the designated local agency as--
                          ``(i)(I) having served on active duty (other 
                      than active duty for training) in the Armed Forces 
                      of the United States for a period of more than 180 
                      days, or
                          ``(II) having been discharged or released from 
                      active duty in the Armed Forces of the United 
                      States for a service-connected disability, and
                          ``(ii) not having any day during the 60-day 
                      period ending on the hiring date which was a day 
                      of extended active duty in the Armed Forces of the 
                      United States.
                For purposes of clause (ii), the term `extended active 
                duty' means a period of more than 90 days during which 
                the individual was on active duty (other than active 
                duty for training).
            ``(4) Qualified ex-felon.--The term `qualified ex-felon' 
        means any individual who is certified by the designated local 
        agency--
                    ``(A) as having been convicted of a felony under any 
                statute of the United States or any State,
                    ``(B) as having a hiring date which is not more than 
                1 year after the last date on which such individual was 
                so convicted or was released from prison, and
                    ``(C) as being a member of a family which had an 
                income during the 6 months immediately preceding the 
                earlier of the month in which such income determination 
                occurs or the month in which the hiring date occurs, 
                which, on an annual basis, would be 70 percent or less 
                of the Bureau of Labor Statistics lower living standard.
        Any determination under subparagraph (C) shall be valid for the 
        45-day period beginning on the date such determination is made.
            ``(5) High-risk youth.--

[[Page 110 STAT. 1770]]

                    ``(A) In general.--The term `high-risk youth' means 
                any individual who is certified by the designated local 
                agency--
                          ``(i) as having attained age 18 but not age 25 
                      on the hiring date, and
                          ``(ii) as having his principal place of abode 
                      within an empowerment zone or enterprise 
                      community.
                    ``(B) Youth must continue to reside in zone.--In the 
                case of a high-risk youth, the term `qualified wages' 
                shall not include wages paid or incurred for services 
                performed while such youth's principal place of abode is 
                outside an empowerment zone or enterprise community.
            ``(6) Vocational rehabilitation referral.--The term 
        `vocational rehabilitation referral' means any individual who is 
        certified by the designated local agency as--
                    ``(A) having a physical or mental disability which, 
                for such individual, constitutes or results in a 
                substantial handicap to employment, and
                    ``(B) having been referred to the employer upon 
                completion of (or while receiving) rehabilitative 
                services pursuant to--
                          ``(i) an individualized written rehabilitation 
                      plan under a State plan for vocational 
                      rehabilitation services approved under the 
                      Rehabilitation Act of 1973, or
                          ``(ii) a program of vocational rehabilitation 
                      carried out under chapter 31 of title 38, United 
                      States Code.
            ``(7) Qualified summer youth employee.--
                    ``(A) In general.--The term `qualified summer youth 
                employee' means any individual--
                          ``(i) who performs services for the employer 
                      between May 1 and September 15,
                          ``(ii) who is certified by the designated 
                      local agency as having attained age 16 but not 18 
                      on the hiring date (or if later, on May 1 of the 
                      calendar year involved),
                          ``(iii) who has not been an employee of the 
                      employer during any period prior to the 90-day 
                      period described in subparagraph (B)(i), and
                          ``(iv) who is certified by the designated 
                      local agency as having his principal place of 
                      abode within an empowerment zone or enterprise 
                      community.
                    ``(B) Special rules for determining amount of 
                credit.--For purposes of applying this subpart to wages 
                paid or incurred to any qualified summer youth 
                employee--
                          ``(i) subsection (b)(2) shall be applied by 
                      substituting `any 90-day period between May 1 and 
                      September 15' for `the 1-year period beginning 
                      with the day the individual begins work for the 
                      employer', and
                          ``(ii) subsection (b)(3) shall be applied by 
                      substituting `$3,000' for `$6,000'.
                The preceding sentence shall not apply to an individual 
                who, with respect to the same employer, is certified as 
                a member of another targeted group after such individual 
                has been a qualified summer youth employee.
                    ``(C) Youth must continue to reside in zone.--
                Paragraph (5)(B) shall apply for purposes of 
                subparagraph (A)(iv).

[[Page 110 STAT. 1771]]

            ``(8) Qualified food stamp recipient.--
                    ``(A) In general.--The term `qualified food stamp 
                recipient' means any individual who is certified by the 
                designated local agency--
                          ``(i) as having attained age 18 but not age 25 
                      on the hiring date, and
                          ``(ii) as being a member of a family--
                                    ``(I) receiving assistance under a 
                                food stamp program under the Food Stamp 
                                Act of 1977 
                                for the 6-month period ending on the 
                                hiring date, or
                                    ``(II) receiving such assistance for 
                                at least 3 months of the 5-month period 
                                ending on the hiring date, in the case 
                                of a member of a family who ceases to be 
                                eligible for such assistance under 
                                section 6(o) of the Food Stamp Act of 
                                1977.
                    ``(B) Participation <<NOTE: Contracts.>>  
                information.--Notwithstanding any other provision of 
                law, the Secretary of the Treasury and the Secretary of 
                Agriculture shall enter into an agreement to provide 
                information to designated local agencies with respect to 
                participation in the food stamp program.
            ``(9) Hiring date.--The term `hiring date' means the day the 
        individual is hired by the employer.
            ``(10) Designated local agency.--The term `designated local 
        agency' means a State employment security agency established in 
        accordance with the Act of June 6, 1933, as amended (29 U.S.C. 
        49-49n).
            ``(11) Special rules for certifications.--
                    ``(A) In general.--An individual shall not be 
                treated as a member of a targeted group unless--
                          ``(i) on or before the day on which such 
                      individual begins work for the employer, the 
                      employer 
                      has received a certification from a designated 
                      local agency that such individual is a member of a 
                      targeted group, or
                          ``(ii)(I) on or before the day the individual 
                      is offered employment with the employer, a pre-
                      screening notice is completed by the employer with 
                      respect to such individual, and
                          ``(II) not later than the 21st day after the 
                      individual begins work for the employer, the 
                      employer submits such notice, signed by the 
                      employer and the individual under penalties of 
                      perjury, to the designated local agency as part of 
                      a written request for such a certification from 
                      such agency.
                For purposes of this paragraph, the term `pre-screening 
                notice' means a document (in such form as the Secretary 
                shall prescribe) which contains information provided by 
                the individual on the basis of which the employer 
                believes that the individual is a member of a targeted 
                group.
                    ``(B) Incorrect certifications.--If--
                          ``(i) an individual has been certified by a 
                      designated local agency as a member of a targeted 
                      group, and
                          ``(ii) such certification is incorrect because 
                      it was based on false information provided by such 
                      individual,
                the certification shall be revoked and wages paid by the 
                employer after the date on which notice of revocation is

[[Page 110 STAT. 1772]]

                received by the employer shall not be treated as 
                qualified wages.
                    ``(C) Explanation of denial of request.--If a 
                designated local agency denies a request for 
                certification of membership in a targeted group, such 
                agency shall provide to the person making such request a 
                written explanation of the reasons for such denial.''.

    (c) Minimum Employment Period.--Paragraph (3) of section 51(i) 
(relating to certain individuals ineligible) is amended to read as 
follows:
            ``(3) Individuals not meeting minimum employment period.--No 
        wages shall be taken into account under subsection (a) with 
        respect to any individual unless such individual either--
                    ``(A) is employed by the employer at least 180 days 
                (20 days in the case of a qualified summer youth 
                employee), or
                    ``(B) has completed at least 400 hours (120 hours in 
                the case of a qualified summer youth employee) of 
                services performed for the employer.''.

    (d) Termination.--Paragraph (4) of section 51(c) (relating to wages 
defined) is amended to read as follows:
            ``(4) Termination.--The term `wages' shall not include any 
        amount paid or incurred to an individual who begins work for the 
        employer--
                    ``(A) after December 31, 1994, and before October 1, 
                1996, or
                    ``(B) after September 30, 1997.''.

    (e) Redesignation of Credit.--
            (1) Sections 38(b)(2), 41(b)(2)(D)(iii), 45A(b)(1)(B), 51 
        (a) and (g), and 196(c) are each amended in the text by striking 
        ``targeted jobs credit'' each place it appears and inserting 
        ``work opportunity credit''.
            (2) The subpart heading for subpart F of part IV of 
        subchapter A of chapter 1 is amended by striking ``Targeted Jobs 
        Credit'' and inserting ``Work Opportunity Credit''.
            (3) The table of subparts for such part IV is amended by 
        striking ``targeted jobs credit'' and inserting ``work 
        opportunity credit''.
            (4) The headings for sections 41(b)(2)(D)(iii) and 
        1396(c)(3) are each amended by striking ``targeted jobs credit'' 
        and inserting ``work opportunity credit''.
            (5) The heading for subsection (j) of section 51 is amended 
        by striking ``Targeted Jobs Credit'' and inserting ``Work 
        Opportunity Credit''.

    (f) Technical Amendment.--Paragraph (1) of section 51(c) is amended 
by striking ``, subsection (d)(8)(D),''.
    (g) Effective <<NOTE: 26 USC 38 note.>>  Date.--The amendments made 
by this section shall apply to individuals who begin work for the 
employer after September 30, 1996.
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) Extension.--Subsection (d) of section 127 (relating to 
educational assistance programs) is amended by striking ``December 31, 
1994.'' and inserting ``May 31, 1997. In the case of any taxable year 
beginning in 1997, only expenses paid with respect to courses

[[Page 110 STAT. 1773]]

beginning before July 1, 1997, shall be taken into account in 
determining the amount excluded under this section.''.
    (b) Limitation to Education Below Graduate Level.--The last sentence 
of section 127(c)(1) is amended by inserting before the period the 
following: ``, and such term also does not include any payment for, or 
the provision of any benefits with respect to, any graduate level course 
of a kind normally taken by an individual pursuing a program leading to 
a law, business, medical, or other advanced academic or professional 
degree''.
    (c) Effective <<NOTE: 26 USC 127 note.>>  Dates.--
            (1) Extension.--The amendment made by subsection (a) shall 
        apply to taxable years beginning after December 31, 1994.
            (2) Graduate education.--The amendment made by subsection 
        (b) shall apply with respect to expenses relating to courses 
        beginning after June 30, 1996.
            (3) Expedited procedures.--The Secretary of the Treasury 
        shall establish expedited procedures for the refund of any 
        overpayment of taxes imposed by the Internal Revenue Code of 
        1986 which is attributable to amounts excluded from gross income 
        during 1995 or 1996 under section 127 of such Code, including 
        procedures waiving the requirement
that an employer obtain an employee's signature where the employer 
demonstrates to the satisfaction of the Secretary that any refund 
collected by the employer on behalf of the employee will be paid to the 
employee.
SEC. 1203. FUTA EXEMPTION FOR ALIEN AGRICULTURAL WORKERS.

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

SEC. 1204. RESEARCH CREDIT.

    (a) In General.--Subsection (h) of section 41 (relating to credit 
for research activities) is amended to read as follows:
    ``(h) Termination.--
            ``(1) In general.--This section shall not apply to any 
        amount paid or incurred--
                    ``(A) after June 30, 1995, and before July 1, 
                1996, or
                    ``(B) after May 31, 1997.
        Notwithstanding the preceding sentence, in the case of a 
        taxpayer making an election under subsection (c)(4) for its 
        first taxable year beginning after June 30, 1996, and before 
        July 1, 1997, this section shall apply to amounts paid or 
        incurred during the first 11 months of such taxable year.
            ``(2) Computation of base amount.--In the case of any 
        taxable year with respect to which this section applies to a 
        number of days which is less than the total number of days in 
        such taxable year, the base amount with respect to such taxable 
        year shall be the amount which bears the same ratio to the base 
        amount for such year (determined without regard to this 
        paragraph) as the number of days in such taxable year to which 
        this section applies bears to the total number of days in such 
        taxable year.''.

    (b) Base Amount for Start-Up Companies.--Clause (i) of section 
41(c)(3)(B) (relating to start-up companies) is amended to read as 
follows:

[[Page 110 STAT. 1774]]

                          ``(i)  Taxpayers to which subparagraph 
                      applies.--The fixed-base percentage shall be 
                      determined under this subparagraph if--
                                    ``(I) the first taxable year in 
                                which a taxpayer had both gross receipts 
                                and qualified research expenses begins 
                                after December 31, 1983, or
                                    ``(II) there are fewer than 3 
                                taxable years beginning after December 
                                31, 1983, and before January 1, 1989, in 
                                which the taxpayer had both gross 
                                receipts and qualified research 
                                expenses.''.

    (c) Election of Alternative Incremental Credit.--Subsection (c) of 
section 41 is amended by redesignating paragraphs (4) and (5) as 
paragraphs (5) and (6), respectively, and by inserting after paragraph 
(3) the following new paragraph:
            ``(4) Election of alternative incremental credit.--
                    ``(A) In general.--At the election of the taxpayer, 
                the credit determined under subsection (a)(1) shall be 
                equal to the sum of--
                          ``(i) 1.65 percent of so much of the qualified 
                      research expenses for the taxable year as exceeds 
                      1 percent of the average described in subsection 
                      (c)(1)(B) but does not exceed 1.5 percent of such 
                      average,
                          ``(ii) 2.2 percent of so much of such expenses 
                      as exceeds 1.5 percent of such average but does 
                      not exceed 2 percent of such average, and
                          ``(iii) 2.75 percent of so much of such 
                      expenses as exceeds 2 percent of such average.
                    ``(B) Election.--An election under this paragraph 
                may be made only for the first taxable year of the 
                taxpayer beginning after June 30, 1996. Such an election 
                shall apply to the taxable year for which made and all 
                succeeding taxable years unless revoked with the consent 
                of the Secretary.''.

    (d) Increased Credit for Contract Research Expenses With Respect to 
Certain Research Consortia.--Paragraph (3) of section 41(b) is amended 
by adding at the end the following new subparagraph:
                    ``(C) Amounts paid to certain research 
                consortia.--
                          ``(i) In general.--Subparagraph (A) shall be 
                      applied by substituting `75 percent' for `65 
                      percent' with respect to amounts paid or incurred 
                      by the taxpayer to a qualified research consortium 
                      for qualified research on behalf of the taxpayer 
                      and 1 or more unrelated taxpayers. For purposes of 
                      the preceding sentence, all persons treated as a 
                      single employer under subsection (a) or (b) of 
                      section 52 shall be treated as related taxpayers.
                          ``(ii) Qualified research consortium.--The 
                      term `qualified research consortium' means any 
                      organization which--
                                    ``(I) is described in section 
                                501(c)(3) or 501(c)(6) and is exempt 
                                from tax under section 501(a),
                                    ``(II) is organized and operated 
                                primarily to conduct scientific 
                                research, and
                                    ``(III) is not a private 
                                foundation.''.

[[Page 110 STAT. 1775]]

    (e)  Conforming Amendment.--Subparagraph (D) of section 28(b)(1) is 
amended by inserting ``, and before July 1, 1996, and periods after May 
31, 1997'' after ``June 30, 1995''.
    (f) Effective <<NOTE: 26 USC 41 note.>>  Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        ending after June 30, 1996.
            (2) Subsections (c) and (d).--The amendments made by 
        subsections (c) and (d) shall apply to taxable years beginning 
        after June 30, 1996.
            (3) Estimated tax.--The amendments made by this section 
        shall not be taken into account under section 6654 or 6655 of 
        the Internal Revenue Code of 1986 (relating to failure to pay 
        estimated tax) in determining the amount of any installment 
        required to be paid for a taxable year beginning in 1997.

SEC. 1205. ORPHAN DRUG TAX CREDIT.

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

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

    (b) Credit Termination.--Subsection (e) of section 45C, as 
redesignated by subsection (a)(1), is amended to read as follows:
    ``(e) Termination.--This section shall not apply to any amount paid 
or incurred--
            ``(1) after December 31, 1994, and before July 1, 
        1996, or
            ``(2) after May 31, 1997.''.

    (c) No Pre-July 1, 1996 Carrybacks.--Subsection (d) of section 39 
(relating to carryback and carryforward of unused credits) is amended by 
adding at the end the following new paragraph:
            ``(7) No carryback of section 45c credit before july 1, 
        1996.--No portion of the unused business credit for any taxable 
        year which is attributable to the orphan drug credit determined 
        under section 45C may be carried back to a taxable year ending 
        before July 1, 1996.''.

    (d) Additional Conforming Amendments.--
            (1) Section 45C(a), as redesignated by subsection (a)(1), is 
        amended by striking ``There shall be allowed as a credit against 
        the tax imposed by this chapter for the taxable year''

[[Page 110 STAT. 1776]]

        and inserting ``For purposes of section 38, the credit 
        determined under this section for the taxable year is''.
            (2) Section 45C(d), as so redesignated, is amended by 
        striking paragraph (2) and by redesignating paragraphs (3), (4), 
        and (5) as paragraphs (2), (3), and (4).
            (3) Section 29(b)(6)(A) is amended by striking ``sections 27 
        and 28'' and inserting ``section 27''.
            (4) Section 30(b)(3)(A) is amended by striking ``sections 
        27, 28, and 29'' and inserting ``sections 27 and 29''.
            (5) Section 53(d)(1)(B) is amended--
                    (A) by striking ``or not allowed under section 28 
                solely by reason of the application of section 
                28(d)(2)(B),'' in clause (iii), and
                    (B) by striking ``or not allowed under section 28 
                solely by reason of the application of section 
                28(d)(2)(B)'' in clause (iv)(II).
            (6) Section 55(c)(2) is amended by striking ``28(d)(2),''.
            (7) Section 280C(b) is amended--
                    (A) by striking ``section 28(b)'' in paragraph (1) 
                and inserting ``section 45C(b)'',
                    (B) by striking ``section 28'' in paragraphs (1) and 
                (2)(A) and inserting ``section 45C'', and
                    (C) by striking ``subsection (d)(2) thereof'' in 
                paragraphs (1) and (2)(A) and inserting ``section 
                38(c)''.

    (e) Effective Date.--The <<NOTE: 26 USC 29 note.>>  amendments made 
by this section shall apply to amounts paid or incurred in taxable years 
ending after June 30, 1996.

SEC. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

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

    (b) Effective <<NOTE: 26 USC 170 note.>>  Date.--The amendment made 
by this section shall apply to contributions made after June 30, 1996.
SEC. 1207. EXTENSION OF BINDING CONTRACT DATE FOR BIOMASS AND COAL 
                          FACILITIES.

    (a) In General.--Subparagraph (A) of section 29(g)(1) (relating to 
extension of certain facilities) is amended by striking ``January 1, 
1997'' and inserting ``July 1, 1998'' and by striking ``January 1, 
1996'' and inserting ``January 1, 1997''.
    (b) Effective <<NOTE: 26 USC 29 note.>>  Date.--The amendment made 
by this section shall take effect on the date of the enactment of this 
Act.
SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR USE 
                          OR USED IN DIESEL-POWERED MOTORBOATS.

    Subparagraph (D) of section 4041(a)(1) (relating to the imposition 
of tax on diesel fuel and special motor fuels) is amended by 
redesignating clauses (i) and (ii) as clauses (ii) and (iii), 
respectively, and by inserting before clause (ii) (as redesignated) the 
following new clause:
                          ``(i) no tax shall be imposed by subsection 
                      (a) or (d)(1) during the period beginning on the 
                      date which

[[Page 110 STAT. 1777]]

                      is 7 days after the date of the enactment of the 
                      Small Business Job Protection Act of 1996 and 
                      ending on December 31, 1997,''.

            Subtitle C--Provisions Relating to S Corporations

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

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

SEC. 1302. ELECTING SMALL BUSINESS TRUSTS.

    (a) General Rule.--Subparagraph (A) of section 1361(c)(2) (relating 
to certain trusts permitted as shareholders) is amended by inserting 
after clause (iv) the following new clause:
                          ``(v) An electing small business trust.''.

    (b) Current Beneficiaries Treated as Shareholders.--Subparagraph (B) 
of section 1361(c)(2) is amended by adding at the end the following new 
clause:
                          ``(v) In the case of a trust described in 
                      clause (v) of subparagraph (A), each potential 
                      current beneficiary of such trust shall be treated 
                      as a shareholder; except that, if for any period 
                      there is no potential current beneficiary of such 
                      trust, such trust shall be treated as the 
                      shareholder during such period.''.

    (c) Electing Small Business Trust Defined.--Section 1361 (defining S 
corporation) is amended by adding at the end the following new 
subsection:
    ``(e) Electing Small Business Trust Defined.--
            ``(1) Electing small business trust.--For purposes of this 
        section--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `electing small business 
                trust' means any trust if--
                          ``(i) such trust does not have as a 
                      beneficiary any person other than (I) an 
                      individual, (II) an estate, or (III) an 
                      organization described in paragraph (2), (3), (4), 
                      or (5) of section 170(c) which holds a contingent 
                      interest and is not a potential current 
                      beneficiary,
                          ``(ii) no interest in such trust was acquired 
                      by purchase, and
                          ``(iii) an election under this subsection 
                      applies to such trust.
                    ``(B) Certain trusts not eligible.--The term 
                `electing small business trust' shall not include--
                          ``(i) any qualified subchapter S trust (as 
                      defined in subsection (d)(3)) if an election under 
                      subsection (d)(2) applies to any corporation the 
                      stock of which is held by such trust, and
                          ``(ii) any trust exempt from tax under this 
                      subtitle.
                    ``(C) Purchase.--For purposes of subparagraph (A), 
                the term `purchase' means any acquisition if the basis 
                of the property acquired is determined under section 
                1012.
            ``(2) Potential current beneficiary.--For purposes of this 
        section, the term `potential current beneficiary' means,

[[Page 110 STAT. 1778]]

        with respect to any period, any person who at any time during 
        such period is entitled to, or at the discretion of any person 
        may receive, a distribution from the principal or income of the 
        trust. If a trust disposes of all of the stock which it holds in 
        an S corporation, then, with respect to such corporation, the 
        term `potential current beneficiary' does not include any person 
        who first met the requirements of the preceding sentence during 
        the 60-day period ending on the date of such disposition.
            ``(3) Election.--An election under this subsection shall be 
        made by the trustee. Any such election shall apply to the 
        taxable year of the trust for which made and all subsequent 
        taxable years of such trust unless revoked with the consent of 
        the Secretary.
            ``(4) Cross reference.--
                  ``For special treatment of electing small business 
                trusts, see section 641(d).''.

    (d) Taxation of Electing Small Business Trusts.--Section 641 
(relating to imposition of tax on trusts) is amended by adding at the 
end the following new subsection:
    ``(d) Special Rules for Taxation of Electing Small Business 
Trusts.--
            ``(1) In general.--For purposes of this chapter--
                    ``(A) the portion of any electing small business 
                trust which consists of stock in 1 or more S 
                corporations shall be treated as a separate trust, and
                    ``(B) the amount of the tax imposed by this chapter 
                on such separate trust shall be determined with the 
                modifications of paragraph (2).
            ``(2) Modifications.--For purposes of paragraph (1), the 
        modifications of this paragraph are the following:
                    ``(A) Except as provided in section 1(h), the amount 
                of the tax imposed by section 1(e) shall be determined 
                by using the highest rate of tax set forth in section 
                1(e).
                    ``(B) The exemption amount under section 55(d) shall 
                be zero.
                    ``(C) The only items of income, loss, deduction, or 
                credit to be taken into account are the following:
                          ``(i) The items required to be taken into 
                      account under section 1366.
                          ``(ii) Any gain or loss from the disposition 
                      of stock in an S corporation.
                          ``(iii) To the extent provided in regulations, 
                      State or local income taxes or administrative 
                      expenses to the extent allocable to items 
                      described in clauses (i) and (ii).
                No deduction or credit shall be allowed for any amount 
                not described in this paragraph, and no item described 
                in this paragraph shall be apportioned to any 
                beneficiary.
                    ``(D) No amount shall be allowed under paragraph (1) 
                or (2) of section 1211(b).
            ``(3) Treatment of remainder of trust and distributions.--
        For purposes of determining--
                    ``(A) the amount of the tax imposed by this chapter 
                on the portion of any electing small business trust not 
                treated as a separate trust under paragraph (1), and
                    ``(B) the distributable net income of the entire 
                trust,

[[Page 110 STAT. 1779]]

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

    (e) Technical Amendment.--Paragraph (1) of section 1366(a) is 
amended by inserting ``, or of a trust or estate which terminates,'' 
after ``who dies''.
SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN 
                          TRUSTS.

    Subparagraph (A) of section 1361(c)(2) (relating to certain trusts 
permitted as shareholders) is amended--
            (1) by striking ``60-day period'' each place it appears in 
        clauses (ii) and (iii) and inserting ``2-year period'', and
            (2) by striking the last sentence in clause (ii).
SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE 
                          HARBOR DEBT.

    Clause (iii) of section 1361(c)(5)(B) (defining straight debt) is 
amended by striking ``or a trust described in paragraph (2)'' and 
inserting ``a trust described in paragraph (2), or a person which is 
actively and regularly engaged in the business of lending money''.
SEC. 1305. RULES RELATING TO INADVERTENT TERMINATIONS AND INVALID 
                          ELECTIONS.

    (a) General Rule.--Subsection (f) of section 1362 (relating to 
inadvertent terminations) is amended to read as follows:

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

[[Page 110 STAT. 1780]]

then, notwithstanding the circumstances resulting in such 
ineffectiveness or termination, such corporation shall be treated as an 
S corporation during the period specified by the Secretary.''.
    (b) Late Elections, Etc.--Subsection (b) of section 1362 is amended 
by adding at the end the following new paragraph:
            ``(5) Authority to treat late elections, etc., as timely.--
        If--
                    ``(A) an election under subsection (a) is made for 
                any taxable year (determined without regard to paragraph 
                (3)) after the date prescribed by this subsection for 
                making such election for such taxable year or no such 
                election is made for any taxable year, and
                    ``(B) the Secretary determines that there was 
                reasonable cause for the failure to timely make such 
                election,
        the Secretary may treat such an election as timely made for such 
        taxable year (and paragraph (3) shall not apply).''.

    (c) Effective <<NOTE: 26 USC 1362 note.>>  Date.--The amendments 
made by subsections (a) and (b) shall apply with respect to elections 
for taxable years beginning after December 31, 1982.

SEC. 1306. AGREEMENT TO TERMINATE YEAR.

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

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

    (a) In General.--Paragraph (1) of section 1377(b) (relating to post-
termination transition period) is amended by striking ``and'' at the end 
of subparagraph (A), by redesignating subparagraph (B) as subparagraph 
(C), and by inserting after subparagraph (A) the following new 
subparagraph:
                    ``(B) the 120-day period beginning on the date of 
                any determination pursuant to an audit of the taxpayer 
                which follows the termination of the corporation's 
                election and which adjusts a subchapter S item of 
                income, loss, or deduction of the corporation arising 
                during the S period (as defined in section 1368(e)(2)), 
                and''.

    (b) Determination Defined.--Paragraph (2) of section 1377(b) is 
amended by striking subparagraphs (A) and (B), by redesignating 
subparagraph (C) as subparagraph (B), and by inserting before 
subparagraph (B) (as so redesignated) the following new subparagraph:

[[Page 110 STAT. 1781]]

                    ``(A) a determination as defined in section 1313(a), 
                or''.

    (c) Repeal of Special Audit Provisions for Sub-
chapter S Items.--
            (1) General rule.--Subchapter <<NOTE: 26 USC 6241 et seq.>>  
        D of chapter 63 (relating to tax treatment of subchapter S 
        items) is hereby repealed.
            (2) Consistent treatment required.--Section 6037 (relating 
        to return of S corporation) is amended by adding at the end the 
        following new subsection:

    ``(c) Shareholder's Return Must Be Consistent With Corporate Return 
or Secretary Notified of Inconsistency.--
            ``(1) In general.--A shareholder of an S corporation shall, 
        on such shareholder's return, treat a subchapter S item in a 
        manner which is consistent with the treatment of such item on 
        the corporate return.
            ``(2) Notification of inconsistent treatment.--
                    ``(A) In general.--In the case of any subchapter S 
                item, if--
                          ``(i)(I) the corporation has filed a return 
                      but the shareholder's treatment on his return is 
                      (or may be) inconsistent with the treatment of the 
                      item on the corporate return, or
                          ``(II) the corporation has not filed a return, 
                      and
                          ``(ii) the shareholder files with the 
                      Secretary a statement identifying the 
                      inconsistency,
                paragraph (1) shall not apply to such item.
                    ``(B) Shareholder receiving incorrect information.--
                A shareholder shall be treated as having complied with 
                clause (ii) of subparagraph (A) with respect to a 
                subchapter S item if the shareholder--
                          ``(i) demonstrates to the satisfaction of the 
                      Secretary that the treatment of the subchapter S 
                      item on the shareholder's return is consistent 
                      with the treatment of the item on the schedule 
                      furnished to the shareholder by the corporation, 
                      and
                          ``(ii) elects to have this paragraph apply 
                      with respect to that item.
            ``(3) Effect of failure to notify.--In any case--
                    ``(A) described in subparagraph (A)(i)(I) of 
                paragraph (2), and
                    ``(B) in which the shareholder does not comply with 
                subparagraph (A)(ii) of paragraph (2),
        any adjustment required to make the treatment of the items by 
        such shareholder consistent with the treatment of the items on 
        the corporate return shall be treated as arising out of 
        mathematical or clerical errors and assessed according to 
        section 6213(b)(1). Paragraph (2) of section 6213(b) shall not 
        apply to any assessment referred to in the preceding sentence.
            ``(4) Subchapter s item.--For purposes of this subsection, 
        the term `subchapter S item' means any item of an S corporation 
        to the extent that regulations prescribed by the Secretary 
        provide that, for purposes of this subtitle, such item is more 
        appropriately determined at the corporation level than at the 
        shareholder level.

[[Page 110 STAT. 1782]]

            ``(5) Addition to tax for failure to comply with section.--
                  ``For addition to tax in the case of a shareholder's 
                negligence in connection with, or disregard of, the 
                requirements of this section, see part II of subchapter 
                A of chapter 68.''.

            (3) Conforming amendments.--
                    (A) Section 1366 is amended by striking sub-
                section (g).
                    (B) Subsection (b) of section 6233 is amended to 
                read as follows:

    ``(b) Similar Rules in Certain Cases.--If a partnership return is 
filed for any taxable year but it is determined that there is no entity 
for such taxable year, to the extent provided in regulations, rules 
similar to the rules of subsection (a) shall apply.''.
                    (C) The table of subchapters for chapter 63 is 
                amended by striking the item relating to subchapter D.

SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

    (a) In General.--Paragraph (2) of section 1361(b) (defining 
ineligible corporation) is amended by striking subparagraph (A) and by 
redesignating subparagraphs (B), (C), (D), and (E) as subparagraphs (A), 
(B), (C), and (D), respectively.
    (b) Treatment of Certain Wholly Owned S Corporation Subsidiaries.--
Section 1361(b) (defining small business corporation) is amended by 
adding at the end the following new paragraph:
            ``(3) Treatment of certain wholly owned subsidiaries.--
                    ``(A) In general.--For purposes of this title--
                          ``(i) a corporation which is a qualified 
                      subchapter S subsidiary shall not be treated as a 
                      separate corporation, and
                          ``(ii) all assets, liabilities, and items of 
                      income, deduction, and credit of a qualified 
                      subchapter S subsidiary shall be treated as 
                      assets, liabilities, and such items (as the case 
                      may be) of the S corporation.
                    ``(B) Qualified subchapter s subsidiary.--For 
                purposes of this paragraph, the term `qualified 
                subchapter S subsidiary' means any domestic corporation 
                which is not an ineligible corporation (as defined in 
                paragraph (2)), if--
                          ``(i) 100 percent of the stock of such 
                      corporation is held by the S corporation, and
                          ``(ii) the S corporation elects to treat such 
                      corporation as a qualified subchapter S 
                      subsidiary.
                    ``(C) Treatment of terminations of qualified 
                subchapter s subsidiary status.--For purposes of this 
                title, if any corporation which was a qualified 
                subchapter S subsidiary ceases to meet the requirements 
                of subparagraph (B), such corporation shall be treated 
                as a new corporation acquiring all of its assets (and 
                assuming all of its liabilities) immediately before such 
                cessation from the S corporation in exchange for its 
                stock.
                    ``(D) Election after termination.--If a 
                corporation's status as a qualified subchapter S 
                subsidiary terminates, such corporation (and any 
                successor corporation) shall not be eligible to make--

[[Page 110 STAT. 1783]]

                          ``(i) an election under subparagraph (B)(ii) 
                      to be treated as a qualified subchapter S 
                      subsidiary, or
                          ``(ii) an election under section 1362(a) to be 
                      treated as an S corporation,
                before its 5th taxable year which begins after the 1st 
                taxable year for which such termination was effective, 
                unless the Secretary consents to such election.''.

    (c) Certain Dividends Not Treated as Passive Investment Income.--
Paragraph (3) of section 1362(d) is amended by adding at the end the 
following new subparagraph:
                    ``(F) Treatment of certain dividends.--If an S 
                corporation holds stock in a C corporation meeting the 
                requirements of section 1504(a)(2), the term `passive 
                investment income' shall not include dividends from such 
                C corporation to the extent such dividends are 
                attributable to the earnings and profits of such C 
                corporation derived from the active conduct of a trade 
                or business.''.

    (d) Conforming Amendments.--
            (1) Subsection (c) of section 1361 is amended by striking 
        paragraph (6).
            (2) Subsection (b) of section 1504 (defining includible 
        corporation) is amended by adding at the end the following new 
        paragraph:
            ``(8) An S corporation.''.

SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.

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

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

    (c) Conforming Amendments.--Subparagraph (A) of section 1368(e)(1) 
is amended--

[[Page 110 STAT. 1784]]

            (1) by striking ``as provided in subparagraph (B)'' and 
        inserting ``as otherwise provided in this paragraph'', and
            (2) by striking ``section 1367(b)(2)(A)'' and inserting 
        ``section 1367(a)(2)''.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.

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

SEC. 1311. ELIMINATION <<NOTE: 26 USC 1361 note.>>  OF CERTAIN EARNINGS 
            AND PROFITS.

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

the amount of such corporation's accumulated earnings and profits (as of 
the beginning of such first taxable year) shall be reduced by an amount 
equal to the portion (if any) of such accumulated earnings and profits 
which were accumulated in any taxable year beginning before January 1, 
1983, for which such corporation was an electing small business 
corporation under such subchapter S.
    (b) Conforming Amendments.--
            (1) Paragraph (3) of section 1362(d), as amended by section 
        1308, is amended--
                    (A) by striking ``subchapter c'' in the paragraph 
                heading and inserting ``accumulated'',
                    (B) by striking ``subchapter C'' in subparagraph 
                (A)(i)(I) and inserting ``accumulated'', and
                    (C) by striking subparagraph (B) and redesignating 
                the following subparagraphs accordingly.
            (2)(A) Subsection (a) of section 1375 is amended by striking 
        ``subchapter C'' in paragraph (1) and inserting ``accumulated''.
            (B) Paragraph (3) of section 1375(b) is amended to read as 
        follows:
            ``(3) Passive investment income, etc.--The terms `passive 
        investment income' and `gross receipts' have the same respective 
        meanings as when used in paragraph (3) of section 1362(d).''.
            (C) The section heading for section 1375 is amended by 
        striking ``subchapter C'' and inserting ``accumulated''.
            (D) The table of sections for part III of subchapter S of 
        chapter 1 is amended by striking ``subchapter C'' in the item 
        relating to section 1375 and inserting ``accumulated''.
            (3) Clause (i) of section 1042(c)(4)(A) is amended by 
        striking ``section 1362(d)(3)(D)'' and inserting ``section 
        1362(d)(3)(C)''.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS UNDER AT-
                          RISK RULES ALLOWED.

    Paragraph (3) of section 1366(d) (relating to carryover of 
disallowed losses and deductions to post-termination transition period) 
is amended by adding at the end the following new subparagraph:

[[Page 110 STAT. 1785]]

                    ``(D) At-risk limitations.--To the extent that any 
                increase in adjusted basis described in subparagraph (B) 
                would have increased the shareholder's amount at risk 
                under section 465 if such increase had occurred on the 
                day preceding the commencement of the post-termination 
                transition period, rules similar to the rules described 
                in subparagraphs (A) through (C) shall apply to any 
                losses disallowed by reason of section 465(a).''.
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK TO REFLECT 
                          CERTAIN ITEMS OF INCOME.

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

    (b) Effective <<NOTE: 26 USC 1367 note.>>  Date.--The amendment made 
by subsection (a) shall apply in the case of decedents dying after the 
date of the enactment of this Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLICABLE TO REAL 
                          PROPERTY SUBDIVIDED FOR SALE BY 
                          NONCORPORATE TAXPAYERS.

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

SEC. 1315. FINANCIAL INSTITUTIONS.

    Subparagraph (A) of section 1361(b)(2) (defining ineligible 
corporation), as redesignated by section 1308(a), is amended to read as 
follows:
                    ``(A) a financial institution which uses the reserve 
                method of accounting for bad debts described in section 
                585,''.
SEC. 1316. CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO BE 
                          SHAREHOLDERS.

    (a) Eligibility To Be Shareholders.--
            (1) In general.--Subparagraph (B) of section 1361(b)(1) 
        (defining small business corporation) is amended to read as 
        follows:
                    ``(B) have as a shareholder a person (other than an 
                estate, a trust described in subsection (c)(2), or an 
                organiza

[[Page 110 STAT. 1786]]

                tion described in subsection (c)(7)) who is not an 
                individual,''.
            (2) Eligible exempt organizations.--Section 1361(c) 
        (relating to special rules for applying subsection (b)) is 
        amended by adding at the end the following new paragraph:
            ``(7) Certain exempt organizations permitted as 
        shareholders.--For purposes of subsection (b)(1)(B), an 
        organization which is--
                    ``(A) described in section 401(a) or 501(c)(3), and
                    ``(B) exempt from taxation under section 501(a),
        may be a shareholder in an S corporation.''.

    (b) Contributions of S Corporation Stock.--Section 170(e)(1) 
(relating to certain contributions of ordinary income and capital gain 
property) is amended by adding at the end the following new sentence: 
``For purposes of applying this paragraph in the case of a charitable 
contribution of stock in an S corporation, rules similar to the rules of 
section 751 shall apply in determining whether gain on such stock would 
have been long-term capital gain if such stock were sold by the 
taxpayer.''.
    (c) Treatment of Income.--Section 512 (relating to unrelated 
business taxable income), as amended by section 1113, is amended by 
adding at the end the following new subsection:
    ``(e) Special Rules Applicable to S Corporations.--
            ``(1) In general.--If an organization described in section 
        1361(c)(7) holds stock in an S corporation--
                    ``(A) such interest shall be treated as an interest 
                in an unrelated trade or business, and
                    ``(B) notwithstanding any other provision of this 
                part--
                          ``(i) all items of income, loss, or deduction 
                      taken into account under section 1366(a), and
                          ``(ii) any gain or loss on the disposition of 
                      the stock in the S corporation,
        shall be taken into account in computing the unrelated business 
        taxable income of such organization.
            ``(2) Basis reduction.--Except as provided in regulations, 
        for purposes of paragraph (1), the basis of any stock acquired 
        by purchase (within the meaning of section 1012) shall be 
        reduced by the amount of any dividends received by the 
        organization with respect to the stock.''.

    (d) Certain Benefits not Applicable to S Corporations.--
            (1) Contribution to esops.--Paragraph (9) of section 404(a) 
        (relating to certain contributions to employee ownership plans) 
        is amended by inserting at the end the following new 
        subparagraph:
                    ``(C) S corporations.--This paragraph shall not 
                apply to an S corporation.''.
            (2) Dividends on employer securities.--Paragraph (1) of 
        section 404(k) (relating to deduction for dividends on certain 
        employer securities) is amended by striking ``a corporation'' 
        and inserting ``a C corporation''.
            (3) Exchange treatment.--Subparagraph (A) of section 
        1042(c)(1) (defining qualified securities) is amended by 
        striking ``domestic corporation'' and inserting ``domestic C 
        corporation''.

    (e) Conforming Amendment.--Clause (i) of section 1361(e)(1)(A), as 
added by section 1302, is amended by striking ``which holds a contingent 
interest and is not a potential current beneficiary''.

[[Page 110 STAT. 1787]]

    (f) Effective <<NOTE: 26 USC 170 note.>>  Date.--The amendments made 
by this section shall apply to taxable years beginning after December 
31, 1997.

SEC. 1317. EFFECTIVE DATE.

    (a) In <<NOTE: 26 USC 641 note.>>  General.--Except as otherwise 
provided in this subtitle, the amendments made by this subtitle shall 
apply to taxable years beginning after December 31, 1996.

    (b) Treatment of Certain <<NOTE: 26 USC 1362 note.>>  Elections 
Under Prior Law.--For purposes of section 1362(g) of the Internal 
Revenue Code of 1986 (relating to election after termination), any 
termination under section 1362(d) of such Code in a taxable year 
beginning before January 1, 1997, shall not be taken into account.

                   Subtitle D--Pension Simplification

                CHAPTER 1--SIMPLIFIED DISTRIBUTION RULES

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

    (a) In General.--Subsection (d) of section 402 (relating to 
taxability of beneficiary of employees' trust) is amended to read as 
follows:
    ``(d) Taxability of Beneficiary of Certain Foreign Situs Trusts.--
For purposes of subsections (a), (b), and (c), a stock bonus, pension, 
or profit-sharing trust which would qualify for exemption from tax under 
section 501(a) except for the fact that it is a trust created or 
organized outside the United States shall be treated as if it were a 
trust exempt from tax under section 501(a).''.
    (b) Conforming Amendments.--
            (1) Subparagraph (D) of section 402(e)(4) (relating to other 
        rules applicable to exempt trusts) is amended to read as 
        follows:
                    ``(D) Lump-sum distribution.--For purposes of this 
                paragraph--
                          ``(i) In general.--The term `lump-sum 
                      distribution' means the distribution or payment 
                      within one taxable year of the recipient of the 
                      balance to the credit of an employee which becomes 
                      payable to the recipient--
                                    ``(I) on account of the employee's 
                                death,
                                    ``(II) after the employee attains 
                                age 59\1/2\,
                                    ``(III) on account of the employee's 
                                separation from service, or
                                    ``(IV) after the employee has become 
                                disabled (within the meaning of section 
                                72(m)(7)),
                      from a trust which forms a part of a plan 
                      described in section 401(a) and which is exempt 
                      from tax under section 501 or from a plan 
                      described in section 403(a). Subclause (III) of 
                      this clause shall be applied only with respect to 
                      an individual who is an employee without regard to 
                      section 401(c)(1), and subclause (IV) shall be 
                      applied only with respect to an employee within 
                      the meaning of section 401(c)(1). For purposes of 
                      this clause, a distribution to two or more trusts 
                      shall be treated as a distribution to one 
                      recipient. For purposes of this paragraph, the 
                      balance to the credit of the employee does not 
                      include the accumulated deductible employee 
                      contributions under the plan (within the meaning 
                      of section 72(o)(5)).

[[Page 110 STAT. 1788]]

                          ``(ii) Aggregation of certain trusts and 
                      plans.--For purposes of determining the balance to 
                      the credit of an employee under clause (i)--
                                    ``(I) all trusts which are part of a 
                                plan shall be treated as a single trust, 
                                all pension plans maintained by the 
                                employer shall be treated as a single 
                                plan, all profit-sharing plans 
                                maintained by the employer shall be 
                                treated as a single plan, and all stock 
                                bonus plans maintained by the employer 
                                shall be treated as a single plan, and
                                    ``(II) trusts which are not 
                                qualified trusts under section 401(a) 
                                and annuity contracts which do not 
                                satisfy the requirements of section 
                                404(a)(2) shall not be taken into 
                                account.
                          ``(iii) Community property laws.--The 
                      provisions of this paragraph shall be applied 
                      without regard to community property laws.
                          ``(iv) Amounts subject to penalty.--This 
                      paragraph shall not apply to amounts described in 
                      subparagraph (A) of section 72(m)(5) to the extent 
                      that section 72(m)(5) applies to such amounts.
                          ``(v) Balance to credit of employee not to 
                      include amounts payable under qualified domestic 
                      relations order.--For purposes of this paragraph, 
                      the balance to the credit of an employee shall not 
                      include any amount payable to an alternate payee 
                      under a qualified domestic relations order (within 
                      the meaning of section 414(p)).
                          ``(vi) Transfers to cost-of-living arrangement 
                      not treated as distribution.--For purposes of this 
                      paragraph, the balance to the credit of an 
                      employee under a defined contribution plan shall 
                      not include any amount transferred from such 
                      defined contribution plan to a qualified cost-of-
                      living arrangement (within the meaning of section 
                      415(k)(2)) under a defined benefit plan.
                          ``(vii) Lump-sum distributions of alternate 
                      payees.--If any distribution or payment of the 
                      balance to the credit of an employee would be 
                      treated as a lump-sum distribution, then, for 
                      purposes of this paragraph, the payment under a 
                      qualified domestic relations order (within the 
                      meaning of section 414(p)) of the balance to the 
                      credit of an alternate payee who is the spouse or 
                      former spouse of the employee shall be treated as 
                      a lump-sum distribution. For purposes of this 
                      clause, the balance to the credit of the alternate 
                      payee shall not include any amount payable to the 
                      employee.''.
            (2) Section 402(c) (relating to rules applicable to 
        rollovers from exempt trusts) is amended by striking paragraph 
        (10).
            (3) Paragraph (1) of section 55(c) (defining regular tax) is 
        amended by striking ``shall not include any tax imposed by 
        section 402(d) and''.
            (4) Paragraph (8) of section 62(a) (relating to certain 
        portion of lump-sum distributions from pension plans taxed under 
        section 402(d)) is hereby repealed.

[[Page 110 STAT. 1789]]

            (5) Section 401(a)(28)(B) (relating to coordination with 
        distribution rules) is amended by striking clause (v).
            (6) Subparagraph (B)(ii) of section 401(k)(10) (relating to 
        distributions that must be lump-sum distributions) is amended to 
        read as follows:
                          ``(ii) Lump-sum distribution.--For purposes of 
                      this subparagraph, the term `lump-sum 
                      distribution' has the meaning given such term by 
                      section 402(e)(4)(D) (without regard to subclauses 
                      (I), (II), (III), and (IV) of clause (i) 
                      thereof).''.
            (7) Section 406(c) (relating to termination of status as 
        deemed employee not to be treated as separation from service for 
        purposes of limitation of tax) is hereby repealed.
            (8) Section 407(c) (relating to termination of status as 
        deemed employee not to be treated as separation from service for 
        purposes of limitation of tax) is hereby repealed.
            (9) Section 691(c) (relating to deduction for estate tax) is 
        amended by striking paragraph (5).
            (10) Paragraph (1) of section 871(b) (relating to imposition 
        of tax) is amended by striking ``section 1, 55, or 402(d)(1)'' 
        and inserting ``section 1 or 55''.
            (11) Subsection (b) of section 877 (relating to alternative 
        tax) is amended by striking ``section 1, 55, or 402(d)(1)'' and 
        inserting ``section 1 or 55''.
            (12) Section 4980A(c)(4) is amended--
                    (A) by striking ``to which an election under section 
                402(d)(4)(B) applies'' and inserting ``(as defined in 
                section 402(e)(4)(D)) with respect to which the 
                individual elects to have this paragraph apply'',
                    (B) by adding at the end the following new flush 
                sentence:
        ``An individual may elect to have this paragraph apply to only 
        one lump-sum distribution.'', and
                    (C) by striking the heading and inserting:
            ``(4) Special one-time election.--''.
            (13) Section 402(e) is amended by striking paragraph (5).

    (c) Effective <<NOTE: 26 USC 402 note.>>  Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 1999.
            (2) Retention of certain transition rules.--The amendments 
        made by this section shall not apply to any distribution for 
        which the taxpayer is eligible to elect the benefits of section 
        1122(h) (3) or (5) of the Tax Reform Act of 1986. 
        Notwithstanding the preceding sentence, individuals who elect 
        such benefits after December 31, 1999, shall not be eligible for 

        5-year averaging under section 402(d) of the Internal Revenue 
        Code of 1986 (as in effect immediately before such 
        amendments).
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES' DEATH 
                          BENEFITS.

    (a) In General.--Subsection (b) of section 101 is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subsection (c) of section 101 is amended by striking 
        ``subsection (a) or (b)'' and inserting ``subsection (a)''.

[[Page 110 STAT. 1790]]

            (2) Sections 406(e) and 407(e) are each amended by striking 
        paragraph (2) and by redesignating paragraph (3) as paragraph 
        (2).
            (3) Section 7701(a)(20) is amended by striking ``, for the 
        purpose of applying the provisions of section 101(b) with 
        respect to employees' death benefits''.

    (c) Effective <<NOTE: 26 USC 101 note.>>  Date.--The amendments made 
by this section shall apply with respect to decedents dying after the 
date of the enactment of this Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBUTIONS 
                          UNDER CERTAIN EMPLOYER PLANS.

    (a) General Rule.--Subsection (d) of section 72 (relating to 
annuities; certain proceeds of endowment and life insurance contracts) 
is amended to read as follows:
    ``(d) Special Rules for Qualified Employer Retirement Plans.--
            ``(1) Simplified method of taxing annuity payments.--
                    ``(A) In general.--In the case of any amount 
                received as an annuity under a qualified employer 
                retirement plan--
                          ``(i) subsection (b) shall not apply, and
                          ``(ii) the investment in the contract shall be 
                      recovered as provided in this paragraph.
                    ``(B) Method of recovering investment in 
                contract.--
                          ``(i) In general.--Gross income shall not 
                      include so much of any monthly annuity payment 
                      under a qualified employer retirement plan as does 
                      not exceed the amount obtained by dividing--
                                    ``(I) the investment in the contract 
                                (as of the annuity starting date), by
                                    ``(II) the number of anticipated 
                                payments determined under the table 
                                contained in clause (iii) (or, in the 
                                case of a contract to which subsection 
                                (c)(3)(B) applies, the number of monthly 
                                annuity payments under such contract).
                          ``(ii) Certain rules made applicable.--Rules 
                      similar to the rules of paragraphs (2) and (3) of 
                      subsection (b) shall apply for purposes of this 
                      paragraph.
                          ``(iii) Number of anticipated payments.--

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

                    ``(C) Adjustment for refund feature not 
                applicable.--For purposes of this paragraph, investment 
                in the contract shall be determined under subsection 
                (c)(1) without regard to subsection (c)(2).
                    ``(D) Special rule where lump sum paid in connection 
                with commencement of annuity payments.--If, in 
                connection with the commencement of annuity payments 
                under any qualified employer retirement plan, the 
                taxpayer receives a lump-sum payment--

[[Page 110 STAT. 1791]]

                          ``(i) such payment shall be taxable under 
                      subsection (e) as if received before the annuity 
                      starting date, and
                          ``(ii) the investment in the contract for 
                      purposes of this paragraph shall be determined as 
                      if such payment had been so received.
                    ``(E) Exception.--This paragraph shall not apply in 
                any case where the primary annuitant has attained age 75 
                on the annuity starting date unless there are fewer than 
                5 years of guaranteed payments under the annuity.
                    ``(F) Adjustment where annuity payments not on 
                monthly basis.--In any case where the annuity payments 
                are not made on a monthly basis, appropriate adjustments 
                in the application of this paragraph shall be made to 
                take into account the period on the basis of which such 
                payments are made.
                    ``(G) Qualified employer retirement plan.--For 
                purposes of this paragraph, the term `qualified employer 
                retirement plan' means any plan or contract described in 
                paragraph (1), (2), or (3) of section 4974(c).
            ``(2) Treatment of employee contributions under defined 
        contribution plans.--For purposes of this section, employee 
        contributions (and any income allocable thereto) under a defined 
        contribution plan may be treated as a separate contract.''.

    (b) Effective <<NOTE: 26 USC 72 note.>>  Date.--The amendment made 
by this section shall apply in cases where the annuity starting date is 
after the 90th day after the date of the enactment of this Act.

SEC. 1404. REQUIRED DISTRIBUTIONS.

    (a) In General.--Section 401(a)(9)(C) (defining required beginning 
date) is amended to read as follows:
                    ``(C) Required beginning date.--For purposes of this 
                paragraph--
                          ``(i) In general.--The term `required 
                      beginning date' means April 1 of the calendar year 
                      following the later of--
                                    ``(I) the calendar year in which the 
                                employee attains age 70\1/2\, or
                                    ``(II) the calendar year in which 
                                the employee retires.
                          ``(ii) Exception.--Subclause (II) of clause 
                      (i) shall not apply--
                                    ``(I) except as provided in section 
                                409(d), in the case of an employee who 
                                is a 5-percent owner (as defined in 
                                section 416) with respect to the plan 
                                year ending in the calendar year in 
                                which the employee attains age 70\1/2\, 
                                or
                                    ``(II) for purposes of section 408 
                                (a)(6) or (b)(3).
                          ``(iii) Actuarial adjustment.--In the case of 
                      an employee to whom clause (i)(II) applies who 
                      retires in a calendar year after the calendar year 
                      in which the employee attains age 70\1/2\, the 
                      employee's accrued benefit shall be actuarially 
                      increased to take into account the period after 
                      age 70\1/2\ in which the employee was not 
                      receiving any benefits under the plan.

[[Page 110 STAT. 1792]]

                          ``(iv) Exception for governmental and church 
                      plans.--Clauses (ii) and (iii) shall not apply in 
                      the case of a governmental plan or church plan. 
                      For purposes of this clause, the term `church 
                      plan' means a plan maintained by a church for 
                      church employees, and the term `church' means any 
                      church (as defined in section 3121(w)(3)(A)) or 
                      qualified church-controlled organization (as 
                      defined in section 3121(w)(3)(B)).''.

    (b) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendment made 
by subsection (a) shall apply to years beginning after December 31, 
1996.

             CHAPTER 2--INCREASED ACCESS TO RETIREMENT PLANS

                   Subchapter A--Simple Savings Plans

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

    (a) In General.--Section 408 (relating to individual retirement 
accounts) is amended by redesignating subsection (p) as subsection (q) 
and by inserting after subsection (o) the following new subsection:
    ``(p) Simple Retirement Accounts.--
            ``(1) In general.--For purposes of this title, the term 
        `simple retirement account' means an individual retirement plan 
        (as defined in section 7701(a)(37))--
                    ``(A) with respect to which the requirements of 
                paragraphs (3), (4), and (5) are met; and
                    ``(B) with respect to which the only contributions 
                allowed are contributions under a qualified salary 
                reduction arrangement.
            ``(2) Qualified salary reduction arrangement.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `qualified salary reduction arrangement' means 
                a written arrangement of an eligible employer under 
                which--
                          ``(i) an employee eligible to participate in 
                      the arrangement may elect to have the employer 
                      make payments--
                                    ``(I) as elective employer 
                                contributions to a simple retirement 
                                account on behalf of the employee, or
                                    ``(II) to the employee directly in 
                                cash,
                          ``(ii) the amount which an employee may elect 
                      under clause (i) for any year is required to be 
                      expressed as a percentage of compensation and may 
                      not exceed a total of $6,000 for any year,
                          ``(iii) the employer is required to make a 
                      matching contribution to the simple retirement 
                      account for any year in an amount equal to so much 
                      of the amount the employee elects under clause 
                      (i)(I) as does not exceed the applicable 
                      percentage of compensation for the year, and
                          ``(iv) no contributions may be made other than 
                      contributions described in clause (i) or (iii).
                    ``(B) Employer may elect 2-percent nonelective 
                contribution.--

[[Page 110 STAT. 1793]]

                          ``(i) In general.--An employer shall be 
                      treated as meeting the requirements of 
                      subparagraph (A)(iii) for any year if, in lieu of 
                      the contributions described in such clause, the 
                      employer elects to make nonelective contributions 
                      of 2 percent of compensation for each employee who 
                      is eligible to participate in the arrangement and 
                      who has at least $5,000 of compensation from the 
                      employer for the year. If an employer makes an 
                      election under this subparagraph for any year, the 
                      employer shall notify employees of such election 
                      within a reasonable period of time before the 60-
                      day period for such year under paragraph (5)(C).
                          ``(ii) Compensation limitation.--The 
                      compensation taken into account under clause (i) 
                      for any year shall not exceed the limitation in 
                      effect for such year under section 401(a)(17).
                    ``(C) Definitions.--For purposes of this 
                subsection--
                          ``(i) Eligible employer.--
                                    ``(I) In general.--The term 
                                `eligible employer' means, with respect 
                                to any year, an employer which had no 
                                more than 100 employees who received at 
                                least $5,000 of compensation from the 
                                employer for the preceding year.
                                    ``(II) 2-year grace period.--An 
                                eligible employer who establishes and 
                                maintains a plan under this subsection 
                                for 1 or more years and who fails to be 
                                an eligible employer for any subsequent 
                                year shall be treated as an eligible 
                                employer for the 2 years following the 
                                last year the employer was an eligible 
                                employer. If such failure is due to any 
                                acquisition, disposition, or similar 
                                transaction involving an eligible 
                                employer, the preceding sentence shall 
                                apply only in accordance with rules 
                                similar to the rules of section 
                                410(b)(6)(C)(i).
                          ``(ii) Applicable percentage.--
                                    ``(I) In general.--The term 
                                `applicable percentage' means 3 percent.
                                    ``(II) Election of lower 
                                percentage.--An employer may elect to 
                                apply a lower percentage (not less than 
                                1 percent) for any year for all 
                                employees eligible to participate in the 
                                plan for such year if the employer 
                                notifies the employees of such lower 
                                percentage within a reasonable period of 
                                time before the 60-day election period 
                                for such year under paragraph (5)(C). An 
                                employer may not elect a lower 
                                percentage under this subclause for any 
                                year if that election would result in 
                                the applicable percentage being lower 
                                than 3 percent in more than 2 of the 
                                years in the 5-year period ending with 
                                such year.
                                    ``(III) Special rule for years 
                                arrangement not in effect.--If any year 
                                in the 5-year period described in 
                                subclause (II) is a year prior to the 
                                first year for which any qualified 
                                salary reduction arrangement is in 
                                effect with respect to the employer (or 
                                any predecessor), the employer shall be 
                                treated as if the level of the employer 
                                matching

[[Page 110 STAT. 1794]]

                                contribution was at
3 percent of compensation for such prior year.
                    ``(D) Arrangement may be only plan of employer.--
                          ``(i) In general.--An arrangement shall not be 
                      treated as a qualified salary reduction 
                      arrangement for any year if the employer (or any 
                      predecessor employer) maintained a qualified plan 
                      with respect to which contributions were made, or 
                      benefits were accrued, for service in any year in 
                      the period beginning with the year such 
                      arrangement became effective and ending with the 
                      year for which the determination is being made.
                          ``(ii) Qualified plan.--For purposes of this 
                      subparagraph, the term `qualified plan' means a 
                      plan, contract, pension, or trust described in 
                      subparagraph (A) or (B) of section 219(g)(5).
                    ``(E) Cost-of-living adjustment.--The Secretary 
                shall adjust the $6,000 amount under subparagraph 
                (A)(ii) at the same time and in the same manner as under 
                section 415(d), except that the base period taken into 
                account shall be the calendar quarter ending September 
                30, 1996, and any increase under this subparagraph which 
                is not a multiple of $500 shall be rounded to the next 
                lower multiple of $500.
            ``(3) Vesting requirements.--The requirements of this 
        paragraph are met with respect to a simple retirement account if 
        the employee's rights to any contribution to the simple 
        retirement account are nonforfeitable. For purposes of this 
        paragraph, rules similar to the rules of subsection (k)(4) shall 
        apply.
            ``(4) Participation requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to any simple retirement 
                account for a year only if, under the qualified salary 
                reduction arrangement, all employees of the employer 
                who--
                          ``(i) received at least $5,000 in compensation 
                      from the employer during any 2 preceding years, 
                      and
                          ``(ii) are reasonably expected to receive at 
                      least $5,000 in compensation during the year,
                are eligible to make the election under paragraph 
                (2)(A)(i) or receive the nonelective contribution 
                described in paragraph (2)(B).
                    ``(B) Excludable employees.--An employer may elect 
                to exclude from the requirement under subparagraph (A) 
                employees described in section 410(b)(3).
            ``(5) Administrative requirements.--The requirements 
        of this paragraph are met with respect to any simplified 
        retirement account if, under the qualified salary reduction 
        arrangement--
                    ``(A) an employer must--
                          ``(i) make the elective employer contributions 
                      under paragraph (2)(A)(i) not later than the close 
                      of the 30-day period following the last day of the 
                      month with respect to which the contributions are 
                      to be made, and
                          ``(ii) make the matching contributions under 
                      paragraph (2)(A)(iii) or the nonelective 
                      contributions under

[[Page 110 STAT. 1795]]

                      paragraph (2)(B) not later than the date described 
                      in section 404(m)(2)(B),
                    ``(B) an employee may elect to terminate 
                participation in such arrangement at any time during the 
                year, except that if an employee so terminates, the 
                arrangement may provide that the employee may not elect 
                to resume participation until the beginning of the next 
                year, and
                    ``(C) each employee eligible to participate may 
                elect, during the 60-day period before the beginning of 
                any year (and the 60-day period before the first day 
                such employee is eligible to participate), to 
                participate in the arrangement, or to modify the amounts 
                subject to such arrangement, for such year.
            ``(6) Definitions.--For purposes of this subsection--
                    ``(A) Compensation.--
                          ``(i) In general.--The term `compensation' 
                      means amounts described in paragraphs (3) and (8) 
                      of section 6051(a).
                          ``(ii) Self-employed.--In the case of an 
                      employee described in subparagraph (B), the term 
                      `compensation' means net earnings from self-
                      employment determined under section 1402(a) 
                      without regard to any contribution under this 
                      subsection.
                    ``(B) Employee.--The term `employee' includes an 
                employee as defined in section 401(c)(1).
                    ``(C) Year.--The term `year' means the calendar 
                year.
            ``(7) Use of designated financial institution.--A plan shall 
        not be treated as failing to satisfy the requirements of this 
        subsection or any other provision of this title merely because 
        the employer makes all contributions to the individual 
        retirement accounts or annuities of a designated trustee or 
        issuer. The preceding sentence shall not apply unless each plan 
        participant is notified in writing (either separately or as part 
        of the notice under subsection (l)(2)(C)) that the participant's 
        balance may be transferred without cost or penalty to another 
        individual account or annuity in accordance with subsection 
        (d)(3)(G).''.

    (b) Tax Treatment of Simple Retirement Accounts.--
            (1) Deductibility of contributions by employees.--
                    (A) Section 219(b) (relating to maximum amount of 
                deduction) is amended by adding at the end the following 
                new paragraph:
            ``(4) Special rule for simple retirement accounts.--This 
        section shall not apply with respect to any amount contributed 
        to a simple retirement account established under section 
        408(p).''.
                    (B) Section 219(g)(5)(A) (defining active 
                participant) is amended by striking ``or'' at the end of 
                clause (iv) and by adding at the end the following new 
                clause:
                          ``(vi) any simple retirement account (within 
                      the meaning of section 408(p)), or''.
            (2) Deductibility of employer contributions.--Section 404 
        (relating to deductions for contributions of an employer to 
        pension, etc. plans) is amended by adding at the end the 
        following new subsection:

    ``(m) Special Rules for Simple Retirement Accounts.--

[[Page 110 STAT. 1796]]

            ``(1) In general.--Employer contributions to a simple 
        retirement account shall be treated as if they are made to a 
        plan subject to the requirements of this section.
            ``(2) Timing.--
                    ``(A) Deduction.--Contributions described in 
                paragraph (1) shall be deductible in the taxable year of 
                the employer with or within which the calendar year for 
                which the contributions were made ends.
                    ``(B) Contributions after end of year.--For purposes 
                of this subsection, contributions shall be treated as 
                made for a taxable year if they are made on account of 
                the taxable year and are made not later than the time 
                prescribed by law for filing the return for the taxable 
                year (including extensions thereof).''.
            (3) Contributions and distributions.--
                    (A) Section 402 (relating to taxability of 
                beneficiary of employees' trust) is amended by adding at 
                the end the following new subsection:

    ``(k) Treatment of Simple Retirement Accounts.--Rules similar to the 
rules of paragraphs (1) and (3) of subsection (h) shall apply to 
contributions and distributions with respect to a simple retirement 
account under section 408(p).''.
                    (B) Section 408(d)(3) is amended by adding at the 
                end the following new subparagraph:
                    ``(G) Simple retirement accounts.--This paragraph 
                shall not apply to any amount paid or distributed out of 
                a simple retirement account (as defined in subsection 
                (p)) unless--
                          ``(i) it is paid into another simple 
                      retirement account, or
                          ``(ii) in the case of any payment or 
                      distribution to which section 72(t)(6) does not 
                      apply, it is paid into an individual retirement 
                      plan.''.
                    (C) Clause (i) of section 457(c)(2)(B) is amended by 
                striking ``section 402(h)(1)(B)'' and inserting 
                ``section 402 (h)(1)(B) or (k)''.
            (4) Penalties.--
                    (A) Early withdrawals.--Section 72(t) (relating to 
                additional tax in early distributions) is amended by 
                adding at the end the following new paragraph:
            ``(6) Special rules for simple retirement accounts.--In the 
        case of any amount received from a simple retirement account 
        (within the meaning of section 408(p)) during the 2-year period 
        beginning on the date such individual first participated in any 
        qualified salary reduction arrangement maintained by the 
        individual's employer under section 408(p)(2), paragraph (1) 
        shall be applied by substituting `25 percent' for `10 
        percent'.''.
                    (B) Failure to report.--Section 6693 is amended by 
                redesignating subsection (c) as subsection (d) and by 
                inserting after subsection (b) the following new 
                subsection:

    ``(c) Penalties Relating to Simple Retirement Accounts.--
            ``(1) Employer penalties.--An employer who fails to provide 
        1 or more notices required by section 408(l)(2)(C) shall pay a 
        penalty of $50 for each day on which such failures continue.
            ``(2) Trustee penalties.--A trustee who fails--

[[Page 110 STAT. 1797]]

                    ``(A) to provide 1 or more statements required by 
                the last sentence of section 408(i) shall pay a penalty 
                of $50 for each day on which such failures continue, or
                    ``(B) to provide 1 or more summary descriptions 
                required by section 408(l)(2)(B) shall pay a penalty of 
                $50 for each day on which such failures continue.
            ``(3) Reasonable cause exception.--No penalty shall be 
        imposed under this subsection with respect to any failure which 
        the taxpayer shows was due to reasonable cause.''.
            (5) Reporting requirements.--
                    (A) Section 408(l) is amended by adding at the end 
                the following new paragraph:
            ``(2) Simple retirement accounts.--
                    ``(A) No employer reports.--Except as provided in 
                this paragraph, no report shall be required under this 
                section by an employer maintaining a qualified salary 
                reduction arrangement under subsection (p).
                    ``(B) Summary description.--The trustee of any 
                simple retirement account established pursuant to a 
                qualified salary reduction arrangement under subsection 
                (p) shall provide to the employer maintaining the 
                arrangement, each year a description containing the 
                following information:
                          ``(i) The name and address of the employer and 
                      the trustee.
                          ``(ii) The requirements for eligibility for 
                      participation.
                          ``(iii) The benefits provided with respect to 
                      the arrangement.
                          ``(iv) The time and method of making elections 
                      with respect to the arrangement.
                          ``(v) The procedures for, and effects of, 
                      withdrawals (including rollovers) from the 
                      arrangement.
                    ``(C) Employee notification.--The employer shall 
                notify each employee immediately before the period for 
                which an election described in subsection (p)(5)(C) may 
                be made of the employee's opportunity to make such 
                election. Such notice shall include a copy of the 
                description described in subparagraph (B).''.
                    (B) Section 408(l) is amended by striking ``An 
                employer'' and inserting the following:
            ``(1) In general.--An employer''.
            (6) Reporting requirements.--Section 408(i) is amended by 
        adding at the end the following new flush sentence:

``In the case of a simple retirement account under subsection (p), only 
one report under this subsection shall be required to be submitted each 
calendar year to the Secretary (at the time provided under paragraph 
(2)) but, in addition to the report under this subsection, there shall 
be furnished, within 30 days after each calendar year, to the individual 
on whose behalf the account is maintained a statement with respect to 
the account balance as of the close of, and the account activity during, 
such calendar year.''.
            (7) Exemption from top-heavy plan rules.--Section 416(g)(4) 
        (relating to special rules for top-heavy plans) is amended by 
        adding at the end the following new subparagraph:

[[Page 110 STAT. 1798]]

                    ``(G) Simple retirement accounts.--The term `top-
                heavy plan' shall not include a simple retirement 
                account under section 408(p).''.
            (8) Employment taxes.--
                    (A) Paragraph (5) of section 3121(a) is amended by 
                striking ``or'' at the end of subparagraph (F), by 
                inserting ``or'' at the end of subparagraph (G), and by 
                adding at the end the following new subparagraph:
                    ``(H) under an arrangement to which section 408(p) 
                applies, other than any elective contributions under 
                paragraph (2)(A)(i) thereof,''.
                    (B) Section <<NOTE: 26 USC 409.>>  209(a)(4) of the 
                Social Security Act is amended by inserting ``; or (J) 
                under an arrangement to which section 408(p) of such 
                Code applies, other than any elective contributions 
                under paragraph (2)(A)(i) thereof'' before the semicolon 
                at the end thereof.
                    (C) Paragraph (5) of section 3306(b) is amended by 
                striking ``or'' at the end of subparagraph (F), by 
                inserting ``or'' at the end of subparagraph (G), and by 
                adding at the end the following new subparagraph:
                    ``(H) under an arrangement to which section 408(p) 
                applies, other than any elective contributions under 
                paragraph (2)(A)(i) thereof,''.
                    (D) Paragraph (12) of section 3401(a) is amended by 
                adding the following new subparagraph:
                    ``(D) under an arrangement to which section 408(p) 
                applies; or''.
            (9) Conforming amendments.--
                    (A) Section 280G(b)(6) is amended by striking ``or'' 
                at the end of subparagraph (B), by striking the period 
                at the end of subparagraph (C) and inserting ``, or'' 
                and by adding after subparagraph (C) the following new 
                subparagraph:
                    ``(D) a simple retirement account described in 
                section 408(p).''.
                    (B) Section 402(g)(3) is amended by striking ``and'' 
                at the end of subparagraph (B), by striking the period 
                at the end of subparagraph (C) and inserting ``, and'', 
                and by adding after subparagraph (C) the following new 
                subparagraph:
                    ``(D) any elective employer contribution under 
                section 408(p)(2)(A)(i).''.
                    (C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) 
                of section 414 are each amended by inserting ``408(p),'' 
                after ``408(k),''.
                    (D) Section 4972(d)(1)(A) is amended by striking 
                ``and'' at the end of clause (ii), by striking the 
                period at the end of clause (iii) and inserting ``, 
                and'', and by adding after clause (iii) the following 
                new clause:
                          ``(iv) any simple retirement account (within 
                      the meaning of section 408(p)).''.

    (c) Repeal of Salary Reduction Simplified Employee Pensions.--
Section 408(k)(6) is amended by adding at the end the following new 
subparagraph:
                    ``(H) Termination.--This paragraph shall not apply 
                to years beginning after December 31, 1996. The 
                preceding sentence shall not apply to a simplified 
                employee pension

[[Page 110 STAT. 1799]]

                if the terms of such pension, as in effect on December 
                31, 1996, provide that an employee may make the election 
                described in subparagraph (A).''.

    (d) Modifications of ERISA.--
            (1) Reporting requirements.--Section 101 of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 1021) is 
        amended by redesignating subsection (g) as subsection (h) and by 
        inserting after subsection (f) the following new subsection:

    ``(g) Simple Retirement Accounts.--
            ``(1) No employer reports.--Except as provided in this 
        subsection, no report shall be required under this section by an 
        employer maintaining a qualified salary reduction arrangement 
        under section 408(p) of the Internal Revenue Code of 1986.
            ``(2) Summary description.--The trustee of any simple 
        retirement account established pursuant to a qualified salary 
        reduction arrangement under section 408(p) of such Code shall 
        provide to the employer maintaining the arrangement each year a 
        description containing the following information:
                    ``(A) The name and address of the employer and the 
                trustee.
                    ``(B) The requirements for eligibility for 
                participation.
                    ``(C) The benefits provided with respect to the 
                arrangement.
                    ``(D) The time and method of making elections with 
                respect to the arrangement.
                    ``(E) The procedures for, and effects of, 
                withdrawals (including rollovers) from the arrangement.
            ``(3) Employee notification.--The employer shall notify each 
        employee immediately before the period for which an election 
        described in section 408(p)(5)(C) of such Code may be made of 
        the employee's opportunity to make such election. Such notice 
        shall include a copy of the description described in paragraph 
        (2).''
            (2) Fiduciary duties.--Section 404(c) of such Act (29 U.S.C. 
        1104(c)) is amended by inserting ``(1)'' after ``(c)'', by 
        redesignating paragraphs (1) and (2) as subparagraphs (A) and 
        (B), respectively, and by adding at the end the following new 
        paragraph:
            ``(2) In the case of a simple retirement account established 
        pursuant to a qualified salary reduction arrangement under 
        section 408(p) of the Internal Revenue Code of 1986, a 
        participant or beneficiary shall, for purposes of paragraph (1), 
        be treated as exercising control over the assets in the account 
        upon the earliest of--
                    ``(A) an affirmative election among investment 
                options with respect to the initial investment of any 
                contribution,
                    ``(B) a rollover to any other simple retirement 
                account or individual retirement plan, or
                    ``(C) one year after the simple retirement account 
                is established.
        No reports, other than those required under section 101(g), 
        shall be required with respect to a simple retirement account 
        established pursuant to such a qualified salary reduction 
        arrangement.''.

[[Page 110 STAT. 1800]]

    (e) Effective <<NOTE: 26 USC 72 note.>>  Date.--The amendments made 
by this section shall apply to taxable years beginning after December 
31, 1996.

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

    (a) Alternative Method of Satisfying Section 401(k) 
Nondiscrimination Tests.--Section 401(k) (relating to cash or deferred 
arrangements) is amended by adding at the end the following new 
paragraph:
            ``(11) Adoption of simple plan to meet nondiscrimination 
        tests.--
                    ``(A) In general.--A cash or deferred arrangement 
                maintained by an eligible employer shall be treated as 
                meeting the requirements of paragraph (3)(A)(ii) if such 
                arrangement meets--
                          ``(i) the contribution requirements of 
                      subparagraph (B),
                          ``(ii) the exclusive plan requirements of 
                      subparagraph (C), and
                          ``(iii) the vesting requirements of section 
                      408(p)(3).
                    ``(B) Contribution requirements.--
                          ``(i) In general.--The requirements of this 
                      subparagraph are met if, under the arrangement--
                                    ``(I) an employee may elect to have 
                                the employer make elective contributions 
                                for the year on behalf of the employee 
                                to a trust under the plan in an amount 
                                which is expressed as a percentage of 
                                compensation of the employee but which 
                                in no event exceeds $6,000,
                                    ``(II) the employer is required to 
                                make a matching contribution to the 
                                trust for the year in an amount equal to 
                                so much of the amount the employee 
                                elects under subclause (I) as does not 
                                exceed 3 percent of compensation for the 
                                year, and
                                    ``(III) no other contributions may 
                                be made other than contributions 
                                described in subclause (I) or (II).
                          ``(ii) Employer may elect 2-percent 
                      nonelective contribution.--An employer shall be 
                      treated as meeting the requirements of clause 
                      (i)(II) for any year if, in lieu of the 
                      contributions described in such clause, the 
                      employer elects (pursuant to the terms of the 
                      arrangement) to make nonelective contributions of 
                      2 percent of compensation for each employee who is 
                      eligible to participate in the arrangement and who 
                      has at least $5,000 of compensation from the 
                      employer for the year. If an employer makes an 
                      election under this subparagraph for any year, the 
                      employer shall notify employees of such election 
                      within a reasonable period of time before the 60th 
                      day before the beginning of such year.
                    ``(C) Exclusive plan requirement.--The requirements 
                of this subparagraph are met for any year to which this 
                paragraph applies if no contributions were made, or 
                benefits were accrued, for services during such year 
                under any qualified plan of the employer on behalf of 
                any employee eligible to participate in the cash or 
                deferred

[[Page 110 STAT. 1801]]

                arrangement, other than contributions described in 
                subparagraph (B).
                    ``(D) Definitions and special rule.--
                          ``(i) Definitions.--For purposes of this 
                      paragraph, any term used in this paragraph which 
                      is also used in section 408(p) shall have the 
                      meaning given such term by such section.
                          ``(ii) Coordination with top-heavy rules.--A 
                      plan meeting the requirements of this paragraph 
                      for any year shall not be treated as a top-heavy 
                      plan under section 416 for such year.''.

    (b) Alternative Methods of Satisfying Section 401(m) 
Nondiscrimination Tests.--Section 401(m) (relating to nondiscrimination 
test for matching contributions and employee contributions) is amended 
by redesignating paragraph (10) as paragraph (11) and by adding after 
paragraph (9) the following new paragraph:
            ``(10) Alternative method of satisfying tests.--A defined 
        contribution plan shall be treated as meeting the requirements 
        of paragraph (2) with respect to matching contributions if the 
        plan--
                    ``(A) meets the contribution requirements of 
                subparagraph (B) of subsection (k)(11),
                    ``(B) meets the exclusive plan requirements of 
                subsection (k)(11)(C), and
                    ``(C) meets the vesting requirements of section 
                408(p)(3).''.

    (c) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendments made 
by this section shall apply to plan years beginning after December 31, 
1996.

                     Subchapter B--Other Provisions

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

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

[[Page 110 STAT. 1802]]

                      part by any of the foregoing may include a 
                      qualified cash or deferred arrangement as part of 
                      a plan maintained by the employer.''.

    (b) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendment made 
by this section shall apply to plan years beginning after December 31, 
1996, but shall not apply to any cash or deferred arrangement to which 
clause (i) of section 1116(f)(2)(B) of the Tax Reform Act of 1986 
applies.

SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUCTION.

    (a) Spousal IRA Computed on Basis of Compensation of Both Spouses.--
Subsection (c) of section 219 (relating to special rules for certain 
married individuals) is amended to read as follows:
    ``(c) Special Rules for Certain Married Individuals.--
            ``(1) In general.--In the case of an individual to whom this 
        paragraph applies for the taxable year, the limitation of 
        paragraph (1) of subsection (b) shall be equal to the lesser 
        of--
                    ``(A) the dollar amount in effect under subsection 
                (b)(1)(A) for the taxable year, or
                    ``(B) the sum of--
                          ``(i) the compensation includible in such 
                      individual's gross income for the taxable year, 
                      plus
                          ``(ii) the compensation includible in the 
                      gross income of such individual's spouse for the 
                      taxable year reduced by the amount allowed as a 
                      deduction under subsection (a) to such spouse for 
                      such taxable year.
            ``(2) Individuals to whom paragraph (1) applies.--Paragraph 
        (1) shall apply to any individual if--
                    ``(A) such individual files a joint return for the 
                taxable year, and
                    ``(B) the amount of compensation (if any) includible 
                in such individual's gross income for the taxable year 
                is less than the compensation includible in the gross 
                income of such individual's spouse for the taxable 
                year.''.

    (b) Conforming Amendments.--
            (1) Paragraph (2) of section 219(f) (relating to other 
        definitions and special rules) is amended by striking 
        ``subsections (b) and (c)'' and inserting ``subsection (b)''.
            (2) Section 219(g)(1) is amended by striking ``(c)(2)'' and 
        inserting ``(c)(1)(A)''.
            (3) Section 408(d)(5) is amended by striking ``$2,250'' and 
        inserting ``the dollar amount in effect under section 
        219(b)(1)(A)''.

    (c) Effective <<NOTE: 26 USC 219 note.>>  Date.--The amendments made 
by this section shall apply to taxable years beginning after December 
31, 1996.

                 CHAPTER 3--NONDISCRIMINATION PROVISIONS

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

    (a) In General.--Paragraph (1) of section 414(q) (defining highly 
compensated employee) is amended to read as follows:
            ``(1) In general.--The term `highly compensated employee' 
        means any employee who--
                    ``(A) was a 5-percent owner at any time during the 
                year or the preceding year, or

[[Page 110 STAT. 1803]]

                    ``(B) for the preceding year--
                          ``(i) had compensation from the employer in 
                      excess of $80,000, and
                          ``(ii) if the employer elects the application 
                      of this clause for such preceding year, was in the 
                      top-paid group of employees for such preceding 
                      year.
        The Secretary shall adjust the $80,000 amount under subparagraph 
        (B) at the same time and in the same manner as under section 
        415(d), except that the base period shall be the calendar 
        quarter ending September 30, 1996.''.

    (b) Repeal of Family Aggregation Rules.--
            (1) In general.--Paragraph (6) of section 414(q) is hereby 
        repealed.
            (2) Compensation limit.--Paragraph (17)(A) of section 401(a) 
        is amended by striking the last sentence.
            (3) Deduction.--Subsection (l) of section 404 is amended by 
        striking the last sentence.

    (c) Conforming Amendments.--
            (1)(A) Subsection (q) of section 414 is amended by striking 
        paragraphs (2), (5), and (12) and by redesignating paragraphs 
        (3), (4), (7), (8), (9), (10), and (11) as paragraphs (2) 
        through (8), respectively.
            (B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii), 408(k)(2)(C), 
        and 416(i)(1)(D) are each amended by striking ``section 
        414(q)(7)'' and inserting ``section 414(q)(4)''.
            (C) Section 416(i)(1)(A) is amended by striking ``section 
        414(q)(8)'' and inserting ``section 414(q)(5)''.
            (D) Subparagraph (A) of section 414(r)(2) is amended by 
        striking ``subsection (q)(8)'' and inserting ``subsection 
        (q)(5)''.
            (E) Section 414(q)(5), as redesignated by subparagraph (A), 
        is amended by striking ``under paragraph (4), or the number of 
        officers taken into account under paragraph (5)''.
            (2) Section 1114 <<NOTE: 26 USC 414 note.>> (c)(4) of the 
        Tax Reform Act of 1986 is amended by adding at the end the 
        following new sentence: ``Any reference in this paragraph to 
        section 414(q) shall be treated as a reference to such section 
        as in effect on the day before the date of the enactment of the 
        Small Business Job Protection Act of 1996.''.

    (d) Effective <<NOTE: 26 USC 414 note.>>  Date.--
            (1) In general.--The amendments made by this section shall 
        apply to years beginning after December 31, 1996, except that in 
        determining whether an employee is a highly compensated employee 
        for years beginning in 1997, such amendments shall be treated as 
        having been in effect for years beginning in 1996.
            (2) Family aggregation.--The amendments made by subsection 
        (b) shall apply to years beginning after December 31, 1996.
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIREMENTS.

    (a) General Rule.--Section 401(a)(26)(A) (relating to additional 
participation requirements) is amended to read as follows:
                    ``(A) In general.--In the case of a trust which is a 
                part of a defined benefit plan, such trust shall not 
                constitute a qualified trust under this subsection 
                unless on

[[Page 110 STAT. 1804]]

                each day of the plan year such trust benefits at least 
                the lesser of--
                          ``(i) 50 employees of the employer, or
                          ``(ii) the greater of--
                                    ``(I) 40 percent of all employees of 
                                the employer, or
                                    ``(II) 2 employees (or if there is 
                                only 1 employee, such employee).''.

    (b) Separate Line of Business Test.--Section 401(a)(26)(G) (relating 
to separate line of business) is amended by striking ``paragraph (7)'' 
and inserting ``paragraph (2)(A) or (7)''.
    (c) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendments made 
by this section shall apply to years beginning after December 31, 1996.
SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR DEFERRED 
                          ARRANGEMENTS AND MATCHING CONTRIBUTIONS.

    (a) Alternative Methods of Satisfying Section 401(k) 
Nondiscrimination Tests.--Section 401(k) (relating to cash or deferred 
arrangements), as amended by section 1422, is amended by adding at the 
end the following new paragraph:
            ``(12) Alternative methods of meeting nondiscrimination 
        requirements.--
                    ``(A) In general.--A cash or deferred arrangement 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement--
                          ``(i) meets the contribution requirements of 
                      subparagraph (B) or (C), and
                          ``(ii) meets the notice requirements of 
                      subparagraph (D).
                    ``(B) Matching contributions.--
                          ``(i) In general.--The requirements of this 
                      subparagraph are met if, under the arrangement, 
                      the employer makes matching contributions on 
                      behalf of each employee who is not a highly 
                      compensated employee in an amount equal to--
                                    ``(I) 100 percent of the elective 
                                contributions of the employee to the 
                                extent such elective contributions do 
                                not exceed 3 percent of the employee's 
                                compensation, and
                                    ``(II) 50 percent of the elective 
                                contributions of the employee to the 
                                extent that such elective contributions 
                                exceed 3 percent but do not exceed 5 
                                percent of the employee's compensation.
                          ``(ii) Rate for highly compensated 
                      employees.--The requirements of this subparagraph 
                      are not met if, under the arrangement, the rate of 
                      matching contribution with respect to any elective 
                      contribution of a highly compensated employee at 
                      any rate of elective contribution is greater than 
                      that with respect to an employee who is not a 
                      highly compensated employee.
                          ``(iii) Alternative plan designs.--If the rate 
                      of any matching contribution with respect to any 
                      rate of elective contribution is not equal to the 
                      percentage required under clause (i), an 
                      arrangement shall not be treated as failing to 
                      meet the requirements of clause (i) if--

[[Page 110 STAT. 1805]]

                                    ``(I) the rate of an employer's 
                                matching contribution does not increase 
                                as an employee's rate of elective 
                                contributions increase, and
                                    ``(II) the aggregate amount of 
                                matching contributions at such rate of 
                                elective contribution is at least equal 
                                to the aggregate amount of matching 
                                contributions which would be made if 
                                matching contributions were made on the 
                                basis of the percentages described in 
                                clause (i).
                    ``(C) Nonelective contributions.--The requirements 
                of this subparagraph are met if, under the arrangement, 
                the employer is required, without regard to whether the 
                employee makes an elective contribution or employee 
                contribution, to make a contribution to a defined 
                contribution plan on behalf of each employee who is not 
                a highly compensated employee and who is eligible to 
                participate in the arrangement in an amount equal to at 
                least 3 percent of the employee's compensation.
                    ``(D) Notice requirement.--An arrangement meets the 
                requirements of this paragraph if, under the 
                arrangement, each employee eligible to participate is, 
                within a reasonable period before any year, given 
                written notice of the employee's rights and obligations 
                under the arrangement which--
                          ``(i) is sufficiently accurate and 
                      comprehensive to apprise the employee of such 
                      rights and obligations, and
                          ``(ii) is written in a manner calculated to be 
                      understood by the average employee eligible to 
                      participate.
                    ``(E) Other requirements.--
                          ``(i) Withdrawal and vesting restrictions.--An 
                      arrangement shall not be treated as meeting the 
                      requirements of subparagraph (B) or (C) of this 
                      paragraph unless the requirements of subparagraphs 
                      (B) and (C) of paragraph (2) are met with respect 
                      to all employer contributions (including matching 
                      contributions) taken into account in determining 
                      whether the requirements of subparagraphs (B) and 
                      (C) of this paragraph are met.
                          ``(ii) Social security and similar 
                      contributions not taken into account.--An 
                      arrangement shall not be treated as meeting the 
                      requirements of subparagraph (B) or (C) unless 
                      such requirements are met without regard to 
                      subsection (l), and, for purposes of subsection 
                      (l), employer contributions under subparagraph (B) 
                      or (C) shall not be taken into account.
                    ``(F) Other plans.--An arrangement shall be treated 
                as meeting the requirements under subparagraph (A)(i) if 
                any other plan maintained by the employer meets such 
                requirements with respect to employees eligible under 
                the arrangement.''.

    (b) Alternative Methods of Satisfying Section 401(m) 
Nondiscrimination Tests.--Section 401(m) (relating to nondiscrimination 
test for matching contributions and employee contributions), as amended 
by section 1422(b), is amended by redesignating paragraph (11) as 
paragraph (12) and by adding after paragraph (10) the following new 
paragraph:

[[Page 110 STAT. 1806]]

            ``(11) Alternative method of satisfying tests.--
                    ``(A) In general.--A defined contribution plan shall 
                be treated as meeting the requirements of paragraph (2) 
                with respect to matching contributions if the plan--
                          ``(i) meets the contribution requirements of 
                      subparagraph (B) or (C) of subsection (k)(12),
                          ``(ii) meets the notice requirements of 
                      subsection (k)(12)(D), and
                          ``(iii) meets the requirements of subparagraph 
                      (B).
                    ``(B) Limitation on matching contributions.--The 
                requirements of this subparagraph are met if--
                          ``(i) matching contributions on behalf of any 
                      employee may not be made with respect to an 
                      employee's contributions or elective deferrals in 
                      excess of 6 percent of the employee's 
                      compensation,
                          ``(ii) the rate of an employer's matching 
                      contribution does not increase as the rate of an 
                      employee's contributions or elective deferrals 
                      increase, and
                          ``(iii) the matching contribution with respect 
                      to any highly compensated employee at any rate of 
                      an employee contribution or rate of elective 
                      deferral is not greater than that with respect to 
                      an employee who is not a highly compensated 
                      employee.''.

    (c) Year for Computing Nonhighly Compensated Employee Percentage.--
            (1) Cash or deferred arrangements.--Section 401(k)(3)(A) is 
        amended--
                    (A) by striking ``such year'' in clause (ii) and 
                inserting ``the plan year'',
                    (B) by striking ``for such plan year'' in clause 
                (ii) and inserting ``for the preceding plan year'', and
                    (C) by adding at the end the following new sentence: 
                ``An arrangement may apply clause (ii) by using the plan 
                year rather than the preceding plan year if the employer 
                so elects, except that if such an election is made, it 
                may not be changed except as provided by the 
                Secretary.''.
            (2) Matching and employee contributions.--Section 
        401(m)(2)(A) is amended--
                    (A) by inserting ``for such plan year'' after 
                ``highly compensated employees'',
                    (B) by inserting ``for the preceding plan year'' 
                after ``eligible employees'' each place it appears in 
                clause (i) and clause (ii), and
                    (C) by adding at the end the following flush 
                sentence:
                ``This subparagraph may be applied by using the plan 
                year rather than the preceding plan year if the employer 
                so elects, except that if such an election is made, it 
                may not be changed except as provided by the 
                Secretary.''.

    (d) Special Rule for Determining Average Deferral Percentage for 
First Plan Year, Etc.--
            (1) Paragraph (3) of section 401(k) is amended by adding at 
        the end the following new subparagraph:
                    ``(E) For purposes of this paragraph, in the case of 
                the first plan year of any plan (other than a successor 
                plan), the amount taken into account as the actual 
                deferral percentage of nonhighly compensated employees 
                for the preceding plan year shall be--

[[Page 110 STAT. 1807]]

                          ``(i) 3 percent, or
                          ``(ii) if the employer makes an election under 
                      this subclause, the actual deferral percentage of 
                      nonhighly compensated employees determined for 
                      such first plan year.''.
            (2) Paragraph (3) of section 401(m) is amended by adding at 
        the end the following: ``Rules similar to the rules of 
        subsection (k)(3)(E) shall apply for purposes of this 
        subsection.''.

    (e) Distribution of Excess Contributions and Excess Aggregate 
Contributions.--
            (1) Subparagraph (C) of section 401(k)(8) (relating to 
        arrangement not disqualified if excess contributions 
        distributed) is amended by striking ``on the basis of the 
        respective portions of the excess contributions attributable to 
        each of such employees'' and inserting ``on the basis of the 
        amount of contributions by, or on behalf of, each of such 
        employees''.
            (2) Subparagraph (C) of section 401(m)(6) (relating to 
        method of distributing excess aggregate contributions) is 
        amended by striking ``on the basis
of the respective portions of such amounts attributable to each of such 
employees'' and inserting ``on the basis of the amount of contributions 
on behalf of, or by, each such employee''.

    (f) Effective <<NOTE: 26 USC 401 note.>>  Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to years beginning after December 31, 1998.
            (2) Exceptions.--The amendments made by subsections (c), 
        (d), and (e) shall apply to years beginning after December 31, 
        1996.
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 PURPOSES.

    (a) General Rule.--Section 415(c)(3) (defining participant's 
compensation) is amended by adding at the end the following new 
subparagraph:
                    ``(D) Certain deferrals included.--The term 
                `participant's compensation' shall include--
                          ``(i) any elective deferral (as defined in 
                      section 402(g)(3)), and
                          ``(ii) any amount which is contributed or 
                      deferred by the employer at the election of the 
                      employee and which is not includible in the gross 
                      income of the employee by reason of section 125 or 
                      457.''.

    (b) Conforming Amendments.--
            (1) Section 414(q)(4), as redesignated by section 1431, is 
        amended to read as follows:
            ``(4) Compensation.--For purposes of this subsection, the 
        term `compensation' has the meaning given such term by section 
        415(c)(3).''.
            (2) Section 414(s)(2) is amended by inserting ``not'' after 
        ``elect'' in the text and heading thereof.

    (c) Effective <<NOTE: 26 USC 414 note.>>  Date.--The amendments made 
by this section shall apply to years beginning after December 31, 1997.

[[Page 110 STAT. 1808]]

                   CHAPTER 4--MISCELLANEOUS PROVISIONS

SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVIDUALS.

    (a) Aggregation Rules.--Section 401(d) (relating to additional 
requirements for qualification of trusts and plans benefiting owner-
employees) is amended to read as follows:
    ``(d) Contribution Limit on Owner-Employees.--A trust forming part 
of a pension or profit-sharing plan which provides contributions or 
benefits for employees some or all of whom are owner-employees shall 
constitute a qualified trust under this section only if, in addition to 
meeting the requirements of subsection (a), the plan provides that 
contributions on behalf of any owner-employee may be made only with 
respect to the earned income of such owner-employee which is derived 
from the trade or business with respect to which such plan is 
established.''.
    (b) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendments made 
by this section shall apply to years beginning after December 31, 1996.
SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR MULTIEMPLOYER 
                          PLANS.

    (a) Amendments to 1986 Code.--Paragraph (2) of section 411(a) 
(relating to minimum vesting standards) is amended--
            (1) by striking ``subparagraph (A), (B), or (C)'' and 
        inserting ``subparagraph (A) or (B)''; and
            (2) by striking subparagraph (C).

    (b) Amendments to ERISA.--Paragraph (2) of section 203(a) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)) is 
amended--
            (1) by striking ``subparagraph (A), (B), or (C)'' and 
        inserting ``subparagraph (A) or (B)''; and
            (2) by striking subparagraph (C).

    (c) Effective <<NOTE: 26 USC 411 note.>>  Date.--The amendments made 
by this section shall apply to plan years beginning on or after the 
earlier of--
            (1) the later of--
                    (A) January 1, 1997, or
                    (B) the date on which the last of the collective 
                bargaining agreements pursuant to which the plan is 
                maintained terminates (determined without regard to any 
                extension thereof after the date of the enactment of 
                this Act), or
            (2) January 1, 1999.

Such amendments shall not apply to any individual who does not have more 
than 1 hour of service under the plan on or after the 1st day of the 1st 
plan year to which such amendments apply.
SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS.

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

[[Page 110 STAT. 1809]]

                regard to the limitation of its application to profit-
                sharing or stock bonus plans).''.

    (b) Public Utility Districts.--Clause (i) of section 401(k)(7)(B) 
(defining rural cooperative) is amended to read as follows:
                          ``(i) any organization which--
                                    ``(I) is engaged primarily in 
                                providing electric service on a mutual 
                                or cooperative basis, or
                                    ``(II) is engaged primarily in 
                                providing electric service to the public 
                                in its area of service and which is 
                                exempt from tax under this subtitle or 
                                which is a State or local government (or 
                                an agency or instrumentality thereof), 
                                other than a municipality (or an agency 
                                or instrumentality thereof),''.

    (c) Effective <<NOTE: 26 USC 401 note.>>  Dates.--
            (1) Distributions.--The amendments made by subsection (a) 
        shall apply to distributions after the date of the enactment of 
        this Act.
            (2) Public utility districts.--The amendments made by 
        subsection (b) shall apply to plan years beginning after 
        December 31, 1996.
SEC. 1444. TREATMENT OF GOVERNMENTAL PLANS UNDER 
                          SECTION 415.

    (a) Compensation Limit.--Subsection (b) of section 415 is amended by 
adding immediately after paragraph (10) the following new paragraph:
            ``(11) Special limitation rule for governmental plans.--In 
        the case of a governmental plan (as defined in section 414(d)), 
        subparagraph (B) of paragraph (1) shall not apply.''.

    (b) Treatment of Certain Excess Benefit Plans.--
            (1) In general.--Section 415 is amended by adding at the end 
        the following new subsection:

    ``(m) Treatment of Qualified Governmental Excess Benefit 
Arrangements.--
            ``(1) Governmental plan not affected.--In determining 
        whether a governmental plan (as defined in section 414(d)) meets 
        the requirements of this section, benefits provided under a 
        qualified governmental excess benefit arrangement shall not be 
        taken into account. Income accruing to a governmental plan (or 
        to a trust that is maintained solely for the purpose of 
        providing benefits under a qualified governmental excess benefit 
        arrangement) in respect of a qualified governmental excess 
        benefit arrangement shall constitute income derived from the 
        exercise of an essential governmental function upon which such 
        governmental plan (or trust) shall be exempt from tax under 
        section 115.
            ``(2) Taxation of participant.--For purposes of this 
        chapter--
                    ``(A) the taxable year or years for which amounts in 
                respect of a qualified governmental excess benefit 
                arrangement are includible in gross income by a 
                participant, and
                    ``(B) the treatment of such amounts when so 
                includible by the participant,
        shall be determined as if such qualified governmental excess 
        benefit arrangement were treated as a plan for the deferral of 
        compensation which is maintained by a corporation not

[[Page 110 STAT. 1810]]

        exempt from tax under this chapter and which does not meet the 
        requirements for qualification under section 401.
            ``(3) Qualified governmental excess benefit arrangement.--
        For purposes of this subsection, the term `qualified 
        governmental excess benefit arrangement' means a portion of a 
        governmental plan if--
                    ``(A) such portion is maintained solely for the 
                purpose of providing to participants in the plan that 
                part of the participant's annual benefit otherwise 
                payable under the terms of the plan that exceeds the 
                limitations on benefits imposed by this section,
                    ``(B) under such portion no election is provided at 
                any time to the participant (directly or indirectly) to 
                defer compensation, and
                    ``(C) benefits described in subparagraph (A) are not 
                paid from a trust forming a part of such governmental 
                plan unless such trust is maintained solely for the 
                purpose of providing such benefits.''.
            (2) Coordination with section 457.--Subsection (e) of 
        section 457 is amended by adding at the end the following new 
        paragraph:
            ``(14) Treatment of qualified governmental excess benefit 
        arrangements.--Subsections (b)(2) and (c)(1) shall not apply to 
        any qualified governmental excess benefit arrangement (as 
        defined in section 415(m)(3)), and benefits provided under such 
        an arrangement shall not be taken into account in determining 
        whether any other plan is an eligible deferred compensation 
        plan.''.
            (3) Conforming amendment.--Paragraph (2) of section 457(f) 
        is amended by striking ``and'' at the end of subparagraph (C), 
        by striking the period at the end of subparagraph (D) and 
        inserting ``, and'', and by inserting immediately thereafter the 
        following new subparagraph:
                    ``(E) a qualified governmental excess benefit 
                arrangement described in section 415(m).''.

    (c) Exemption for Survivor and Disability Benefits.--Paragraph (2) 
of section 415(b) is amended by adding at the end the following new 
subparagraph:
                    ``(I) Exemption for survivor and disability benefits 
                provided under governmental plans.--Subparagraph (C) of 
                this paragraph and paragraph (5) shall not apply to--
                          ``(i) income received from a governmental plan 
                      (as defined in section 414(d)) as a pension, 
                      annuity, or similar allowance as the result of the 
                      recipient becoming disabled by reason of personal 
                      injuries or sickness, or
                          ``(ii) amounts received from a governmental 
                      plan by the beneficiaries, survivors, or the 
                      estate of an employee as the result of the death 
                      of the employee.''.

    (d) Revocation of Grandfather Election.--
            (1) In general.--Subparagraph (C) of section 415(b)(10) is 
        amended by adding at the end the following new clause:
                          ``(ii) Revocation of election.--An election 
                      under clause (i) may be revoked not later than the 
                      last day of the third plan year beginning after 
                      the date 
                      of the enactment of this clause. The revocation 
                      shall

[[Page 110 STAT. 1811]]

                      apply to all plan years to which the election 
                      applied and to all subsequent plan years. Any 
                      amount paid by a plan in a taxable year ending 
                      after the revocation shall be includible in income 
                      in such taxable year under the rules of this 
                      chapter in effect for such taxable year, except 
                      that, for purposes of applying the limitations 
                      imposed by this section, any portion of such 
                      amount which is attributable to any taxable year 
                      during which the election was in effect shall be 
                      treated as received in such taxable year.''.
            (2) Conforming amendment.--Subparagraph (C) of section 
        415(b)(10) is amended by striking ``This'' and inserting:
                          ``(i) In general.--This''.

    (e) Effective <<NOTE: 26 USC 415 note.>>  Date.--
            (1) In general.--The amendments made by subsections (a), 
        (b), and (c) shall apply to years beginning after December 31, 
        1994. The amendments made by subsection (d) shall apply with 
        respect to revocations adopted after the date of the enactment 
        of this Act.
            (2) Treatment for years beginning before january 1, 1995.--
        Nothing in the amendments made by this section shall be 
        construed to imply that a governmental plan (as defined in 
        section 414(d) of the Internal Revenue Code of 1986) fails to 
        satisfy the requirements of section 415 of such Code for any 
        taxable year beginning before January 1, 1995.

SEC. 1445. UNIFORM RETIREMENT AGE.

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

    (b) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendment made 
by this section shall apply to years beginning after December 31, 1996.

SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES.

    (a) All Disabled Participants Receiving Contributions.--Section 
415(c)(3)(C) is amended by adding at the end the following: ``If a 
defined contribution plan provides for the continuation of contributions 
on behalf of all participants described in clause (i) for a fixed or 
determinable period, this subparagraph shall be applied without regard 
to clauses (ii) and (iii).''.
    (b) Effective <<NOTE: 26 USC 415 note.>>  Date.--The amendment made 
by this section shall apply to years beginning after December 31, 1996.

[[Page 110 STAT. 1812]]

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

    (a) Special Rules for Plan Distributions.--Paragraph (9) of section 
457(e) (relating to other definitions and special rules) is amended to 
read as follows:
            ``(9) Benefits not treated as made available by reason of 
        certain elections, etc.--
                    ``(A) Total amount payable is $3,500 or less.--The 
                total amount payable to a participant under the plan 
                shall not be treated as made available merely because 
                the participant may elect to receive such amount (or the 
                plan may distribute such amount without the 
                participant's consent) if--
                          ``(i) such amount does not exceed $3,500, and
                          ``(ii) such amount may be distributed only 
                      if--
                                    ``(I) no amount has been deferred 
                                under the plan with respect to such 
                                participant during the 2-year period 
                                ending on the date of the distribution, 
                                and
                                    ``(II) there has been no prior 
                                distribution under the plan to such 
                                participant to which this subparagraph 
                                applied.
                A plan shall not be treated as failing to meet the 
                distribution requirements of subsection (d) by reason of 
                a distribution to which this subparagraph applies.
                    ``(B) Election to defer commencement of 
                distributions.--The total amount payable to a 
                participant under the plan shall not be treated as made 
                available merely because the participant may elect to 
                defer commencement of distributions under the plan if--
                          ``(i) such election is made after amounts may 
                      be available under the plan in accordance with 
                      subsection (d)(1)(A) and before commencement of 
                      such distributions, and
                          ``(ii) the participant may make only 1 such 
                      election.''.

    (b) Cost-of-Living Adjustment of Maximum Deferral Amount.--
Subsection (e) of section 457, as amended by section 1444(b)(2) 
(relating to governmental plans), is amended by adding at the end the 
following new paragraph:
            ``(15) Cost-of-living adjustment of maximum deferral 
        amount.--The Secretary shall adjust the $7,500 amount specified 
        in subsections (b)(2) and (c)(1) at the same time and in the 
        same manner as under section 415(d), except that the base period 
        shall be the calendar quarter ending September 30, 1994, and any 
        increase under this paragraph which is not a multiple of $500 
        shall be rounded to the next lowest multiple of $500.''.

    (c) Effective <<NOTE: 26 USC 457 note.>>  Date.--The amendments made 
by this section shall apply to taxable years beginning after December 
31, 1996.
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION PLANS OF 
                          STATE AND LOCAL GOVERNMENTS.

    (a) In General.--Section 457 is amended by adding at the end the 
following new subsection:

[[Page 110 STAT. 1813]]

    ``(g) Governmental Plans Must Maintain Set-Asides for Exclusive 
Benefit of Participants.--
            ``(1) In general.--A plan maintained by an eligible employer 
        described in subsection (e)(1)(A) shall not be treated as an 
        eligible deferred compensation plan unless all assets and income 
        of the plan described in subsection (b)(6) are held in trust for 
        the exclusive benefit of participants and their beneficiaries.
            ``(2) Taxability of trusts and participants.--For purposes 
        of this title--
                    ``(A) a trust described in paragraph (1) shall be 
                treated as an organization exempt from taxation under 
                section 501(a), and
                    ``(B) notwithstanding any other provision of this 
                title, amounts in the trust shall be includible in the 
                gross income of participants and beneficiaries only to 
                the extent, and at the time, provided in this section.
            ``(3) Custodial accounts and contracts.--For purposes of 
        this subsection, custodial accounts and contracts described in 
        section 401(f) shall be treated as trusts under rules similar to 
        the rules under section 401(f).''.

    (b) Conforming Amendment.--Paragraph (6) of section 457(b) is 
amended by inserting ``except as provided in subsection (g),'' before 
``which provides that''.
    (c) Effective <<NOTE: 26 USC 457 note.>>  Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to assets and income 
        described in section 457(b)(6) of the Internal Revenue Code of 
        1986 held by a plan on and after the date of the enactment of 
        this Act.
            (2) Transition rule.--In the case of a plan in existence on 
        the date of the enactment of this Act, a trust need not be 
        established by reason of the amendments made by this section 
        before January 1, 1999.
SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS UNDER 
                          SECTION 415 LIMITATIONS.

    (a) In <<NOTE: 26 USC 411 note.>>  General.--Subparagraph (A) of 
section 767(d)(3) of the Uruguay Round Agreements Act is amended to read 
as follows:
                    ``(A) Exception.--A plan that was adopted and in 
                effect before December 8, 1994, shall not be required to 
                apply the amendments made by subsection (b) with respect 
                to benefits accrued before the earlier of--
                          ``(i) the later of the date a plan amendment 
                      applying the amendments made by subsection (b) is 
                      adopted or made effective, or
                          ``(ii) the first day of the first limitation 
                      year beginning after December 31, 1999.
                Determinations under section 415(b)(2)(E) of the 
                Internal Revenue Code of 1986 before such earlier date 
                shall be made with respect to such benefits on the basis 
                of such section as in effect on December 7, 1994 (except 
                that the modification made by section 1449(b) of the 
                Small Business Job Protection Act of 1996 shall be taken 
                into account), and the provisions of the plan as in 
                effect on December 7, 1994, but only if such provisions 
                of the plan meet the requirements of such section (as so 
                in effect).''.

[[Page 110 STAT. 1814]]

    (b) Modification of Certain Assumptions for Adjusting Benefits of 
Defined Benefit Plans for Early Retirees.--Subparagraph (E) of section 
415(b)(2) (relating to limitation on certain assumptions) is amended--
            (1) by striking ``Except as provided in clause (ii), for 
        purposes of adjusting any benefit or limitation under 
        subparagraph (B) or (C),'' in clause (i) and inserting ``For 
        purposes of adjusting any limitation under subparagraph (C) and, 
        except as provided in clause (ii), for purposes of adjusting any 
        benefit under subparagraph (B),'', and
            (2) by striking ``For purposes of adjusting the benefit or 
        limitation of any form of benefit subject to section 
        417(e)(3),'' in clause (ii) and inserting ``For purposes of 
        adjusting any benefit under subparagraph (B) for any form of 
        benefit subject to section 417(e)(3),''.

    (c) Effective <<NOTE: 26 USC 415 note.>>  Date.--The amendments made 
by this section shall take effect as if included in the provisions of 
section 767 of the Uruguay Round Agreements Act.

    (d) Transitional <<NOTE: 26 USC 411 note.>>  Rule.--In the case of a 
plan that was adopted and in effect before December 8, 1994, if--
            (1) a plan amendment was adopted or made effective on or 
        before the date of the enactment of this Act applying the 
        amendments made by section 767 of the Uruguay Round Agreements 
        Act, and
            (2) within 1 year after the date of the enactment of this 
        Act, a plan amendment is adopted which repeals the amendment 
        referred to in paragraph (1),

the amendment referred to in paragraph (1) shall not be taken into 
account in applying section 767(d)(3)(A) of the Uruguay Round Agreements 
Act, as amended by subsection (a).

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

    (a) Multiple <<NOTE: 26 USC 403 note.>>  Salary Reduction Agreements 
Permitted.--
            (1) General rule.--For purposes of section 403(b) of the 
        Internal Revenue Code of 1986, the frequency that an employee is 
        permitted to enter into a salary reduction agreement, the salary 
        to which such an agreement may apply, and the ability to revoke 
        such an agreement shall be determined under the rules applicable 
        to cash or deferred elections under section 401(k) of such Code.
            (2) Constructive receipt.--Section 402(e)(3) is amended by 
        inserting ``or which is part of a salary reduction agreement 
        under section 403(b)'' after ``section 401(k)(2))''.
            (3) Effective date.--This subsection shall apply to taxable 
        years beginning after December 31, 1995.

    (b) Treatment of Indian Tribal Governments.--
            (1) In general.--In the case of any contract purchased in a 
        plan year beginning before January 1, 1995, section 403(b) of 
        the Internal Revenue Code of 1986 shall be applied as if any 
        reference to an employer described in section 501(c)(3) of the 
        Internal Revenue Code of 1986 which is exempt from tax under 
        section 501 of such Code included a reference to an employer 
        which is an Indian tribal government (as defined by section 
        7701(a)(40) of such Code), a subdivision of an Indian tribal 
        government (determined in accordance with section 7871(d) of 
        such Code), an agency or instrumentality of an Indian tribal 
        government or subdivision thereof, or a corpora

[[Page 110 STAT. 1815]]

        tion chartered under Federal, State, or tribal law which is 
        owned in whole or in part by any of the foregoing.
            (2) Rollovers.--Solely for purposes of applying section 
        403(b)(8) of such Code to a contract to which paragraph (1) 
        applies, a qualified cash or deferred arrangement under section 
        401(k) of such Code shall be treated as if it were a plan or 
        contract described in clause (ii) of section 403(b)(8)(A) of 
        such Code.

    (c) Elective Deferrals.--
            (1) In general.--Subparagraph (E) of section 403(b)(1) is 
        amended to read as follows:
                    ``(E) in the case of a contract purchased under a 
                salary reduction agreement, the contract meets the 
                requirements of section 401(a)(30),''.
            (2) Effective <<NOTE: 26 USC 403 note.>>  date.--The 
        amendment made by this subsection shall apply to years beginning 
        after December 31, 1995, except a contract shall not be required 
        to meet any change in any requirement by reason of such 
        amendment before the 90th day after the date of the enactment of 
        this Act.
SEC. 1451. SPECIAL RULES RELATING TO JOINT AND SURVIVOR ANNUITY 
                          EXPLANATIONS.

    (a) Amendment to Internal Revenue Code.--Section 417(a) is amended 
by adding at the end the following new paragraph:
            ``(7) Special rules relating to time for written ex-
        planation.--Notwithstanding any other provision of this 
        subsection--
                    ``(A) Explanation may be provided after annuity 
                starting date.--
                          ``(i) In general.--A plan may provide the 
                      written explanation described in paragraph (3)(A) 
                      after the annuity starting date. In any case to 
                      which this subparagraph applies, the applicable 
                      election period under paragraph (6) shall not end 
                      before the 30th day after the date on which such 
                      explanation is provided.
                          ``(ii) Regulatory authority.--The Secretary 
                      may by regulations limit the application of clause 
                      (i), except that such regulations may not limit 
                      the period of time by which the annuity starting 
                      date precedes the provision of the written 
                      explanation other than by providing that the 
                      annuity starting date may not be earlier than 
                      termination of employment.
                    ``(B) Waiver of 30-day period.--A plan may permit a 
                participant to elect (with any applicable spousal 
                consent) to waive any requirement that the written 
                explanation be provided at least 30 days before the 
                annuity starting date (or to waive the 30-day 
                requirement under subparagraph (A)) if the distribution 
                commences more than 7 days after such explanation is 
                provided.''.

    (b) Amendment to ERISA.--Section 205(c) of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1055(c)) is amended by adding at 
the end the following new paragraph:
            ``(8) Notwithstanding any other provision of this 
        subsection--
                    ``(A)(i) A plan may provide the written explanation 
                described in paragraph (3)(A) after the annuity starting

[[Page 110 STAT. 1816]]

                date. In any case to which this subparagraph applies, 
                the applicable election period under paragraph (7) shall 
                not end before the 30th day after the date on which such 
                explanation is provided.
                    ``(ii) The Secretary may by regulations limit the 
                application of clause (i), except that such regulations 
                may not limit the period of time by which the annuity 
                starting date precedes the provision of the written 
                explanation other than by providing that the annuity 
                starting date may not be earlier than termination of 
                employment.
                    ``(B) A plan may permit a participant to elect (with 
                any applicable spousal consent) to waive any requirement 
                that the written explanation be provided at least 30 
                days before the annuity starting date (or to waive the 
                30-day requirement under subparagraph (A)) if the 
                distribution commences more than 7 days after such 
                explanation is provided.''.

    (c) Effective <<NOTE: 26 USC 417 note.>>  Date.--The amendments made 
by this section shall apply to plan years beginning after December 31, 
1996.
SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT PLAN 
                          AND DEFINED CONTRIBUTION PLAN FOR SAME 
                          EMPLOYEE; EXCESS DISTRIBUTIONS.

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

    (d) Effective <<NOTE: 26 USC 415 note.>>  Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to limitation years 
        beginning after December 31, 1999.

[[Page 110 STAT. 1817]]

            (2) Excess distributions.--The amendment made by subsection 
        (b) shall apply to years beginning after December 31, 1996.

SEC. 1453. TAX ON PROHIBITED TRANSACTIONS.

    (a) In General.--Section 4975(a) is amended by striking ``5 
percent'' and inserting ``10 percent''.
    (b) Effective <<NOTE: 26 USC 4975 note.>>  Date.--The amendment made 
by this section shall apply to prohibited transactions occurring after 
the date of the enactment of this Act.

SEC. 1454. TREATMENT OF LEASED EMPLOYEES.

    (a) General Rule.--Subparagraph (C) of section 414(n)(2) (defining 
leased employee) is amended to read as follows:
                    ``(C) such services are performed under primary 
                direction or control by the recipient.''.

    (b) Effective <<NOTE: 26 USC 414 note.>>  Date.--The amendment made 
by subsection (a) shall apply to years beginning after December 31, 
1996, but shall not apply to any relationship determined under an 
Internal Revenue Service ruling issued before the date of the enactment 
of this Act pursuant to section 414(n)(2)(C) of the Internal Revenue 
Code of 1986 (as in effect on the day before such date) not to involve a 
leased employee.
SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN PENSION 
                          REPORTING REQUIREMENTS.

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

    (b) Modification of Reportable Designated Distributions.--
            (1) Section 408.--Subsection (i) of section 408 (relating to 
        individual retirement account reports) is amended by inserting 
        ``aggregating $10 or more in any calendar year'' after 
        ``distributions''.

[[Page 110 STAT. 1818]]

            (2) Section 6047.--Paragraph (1) of section 6047(d) 
        (relating to reports by employers, plan administrators, etc.) is 

        amended by adding at the end the following new sentence: ``No 
        return or report may be required under the preceding sentence 
        with respect to distributions to any person during any year 
        unless such distributions aggregate $10 or more.''.

    (c) Qualifying Rollover Distributions.--Section 6652(i) is amended--
            (1) by striking ``the $10'' and inserting ``$100'', and
            (2) by striking ``$5,000'' and inserting ``$50,000''.

    (d) Conforming Amendments.--
            (1) Paragraph (1) of section 6047(f) is amended to read as 
        follows:
                  ``(1) For provisions relating to penalties for 
                failures to file returns and reports required under this 
                section, see sections 6652(e), 6721, and 6722.''.

            (2) Subsection (e) of section 6652 is amended by adding at 
        the end the following new sentence: ``This subsection shall not 
        apply to any return or statement which is an information return 
        described in section 6724(d)(1)(C)(ii) or a payee statement 
        described in section 6724(d)(2)(X).''.
            (3) Subsection (a) of section 6693 is amended by adding at 
        the end the following new sentence: ``This subsection shall not 
        apply to any report which is an information return described in 
        section 6724(d)(1)(C)(i) or a payee statement described in 
        section 6724(d)(2)(W).''.

    (e) Effective <<NOTE: 26 USC 408 note.>>  Date.--The amendments made 
by this section shall apply to returns, reports, and other statements 
the due date for which (determined without regard to extensions) is 
after December 31, 1996.
SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO TAX ON 
                          NET EARNINGS FROM SELF-EMPLOYMENT.

    (a) In General.--Section 1402(a)(8) (defining net earnings from 
self-employment) is amended by inserting ``, but shall not include in 
such net earnings from self-employment the rental value of any parsonage 
or any parsonage allowance (whether or not excludable under section 107) 
provided after the individual retires, or any other retirement benefit 
received by such individual from a church plan (as defined in section 
414(e)) after the individual retires'' before the semicolon at the end.
    (b) Effective <<NOTE: 26 USC 1402 note.>>  Date.--The amendments 
made by this section shall apply to years beginning before, on, or after 
December 31, 1994.
SEC. 1457. SAMPLE <<NOTE: 26 USC 414 note.>>  LANGUAGE FOR SPOUSAL 
                          CONSENT AND QUALIFIED DOMESTIC RELATIONS 
                          FORMS.

    (a) Development of Sample Language.--Not later than January 1, 1997, 
the Secretary of the Treasury shall develop--
            (1) sample language for inclusion in a form for the spousal 
        consent required under section 417(a)(2) of the Internal Revenue 
        Code of 1986 and section 205(c)(2) of the Employee Retirement 
        Income Security Act of 1974 which--
                    (A) is written in a manner calculated to be 
                understood by the average person, and
                    (B) discloses in plain form--
                          (i) whether the waiver to which the spouse 
                      consents is irrevocable, and

[[Page 110 STAT. 1819]]

                          (ii) whether such waiver may be revoked by a 
                      qualified domestic relations order, and
            (2) sample language for inclusion in a form for a qualified 
        domestic relations order described in section 414(p)(1)(A) of 
        such Code and section 206(d)(3)(B)(i) of such Act which--
                    (A) meets the requirements contained in such 
                sections, and
                    (B) the provisions of which focus attention on the 
                need to consider the treatment of any lump sum payment, 
                qualified joint and survivor annuity, or qualified 
                preretirement survivor annuity.

    (b) Publicity.--The Secretary of the Treasury shall include 
publicity for the sample language developed under subsection (a) in the 
pension outreach efforts undertaken by the Secretary.
SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS TO VOLUNTEERS 
                          PERFORMING FIRE FIGHTING OR PREVENTION 
                          SERVICES, EMERGENCY MEDICAL SERVICES, OR 
                          AMBULANCE SERVICES.

    (a) In General.--Paragraph (11) of section 457(e) (relating to 
deferred compensation plans of State and local governments and tax-
exempt organizations) is amended to read as follows:
            ``(11) Certain plans excluded.--
                    ``(A) In general.--The following plans shall be 
                treated as not providing for the deferral of 
                compensation:
                          ``(i) Any bona fide vacation leave, sick 
                      leave, compensatory time, severance pay, 
                      disability pay, or death benefit plan.
                          ``(ii) Any plan paying solely length of 
                      service awards to bona fide volunteers (or their 
                      beneficiaries) on account of qualified services 
                      performed by such volunteers.
                    ``(B) Special rules applicable to length of service 
                award plans.--
                          ``(i) Bona fide volunteer.--An individual 
                      shall be treated as a bona fide volunteer for 
                      purposes of subparagraph (A)(ii) if the only 
                      compensation received by such individual for 
                      performing qualified services is in the form of--
                                    ``(I) reimbursement for (or a 
                                reasonable allowance for) reasonable 
                                expenses incurred in the performance of 
                                such services, or
                                    ``(II) reasonable benefits 
                                (including length of service awards), 
                                and nominal fees for such services, 
                                customarily paid by eligible employers 
                                in connection with the performance of 
                                such services by
                                volunteers.
                          ``(ii) Limitation on accruals.--A plan shall 
                      not be treated as described in subparagraph 
                      (A)(ii) if the aggregate amount of length of 
                      service awards accruing with respect to any year 
                      of service for any bona fide volunteer exceeds 
                      $3,000.
                    ``(C) Qualified services.--For purposes of this 
                paragraph, the term `qualified services' means fire 
                fighting and prevention services, emergency medical 
                services, and ambulance services.''.

    (b) Exemption From Social Security Taxes.--

[[Page 110 STAT. 1820]]

            (1) Subsection (a)(5) of section 3121, as amended by section 
        1421, is amended by striking ``(or)'' at the end of subparagraph 
        (G), by inserting ``or'' at the end of subparagraph (H), and by 
        adding at the end the following new subparagraph:
                    ``(I) under a plan described in section 
                457(e)(11)(A)(ii) and maintained by an eligible employer 
                (as defined in section 457(e)(1)).''.
            (2) Section <<NOTE: 42 USC 409.>>  209(a)(4) of the Social 
        Security Act is amended by inserting ``; or (K) under a plan 
        described in section 457(e)(11)(A)(ii) of the Internal Revenue 
        Code of 1986 and maintained by an eligible employer (as defined 
        in section 457(e)(1) of such Code)'' before the semicolon at the 
        end thereof.

    (c) Effective Date.--
            (1) Subsection <<NOTE: 26 USC 457 note.>>  (a).--The 
        amendment made by subsection (a) shall apply to accruals of 
        length of service awards after December 31, 1996.
            (2) Subsection <<NOTE: 26 USC 3121 note.>>  (b).--The 
        amendments made by subsection (b) shall apply to remuneration 
        paid after December 31, 1996.
SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN PLANS 
                          THAT PROVIDE FOR EARLY PARTICIPATION.

    (a) Cash or Deferred Arrangements.--Paragraph (3) of section 401(k) 
(relating to application of participation and discrimination standards), 
as amended by section 1433(d)(1) of this Act, is amended by adding at 
the end the following new subparagraph:
                    ``(F) Special rule for early participation.--If an 
                employer elects to apply section 410(b)(4)(B) in 
                determining whether a cash or deferred arrangement meets 
                the requirements of subparagraph (A)(i), the employer 
                may, in determining whether the arrangement meets the 
                requirements of subparagraph (A)(ii), exclude from 
                consideration all eligible employees (other than highly 
                compensated employees) who have not met the minimum age 
                and service requirements of section 410(a)(1)(A).''.

    (b) Matching Contributions.--Paragraph (5) of section 401(m) 
(relating to employees taken into consideration) is amended by adding at 
the end the following new subparagraph:
                    ``(C) Special rule for early participation.--If an 
                employer elects to apply section 410(b)(4)(B) in 
                determining whether a plan meets the requirements of 
                section 410(b), the employer may, in determining whether 
                the plan meets the requirements of paragraph (2), 
                exclude from consideration all eligible employees (other 
                than highly compensated employees) who have not met the 
                minimum age and service requirements of section 
                410(a)(1)(A).''.

    (c) Effective <<NOTE: 26 USC 401 note.>>  Date.--The amendments made 
by this section shall apply to plan years beginning after December 31, 
1998.
SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE 
                          COMPANY GENERAL ACCOUNTS.

    (a) In General.--Section 401 of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1101) is amended by adding at the end 
the following new subsection:
    ``(c)(1)(A) Not <<NOTE: Proposed regulations.>>  later than June 30, 
1997, the Secretary shall issue proposed regulations to provide guidance 
for the purpose of determining, in cases where an insurer issues 1 or 
more policies to or for the benefit of an employee benefit plan (and 
such policies are supported by assets of such insurer's general 
account), which

[[Page 110 STAT. 1821]]

assets held by the insurer (other than plan assets held in its separate 
accounts) constitute assets of the plan for purposes of this part and 
section 4975 of the Internal Revenue Code of 1986 and to provide 
guidance with respect to the application of this title to the general 
account assets of insurers.

    ``(B) The proposed regulations under subparagraph (A) shall be 
subject to public notice and comment until September 30, 1997.
    ``(C) The <<NOTE: Regulations.>>  Secretary shall issue final 
regulations providing the guidance described in subparagraph (A) not 
later than December 31, 1997.

    ``(D) Such regulations shall only apply with respect to policies 
which are issued by an insurer on or before December 31, 1998, to or for 
the benefit of an employee benefit plan which is supported by assets of 
such insurer's general account. With respect to policies issued on or 
before December 31, 1998, such regulations shall take effect at the end 
of the 18-month period following the date on which such regulations 
become final.
    ``(2) The Secretary shall ensure that the regulations issued under 
paragraph (1)--
            ``(A) are administratively feasible, and
            ``(B) protect the interests and rights of the plan and of 
        its participants and beneficiaries (including meeting the 
        requirements of paragraph (3)).

    ``(3) The regulations prescribed by the Secretary pursuant to 
paragraph (1) shall require, in connection with any policy issued by an 
insurer to or for the benefit of an employee benefit plan to the extent 
that the policy is not a guaranteed benefit policy (as defined in 
subsection (b)(2)(B))--
            ``(A) that a plan fiduciary totally independent of the 
        insurer authorize the purchase of such policy (unless such 
        purchase is a transaction exempt under section 408(b)(5)),
            ``(B) that the insurer describe (in such form and manner as 
        shall be prescribed in such regulations), in annual reports and 
        in policies issued to the policyholder after the date on which 
        such regulations are issued in final form pursuant to paragraph 
        (1)(C)--
                    ``(i) a description of the method by which any 
                income and expenses of the insurer's general account are 
                allocated to the policy during the term of the policy 
                and upon the termination of the policy, and
                    ``(ii) for each report, the actual return to the 
                plan under the policy and such other financial 
                information as the Secretary may deem appropriate for 
                the period covered by each such annual report,
            ``(C) that the insurer disclose to the plan fiduciary the 
        extent to which alternative arrangements supported by assets of 
        separate accounts of the insurer (which generally hold plan 
        assets) are available, whether there is a right under the policy 
        to transfer funds to a separate account and the terms governing 
        any such right, and the extent to which support by assets of the 
        insurer's general account and support by assets of separate 
        accounts of the insurer might pose differing risks to the plan, 
        and
            ``(D) that the insurer manage those assets of the insurer 
        which are assets of such insurer's general account (irrespective 
        of whether any such assets are plan assets) with the care, 
        skill, prudence, and diligence under the circumstances then

[[Page 110 STAT. 1822]]

        prevailing that a prudent man acting in a like capacity and 
        familiar with such matters would use in the conduct of an 
        enterprise of a like character and with like aims, taking into 
        account all obligations supported by such enterprise.

    ``(4) Compliance by the insurer with all requirements of the 
regulations issued by the Secretary pursuant to paragraph (1) shall be 
deemed compliance by such insurer with sections 404, 406, and 407 with 
respect to those assets of the insurer's general account which support a 
policy described in paragraph (3).

    ``(5)(A) Subject to subparagraph (B), any regulations issued under 
paragraph (1) shall not take effect before the date on which such 
regulations become final.
    ``(B) No person shall be subject to liability under this part or 
section 4975 of the Internal Revenue Code of 1986 for conduct which 
occurred before the date which is 18 months following the date described 
in subparagraph (A) on the basis of a claim that the assets of an 
insurer (other than plan assets held in a separate account) constitute 
assets of the plan, except--
            ``(i) as otherwise provided by the Secretary in regulations 
        intended to prevent avoidance of the regulations issued under 
        paragraph (1), or
            ``(ii) as provided in an action brought by the Secretary 
        pursuant to paragraph (2) or (5) of section 502(a) for a breach 
        of fiduciary responsibilities which would also constitute a 
        violation of Federal or State criminal law.

The Secretary shall bring a cause of action described in clause (ii) if 
a participant, beneficiary, or fiduciary demonstrates to the 
satisfaction of the Secretary that a breach described in clause (ii) has 
occurred.
    ``(6) Nothing in this subsection shall preclude the application of 
any Federal criminal law.
    ``(7) For purposes of this subsection, the term `policy' includes a 
contract.''.
    (b) Effective <<NOTE: 29 USC 1101 note.>>  Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendment made by this section shall take effect on January 1, 
        1975.
            (2) Civil actions.--The amendment made by this section shall 
        not apply to any civil action commenced before November 7, 1995.
SEC. 1461. SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED 
                          MINISTERS.

    (a) In General.--Section 414(e) (defining church plan) is amended by 
adding at the end the following new paragraph:
            ``(5) Special rules for chaplains and self-employed 
        ministers.--
                    ``(A) Certain ministers may participate.--For 
                purposes of this part--
                          ``(i) In general.--An employee of a church or 
                      a convention or association of churches shall 
                      include a duly ordained, commissioned, or licensed 
                      minister of a church who, in connection with the 
                      exercise of his or her ministry--
                                    ``(I) is a self-employed individual 
                                (within the meaning of section 
                                401(c)(1)(B)), or

[[Page 110 STAT. 1823]]

                                    ``(II) is employed by an 
                                organization other than an organization 
                                described in section 501(c)(3).
                          ``(ii) Treatment as employer and employee.--
                                    ``(I) Self-employed.--A minister 
                                described in clause (i)(I) shall be 
                                treated as his or her own employer which 
                                is an organization described in section 
                                501(c)(3) and which is exempt from tax 
                                under section 501(a).
                                    ``(II) Others.--A minister described 
                                in clause (i)(II) shall be treated as 
                                employed by an organization described in 
                                section 501(c)(3) and exempt from tax 
                                under section 501(a).
                    ``(B) Special rules for applying section 403(b) to 
                self-employed ministers.--In the case of a minister 
                described in subparagraph (A)(i)(I)--
                          ``(i) the minister's includible compensation 
                      under section 403(b)(3) shall be determined by 
                      reference to the minister's earned income (within 
                      the meaning of section 401(c)(2)) from such 
                      ministry rather than the amount of compensation 
                      which is received from an employer, and
                          ``(ii) the years (and portions of years) in 
                      which such minister was a self-employed individual 
                      (within the meaning of section 401(c)(1)(B)) with 
                      respect to such ministry shall be included for 
                      purposes of section 403(b)(4).
                    ``(C) Effect on non-denominational plans.--If a duly 
                ordained, commissioned, or licensed minister of a church 
                in the exercise of his or her ministry participates in a 
                church plan (within the meaning of this section) and in 
                the exercise of such ministry is employed by an employer 
                not eligible to participate in such church plan, then 
                such employer may exclude such minister from being 
                treated as an employee of such employer for purposes of 
                applying sections 401(a)(3), 401(a)(4), and 401(a)(5), 
                as in effect on September 1, 1974, and sections 
                401(a)(4), 401(a)(5), 401(a)(26), 401(k)(3), 401(m), 
                403(b)(1)(D) (including section 403(b)(12)), and 410 to 
                any stock bonus, pension, profit-sharing, or annuity 
                plan (including an annuity described in section 403(b) 
                or a retirement income account described in section 
                403(b)(9)). The Secretary <<NOTE: Regulations.>>  shall 
                prescribe such regulations as may be necessary or 
                appropriate to carry out the purpose of, and prevent the 
                abuse of, this subparagraph.
                    ``(D) Compensation taken into account only once.--If 
                any compensation is taken into account in determining 
                the amount of any contributions made to, or benefits to 
                be provided under, any church plan, such compensation 
                shall not also be taken into account in determining the 
                amount of any contributions made to, or benefits to be 
                provided under, any other stock bonus, pension, profit-
                sharing, or annuity plan which is not a church plan.''.

    (b) Contributions by Certain Ministers to Retirement Income 
Accounts.--Section 404(a) (relating to deduction for contributions of an 
employer to an employees' trust or annuity plan and compensation under a 
deferred-payment plan) is amended by adding at the end the following new 
paragraph:

[[Page 110 STAT. 1824]]

            ``(10) Contributions by certain ministers to retirement 
        income accounts.--In the case of contributions made by a 
        minister described in section 414(e)(5) to a retirement income 
        account described in section 403(b)(9) and not by a person other 
        than such minister, such contributions--
                    ``(A) shall be treated as made to a trust which is 
                exempt from tax under section 501(a) and which is part 
                of a plan which is described in section 401(a), and
                    ``(B) shall be deductible under this subsection to 
                the extent such contributions do not exceed the limit on 
                elective deferrals under section 402(g), the exclusion 
                allowance under section 403(b)(2), or the limit on 
                annual additions under section 415.
        For purposes of this paragraph, all plans in which the minister 
        is a participant shall be treated as one plan.''.

    (c) Effective <<NOTE: 26 USC 404 note.>>  Date.--The amendments made 
by this section shall apply to years beginning after December 31, 1996.
SEC. 1462. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE FOR PRE-ERISA 
                          RULES FOR CHURCH PLANS.

    (a) In General.--Section 414(q) (defining highly compensated 
employee), as amended by section 1431(c)(1)(A) of this Act, is amended 
by adding at the end the following new paragraph:
            ``(7) Certain employees not considered highly compensated 
        and excluded employees under pre-erisa rules for church plans.--
        In the case of a church plan (as defined in subsection (e)), no 
        employee shall be considered an officer, a person whose 
        principal duties consist of supervising the work of other 
        employees, or a highly compensated employee for any year unless 
        such employee is a highly compensated employee under paragraph 
        (1) for such year.''.

    (b) Safeharbor <<NOTE: 26 USC 414 note.>>  Authority.--The Secretary 
of the Treasury may design nondiscrimination and coverage safe harbors 
for church plans.

    (c) Effective <<NOTE: 26 USC 414 note.>>  Date.--The amendments made 
by subsection (a) shall apply to years beginning after December 31, 
1996.
SEC. 1463. RULE RELATING TO INVESTMENT IN CONTRACT NOT TO APPLY TO 
                          FOREIGN MISSIONARIES.

    (a) In General.--The last sentence of section 72(f) is amended by 
inserting ``, or to the extent such credits are attributable to services 
performed as a foreign missionary (within the meaning of section 
403(b)(2)(D)(iii))'' before the last period.
    (b) Effective <<NOTE: 26 USC 72 note.>>  Date.--The amendment made 
by this section shall apply to taxable years beginning after December 
31, 1996.
SEC. 1464. WAIVER OF EXCISE TAX ON FAILURE TO PAY LIQUIDITY 
                          SHORTFALL.

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

[[Page 110 STAT. 1825]]

        the Secretary may waive all or part of the tax imposed by this 
        subsection.''.

    (b) Effective <<NOTE: 26 USC 4971 note.>>  Date.--The amendment made 
by this section shall take effect as if included in the amendment made 
by clause (ii) of section 751(a)(9)(B) of the Retirement Protection Act 
of 1994 (108 Stat. 5020).

SEC. 1465. DATE <<NOTE: 26 USC 401 note.>>  FOR ADOPTION OF PLAN 
            AMENDMENTS.

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

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

                   Subtitle E--Foreign Simplification

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

    (a) In General.--
            (1) Repeal of inclusion.--Paragraph (1) of section 951(a) 
        (relating to amounts included in gross income of United States 
        shareholders) is amended by striking subparagraph (C), by 
        striking ``; and'' at the end of subparagraph (B) and inserting 
        a period, and by adding ``and'' at the end of subparagraph (A).
            (2) Repeal of inclusion amount.--Section 956A (relating to 
        earnings invested in excess passive assets) is repealed.

    (b) Conforming Amendments.--
            (1) Subparagraph (G) of section 904(d)(3), as amended by 
        section 1703(i)(1), is amended by striking ``subparagraph (B) or 
        (C) of section 951(a)(1)'' and inserting ``section 
        951(a)(1)(B)''.
            (2) Paragraph (1) of section 956(b) is amended to read as 
        follows:
            ``(1) Applicable earnings.--For purposes of this section, 
        the term `applicable earnings' means, with respect to any 
        controlled foreign corporation, the sum of--
                    ``(A) the amount (not including a deficit) referred 
                to in section 316(a)(1), and
                    ``(B) the amount referred to in section 316(a)(2),
        but reduced by distributions made during the taxable year and by 
        earnings and profits described in section 959(c)(1).''.
            (3) Paragraph (3) of section 956(b) is amended to read as 
        follows:
            ``(3) Special rule where corporation ceases to be controlled 
        foreign corporation.--If any foreign corporation ceases to be a 
        controlled foreign corporation during any taxable year--
                    ``(A) the determination of any United States 
                shareholder's pro rata share shall be made on the basis 
                of stock owned (within the meaning of section 958(a)) by 
                such share

[[Page 110 STAT. 1826]]

                holder on the last day during the taxable year on which 
                the foreign corporation is a controlled foreign 
                corporation,
                    ``(B) the average referred to in subsection 
                (a)(1)(A) for such taxable year shall be determined by 
                only taking into account quarters ending on or before 
                such last day, and
                    ``(C) in determining applicable earnings, the amount 
                taken into account by reason of being described in 
                paragraph (2) of section 316(a) shall be the portion of 
                the amount so described which is allocable (on a pro 
                rata basis) to the part of such year during which the 
                corporation is a controlled foreign corporation.''.
            (4) Subsection (a) of section 959 (relating to exclusion 
        from gross income of previously taxed earnings and profits) is 
        amended by adding ``or'' at the end of paragraph (1), by 
        striking ``or'' at the end of paragraph (2), and by striking 
        paragraph (3).
            (5) Subsection (a) of section 959 is amended by striking 
        ``paragraphs (2) and (3)'' in the last sentence and inserting 
        ``paragraph (2)''.
            (6) Subsection (c) of section 959 is amended by adding at 
        the end the following flush sentence:

``References in this subsection to section 951(a)(1)(C) and subsection 
(a)(3) shall be treated as references to such provisions as in effect on 
the day before the date of the enactment of the Small Business Job 
Protection Act of 1996.''.
            (7) Paragraph (1) of section 959(f) is amended to read as 
        follows:
            ``(1) In general.--For purposes of this section, amounts 
        that would be included under subparagraph (B) of section 
        951(a)(1) (determined without regard to this section) shall be 
        treated as attributable first to earnings described in 
        subsection (c)(2), and then to earnings described in subsection 
        (c)(3).''.
            (8) Paragraph (2) of section 959(f) is amended by striking 
        ``subparagraphs (B) and (C) of section 951(a)(1)'' and inserting 
        ``section 951(a)(1)(B)''.
            (9) Subsection (b) of section 989 is amended by striking 
        ``subparagraph (B) or (C) of section 951(a)(1)'' and inserting 
        ``section 951(a)(1)(B)''.
            (10) Paragraph (9) of section 1297(b) is amended by striking 
        ``subparagraph (B) or (C) of section 951(a)(1)'' and inserting 
        ``section 951(a)(1)(B)''.
            (11) Subsections (d)(3)(B) and (e)(2)(B)(ii) of section 1297 
        are each amended by striking ``or section 956A''.
            (12) Subparagraph (G) of section 904(d)(3) is amended by 
        striking ``subparagraph (B) or (C) of section 951(a)(1)'' and 
        inserting ``section 951(a)(1)(B)''.

    (c) Clerical Amendment.--The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by striking the item 
relating to section 956A.
    (d) Effective <<NOTE: 26 USC 904 note.>>  Date.--The amendments made 
by this section shall apply to taxable years of foreign corporations 
beginning after December 31, 1996, and to taxable years of United States 
shareholders within which or with which such taxable years of foreign 
corporations end.

[[Page 110 STAT. 1827]]

                       Subtitle F--Revenue Offsets

                       PART I--GENERAL PROVISIONS

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

    (a) In General.--Section 936 is amended by adding at the end the 
following new subsection:
    ``(j) Termination.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, this section shall not apply to any taxable year 
        beginning after December 31, 1995.
            ``(2) Transition rules for active business income credit.--
        Except as provided in paragraph (3)--
                    ``(A) Economic activity credit.--In the case of an 
                existing credit claimant--
                          ``(i) with respect to a possession other than 
                      Puerto Rico, and
                          ``(ii) to which subsection (a)(4)(B) does not 
                      apply,
                the credit determined under subsection (a)(1)(A) shall 
                be allowed for taxable years beginning after December 
                31, 1995, and before January 1, 2002.
                    ``(B) Special rule for reduced credit.--
                          ``(i) In general.--In the case of an existing 
                      credit claimant to which subsection (a)(4)(B) 
                      applies, the credit determined under subsection 
                      (a)(1)(A) shall be allowed for taxable years 
                      beginning after December 31, 1995, and before 
                      January 1, 1998.
                          ``(ii) Election irrevocable after 1997.--An 
                      election under subsection (a)(4)(B)(iii) which is 
                      in effect for the taxpayer's last taxable year 
                      beginning before 1997 may not be revoked unless it 
                      is revoked for the taxpayer's first taxable year 
                      beginning in 1997 and all subsequent taxable 
                      years.
                    ``(C) Economic activity credit for puerto rico.--
                  ``For economic activity credit for Puerto Rico, see 
                section 30A.

            ``(3) Additional restricted credit.--
                    ``(A) In general.--In the case of an existing credit 
                claimant--
                          ``(i) the credit under subsection (a)(1)(A) 
                      shall be allowed for the period beginning with the 
                      first taxable year after the last taxable year to 
                      which subparagraph (A) or (B) of paragraph (2), 
                      whichever is appropriate, applied and ending with 
                      the last taxable year beginning before January 1, 
                      2006, except that
                          ``(ii) the aggregate amount of taxable income 
                      taken into account under subsection (a)(1)(A) for 
                      any such taxable year shall not exceed the 
                      adjusted base period income of such claimant.
                    ``(B) Coordination with subsection (a)(4).--The 
                amount of income described in subsection (a)(1)(A) which 
                is taken into account in applying subsection (a)(4) 
                shall be such income as reduced under this paragraph.
            ``(4) Adjusted base period income.--For purposes of 
        paragraph (3)--

[[Page 110 STAT. 1828]]

                    ``(A) In general.--The term `adjusted base period 
                income' means the average of the inflation-adjusted 
                possession incomes of the corporation for each base 
                period year.
                    ``(B) Inflation-adjusted possession income.--For 
                purposes of subparagraph (A), the inflation-adjusted 
                possession income of any corporation for any base period 
                year shall be an amount equal to the sum of--
                          ``(i) the possession income of such 
                      corporation for such base period year, plus
                          ``(ii) such possession income multiplied by 
                      the inflation adjustment percentage for such base 
                      period year.
                    ``(C) Inflation adjustment percentage.--For purposes 
                of subparagraph (B), the inflation adjustment percentage 
                for any base period year means the percentage (if any) 
                by which--
                          ``(i) the CPI for 1995, exceeds
                          ``(ii) the CPI for the calendar year in which 
                      the base period year for which the determination 
                      is being made ends.
                For purposes of the preceding sentence, the CPI for any 
                calendar year is the CPI (as defined in section 1(f)(5)) 
                for such year under section 1(f)(4).
                    ``(D) Increase in inflation adjustment percentage 
                for growth during base years.--The inflation adjustment 
                percentage (determined under subparagraph (C) without 
                regard to this subparagraph) for each of the 5 taxable 
                years referred to in paragraph (5)(A) shall be increased 
                by--
                          ``(i) 5 percentage points in the case of a 
                      taxable year ending during the 1-year period 
                      ending on October 13, 1995;
                          ``(ii) 10.25 percentage points in the case of 
                      a taxable year ending during the 1-year period 
                      ending on October 13, 1994;
                          ``(iii) 15.76 percentage points in the case of 
                      a taxable year ending during the 1-year period 
                      ending on October 13, 1993;
                          ``(iv) 21.55 percentage points in the case of 
                      a taxable year ending during the 1-year period 
                      ending on October 13, 1992; and
                          ``(v) 27.63 percentage points in the case of a 
                      taxable year ending during the 1-year period 
                      ending on October 13, 1991.
            ``(5) Base period year.--For purposes of this subsection--
                    ``(A) In general.--The term `base period year' means 
                each of 3 taxable years which are among the 5 most 
                recent taxable years of the corporation ending before 
                October 14, 1995, determined by disregarding--
                          ``(i) one taxable year for which the 
                      corporation had the largest inflation-adjusted 
                      possession income, and
                          ``(ii) one taxable year for which the 
                      corporation had the smallest inflation-adjusted 
                      possession income.
                    ``(B) Corporations not having significant possession 
                income throughout 5-year period.--
                          ``(i) In general.--If a corporation does not 
                      have significant possession income for each of the 
                      most

[[Page 110 STAT. 1829]]

                      recent 5 taxable years ending before October 14, 
                      1995, then, in lieu of applying subparagraph (A), 
                      the term `base period year' means only those 
                      taxable years (of such 5 taxable years) for which 
                      the corporation has significant possession income; 
                      except that, if such corporation has significant 
                      possession income for 4 of such 5 taxable years, 
                      the rule of subparagraph (A)(ii) shall apply.
                          ``(ii) Special rule.--If there is no year (of 
                      such 5 taxable years) for which a corporation has 
                      significant possession income--
                                    ``(I) the term `base period year' 
                                means the first taxable year ending on 
                                or after October 14, 1995, but
                                    ``(II) the amount of possession 
                                income for such year which is taken into 
                                account under paragraph (4) shall be the 
                                amount which would be determined if such 
                                year were a short taxable year ending on 
                                September 30, 1995.
                          ``(iii) Significant possession income.--For 
                      purposes of this subparagraph, the term 
                      `significant possession income' means possession 
                      income which exceeds 2 percent of the possession 
                      income of the taxpayer for the taxable year (of 
                      the period of 6 taxable years ending with the 
                      first taxable year ending on or after October 14, 
                      1995) having the greatest possession income.
                    ``(C) Election to use one base period year.--
                          ``(i) In general.--At the election of the 
                      taxpayer, the term `base period year' means--
                                    ``(I) only the last taxable year of 
                                the corporation ending in calendar year 
                                1992, or
                                    ``(II) a deemed taxable year which 
                                includes the first ten months of 
                                calendar year 1995.
                          ``(ii) Base period income for 1995.--In 
                      determining the adjusted base period income of the 
                      corporation for the deemed taxable year under 
                      clause (i)(II), the possession income shall be 
                      annualized and shall be determined without regard 
                      to any extraordinary item.
                          ``(iii) Election.--An election under this 
                      subparagraph by any possession corporation may be 
                      made only for the corporation's first taxable year 
                      beginning after December 31, 1995, for which it is 
                      a possession corporation. The rules of subclauses 
                      (II) and (III) of subsection (a)(4)(B)(iii) shall 
                      apply to the election under this subparagraph.
                    ``(D) Acquisitions and dispositions.--Rules similar 
                to the rules of subparagraphs (A) and (B) of section 
                41(f)(3) shall apply for purposes of this subsection.
            ``(6) Possession income.--For purposes of this subsection, 
        the term `possession income' means, with respect to any 
        possession, the income referred to in subsection (a)(1)(A) 
        determined with respect to that possession. In no event shall 
        possession income be treated as being less than zero.
            ``(7) Short years.--If the current year or a base period 
        year is a short taxable year, the application of this subsection

[[Page 110 STAT. 1830]]

        shall be made with such annualizations as the Secretary shall 
        prescribe.
            ``(8) Special rules for certain possessions.--
                    ``(A) In general.--In the case of an existing credit 
                claimant with respect to an applicable possession, this 
                section (other than the preceding paragraphs of this 
                subsection) shall apply to such claimant with respect to 
                such applicable possession for taxable years beginning 
                after December 31, 1995, and before January 1, 2006.
                    ``(B) Applicable possession.--For purposes of this 
                paragraph, the term `applicable possession' means Guam, 
                American Samoa, and
the Commonwealth of the Northern Mariana Islands.
            ``(9) Existing credit claimant.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `existing credit 
                claimant' means a corporation--
                          ``(i)(I) which was actively conducting a trade 
                      or business in a possession on October 13, 1995, 
                      and
                          ``(II) with respect to which an election under 
                      this section is in effect for the corporation's 
                      taxable year which includes October 13, 1995, or
                          ``(ii) which acquired all of the assets of a 
                      trade or business of a corporation which--
                                    ``(I) satisfied the requirements of 
                                subclause (I) of clause (i) with respect 
                                to such trade or busi-
                                ness, and
                                    ``(II) satisfied the requirements of 
                                subclause (II) of clause (i).
                    ``(B) New lines of business prohibited.--If, after 
                October 13, 1995, a corporation which would (but for 
                this subparagraph) be an existing credit claimant adds a 
                substantial new line of business (other than in an 
                acquisition described in subparagraph (A)(ii)), such 
                corporation shall cease to be treated as an existing 
                credit claimant as of the close of the taxable year 
                ending before the date of such addition.
                    ``(C) Binding contract exception.--If, on October 
                13, 1995, and at all times thereafter, there is in 
                effect with respect to a corporation a binding contract 
                for the acquisition of assets to be used in, or for the 
                sale of assets to be produced from, a trade or business, 
                the corporation shall be treated for purposes of this 
                paragraph as actively conducting such trade or business 
                on October 13, 1995. The preceding sentence shall not 
                apply if such trade or business is not actively 
                conducted before January 1, 1996.
            ``(10) Separate application to each possession.--For 
        purposes of determining--
                    ``(A) whether a taxpayer is an existing credit 
                claim-
                ant, and
                    ``(B) the amount of the credit allowed under this 
                section,
        this subsection (and so much of this section as relates to this 
        subsection) shall be applied separately with respect to each 
        possession.''.

    (b) Economic Activity Credit for Puerto Rico.--

[[Page 110 STAT. 1831]]

            (1) In general.--Subpart B of part IV of subchapter A of 
        chapter 1 is amended by adding at the end the following new 
        section:

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

    ``(a) Allowance of Credit.--
            ``(1) In general.--Except as otherwise provided in this 
        section, if the conditions of both paragraph (1) and paragraph 
        (2) of subsection (b) are satisfied with respect to a qualified 
        domestic corporation, there shall be allowed as a credit against 
        the tax imposed by this chapter an amount equal to the portion 
        of the tax which is attributable to the taxable income, from 
        sources without the United States, from--
                    ``(A) the active conduct of a trade or business 
                within Puerto Rico, or
                    ``(B) the sale or exchange of substantially all of 
                the assets used by the taxpayer in the active conduct of 
                such trade or business.
        In the case of any taxable year beginning after December 31, 
        2001, the aggregate amount of taxable income taken into account 
        under the preceding sentence (and in applying subsection (d)) 
        shall not exceed the adjusted base period income of such 
        corporation, as determined in the same manner as under section 
        936(j).
            ``(2) Qualified domestic corporation.--For purposes of 
        paragraph (1), the term `qualified domestic corporation' means a 
        domestic corporation--
                    ``(A) which is an existing credit claimant with 
                respect to Puerto Rico, and
                    ``(B) with respect to which section 936(a)(4)(B) 
                does not apply for the taxable year.
            ``(3) Separate application.--For purposes of deter-
        mining--
                    ``(A) whether a taxpayer is an existing credit 
                claimant with respect to Puerto Rico, and
                    ``(B) the amount of the credit allowed under this 
                section,
        this section (and so much of section 936 as relates to this 
        section) shall be applied separately with respect to Puerto 
        Rico.

    ``(b) Conditions Which Must Be Satisfied.--The conditions referred 
to in subsection (a) are--
            ``(1) 3-year period.--If 80 percent or more of the gross 
        income of the qualified domestic corporation for the 3-year 
        period immediately preceding the close of the taxable year (or 
        for such part of such period immediately preceding the close of 
        such taxable year as may be applicable) was derived from sources 
        within a possession (determined without regard to section 
        904(f)).
            ``(2) Trade or business.--If 75 percent or more of the gross 
        income of the qualified domestic corporation for such period or 
        such part thereof was derived from the active conduct of a trade 
        or business within a possession.

    ``(c) Credit Not Allowed Against Certain Taxes.--The credit provided 
by subsection (a) shall not be allowed against the tax imposed by--
            ``(1) section 59A (relating to environmental tax),

[[Page 110 STAT. 1832]]

            ``(2) section 531 (relating to the tax on accumulated 
        earnings),
            ``(3) section 541 (relating to personal holding company 
        tax), or
            ``(4) section 1351 (relating to recoveries of foreign 
        expropriation losses).

    ``(d) Limitations on Credit for Active Business Income.--The amount 
of the credit determined under subsection (a) for any taxable year shall 
not exceed the sum of the following amounts:
            ``(1) 60 percent of the sum of--
                    ``(A) the aggregate amount of the qualified domestic 
                corporation's qualified possession wages for such 
                taxable year, plus
                    ``(B) the allocable employee fringe benefit expenses 
                of the qualified domestic corporation for such taxable 
                year.
            ``(2) The sum of--
                    ``(A) 15 percent of the depreciation allowances for 
                the taxable year with respect to short-life qualified 
                tangible property,
                    ``(B) 40 percent of the depreciation allowances for 
                the taxable year with respect to medium-life qualified 
                tangible property, and
                    ``(C) 65 percent of the depreciation allowances for 
                the taxable year with respect to long-life qualified 
                tangible property.
            ``(3) If the qualified domestic corporation does not have an 
        election to use the method described in section 936(h)(5)(C)(ii) 
        (relating to profit split) in effect for the taxable year, the 
        amount of the qualified possession income taxes for the taxable 
        year allocable to nonsheltered income.

    ``(e) Administrative Provisions.--For purposes of this title--
            ``(1) the provisions of section 936 (including any 
        applicable election thereunder) shall apply in the same manner 
        as if the credit under this section were a credit under section 
        936(a)(1)(A) for a domestic corporation to which section 
        936(a)(4)(A) applies,
            ``(2) the credit under this section shall be treated in the 
        same manner as the credit under section 936, and
            ``(3) a corporation to which this section applies shall be 
        treated in the same manner as if it were a corporation electing 
        the application of section 936.

    ``(f) Definitions.--For purposes of this section, any term used in 
this section which is also used in section 936 shall have the same 
meaning given such term by section 936.
    ``(g) Application of Section.--This section shall apply to taxable 
years beginning after December 31, 1995, and before January 1, 2006.''.
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 55(c) is amended by 
                striking ``and the section 936 credit allowable under 
                section 27(b)'' and inserting ``, the section 936 credit 
                allowable under section 27(b), and the Puerto Rican 
                economic activity credit under section 30A''.
                    (B) Subclause (I) of section 56(g)(4)(C)(ii) is 
                amended--
                          (i) by inserting ``30A,'' before ``936'', and
                          (ii) by striking ``and (i)'' and inserting ``, 
                      (i), 
                      and (j)''.

[[Page 110 STAT. 1833]]

                    (C) Clause (iii) of section 56(g)(4)(C) is amended 
                by adding at the end the following new subclause:
                                    ``(VI) Application to section 30a 
                                corporations.--References in this clause 
                                to section 936 shall be treated as 
                                including references to section 30A.''.
                    (D) Subsection (b) of section 59 is amended by 
                striking ``section 936,'' and all that follows and 
                inserting ``section 30A or 936, alternative minimum 
                taxable income shall not include any income with respect 
                to which a credit is determined under section 30A or 
                936.''.
                    (E) The table of sections for subpart B of part IV 
                of subchapter A of chapter 1 is amended by adding at the 
                end the following new item:

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

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

                      ``Subpart B--Other Credits''.

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

    (c) Effective <<NOTE: 26 USC 30A note.>>  Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 1995.
            (2) Special rule for qualified possession source investment 
        income.--The amendments made by this section shall not apply to 
        qualified possession source investment income received or 
        accrued before July 1, 1996, without regard to the taxable year 
        in which received or accrued.
            (3) Special transition rule for payment of estimated tax 
        installment.--In determining the amount of any installment due 
        under section 6655 of the Internal Revenue Code of 1986 after 
        the date of the enactment of this Act and before October 1, 
        1996, only \1/2\ of any increase in tax (for the taxable year 
        for which such installment is made) by reason of the amendments 
        made by subsections (a) and (b) shall be taken into account. Any 
        reduction in such installment by reason of the preceding 
        sentence shall be recaptured by increasing the next required 
        installment for such year by the amount of such reduction.
SEC. 1602. REPEAL OF EXCLUSION FOR INTEREST ON LOANS USED TO 
                          ACQUIRE EMPLOYER SECURITIES.

    (a) In General.--Section 133 (relating to interest on certain loans 
used to acquire employer securities) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subparagraph (B) of section 291(e)(1) is amended 
        by striking clause (iv) and by redesignating clause (v) as 
        clause (iv).
            (2) Section 812 is amended by striking subsection (g).
            (3) Paragraph (5) of section 852(b) is amended by striking 
        subparagraph (C).

[[Page 110 STAT. 1834]]

            (4) Paragraph (2) of section 4978(b) is amended by striking 
        subparagraph (A) and all that follows and inserting the 
        following:
                    ``(A) first from qualified securities to which 
                section 1042 applied acquired during the 3-year period 
                ending on the date of the disposition, beginning with 
                the securities first so acquired, and
                    ``(B) then from any other employer securities.
        If subsection (d) applies to a disposition, the disposition 
        shall be treated as made from employer securities in the 
        opposite order of the preceding sentence.''.
            (5)(A) Section 4978B (relating to tax on disposition of 
        employer securities to which section 133 applied) is hereby 
        repealed.
            (B) The table of sections for chapter 43 is amended by 
        striking the item relating to section 4978B.
            (6) Subsection (e) of section 6047 is amended by striking 
        paragraphs (1), (2), and (3) and inserting the following new 
        paragraphs:
            ``(1) any employer maintaining, or the plan administrator 
        (within the meaning of section 414(g)) of, an employee stock 
        ownership plan which holds stock with respect to which section 
        404(k) applies to dividends paid on such stock, or
            ``(2) both such employer or plan administrator,''.
            (7) Subsection (f) of section 7872 is amended by striking 
        paragraph (12).
            (8) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        133.

    (c) Effective <<NOTE: 26 USC 133 note.>>  Date.--
            (1) In general.--The amendments made by this section shall 
        apply to loans made after the date of the enactment of this Act.
            (2) Refinancings.--The amendments made by this section shall 
        not apply to loans made after the date of the enactment of this 
        Act to refinance securities acquisition loans (determined 
        without regard to section 133(b)(1)(B) of the Internal Revenue 
        Code of 1986, as in effect on the day before the date of the 
        enactment of this Act) made on or before such date or to 
        refinance loans described in this paragraph if--
                    (A) the refinancing loans meet the requirements of 
                section 133 of such Code (as so in effect),
                    (B) immediately after the refinancing the principal 
                amount of the loan resulting from the refinancing does 
                not exceed the principal amount of the refinanced loan 
                (immediately before the refinancing), and
                    (C) the term of such refinancing loan does not 
                extend beyond the last day of the term of the original 
                securities acquisition loan.
        For purposes of this paragraph, the term ``securities 
        acquisition loan'' includes a loan from a corporation to an 
        employee stock ownership plan described in section 133(b)(3) of 
        such Code (as so in effect).
            (3) Exception.--Any loan made pursuant to a binding written 
        contract in effect before June 10, 1996, and at all times 
        thereafter before such loan is made, shall be treated

[[Page 110 STAT. 1835]]

        for purposes of paragraphs (1) and (2) as a loan made on or 
        before the date of the enactment of this Act.
SEC. 1603. CERTAIN AMOUNTS DERIVED FROM FOREIGN CORPORATIONS 
                          TREATED AS UNRELATED BUSINESS TAXABLE 
                          INCOME.

    (a) General Rule.--Subsection (b) of section 512 (relating to 
modifications) is amended by adding at the end the following new 
paragraph:
            ``(17) Treatment of certain amounts derived from 
        foreign corporations.--
                    ``(A) In general.--Notwithstanding paragraph (1), 
                any amount included in gross income under section 
                951(a)(1)(A) shall be included as an item of gross 
                income derived from an unrelated trade or business to 
                the extent the amount so included is attributable to 
                insurance income (as defined in section 953) which, if 
                derived directly by the organization, would be treated 
                as gross income from an unrelated trade or business. 
                There shall be allowed all deductions directly connected 
                with amounts included in gross income under the 
                preceding sentence.
                    ``(B) Exception.--
                          ``(i) In general.--Subparagraph (A) shall not 
                      apply to income attributable to a policy of 
                      insurance or reinsurance with respect to which the 
                      person (directly or indirectly) insured is--
                                    ``(I) such organization,
                                    ``(II) an affiliate of such 
                                organization which is exempt from tax 
                                under section 501(a), or
                                    ``(III) a director or officer of, or 
                                an individual who (directly or 
                                indirectly) performs services for, such 
                                organization or affiliate but only if 
                                the insurance covers primarily risks 
                                associated with the performance of 
                                services in connection with such 
                                organization or affiliate.
                          ``(ii) Affiliate.--For purposes of this 
                      subparagraph--
                                    ``(I) In general.--The determination 
                                as to whether an entity is an affiliate 
                                of an organization shall be made under 
                                rules similar to the rules of section 
                                168(h)(4)(B).
                                    ``(II) Special Rule.--Two or more 
                                organizations (and any affiliates of 
                                such organizations) shall be treated as 
                                affiliates if such organizations are 
                                colleges or universities described in 
                                section 170(b)(1)(A)(ii) or 
                                organizations described in section 
                                170(b)(1)(A)(iii) and participate in an 
                                insurance arrangement that provides for 
                                any profits from such arrangement to be 
                                returned to the policyholders in their 
                                capacity as such.
                    ``(C) Regulations.--The Secretary shall prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph, including 
                regulations for the application of this paragraph in the 
                case of income paid through 1 or more entities or 
                between 2 or more chains of entities.''.

[[Page 110 STAT. 1836]]

    (b) Effective <<NOTE: 26 USC 512 note.>>  Date.--The amendment made 
by this section shall apply to amounts included in gross income in any 
taxable year beginning after December 31, 1995.

SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD.

    (a) General Rule.--Section 167 (relating to depreciation) is amended 
by redesignating subsection (g) as subsection (h) and by inserting after 
subsection (f) the following new subsection:

    ``(g) Depreciation Under Income Forecast Method.--
            ``(1) In general.--If the depreciation deduction allowable 
        under this section to any taxpayer with respect to any property 
        is determined under the income forecast method or any similar 
        method--
                    ``(A) the income from the property to be taken into 
                account in determining the depreciation deduction under 
                such method shall be equal to the amount of income 
                earned in connection with the property before the close 
                of the 10th taxable year following the taxable year in 
                which the property was placed in service,
                    ``(B) the adjusted basis of the property shall only 
                include amounts with respect to which the requirements 
                of section 461(h) are satisfied,
                    ``(C) the depreciation deduction under such method 
                for the 10th taxable year beginning after the taxable 
                year in which the property was placed in service shall 
                be equal to the adjusted basis of such property as of 
                the beginning of such 10th taxable year, and
                    ``(D) such taxpayer shall pay (or be entitled to 
                receive) interest computed under the look-back method of 
                paragraph (2) for any recomputation year.
            ``(2) Look-back method.--The interest computed under the 
        look-back method of this paragraph for any recomputation year 
        shall be determined by--
                    ``(A) first determining the depreciation deductions 
                under this section with respect to such property which 
                would have been allowable for prior taxable years if the 
                determination of the amounts so allowable had been made 
                on the basis of the sum of the following (instead of the 
                estimated income from such property)--
                          ``(i) the actual income earned in connection 
                      with such property for periods before the close of 
                      the recomputation year, and
                          ``(ii) an estimate of the future income to be 
                      earned in connection with such property for 
                      periods after the recomputation year and before 
                      the close of the 10th taxable year following the 
                      taxable year in which the property was placed in 
                      service,
                    ``(B) second, determining (solely for purposes of 
                computing such interest) the overpayment or underpayment 
                of tax for each such prior taxable year which would 
                result solely from the application of subparagraph (A), 
                and
                    ``(C) then using the adjusted overpayment rate (as 
                defined in section 460(b)(7)), compounded daily, on the 
                overpayment or underpayment determined under 
                subparagraph (B).
        For purposes of the preceding sentence, any cost incurred after 
        the property is placed in service (which is not treated as a

[[Page 110 STAT. 1837]]

        separate property under paragraph (5)) shall be taken into 
        account by discounting (using the Federal mid-term rate 
        determined under section 1274(d) as of the time such cost is 
        incurred) such cost to its value as of the date the property is 
        placed in service. The taxpayer may elect with respect to any 
        property to have the preceding sentence not apply to such 
        property.
            ``(3) Exception from look-back method.--Paragraph (1)(D) 
        shall not apply with respect to any property which had a cost 
        basis of $100,000 or less.
            ``(4) Recomputation year.--For purposes of this subsection, 
        except as provided in regulations, the term `recomputation year' 
        means, with respect to any property, the 3d and the 10th taxable 
        years beginning after the taxable year in which the property was 
        placed in service, unless the actual income earned in connection 
        with the property for the period before the close of such 3d or 
        10th taxable year is within 10 percent of the income earned in 
        connection with the property for such period which was taken 
        into account under paragraph (1)(A).
            ``(5) Special rules.--
                    ``(A) Certain costs treated as separate property.--
                For purposes of this subsection, the following costs 
                shall be treated as separate properties:
                          ``(i) Any costs incurred with respect to any 
                      property after the 10th taxable year beginning 
                      after the taxable year in which the property was 
                      placed in service.
                          ``(ii) Any costs incurred after the property 
                      is placed in service and before the close of such 
                      10th taxable year if such costs are significant 
                      and give rise to a significant increase in the 
                      income from the property which was not included in 
                      the estimated income from the property.
                    ``(B) Syndication income from television series.--In 
                the case of property which
is 1 or more episodes in a television series, income from syndicating 
such series shall not be required to be taken into account under this 
subsection before the earlier of--
                          ``(i) the 4th taxable year beginning after the 
                      date the first episode in such series is placed in 
                      service, or
                          ``(ii) the earliest taxable year in which the 
                      taxpayer has an arrangement relating to the future 
                      syndication of such series.
                    ``(C) Special rules for financial exploitation of 
                characters, etc.--For purposes of this subsection, in 
                the case of television and motion picture films, the 
                income from the
property shall include income from the exploitation of characters, 
designs, scripts, scores, and other incidental income associated with 
such films, but only to the extent that such income is earned in 
connection with the ultimate use of such items by, or the ultimate sale 
of merchandise to, persons who are not related persons 
(within the meaning of section 267(b)) to the taxpayer.
                    ``(D) Collection of interest.--For purposes of 
                subtitle F (other than sections 6654 and 6655), any 
                interest required to be paid by the taxpayer under 
                paragraph (1)

[[Page 110 STAT. 1838]]

                for any recomputation year shall be treated as an 
                increase in the tax imposed by this chapter for such 
                year.
                    ``(E) Determinations.--For purposes of paragraph 
                (2), determinations of the amount of income earned in 
                connection with any property shall be made in the same 
                manner as for purposes of applying the income forecast 
                method; except that any income from the disposition of 
                such property shall be taken into account.
                    ``(F) Treatment of pass-thru entities.--Rules 
                similar to the rules of section 460(b)(4) shall apply 
                for purposes of this subsection.''

    (b) Effective <<NOTE: 26 USC 167 note.>>  Date.--
            (1) In general.--The amendment made by subsection (a) shall 
        apply to property placed in service after September 13, 1995.
            (2) Binding contracts.--The amendment made by subsection (a) 
        shall not apply to any property produced or acquired by the 
        taxpayer pursuant to a written contract which was binding on 
        September 13, 1995, and at all times thereafter before such 
        production or acquisition.
            (3) Underpayments of income tax.--No addition to tax shall 
        be made under section 6662 of such Code as a result of the 
        application of subsection (d) of that section (relating to 
        substantial understatements of income tax) with respect to any 
        underpayment of income tax for any taxable year ending before 
        such date of enactment, to the extent such underpayment was 
        created or increased by the amendments made by subsection (a).
SEC. 1605. REPEAL OF EXCLUSION FOR PUNITIVE DAMAGES AND FOR 
                          DAMAGES NOT ATTRIBUTABLE TO PHYSICAL 
                          INJURIES OR SICKNESS.

    (a) In General.--Paragraph (2) of section 104(a) (relating to 
compensation for injuries or sickness) is amended to read as follows:
            ``(2) the amount of any damages (other than punitive 
        damages) received (whether by suit or agreement and whether as 
        lump sums or as periodic payments) on account of personal 
        physical injuries or physical sickness;''.

    (b) Emotional Distress as Such Treated as Not Physical Injury or 
Physical Sickness.--Section 104(a) is amended by striking the last 
sentence and inserting the following new sentence: ``For purposes of 
paragraph (2), emotional distress shall not be treated as a physical 
injury or physical sickness. The preceding sentence shall not apply to 
an amount of damages not in excess of the amount paid for medical care 
(described in subparagraph (A) or (B) of section 213(d)(1)) attributable 
to emotional distress.''.

    (c) Application of Prior Law for States in Which Only Punitive 
Damages May Be Awarded in Wrongful Death Actions.--Section 104 is 
amended by redesignating subsection (c) as subsection (d) and by 
inserting after subsection (b) the following new subsection:
    ``(c) Application of Prior Law in Certain Cases.--The phrase `(other 
than punitive damages)' shall not apply to punitive damages awarded in a 
civil action--
            ``(1) which is a wrongful death action, and
            ``(2) with respect to which applicable State law (as in 
        effect on September 13, 1995 and without regard to any 
        modification

[[Page 110 STAT. 1839]]

        after such date) provides, or has been construed to provide by a 
        court of competent jurisdiction pursuant to a decision issued on 
        or before September 13, 1995, that only punitive damages may be 
        awarded in such an action.

This subsection shall cease to apply to any civil action filed on or 
after the first date on which the applicable State
law ceases to provide (or is no longer construed to provide) the 
treatment described in paragraph (2).''.

    (d) Effective <<NOTE: 26 USC 104 note.>>  Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to amounts received 
        after the date of the enactment of this Act, in taxable years 
        ending after such date.
            (2) Exception.--The amendments made by this section shall 
        not apply to any amount received under a written binding 
        agreement, court decree, or mediation award in effect on (or 
        issued on or before) September 13, 1995.
SEC. 1606. REPEAL OF DIESEL FUEL TAX REBATE TO PURCHASERS OF 
                          DIESEL-POWERED AUTOMOBILES AND LIGHT 
                          TRUCKS.

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

    (c) Effective <<NOTE: 26 USC 34 note.>>  Date.--The amendments made 
by this section shall apply to vehicles purchased after the date of the 
enactment of this Act.
SEC. 1607. EXTENSION AND PHASEDOWN OF LUXURY PASSENGER AUTOMOBILE 
                          TAX.

    (a) Extension.--Subsection (f) of section 4001 is amended by 
striking ``1999'' and inserting ``2002''.
    (b) Phasedown.--Section 4001 is amended by redesignating subsection 
(f) (as amended by subsection (a) of this section) as subsection (g) and 
by inserting after subsection (e) the following new subsection:
    ``(f) Phasedown.--For sales occurring in calendar years after 1995 
and before 2003, subsection (a) shall be applied by substituting for `10 
percent' the percentage determined in accordance with the following 
table:
``If the calendar year is:                            The percentage is:
  1996..................................................9 percent       
  1997..................................................8 percent       
  1998..................................................7 percent       
  1999..................................................6 percent       
  2000..................................................5 percent       
  2001..................................................4 percent       
  2002................................................3 percent     .''.

[[Page 110 STAT. 1840]]

    (c) Effective <<NOTE: 26 USC 4001 note.>>  Date.--The amendments 
made by this section shall apply with respect to sales occurring after 
the date which is 7 days after the date of the enactment of this Act.
SEC. 1608. TERMINATION OF FUTURE TAX-EXEMPT BOND FINANCING FOR 
                          LOCAL FURNISHERS OF ELECTRICITY AND GAS.

    (a) In General.--Section 142(f) (relating to local furnishing of 
electric energy or gas) is amended by adding at the end the following 
new paragraphs:
            ``(3) Termination of future financing.--For purposes of this 
        section, no bond may be issued as part of an issue described in 
        subsection (a)(8) with respect to a facility for the local 
        furnishing of electric energy or gas on or after the date of the 
        enactment of this paragraph unless--
                    ``(A) the facility will--
                          ``(i) be used by a person who is engaged in 
                      the local furnishing of that energy source on 
                      January 1, 1997, and
                          ``(ii) be used to provide service within the 
                      area served by such person on January 1, 1997, (or 
                      within a county or city any portion of which is 
                      within such area), or
                    ``(B) the facility will be used by a successor in 
                interest to such person for the same use and within the 
                same service area as described in subparagraph (A).
            ``(4) Election to terminate tax-exempt bond financing by 
        certain furnishers.--
                    ``(A) In general.--In the case of a facility 
                financed with bonds issued before the date of the 
                enactment of this paragraph which would cease to be tax-
                exempt by reason of the failure to meet the local 
                furnishing requirement of subsection (a)(8) as a result 
                of a service area expansion, such bonds shall not cease 
                to be tax-exempt bonds (and section 150(b)(4) shall not 
                apply) if the person engaged in such local furnishing by 
                such facility makes an election described in 
                subparagraph (B).
                    ``(B) Election.--An election is described in this 
                subparagraph if it is an election made in such manner as 
                the Secretary prescribes, and such person (or its 
                predecessor in interest) agrees that--
                          ``(i) such election is made with respect to 
                      all facilities for the local furnishing of 
                      electric energy or gas, or both, by such person,
                          ``(ii) no bond exempt from tax under section 
                      103 and described in subsection (a)(8) may be 
                      issued on or after the date of the enactment of 
                      this paragraph with respect to all such facilities 
                      of such person,
                          ``(iii) any expansion of the service area--
                                    ``(I) is not financed with the 
                                proceeds of any exempt facility bond 
                                described in subsection (a)(8), and
                                    ``(II) is not treated as a 
                                nonqualifying use under the rules of 
                                paragraph (2), and
                          ``(iv) all outstanding bonds used to finance 
                      the facilities for such person are redeemed not 
                      later than 6 months after the later of--

[[Page 110 STAT. 1841]]

                                    ``(I) the earliest date on which 
                                such bonds may be redeemed, or
                                    ``(II) the date of the election.
                    ``(C) Related persons.--For purposes of this 
                paragraph, the term `person' includes a group of related 
                persons (within the meaning of section 144(a)(3)) which 
                includes such person.''.

    (b) No <<NOTE: 26 USC 142 note.>>  Inference With Respect To 
Outstanding Bonds.--The use of the term ``person'' in section 142(f)(3) 
of the Internal Revenue Code of 1986, as added by subsection (a), shall 
not be construed to affect the tax-exempt status of interest on any 
bonds issued before the date of the enactment of this Act.
SEC. 1609. EXTENSION OF AIRPORT AND AIRWAY TRUST FUND EXCISE 
                          TAXES.

    (a) Fuel Tax.--
            (1) Subparagraph (A) of section 4091(b)(3) is amended to 
        read as follows:
                    ``(A) The rate of tax specified in paragraph (1) 
                shall be 4.3 cents per gallon--
                          ``(i) after December 31, 1995, and before the 
                      date which is 7 calendar days after the date of 
                      the enactment of the Small Business Job Protection 
                      Act of 1996, and
                          ``(ii) after December 31, 1996.''.
            (2) Section 4081(d) is amended--
                    (A) by adding at the end the following new 
                paragraph:
            ``(3) Aviation gasoline.--After December 31, 1996, the rate 
        of tax specified in subsection (a)(2)(A)(i) on aviation gasoline 
        shall be 4.3 cents per gallon.'', and
                    (B) by inserting ``(other than the tax on aviation 
                gasoline)'' after ``subsection (a)(2)(A)''.
            (3) Section 4041(c)(5) is amended by inserting ``, and 
        during the period beginning on the date which is 7 calendar days 
        after the date of the enactment of the Small Business Job 
        Protection Act of 1996 and ending on December 31, 1996'' after 
        ``December 31, 1995''.

    (b) Ticket Taxes.--Sections 4261(g) and 4271(d) are each amended by 
striking ``January 1, 1996'' and inserting ``January 1, 1996, and to 
transportation beginning on or after the date which is 7 calendar days 
after the date of the enactment of the Small Business Job Protection Act 
of 1996 and before January 1, 1997''.
    (c) Transfers to Airport and Airway Trust Fund.--
            (1) Subsection (b) of section 9502 is amended by striking 
        ``January 1, 1996'' each place it appears and inserting 
        ``January 1, 1997''.
            (2) Paragraph (3) of section 9502(f) is amended to read as 
        follows:
            ``(3) Termination.--Notwithstanding the preceding provisions 
        of this subsection, the Airport and Airway Trust Fund financing 
        rate shall be zero with respect to--
                    ``(A) taxes imposed after December 31, 1995, and 
                before the date which is 7 calendar days after the date 
                of the enactment of the Small Business Job Protection 
                Act of 1996, and
                    ``(B) taxes imposed after December 31, 1996.''.

[[Page 110 STAT. 1842]]

            (3) Subsection (d) of section 9502 is amended by adding at 
        the end the following new paragraph:
            ``(5) Transfers from airport and airway trust fund on 
        account of refunds of taxes on transportation by air.--The 
        Secretary of the Treasury shall pay from time to time from the 
        Airport and Airway Trust Fund into the general fund of the 
        Treasury amounts equivalent to the amounts paid after December 
        31, 1995, under section 6402 (relating to authority to make 
        credits or refunds) or section 6415 (relating to credits or 
        refunds to persons who collected certain taxes) in respect of 
        taxes under sections 4261 and 4271.''.

    (d) Excise Tax Exemption for Certain Emergency Medical 
Transportation by Air Ambulance.--Subsection (f) of section 4261 
(relating to imposition of tax on transportation by air) is amended to 
read as follows:
    ``(f) Exemption for Air Ambulances Providing Certain Emergency 
Medical Transportation.--No tax shall be imposed under this section or 
section 4271 on any air transportation for the purpose of providing 
emergency medical services--
            ``(1) by helicopter, or
            ``(2) by a fixed-wing aircraft equipped for and exclusively 
        dedicated to acute care emergency medical services.''.

    (e) Exemption for Certain Helicopter Uses.--Subsection (e) of 
section 4261 is amended by adding at the end the following new sentence: 
``In the case of helicopter transportation described in paragraph (1), 
this subsection shall be applied by treating each flight segment as a 
distinct flight.''.
    (f) Flight-By-Flight Determination of Availability for Hire for 
Affiliated Groups.--Section 4282 is amended by redesignating subsection 
(b) as subsection (c) and by inserting after subsection (a) the 
following new subsection:
    ``(b) Availability for Hire.--For purposes of subsection (a), the 
determination of whether an aircraft is available for hire by persons 
who are not members of an affiliated group shall be made on a flight-by-
flight basis.''
    (g) Consolidation of Taxes on Aviation Gasoline.--
            (1) In General.--Subparagraph (A) of section 4081(a)(2) 
        (relating to imposition of tax on gasoline and diesel fuel) is 
        amended by redesignating clause (ii) as clause (iii) and by 
        striking clause (i) and inserting the following:
                          ``(i) in the case of gasoline other than 
                      aviation gasoline, 18.3 cents per gallon,
                          ``(ii) in the case of aviation gasoline, 19.3 
                      cents per gallon, and''.
            (2) Termination.--Subsection (d) of section 4081 is 
        amended by redesignating paragraph (2) as paragraph (3) and by 
        inserting after paragraph (1) the following new paragraph:
            ``(2) Aviation gasoline.--On and after January 1, 1997, the 
        rate specified in subsection (a)(2)(A)(ii) shall be 4.3 cents 
        per gallon.''
            (3) Repeal of Retail Level Tax.--
                    (A) Subsection (c) of section 4041 is amended by 
                striking paragraphs (2) and (3) and by redesignating 
                paragraphs (4) and (5) as paragraphs (2) and (3), 
                respectively.

[[Page 110 STAT. 1843]]

                    (B) Paragraph (3) of section 4041(c), as 
                redesignated by paragraph (1), is amended by striking 
                ``paragraphs (1) and (2)'' and inserting ``paragraph 
                (1)''.
            (4) Conforming Amendments.--
                    (A) Paragraph (1) of section 4041(k) is amended by 
                adding ``and'' at the end of subparagraph (A), by 
                striking ``, and'' at the end of subparagraph (B) and 
                inserting a period, and by striking subparagraph (C).
                    (B) Paragraph (1) of section 4081(d) is amended by 
                striking ``each rate of tax specified in subsection 
                (a)(2)(A)'' and inserting ``the rates of tax specified 
                in clauses (i) and (iii) of subsection (a)(2)(A)''.
                    (C) Sections 6421(f)(2)(A) and 9502(f)(1)(A) are 
                each
                amended by striking ``section 4041(c)(4)'' and inserting 
                ``section 4041(c)(2)''.
                    (D) Paragraph (2) of section 9502(b) is amended by 
                striking ``14 cents'' and inserting ``15 cents''.

    (h) Floor <<NOTE: 26 USC 4091 note.>>  Stocks Taxes on Aviation 
Fuel.--
            (1) Imposition of tax.--In the case of aviation fuel on 
        which tax was imposed under section 4091 of the Internal Revenue 
        Code of 1986 before the tax-increase date described in paragraph 
        (3)(A)(i) and which is held on such date by any person, there is 
        hereby imposed a floor stocks tax of 17.5 cents per gallon.
            (2) Liability for tax and method of payment.--
                    (A) Liability for tax.--A person holding aviation 
                fuel on a tax-increase date to which the tax imposed by 
                paragraph (1) applies shall be liable for such tax.
                    (B) Method of payment.--The tax imposed by paragraph 
                (1) shall be paid in such manner as the Secretary shall 
                prescribe.
                    (C) Time for payment.--The tax imposed by paragraph 
                (1) with respect to any tax-increase date shall be paid 
                on or before the first day of the 7th month beginning 
                after such tax-increase date.
            (3) Definitions.--For purposes of this subsection--
                    (A) Tax increase date.--The term ``tax-increase 
                date'' means the date which is 7 calendar days after the 
                date of the enactment of this Act.
                    (B) Aviation fuel.--The term ``aviation fuel'' has 
                the meaning given such term by section 4093 of such 
                Code.
                    (C) Held by a person.--Aviation fuel shall be 
                considered as ``held by a person'' if title thereto has 
                passed to such person (whether or not delivery to the 
                person has been made).
                    (D) Secretary.--The term ``Secretary'' means the 
                Secretary of the Treasury or his delegate.
            (4) Exception for exempt uses.--The tax imposed by paragraph 
        (1) shall not apply to aviation fuel held by any person on any 
        tax-increase date exclusively for any use for which a credit or 
        refund of the entire tax imposed by section 4091 of such Code is 
        allowable for aviation fuel purchased on or after such tax-
        increase date for such use.
            (5) Exception for certain amounts of fuel.--
                    (A) In general.--No tax shall be imposed by 
                paragraph (1) on aviation fuel held on any tax-increase 
                date by any person if the aggregate amount of aviation 
                fuel

[[Page 110 STAT. 1844]]

                held by such person on such date does not exceed 2,000 
                gallons. The preceding sentence shall apply only if such 
                person submits to the Secretary (at the time and in the 
                manner required by the Secretary) such information as 
                the Secretary shall require for purposes of this 
                paragraph.
                    (B) Exempt fuel.--For purposes of subparagraph (A), 
                there shall not be taken into account fuel held by any 
                person which is exempt from the tax imposed by paragraph 
                (1) by reason of paragraph (4).
                    (C) Controlled groups.--For purposes of this 
                paragraph--
                          (i) Corporations.--
                                    (I) In general.--All persons treated 
                                as a controlled group shall be treated 
                                as 1 person.
                                    (II) Controlled group.--The term 
                                ``controlled group'' has the meaning 
                                given to such term by subsection (a) of 
                                section 1563 of such Code; except that 
                                for such purposes the phrase ``more than 
                                50 percent'' shall be substituted for 
                                the phrase ``at least 80 percent'' each 
                                place it appears in such subsection.
                          (ii) Nonincorporated persons under common 
                      control.--Under regulations prescribed by the 
                      Secretary, principles similar to the principles of 
                      clause (i) shall apply to a group of persons under 
                      common control where 1 or more of such persons is 
                      not a corporation.
            (6) Other law applicable.--All provisions of law, including 
        penalties, applicable with respect to the taxes imposed by 
        section 4091 of such Code shall, insofar as applicable and not 
        inconsistent with the provisions of this subsection, apply with 
        respect to the floor stock taxes imposed by paragraph (1) to the 
        same extent as if such taxes were imposed by such section 4091.

    (i) Effective <<NOTE: 26 USC 4041 note.>>  Date.--The amendments 
made by this section shall take effect on the 7th calendar day after the 
date of the enactment of this Act, except that the amendments made by 
subsection (b) shall not apply to any amount paid before such date.
SEC. 1610. BASIS ADJUSTMENT TO PROPERTY HELD BY CORPORATION WHERE 
                          STOCK IN CORPORATION IS REPLACEMENT 
                          PROPERTY UNDER INVOLUNTARY CONVERSION 
                          RULES.

    (a) In General.--Subsection (b) of section 1033 is amended to read 
as follows:
    ``(b) Basis of Property Acquired Through Involuntary Conversion.--
            ``(1) Conversions described in subsection (a)(1).--If the 
        property was acquired as the result of a compulsory or 
        involuntary conversion described in subsection (a)(1), the basis 
        shall be the same as in the case of the property so converted--
                    ``(A) decreased in the amount of any money received 
                by the taxpayer which was not expended in accordance 
                with the provisions of law (applicable to the year in 
                which such conversion was made) determining the taxable 
                status of the gain or loss upon such conversion, and
                    ``(B) increased in the amount of gain or decreased 
                in the amount of loss to the taxpayer recognized upon

[[Page 110 STAT. 1845]]

                such conversion under the law applicable to the year in 
                which such conversion was made.
            ``(2) Conversions described in subsection (a)(2).--In the 
        case of property purchased by the taxpayer in a transaction 
        described in subsection (a)(2) which resulted in the 
        nonrecognition of any part of the gain realized as the result of 
        a compulsory or involuntary conversion, the basis shall be the 
        cost of such property decreased in the amount of the gain not so 
        recognized; and if the property purchased consists of more than 
        1 piece of property, the basis determined under this sentence 
        shall be allocated to the purchased properties in proportion to 
        their respective costs.
            ``(3) Property held by corporation the stock of which is 
        replacement property.--
                    ``(A) In general.--If the basis of stock in a 
                corporation is decreased under paragraph (2), an amount 
                equal to such decrease shall also be applied to reduce 
                the basis of property held by the corporation at the 
                time the taxpayer acquired control (as defined in 
                subsection (a)(2)(E)) of such corporation.
                    ``(B) Limitation.--Subparagraph (A) shall not apply 
                to the extent that it would (but for this subparagraph) 
                require a reduction in the aggregate adjusted bases of 
                the property of the corporation below the taxpayer's 
                adjusted basis of the stock in the corporation 
                (determined immediately after such basis is decreased 
                under paragraph (2)).
                    ``(C) Allocation of basis reduction.--The decrease 
                required under subparagraph (A) shall be allocated--
                          ``(i) first to property which is similar or 
                      related in service or use to the converted 
                      property,
                          ``(ii) second to depreciable property (as 
                      defined in section 1017(b)(3)(B)) not described in 
                      clause (i), and
                          ``(iii) then to other property.
                    ``(D) Special rules.--
                          ``(i) Reduction not to exceed adjusted basis 
                      of property.--No reduction in the basis of any 
                      property under this paragraph shall exceed the 
                      adjusted basis of such property (determined 
                      without regard to such reduction).
                          ``(ii) Allocation of reduction among 
                      properties.--If more than 1 property is described 
                      in a clause of subparagraph (C), the reduction 
                      under this paragraph shall be allocated among such 
                      property in proportion to the adjusted bases of 
                      such property (as so determined).''.

    (b) Effective <<NOTE: 26 USC 1033 note.>>  Date.--The amendment made 
by this section shall apply to involuntary conversions occurring after 
the date of the enactment of this Act.
SEC. 1611. TREATMENT OF CERTAIN INSURANCE CONTRACTS ON RETIRED 
                          LIVES.

    (a) General Rule.--
            (1) Paragraph (2) of section 817(d) (defining variable 
        contract) is amended by striking ``or'' at the end of 
        subparagraph (A), by striking ``and'' at the end of subparagraph 
        (B) and

[[Page 110 STAT. 1846]]

        inserting ``or'', and by inserting after subparagraph (B) the 
        following new subparagraph:
                    ``(C) provides for funding of insurance on retired 
                lives as described in section 807(c)(6), and''.
            (2) Paragraph (3) of section 817(d) is amended by striking 
        ``or'' at the end of subparagraph (A), by striking the period at 
        the end of subparagraph (B) and inserting ``, or'', and by 
        inserting after subparagraph (B) the following new subparagraph:
                    ``(C) in the case of funds held under a contract 
                described in paragraph (2)(C), the amounts paid in, or 
                the amounts paid out, reflect the investment return and 
                the market value of the segregated asset account.''.

    (b) Effective <<NOTE: 26 USC 817 note.>>  Date.--The amendments made 
by this section shall apply to taxable years beginning after December 
31, 1995.

SEC. 1612. TREATMENT OF MODIFIED GUARANTEED CONTRACTS.

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

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

    ``(a) Computation of Reserves.--In the case of a modified guaranteed 
contract, clause (ii) of section 807(e)(1)(A) shall not apply.
    ``(b) Segregated Assets Under Modified Guaranteed Contracts Marked 
to Market.--
            ``(1) In general.--In the case of any life insurance 
        company, for purposes of this subtitle--
                    ``(A) Any gain or loss with respect to a segregated 
                asset shall be treated as ordinary income or loss, as 
                the case may be.
                    ``(B) If any segregated asset is held by such 
                company as of the close of any taxable year--
                          ``(i) such company shall recognize gain or 
                      loss as if such asset were sold for its fair 
                      market value on the last business day of such 
                      taxable year, and
                          ``(ii) any such gain or loss shall be taken 
                      into account for such taxable year.
                Proper adjustment shall be made in the amount of any 
                gain or loss subsequently realized for gain or loss 
                taken into account under the preceding sentence. The 
                Secretary may provide by regulations for the application 
                of this subparagraph at times other than the times 
                provided in this subparagraph.
            ``(2) Segregated asset.--For purposes of paragraph (1), the 
        term `segregated asset' means any asset held as part of a 
        segregated account referred to in subsection (d)(1) under a 
        modified guaranteed contract.

    ``(c) Special Rule in Computing Life Insurance Reserves.--For 
purposes of applying section 816(b)(1)(A) to any modified guaranteed 
contract, an assumed rate of interest shall include a rate of interest 
determined, from time to time, with reference to a market rate of 
interest.
    ``(d) Modified Guaranteed Contract Defined.--For purposes of this 
section, the term `modified guaranteed contract' means a contract not 
described in section 817--

[[Page 110 STAT. 1847]]

            ``(1) all or part of the amounts received under which are 
        allocated to an account which, pursuant to State law or 
        regulation, is segregated from the general asset accounts of the 
        company and is valued from time to time with reference to market 
        values,
            ``(2) which--
                    ``(A) provides for the payment of annuities,
                    ``(B) is a life insurance contract, or
                    ``(C) is a pension plan contract which is not a 
                life, accident, or health, property, casualty, or 
                liability contract,
            ``(3) for which reserves are valued at market for annual 
        statement purposes, and
            ``(4) which provides for a net surrender value or a 
        policyholder's fund (as defined in section 807(e)(1)).

If only a portion of a contract is not described in section 817, such 
portion shall be treated for purposes of this section as a separate 
contract.
    ``(e) Regulations.--The Secretary may prescribe regulations--
            ``(1) to provide for the treatment of market value 
        adjustments under sections 72, 7702, 7702A, and 807(e)(1)(B),
            ``(2) to determine the interest rates applicable under 
        sections 807(c)(3), 807(d)(2)(B), and 812 with respect to a 
        modified guaranteed contract annually, in a manner appropriate 
        for modified guaranteed contracts and, to the extent appropriate 
        for such a contract, to modify or waive the applicability of 
        section 811(d),
            ``(3) to provide rules to limit ordinary gain or loss 
        treatment to assets constituting reserves for modified 
        guaranteed contracts (and not other assets) of the company,
            ``(4) to provide appropriate treatment of transfers of 
        assets to and from the segregated account, and
            ``(5) as may be necessary or appropriate to carry out the 
        purposes of this section.''.

    (b) Clerical Amendment.--The table of sections for subpart E of part 
I of subchapter L of chapter 1 is amended by inserting after the item 
relating to section 817 the following new item:

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

    (c) Effective <<NOTE: 26 USC 817A note.>>  Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 1995.
            (2) Treatment of net adjustments.--Except as provided in 
        paragraph (3), in the case of any taxpayer required by the 
        amendments made by this section to change its calculation of 
        reserves to take into account market value adjustments and to 
        mark segregated assets to market for any taxable year--
                    (A) such changes shall be treated as a change in 
                method of accounting initiated by the taxpayer,
                    (B) such changes shall be treated as made with the 
                consent of the Secretary, and
                    (C) the adjustments required by reason of section 
                481 of the Internal Revenue Code of 1986, shall be taken 
                into account as ordinary income by the taxpayer for the 
                taxpayer's first taxable year beginning after December 
                31, 1995.
            (3) Limitation on loss recognition and on deduction for 
        reserve increases.--
                    (A) Limitation on loss recognition.--

[[Page 110 STAT. 1848]]

                          (i) In general.--The aggregate loss recognized 
                      by reason of the application of section 481 of the 
                      Internal Revenue Code of 1986 with respect to 
                      section 817A(b) of such Code (as added by this 
                      section) for the first taxable year of the 
                      taxpayer beginning after December 31, 1995, shall 
                      not exceed the amount included in the taxpayer's 
                      gross income for such year by reason of the excess 
                      (if any) of--
                                    (I) the amount of life insurance 
                                reserves as of the close of the prior 
                                taxable year, over
                                    (II) the amount of such reserves as 
                                of the beginning of such first taxable 
                                year,
                      to the extent such excess is attributable to 
                      subsection (a) of such section 817A. 
                      Notwithstanding the preceding sentence, the 
                      adjusted basis of each segregated asset shall be 
                      determined as if all such losses were recognized.
                          (ii) Disallowed loss allowed over period.--The 
                      amount of the loss which is not allowed under 
                      clause (i) shall be allowed ratably over the 
                      period of 7 taxable years beginning with the 
                      taxpayer's first taxable year beginning after 
                      December 31, 1995.
                    (B) Limitation on deduction for increase in 
                reserves.--
                          (i) In general.--The deduction allowed for the 
                      first taxable year of the taxpayer beginning after 
                      December 31, 1995, by reason of the application of 
                      section 481 of such Code with respect to section 
                      817A(a) of such Code (as added by this section) 
                      shall not exceed the aggregate built-in gain 
                      recognized by reason of the application of such 
                      section 481 with respect to section 817A(b) of 
                      such Code (as added by this section) for such 
                      first taxable year.
                          (ii) Disallowed deduction allowed over 
                      period.--The amount of the deduction which is 
                      disallowed under clause (i) shall be allowed 
                      ratably over the period of 7 taxable years 
                      beginning with the taxpayer's first taxable year 
                      beginning after December 31, 1995.
                          (iii) Built-in gain.--For purposes of this 
                      subparagraph, the built-in gain on an asset is the 
                      amount equal to the excess of--
                                    (I) the fair market value of the 
                                asset as of the beginning of the first 
                                taxable year of the taxpayer beginning 
                                after December 31, 1995, over
                                    (II) the adjusted basis of such 
                                asset as of 
                                such time.

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

    (a) Treatment of Contributions in Aid of Construction.--
            (1) In general.--Section 118 (relating to contributions to 
        the capital of a corporation) is amended--
                    (A) by redesignating subsection (c) as subsection 
                (e), and
                    (B) by inserting after subsection (b) the following 
                new subsections:

[[Page 110 STAT. 1849]]

    ``(c) Special Rules for Water and Sewerage Disposal 
Utilities.--
            ``(1) General rule.--For purposes of this section, the term 
        `contribution to the capital of the taxpayer' includes any 
        amount of money or other property received from any person 
        (whether or not a shareholder) by a regulated public utility 
        which provides water or sewerage disposal services if--
                    ``(A) such amount is a contribution in aid of con-
                struction,
                    ``(B) in the case of contribution of property other 
                than water or sewerage disposal facilities, such amount 
                meets the requirements of the expenditure rule of 
                paragraph (2), and
                    ``(C) such amount (or any property acquired or 
                constructed with such amount) is not included in the 
                taxpayer's rate base for ratemaking purposes.
            ``(2) Expenditure rule.--An amount meets the requirements of 
        this paragraph if--
                    ``(A) an amount equal to such amount is expended for 
                the acquisition or construction of tangible property 
                described in section 1231(b)--
                          ``(i) which is the property for which the 
                      contribu-
                      tion was made or is of the same type as such 
                      property, and
                          ``(ii) which is used predominantly in the 
                      trade or business of furnishing water or sewerage 
                      disposal 
                      services,
                    ``(B) the expenditure referred to in subparagraph 
                (A) occurs before the end of the second taxable year 
                after the year in which such amount was received, and
                    ``(C) accurate records are kept of the amounts 
                contributed and expenditures made, the expenditures to 
                which contributions are allocated, and the year in which 
                the contributions and expenditures are received and 
                made.
            ``(3) Definitions.--For purposes of this subsection--
                    ``(A) Contribution in aid of construction.--The term 
                `contribution in aid of construction' shall be defined 
                by regulations prescribed by the Secretary, except that 
                such term shall not include amounts paid as service 
                charges for starting or stopping services.
                    ``(B) Predominantly.--The term `predominantly' means 
                80 percent or more.
                    ``(C) Regulated public utility.--The term `regulated 
                public utility' has the meaning given such term by 
                section 7701(a)(33), except that such term shall not 
                include any utility which is not required to provide 
                water or sewerage disposal services to members of the 
                general public in its service area.
            ``(4) Disallowance of deductions and credits; adjusted 
        basis.--Notwithstanding any other provision of this subtitle, no 
        deduction or credit shall be allowed for, or by reason of, any 
        expenditure which constitutes a contribution in aid of 
        construction to which this subsection applies. The adjusted 
        basis of any property acquired with contributions in aid of 
        construction to which this subsection applies shall be zero.

[[Page 110 STAT. 1850]]

    ``(d) Statute of Limitations.--If the taxpayer for any taxable year 
treats an amount as a contribution to the capital of the taxpayer 
described in subsection (c), then--
            ``(1) the statutory period for the assessment of any 
        deficiency attributable to any part of such amount shall not 
        expire before the expiration of 3 years from the date the 
        Secretary is notified by the taxpayer (in such manner as the 
        Secretary may prescribe) of--
                    ``(A) the amount of the expenditure referred to in 
                subparagraph (A) of subsection (c)(2),
                    ``(B) the taxpayer's intention not to make the 
                expenditures referred to in such subparagraph, or
                    ``(C) a failure to make such expenditure within the 
                period described in subparagraph (B) of subsection 
                (c)(2), and
            ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of any 
        other law or rule of law which would otherwise prevent such 
        assessment.''.
            (2) Conforming amendment.--Section 118(b) is amended by 
        inserting ``except as provided in subsection (c),'' before ``the 
        term''.
            (3) Effective <<NOTE: 26 USC 118 note.>>  date.--The 
        amendments made by this subsection shall apply to amounts 
        received after June 12, 1996.

    (b) Recovery Method and Period for Water Utility 
Property.--
            (1) Requirement to use straight line method.--Section 
        168(b)(3) is amended by adding at the end the following new 
        subparagraph:
                    ``(F) Water utility property described in subsection 
                (e)(5).''.
            (2) 25-year recovery period.--The table contained in section 
        168(c)(1) is amended by inserting the following item after the 
        item relating to 20-year property:

``Water utility property                                     25 years''.

            (3) Water utility property.--
                    (A) In general.--Section 168(e) is amended by adding 
                at the end the following new paragraph:
            ``(5) Water utility property.--The term `water utility 
        property' means property--
                    ``(A) which is an integral part of the gathering, 
                treatment, or commercial distribution of water, and 
                which, without regard to this paragraph, would be 20-
                year property, and
                    ``(B) any municipal sewer.''.
                    (B) Conforming amendments.--Section 168 is 
                amended--
                          (i) by striking subparagraph (F) of subsection 
                      (e)(3), and
                          (ii) by striking the item relating to 
                      subparagraph (F) in the table in subsection 
                      (g)(3).
            (4) Alternative system.--Clause (iv) of section 168(g)(2)(C) 
        is amended by inserting ``or water utility property'' after 
        ``tunnel bore''.
            (5) Effective <<NOTE: 26 USC 168 note.>>  date.--The 
        amendments made by this subsection shall apply to property 
        placed in service after June 12, 1996, other than property 
        placed in service pursuant to

[[Page 110 STAT. 1851]]

        a binding contract in effect before June 10, 1996, and at all 
        times thereafter before the property is placed in service.
SEC. 1614. ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP 
                          FUNDING CORPORATION.

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

[[Page 110 STAT. 1852]]

                    ``(D) Senior stock.--For purposes of this paragraph, 
                the term `senior stock' means stock--
                          ``(i) which participates pro rata and fully in 
                      the equity value of the corporation with all other 
                      common stock of the corporation but which has the 
                      right to payment of liquidation proceeds prior to 
                      payment of liquidation proceeds in respect of 
                      other common stock of the corporation;
                          ``(ii) which has a fixed right upon 
                      liquidation and upon redemption to an amount equal 
                      to the 
                      greater of--
                                    ``(I) the fair market value of such 
                                stock on the date of liquidation or 
                                redemption (whichever is applicable); or
                                    ``(II) the fair market value of all 
                                assets transferred in exchange for such 
                                stock and reduced by the amount of all 
                                liabilities of the corporation which has 
                                made an election under this paragraph 
                                assumed by the transferee corporation in 
                                such transfer;
                          ``(iii) the holder of which has the right to 
                      require the transferee corporation to redeem on a 
                      date that is not later than 10 years after the 
                      date on which an election under this paragraph was 
                      made and pursuant to such election such stock was 
                      issued; and
                          ``(iv) in respect of which, during the time 
                      such stock is outstanding, there is not 
                      outstanding any equity interest in the corporation 
                      having any liquidation, redemption or dividend 
                      rights in the corporation which are superior to 
                      those of such stock.
                    ``(E) Independent member.--The term `independent 
                member' means a member of the board of directors of the 
                issuer who (except for services as a member of such 
                board) receives no compensation directly or indirectly--
                          ``(i) for services performed in connection 
                      with such transferee corporation, or
                          ``(ii) for services as a member of the board 
                      of directors or as an officer of such transferee 
                      corporation.
                For purposes of clause (ii), the term `officer' includes 
                any individual having powers or responsibilities similar 
                to those of officers.
                    ``(F) Coordination with certain private foundation 
                taxes.--For purposes of sections 4942 (relating to the 
                excise tax on a failure to distribute income) and 4943 
                (relating to the excise tax on excess business 
                holdings), the transferee corporation referred to in 
                subparagraph (B) shall be treated as a functionally 
                related business (within the meaning of section 
                4942(j)(4)) with respect to the issuer during the period 
                commencing with the date on which an election is made 
                under this paragraph and ending on the date that is the 
                earlier of--
                          ``(i) the last day of the last taxable year 
                      for which more than 50 percent of the gross income 
                      of such transferee corporation is derived from, or 
                      more than 50 percent of the assets (by value) of 
                      such transferee corporation consists of, student 
                      loan notes incurred under the Higher Education Act 
                      of 1965; or

[[Page 110 STAT. 1853]]

                          ``(ii) the last day of the taxable year of the 
                      issuer during which occurs the date which is 10 
                      years after the date on which the election under 
                      this paragraph is made.
                    ``(G) Election.--An election under this paragraph 
                may be revoked only with the consent of the 
                Secretary.''.

    (b) Effective <<NOTE: 26 USC 150 note.>>  Date.--The amendment made 
by this section shall take effect on the date of the enactment of this 
Act.
SEC. 1615. CERTAIN TAX BENEFITS DENIED TO INDIVIDUALS FAILING TO 
                          PROVIDE TAXPAYER IDENTIFICATION NUMBERS.

    (a) Personal Exemption.--
            (1) In general.--Section 151 (relating to allowance of 
        deductions for personal exemptions) is amended by adding at the 
        end the following new subsection:

    ``(e) Identifying Information Required.--No exemption shall be 
allowed under this section with respect to any individual unless the TIN 
of such individual is included on the return claiming the exemption.''.
            (2) Conforming amendments.--
                    (A) Subsection (e) of section 6109 is repealed.
                    (B) Section 6724(d)(3) is amended by adding ``and'' 
                at the end of subparagraph (C), by striking subparagraph 
                (D), and by redesignating subparagraph (E) as 
                subparagraph (D).

    (b) Dependent Care Credit.--Subsection (e) of section 21 (relating 
to expenses for household and dependent care services necessary for 
gainful employment) is amended by adding at the end the following new 
paragraph:
            ``(10) Identifying information required with respect to 
        qualifying individuals.--No credit shall be allowed under this 
        section with respect to any qualifying individual unless the TIN 
        of such individual is included on the return claiming the 
        credit.''.

    (c) Extension of Procedures Applicable to Mathematical or Clerical 
Errors.--Section 6213(g)(2) (relating to the definition of mathematical 
or clerical errors), as amended by the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996, is amended by striking ``and'' 
at the end of subparagraph (F), by striking the period at the end of 
subparagraph (G) and inserting ``, and'', and by inserting at the end 
the following new subparagraph:
                    ``(H) an omission of a correct TIN required under 
                section 21 (relating to expenses for household and 
                dependent care services necessary for gainful 
                employment) or section 151 (relating to allowance of 
                deductions for personal exemptions).''.

    (d) Effective <<NOTE: 26 USC 21 note.>>  Date.--
            (1) In general.--The amendments made by this section shall 
        apply with respect to returns the due date for which (without 
        regard to extensions) is on or after the 30th day after the date 
        of the enactment of this Act.
            (2) Special rule for 1995 and 1996.--In the case of returns 
        for taxable years beginning in 1995 or 1996, a taxpayer shall 
        not be required by the amendments made by this section to 
        provide a taxpayer identification number for a child who is born 
        after October 31, 1995, in the case of a taxable year

[[Page 110 STAT. 1854]]

        beginning in 1995 or November 30, 1996, in the case of a taxable 
        year beginning in 1996.
SEC. 1616. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAVINGS 
                          ASSOCIATIONS.

    (a) In General.--Section 593 (relating to reserves for losses on 
loans) is amended by adding at the end the following new subsections:
    ``(f) Termination of Reserve Method.--Subsections (a), (b), (c), and 
(d) shall not apply to any taxable year beginning after December 31, 
1995.

    ``(g) 6-Year Spread of Adjustments.--
            ``(1) In general.--In the case of any taxpayer who is 
        required by reason of subsection (f) to change its method of 
        computing reserves for bad debts--
                    ``(A) such change shall be treated as a change in a 
                method of accounting,
                    ``(B) such change shall be treated as initiated by 
                the taxpayer and as having been made with the consent of 
                the Secretary, and
                    ``(C) the net amount of the adjustments required to 
                be taken into account by the taxpayer under section 
                481(a)--
                          ``(i) shall be determined by taking into 
                      account only applicable excess reserves, and
                          ``(ii) as so determined, shall be taken into 
                      account ratably over the 6-taxable year period 
                      beginning with the first taxable year beginning 
                      after December 31, 1995.
            ``(2) Applicable excess reserves.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `applicable excess reserves' means the excess 
                (if any) of--
                          ``(i) the balance of the reserves described in 
                      subsection (c)(1) (other than the supplemental 
                      reserve) as of the close of the taxpayer's last 
                      taxable year beginning before January 1, 1996, 
                      over
                          ``(ii) the lesser of--
                                    ``(I) the balance of such reserves 
                                as of the close of the taxpayer's last 
                                taxable year beginning before January 1, 
                                1988, or
                                    ``(II) the balance of the reserves 
                                described in subclause (I), reduced in 
                                the same manner as under section 
                                585(b)(2)(B)(ii) on the basis of the 
                                taxable years described in clause (i) 
                                and this clause.
                    ``(B) Special rule for thrifts which become small 
                banks.--In the case of a bank (as defined in section 
                581) which was not a large bank (as defined in section 
                585(c)(2)) for its first taxable year beginning after 
                December 31, 1995--
                          ``(i) the balance taken into account under 
                      subparagraph (A)(ii) shall not be less than the 
                      amount which would be the balance of such reserves 
                      as of the close of its last taxable year beginning 
                      before such date if the additions to such reserves 
                      for all taxable years had been determined under 
                      section 585(b)(2)(A), and

[[Page 110 STAT. 1855]]

                          ``(ii) the opening balance of the reserve for 
                      bad debts as of the beginning of such first 
                      taxable year shall be the balance taken into 
                      account under subparagraph (A)(ii) (determined 
                      after the application of clause (i) of this 
                      subparagraph).
                The preceding sentence shall not apply for purposes of 
                paragraphs (5) and (6) or subsection (e)(1).
            ``(3) Recapture of pre-1988 reserves where taxpayer ceases 
        to be bank.--If, during any taxable year beginning after 
        December 31, 1995, a taxpayer to which paragraph (1) applied is 
        not a bank (as defined in section 581), paragraph (1) shall 
        apply to the reserves described in paragraph (2)(A)(ii) and the 
        supplemental reserve; except that such reserves shall be taken 
        into account ratably over the 6-taxable year period beginning 
        with such taxable year.
            ``(4) Suspension of recapture if residential loan 
        requirement met.--
                    ``(A) In general.--In the case of a bank which meets 
                the residential loan requirement of subparagraph (B) for 
                the first taxable year beginning after December 31, 
                1995, or for the following taxable year--
                          ``(i) no adjustment shall be taken into 
                      account under paragraph (1) for such taxable year, 
                      and
                          ``(ii) such taxable year shall be disregarded 
                      in determining--
                                    ``(I) whether any other taxable year 
                                is a taxable year for which an 
                                adjustment is required to be taken into 
                                account under paragraph (1), and
                                    ``(II) the amount of such 
                                adjustment.
                    ``(B) Residential loan requirement.--A taxpayer 
                meets the residential loan requirement of this 
                subparagraph for any taxable year if the principal 
                amount of the residential loans made by the taxpayer 
                during such year is not less than the base amount for 
                such year.
                    ``(C) Residential loan.--For purposes of this 
                paragraph, the term `residential loan' means any loan 
                described in clause (v) of section 7701(a)(19)(C) but 
                only if such loan is incurred in acquiring, 
                constructing, or improving the property described in 
                such clause.
                    ``(D) Base amount.--For purposes of subparagraph 
                (B), the base amount is the average of the principal 
                amounts of the residential loans made by the taxpayer 
                during the 6 most recent taxable years beginning on or 
                before December 31, 1995. At the election of the 
                taxpayer who made such loans during each of such 6 
                taxable years, the preceding sentence shall be applied 
                without regard to the taxable year in which such 
                principal amount was the highest and the taxable year in 
                such principal amount was the lowest. Such an election 
                may be made only for the first taxable year beginning 
                after such date, and, if made for such taxable year, 
                shall apply to the succeeding taxable year unless 
                revoked with the consent of the Secretary.
                    ``(E) Controlled groups.--In the case of a taxpayer 
                which is a member of any controlled group of 
                corporations described in section 1563(a)(1), 
                subparagraph (B) shall be applied with respect to such 
                group.

[[Page 110 STAT. 1856]]

            ``(5) Continued application of fresh start under section 585 
        transitional rules.--In the case of a taxpayer to which 
        paragraph (1) applied and which was not a large bank (as defined 
        in section 585(c)(2)) for its first taxable year beginning after 
        December 31, 1995:
                    ``(A) In general.--For purposes of determining the 
                net amount of adjustments referred to in section 
                585(c)(3)(A)(iii), there shall be taken into account 
                only the excess (if any) of the reserve for bad debts as 
                of the close of the last taxable year before the 
                disqualification year over the balance taken into 
                account by such taxpayer under paragraph (2)(A)(ii) of 
                this subsection.
                    ``(B) Treatment under elective cut-off method.--For 
                purposes of applying section 585(c)(4)--
                          ``(i) the balance of the reserve taken into 
                      account under subparagraph (B) thereof shall be 
                      reduced by the balance taken into account by such 
                      taxpayer under paragraph (2)(A)(ii) of this 
                      subsection, and
                          ``(ii) no amount shall be includible in gross 
                      income by reason of such reduction.
            ``(6) Suspended reserve included as section 381(c) items.--
        The balance taken into account by a taxpayer under paragraph 
        (2)(A)(ii) of this subsection and the supplemental reserve shall 
        be treated as items described in section 381(c).
            ``(7) Conversions to credit unions.--In the case of a 
        taxpayer to which paragraph (1) applied which becomes a credit 
        union described in section 501(c) and exempt from taxation under 
        section 501(a)--
                    ``(A) any amount required to be included in the 
                gross income of the credit union by reason of this 
                subsection shall be treated as derived from an unrelated 
                trade or business (as defined in section 513), and
                    ``(B) for purposes of paragraph (3), the credit 
                union shall not be treated as if it were a bank.
            ``(8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out this subsection and 
        subsection (e), including regulations providing for the 
        application of such subsections in the case of acquisitions, 
        mergers, spin-offs, and other reorganizations.''.

    (b) Conforming Amendments.--
            (1) Subsection (d) of section 50 is amended by adding at the 
        end the following new sentence:

``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to in 
paragraph (1) of this subsection shall not apply to any taxable year 
beginning after December 31, 1995.''
            (2) Subsection (e) of section 52 is amended by striking 
        paragraph (1) and by redesignating paragraphs (2) and (3) as 
        paragraphs (1) and (2), respectively.
            (3) Subsection (a) of section 57 is amended by striking 
        paragraph (4).
            (4) Section 246 is amended by striking subsection (f).
            (5) Clause (i) of section 291(e)(1)(B) is amended by 
        striking ``or to which section 593 applies''.
            (6) Subparagraph (A) of section 585(a)(2) is amended by 
        striking ``other than an organization to which section 593 
        applies''.

[[Page 110 STAT. 1857]]

            (7)(A) The material preceding subparagraph (A) of section 
        593(e)(1) is amended by striking ``by a domestic building and 
        loan association or an institution that is treated as a mutual 
        savings bank under section 591(b)'' and inserting ``by a 
        taxpayer having a balance described in subsection 
        (g)(2)(A)(ii)''.
            (B) Subparagraph (B) of section 593(e)(1) is amended to read 
        as follows:
                    ``(B) then out of the balance taken into account 
                under subsection (g)(2)(A)(ii) (properly adjusted for 
                amounts charged against such reserves for taxable years 
                beginning after December 31, 1987),''.
            (C) The second sentence of section 593(e)(1) is amended by 
        striking ``the association or an institution that is treated as 
        a mutual savings bank under section 591(b)'' and inserting ``a 
        taxpayer having a balance described in subsection 
        (g)(2)(A)(ii)''.
            (D) The third sentence of section 593(e)(1) is amended by 
        striking ``an association'' and inserting ``a taxpayer having a 
        balance described in subsection (g)(2)(A)(ii)''.
            (E) Paragraph (1) of section 593(e) is amended by adding at 
        the end the following new sentence: ``This paragraph shall not 
        apply to any distribution of all of the stock of a bank (as 
        defined in section 581) to another corporation if, immediately 
        after the distribution, such bank and such other corporation are 
        members of the same affiliated group (as defined in section 
        1504) and the provisions of section 5(e) of the Federal Deposit 
        Insurance Act (as in effect on December 31, 1995) or similar 
        provisions are in effect.''.
            (8) Section 595 is hereby repealed.
            (9) Section 596 is hereby repealed.
            (10) Subsection (a) of section 860E is amended--
                    (A) by striking ``Except as provided in paragraph 
                (2), the'' in paragraph (1) and inserting ``The'',
                    (B) by striking paragraphs (2) and (4) and 
                redesignating paragraphs (3), (5), and (6) as paragraphs 
                (2), (3), and (4), respectively,
                    (C) by striking in paragraph (2) (as so 
                redesignated) all that follows ``subsection'' and 
                inserting a period, and
                    (D) by striking the last sentence of paragraph (4) 
                (as so redesignated).
            (11) Paragraph (3) of section 992(d) is amended by striking 
        ``or 593''.
            (12) Section 1038 is amended by striking subsection (f).
            (13) Clause (ii) of section 1042(c)(4)(B) is amended by 
        striking ``or 593''.
            (14) Subsection (c) of section 1277 is amended by striking 
        ``or to which section 593 applies''.
            (15) Subparagraph (B) of section 1361(b)(2) is amended by 
        striking ``or to which section 593 applies''.
            (16) The table of sections for part II of subchapter H of 
        chapter 1 is amended by striking the items relating to sections 
        595 and 596.

    (c) Effective <<NOTE: 26 USC 593 note.>>  Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 1995.

[[Page 110 STAT. 1858]]

            (2) Subsection (b)(7)(B).--The amendments made by subsection 
        (b)(7)(B) shall not apply to any distribution with respect to 
        preferred stock if--
                    (A) such stock is outstanding at all times after 
                October 31, 1995, and before the distribution, and
                    (B) such distribution is made before the date which 
                is 1 year after the date of the enactment of this Act 
                (or, in the case of stock which may be redeemed, if 
                later, the date which is 30 days after the earliest date 
                that such stock may be redeemed).
            (3) Subsection (b)(8).--The amendment made by subsection 
        (b)(8) shall apply to property acquired in taxable years 
        beginning after December 31, 1995.
            (4) Subsection (b)(10).--The amendments made by subsection 
        (b)(10) shall not apply to any residual interest held by a 
        taxpayer if such interest has been held by such taxpayer at all 
        times after October 31, 1995.
SEC. 1617. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIMITED TO 
                          SUBSIDIES WITH RESPECT TO DWELLING 
                          UNITS.

    (a) In General.--Paragraph (1) of section 136(c) (defining energy 
conservation measure) is amended by striking ``energy demand--'' and all 
that follows and inserting ``energy demand with respect to a dwelling 
unit.''.
    (b) Conforming Amendments.--
            (1) Subsection (a) of section 136 is amended to read as 
        follows:

    ``(a) Exclusion.--Gross income shall not include the value of any 
subsidy provided (directly or indirectly) by a public utility to a 
customer for the purchase or installation of any energy conservation 
measure.''.
            (2) Paragraph (2) of section 136(c) is amended--
                    (A) by striking subparagraph (A) and by 
                redesignating subparagraphs (B) and (C) as subparagraphs 
                (A) and (B), respectively, and
                    (B) by striking ``and special rules'' in the 
                paragraph heading.

    (c) Effective <<NOTE: 26 USC 136 note.>>  Date.--The amendments made 
by this section shall apply to amounts received after December 31, 1996, 
unless received pursuant to a written binding contract in effect on 
September 13, 1995, and at all times thereafter.

           PART II--FINANCIAL ASSET SECURITIZATION INVESTMENTS

SEC. 1621. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS.

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

       ``PART V--FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS

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

[[Page 110 STAT. 1859]]

                ``Sec. 860L. Definitions and other special rules.

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

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

    ``(c) Treatment of Regular Interests.--For purposes of this title--
            ``(1) a regular interest in a FASIT, if not otherwise a debt 
        instrument, shall be treated as a debt instrument,
            ``(2) section 163(e)(5) shall not apply to such an interest, 
        and
            ``(3) amounts includible in gross income with respect to 
        such an interest shall be determined under an accrual method of 
        accounting.
``SEC. 860I. GAIN RECOGNITION ON CONTRIBUTIONS TO A FASIT AND IN 
                            OTHER CASES.

    ``(a) Treatment of Property Acquired by FASIT.--
            ``(1) Property acquired from holder of ownership interest or 
        related person.--If property is sold or contributed to a FASIT 
        by the holder of the ownership interest in such FASIT (or by a 
        related person) gain (if any) shall be recognized to such holder 
        (or person) in an amount equal to the excess (if any) of such 
        property's value under subsection (d) on the date of such sale 
        or contribution over its adjusted basis on such date.
            ``(2) Property acquired other than from holder of ownership 
        interest or related person.--Property which is acquired by a 
        FASIT other than in a transaction to which paragraph (1) applies 
        shall be treated--
                    ``(A) as having been acquired by the holder of the 
                ownership interest in the FASIT for an amount equal to 
                the FASIT's cost of acquiring such property, and
                    ``(B) as having been sold by such holder to the 
                FASIT at its value under subsection (d) on such date.

    ``(b) Gain Recognition on Property Outside FASIT Which Supports 
Regular Interests.--If property held by the holder of the ownership 
interest in a FASIT (or by any person related to such holder) supports 
any regular interest in such FASIT--

[[Page 110 STAT. 1860]]

            ``(1) gain shall be recognized to such holder (or person) in 
        the same manner as if such holder (or person) had sold such 
        property at its value under subsection (d) on the earliest date 
        such property supports such an interest, and
            ``(2) such property shall be treated as held by such FASIT 
        for purposes of this part.

    ``(c) Deferral of Gain Recognition.--The Secretary may prescribe 
regulations which--
            ``(1) provide that gain otherwise recognized under 
        subsection (a) or (b) shall not be recognized before the 
        earliest date on which such property supports any regular 
        interest in such FASIT or any indebtedness of the holder of the 
        ownership interest (or of any person related to such holder), 
        and
            ``(2) provide such adjustments to the other provisions of 
        this part to the extent appropriate in the context of the 
        treatment provided under paragraph (1).

    ``(d) Valuation.--For purposes of this section--
            ``(1) In general.--The value of any property under this 
        subsection shall be--
                    ``(A) in the case of a debt instrument which is not 
                traded on an established securities market, the sum of 
                the present values of the reasonably expected payments 
                under such instrument determined (in the manner provided 
                by regulations prescribed by the Secretary)--
                          ``(i) as of the date of the event resulting in 
                      the gain recognition under this section, and
                          ``(ii) by using a discount rate equal to 120 
                      percent of the applicable Federal rate (as defined 
                      in section 1274(d)), or such other discount rate 
                      specified in such regulations, compounded 
                      semiannually, and
                    ``(B) in the case of any other property, its fair 
                market value.
            ``(2) Special rule for revolving loan accounts.--For 
        purposes of paragraph (1)--
                    ``(A) each extension of credit (other than the 
                accrual of interest) on a revolving loan account shall 
                be treated as a separate debt instrument, and
                    ``(B) payments on such extensions of credit having 
                substantially the same terms shall be applied to such 
                extensions beginning with the earliest such extension.

    ``(e) Special Rules.--
            ``(1) Nonrecognition rules not to apply.--Gain required to 
        be recognized under this section shall be recognized 
        notwithstanding any other provision of this subtitle.
            ``(2) Basis adjustments.--The basis of any property on which 
        gain is recognized under this section shall be increased by the 
        amount of gain so recognized.
``SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT 
                            INCLUSIONS.

    ``(a) In General.--The taxable income of the holder of the ownership 
interest or any high-yield interest in a FASIT for any taxable year 
shall in no event be less than the sum of--
            ``(1) such holder's taxable income determined solely with 
        respect to such interests (including gains and losses from sales 
        and exchanges of such interests), and

[[Page 110 STAT. 1861]]

            ``(2) the excess inclusion (if any) under section 860E(a)(1) 
        for such taxable year.

    ``(b) Coordination With Section 172.--Any increase in the taxable 
income of any holder of the ownership interest or a high-yield interest 
in a FASIT for any taxable year by reason of subsection (a) shall be 
disregarded--
            ``(1) in determining under section 172 the amount of any net 
        operating loss for such taxable year, and
            ``(2) in determining taxable income for such taxable year 
        for purposes of the second sentence of section 172(b)(2).

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

    ``(d) Affiliated Groups.--All members of an affiliated group filing 
a consolidated return shall be treated as one taxpayer for purposes of 
this section.
``SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS TO 
                            DISQUALIFIED HOLDERS.

    ``(a) General Rule.--In the case of any high-yield interest which is 
held by a disqualified holder--
            ``(1) the gross income of such holder shall not include any 
        income (other than gain) attributable to such interest, and
            ``(2) amounts not includible in the gross income of such 
        holder by reason of paragraph (1) shall be included (at the time 
        otherwise includible under paragraph (1)) in the gross income of 
        the most recent holder of such interest which is not a 
        disqualified holder.

    ``(b) Exceptions.--Rules similar to the rules of paragraphs (4) and 
(7) of section 860E(e) shall apply to the tax imposed by reason of the 
inclusion in gross income under subsection (a).
    ``(c) Disqualified Holder.--For purposes of this section, the term 
`disqualified holder' means any holder other than--
            ``(1) an eligible corporation (as defined in section 
        860L(a)(2)), or
            ``(2) a FASIT.

    ``(d) Treatment of Interests Held By Securities Dealers.--
            ``(1) In general.--Subsection (a) shall not apply to any 
        high-yield interest held by a disqualified holder if such holder 
        is a dealer in securities who acquired such interest exclusively 
        for sale to customers in the ordinary course of business (and 
        not for investment).
            ``(2) Change in dealer status.--
                    ``(A) In general.--In the case of a dealer in 
                securities which is not an eligible corporation (as 
                defined in section 860L(a)(2)), if--

[[Page 110 STAT. 1862]]

                          ``(i) such dealer ceases to be a dealer in 
                      securities, or
                          ``(ii) such dealer commences holding the high-
                      yield interest for investment,
                there is hereby imposed (in addition to other taxes) an 
                excise tax equal to the product of the highest rate of 
                tax specified in section 11(b)(1) and the income of such 
                dealer attributable to such interest for periods after 
                the date of such cessation or commencement.
                    ``(B) Holding for 31 days or less.--For purposes of 
                subparagraph (A)(ii), a dealer shall not be treated as 
                holding an interest for investment before the thirty-
                second day after the date such dealer acquired such 
                interest unless such interest is so held as part of a 
                plan to avoid the purposes of this paragraph.
                    ``(C) Administrative provisions.--The deficiency 
                procedures of subtitle F shall apply to the tax imposed 
                by this paragraph.

    ``(e) Treatment of High-Yield Interests in Pass-Thru
Entities.--
            ``(1) In general.--If a pass-thru entity (as defined in 
        section 860E(e)(6)) issues a debt or equity interest--
                    ``(A) which is supported by any regular interest in 
                a FASIT, and
                    ``(B) which has an original yield to maturity which 
                is greater than each of--
                          ``(i) the sum determined under clauses (i) and 
                      (ii) of section 163(i)(1)(B) with respect to such 
                      debt or equity interest, and
                          ``(ii) the yield to maturity to such entity on 
                      such regular interest (determined as of the date 
                      such entity acquired such interest),
        there is hereby imposed on the pass-thru entity a tax (in 
        addition to other taxes) equal to the product of the highest 
        rate of tax specified in section 11(b)(1) and the income of the 
        holder of such debt or equity interest which is properly 
        attributable to such regular interest. For 
        purposes <<NOTE: Regulations.>>  of the preceding sentence, the 
        yield to maturity of any equity interest shall be determined 
        under regulations prescribed by the Secretary.
            ``(2) Exception.--Paragraph (1) shall not apply to 
        arrangements not having as a principal purpose the avoidance of 
        the purposes of this subsection.

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

    ``(a) FASIT.--
            ``(1) In general.--For purposes of this title, the terms 
        `financial asset securitization investment trust' and `FASIT' 
        mean any entity--
                    ``(A) for which an election to be treated as a FASIT 
                applies for the taxable year,
                    ``(B) all of the interests in which are regular 
                interests or the ownership interest,
                    ``(C) which has only one ownership interest and such 
                ownership interest is held directly by an eligible 
                corporation,
                    ``(D) as of the close of the third month beginning 
                after the day of its formation and at all times 
                thereafter, substan

[[Page 110 STAT. 1863]]

                tially all of the assets of which (including assets 
                treated as held by the entity under section 860I(b)(2)) 
                consist of permitted assets, and
                    ``(E) which is not described in section 851(a).
        A rule similar to the rule of the last sentence of section 
        860D(a) shall apply for purposes of this paragraph.
            ``(2) Eligible corporation.--For purposes of paragraph 
        (1)(C), the term `eligible corporation' means any domestic C 
        corporation other than--
                    ``(A) a corporation which is exempt from, or is not 
                subject to, tax under this chapter,
                    ``(B) an entity described in section 851(a) or 
                856(a),
                    ``(C) a REMIC, and
                    ``(D) an organization to which part I of subchapter 
                T applies.
            ``(3) Election.--An entity (otherwise meeting the 
        requirements of paragraph (1)) may elect to be treated as a 
        FASIT. Except as provided in paragraph (5), such an election 
        shall apply to the taxable year for which made and all 
        subsequent taxable years unless revoked with the consent of the 
        Secretary.
            ``(4) Termination.--If any entity ceases to be a FASIT at 
        any time during the taxable year, such entity shall not be 
        treated as a FASIT after the date of such cessation.
            ``(5) Inadvertent terminations, etc.--Rules similar to the 
        rules of section 860D(b)(2)(B) shall apply to inadvertent 
        failures to qualify or remain qualified as a FASIT.
            ``(6) Permitted assets not treated as interest in fasit.--
        Except as provided in regulations prescribed by the Secretary, 
        any asset which is a permitted asset at the time acquired by a 
        FASIT shall not be treated at any time as an interest in such 
        FASIT.

    ``(b) Interests in FASIT.--For purposes of this part--
            ``(1) Regular interest.--
                    ``(A) In general.--The term `regular interest' means 
                any interest which is issued by a FASIT after the 
                startup date with fixed terms and which is designated as 
                a regular interest if--
                          ``(i) such interest unconditionally entitles 
                      the holder to receive a specified principal amount 
                      (or other similar amount),
                          ``(ii) interest payments (or other similar 
                      amounts), if any, with respect to such interest 
                      are determined based on a fixed rate, or, except 
                      as otherwise provided by the Secretary, at a 
                      variable rate permitted under section 
                      860G(a)(1)(B)(i),
                          ``(iii) such interest does not have a stated 
                      maturity (including options to renew) greater than 
                      30 years (or such longer period as may be 
                      permitted by regulations),
                          ``(iv) the issue price of such interest does 
                      not exceed 125 percent of its stated principal 
                      amount, and
                          ``(v) the yield to maturity on such interest 
                      is less than the sum determined under section 
                      163(i)(1)(B) with respect to such interest.
                An interest shall not fail to meet the requirements of 
                clause (i) merely because the timing (but not the 
                amount) of the principal payments (or other similar 
                amounts) may

[[Page 110 STAT. 1864]]

                be contingent on the extent that payments on debt 
                instruments held by the FASIT are made in advance of 
                anticipated payments and on the amount of income from 
                permitted assets.
                    ``(B) High-yield interests.--
                          ``(i) In general.--The term `regular interest' 
                      includes any high-yield interest.
                          ``(ii) High-yield interest.--The term `high-
                      yield interest' means any interest which would be 
                      described in subparagraph (A) but for--
                                    ``(I) failing to meet the 
                                requirements of one or more of clauses 
                                (i), (iv), or (v) thereof, or
                                    ``(II) failing to meet the 
                                requirement of clause (ii) thereof but 
                                only if interest payments (or other 
                                similar amounts), if any, with respect 
                                to such interest consist of a specified 
                                portion of the interest payments on 
                                permitted assets and such portion does 
                                not vary during the period such interest 
                                is outstanding.
            ``(2) Ownership interest.--The term `ownership interest' 
        means the interest issued by a FASIT after the startup day which 
        is designated as an ownership interest and which is not a 
        regular interest.

    ``(c) Permitted Assets.--For purposes of this part--
            ``(1) In general.--The term `permitted asset' means--
                    ``(A) cash or cash equivalents,
                    ``(B) any debt instrument (as defined in section 
                1275(a)(1)) under which interest payments (or other 
                similar amounts), if any, at or before maturity meet the 
                requirements applicable under clause (i) or (ii) of 
                section 860G(a)(1)(B),
                    ``(C) foreclosure property,
                    ``(D) any asset--
                          ``(i) which is an interest rate or foreign 
                      currency notional principal contract, letter of 
                      credit, insurance, guarantee against payment 
                      defaults, or other similar instrument permitted by 
                      the Secretary, and
                          ``(ii) which is reasonably required to 
                      guarantee or hedge against the FASIT's risks 
                      associated with being the obligor on interests 
                      issued by the FASIT,
                    ``(E) contract rights to acquire debt instruments 
                described in subparagraph (B) or assets described in 
                subparagraph (D),
                    ``(F) any regular interest in another FASIT, and
                    ``(G) any regular interest in a REMIC.
            ``(2) Debt issued by holder of ownership interest not 
        permitted asset.--The term `permitted asset' shall not include 
        any debt instrument issued by the holder of the ownership 
        interest in the FASIT or by any person related to such holder or 
        any direct or indirect interest in such a debt instrument. The 
        preceding sentence shall not apply to cash equivalents and to 
        any other investment specified in regulations prescribed by the 
        Secretary.
            ``(3) Foreclosure property.--
                    ``(A) In general.--The term `foreclosure property' 
                means property--

[[Page 110 STAT. 1865]]

                          ``(i) which would be foreclosure property 
                      under section 856(e) (determined without regard to 
                      paragraph (5) thereof) if such property were real 
                      property acquired by a real estate investment 
                      trust, and
                          ``(ii) which is acquired in connection with 
                      the default or imminent default of a debt 
                      instrument held by the FASIT unless the security 
                      interest in such property was created for the 
                      principal purpose of permitting the FASIT to 
                      invest in such property.
                Solely for purposes of subsection (a)(1), the 
                determination of whether any property is foreclosure 
                property shall be made without regard to section 
                856(e)(4).
                    ``(B) Authority to reduce grace period.--In the case 
                of property other than real property and other than 
                personal property incident to real property, the 
                Secretary may by regulation reduce for purposes of 
                subparagraph (A) the periods otherwise applicable under 
                paragraphs (2) and (3) of section 856(e).

    ``(d) Startup Day.--For purposes of this part--
            ``(1) In general.--The term `startup day' means the date 
        designated in the election under subsection (a)(3) as the 
        startup day of the FASIT. Such day shall be the beginning of the 
        first taxable year of the FASIT.
            ``(2) Treatment of property held on startup day.--All 
        property held (or treated as held under section 860I(c)(2)) by 
        an entity as of the startup day shall be treated as contributed 
        to such entity on such day by the holder of the ownership 
        interest in such entity.

    ``(e) Tax on Prohibited Transactions.--
            ``(1) In general.--There is hereby imposed for each taxable 
        year of a FASIT a tax equal to 100 percent of the net income 
        derived from prohibited transactions. Such tax shall be paid by 
        the holder of the ownership interest in the FASIT.
            ``(2) Prohibited transactions.--For purposes of this part, 
        the term `prohibited transaction' means--
                    ``(A) the receipt of any income derived from any 
                asset that is not a permitted asset,
                    ``(B) except as provided in paragraph (3), the 
                disposition of any permitted asset,
                    ``(C) the receipt of any income derived from any 
                loan originated by the FASIT, and
                    ``(D) the receipt of any income representing a fee 
                or other compensation for services (other than any fee 
                received as compensation for a waiver, amendment, or 
                consent under permitted assets (other than foreclosure 
                property) held by the FASIT).
            ``(3) Exception for income from certain dispositions.--
                    ``(A) In general.--Paragraph (2)(B) shall not apply 
                to a disposition which would not be a prohibited 
                transaction (as defined in section 860F(a)(2)) by reason 
                of--
                          ``(i) clause (ii), (iii), or (iv) of section 
                      860F(a)(2)(A), or
                          ``(ii) section 860F(a)(5), if the FASIT were 
                      treated as a REMIC and debt instruments described 
                      in subsection (c)(1)(B) were treated as qualified 
                      mortgages.

[[Page 110 STAT. 1866]]

                    ``(B) Substitution of debt instruments; reduction of 
                over-collateralization.--Paragraph (2)(B) shall not 
                apply to--
                          ``(i) the substitution of a debt instrument 
                      described in subsection (c)(1)(B) for another debt 
                      instrument which is a permitted asset, or
                          ``(ii) the distribution of a debt instrument 
                      con-
                      tributed by the holder of the ownership interest 
                      to such holder in order to reduce over-
                      collateralization of the FASIT,
                but only if a principal purpose of acquiring the debt 
                instrument which is disposed of was not the recognition 
                of gain (or the reduction of a loss) as a result of an 
                increase in the market value of the debt instrument 
                after its acquisition by the FASIT.
                    ``(C) Liquidation of class of regular interests.--
                Paragraph (2)(B) shall not apply to the complete 
                liquidation of any class of regular interests.
            ``(4) Net income.--For purposes of this subsection, net 
        income shall be determined in accordance with section 
        860F(a)(3).

    ``(f) Coordination With Other Provisions.--
            ``(1) Wash sales rules.--Rules similar to the rules of 
        section 860F(d) shall apply to the ownership interest in a 
        FASIT.
            ``(2) Section 475.--Except as provided by the Secretary by 
        regulations, if any security which is sold or contributed to a 
        FASIT by the holder of the ownership interest in such FASIT was 
        required to be marked-to-market under section 475 by such 
        holder, section 475 shall continue to apply to such security; 
        except that in applying section 475 while such security is held 
        by the FASIT, the fair market value of such security for 
        purposes of section 475 shall not be less than its value under 
        section 860I(d).

    ``(g) Related Person.--For purposes of this part, a person 
(hereinafter in this subsection referred to as the `related person') is 
related to any person if--
            ``(1) the related person bears a relationship to such person 
        specified in section 267(b) or section 707(b)(1), or
            ``(2) the related person and such person are engaged in 
        trades or businesses under common control (within the meaning of 
        subsections (a) and (b) of section 52).

For purposes of paragraph (1), in applying section 267(b) or 707(b)(1), 
`20 percent' shall be substituted for `50 percent'.
    ``(h) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
part, including regulations to prevent the abuse of the purposes of this 
part through transactions which are not primarily related to 
securitization of debt instruments by a FASIT.''.
    (b) Technical Amendments.--
            (1) Paragraph (2) of section 26(b) is amended by striking 
        ``and'' at the end of subparagraph (M), by striking the period 
        at the end of subparagraph (N) and inserting ``, and'', and by 
        adding at the end the following new subparagraph:
                    ``(O) section 860K (relating to treatment of 
                transfers of high-yield interests to disqualified 
                holders).''.

[[Page 110 STAT. 1867]]

            (2) Paragraph (6) of section 56(g) is amended by striking 
        ``or REMIC'' and inserting ``REMIC, or FASIT''.
            (3) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``or a REMIC to which part IV of subchapter M applies'' 
        and inserting ``a REMIC to which part IV of subchapter M 
        applies, or a FASIT to which part V of subchapter M applies''.
            (4) Paragraph (1) of section 582(c) is amended by inserting 
        ``, and any regular interest in a FASIT,'' after ``REMIC''.
            (5) Subparagraph (E) of section 856(c)(6) is amended by 
        adding at the end the following new sentence: ``The principles 
        of the preceding provisions of this subparagraph shall apply to 
        regular interests in a FASIT.''.
            (6) Paragraph (3) of section 860G(a) is amended by striking 
        ``and'' at the end of subparagraph (B), by striking the period 
        at the end of subparagraph (C) and inserting ``, and'', and by 
        inserting after subparagraph (C) the following new subparagraph:
                    ``(D) any regular interest in a FASIT which is 
                transferred to, or purchased by, the REMIC as described 
                in clauses (i) and (ii) of subparagraph (A) but only if 
                95 percent or more of the value of the assets of such 
                FASIT is at all times attributable to obligations 
                described in subparagraph (A) (without regard to such 
                clauses).''.
            (7) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``or REMIC'' and inserting ``REMIC, or FASIT''.
            (8) Clause (xi) of section 7701(a)(19)(C) is amended to read 
        as follows:
                          ``(xi) any regular or residual interest in a 
                      REMIC, and any regular interest in a FASIT, but 
                      only in the proportion which the assets of such 
                      REMIC or FASIT consist of property described in 
                      any of the preceding clauses of this subparagraph; 
                      except that if 95 percent or more of the assets of 
                      such REMIC or FASIT are assets described in 
                      clauses (i) through (x), the entire interest in 
                      the REMIC or FASIT shall qualify.''.
            (9) Subparagraph (A) of section 7701(i)(2) is amended by 
        inserting ``or a FASIT'' after ``a REMIC''.

    (c) Clerical Amendment.--The table of parts for subchapter M of 
chapter 1 is amended by adding at the end the following new item:
                ``Part V. Financial asset securitization investment 
                                trusts.''.

    (d) Effective <<NOTE: 26 USC 26 note.>>  Date.--The amendments made 
by this section shall take effect on September 1, 1997.

    (e) Treatment <<NOTE: 26 USC 860I note.>>  of Existing 
Securitization Entities.--
            (1) In general.--In the case of the holder of the ownership 
        interest in a pre-effective date FASIT--
                    (A) gain shall not be recognized under section 
                860L(d)(2) of the Internal Revenue Code of 1986 on 
                property deemed contributed to the FASIT, and
                    (B) gain shall not be recognized under section 860I 
                of such Code on property contributed to such FASIT,
        until such property (or portion thereof) ceases to be properly 
        allocable to a pre-FASIT interest.
            (2) Allocation of property to pre-fasit interest.--For 
        purposes of paragraph (1), property shall be allocated to a pre-
        FASIT interest in such manner as the Secretary of the Treasury 
        may prescribe, except that all property in a FASIT

[[Page 110 STAT. 1868]]

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

                    Subtitle G--Technical Corrections

SEC. 1701. COORDINATION WITH OTHER SUBTITLES.

    For purposes of applying the amendments made by any subtitle of this 
title other than this subtitle, the provisions of this subtitle shall be 
treated as having been enacted immediately before the provisions of such 
other subtitles.
SEC. 1702. AMENDMENTS <<NOTE: 26 USC 1 note.>>  RELATED TO REVENUE 
                          RECONCILIATION ACT OF 1990.

    (a) Amendments Related to Subtitle A.--
            (1) Subparagraph (B) of section 59(j)(3) is amended by 
        striking ``section 1(i)(3)(B)'' and inserting ``section 
        1(g)(3)(B)''.
            (2) Clause (i) of section 151(d)(3)(C) is amended by 
        striking ``joint of a return'' and inserting ``joint return''.

    (b) Amendments Related to Subtitle B.--
            (1) Paragraph (1) of section 11212(e) of the Revenue 
        Reconciliation Act of 1990 <<NOTE: 26 USC 6724.>>  is amended by 
        striking ``Paragraph (1) of section 6724(d)'' and inserting 
        ``Subparagraph (B) of section 6724(d)(1)''.
            (2)(A) Subparagraph (B) of section 4093(c)(2), as in effect 
        before the amendments made by the Revenue Reconciliation Act of 
        1993, is amended by inserting before the period ``unless such 
        fuel is sold for exclusive use by a State or any political 
        subdivision thereof''.
            (B) Paragraph (4) of section 6427(l), as in effect before 
        the amendments made by the Revenue Reconciliation Act of 1993, 
        is amended by inserting before the period ``unless such fuel was 
        used by a State or any political subdivision thereof''.
            (3) Paragraph (1) of section 6416(b) is amended by striking 
        ``chapter 32 or by section 4051'' and inserting ``chapter 31 or 
        32''.
            (4) Section 7012 is amended--
                    (A) by striking ``production or importation of 
                gasoline'' in paragraph (3) and inserting ``taxes on 
                gasoline and diesel fuel'', and
                    (B) by striking paragraph (4) and redesignating 
                paragraphs (5) and (6) as paragraphs (4) and (5), 
                respectively.
            (5) Subsection (c) of section 5041 is amended by striking 
        paragraph (6) and by inserting the following new paragraphs:
            ``(6) Credit for transferee in bond.--If--

[[Page 110 STAT. 1869]]

                    ``(A) wine produced by any person would be eligible 
                for any credit under paragraph (1) if removed by such 
                person during the calendar year,
                    ``(B) wine produced by such person is removed during 
                such calendar year by any other person (hereafter in 
                this paragraph referred to as the `transferee') to whom 
                such wine was transferred in bond and who is liable for 
                the tax imposed by this section with respect to such 
                wine, and
                    ``(C) such producer holds title to such wine at the 
                time of its removal and provides to the transferee such 
                information as is necessary to properly determine the 
                transferee's credit under this paragraph,
        then, the transferee (and not the producer) shall be allowed the 
        credit under paragraph (1) which would be allowed to the 
        producer if the wine removed by the transferee had been removed 
        by the producer on that date.
            ``(7) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection, including regulations--
                    ``(A) to prevent the credit provided in this 
                subsection from benefiting any person who produces more 
                than 250,000 wine gallons of wine during a calendar 
                year, and
                    ``(B) to assure proper reduction of such credit for 
                persons producing more than 150,000 wine gallons of wine 
                during a calendar year.''.
            (6) Paragraph (3) of section 5061(b) is amended to read as 
        follows:
            ``(3) section 5041(f),''.
            (7) Section 5354 is amended by inserting ``(taking into 
        account the appropriate amount of credit with respect to such 
        wine under section 5041(c))'' after ``any one time''.

    (c) Amendments Related to Subtitle C.--
            (1) Paragraph (4) of section 56(g) is amended by 
        redesignating subparagraphs (I) and (J) as subparagraphs (H) and 
        (I), respectively.
            (2) Subparagraph (B) of section 6724(d)(1) is amended--
                    (A) by striking ``or'' at the end of clause (xii), 
                and
                    (B) by striking the period at the end of clause 
                (xiii) and inserting ``, or''.
            (3) Subsection (g) of section 6302 is amended by in-
        serting ``, 22,'' after ``chapters 21''.
            (4) The earnings <<NOTE: 26 USC 832 note.>>  and profits of 
        any insurance company to which section 11305(c)(3) of the 
        Revenue Reconciliation Act of 1990 applies shall be determined 
        without regard to any deduction allowed under such section; 
        except that, for pur-
        poses of applying sections 56 and 902, and subpart F of part III 
        of subchapter N of chapter 1 of the Internal Revenue Code of 
        1986, such deduction shall be taken into account.
            (5) Subparagraph (D) of section 6038A(e)(4) is amended--
                    (A) by striking ``any transaction to which the 
                summons relates'' and inserting ``any affected taxable 
                year'', and
                    (B) by adding at the end thereof the following new 
                sentence: ``For purposes of this subparagraph, the term 
                `affected taxable year' means any taxable year if the 
                determination of the amount of tax imposed for such 
                taxable

[[Page 110 STAT. 1870]]

                year is affected by the treatment of the transaction to 
                which the summons relates.''.
            (6) Subparagraph (A) of section 6621(c)(2) is amended by 
        adding at the end thereof the following new flush sentence:
                ``The preceding sentence shall be applied without regard 
                to any such letter or notice which is withdrawn by the 
                Secretary.''.
            (7) Clause (i) of section 6621(c)(2)(B) is amended by 
        striking ``this subtitle'' and inserting ``this title''.

    (d) Amendments Related to Subtitle D.--
            (1) Notwithstanding <<NOTE: 26 USC 41 note.>>  section 
        11402(c) of the Revenue 
        Reconciliation Act of 1990, the amendment made by section 
        11402(b)(1) of such Act shall apply to taxable years ending 
        after December 31, 1989.
            (2) Clause (ii) of section 143(m)(4)(C) is amended--
                    (A) by striking ``any month of the 10-year period'' 
                and inserting ``any year of the 4-year period'',
                    (B) by striking ``succeeding months'' and inserting 
                ``succeeding years'', and
                    (C) by striking ``over the remainder of such period 
                (or, if lesser, 5 years)'' and inserting ``to zero over 
                the succeeding 5 years''.

    (e) Amendments Related to Subtitle E.--
            (1)(A) Clause (ii) of section 56(d)(1)(B) is amended to read 
        as follows:
                          ``(ii) appropriate adjustments in the 
                      application of section 172(b)(2) shall be made to 
                      take into account the limitation of subparagraph 
                      (A).''.
            (B) For purposes <<NOTE: 26 USC 56 note.>>  of applying 
        sections 56(g)(1) and 56(g)(3) of the Internal Revenue Code of 
        1986 with respect to taxable years beginning in 1991 and 1992, 
        the reference in such sections to the alternative tax net 
        operating loss deduction shall be treated as including a 
        reference to the deduction under section 56(h) of such Code as 
        in effect before the amendments made by section 1915 of the 
        Energy Policy Act of 1992.
            (2) Clause (i) of section 613A(c)(3)(A) is amended by 
        striking ``the table contained in''.
            (3) Section 6501 is amended--
                    (A) by striking subsection (m) (relating to 
                deficiency attributable to election under section 44B) 
                and by redesignating subsections (n) and (o) as 
                subsections (m) and (n), respectively, and
                    (B) by striking ``section 40(f) or 51(j)'' in 
                subsection (m) (as redesignated by subparagraph (A)) and 
                inserting ``section 40(f), 43, or 51(j)''.
            (4) Subparagraph (C) of section 38(c)(2) (as in effect on 
        the day before the date of the enactment of the Revenue 
        Reconciliation Act of 1990) is amended by inserting before the 
        period at the end of the first sentence the following: ``and 
        without regard to the deduction under section 56(h)''.
            (5) The amendment <<NOTE: 26 USC 53 note.>>  made by section 
        1913(b)(2)(C)(i) of the Energy Policy Act of 1992 shall apply to 
        taxable years beginning after December 31, 1990.

    (f) Amendments Related to Subtitle F.--
            (1)(A) Section 2701(a)(3) is amended by adding at the end 
        thereof the following new subparagraph:

[[Page 110 STAT. 1871]]

                    ``(C) Valuation of qualified payments where no 
                liquidation, etc. rights.--In the case of an applicable 
                retained interest which is described in subparagraph 
                (B)(i) but not subparagraph (B)(ii), the value of the 
                distribution right shall be determined without regard to 
                this section.''.
            (B) Section 2701(a)(3)(B) is amended by inserting 
        ``certain'' before ``qualified'' in the heading thereof.
            (C) Sections 2701 (d)(1) and (d)(4) are each amended by 
        striking ``subsection (a)(3)(B)'' and inserting ``subsection 
        (a)(3) (B) or (C)''.
            (2) Clause (i) of section 2701(a)(4)(B) is amended by 
        inserting ``(or, to the extent provided in regulations, the 
        rights as to either income or capital)'' after ``income and 
        capital''.
            (3)(A) Section 2701(b)(2) is amended by adding at the end 
        thereof the following new subparagraph:
                    ``(C) Applicable family member.--For purposes of 
                this subsection, the term `applicable family member' 
                includes any lineal descendant of any parent of the 
                transferor or the transferor's spouse.''.
            (B) Section 2701(e)(3) is amended--
                    (i) by striking subparagraph (B), and
                    (ii) by striking so much of paragraph (3) as 
                precedes ``shall be treated as holding'' and inserting:
            ``(3) Attribution of indirect holdings and transfers.--An 
        individual''.
            (C) Section 2704(c)(3) is amended by striking ``section 
        2701(e)(3)(A)'' and inserting ``section 2701(e)(3)''.
            (4) Clause (i) of section 2701(c)(1)(B) is amended to read 
        as follows:
                          ``(i) a right to distributions with respect to 

                      any interest which is junior to the rights of the 
                      transferred interest,''.
            (5)(A) Clause (i) of section 2701(c)(3)(C) is amended to 
        read as follows:
                          ``(i) In general.--Payments under any interest 
                      held by a transferor which (without regard to this 
                      subparagraph) are qualified payments shall be 
                      treated as qualified payments unless the 
                      transferor elects not to treat such payments as 
                      qualified payments. Payments described in the 
                      preceding sentence which are held by an applicable 
                      family member shall be treated as qualified 
                      payments only if such member elects to treat such 
                      payments as qualified payments.''.
            (B) The first sentence of section 2701(c)(3)(C)(ii) is 
        amended to read as follows: ``A transferor or applicable family 
        member holding any distribution right which (without regard to 
        this subparagraph) is not a qualified payment may elect to treat 
        such right as a qualified payment, to be paid in the amounts and 
        at the times specified in such election.''.
            (C) The time <<NOTE: 26 USC 2701 note.>>  for making an 
        election under the second sentence of section 2701(c)(3)(C)(i) 
        of the Internal Revenue Code of 1986 (as amended by subparagraph 
        (A)) shall not expire before the due date (including extensions) 
        for filing the transferor's return of the tax imposed by section 
        2501 of such Code for the first calendar year ending after the 
        date of enactment.
            (6) Section 2701(d)(3)(A)(iii) is amended by striking ``the 
        period ending on the date of''.

[[Page 110 STAT. 1872]]

            (7) Subclause (I) of section 2701(d)(3)(B)(ii) is amended by 
        inserting ``or the exclusion under section 2503(b),'' after 
        ``section 2523,''.
            (8) Section 2701(e)(5) is amended--
                    (A) by striking ``such contribution to capital or 
                such redemption, recapitalization, or other change'' in 
                subparagraph (A) and inserting ``such transaction'', and
                    (B) by striking ``the transfer'' in subparagraph (B) 
                and inserting ``such transaction''.
            (9) Section 2701(d)(4) is amended by adding at the end 
        thereof the following new subparagraph:
                    ``(C) Transfer to transferors.--In the case of a 
                taxable event described in paragraph (3)(A)(ii) 
                involving a transfer of an applicable retained interest 
                from an applicable family member to a transferor, this 
                subsection shall continue to apply to the transferor 
                during any period the transferor holds such interest.''.
            (10) Section 2701(e)(6) is amended by inserting ``or to 
        reflect the application of subsection (d)'' before the period at 
        the end thereof.
            (11)(A) Section 2702(a)(3)(A) is amended--
                    (i) by striking ``to the extent'' and inserting 
                ``if'' in clause (i),
                    (ii) by striking ``or'' at the end of clause (i),
                    (iii) by striking the period at the end of clause 
                (ii) and inserting ``, or'', and
                    (iv) by adding at the end thereof the following new 
                clause:
                          ``(iii) to the extent that regulations provide 
                      that such transfer is not inconsistent with the 
                      purposes of this section.''.
            (B)(i) Section 2702(a)(3) is amended by striking 
        ``incomplete transfer'' each place it appears and inserting 
        ``incomplete gift''.
            (ii) The heading for section 2702(a)(3)(B) is amended by 
        striking ``Incomplete transfer'' and inserting ``Incomplete 
        gift''.

    (g) Amendments Related to Subtitle G.--
            (1)(A) Subsection (a) of section 1248 is amended--
                    (i) by striking ``, or if a United States person 
                receives a distribution from a foreign corporation 
                which, under section 302 or 331, is treated as an 
                exchange of stock'' in paragraph (1), and
                    (ii) by adding at the end thereof the following new 
                sentence: ``For purposes of this section, a United 
                States person shall be treated as having sold or 
                exchanged any stock if, under any provision of this 
                subtitle, such person is treated as realizing gain from 
                the sale or exchange of such stock.''.
            (B) Paragraph (1) of section 1248(e) is amended by 
        striking ``, or receives a distribution from a domestic 
        corporation which, under section 302 or 331, is treated as an 
        exchange of stock''.
            (C) Subparagraph (B) of section 1248(f)(1) is amended by 
        striking ``or 361(c)(1)'' and inserting ``355(c)(1), or 
        361(c)(1)''.
            (D) Paragraph (1) of section 1248(i) is amended to read as 
        follows:

[[Page 110 STAT. 1873]]

            ``(1) In general.--If any shareholder of a 10-percent 
        corporate shareholder of a foreign corporation exchanges stock 
        of the 10-percent corporate shareholder for stock of the foreign 
        corporation, such 10-percent corporate shareholder shall 
        recognize gain in the same manner as if the stock of the foreign 
        corporation received in such exchange had been--
                    ``(A) issued to the 10-percent corporate share-
                holder, and
                    ``(B) then distributed by the 10-percent corporate 
                shareholder to such shareholder in redemption or 
                liquidation (whichever is appropriate).
        The amount of gain recognized by such 10-percent corporate 
        shareholder under the preceding sentence shall not exceed the 
        amount treated as a dividend under this section.''.
            (2) Section 897 is amended by striking subsection (f).
            (3) Paragraph (13) of section 4975(d) is amended by striking 
        ``section 408(b)'' and inserting ``section 408(b)(12)''.
            (4) Clause (iii) of section 56(g)(4)(D) is amended by 
        inserting ``, but only with respect to taxable years beginning 
        after December 31, 1989'' before the period at the end thereof.
            (5)(A) Paragraph <<NOTE: 26 USC 42 note.>>  (11) of section 
        11701(a) of the Revenue Reconciliation Act of 1990 (and the 
        amendment made by such paragraph) are hereby repealed, and 
        section 7108(r)(2) of the Revenue Reconciliation Act of 1989 
        shall be applied as if such paragraph (and amendment) had never 
        been enacted.
            (B) Subparagraph (A) shall not apply to any building if the 
        owner of such building establishes to the satisfaction of the 
        Secretary of the Treasury or his delegate that such owner 
        reasonably relied on the amendment made by such paragraph (11).

    (h) Amendments Related to Subtitle H.--
            (1)(A) Clause (vi) of section 168(e)(3)(B) is amended by 
        striking ``or'' at the end of subclause (I), by striking the 
        period at the end of subclause (II) and inserting ``, or'', and 
        by adding at the end thereof the following new subclause:
                                    ``(III) is described in section 
                                48(l)(3)(A)(ix) (as in effect on the day 
                                before the date of the enactment of the 
                                Revenue Reconciliation Act of 1990).''.
            (B) Subparagraph (B) of section 168(e)(3) (relating to 
        5-year property) is amended by adding at the end the following 
        flush sentence:
                ``Nothing in any provision of law shall be construed to 
                treat property as not being described in clause (vi)(I) 
                (or the corresponding provisions of prior law) by reason 
                of being public utility property (within the meaning of 
                section 48(a)(3)).''.
            (C) Subparagraph (K) of section 168(g)(4) is amended by 
        striking ``section 48(a)(3)(A)(iii)'' and inserting ``section 
        48(l)(3)(A)(ix) (as in effect on the day before the date of the 
        enactment of the Revenue Reconciliation Act of 1990)''.
            (2) Clause (ii) of section 172(b)(1)(E) is amended by 
        striking ``subsection (m)'' and inserting ``subsection (h)''.
            (3) Sections 805(a)(4)(E), 832(b)(5)(C)(ii)(II), and 
        832(b)(5)(D)(ii)(II) are each amended by striking ``243(b)(5)'' 
        and inserting ``243(b)(2)''.
            (4) Subparagraph (A) of section 243(b)(3) is amended by 
        inserting ``of'' after ``In the case''.

[[Page 110 STAT. 1874]]

            (5) The subsection heading for subsection (a) of section 
        280F is amended by striking ``Investment Tax Credit and''.
            (6) Clause (i) of section 1504(c)(2)(B) is amended by 
        inserting ``section'' before ``243(b)(2)''.
            (7) Paragraph (3) of section 341(f) is amended by striking 
        ``351, 361, 371(a), or 374(a)'' and inserting ``351, or 361''.
            (8) Paragraph (2) of section 243(b) is amended to read as 
        follows:
            ``(2) Affiliated group.--For purposes of this subsection:
                    ``(A) In general.--The term `affiliated group' has 
                the meaning given such term by section 1504(a), except 
                that for such purposes sections 1504(b)(2), 1504(b)(4), 
                and 1504(c) shall not apply.
                    ``(B) Group must be consistent in foreign tax 
                treatment.--The requirements of paragraph (1)(A) shall 
                not be treated as being met with respect to any dividend 
                received by a corporation if, for any taxable year which 
                includes the day on which such dividend is received--
                          ``(i) 1 or more members of the affiliated 
                      group referred to in paragraph (1)(A) choose to 
                      any extent to take the benefits of section 901, 
                      and
                          ``(ii) 1 or more other members of such group 
                      claim to any extent a deduction for taxes 
                      otherwise creditable under section 901.''.
            (9) The amendment <<NOTE: 26 USC 861.>>  made by section 
        11813(b)(17) of the Revenue Reconciliation Act of 1990 shall be 
        applied as if the material stricken by such amendment included 
        the closing parenthesis after ``section 48(a)(5)''.
            (10) Paragraph (1) of section 179(d) is amended by striking 
        ``in a trade or business'' and inserting ``a trade or 
        business''.
            (11) Subparagraph (E) of section 50(a)(2) is amended by 
        striking ``section 48(a)(5)(A)'' and inserting ``section 
        48(a)(5)''.
            (12) The amendment <<NOTE: 26 USC 56.>>  made by section 
        11801(c)(9)(G)(ii) of the Revenue Reconciliation Act of 1990 
        shall be applied as if it struck ``Section 422A(c)(2)'' and 
        inserted ``Section 422(c)(2)''.
            (13) Subparagraph (B) of section 424(c)(3) is amended by 
        striking ``a qualified stock option, an incentive stock option, 
        an option granted under an employee stock purchase plan, or a 
        restricted stock option'' and inserting ``an incentive stock 
        option or an option granted under an employee stock purchase 
        plan''.
            (14) Subparagraph (E) of section 1367(a)(2) is amended by 
        striking ``section 613A(c)(13)(B)'' and inserting ``section 
        613A(c)(11)(B)''.
            (15) Subparagraph (B) of section 460(e)(6) is amended by 
        striking ``section 167(k)'' and inserting ``section 
        168(e)(2)(A)(ii)''.
            (16) Subparagraph (C) of section 172(h)(4) is amended by 
        striking ``subsection (b)(1)(M)'' and inserting ``subsection 
        (b)(1)(E)''.
            (17) Section 6503 is amended--
                    (A) by redesignating the subsection relating to 
                extension in case of certain summonses as subsection 
                (j), and
                    (B) by redesignating the subsection relating to 
                cross references as subsection (k).
            (18) Paragraph (4) of section 1250(e) is hereby repealed.
            (19) Paragraph (1) of section 179(d) is amended by adding at 
        the end the following new sentence: ``Such term shall not

[[Page 110 STAT. 1875]]

        include any property described in section 50(b) and shall not 
        include air conditioning or heating units.''.

    ``(i) Effective <<NOTE: 26 USC 38 note.>>  Date.--Except as 
otherwise expressly provided, any amendment made by this section shall 
take effect as if included in the provision of the Revenue 
Reconciliation Act of 1990 to which such amendment relates.''.
SEC. 1703. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT OF 
                          1993.

    (a) Amendment Related to Section 13114.--Paragraph (2) of section 
1044(c) <<NOTE: 26 USC 1044.>>  is amended to read as follows:
            ``(2) Purchase.--The taxpayer shall be considered to have 
        purchased any property if, but for subsection (d), the 
        unadjusted basis of such property would be its cost within the 
        meaning of section 1012.''.

    (b) Amendments Related to Section 13142.--
            (1) Subparagraph (B) of section 13142(b)(6) of the Revenue 
        Reconciliation Act of 1993 <<NOTE: 26 USC 42 note.>>  is amended 
        to read as follows:
                    ``(B) Full-time students, waiver authority, and 
                prohibited discrimination.--The amendments made by 
                paragraphs (2), (3), and (4) shall take effect on the 
                date of the enactment of this Act.''.
            (2) Subparagraph (C) of section 13142(b)(6) of such Act is 
        amended by striking ``paragraph (2)'' and inserting ``paragraph 
        (5)''.

    (c) Amendment Related to Section 13161.--
            (1) In general.--Subsection (e) of <<NOTE: 26 USC 4001.>>  
        section 4001 (relating to inflation adjustment) is amended to 
        read as follows:

    ``(e) Inflation Adjustment.--
            ``(1) In general.--The $30,000 amount in subsection (a) and 
        section 4003(a) shall be increased by an amount equal to--
                    ``(A) $30,000, multiplied by
                    ``(B) the cost-of-living adjustment under section 
                1(f)(3) for the calendar year in which the vehicle is 
                sold, determined by substituting `calendar year 1990' 
                for `calendar year 1992' in subparagraph (B) thereof.
            ``(2) Rounding.--If any amount as adjusted under paragraph 
        (1) is not a multiple of $2,000, such amount shall be rounded to 
        the next lowest multiple of $2,000.''.
            (2) Effective <<NOTE: 26 USC 4001 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect on the date of 
        the enactment of this Act.

    (d) Amendment Related to Section 13201.--Clause (ii) of section 
135(b)(2)(B) is <<NOTE: 26 USC 135.>>  amended by inserting before the 
period at the end thereof the following: ``, determined by substituting 
`calendar year 1989' for `calendar year 1992' in subparagraph (B) 
thereof''.

    (e) Amendments Related to Section 13203.--Subsection (a) of section 
59 <<NOTE: 26 USC 59.>>  is amended--
            (1) by striking ``the amount determined under section 
        55(b)(1)(A)'' in paragraph (1)(A) and (2)(A)(i) and inserting 
        ``the pre-credit tentative minimum tax'',
            (2) by striking ``specified in section 55(b)(1)(A)'' in 
        paragraph (1)(C) and inserting ``specified in subparagraph 
        (A)(i) or (B)(i) of section 55(b)(1) (whichever applies)'',

[[Page 110 STAT. 1876]]

            (3) by striking ``which would be determined under section 
        55(b)(1)(A)'' in paragraph (2)(A)(ii) and inserting ``which 
        would be the pre-credit tentative minimum tax'', and
            (4) by adding at the end thereof the following new 
        paragraph:
            ``(3) Pre-credit tentative minimum tax.--For purposes of 
        this subsection, the term `pre-credit tentative minimum tax' 
        means--
                    ``(A) in the case of a taxpayer other than a 
                corporation, the amount determined under the first 
                sentence of section 55(b)(1)(A)(i), or
                    ``(B) in the case of a corporation, the amount 
                determined under section 55(b)(1)(B)(i).''.

    (f) Amendment Related to Section 13221.--Sections 1201(a) and 
1561(a) are each amended by striking ``last sentence'' each place it 
appears and inserting ``last 2 sentences''.
    (g) Amendments Related to Section 13222.--
            (1) Subparagraph (B) of section 6033(e)(1) is amended by 
        adding at the end thereof the following new clause:
                          ``(iii) Coordination with section 527(f).--
                      This subsection shall not apply to any amount on 
                      which tax is imposed by reason of section 
                      527(f).''.
            (2) Clause (i) of section 6033(e)(1)(B) is amended by 
        striking ``this subtitle'' and inserting ``section 501''.

    (h) Amendment Related to Section 13225.--Paragraph (3) of section 
6655(g) is amended by striking all that follows `` `3rd month' '' in the 
sentence following subparagraph (C) and inserting ``, subsection 
(e)(2)(A) shall be applied by substituting `2 months' for `3 months' in 
clause (i)(I), the election under clause (i) of subsection (e)(2)(C) may 
be made separately for each installment, and clause (ii) of subsection 
(e)(2)(C) shall not apply.''.
    (i) Amendments Related to Section 13231.--
            (1) Subparagraph (G) of section 904(d)(3) is amended by 
        striking ``section 951(a)(1)(B)'' and inserting ``subparagraph 
        (B) or (C) of section 951(a)(1)''.
            (2) Paragraph (1) of section 956A(b) is amended to read as 
        follows:
            ``(1) the amount (not including a deficit) referred to in 
        section 316(a)(1) to the extent such amount was accumulated in 
        prior taxable years beginning after September 30, 1993, and''.
            (3) Subsection (f) of section 956A is amended by inserting 
        before the period at the end thereof: ``and regulations 
        coordinating the provisions of subsections (c)(3)(A) and (d)''.
            (4) Subsection (b) of section 958 is amended by striking 
        ``956(b)(2)'' each place it appears and inserting ``956(c)(2)''.
            (5)(A) Subparagraph (A) of section 1297(d)(2) is amended by 
        striking ``The adjusted basis of any asset'' and inserting ``The 
        amount taken into account under section 1296(a)(2) with respect 
        to any asset''.
            (B) The paragraph heading of paragraph (2) of section 
        1297(d) is amended to read as follows:
            ``(2) Amount taken into account.--''.
            (6) Subsection (e) of section 1297 is amended by inserting 
        ``For purposes of this part--'' after the subsection heading.

    (j) Amendment Related to Section 13241.--Subparagraph (B) of section 
40(e)(1) is amended to read as follows:

[[Page 110 STAT. 1877]]

                    ``(B) for any period before January 1, 2001, during 
                which the rates of tax under section 4081(a)(2)(A) are 
                4.3 cents per gallon.''.

    (k) Amendment Related to Section 13242.--Paragraph (4) of section 
6427(f) is amended by striking ``1995'' and inserting ``1999''.
    (l) Amendment Related to Section 13261.--Clause (iii) of section 
13261(g)(2)(A) of the Revenue Reconciliation <<NOTE: 26 USC 197 note.>>  
Act of 1993 is amended by striking ``by the taxpayer'' and inserting 
``by the taxpayer or a related person''.

    (m) Amendment Related to Section 13301.--Subparagraph (B) of section 
1397B(d)(5) is amended by striking ``preceding''.
    (n) Clerical Amendments.--
            (1) Subsection (d) of section 39 is amended--
                    (A) by striking ``45'' in the heading of paragraph 
                (5) and inserting ``45A'', and
                    (B) by striking ``45'' in the heading of paragraph 
                (6) and inserting ``45B''.
            (2) Subparagraph (A) of section 108(d)(9) is amended by 
        striking ``paragraph (3)(B)'' and inserting ``paragraph 
        (3)(C)''.
            (3) Subparagraph (C) of section 143(d)(2) is amended by 
        striking the period at the end thereof and inserting a comma.
            (4) Clause (ii) of section 163(j)(6)(E) is amended by 
        striking ``which is a'' and inserting ``which is''.
            (5) Subparagraph (A) of section 1017(b)(4) is amended by 
        striking ``subsection (b)(2)(D)'' and inserting ``subsection 
        (b)(2)(E)''.
            (6) So much of section 1245(a)(3) as precedes subparagraph 
        (A) thereof is amended to read as follows:
            ``(3) Section 1245 property.--For purposes of this section, 
        the term `section 1245 property' means any property which is or 
        has been property of a character subject to the allowance for 
        depreciation provided in section 167 and is either--''.
            (7) Paragraph (2) of section 1394(e) is amended--
                    (A) by striking ``(i)'' and inserting ``(A)'', and
                    (B) by striking ``(ii)'' and inserting ``(B)''.
            (8) Subsection (m) of section 6501 (as redesignated by 
        section 1602) is amended by striking ``or 51(j)'' and inserting 
        ``45B, or 51(j)''.
            (9)(A) The section 6714 added by section 13242(b)(1) of the 
        Revenue Reconciliation Act of 1993 is hereby redesignated as 
        section 6715.
            (B) The table of sections for part I of subchapter B of 
        chapter 68 is amended by striking ``6714'' in the item added by 
        such section 13242(b)(2) of such Act and inserting ``6715''.
            (10) Paragraph (2) of section 9502(b) is amended by 
        inserting ``and before'' after ``1982,''.
            (11) Subsection (a)(3) of section 13206 of the Revenue 
        Reconciliation Act of 1993 is <<NOTE: 26 USC 1258 note.>>  
        amended by striking ``this section'' and inserting ``this 
        subsection''.
            (12) Paragraph (1) of section 13215(c) of the Revenue 
        Reconciliation Act of 1993 is <<NOTE: 42 USC 401 note.>>  
        amended by striking ``Public Law 92-21'' and inserting ``Public 
        Law 98-21''.
            (13) Paragraph (2) of section 13311(e) of the Revenue 
        Reconciliation Act of 1993 is <<NOTE: 26 USC 38 note.>>  amended 
        by striking ``section 1393(a)(3)'' and inserting ``section 
        1393(a)(2)''.

[[Page 110 STAT. 1878]]

            (14) Subparagraph (B) of section 117(d)(2) is amended by 
        striking ``section 132(f)'' and inserting ``section 132(h)''.

    (o) Effective <<NOTE: 26 USC 39 note.>>  Date.--Any amendment made 
by this section shall take effect as if included in the provision of the 
Revenue Reconciliation Act of 1993 to which such amendment relates.

SEC. 1704. MISCELLANEOUS PROVISIONS.

    (a) Application <<NOTE: 26 USC 401, 420, 4980.>>  of Amendments Made 
by Title XII of Omnibus Budget Reconciliation Act of 1990.--Except as 
otherwise expressly provided, whenever in title XII of the Omnibus 
Budget Reconciliation Act of 1990 an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

    (b) Treatment of Certain Amounts Under Hedge Bond Rules.--
            (1) In general.--Clause (iii) of section 149(g)(3)(B) is 
        amended to read as follows:
                          ``(iii) Amounts held pending reinvestment or 
                      redemption.--Amounts held for not more than 30 
                      days pending reinvestment or bond redemption shall 
                      be treated as invested in bonds described in 
                      clause (i).''.
            (2) Effective <<NOTE: 26 USC 149 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in the amendments made by section 7651 of the Omnibus Budget 
        Reconciliation Act of 1989.

    (c) Treatment of Certain Distributions Under Section 1445.--
            (1) In general.--Paragraph (3) of section 1445(e) is 
        amended by adding at the end thereof the following new sentence: 
        ``Rules similar to the rules of the preceding provisions of this 
        paragraph shall apply in the case of any distribution to which 
        section 301 applies and which is not made out of the earnings 
        and profits of such a domestic corporation.''.
            (2) Effective <<NOTE: 26 USC 1445 note.>>  date.--The 
        amendment made by paragraph (1) shall apply to distributions 
        after the date of the enactment of this Act.

    (d) Treatment of Certain Credits Under Section 469.--
            (1) In general.--Subparagraph (B) of section 469(c)(3) is 
        amended by adding at the end thereof the following new sentence: 
        ``If the preceding sentence applies to the net income from any 
        property for any taxable year, any credits allowable under 
        subpart B (other than section 27(a)) or D of part IV of 
        subchapter A for such taxable year which are attributable to 
        such property shall be treated as credits not from a passive 
        activity to the extent the amount of such credits does not 
        exceed the regular tax liability of the taxpayer for the taxable 
        year which is allocable to such net income.''.
            (2) Effective <<NOTE: 26 USC 469 note.>>  date.--The 
        amendment made by paragraph (1) shall apply to taxable years 
        beginning after December 31, 1986.

    (e) Treatment of Dispositions Under Passive Loss Rules.--
            (1) In general.--Subparagraph (A) of section 469(g)(1) is 
        amended to read as follows:
                    ``(A) In general.--If all gain or loss realized on 
                such disposition is recognized, the excess of--

[[Page 110 STAT. 1879]]

                          ``(i) any loss from such activity for such 
                      taxable year (determined after the application of 
                      subsection (b)), over
                          ``(ii) any net income or gain for such taxable 
                      year from all other passive activities (determined 
                      after the application of subsection (b)),
                shall be treated as a loss which is not from a passive 
                activity.''.
            (2) Effective <<NOTE: 26 USC 469 note.>>  date.--The 
        amendment made by paragraph (1) shall apply to taxable years 
        beginning after December 31, 1986.

    (f) Miscellaneous Amendments to Foreign Provisions.--
            (1) Coordination of unified estate tax credit with 
        treaties.--Subparagraph (A) of section 2102(c)(3) is amended by 
        adding at the end thereof the following new sentence: ``For 
        purposes of the preceding sentence, property shall not be 
        treated as situated in the United States if such property is 
        exempt from the tax imposed by this subchapter under any treaty 
        obligation of the United States.''.
            (2) Treatment of certain interest paid to related 
        person.--
                    (A) Subparagraph (B) of section 163(j)(1) is amended 
                by inserting before the period at the end thereof the 
                following: ``(and clause (ii) of paragraph (2)(A) shall 
                not apply for purposes of applying this subsection to 
                the amount so treated)''.
                    (B) Subsection (j) of section 163 is amended by 
                redesignating paragraph (7) as paragraph (8) and by 
                inserting after paragraph (6) the following new 
                paragraph:
            ``(7) Coordination with passive loss rules, etc.--This 
        subsection shall be applied before sections 465 and 469.''.
                    (C) The amendments <<NOTE: 26 USC 163 note.>>  made 
                by this paragraph shall apply as if included in the 
                amendments made by section 7210(a) of the Revenue 
                Reconciliation Act of 1989.
            (3) Treatment of interest allocable to effectively connected 
        income.--
                    (A) In general.--
                          (i) Subparagraph (B) of section 884(f)(1) is 
                      amended by striking ``to the extent'' and all that 
                      follows down through ``subparagraph (A)'' and 
                      inserting ``to the extent that the allocable 
                      interest exceeds the interest described in 
                      subparagraph (A)''.
                          (ii) The second sentence of section 884(f)(1) 
                      is amended by striking ``reasonably expected'' and 
                      all that follows down through the period at the 
                      end thereof and inserting ``reasonably expected to 
                      be allocable interest.''.
                          (iii) Paragraph (2) of section 884(f) is 
                      amended to read as follows:
            ``(2) Allocable interest.--For purposes of this subsection, 
        the term `allocable interest' means any interest which is 
        allocable to income which is effectively connected (or treated 
        as effectively connected) with the conduct of a trade or 
        business in the United States.''.
                    (B) Effective <<NOTE: 26 USC 884 note.>>  date.--The 
                amendments made by subparagraph (A) shall take effect as 
                if included in the

[[Page 110 STAT. 1880]]

                amendments made by section 1241(a) of the Tax Reform Act 
                of 1986.
            (4) Clarification of source rule.--
                    (A) In general.--Paragraph (2) of section 865(b) is 
                amended by striking ``863(b)'' and inserting ``863''.
                    (B) Effective <<NOTE: 26 USC 865 note.>>  date.--The 
                amendment made by subparagraph (A) shall take effect as 
                if included in the amendments made by section 1211 of 
                the Tax Reform Act of 1986.
            (5) Repeal of obsolete provisions.--
                    (A) Paragraph (1) of section 6038(a) is amended by 
                striking ``, and'' at the end of subparagraph (E) and 
                inserting a period, and by striking subparagraph (F).
                    (B) Subsection (b) of section 6038A is amended by 
                adding ``and'' at the end of paragraph (2), by striking 
                ``, and'' at the end of paragraph (3) and inserting a 
                period, and by striking paragraph (4).

    (g) Clarification of Treatment of Medicare Entitlement Under COBRA 
Provisions.--
            (1) In general.--
                    (A) Subclause (V) of section 4980B(f)(2)(B)(i) is 
                amended to read as follows:
                                    ``(V) Medicare entitlement followed 
                                by qualifying event.--In the case of a 
                                qualifying event described in paragraph 
                                (3)(B) that occurs less than 18 months 
                                after the date the covered employee 
                                became entitled to benefits under title 
                                XVIII of the Social Security Act, the 
                                period of coverage for qualified 
                                beneficiaries other than the covered 
                                employee shall not terminate under this 
                                clause before the close of the 36-month 
                                period beginning on the date the covered 
                                employee became so entitled.''.
                    (B) Clause (v) of section 602(2)(A) of the Employee 
                Retirement Income Security Act of 1974 <<NOTE: 29 USC 
                1162.>>  is amended to read as follows:
                          ``(v) Medicare entitlement followed by 
                      qualifying event.--In the case of a qualifying 
                      event described in section 603(2) that occurs less 
                      than 18 months after the date the covered employee 
                      became entitled to benefits under title XVIII of 
                      the Social Security Act, the period of coverage 
                      for qualified beneficiaries other than the covered 
                      employee shall not terminate under this 
                      subparagraph before the close of the 36-month 
                      period beginning on the date the covered employee 
                      became so entitled.''.
                    (C) Clause (iv) of section 2202(2)(A) of the Public 
                Health Service Act is amended to read <<NOTE: 42 USC 
                300bb-2.>>  as follows:
                          ``(iv) Medicare entitlement followed by 
                      qualifying event.--In the case of a qualifying 
                      event described in section 2203(2) that occurs 
                      less than 18 months after the date the covered 
                      employee became entitled to benefits under title 
                      XVIII of the Social Security Act, the period of 
                      coverage for qualified beneficiaries other than 
                      the covered employee shall not terminate under 
                      this subparagraph before the close

[[Page 110 STAT. 1881]]

                      of the 36-month period beginning on the date the 
                      covered employee became so entitled.''.
            (2) Effective <<NOTE: 26 USC 4980B note.>>  date.--The 
        amendments made by this subsection shall apply to plan years 
        beginning after December 31, 1989.

    (h) Treatment of Certain REMIC Inclusions.--
            (1) In general.--Subsection (a) of section 860E is amended 
        by adding at the end thereof the following new paragraph:
            ``(6) Coordination with minimum tax.--For purposes of part 
        VI of subchapter A of this chapter--
                    ``(A) the reference in section 55(b)(2) to taxable 
                income shall be treated as a reference to taxable income 
                determined without regard to this subsection,
                    ``(B) the alternative minimum taxable income of any 
                holder of a residual interest in a REMIC for any taxable 
                year shall in no event be less than the excess inclusion 
                for such taxable year, and
                    ``(C) any excess inclusion shall be disregarded for 
                purposes of computing the alternative tax net operating 
                loss deduction.
        The preceding sentence shall not apply to any organization to 
        which section 593 applies, except to the extent provided in 
        regulations prescribed by the Secretary under paragraph (2).''.
            (2) Effective <<NOTE: 26 USC 860E note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in the amendments made by section 671 of the Tax Reform Act of 
        1986 unless the taxpayer elects to apply such amendment only to 
        taxable years beginning after the date of the enactment of this 
        Act.

    (i) Exemption From Harbor Maintenance Tax for Certain Passengers.--
            (1) In general.--Subparagraph (D) of section 4462(b)(1) 
        (relating to special rule for Alaska, Hawaii, and possessions) 
        is amended by inserting before the period the following: 
        ``, or passengers transported on United States flag vessels 
        operating solely within the State waters of Alaska or Hawaii and 
        adjacent international waters''.
            (2) Effective <<NOTE: 26 USC 4462 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in the amendments made by section 1402(a) of the Harbor 
        Maintenance Revenue Act of 1986.

    (j) Amendments Related to Revenue Provisions of Energy Policy Act of 
1992.--
            (1) Effective with respect to taxable years beginning after 
        December 31, 1990, subclause (II) of section 53(d)(1)(B)(iv) is 
        amended to read as follows:
                                    ``(II) the adjusted net minimum tax 
                                for any taxable year is the amount of 
                                the net minimum tax for such year 
                                increased in the manner provided in 
                                clause (iii).''.
            (2) Subsection (g) of section 179A is redesignated as 
        subsection (f).
            (3) Subparagraph (E) of section 6724(d)(3) is amended by 
        striking ``section 6109(f)'' and inserting ``section 6109(h)''.
            (4)(A) Subsection (d) of section 30 is amended--

[[Page 110 STAT. 1882]]

                    (i) by inserting ``(determined without regard to 
                subsection (b)(3))'' before the period at the end of 
                paragraph (1) thereof, and
                    (ii) by adding at the end thereof the following new 
                paragraph:
            ``(4) Election to not take credit.--No credit shall be 
        allowed under subsection (a) for any vehicle if the taxpayer 
        elects to not have this section apply to such vehicle.''.
            (B) Subsection (m) of section 6501 (as redesignated by 
        section 1602) is amended by striking ``section 40(f)'' and 
        inserting ``sections 30(d)(4), 40(f)''.
            (5) Subclause (III) of section 501(c)(21)(D)(ii) is amended 
        by striking ``section 101(6)'' and inserting ``section 101(7)'' 
        and by striking ``1752(6)'' and inserting ``1752(7)''.
            (6) Paragraph <<NOTE: 26 USC 468A.>>  (1) of section 1917(b) 
        of the Energy Policy Act of 1992 shall be applied as if ``at a 
        rate'' appeared instead of ``at the rate'' in the material 
        proposed to be stricken.
            (7) Paragraph <<NOTE: 26 USC 142.>>  (2) of section 1921(b) 
        of the Energy Policy Act of 1992 shall be applied as if a comma 
        appeared after ``(2)'' in the material proposed to be stricken.
            (8) Subsection <<NOTE: 26 USC 737.>>  (a) of section 1937 of 
        the Energy Policy Act of 1992 shall be applied as if ``Subpart 
        B'' appeared instead of ``Subpart C''.

    (k) Treatment <<NOTE: 26 USC 401 note.>>  of Qualified Football 
Coaches Plan.--
            (1) In general.--For purposes of the Internal Revenue Code 
        of 1986, a qualified football coaches plan--
                    (A) shall be treated as a multiemployer collectively 
                bargained plan, and
                    (B) notwithstanding section 401(k)(4)(B) of such 
                Code, may include a qualified cash and deferred 
                arrangement under section 401(k) of such Code.
            (2) Qualified football coaches plan.--For purposes of this 
        subsection, the term ``qualified football coaches plan'' means 
        any defined contribution plan which is established and 
        maintained by an organization--
                    (A) which is described in section 501(c) of such 
                Code,
                    (B) the membership of which consists entirely of 
                individuals who primarily coach football as full-time 
                employees of 4-year colleges or universities described 
                in section 170(b)(1)(A)(ii) of such Code, and
                    (C) which was in existence on September 18, 1986.
            (3) Effective date.--This subsection shall apply to years 
        beginning after December 22, 1987.

    (l) Determination of Unrecovered Investment in Annuity Contract.--
            (1) In general.--Subparagraph (A) of section 72(b)(4) is 
        amended by inserting ``(determined without regard to subsection 
        (c)(2))'' after ``contract''.
            (2) Effective <<NOTE: 26 USC 72 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in the amendments made by section 1122(c) of the Tax Reform Act 
        of 1986.

    (m) Modifications to Election To Include Child's Income on Parent's 
Return.--
            (1) Eligibility for election.--Clause (ii) of section 
        1(g)(7)(A) (relating to election to include certain unearned 
        income of child on parent's return) is amended to read as 
        follows:

[[Page 110 STAT. 1883]]

                          ``(ii) such gross income is more than the 
                      amount described in paragraph (4)(A)(ii)(I) and 
                      less than 10 times the amount so described,''.
            (2) Computation of tax.--Subparagraph (B) of section 1(g)(7) 
        (relating to income included on parent's return) is amended--
                    (A) by striking ``$1,000'' in clause (i) and 
                inserting ``twice the amount described in paragraph 
                (4)(A)(ii)(I)'', and
                    (B) by amending subclause (II) of clause (ii) to 
                read as follows:
                                    ``(II) for each such child, 15 
                                percent of the lesser of the amount 
                                described in paragraph (4)(A)(ii)(I) or 
                                the excess of the gross income of such 
                                child over the amount so described, 
                                and''.
            (3) Minimum tax.--Subparagraph (B) of section 59(j)(1) is 
        amended by striking ``$1,000'' and inserting ``twice the amount 
        in effect for the taxable year under section 63(c)(5)(A)''.
            (4) Effective <<NOTE: 26 USC 1 note.>>  date.--The 
        amendments made by this subsection shall apply to taxable years 
        beginning after December 31, 1995.

    (n) Treatment of Certain Veterans' Reemployment Rights.--
            (1) In general.--Section 414 is amended by adding at the end 
        the following new subsection:

    ``(u) Special Rules Relating to Veterans' Reemployment Rights Under 
USERRA.--
            ``(1) Treatment of certain contributions made pursuant to 
        veterans' reemployment rights.--If any contribution is made by 
        an employer or an employee under an individual account plan with 
        respect to an employee, or by an employee to a defined benefit 
        plan that provides for employee contributions, and such 
        contribution is required by reason of such employee's rights 
        under chapter 43 of title 38, United States Code, resulting from 
        qualified military service, then--
                    ``(A) such contribution shall not be subject to any 
                otherwise applicable limitation contained in section 
                402(g), 402(h), 403(b), 404(a), 404(h), 408, 415, or 
                457, and shall not be taken into account in applying 
                such limitations to other contributions or benefits 
                under such plan or any other plan, with respect to the 
                year in which the contribution is made,
                    ``(B) such contribution shall be subject to the 
                limitations referred to in subparagraph (A) with respect 
                to the year to which the contribution relates (in 
                accordance with rules prescribed by the Secretary), and
                    ``(C) such plan shall not be treated as failing to 
                meet the requirements of section 401(a)(4), 401(a)(26), 
                401(k)(3), 401(k)(11), 401(k)(12), 401(m), 403(b)(12), 
                408(k)(3), 408(k)(6), 408(p), 410(b), or 416 by reason 
                of the making of (or the right to make) such 
                contribution.
        For purposes of the preceding sentence, any elective deferral or 
        employee contribution made under paragraph (2) shall be treated 
        as required by reason of the employee's rights under such 
        chapter 43.
            ``(2) Reemployment rights under userra with respect to 
        elective deferrals.--

[[Page 110 STAT. 1884]]

                    ``(A) In general.--For purposes of this subchapter 
                and section 457, if an employee is entitled to the 
                benefits of chapter 43 of title 38, United States Code, 
                with respect to any plan which provides for elective 
                deferrals, the employer sponsoring the plan shall be 
                treated as meeting the requirements of such chapter 43 
                with respect to such elective deferrals only if such 
                employer--
                          ``(i) permits such employee to make additional 
                      elective deferrals under such plan (in the amount 
                      determined under subparagraph (B) or such lesser 
                      amount as is elected by the employee) during the 
                      period which begins on the date of the 
                      reemployment of such employee with such employer 
                      and has the same length as the lesser of--
                                    ``(I) the product of 3 and the 
                                period of qualified military service 
                                which resulted in such rights, and
                                    ``(II) 5 years, and
                          ``(ii) makes a matching contribution with 
                      respect to any additional elective deferral made 
                      pursuant to clause (i) which would have been 
                      required had such deferral actually been made 
                      during the period of such qualified military 
                      service.
                    ``(B) Amount of makeup required.--The amount 
                determined under this subparagraph with respect to any 
                plan is the maximum amount of the elective deferrals 
                that the individual would have been permitted to make 
                under the plan in accordance with the limitations 
                referred to in paragraph (1)(A) during the period of 
                qualified military service if the individual had 
                continued to be employed by the employer during such 
                period and received compensation as determined under 
                paragraph (7). Proper adjustment shall be made to the 
                amount determined under the preceding sentence for any 
                elective deferrals actually made during the period of 
                such qualified military service.
                    ``(C) Elective deferral.--For purposes of this 
                paragraph, the term `elective deferral' has the meaning 
                given such term by section 402(g)(3); except that such 
                term shall include any deferral of compensation under an 
                eligible deferred compensation plan (as defined in 
                section 457(b)).
                    ``(D) After-tax employee contributions.--References 
                in subparagraphs (A) and (B) to elective deferrals shall 
                be treated as including references to employee 
                contributions.
            ``(3) Certain retroactive adjustments not required.--For 
        purposes of this subchapter and subchapter E, no provision of 
        chapter 43 of title 38, United States Code, shall be construed 
        as requiring--
                    ``(A) any crediting of earnings to an employee with 
                respect to any contribution before such contribution is 
                actually made, or
                    ``(B) any allocation of any forfeiture with respect 
                to the period of qualified military service.
            ``(4) Loan repayment suspensions permitted.--If any plan 
        suspends the obligation to repay any loan made to an employee 
        from such plan for any part of any period during which such 
        employee is performing service in the uniformed services (as 
        defined in chapter 43 of title 38, United States

[[Page 110 STAT. 1885]]

        Code), whether or not qualified military service, such 
        suspension shall not be taken into account for purposes of 
        section 72(p), 401(a), or 4975(d)(1).
            ``(5) Qualified military service.--For purposes of this 
        subsection, the term `qualified military service' means any 
        service in the uniformed services (as defined in chapter 43 of 
        title 38, United States Code) by any individual if such 
        individual is entitled to reemployment rights under such chapter 
        with respect to such service.
            ``(6) Individual account plan.--For purposes of this 
        subsection, the term `individual account plan' means any defined 
        contribution plan (including any tax-sheltered annuity plan 
        under section 403(b), any simplified employee pension under 
        section 408(k), any qualified salary reduction arrangement under 
        section 408(p), and any eligible deferred compensation plan (as 
        defined in section 457(b)).
            ``(7) Compensation.--For purposes of sections 403(b)(3), 
        415(c)(3), and 457(e)(5), an employee who is in qualified 
        military service shall be treated as receiving compensation from 
        the employer during such period of qualified military service 
        equal to--
                    ``(A) the compensation the employee would have 
                received during such period if the employee were not in 
                qualified military service, determined based on the rate 
                of pay the employee would have received from the 
                employer but for absence during the period of qualified 
                military service, or
                    ``(B) if the compensation the employee would have 
                received during such period was not reasonably certain, 
                the employee's average compensation from the employer 
                during the 12-month period immediately preceding the 
                qualified military service (or, if shorter, the period 
                of employment immediately preceding the qualified 
                military service).
            ``(8) USERRA requirements for qualified retirement plans.--
        For purposes of this subchapter and section 457, an employer 
        sponsoring a retirement plan shall be treated as meeting the 
        requirements of chapter 43 of title 38, United States Code, only 
        if each of the following requirements is met:
                    ``(A) An individual reemployed under such chapter is 
                treated with respect to such plan as not having incurred 
                a break in service with the employer maintaining the 
                plan by reason of such individual's period of qualified 
                military service.
                    ``(B) Each period of qualified military service 
                served by an individual is, upon reemployment under such 
                chapter, deemed with respect to such plan to constitute 
                service with the employer maintaining the plan for the 
                purpose of determining the nonforfeitability of the 
                individual's accrued benefits under such plan and for 
                the purpose of determining the accrual of benefits under 
                such plan.
                    ``(C) An individual reemployed under such chapter is 
                entitled to accrued benefits that are contingent on the 
                making of, or derived from, employee contributions or 
                elective deferrals only to the extent the individual 
                makes payment to the plan with respect to such 
                contributions or deferrals. No such payment may exceed 
                the amount the

[[Page 110 STAT. 1886]]

                individual would have been permitted or required to 
                contribute had the individual remained continuously 
                employed by the employer throughout the period of 
                qualified military service. Any payment to such plan 
                shall be made during the period beginning with the date 
                of reemployment and whose duration is 3 times the period 
                of the qualified military service (but not greater than 
                5 years).
            ``(9) Plans not subject to title 38.--This subsection shall 
        not apply to any retirement plan to which chapter 43 of title 
        38, United States Code, does not apply.
            ``(10) References.--For purposes of this section, any 
        reference to chapter 43 of title 38, United States Code, shall 
        be treated as a reference to such chapter as in effect on 
        December 12, 1994 (without regard to any subsequent 
        amendment).''.
            (2) Amendment to erisa.--Section 408(b)(1) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 1148(b)) 
        is <<NOTE: 29 USC 1108.>>  amended by adding at the end the 
        following new sentence: ``A loan made by a plan shall not fail 
        to meet the requirements of the preceding sentence by reason of 
        a loan repayment suspension described under section 414(u)(4) of 
        the Internal Revenue Code of 1986.''.
            (3) Effective <<NOTE: 26 USC 414 note.>>  date.--The 
        amendments made by this subsection shall be effective as of 
        December 12, 1994.

    (o) Reporting of Real Estate Transactions.--
            (1) In general.--Paragraph (3) of section 6045(e) (relating 
        to prohibition of separate charge for filing return) is amended 
        by adding at the end the following new sentence: ``Nothing in 
        this paragraph shall be construed to prohibit the real estate 
        reporting person from taking into account its cost of complying 
        with such requirement in establishing its charge (other than a 
        separate charge for complying with such requirement) to any 
        customer for performing services in the case of a real estate 
        transaction.''.
            (2) Effective <<NOTE: 26 USC 6045 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in section 1015(e)(2)(A) of the Technical and Miscellaneous 
        Revenue Act of 1988.

    (p) Clarification of Denial of Deduction for Stock Redemption 
Expenses.
            (1) In general.--Paragraph (1) of section 162(k) is 
        amended by striking ``the redemption of its stock'' and 
        inserting ``the reacquisition of its stock or of the stock of 
        any related person (as defined in section 465(b)(3)(C))''.
            (2) Certain deductions permitted.--Subparagraph (A) of 
        section 162(k)(2) is amended by striking ``or'' at the end of 
        clause (i), by redesignating clause (ii) as clause (iii), and by 
        inserting after clause (i) the following new clause:
                          ``(ii) deduction for amounts which are 
                      properly allocable to indebtedness and amortized 
                      over the term of such indebtedness, or''.
            (3) Clerical amendment.--The subsection heading for 
        subsection (k) of section 162 is amended by striking 
        ``Redemption'' and inserting ``Reacquisition''.
            (4) Effective <<NOTE: 26 USC 162 note.>>  date.--
                    (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by this subsection shall apply

[[Page 110 STAT. 1887]]

                to amounts paid or incurred after September 13, 1995, in 
                taxable years ending after such date.
                    (B) Paragraph (2).--The amendment made by paragraph 
                (2) shall take effect as if included in the amendment 
                made by section 613 of the Tax Reform Act of 1986.

    (q) Clerical Amendment to Section 404.--
            (1) In general.--Paragraph (1) of section 404(j) is amended 
        by striking ``(10)'' and inserting ``(9)''.
            (2) Effective <<NOTE: 26 USC 404 note.>>  date.--The 
        amendment made by paragraph (1) shall take effect as if included 
        in the amendments made by section 713(d)(4)(A) of the Deficit 
        Reduction Act of 1984.

    (r) Passive Income Not To Include FSC Income, Etc.--
            (1) In general.--Paragraph (2) of section 1296(b) is 
        amended by striking ``or'' at the end of subparagraph (B), by 
        striking the period at the end of subparagraph (C) and inserting 
        ``, or'', and by inserting after subparagraph (C) the following 
        new subparagraph:
                    ``(D) which is foreign trade income of an FSC or 
                export trade income of an export trade corporation (as 
                defined in section 971).''.
            (2) Effective <<NOTE: 26 USC 1296 note.>>  date.--The 
        amendments made by paragraph (1) shall take effect as if 
        included in the amendments made by section 1235 of the Tax 
        Reform Act of 1986.

    (s) Technical Correction of Intermediate Sanctions 
Provisions.--
            (1) Subparagraph (C) of section 6652(c)(1) is amended by 
        striking ``$10'' and inserting ``$20'', and by striking 
        ``$5,000'' and inserting ``$10,000''.
            (2) Subparagraph (D) of section 6652(c)(1) is amended by 
        striking ``$10'' and inserting ``$20''.

    (t) Miscellaneous Clerical Amendments.--
            (1) Subclause (II) of section 56(g)(4)(C)(ii) is amended by 
        striking ``of the subclause'' and inserting ``of subclause''.
            (2) Paragraph (2) of section 72(m) is amended by inserting 
        ``and'' at the end of subparagraph (A), by striking subparagraph 
        (B), and by redesignating subparagraph (C) as subpara-
        graph (B).
            (3) Paragraph (2) of section 86(b) is amended by striking 
        ``adusted'' and inserting ``adjusted''.
            (4)(A) The heading for section 112 is amended by striking 
        ``combat pay'' and inserting ``combat zone compensation''.
            (B) The item relating to section 112 in the table of 
        sections for part III of subchapter B of chapter 1 is amended by 
        striking ``combat pay'' and inserting ``combat zone 
        compensation''.
            (C) Paragraph (1) of section 3401(a) is amended by striking 
        ``combat pay'' and inserting ``combat zone compensation''.
            (5) Clause (i) of section 172(h)(3)(B) is amended by 
        striking the comma at the end thereof and inserting a period.
            (6) Clause (ii) of section 543(a)(2)(B) is amended by 
        striking ``section 563(c)'' and inserting ``section 563(d)''.
            (7) Paragraph (1) of section 958(a) is amended by striking 
        ``sections 955(b)(1) (A) and (B), 955(c)(2)(A)(ii), and 
        960(a)(1)'' and inserting ``section 960(a)(1)''.
            (8) Subsection (g) of section 642 is amended by striking 
        ``under 2621(a)(2)'' and inserting ``under section 2621(a)(2)''.
            (9) Section 1463 is amended by striking ``this subsection'' 
        and inserting ``this section''.

[[Page 110 STAT. 1888]]

            (10) Subsection (k) of section 3306 is amended by inserting 
        a period at the end thereof.
            (11) The item relating to section 4472 in the table of 
        sections for subchapter B of chapter 36 is amended by striking 
        ``and special rules''.
            (12) Paragraph (3) of section 5134(c) is amended by striking 
        ``section 6662(a)'' and inserting ``section 6665(a)''.
            (13) Paragraph (2) of section 5206(f) is amended by striking 
        ``section 5(e)'' and inserting ``section 105(e)''.
            (14) Paragraph (1) of section 6050B(c) is amended by 
        striking ``section 85(c)'' and inserting ``section 85(b)''.
            (15) Subsection (k) of section 6166 is amended by striking 
        paragraph (6).
            (16) Subsection (e) of section 6214 is amended to read as 
        follows:

    ``(e) Cross Reference.--
                  ``For provision giving Tax Court jurisdiction to order 
                a refund of an overpayment and to award sanctions, see 
                section 6512(b)(2).''.

            (17) The section heading for section 6043 is amended by 
        striking the semicolon and inserting a comma.
            (18) The item relating to section 6043 in the table of 
        sections for subpart B of part III of subchapter A of chapter 61 
        is amended by striking the semicolon and inserting a comma.
            (19) The table of sections for part I of subchapter A of 
        chapter 68 is amended by striking the item relating to section 
        6662.
            (20)(A) Section 7232 is amended--
                    (i) by striking ``lubricating oil,'' in the 
                heading, and
                    (ii) by striking ``lubricating oil,'' in the text.
            (B) The table of sections for part II of subchapter A of 
        chapter 75 is amended by striking ``lubricating oil,'' in the 
        item relating to section 7232.
            (21) Paragraph (1) of section 6701(a) of the Omnibus Budget 
        Reconciliation Act of 1989 <<NOTE: 26 USC 4980B.>>  is amended 
        by striking ``subclause (IV)'' and inserting ``subclause (V)''.
            (22) Clause <<NOTE: 26 USC 4979A.>>  (ii) of section 
        7304(a)(2)(D) of such Act is amended by striking ``subsection 
        (c)(2)'' and inserting ``subsection (c)''.
            (23) Paragraph <<NOTE: 26 USC 6050H.>>  (1) of section 
        7646(b) of such Act is amended by striking ``section 
        6050H(b)(1)'' and inserting ``section 6050H(b)(2)''.
            (24) Paragraph <<NOTE: 26 USC 461.>>  (10) of section 
        7721(c) of such Act is 
        amended by striking ``section 6662(b)(2)(C)(ii)'' and inserting 
        ``section 6661(b)(2)(C)(ii)''.
            (25) Subparagraph <<NOTE: 26 USC 954.>>  (A) of section 
        7811(i)(3) of such Act is amended by inserting ``the first place 
        it appears'' before ``in clause (i)''.
            (26) Paragraph <<NOTE: 26 USC 381.>>  (10) of section 
        7841(d) of such Act is 
        amended by striking ``section 381(a)'' and inserting ``section 
        381(c)''.
            (27) Paragraph <<NOTE: 26 USC 401 note.>>  (2) of section 
        7861(c) of such Act is amended by inserting ``the second place 
        it appears'' before ``and inserting''.
            (28) Paragraph (1) of section 460(b) is amended by striking 
        ``the look-back method of paragraph (3)'' and inserting ``the 
        look-back method of paragraph (2)''.

[[Page 110 STAT. 1889]]

            (29) Subparagraph (C) of section 50(a)(2) is amended by 
        striking ``subsection (c)(4)'' and inserting ``subsection 
        (d)(5)''.
            (30) Subparagraph (B) of section 172(h)(4) is amended by 
        striking the material following the heading and preceding clause 
        (i) and inserting ``For purposes of subsection 
        (b)(2)--''.
            (31) Subparagraph (A) of section 355(d)(7) is amended by 
        inserting ``section'' before ``267(b)''.
            (32) Subparagraph (C) of section 420(e)(1) is amended by 
        striking ``mean'' and inserting ``means''.
            (33) Paragraph (4) of section 537(b) is amended by striking 
        ``section 172(i)'' and inserting ``section 172(f)''.
            (34) Subparagraph (B) of section 613(e)(1) is amended by 
        striking the comma at the end thereof and inserting a period.
            (35) Paragraph (4) of section 856(a) is amended by striking 
        ``section 582(c)(5)'' and inserting ``section 582(c)(2)''.
            (36) Sections 904(f)(2)(B)(i) and 907(c)(4)(B)(iii) are each 
        amended by inserting ``(as in effect on the day before the date 
        of the enactment of the Revenue Reconciliation Act of 1990)'' 
        after ``section 172(h)''.
            (37) Subsection (b) of section 936 is amended by striking 
        ``subparagraphs (D)(ii)(I)'' and inserting ``subparagraphs 
        (D)(ii)''.
            (38) Subsection (c) of section 2104 is amended by striking 
        ``subparagraph (A), (C), or (D) of section 861(a)(1)'' and 
        inserting ``section 861(a)(1)(A)''.
            (39) Subparagraph (A) of section 280A(c)(1) is amended to 
        read as follows:
                    ``(A) as the principal place of business for any 
                trade or business of the taxpayer,''.
            (40) Section 6038 is amended by redesignating the subsection 
        relating to cross references as subsection (f).
            (41) Clause (iv) of section 6103(e)(1)(A) is amended by 
        striking all that follows ``provisions of'' and inserting 
        ``section 1(g) or 59(j);''.
            (42) The subsection (f) of section 6109 of the Internal 
        Revenue Code of 1986 which was added by section 2201(d) of 
        Public Law 101-624 is redesignated as subsection (g).
            (43) Subsection (b) of section 7454 is amended by striking 
        ``section 4955(e)(2)'' and inserting ``section 4955(f)(2)''.
            (44) Subsection <<NOTE: 26 USC 9507 note.>>  (d) of section 
        11231 of the 
        Revenue Reconciliation Act of 1990 shall be applied as if 
        ``comma'' appeared instead of ``period'' and as if the paragraph 
        (9) proposed to be added ended with a comma.
            (45) Paragraph <<NOTE: 26 USC 832.>>  (1) of section 
        11303(b) of the 
        Revenue Reconciliation Act of 1990 shall be applied as if 
        ``paragraph'' appeared instead of ``subparagraph'' in the 
        material proposed to be stricken.
            (46) Subsection (f) of section 11701 of the 
        Revenue Reconciliation Act of 1990 <<NOTE: 26 USC 6038.>>  is 
        amended by inserting ``(relating to definitions)'' after 
        ``section 6038(e)''.
            (47) Subsection <<NOTE: 26 USC 1253.>>  (i) of section 11701 
        of the 
        Revenue Reconciliation Act of 1990 shall be applied as if 
        ``subsection'' appeared instead of ``section'' in the material 
        proposed to be stricken.
            (48) Subparagraph <<NOTE: 26 USC 56.>>  (B) of section 
        11801(c)(2) of the Revenue Reconciliation Act of 1990 shall be 
        applied as if ``section 56(g)'' appeared instead of  ``section 
        59(g)''.

[[Page 110 STAT. 1890]]

            (49) Subparagraph <<NOTE: 26 USC 247.>>  (C) of section 
        11801(c)(8) of the Revenue Reconciliation Act of 1990 shall be 
        applied as if ``reorganizations'' appeared instead of 
        ``reorganization'' in the material proposed to be stricken.
            (50) Subparagraph <<NOTE: 26 USC 1042.>>  (H) of section 
        11801(c)(9) of the Revenue Reconciliation Act of 1990 shall be 
        applied as if ``section 1042(c)(1)(B)'' appeared instead of 
        ``section 1042(c)(2)(B)''.
            (51) Subparagraph <<NOTE: 26 USC 593.>>  (F) of section 
        11801(c)(12) of the 
        Revenue Reconciliation Act of 1990 shall be applied as if ``and 
        (3)'' appeared instead of  ``and (E)''.
            (52) Subparagraph <<NOTE: 26 USC 6302.>>  (A) of section 
        11801(c)(22) of the 
        Revenue Reconciliation Act of 1990 shall be applied as if 
        ``chapters 21'' appeared instead of ``chapter 21'' in the 
        material proposed to be stricken.
            (53) Paragraph <<NOTE: 26 USC 42.>>  (3) of section 11812(b) 
        of the 
        Revenue Reconciliation Act of 1990 shall be applied by not 
        executing the amendment therein to the heading of section 
        42(d)(5)(B).
            (54) Clause <<NOTE: 26 USC 168.>>  (i) of section 
        11813(b)(9)(A) of the Revenue Reconciliation Act of 1990 shall 
        be applied as if a comma appeared after ``(3)(A)(ix)'' in the 
        material proposed to be stricken.
            (55) Subparagraph <<NOTE: 26 USC prec. 261.>>  (F) of 
        section 11813(b)(13) of the 
        Revenue Reconciliation Act of 1990 shall be applied as if 
        ``tax'' appeared after ``investment'' in the material proposed 
        to be stricken.
            (56) Paragraph <<NOTE: 26 USC 1016.>>  (19) of section 
        11813(b) of the Revenue Reconciliation Act of 1990 shall be 
        applied as if ``Paragraph (20) of section 1016(a), as 
        redesignated by section 11801,'' appeared instead of  
        ``Paragraph (21) of section 1016(a)''.
            (57) Paragraph <<NOTE: 26 USC 4481.>>  (5) section 8002(a) 
        of the Surface Transportation Revenue Act of 1991 shall be 
        applied as if ``4481(e)'' appeared instead of  ``4481(c)''.
            (58) Section 7872 is amended--
                    (A) by striking ``foregone'' each place it appears 
                in subsections (a) and (e)(2) and inserting ``forgone'', 
                and
                    (B) by striking ``Foregone'' in the heading for 
                subsection (e) and the heading for paragraph (2) of 
                subsection (e) and inserting ``Forgone''.
            (59) Paragraph (7) of section 7611(h) is amended by striking 
        ``approporiate'' and inserting ``appropriate''.
            (60) The heading of paragraph (3) of section 419A(c) is 
        amended by striking ``severence'' and inserting ``severance''.
            (61) Clause (ii) of section 807(d)(3)(B) is amended by 
        striking ``Commissoners' '' and inserting ``Commissioners' ''.
            (62) Subparagraph (B) of section 1274A(c)(1) is amended by 
        striking ``instument'' and inserting ``instrument''.
            (63) Subparagraph (B) of section 724(d)(3) by striking 
        ``Subparagaph'' and inserting ``Subparagraph''.
            (64) The last sentence of paragraph (2) of section 42(c) is 
        amended by striking ``of 1988''.
            (65) Paragraph (1) of section 9707(d) is amended by striking 
        ``diligence,'' and inserting ``diligence''.
            (66) Subsection (c) of section 4977 is amended by striking 
        ``section 132(i)(2)'' and inserting ``section 132(h)''.
            (67) The last sentence of section 401(a)(20) is amended by 
        striking ``section 211'' and inserting ``section 521''.

[[Page 110 STAT. 1891]]

            (68) Subparagraph (A) of section 402(g)(3) is amended by 
        striking ``subsection (a)(8)'' and inserting ``subsection 
        (e)(3)''.
            (69) The last sentence of section 403(b)(10) is amended by 
        striking ``an direct'' and inserting ``a direct''.
            (70) Subparagraph (A) of section 4973(b)(1) is amended by 
        striking ``sections 402(c)'' and inserting ``section 402(c)''.
            (71) Paragraph (12) of section 3405(e) is amended by 
        striking ``(b)(3)'' and inserting ``(b)(2)''.
            (72) Paragraph <<NOTE: 26 USC 4973.>>  (41) of section 
        521(b) of the Unemployment Compensation Amendments of 1992 shall 
        be applied as if ``section'' appeared instead of ``sections'' in 
        the material proposed to be stricken.
            (73) Paragraph <<NOTE: 26 USC 691.>>  (27) of section 521(b) 
        of the Unemployment Compensation Amendments of 1992 shall be 
        applied as if ``Section 691(c)(5)'' appeared instead of 
        ``Section 691(c)''.
            (74) Paragraph (5) of section 860F(a) is amended by striking 
        ``paragraph (1)'' and inserting ``paragraph (2)''.
            (75) Paragraph (1) of section 415(k) is amended by adding 
        ``or'' at the end of subparagraph (C), by striking subparagraphs 
        (D) and (E), and by redesignating subparagraph (F) as 
        subparagraph (D).
            (76) Paragraph (2) of section 404(a) is amended by striking 
        ``(18),''.
            (77) Clause (ii) of section 72(p)(4)(A) is amended to read 
        as follows:
                          ``(ii) Special rule.--The term `qualified 
                      employer plan' shall include any plan which was 
                      (or was determined to be) a qualified employer 
                      plan or a government plan.''.
            (78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each 
        amended by striking ``section 6662(d)(2)(C)(ii)'' and inserting 
        ``section 6662(d)(2)(C)(iii)''.
            (79) Subsection (a) of section 164 is amended by striking 
        the paragraphs relating to the generation-skipping tax 
        and the environmental tax imposed by section 59A and by 
        inserting after paragraph (3) the following new paragraphs:
            ``(4) The GST tax imposed on income distributions.
            ``(5) The environmental tax imposed by section 59A.''.
            (80) Subclause (I) of section 936(a)(4)(A)(ii) is amended by 
        striking ``deprecation'' and inserting ``depreciation''.

                      Subtitle H--Other Provisions

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

    (a) In General.--Section 4082 (relating to exemptions for diesel 
fuel) is amended by redesignating subsections (c) and (d) as subsections 
(d) and (e), respectively, and by inserting after subsection (b) the 
following new subsection:
    ``(c) Exception to Dyeing Requirements.--Paragraph (2) of subsection 
(a) shall not apply with respect to any diesel fuel--
            ``(1) removed, entered, or sold in a State for ultimate sale 
        or use in an area of such State during the period such area is 
        exempted from the fuel dyeing requirements under subsection (i) 
        of section 211 of the Clean Air Act (as in effect on the date of 
        the enactment of this subsection) by the Administrator

[[Page 110 STAT. 1892]]

        of the Environmental Protection Agency under paragraph (4) of 
        such subsection (i) (as so in effect), and
            ``(2) the use of which is certified pursuant to regulations 
        issued by the Secretary.''.

    (b) Effective <<NOTE: 26 USC 4082 note.>>  Date.--The amendments 
made by this section shall apply with respect to fuel removed, entered, 
or sold on or after the first day of the first calendar quarter 
beginning after the date of the enactment of this Act.

SEC. 1802. TREATMENT <<NOTE: 26 USC 3121 note.>>  OF CERTAIN UNIVERSITY 
            ACCOUNTS.

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

    (b) Effective Date.--The provisions of subsection (a) shall apply to 
remuneration paid after December 31, 1996.
SEC. 1803. MODIFICATIONS TO EXCISE TAX ON OZONE-DEPLETING 
                          CHEMICALS.

    (a) Recycled Halon.--
            (1) In general.--Section 4682(d)(1) (relating to recycling) 
        is amended by inserting ``, or on any recycled halon imported 
        from any country which is a signatory to the Montreal Protocol 
        on Substances that Deplete the Ozone Layer'' before the period 
        at the end.
            (2) Certification <<NOTE: 26 USC 4682 note.>>  system.--The 
        Secretary of the Treasury, after consultation with the 
        Administrator of the Environmental Protection Agency, shall 
        develop a certification system to ensure compliance with the 
        recycling requirement for imported halon under section 
        4682(d)(1) of the Internal Revenue Code of 1986, as amended by 
        paragraph (1).

[[Page 110 STAT. 1893]]

    (b) Chemicals Used as Propellants in Metered-Dose 
Inhalers Tax-Exempt.--Paragraph (4) of section 4682(g) (relating to 
phase-in of tax on certain substances) is amended to read as follows:
            ``(4) Chemicals used as propellants in metered-dose 
        inhalers.--
                    ``(A) Tax-exempt.--
                          ``(i) In general.--No tax shall be imposed by 
                      section 4681 on--
                                    ``(I) any use of any substance as a 
                                propellant in metered-dose inhalers, or
                                    ``(II) any qualified sale by the 
                                manufacturer, producer, or importer of 
                                any substance.
                          ``(ii) Qualified sale.--For purposes of clause 
                      (i), the term `qualified sale' means any sale by 
                      the manufacturer, producer, or importer of any 
                      substance--
                                    ``(I) for use by the purchaser as a 
                                propellant in metered-dose inhalers, or
                                    ``(II) for resale by the purchaser 
                                to a 2d purchaser for such use by the 2d 
                                purchaser.
                      The preceding sentence shall apply only if the 
                      manufacturer, producer, and importer, and the 1st 
                      and 2d purchasers (if any) meet such registration 
                      requirements as may be prescribed by the 
                      Secretary.
                    ``(B) Overpayments.--If any substance on which tax 
                was paid under this subchapter is used by any person as 
                a propellant in metered-dose inhalers, credit or refund 
                without interest shall be allowed to such person in an 
                amount equal to the tax so paid. Amounts payable under 
                the preceding sentence with respect to uses during the 
                taxable year shall be treated as described in section 
                34(a) for such year unless claim thereof has been timely 
                filed under this subparagraph.''.

    (c) Effective <<NOTE: 26 USC 4682 note.>>  Dates.--
            (1) Recycled halon.--
                    (A) In general.--Except as provided in subparagraph 
                (B), the amendment made by subsection (a)(1) shall take 
                effect on January 1, 1997.
                    (B) Halon-1211.--In the case of Halon-1211, the 
                amendment made by subsection (a)(1) shall take effect on 
                January 1, 1998.
            (2) Metered-dose inhalers.--The amendment made by subsection 
        (b) shall take effect on the 7th day after the date of the 
        enactment of this Act.
SEC. 1804. TAX-EXEMPT <<NOTE: 26 USC 142 note.>>  BONDS FOR SALE 
                          OF ALASKA POWER ADMINISTRATION FACILITY.

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

[[Page 110 STAT. 1894]]

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

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

[[Page 110 STAT. 1895]]

                                    ``(III) any adjustment to the basis 
                                of a participant's interest in the 
                                common trust fund as a result of the 
                                gain so recognized shall be treated as 
                                occurring immediately before the 
                                exchange referred to in paragraph 
                                (1)(B).
                      If the transfer referred to in paragraph (1)(A) is 
                      to two or more regulated investment companies, the 
                      basis increase under subclause (II) shall be 
                      allocated among such companies on the basis of the 
                      respective fair market values of the assets 
                      received by each of such companies.
                          ``(ii) Assumed liabilities.--For purposes of 
                      clause (i), the term `assumed liabilities' means 
                      the aggre-
                      gate of--
                                    ``(I) any liability of the common 
                                trust fund assumed by any regulated 
                                investment company in connection with 
                                the transfer referred to in paragraph 
                                (1)(A), and
                                    ``(II) any liability to which 
                                property so transferred is subject.
            ``(4) Common trust fund must meet diversification rules.--
        This subsection shall not apply to any common trust fund which 
        would not meet the requirements of section 368(a)(2)(F)(ii) if 
        it were a corporation. For purposes of the preceding sentence, 
        Government securities shall not be treated as securities of an 
        issuer in applying the 25-percent and 50-percent test and such 
        securities shall not be excluded for purposes of determining 
        total assets under clause (iv) of section 368(a)(2)(F).''.

    (b) Effective <<NOTE: 26 USC 584 note.>>  Date.--The amendment made 
by subsection (a) shall apply to transfers after December 31, 1995.

SEC. 1806. QUALIFIED STATE TUITION PROGRAMS.

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

              ``PART VIII--QUALIFIED STATE TUITION PROGRAMS

``Sec. 529. Qualified State tuition programs.

``SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

    ``(a) General Rule.--A qualified State tuition program shall be 
exempt from taxation under this subtitle. Notwithstanding the preceding 
sentence, such program shall be subject to the taxes imposed by section 
511 (relating to imposition of tax on unrelated business income of 
charitable organizations).
    ``(b) Qualified State Tuition Program.--For purposes of this 
section--
            ``(1) In general.--The term `qualified State tuition 
        program' means a program established and maintained by a State 
        or agency or instrumentality thereof--
                    ``(A) under which a person--
                          ``(i) may purchase tuition credits or 
                      certificates on behalf of a designated beneficiary 
                      which entitle the beneficiary to the waiver or 
                      payment of qualified higher education expenses of 
                      the beneficiary, or

[[Page 110 STAT. 1896]]

                          ``(ii) may make contributions to an account 
                      which is established for the purpose of meeting 
                      the qualified higher education expenses of the 
                      designated beneficiary of the account, and
                    ``(B) which meets the other requirements of this 
                subsection.
            ``(2) Cash contributions.--A program shall not be treated as 
        a qualified State tuition program unless it provides that 
        purchases or contributions may only be made in cash.
            ``(3) Refunds.--A program shall not be treated as a 
        qualified State tuition program unless it imposes a more than de 
        minimis penalty on any refund of earnings from the account which 
        are not--
                    ``(A) used for qualified higher education expenses 
                of the designated beneficiary,
                    ``(B) made on account of the death or disability of 
                the designated beneficiary, or
                    ``(C) made on account of a scholarship (or allowance 
                or payment described in section 135(d)(1) (B) or (C)) 
                received by the designated beneficiary to the extent the 
                amount of the refund does not exceed the amount of the 
                scholarship, allowance, or payment.
            ``(4) Separate accounting.--A program shall not be 
        treated as a qualified State tuition program unless it provides 
        separate accounting for each designated beneficiary.
            ``(5) No investment direction.--A program shall not be 
        treated as a qualified State tuition program unless it provides 
        that any contributor to, or designated beneficiary under, such 
        program may not direct the investment of any contributions to 
        the program (or any earnings thereon).
            ``(6) No pledging of interest as security.--A program shall 
        not be treated as a qualified State tuition program if it allows 
        any interest in the program or any portion thereof to be used as 
        security for a loan.
            ``(7) Prohibition on excess contributions.--A program shall 
        not be treated as a qualified State tuition program unless it 
        provides adequate safeguards to prevent contributions on behalf 
        of a designated beneficiary in excess of those necessary to 
        provide for the qualified higher education expenses of the 
        beneficiary.

    ``(c) Tax Treatment of Designated Beneficiaries and Contributors.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, no amount shall be includible in gross income of--
                    ``(A) a designated beneficiary under a qualified 
                State tuition program, or
                    ``(B) a contributor to such program on behalf of a 
                designated beneficiary,
        with respect to any distribution or earnings under such program.
            ``(2) Contributions.--In no event shall a contribution 
        to a qualified State tuition program on behalf of a designated 
        beneficiary be treated as a taxable gift for purposes of chapter 
        12.
            ``(3) Distributions.--
                    ``(A) In general.--Any distribution under a 
                qualified State tuition program shall be includible in 
                the gross

[[Page 110 STAT. 1897]]

                income of the distributee in the manner as provided 
                under section 72 to the extent not excluded from gross 
                income under any other provision of this chapter.
                    ``(B) In-kind distributions.--Any benefit furnished 
                to a designated beneficiary under a qualified State 
                tuition program shall be treated as a distribution to 
                the beneficiary.
                    ``(C) Change in beneficiaries.--
                          ``(i) Rollovers.--Subparagraph (A) shall not 
                      apply to that portion of any distribution which, 
                      within 60 days of such distribution, is 
                      transferred to the credit of another designated 
                      beneficiary under a qualified State tuition 
                      program who is a member of the family of the 
                      designated beneficiary with respect to which the 
                      distribution was made.
                          ``(ii) Change in designated beneficiaries.--
                      Any change in the designated beneficiary of an 
                      interest in a qualified State tuition program 
                      shall not be treated as a distribution for 
                      purposes of subparagraph (A) if the new 
                      beneficiary is a member of the family of the old 
                      beneficiary.
                    ``(D) Operating rules.--For purposes of applying 
                section 72--
                          ``(i) to the extent provided by the Secretary, 
                      all qualified State tuition programs of which an 
                      individual is a designated beneficiary shall be 
                      treated as one program,
                          ``(ii) all distributions during a taxable year 
                      shall be treated as one distribution, and
                          ``(iii) the value of the contract, income on 
                      the contract, and investment in the contract shall 
                      be computed as of the close of the calendar year 
                      in which the taxable year begins.
            ``(4) Estate tax inclusion.--The value of any interest in 
        any qualified State tuition program which is attributable to 
        contributions made by an individual to such program on behalf of 
        any designated beneficiary shall be includible in the gross 
        estate of the contributor for purposes of chapter 11.
            ``(5) Special rule for applying section 2503(e).--For 
        purposes of section 2503(e), the waiver (or payment to an 
        educational institution) of qualified higher education expenses 
        of a designated beneficiary under a qualified State tuition 
        program shall be treated as a qualified transfer.

    ``(d) Reporting Requirements.--
            ``(1) In general.--If there is a distribution to any indi-
        vidual with respect to an interest in a qualified State tuition 
        program during any calendar year, each officer or employee 
        having control of the qualified State tuition program or their 
        designee shall make such reports as the Secretary may require 
        regarding such distribution to the Secretary and to the 
        designated beneficiary or the individual to whom the 
        distribution was made. Any such report shall include such 
        information as the Secretary may prescribe.
            ``(2) Timing of reports.--Any report required by this 
        subsection--
                    ``(A) shall be filed at such time and in such matter 
                as the Secretary prescribes, and

[[Page 110 STAT. 1898]]

                    ``(B) shall be furnished to individuals not later 
                than January 31 of the calendar year following the 
                calendar year to which such report relates.

    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Designated beneficiary.--The term `designated 
        beneficiary' means--
                    ``(A) the individual designated at the commencement 
                of participation in the qualified State tuition program 
                as the beneficiary of amounts paid (or to be paid) to 
                the program,
                    ``(B) in the case of a change in beneficiaries 
                described in subsection (c)(2)(C), the individual who is 
                the new beneficiary, and
                    ``(C) in the case of an interest in a qualified 
                State tuition program purchased by a State or local 
                government or an organization described in section 
                501(c)(3) and exempt from taxation under section 501(a) 
                as part of a scholarship program operated by such 
                government or organization, the individual receiving 
                such interest as a scholarship.
            ``(2) Member of family.--The term `member of the family' has 
        the same meaning given such term as section 2032A(e)(2).
            ``(3) Qualified higher education expenses.--The term 
        `qualified higher education expenses' means tuition, fees, 
        books, supplies, and equipment required for the enrollment or 
        attendance of a designated beneficiary at an eligible 
        educational institution (as defined in section 135(c)(3)).
            ``(4) Application of section 514.--An interest in a 
        qualified State tuition program shall not be treated as debt for 
        purposes of section 514.''.

    (b) Conforming Amendments.--
            (1) Section 135(d)(1) is amended by striking ``or'' at the 
        end of subparagraph (B), by striking the period at the end of 
        subparagraph (C) and inserting ``, or'', and by adding at the 
        end the following new subparagraph:
                    ``(D) a payment, waiver, or reimbursement of 
                qualified higher education expenses under a qualified 
                State tuition program (within the meaning of section 
                529(b)).''.
            (2) The table of parts for subchapter F of chapter 1 is 
        amended by adding at the end the following new item:
                ``Part VIII. Qualified State tuition programs.''.

    (c) Effective <<NOTE: 26 USC 529 note.>>  Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after the date of the enactment of 
        this Act.
            (2) Transition rule.--If--
                    (A) a State or agency or instrumentality thereof 
                maintains, on the date of the enactment of this Act, a 
                program under which persons may purchase tuition credits 
                or certificates on behalf of, or make contributions for 
                education expenses of, a designated beneficiary, and
                    (B) such program meets the requirements of a 
                qualified State tuition program before the later of--
                          (i) the date which is 1 year after such date 
                      of enactment, or

[[Page 110 STAT. 1899]]

                          (ii) the first day of the first calendar 
                      quarter after the close of the first regular 
                      session of the State legislature that begins after 
                      such date of enactment,
                the amendments made by this section shall apply to 
                contributions (and earnings allocable thereto) made 
                before the date such program meets the requirements of 
                such amendments without regard to whether any 
                requirements of such amendments are met with respect to 
                such contributions and earnings.
        For purposes of subparagraph (B)(ii), if a State has a 2-year 
        legislative session, each year of such session shall be deemed 
        to be a separate regular session of the State legislature.

SEC. 1807. ADOPTION ASSISTANCE.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits) is amended by inserting 
after section 22 the following new section:

``SEC. 23. ADOPTION EXPENSES.

    ``(a) Allowance of Credit.--
            ``(1) In general.--In the case of an individual, there shall 
        be allowed as a credit against the tax imposed by this chapter 
        the amount of the qualified adoption expenses paid or incurred 
        by the taxpayer.
            ``(2) Year credit allowed.--The credit under paragraph (1) 
        with respect to any expense shall be allowed--
                    ``(A) for the taxable year following the taxable 
                year during which such expense is paid or incurred, or
                    ``(B) in the case of an expense which is paid or 
                incurred during the taxable year in which the adoption 
                becomes final, for such taxable year.

    ``(b) Limitations.--
            ``(1) Dollar limitation.--The aggregate amount of qualified 
        adoption expenses which may be taken into account under 
        subsection (a) for all taxable years with respect to the 
        adoption of a child by the taxpayer shall not exceed $5,000 
        ($6,000, in the case of a child with special needs).
            ``(2) Income limitation.--
                    ``(A) In general.--The amount allowable as a credit 
                under subsection (a) for any taxable year shall be 
                reduced (but not below zero) by an amount which bears 
                the same ratio to the amount so allowable (determined 
                without regard to this paragraph but with regard to 
                para-
                graph (1)) as--
                          ``(i) the amount (if any) by which the 
                      taxpayer's adjusted gross income exceeds $75,000, 
                      bears to
                          ``(ii) $40,000.
                    ``(B) Determination of adjusted gross income.--For 
                purposes of subparagraph (A), adjusted gross income 
                shall be determined--
                          ``(i) without regard to sections 911, 931, and 

                      933, and
                          ``(ii) after the application of sections 86, 
                      135, 137, 219, and 469.
            ``(3) Denial of double benefit.--
                    ``(A) In general.--No credit shall be allowed under 
                subsection (a) for any expense for which a deduction or 
                credit is allowed under any other provision of this 
                chapter.

[[Page 110 STAT. 1900]]

                    ``(B) Grants.--No credit shall be allowed under 
                subsection (a) for any expense to the extent that funds 
                for such expense are received under any Federal, State, 
                or local program.

    ``(c) Carryforwards of Unused Credit.--If the credit allowable under 
subsection (a) for any taxable year exceeds the limitation imposed by 
section 26(a) for such taxable year reduced by the sum of the credits 
allowable under this subpart (other than this section), such excess 
shall be carried to the succeeding taxable year and added to the credit 
allowable under subsection (a) for such taxable year. No credit may be 
carried forward under this subsection to any taxable year following the 
fifth taxable year after the taxable year in which the credit arose. For 
purposes of the preceding sentence, credits shall be treated as used on 
a first-in first-out basis.
    ``(d) Definitions.--For purposes of this section--
            ``(1) Qualified adoption expenses.--The term `qualified 
        adoption expenses' means reasonable and necessary adoption fees, 
        court costs, attorney fees, and other expenses--
                    ``(A) which are directly related to, and the 
                principal purpose of which is for, the legal adoption of 
                an eligible child by the taxpayer,
                    ``(B) which are not incurred in violation of State 
                or Federal law or in carrying out any surrogate 
                parenting arrangement,
                    ``(C) which are not expenses in connection with the 
                adoption by an individual of a child who is the child of 
                such individual's spouse, and
                    ``(D) which are not reimbursed under an employer 
                program or otherwise.
            ``(2) Eligible child.--The term `eligible child' means any 
        individual--
                    ``(A) who--
                          ``(i) has not attained age 18, or
                          ``(ii) is physically or mentally incapable of 
                      caring for himself, and
                    ``(B) in the case of qualified adoption expenses 
                paid or incurred after December 31, 2001, who is a child 
                with special needs.
            ``(3) Child with special needs.--The term `child with 
        special needs' means any child if--
                    ``(A) a State has determined that the child cannot 
                or should not be returned to the home of his parents,
                    ``(B) such State has determined that there exists 
                with respect to the child a specific factor or condition 
                (such as his ethnic background, age, or membership in a 
                minority or sibling group, or the presence of factors 
                such as medical conditions or physical, mental, or 
                emotional handicaps) because of which it is reasonable 
                to conclude that such child cannot be placed with 
                adoptive parents without providing adoption assistance, 
                and
                    ``(C) such child is a citizen or resident of the 
                United States (as defined in section 217(h)(3)).

    ``(e) Special Rules for Foreign Adoptions.--In the case of an 
adoption of a child who is not a citizen or resident of the United 
States (as defined in section 217(h)(3))--

[[Page 110 STAT. 1901]]

            ``(1) subsection (a) shall not apply to any qualified 
        adoption expense with respect to such adoption unless such 
        adoption becomes final, and
            ``(2) any such expense which is paid or incurred before the 
        taxable year in which such adoption becomes final shall be taken 
        into account under this section as if such expense were paid or 
        incurred during such year.

    ``(f) Filing Requirements.--
            ``(1) Married couples must file joint returns.--Rules 
        similar to the rules of paragraphs (2), (3), and (4) of section 
        21(e) shall apply for purposes of this section.
            ``(2) Taxpayer must include tin.--
                    ``(A) In general.--No credit shall be allowed under 
                this section with respect to any eligible child unless 
                the taxpayer includes (if known) the name, age, and TIN 
                of such child on the return of tax for the taxable year.
                    ``(B) Other methods.--The Secretary may, in lieu of 
                the information referred to in subparagraph (A), require 
                other information meeting the purposes of subparagraph 
                (A), including identification of an agent assisting with 
                the adoption.

    ``(g) Basis Adjustments.--For purposes of this subtitle, if a credit 
is allowed under this section for any expenditure with respect to any 
property, the increase in the basis of such property which would (but 
for this subsection) result from such expenditure shall be reduced by 
the amount of the credit so allowed.
    ``(h) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out this section and section 137, 
including regulations which treat unmarried individuals who pay or incur 
qualified adoption expenses with respect to the same child as 1 taxpayer 
for
purposes of applying the dollar limitation in subsection (b)(1) of this 
section and in section 137(b)(1).''.

    (b) Exclusion of Amounts Received Under Employer's Adoption 
Assistance Programs.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by 
redesignating section 137 as section 138 and by inserting after section 
136 the following new section:

``SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

    ``(a) In General.--Gross income of an employee does not include 
amounts paid or expenses incurred by the employer for qualified adoption 
expenses in connection with the adoption of a child by an employee if 
such amounts are furnished pursuant to an adoption assistance program.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The aggregate amount excludable 
        from gross income under subsection (a) for all taxable years 
        with respect to the adoption of a child by the taxpayer shall 
        not exceed $5,000 ($6,000, in the case of a child with special 
        needs).
            ``(2) Income limitation.--The amount excludable from gross 
        income under subsection (a) for any taxable year 
        shall be reduced (but not below zero) by an amount which bears 
        the same ratio to the amount so excludable (determined without 
        regard to this paragraph but with regard to paragraph (1)) as--

[[Page 110 STAT. 1902]]

                    ``(A) the amount (if any) by which the taxpayer's 
                adjusted gross income exceeds $75,000, bears to
                    ``(B) $40,000.
            ``(3) Determination of adjusted gross income.--For purposes 
        of paragraph (2), adjusted gross income shall be 
        determined--
                    ``(A) without regard to this section and sections 
                911, 931, and 933, and
                    ``(B) after the application of sections 86, 135, 
                219, 
                and 469.

    ``(c) Adoption Assistance Program.--For purposes of this section, an 
adoption assistance program is a separate written plan of an employer 
for the exclusive benefit of such employer's 
employees--
            ``(1) under which the employer provides such employees with 
        adoption assistance, and
            ``(2) which meets requirements similar to the requirements 
        of paragraphs (2), (3), (5), and (6) of section 127(b).

An adoption reimbursement program operated under section 1052 of title 
10, United States Code (relating to armed forces) or section 514 of 
title 14, United States Code (relating to members of the Coast Guard) 
shall be treated as an adoption assistance program for purposes of this 
section.

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

``Sec. 23. Adoption expenses.''.

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

``Sec. 137. Adoption assistance programs.
``Sec. 138. Cross reference to other Acts.''.

[[Page 110 STAT. 1903]]

    (d) Study and Report.--The Secretary <<NOTE: 26 USC 23 note.>>  of 
the Treasury shall study the effect on adoptions of the tax credit and 
gross income exclusion established by the amendments made by this 
section and shall submit a report regarding the study to the Committee 
on Finance of the Senate and the Committee on Ways and Means of the 
House of Representatives not later than January 1, 2000.

    (e) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1996.

SEC. 1808. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

    (a) State Plan Requirements.--Section 471(a) of the Social Security 
Act (42 U.S.C 671(a)) is amended--
            (1) by striking ``and'' at the end of paragraph (16);
            (2) by striking the period at the end of paragraph (17) and 
        inserting ``; and''; and
            (3) by adding at the end the following:
            ``(18) not later than January 1, 1997, provides that neither 
        the State nor any other entity in the State that receives funds 
        from the Federal Government and is involved in adoption or 
        foster care placements may--
                    ``(A) deny to any person the opportunity to become 
                an adoptive or a foster parent, on the basis of the 
                race, color, or national origin of the person, or of the 
                child, involved; or
                    ``(B) delay or deny the placement of a child for 
                adoption or into foster care, on the basis of the race, 
                color, or national origin of the adoptive or foster 
                parent, or the child, involved.''.

    (b) Enforcement.--Section 474 of such Act (42 U.S.C. 674) is amended 
by adding at the end the following:
    ``(d)(1) If, during any quarter of a fiscal year, a State's program 
operated under this part is found, as a result of a review conducted 
under section 1123A, or otherwise, to have violated section 471(a)(18) 
with respect to a person or to have failed to implement a corrective 
action plan within a period of time not to exceed 6 months with respect 
to such violation, then, notwithstanding subsection (a) of this section 
and any regulations promulgated under section 1123A(b)(3), the Secretary 
shall reduce the amount otherwise payable to the State under this part, 
for that fiscal year quarter and for any subsequent quarter of such 
fiscal year, until the State program is found, as a result of a 
subsequent review under section 1123A, to have implemented a corrective 
action plan with respect to such violation, by--
            ``(A) 2 percent of such otherwise payable amount, in the 
        case of the 1st such finding for the fiscal year with respect to 
        the State;
            ``(B) 3 percent of such otherwise payable amount, in the 
        case of the 2nd such finding for the fiscal year with respect to 
        the State; or
            ``(C) 5 percent of such otherwise payable amount, in the 
        case of the 3rd or subsequent such finding for the fiscal year 
        with respect to the State.

In imposing the penalties described in this paragraph, the Secretary 
shall not reduce any fiscal year payment to a State by more than 5 
percent.
    ``(2) Any other entity which is in a State that receives funds under 
this part and which violates section 471(a)(18) during a

[[Page 110 STAT. 1904]]

fiscal year quarter with respect to any person shall remit to the 
Secretary all funds that were paid by the State to the entity during the 
quarter from such funds.
    ``(3)(A) Any individual who is aggrieved by a violation of section 
471(a)(18) by a State or other entity may bring an action seeking relief 
from the State or other entity in any United States district court.
    ``(B) An action under this paragraph may not be brought more than 2 
years after the date the alleged violation occurred.

    ``(4) This subsection shall not be construed to affect the 
application of the Indian Child Welfare Act of 1978.''.

    (c) Civil <<NOTE: 42 USC 1996b.>>  Rights.--
            (1) Prohibited conduct.--A person or government that is 
        involved in adoption or foster care placements may not--
                    (A) deny to any individual the opportunity to become 
                an adoptive or a foster parent, on the basis of the 
                race, color, or national origin of the individual, or of 
                the child, involved; or
                    (B) delay or deny the placement of a child for 
                adoption or into foster care, on the basis of the race, 
                color, or national origin of the adoptive or foster 
                parent, or the child, involved.
            (2) Enforcement.--Noncompliance with paragraph (1) is deemed 
        a violation of title VI of the Civil Rights Act of 1964.
            (3) No effect on the indian child welfare act of 1978.--This 
        subsection shall not be construed to affect the application of 
        the Indian Child Welfare Act of 1978.

    (d) Conforming Amendment.--Section 553 of the Howard M. Metzenbaum 
Multiethnic Placement Act of 1994 (42 U.S.C. 5115a) is repealed.
SEC. 1809. 6-MONTH <<NOTE: 26 USC 6302 note.>>  DELAY OF 
                          ELECTRONIC FUND TRANSFER REQUIREMENT.

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

                Subtitle I--Foreign Trust Tax Compliance

SEC. 1901. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

    (a) In General.--Section 6048 (relating to returns as to certain 
foreign trusts) is amended to read as follows:
``SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

    ``(a) Notice of Certain Events.--
            ``(1) General rule.--On or before the 90th day (or such 
        later day as the Secretary may prescribe) after any reportable 
        event, the responsible party shall provide written notice of 
        such event to the Secretary in accordance with paragraph (2).
            ``(2) Contents of notice.--The notice required by paragraph 
        (1) shall contain such information as the Secretary may 
        prescribe, including--

[[Page 110 STAT. 1905]]

                    ``(A) the amount of money or other property (if any) 
                transferred to the trust in connection with the 
                reportable event, and
                    ``(B) the identity of the trust and of each trustee 
                and beneficiary (or class of beneficiaries) of the 
                trust.
            ``(3) Reportable event.--For purposes of this subsection--
                    ``(A) In general.--The term `reportable event' 
                means--
                          ``(i) the creation of any foreign trust by a 
                      United States person,
                          ``(ii) the transfer of any money or property 
                      (directly or indirectly) to a foreign trust by a 
                      United States person, including a transfer by 
                      reason of death, and
                          ``(iii) the death of a citizen or resident of 
                      the United States if--
                                    ``(I) the decedent was treated as 
                                the owner of any portion of a foreign 
                                trust under the 
                                rules of subpart E of part I of 
                                subchapter J of chapter 1, or
                                    ``(II) any portion of a foreign 
                                trust was included in the gross estate 
                                of the decedent.
                    ``(B) Exceptions.--
                          ``(i) Fair market value sales.--Subparagraph 
                      (A)(ii) shall not apply to any transfer of 
                      property to a trust in exchange for consideration 
                      of at least the fair market value of the 
                      transferred property. For purposes of the 
                      preceding sentence, consideration other than cash 
                      shall be taken into account at its fair market 
                      value and the rules of section 679(a)(3) shall 
                      apply.
                          ``(ii) Deferred compensation and charitable 
                      trusts.--Subparagraph (A) shall not apply with 
                      respect to a trust which is--
                                    ``(I) described in section 402(b), 
                                404(a)(4), or 404A, or
                                    ``(II) determined by the Secretary 
                                to be described in section 501(c)(3).
            ``(4) Responsible party.--For purposes of this subsection, 
        the term `responsible party' means--
                    ``(A) the grantor in the case of the creation of an 
                inter vivos trust,
                    ``(B) the transferor in the case of a reportable 
                event described in paragraph (3)(A)(ii) other than a 
                transfer by reason of death, and
                    ``(C) the executor of the decedent's estate in any 
                other case.

    ``(b) United States Grantor of Foreign Trust.--
            ``(1) In general.--If, at any time during any taxable year 
        of a United States person, such person is treated as the owner 
        of any portion of a foreign trust under the rules of subpart E 
        of part I of subchapter J of chapter 1, such person shall be 
        responsible to ensure that--
                    ``(A) such trust makes a return for such year which 
                sets forth a full and complete accounting of all trust 
                activities and operations for the year, the name of the 
                United States agent for such trust, and such other 
                information as the Secretary may prescribe, and
                    ``(B) such trust furnishes such information as the 
                Secretary may prescribe to each United States person (i) 
                who

[[Page 110 STAT. 1906]]

                is treated as the owner of any portion of such trust or 
                (ii) who receives (directly or indirectly) any 
                distribution from the trust.
            ``(2) Trusts not having united states agent.--
                    ``(A) In general.--If the rules of this paragraph 
                apply to any foreign trust, the determination of amounts 
                required to be taken into account with respect to such 
                trust by a United States person under the rules of 
                subpart E of part I of subchapter J of chapter 1 shall 
                be determined by the Secretary.
                    ``(B) United states agent required.--The rules of 
                this paragraph shall apply to any foreign trust to which 
                paragraph (1) applies unless such trust agrees (in such 
                manner, subject to such conditions, and at such time as 
                the Secretary shall prescribe) to authorize a United 
                States person to act as such trust's limited agent 
                solely for purposes of applying sections 7602, 7603, and 
                7604 with respect to--
                          ``(i) any request by the Secretary to examine 
                      records or produce testimony related to the proper 
                      treatment of amounts required to be taken into 
                      account under the rules referred to in 
                      subparagraph (A), or
                          ``(ii) any summons by the Secretary for such 
                      records or testimony.
                The appearance of persons or production of records by 
                reason of a United States person being such an agent 
                shall not subject such persons or records to legal 
                process for any purpose other than determining the 
                correct treatment under this title of the amounts 
                required to be taken into account under the rules 
                referred to in subparagraph (A). A foreign trust which 
                appoints an agent described in this subparagraph shall 
                not be considered to have an office or a permanent 
                establishment in the United States, or to be engaged in 
                a trade or business in the United States, solely because 
                of the activities of such agent pursuant to this 
                subsection.
                    ``(C) Other rules to apply.--Rules similar to the 
                rules of paragraphs (2) and (4) of section 6038A(e) 
                shall apply for purposes of this paragraph.

    ``(c) Reporting by United States Beneficiaries of Foreign Trusts.--
            ``(1) In general.--If any United States person receives 
        (directly or indirectly) during any taxable year of such person 
        any distribution from a foreign
trust, such person shall make a return with respect to such trust for 
such year which includes--
                    ``(A) the name of such trust,
                    ``(B) the aggregate amount of the distributions so 
                received from such trust during such taxable year, and
                    ``(C) such other information as the Secretary may 
                prescribe.
            ``(2) Inclusion in income if records not provided.--
                    ``(A) In general.--If adequate records are not 
                provided to the Secretary to determine the proper 
                treatment of any distribution from a foreign trust, such 
                distribution shall be treated as an accumulation 
                distribution includible in the gross income of the 
                distributee under chapter 1. To

[[Page 110 STAT. 1907]]

                the extent provided in regulations, the preceding 
                sentence shall not apply if the foreign trust elects to 
                be subject to rules similar to the rules of subsection 
                (b)(2)(B).
                    ``(B) Application of accumulation distribution 
                rules.--For purposes of applying section 668 in a case 
                to which subparagraph (A) applies, the applicable number 
                of years for purposes of section 668(a) shall be \1/2\ 
                of the number of years the trust has been in existence.

    ``(d) Special Rules.--
            ``(1) Determination of whether united states person makes 
        transfer or receives distribution.--For purposes of this 
        section, in determining whether a United States person makes a 
        transfer to, or receives a distribution from, a foreign trust, 
        the fact that a portion of such trust is treated as owned by 
        another person under the rules of subpart E of part I of 
        subchapter J of chapter 1 shall be disregarded.
            ``(2) Domestic trusts with foreign activities.--To the 
        extent provided in regulations, a trust which is a United States 
        person shall be treated as a foreign trust for purposes of this 
        section and section 6677 if such trust has substantial 
        activities, or holds substantial property, outside the United 
        States.
            ``(3) Time and manner of filing information.--Any notice or 
        return required under this section shall be made at such time 
        and in such manner as the Secretary shall prescribe.
            ``(4) Modification of return requirements.--The Secretary is 
        authorized to suspend or modify any requirement of this section 
        if the Secretary determines that the United States has no 
        significant tax interest in obtaining the required 
        information.''.

    (b) Increased Penalties.--Section 6677 (relating to failure to file 
information returns with respect to certain foreign trusts) is amended 
to read as follows:
``SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO 
                            CERTAIN FOREIGN TRUSTS.

    ``(a) Civil Penalty.--In addition to any criminal penalty 
provided by law, if any notice or return required to be filed by section 
6048--
            ``(1) is not filed on or before the time provided in such 
        section, or
            ``(2) does not include all the information required pursuant 
        to such section or includes incorrect information,

the person required to file such notice or return shall pay a penalty 
equal to 35 percent of the gross reportable amount. If any failure 
described in the preceding sentence continues for more than 90 days 
after the day on which the Secretary mails notice of such failure to the 
person required to pay such penalty, such person shall pay a penalty (in 
addition to the amount determined under the preceding sentence) of 
$10,000 for each 30-day period (or 
fraction thereof) during which such failure continues after the 
expiration of such 90-day period. In no event shall the penalty under 
this subsection with respect to any failure exceed the gross reportable 
amount.
    ``(b) Special Rules for Returns Under Section 6048(b).--In the case 
of a return required under section 6048(b)--
            ``(1) the United States person referred to in such section 
        shall be liable for the penalty imposed by subsection (a), and

[[Page 110 STAT. 1908]]

            ``(2) subsection (a) shall be applied by substituting `5 
        percent' for `35 percent'.

    ``(c) Gross Reportable Amount.--For purposes of subsection (a), the 
term `gross reportable amount' means--
            ``(1) the gross value of the property involved in the event 
        (determined as of the date of the event) in the case of a 
        failure relating to section 6048(a),
            ``(2) the gross value of the portion of the trust's assets 
        at the close of the year treated as owned by the United States 
        person in the case of a failure relating to section 6048(b)(1), 
        and
            ``(3) the gross amount of the distributions in the case of a 
        failure relating to section 6048(c).

    ``(d) Reasonable Cause Exception.--No penalty shall be imposed by 
this section on any failure which is shown to be due to reasonable cause 
and not due to willful
neglect. The fact that a foreign jurisdiction would impose a civil or 
criminal penalty on the taxpayer (or any other person) for disclosing 
the required information is not reasonable cause.

    ``(e) Deficiency Procedures Not To Apply.--Subchapter B of chapter 
63 (relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed by subsection (a).''.
    (c) Conforming Amendments.--
            (1) Paragraph (2) of section 6724(d) is amended by striking 
        ``or'' at the end of subparagraph (S), by striking the period at 
        the end of subparagraph (T) and inserting ``, or'', and by 
        inserting after subparagraph (T) the following new subparagraph:
                    ``(U) section 6048(b)(1)(B) (relating to foreign 
                trust reporting requirements).''.
            (2) The table of sections for subpart B of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6048 and inserting the following new item:

``Sec. 6048. Information with respect to certain foreign trusts.''.

            (3) The table of sections for part I of subchapter B of 
        chapter 68 is amended by striking the item relating to section 
        6677 and inserting the following new item:

``Sec. 6677. Failure to file information with respect to certain foreign 
           trusts.''.

    (d) Effective <<NOTE: 26 USC 6048 note.>>  Dates.--
            (1) Reportable events.--To the extent related to subsection 
        (a) of section 6048 of the Internal Revenue Code of 1986, as 
        amended by this section, the amendments made by this section 
        shall apply to reportable events (as defined in such section 
        6048) occurring after the date of the enactment of this Act.
            (2) Grantor trust reporting.--To the extent related to 
        subsection (b) of such section 6048, the amendments made by this 
        section shall apply to taxable years of United States persons 
        beginning after December 31, 1995.
            (3) Reporting by united states beneficiaries.--To the extent 
        related to subsection (c) of such section 6048, the amendments 
        made by this section shall apply to distributions received after 
        the date of the enactment of this Act.

[[Page 110 STAT. 1909]]

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

    (a) In General.--Section 1494 is amended by adding at the end the 
following new subsection:
    ``(c) Penalty.--In the case of any failure to file a return required 
by the Secretary with respect to any transfer described in section 1491, 
the person required to file such return shall be liable for the 
penalties provided in section 6677 in the same manner as if such failure 
were a failure to file a notice under section 6048(a).''.
    (b) Effective <<NOTE: 26 USC 1494 note.>>  Date.--The amendment made 
by subsection (a) shall apply to transfers after the date of the 
enactment of this Act.
SEC. 1903. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS 
                          HAVING ONE OR MORE UNITED STATES 
                          BENEFICIARIES.

    (a) Treatment of Trust Obligations, Etc.--
            (1) Paragraph (2) of section 679(a) is amended by striking 
        subparagraph (B) and inserting the following:
                    ``(B) Transfers at fair market value.--To any 
                transfer of property to a trust in exchange for 
                consideration of at least the fair market value of the 
                transferred property. For purposes of the preceding 
                sentence, consideration other than cash shall be taken 
                into account at its fair market value.''.
            (2) Subsection (a) of section 679 (relating to foreign 
        trusts having one or more United States beneficiaries) is 
        amended by adding at the end the following new paragraph:
            ``(3) Certain obligations not taken into account under fair 
        market value exception.--
                    ``(A) In general.--In determining whether paragraph 
                (2)(B) applies to any transfer by a person described in 
                clause (ii) or (iii) of subparagraph (C), there shall 
                not be taken into account--
                          ``(i) except as provided in regulations, any 
                      obligation of a person described in subparagraph 
                      (C), and
                          ``(ii) to the extent provided in regulations, 
                      any obligation which is guaranteed by a person 
                      described in subparagraph (C).
                    ``(B) Treatment of principal payments on 
                obligation.--Principal payments by the trust on any 
                obligation referred to in subparagraph (A) shall be 
                taken into account on and after the date of the payment 
                in determining the portion of the trust attributable to 
                the property transferred.
                    ``(C) Persons described.--The persons described in 
                this subparagraph are--
                          ``(i) the trust,
                          ``(ii) any grantor or beneficiary of the 
                      trust, and
                          ``(iii) any person who is related (within the 
                      meaning of section 643(i)(2)(B)) to any grantor or 
                      beneficiary of the trust.''.

    (b) Exemption of Transfers to Charitable Trusts.--Subsection (a) of 
section 679 is amended by striking ``section 404(a)(4) or 404A'' and 
inserting ``section 6048(a)(3)(B)(ii)''.

    (c) Other Modifications.--Subsection (a) of section 679 is amended 
by adding at the end the following new paragraphs:

[[Page 110 STAT. 1910]]

            ``(4) Special rules applicable to foreign grantor who later 
        becomes a united states person.--
                    ``(A) In general.--If a nonresident alien individual 
                has a residency starting date within 5 years after 
                directly or indirectly transferring property to a 
                foreign trust, 
                this section and section 6048 shall be applied as if 
                such individual transferred to such trust on the 
                residency starting date an amount equal to the portion 
                of such trust attributable to the property transferred 
                by such individual to such trust in such transfer.
                    ``(B) Treatment of undistributed income.--For 
                purposes of this section, undistributed net income for 
                periods before such individual's residency starting date 
                shall be taken into account in determining the portion 
                of the trust which is attributable to property 
                transferred by such individual to such trust but shall 
                not otherwise be taken into account.
                    ``(C) Residency starting date.--For purposes of this 
                paragraph, an individual's residency starting date is 
                the residency starting date determined under section 
                7701(b)(2)(A).
            ``(5) Outbound trust migrations.--If--
                    ``(A) an individual who is a citizen or resident of 
                the United States transferred property to a trust which 
                was not a foreign trust, and
                    ``(B) such trust becomes a foreign trust while such 
                individual is alive,
        then this section and section 6048 shall be applied as if such 
        individual transferred to such trust on the date such trust 
        becomes a foreign trust an amount equal to the portion of such 
        trust attributable to the property previously transferred by 
        such individual to such trust. A rule similar to the rule of 
        paragraph (4)(B) shall apply for purposes of this paragraph.''.

    (d) Modifications Relating to Whether Trust Has United States 
Beneficiaries.--Subsection (c) of section 679 is amended by adding at 
the end the following new paragraph:
            ``(3) Certain united states beneficiaries disregarded.--A 
        beneficiary shall not be treated as a United States person in 
        applying this section with respect to any transfer of property 
        to foreign trust if such beneficiary first became a United 
        States person more than 5 years after the date of such 
        transfer.''.

    (e) Technical Amendment.--Subparagraph (A) of section 679(c)(2) is 
amended to read as follows:
                    ``(A) in the case of a foreign corporation, such 
                corporation is a controlled foreign corporation (as 
                defined in section 957(a)),''.

    (f) Regulations.--Section 679 is amended by adding at the end the 
following new subsection:
    ``(d) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (g) Effective <<NOTE: 26 USC 679 note.>>  Date.--The amendments made 
by this section shall apply to transfers of property after February 6, 
1995.
SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER 
                          GRANTOR TRUST RULES.

    (a) General Rule.--

[[Page 110 STAT. 1911]]

            (1) Subsection (f) of section 672 (relating to special rule 
        where grantor is foreign person) is amended to read as follows:

    ``(f) Subpart Not To Result in Foreign Ownership.--
            ``(1) In general.--Notwithstanding any other provision of 
        this subpart, this subpart shall apply only to the extent such 
        application results in an amount (if any) being currently taken 
        into account (directly or through 1 or more entities) under this 
        chapter in computing the income of a citizen or resident of the 
        United States or a domestic corporation.
            ``(2) Exceptions.--
                    ``(A) Certain revocable and irrevocable trusts.--
                Paragraph (1) shall not apply to any portion of a 
                trust if--
                          ``(i) the power to revest absolutely in the 
                      grantor title to the trust property to which such 
                      portion is attributable is exercisable solely by 
                      the grantor without the approval or consent of any 
                      other person or with the consent of a related or 
                      subordinate party who is subservient to the 
                      grantor, or
                          ``(ii) the only amounts distributable from 
                      such portion (whether income or corpus) during the 
                      lifetime of the grantor are amounts distributable 
                      to the grantor or the spouse of the grantor.
                    ``(B) Compensatory trusts.--Except as provided in 
                regulations, paragraph (1) shall not apply to any 
                portion of a trust distributions from which are taxable 
                as compensation for services rendered.
            ``(3) Special rules.--Except as otherwise provided in 
        regulations prescribed by the Secretary--
                    ``(A) a controlled foreign corporation (as defined 
                in section 957) shall be treated as a domestic 
                corporation for purposes of paragraph (1), and
                    ``(B) paragraph (1) shall not apply for purposes of 
                applying section 1296.
            ``(4) Recharacterization of purported gifts.--In the case of 
        any transfer directly or indirectly from a partnership or 
        foreign corporation which the transferee treats as a 
        gift or bequest, the Secretary may recharacterize such transfer 
        in such circumstances as the Secretary determines to be 
        appropriate to prevent the avoidance of the purposes of this 
        subsection.
            ``(5) Special rule where grantor is foreign 
        person.--If--
                    ``(A) but for this subsection, a foreign person 
                would be treated as the owner of any portion of a trust, 
                and
                    ``(B) such trust has a beneficiary who is a United 
                States person,
        such beneficiary shall be treated as the grantor of such portion 
        to the extent such beneficiary has made (directly or indirectly) 
        transfers of property (other than in a sale for full and 
        adequate consideration) to such foreign person. For purposes of 
        the preceding sentence, any gift shall not be taken into account 
        to the extent such gift would be excluded from taxable gifts 
        under section 2503(b).
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out

[[Page 110 STAT. 1912]]

        the purposes of this subsection, including regulations providing 
        that paragraph (1) shall not apply in appropriate cases.''.
            (2) The last sentence of subsection (c) of section 672 is 
        amended by inserting ``subsection (f) and'' before ``sections 
        674''.

    (b) Credit for Certain Taxes.--
            (1) Paragraph (2) of section 665(d) is amended by adding at 
        the end the following new sentence: ``Under rules or regulations 
        prescribed by the Secretary, in the case of any foreign trust of 
        which the settlor or another person would be treated as owner of 
        any portion of the trust under subpart E but for section 672(f), 
        the term `taxes imposed on the trust' includes the allocable 
        amount of any income, war profits, and excess profits taxes 
        imposed by any foreign country or possession of the United 
        States on the settlor or such other person in respect of trust 
        income.''.
            (2) Paragraph (5) of section 901(b) is amended by adding at 
        the end the following new sentence: ``Under rules or regulations 
        prescribed by the Secretary, in the case of any foreign trust of 
        which the settlor or another person would be treated as owner of 
        any portion of the trust under subpart E but for section 672(f), 
        the allocable amount of any income, war profits, and excess 
        profits taxes imposed by any foreign country or possession of 
        the United States on the settlor or such other person in respect 
        of trust income.''.

    (c) Distributions by Certain Foreign Trusts Through Nominees.--
            (1) Section 643 is amended by adding at the end the 
        following new subsection:

    ``(h) Distributions by Certain Foreign Trusts Through Nominees.--For 
purposes of this part, any amount paid to a United States person which 
is derived directly or indirectly from a foreign trust of which the 
payor is not the grantor shall be deemed in the year of payment to have 
been directly paid by the foreign trust to such United States person.''.
            (2) Section 665 is amended by striking subsection (c).

    (d) Effective <<NOTE: 26 USC 643 note.>>  Date.--
            (1) In general.--Except as provided by paragraph (2), the 
        amendments made by this section shall take effect 
        on the date of the enactment of this Act.
            (2) Exception for certain trusts.--The amendments made by 
        this section shall not apply to any trust--
                    (A) which is treated as owned by the grantor under 
                section 676 or 677 (other than subsection (a)(3) 
                thereof) of the Internal Revenue Code of 1986, and
                    (B) which is in existence on September 19, 1995.
        The preceding sentence shall not apply to the portion of any 
        such trust attributable to any transfer to such trust after 
        September 19, 1995.

    (e) Transitional <<NOTE: 26 USC 1491 note.>>  Rule.--If--
            (1) by reason of the amendments made by this section, any 
        person other than a United States person ceases to be treated as 
        the owner of a portion of a domestic trust, and
            (2) before January 1, 1997, such trust becomes a foreign 
        trust, or the assets of such trust are transferred to a foreign 
        trust,

[[Page 110 STAT. 1913]]

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

SEC. 1905. INFORMATION REPORTING REGARDING FOREIGN GIFTS.

    (a) In General.--Subpart A of part III of subchapter A of chapter 61 
is amended by inserting after section 6039E the following new section:
``SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN 
                              PERSONS.

    ``(a) In General.--If the value of the aggregate foreign gifts 
received by a United States person (other than an organization described 
in section 501(c) and exempt from tax under section 501(a)) during any 
taxable year exceeds $10,000, such United States person shall furnish 
(at such time and in such manner as the Secretary shall prescribe) such 
information as the Secretary may prescribe regarding each foreign gift 
received during such year.
    ``(b) Foreign Gift.--For purposes of this section, the term `foreign 
gift' means any amount received from a person other than a United States 
person which the recipient treats as a gift or bequest. Such term shall 
not include any qualified transfer (within the meaning of section 
2503(e)(2)) or any distribution properly disclosed in a return under 
section 6048(c).
    ``(c) Penalty for Failure To File Information.--
            ``(1) In general.--If a United States person fails to 
        furnish the information required by subsection (a) with respect 
        to 
        any foreign gift within the time prescribed therefor (including 
        extensions)--
                    ``(A) the tax consequences of the receipt of such 
                gift shall be determined by the Secretary, and
                    ``(B) such United States person shall pay (upon 
                notice and demand by the Secretary and in the same 
                manner as tax) an amount equal to 5 percent of the 
                amount of such foreign gift for each month for which the 
                failure continues (not to exceed 25 percent of such 
                amount in the aggregate).
            ``(2) Reasonable cause exception.--Paragraph (1) shall not 
        apply to any failure to report a foreign gift if the United 
        States person shows that the failure is due to reasonable cause 
        and not due to willful neglect.

    ``(d) Cost-of-Living Adjustment.--In the case of any taxable year 
beginning after December 31, 1996, the $10,000 amount under subsection 
(a) shall be increased by an amount equal to the product of such amount 
and the cost-of-living adjustment for such taxable year under section 
1(f)(3), except that subparagraph (B) thereof shall be applied by 
substituting `1995' for `1992'.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Clerical Amendment.--The table of sections for such subpart is 
amended by inserting after the item relating to section 6039E the 
following new item:

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

    (c) Effective <<NOTE: 26 USC 6039F note.>>  Date.--The amendments 
made by this section shall apply to amounts received after the date of 
the enactment of this Act in taxable years ending after such date.

[[Page 110 STAT. 1914]]

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

    (a) Modification of Interest Charge on Accumulation Distributions.--
Subsection (a) of section 668 (relating to interest charge on 
accumulation distributions from foreign trusts) is 
amended to read as follows:
    ``(a) General Rule.--For purposes of the tax determined under 
section 667(a)--
            ``(1) Interest determined using underpayment rates.--The 
        interest charge determined under this section with respect to 
        any distribution is the amount of interest which would be 
        determined on the partial tax computed under section 667(b) for 
        the period described in paragraph (2) using the rates and the 
        method under section 6621 applicable to underpayments of tax.
            ``(2) Period.--For purposes of paragraph (1), the period 
        described in this paragraph is the period which begins on the 
        date which is the applicable number of years before the date of 
        the distribution and which ends on the date of the distribution.
            ``(3) Applicable number of years.--For purposes of paragraph 
        (2)--
                    ``(A) In general.--The applicable number of years 
                with respect to a distribution is the number determined 
                by dividing--
                          ``(i) the sum of the products described in 
                      subparagraph (B) with respect to each 
                      undistributed income year, by
                          ``(ii) the aggregate undistributed net income.
                The quotient determined under the preceding sentence 
                shall be rounded under procedures prescribed by the 
                Secretary.
                    ``(B) Product described.--For purposes of sub-
                paragraph (A), the product described in this 
                subparagraph with respect to any undistributed income 
                year is the product of--
                          ``(i) the undistributed net income for such 
                      year, and
                          ``(ii) the sum of the number of taxable years 
                      between such year and the taxable year of the 
                      distribution (counting in each case the 
                      undistributed income year but not counting the 
                      taxable year of the distribution).
            ``(4) Undistributed income year.--For purposes of this 
        subsection, the term `undistributed income year' means any prior 
        taxable year of the trust for which there is undistributed net 
        income, other than a taxable year during all of which the 
        beneficiary receiving the distribution was not a citizen or 
        resident of the United States.
            ``(5) Determination of undistributed net income.--
        Notwithstanding section 666, for purposes of this subsection, an 
        accumulation distribution from the trust shall be treated as 
        reducing proportionately the undistributed net income for 
        undistributed income years.
            ``(6) Periods before 1996.--Interest for the portion of the 
        period described in paragraph (2) which occurs before January 1, 
        1996, shall be determined--

[[Page 110 STAT. 1915]]

                    ``(A) by using an interest rate of 6 percent, and
                    ``(B) without compounding until January 1, 1996.''.

    (b) Abusive Transactions.--Section 643(a) is amended by inserting 
after paragraph (6) the following new paragraph:
            ``(7) Abusive transactions.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to carry out 
        the purposes of this part, including regulations to prevent 
        avoidance of such purposes.''.

    (c) Treatment of Loans From Trusts.--
            (1) In general.--Section 643 (relating to definitions 
        applicable to subparts A, B, C, and D) is amended by adding at 
        the end the following new subsection:

    ``(i) Loans From Foreign Trusts.--For purposes of subparts B, C, and 
D--
            ``(1) General rule.--Except as provided in regulations, if a 
        foreign trust makes a loan of cash or marketable securities 
        directly or indirectly to--
                    ``(A) any grantor or beneficiary of such trust who 
                is a United States person, or
                    ``(B) any United States person not described in 
                subparagraph (A) who is related to such grantor or 
                beneficiary,
        the amount of such loan shall be treated as a distribution by 
        such trust to such grantor or beneficiary (as the case may be).
            ``(2) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Cash.--The term `cash' includes foreign 
                currencies and cash equivalents.
                    ``(B) Related person.--
                          ``(i) In general.--A person is related to 
                      another person if the relationship between such 
                      persons would result in a disallowance of losses 
                      under section 267 or 707(b). In applying section 
                      267 for purposes of the preceding sentence, 
                      section 267(c)(4) shall be applied as if the 
                      family of an individual includes the spouses of 
                      the members of the family.
                          ``(ii) Allocation.--If any person described in 
                      paragraph (1)(B) is related to more than one 
                      person, the grantor or beneficiary to whom the 
                      treatment under this subsection applies shall be 
                      determined under regulations prescribed by the 
                      Secretary.
                    ``(C) Exclusion of tax-exempts.--The term `United 
                States person' does not include any entity exempt from 
                tax under this chapter.
                    ``(D) Trust not treated as simple trust.--Any trust 
                which is treated under this subsection as making a 
                distribution shall be treated as not described in 
                section 651.
            ``(3) Subsequent transactions regarding loan principal.--If 
        any loan is taken into account under paragraph (1), any 
        subsequent transaction between the trust and the original 
        borrower regarding the principal of the loan (by way of complete 
        or partial repayment, satisfaction, cancellation, discharge, or 
        otherwise) shall be disregarded for purposes of this title.''.

[[Page 110 STAT. 1916]]

            (2) Technical amendment.--Paragraph (8) of section 7872(f) 
        is amended by inserting ``, 643(i),'' before ``or 1274'' each 
        place it appears.

    (d) Effective Dates.--
            (1) Interest <<NOTE: 26 USC 668 note.>>  charge.--The 
        amendment made by subsection (a) shall apply to distributions 
        after the date of the enactment of this Act.
            (2) Abusive <<NOTE: 26 USC 643 note.>>  transactions.--The 
        amendment made by subsection (b) shall take effect on the date 
        of the enactment of this Act.
            (3) Loans <<NOTE: 26 USC 643 note.>>  from trusts.--The 
        amendment made by subsection (c) shall apply to loans of cash or 
        marketable securities made after September 19, 1995.

SEC. 1907. RESIDENCE OF TRUSTS, ETC.

    (a) Treatment as United States Person.--
            (1) In general.--Paragraph (30) of section 7701(a) is 
        amended by striking ``and'' at the end of subparagraph (C) and 
        by striking subparagraph (D) and by inserting the following new 
        subparagraphs:
                    ``(D) any estate (other than a foreign estate, 
                within the meaning of paragraph (31)), and
                    ``(E) any trust if--
                          ``(i) a court within the United States is able 
                      to exercise primary supervision over the 
                      administration of the trust, and
                          ``(ii) one or more United States fiduciaries 
                      have the authority to control all substantial 
                      decisions of the trust.''.
            (2) Conforming amendment.--Paragraph (31) of section 7701(a) 
        is amended to read as follows:
            ``(31) Foreign estate or trust.--
                    ``(A) Foreign estate.--The term `foreign estate' 
                means an estate the income of which, from sources 
                without the United States which is not effectively 
                connected with the conduct of a trade or business within 
                the United States, is not includible in gross income 
                under subtitle A.
                    ``(B) Foreign trust.--The term `foreign trust' means 
                any trust other than a trust described in subparagraph 
                (E) of paragraph (30).''.
            (3) Effective <<NOTE: 26 USC 7701 note.>>  date.--The 
        amendments made by this subsection shall apply--
                    (A) to taxable years beginning after December 31, 
                1996, or
                    (B) at the election of the trustee of a trust, to 
                taxable years ending after the date of the enactment of 
                this Act.
        Such an election, once made, shall be irrevocable.

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

``If a trust which is not a foreign trust becomes a foreign trust, such 
trust shall be treated for purposes of this section as having 
transferred, immediately before becoming a foreign trust, all of its 
assets to a foreign trust.''.

[[Page 110 STAT. 1917]]

            (2) Effective <<NOTE: 26 USC 1491 note.>>  date.--The 
        amendment made by this 
        subsection shall take effect on the date of the enactment of 
        this Act.

 Subtitle J--Generalized <<NOTE: GSP Renewal Act of 1996.>>  System of 
Preferences

SEC. 1951. SHORT <<NOTE: 19 USC 2101 note.>>  TITLE.

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

SEC. 1952. GENERALIZED SYSTEM OF PREFERENCES.

    (a) In General.--Title V of the Trade Act of 1974 is amended to read 
as follows:

              ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

``SEC. 501. AUTHORITY <<NOTE: 19 USC 2461.>>  TO EXTEND PREFERENCES.

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

``SEC. 502. DESIGNATION <<NOTE: 19 USC 2462.>>  OF BENEFICIARY 
            DEVELOPING COUNTRIES.

    ``(a) Authority To Designate Countries.--
            ``(1) Beneficiary developing countries.--The President is 
        authorized to designate countries as beneficiary developing 
        countries for purposes of this title.
            ``(2) Least-developed beneficiary developing countries.--The 
        President is authorized to designate any beneficiary developing 
        country as a least-developed beneficiary developing country for 
        purposes of this title, based on the considerations in section 
        501 and subsection (c) of this section.

    ``(b) Countries Ineligible for Designation.--
            ``(1) Specific countries.--The following countries may not 
        be designated as beneficiary developing countries for purposes 
        of this title:
                    ``(A) Australia.
                    ``(B) Canada.
                    ``(C) European Union member states.
                    ``(D) Iceland.
                    ``(E) Japan.
                    ``(F) Monaco.
                    ``(G) New Zealand.

[[Page 110 STAT. 1918]]

                    ``(H) Norway.
                    ``(I) Switzerland.
            ``(2) Other bases for ineligibility.--The 
        President <<NOTE: President.>>  shall not designate any country 
        a beneficiary developing country under this title if any of the 
        following applies:
                    ``(A) Such country is a Communist country, unless--
                          ``(i) the products of such country receive 
                      nondiscriminatory treatment,
                          ``(ii) such country is a WTO Member (as such 
                      term is defined in section 2(10) of the Uruguay 
                      Round Agreements Act) (19 U.S.C. 3501(10)) and a 
                      member of the International Monetary Fund, and
                          ``(iii) such country is not dominated or 
                      controlled by international communism.
                    ``(B) Such country is a party to an arrangement of 
                countries and participates in any action pursuant to 
                such arrangement, the effect of which is--
                          ``(i) to withhold supplies of vital commodity 
                      resources from international trade or to raise the 
                      price of such commodities to an unreasonable 
                      level, and
                          ``(ii) to cause serious disruption of the 
                      world 
                      economy.
                    ``(C) Such country affords preferential treatment to 
                the products of a developed country, other than the 
                United States, which has, or is likely to have, a 
                significant adverse effect on United States commerce.
                    ``(D)(i) Such country--
                          ``(I) has nationalized, expropriated, or 
                      otherwise seized ownership or control of property, 
                      including 
                      patents, trademarks, or copyrights, owned by a 
                      United States citizen or by a corporation, 
                      partnership, or association which is 50 percent or 
                      more beneficially owned by United States citizens,
                          ``(II) has taken steps to repudiate or nullify 
                      an existing contract or agreement with a United 
                      States citizen or a corporation, partnership, or 
                      association which is
50 percent or more beneficially owned by United States citizens, the 
effect of which is to nationalize, expropriate, or otherwise seize 
ownership or 
control of property, including patents, trademarks, or copyrights, so 
owned, or
                          ``(III) has imposed or enforced taxes or other 

                      exactions, restrictive maintenance or operational 
                      conditions, or other measures with respect to 
                      property, including patents, trademarks, or 
                      copyrights, so owned, the effect of which is to 
                      nationalize, expropriate, or otherwise seize 
                      ownership or control of such property,
                unless clause (ii) applies.
                    ``(ii) This clause applies if the President 
                determines that--
                          ``(I) prompt, adequate, and effective 
                      compensation has been or is being made to the 
                      citizen, corporation, partnership, or association 
                      referred to in clause (i),
                          ``(II) good faith negotiations to provide 
                      prompt, adequate, and effective compensation under 
                      the applicable provisions of international law are 
                      in progress, or the country described in clause 
                      (i) is other

[[Page 110 STAT. 1919]]

                      wise taking steps to discharge its obligations 
                      under international law with respect to such 
                      citizen, corporation, partnership, or association, 
                      or
                          ``(III) a dispute involving such citizen, 
                      corporation, partnership, or association over 
                      compensation for such a seizure has been submitted 
                      to arbitration under the provisions of the 
                      Convention for the Settlement of Investment 
                      Disputes, or in another mutually agreed upon 
                      forum,
                and the President promptly furnishes a copy of such 
                determination to the Senate and House of 
                Representatives.
                    ``(E) Such country fails to act in good faith in 
                recognizing as binding or in enforcing arbitral awards 
                in favor of United States citizens or a corporation, 
                partnership, or association which is 50 percent or more 
                beneficially owned by United States citizens, which have 
                been 
                made by arbitrators appointed for each case or by 
                permanent arbitral bodies to which the parties involved 
                have submitted their dispute.
                    ``(F) Such country aids or abets, by granting 
                sanctuary from prosecution to, any individual or group 
                which has committed an act of international terrorism.
                    ``(G) Such country has not taken or is not taking 
                steps to afford internationally recognized worker rights 
                to 
                workers in the country (including any designated zone in 
                that country).
        Subparagraphs (D), (E), (F), and (G) shall not prevent the 
        designation of any country as a beneficiary developing country 
        under this title if the President determines that such 
        designation will be in the national economic interest of the 
        United States and reports such determination to the Congress 
        with the reasons therefor.

    ``(c) Factors Affecting Country Designation.--In determining whether 
to designate any country as a beneficiary developing country under this 
title, the President shall take into account--
            ``(1) an expression by such country of its desire to be so 
        designated;
            ``(2) the level of economic development of such country, 
        including its per capita gross national product, the living 
        standards of its inhabitants, and any other economic factors 
        which the President deems appropriate;
            ``(3) whether or not other major developed countries are 
        extending generalized preferential tariff treatment to such 
        country;
            ``(4) the extent to which such country has assured the 
        United States that it will provide equitable and reasonable 
        access to the markets and basic commodity resources of such 
        country and the extent to which such country has assured the 
        United States that it will refrain from engaging in unreasonable 
        export practices;
            ``(5) the extent to which such country is providing adequate 
        and effective protection of intellectual property rights;
            ``(6) the extent to which such country has taken 
        action to--
                    ``(A) reduce trade distorting investment practices 
                and policies (including export performance 
                requirements); and

[[Page 110 STAT. 1920]]

                    ``(B) reduce or eliminate barriers to trade in 
                services; and
            ``(7) whether or not such country has taken or is taking 
        steps to afford to workers in that country (including any 
        designated zone in that country) internationally recognized 
        worker rights.

    ``(d) Withdrawal, Suspension, or Limitation of Country 
Designation.--
            ``(1) In general.--The President may withdraw, suspend, or 
        limit the application of the duty-free treatment accorded under 
        this title with respect to any country. In taking any action 
        under this subsection, the President shall consider the factors 
        set forth in section 501 and subsection (c) of this section.
            ``(2) Changed circumstances.--The President shall, after 
        complying with the requirements of subsection (f)(2), withdraw 
        or suspend the designation of any country as a beneficiary 
        developing country if, after such designation, the President 
        determines that as the result of changed circumstances such 
        country would be barred from designation as a beneficiary 
        developing country under subsection (b)(2). Such country shall 
        cease to be a beneficiary developing country on the day on which 
        the President issues an Executive order or Presidential 
        proclamation revoking the designation of such country under this 
        title.
            ``(3) Advice to congress.--The 
        President <<NOTE: President.>>  shall, as necessary, advise the 
        Congress on the application of section 501 and subsection (c) of 
        this section, and the actions the President has taken to 
        withdraw, to suspend, or to limit the application of duty-free 
        treatment with respect to any country which has failed to 
        adequately take the actions described in subsection (c).

    ``(e) Mandatory Graduation of Beneficiary Developing Countries.--If 
the President determines that a beneficiary developing country has 
become a `high income' country, as defined by the official statistics of 
the International Bank for Reconstruction and Development, then the 
President shall terminate the designation of such country as a 
beneficiary developing country for purposes of this title, effective on 
January 1 of the second year following the year in which such 
determination is made.
    ``(f) Congressional Notification.--
            ``(1) Notification of designation.--
                    ``(A) In general.--Before the President designates 
                any country as a beneficiary developing country under 
                this title, the President shall notify the Congress of 
                the President's intention to make such designation, 
                together with the considerations entering into such 
                decision.
                    ``(B) Designation as least-developed beneficiary 
                developing country.--At least 60 days before the 
                President designates any country as a least-developed 
                beneficiary developing country, the President shall 
                notify the Congress of the President's intention to make 
                such designation.
            ``(2) Notification of termination.--If the President has 
        designated any country as a beneficiary developing country under 
        this title, the President shall not terminate such designation 
        unless, at least 60 days before such termination, the President 
        has notified the Congress and has notified such country

[[Page 110 STAT. 1921]]

        of the President's intention to terminate such designation, 
        together with the considerations entering into such decision.

``SEC. 503. DESIGNATION <<NOTE: 19 USC 2463.>>  OF ELIGIBLE ARTICLES.

    ``(a) Eligible Articles.--
            ``(1) Designation.--
                    ``(A) In general.--Except as provided in subsection 
                (b), the President is authorized to designate articles 
                as eligible articles from all beneficiary developing 
                countries for purposes of this title by Executive order 
                or Presidential proclamation after receiving the advice 
                of the International Trade Commission in accordance with 
                subsection (e).
                    ``(B) Least-developed beneficiary developing 
                countries.--Except for articles described in 
                subparagraphs (A), (B), and (E) of subsection (b)(1) and 
                articles described in paragraphs (2) and (3) of 
                subsection (b), the President may, in carrying out 
                section 502(d)(1) and subsection (c)(1) of this section, 
                designate articles as eligible articles only for 
                countries designated as least-developed beneficiary 
                developing countries under section 502(a)(2) if, after 
                receiving the advice of the International Trade 
                Commission in accordance with subsection (e) of this 
                section, the President determines that such articles are 
                not import-sensitive in the context of imports from 
                least-developed beneficiary developing countries.
                    ``(C) Three-year rule.--If, after receiving the 
                advice of the International Trade Commission under 
                subsection (e), an article has been formally considered 
                for designation as an eligible article under this title 
                and denied such designation, such article may not be 
                reconsidered for 
                such designation for a period of 3 years after such 
                denial.
            ``(2) Rule of origin.--
                    ``(A) General rule.--The duty-free treatment 
                provided under this title shall apply to any eligible 
                article which is the growth, product, or manufacture of 
                a beneficiary developing country if--
                          ``(i) that article is imported directly from a 
                      beneficiary developing country into the customs 
                      territory of the United States; and
                          ``(ii) the sum of--
                                    ``(I) the cost or value of the 
                                materials produced in the beneficiary 
                                developing country or any two or more 
                                such countries that are members of the 
                                same association of countries and are 
                                treated as one country under section 
                                507(2), plus
                                    ``(II) the direct costs of 
                                processing operations performed in such 
                                beneficiary developing country or such 
                                member countries,
is not less than 35 percent of the appraised value of such article at 
the time it is entered.
                    ``(B) Exclusions.--An article shall not be treated 
                as the growth, product, or manufacture of a beneficiary 
                developing country by virtue of having merely 
                undergone--
                          ``(i) simple combining or packaging 
                      operations, or
                          ``(ii) mere dilution with water or mere 
                      dilution with another substance that does not 
                      materially alter the characteristics of the 
                      article.

[[Page 110 STAT. 1922]]

            ``(3) Regulations.--The Secretary of the Treasury, after 
        consulting with the United States Trade Representative, shall 
        prescribe such regulations as may be necessary to carry out 
        paragraph (2), including, but not limited to, regulations 
        providing that, in order to be eligible for duty-free treatment 
        under this title, an article--
                    ``(A) must be wholly the growth, product, or 
                manufacture of a beneficiary developing country, or
                    ``(B) must be a new or different article of commerce 
                which has been grown, produced, or manufactured in the 
                beneficiary developing country.

    ``(b) Articles That May Not Be Designated As Eligible Articles.--
            ``(1) Import sensitive articles.--The President may not 
        designate any article as an eligible article under subsection 
        (a) if such article is within one of the following categories of 
        import-sensitive articles:
                    ``(A) Textile and apparel articles which were not 
                eligible articles for purposes of this title on January 
                1, 1994, as this title was in effect on such date.
                    ``(B) Watches, except those watches entered after 
                June 30, 1989, that the President specifically 
                determines, after public notice and comment, will not 
                cause material injury to watch or watch band, strap, or 
                bracelet manufacturing and assembly operations in the 
                United States or the United States insular possessions.
                    ``(C) Import-sensitive electronic articles.
                    ``(D) Import-sensitive steel articles.
                    ``(E) Footwear, handbags, luggage, flat goods, work 
                gloves, and leather wearing apparel which were not 
                eligible articles for purposes of this title on January 
                1, 1995, as this title was in effect on such date.
                    ``(F) Import-sensitive semimanufactured and 
                manufactured glass products.
                    ``(G) Any other articles which the President 
                determines to be import-sensitive in the context of the 
                Generalized System of Preferences.
            ``(2) Articles against which other actions taken.--An 
        article shall not be an eligible article for purposes of this 
        title for any period during which such article is the subject of 
        any action proclaimed pursuant to section 203 of this Act (19 
        U.S.C. 2253) or section 232 or 351 of the Trade Expansion Act of 
        1962 (19 U.S.C. 1862, 1981).
            ``(3) Agricultural products.--No quantity of an agricultural 
        product subject to a tariff-rate quota that exceeds the in-quota 
        quantity shall be eligible for duty-free treatment under this 
        title.

    ``(c) Withdrawal, Suspension, or Limitation of Duty-Free Treatment; 
Competitive Need Limitation.--
            ``(1) In general.--The President may withdraw, suspend, or 
        limit the application of the duty-free treatment accorded under 
        this title with respect to any article, except that no rate of 
        duty may be established with respect to any article pursuant to 
        this subsection other than the rate which would apply but for 
        this title. In taking any action under this subsection, the 
        President shall consider the factors set forth in sections 501 
        and 502(c).

[[Page 110 STAT. 1923]]

            ``(2) Competitive need limitation.--
                    ``(A) Basis for withdrawal of duty-free treatment.--
                          ``(i) In general.--Except as provided in 
                      clause (ii) and subject to subsection (d), 
                      whenever the President determines that a 
                      beneficiary developing country has exported 
                      (directly or indirectly) to the United States 
                      during any calendar year beginning after December 
                      31, 1995--
                                    ``(I) a quantity of an eligible 
                                article having an appraised value in 
                                excess of the applicable amount for the 
                                calendar year, or
                                    ``(II) a quantity of an eligible 
                                article equal to or exceeding 50 percent 
                                of the appraised value of the total 
                                imports of that article into the United 
                                States during any calendar year,
                      the President shall, not later than July 1 of the 
                      next calendar year, terminate the duty-free 
                      treatment for that article from that beneficiary 
                      developing country.
                          ``(ii) Annual adjustment of applicable 
                      amount.--For purposes of applying clause (i), the 
                      applicable amount is--
                                    ``(I) for 1996, $75,000,000, and
                                    ``(II) for each calendar year 
                                thereafter, an amount equal to the 
                                applicable amount in effect for the 
                                preceding calendar year plus $5,000,000.
                    ``(B) Country defined.--For purposes of this 
                paragraph, the term `country' does not include an 
                association of countries which is treated as one country 
                under section 507(2), but does include a country which 
                is a member of any such association.
                    ``(C) Redesignations.--A country which is no longer 
                treated as a beneficiary developing country with respect 
                to an eligible article by reason of subparagraph (A) 
                may, subject to the considerations set forth in sections 
                501 and
502, be redesignated a beneficiary developing country with respect to 
such article if imports of such article from such country did not exceed 
the limitations in subparagraph (A) during the preceding calendar year.
                    ``(D) Least-developed beneficiary developing 
                countries.--Subparagraph (A) shall not apply to any 
                least-developed beneficiary developing country.
                    ``(E) Articles not produced in the united states 
                excluded.--Subparagraph (A)(i)(II) shall not apply with 
                respect to any eligible article if a like or directly 
                competitive article was not produced in the United 
                States on January 1, 1995.
                    ``(F) De minimis waivers.--
                          ``(i) In general.--The President may disregard 
                      subparagraph (A)(i)(II) with respect to any 
                      eligible 
                      article from any beneficiary developing country if 
                      the aggregate appraised value of the imports of 
                      such article into the United States during the 
                      preceding calendar year does not exceed the 
                      applicable amount for such preceding calendar 
                      year.
                          ``(ii) Applicable amount.--For purposes of 
                      applying clause (i), the applicable amount is--

[[Page 110 STAT. 1924]]

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

    ``(d) Waiver of Competitive Need Limitation.--
            ``(1) In general.--The President may waive the application 
        of subsection (c)(2) with respect to any eligible article of any 
        beneficiary developing country if, before July 1 of the calendar 
        year beginning after the calendar year for which a determination 
        described in subsection (c)(2)(A) was made with respect to such 
        eligible article, the President--
                    ``(A) receives the advice of the International Trade 
                Commission under section 332 of the Tariff Act of 1930 
                on whether any industry in the United States is likely 
                to be adversely affected by such waiver,
                    ``(B) determines, based on the considerations 
                described in sections 501 and 502(c) and the advice 
                described in subparagraph (A), that such waiver is in 
                the national economic interest of the United States, and
                    ``(C) publishes the determination described in 
                subparagraph (B) in the Federal Register.
            ``(2) Considerations by the president.--In making any 
        determination under paragraph (1), the President shall give 
        great weight to--
                    ``(A) the extent to which the beneficiary developing 
                country has assured the United States that such country 
                will provide equitable and reasonable access to the 
                markets and basic commodity resources of such country, 
                and
                    ``(B) the extent to which such country provides 
                adequate and effective protection of intellectual 
                property rights.
            ``(3) Other bases for waiver.--The President may waive the 
        application of subsection (c)(2) if, before July 1 of the 
        calendar year beginning after the calendar year for which a 
        determination described in subsection (c)(2) was made with 
        respect to a beneficiary developing country, the President 
        determines that--
                    ``(A) there has been a historical preferential trade 
                relationship between the United States and such country,
                    ``(B) there is a treaty or trade agreement in force 
                covering economic relations between such country and the 
                United States, and
                    ``(C) such country does not discriminate against, or 
                impose unjustifiable or unreasonable barriers to, United 
                States commerce,
        and the President publishes that determination in the Federal 
        Register.
            ``(4) Limitations on waivers.--
                    ``(A) In general.--The President may not exercise 
                the waiver authority under this subsection with respect 
                to a quantity of an eligible article entered during any 
                calendar year beginning after 1995, the aggregate 
                appraised value of which equals or exceeds 30 percent of 
                the aggregate appraised value of all articles that 
                entered duty-free under this title during the preceding 
                calendar year.
                    ``(B) Other waiver limits.--The President may not 
                exercise the waiver authority provided under this sub

[[Page 110 STAT. 1925]]

                section with respect to a quantity of an eligible 
                article entered during any calendar year beginning after 
                1995, the aggregate appraised value of which exceeds 15 
                percent of the aggregate appraised value of all articles 
                that have entered duty-free under this title during the 
                preceding calendar year from those beneficiary 
                developing countries which for the preceding calendar 
                year--
                          ``(i) had a per capita gross national product 
                      (calculated on the basis of the best available 
                      information, including that of the International 
                      Bank for Reconstruction and Development) of $5,000 
                      or more; or
                          ``(ii) had exported (either directly or 
                      indirectly) to the United States a quantity of 
                      articles that was duty-free under this title that 
                      had an aggregate appraised value of more than 10 
                      percent of the aggregate appraised value of all 
                      articles that entered duty-free under this title 
                      during that year.
                    ``(C) Calculation of limitations.--There shall be 
                counted against the limitations imposed under 
                subparagraphs (A) and (B) for any calendar year only 
                that value of any eligible article of any country that--
                          ``(i) entered duty-free under this title 
                      during such calendar year; and
                          ``(ii) is in excess of the value of that 
                      article that would have been so entered during 
                      such calendar year if the limitations under 
                      subsection (c)(2)(A) applied.
            ``(5) Effective period of waiver.--Any waiver granted under 
        this subsection shall remain in effect until the President 
        determines that such waiver is no longer warranted due to 
        changed circumstances.

    ``(e) International Trade Commission Advice.--Before designating 
articles as eligible articles under subsection (a)(1), the President 
shall publish and furnish the International Trade Commission with lists 
of articles which may be considered 
for designation as eligible articles for purposes of this title. The 
provisions of sections 131, 132, 133, and 134 shall be complied with as 
though action under section 501 and this section were action under 
section 123 to carry out a trade agreement entered into under section 
123.
    ``(f) Special Rule Concerning Puerto Rico.--No action under this 
title may affect any tariff duty imposed by the Legislature of Puerto 
Rico pursuant to section 319 of the Tariff Act of 1930 on coffee 
imported into Puerto Rico.
``SEC. 504. <<NOTE: 19 USC 2464.>>  REVIEW AND REPORT TO CONGRESS.

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

``SEC. 505. DATE <<NOTE: 19 USC 2465.>>  OF TERMINATION.

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

``SEC. 506. AGRICULTURAL <<NOTE: 19 USC 2466.>>  EXPORTS OF BENEFICIARY 
            DEVELOPING COUNTRIES.

    ``The appropriate agencies of the United States shall assist 
beneficiary developing countries to develop and implement meas

[[Page 110 STAT. 1926]]

ures designed to assure that the agricultural sectors of their economies 
are not directed to export markets to the detriment of the production of 
foodstuffs for their citizenry.

``SEC. 507. DEFINITIONS <<NOTE: 19 USC 2467.>> .

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

    (b) Table of Contents.--The items relating to title V in the table 
of contents of the Trade Act of 1974 are amended to read as follows:

              ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

``Sec. 501. Authority to extend preferences.
``Sec. 502. Designation of beneficiary developing countries.
``Sec. 503. Designation of eligible articles.
``Sec. 504. Review and reports to Congress.
``Sec. 505. Date of termination.
``Sec. 506. Agricultural exports of beneficiary developing countries.
``Sec. 507. Definitions.''.

SEC. 1953. EFFECTIVE <<NOTE: 19 USC 2461 note.>>  DATE.

    (a) In General.--The amendments made by this subtitle apply to 
articles entered on or after October 1, 1996.
    (b) Retroactive Application.--

[[Page 110 STAT. 1927]]

            (1) General rule.--Notwithstanding section 514 of the Tariff 
        Act of 1930 or any other provision of law and subject to 
        subsection (c)--
                    (A) any article that was entered--
                          (i) after July 31, 1995, and
                          (ii) before January 1, 1996, and
                to which duty-free treatment under title V of the Trade 
                Act of 1974 would have applied if the entry had been 
                made on July 31, 1995, shall be liquidated or 
                reliquidated as free of duty, and the Secretary of the 
                Treasury shall refund any duty paid with respect to such 
                entry, and
                    (B) any article that was entered--
                          (i) after December 31, 1995, and
                          (ii) before October 1, 1996, and
                to which duty-free treatment under title V of the Trade 
                Act of 1974 (as amended by this subtitle) would have 
                applied if the entry had been made on or after October 
                1, 1996, shall be liquidated or reliquidated as free of 
                duty, and the Secretary of the Treasury shall refund any 
                duty paid with respect to such entry.
            (2) Limitation on refunds.--No refund shall be made pursuant 
        to this subsection before October 1, 1996.
            (3) Entry.--As used in this subsection, the term ``entry'' 
        includes a withdrawal from warehouse for consumption.

    (c) Requests.--Liquidation or reliquidation may be made under 
subsection (b) with respect to an entry only if a request therefor is 
filed with the Customs Service, within 180 days after the date of the 
enactment of this Act, that contains sufficient information to enable 
the Customs Service--
            (1) to locate the entry; or
            (2) to reconstruct the entry if it cannot be located.

SEC. 1954. CONFORMING AMENDMENTS.

    (a) Trade Laws.--
            (1) Section 1211(b) of the Omnibus Trade and Competitiveness 
        Act of 1988 (19 U.S.C. 3011(b)) is amended--
                    (A) in paragraph (1), by striking ``(19 U.S.C. 
                2463(a), 2464(c)(3))'' and inserting ``(as in effect on 
                July 31, 
                1995)''; and
                    (B) in paragraph (2), by striking ``(19 U.S.C. 
                2464(c)(1))'' and inserting the following: ``(as in 
                effect on July 31, 1995)''.
            (2) Section 203(c)(7) of the Andean Trade Preference Act (19 
        U.S.C. 3202(c)(7)) is amended by striking ``502(a)(4)'' and 
        inserting ``507(4)''.
            (3) Section 212(b)(7) of the Caribbean Basin Economic 
        Recovery Act (19 U.S.C. 2702(b)(7)) is amended by striking 
        ``502(a)(4)'' and inserting ``507(4)''.
            (4) General note 3(a)(iv)(C) of the Harmonized Tariff 
        Schedule of the United States is amended by striking ``sections 
        503(b) and 504(c)'' and inserting ``subsections (a), (c), and 
        (d) of section 503''.
            (5) Section 201(a)(2) of the North American Free Trade 
        Agreement Implementation Act (19 U.S.C. 3331(a)(2)) is 
        amended by striking ``502(a)(2) of the Trade Act of 1974 (19 
        U.S.C. 2462(a)(2))'' and inserting ``502(f)(2) of the Trade Act 
        of 1974''.

[[Page 110 STAT. 1928]]

            (6) Section 131 of the Uruguay Round Agreements Act (19 
        U.S.C. 3551) is amended in subsections (a) and (b)(1) by 
        striking ``502(a)(4)'' and inserting ``507(4)''.

    (b) Other Laws.--
            (1) Section 871(f)(2)(B) of the Internal Revenue Code of 
        1986 is amended by striking ``within the meaning of section 
        502'' and inserting ``under title V''.
            (2) Section 2202(8) of the Export Enhancement Act of 1988 
        (15 U.S.C. 4711(8)) is amended by striking ``502(a)(4)'' and 
        inserting ``507(4)''.
            (3) Section 231A(a) of the Foreign Assistance Act of 1961 
        (22 U.S.C. 2191a(a)) is amended--
                    (A) in paragraph (1) by striking ``502(a)(4) of the 
                Trade Act of 1974 (19 U.S.C. 2462(a)(4))'' and inserting 
                ``507(4) of the Trade Act of 1974'';
                    (B) in paragraph (2) by striking ``505(c) of the 
                Trade Act of 1974 (19 U.S.C. 2465(c))'' and inserting 
                ``504 of the Trade Act of 1974''; and
                    (C) in paragraph (4) by striking ``502(a)(4)'' and 
                inserting ``507(4)''.
            (4) Section 1621(a)(1) of the International Financial 
        Institutions Act (22 U.S.C. 262p-4p(a)(1)) is amended by 
        striking ``502(a)(4)'' and inserting ``507(4)''.
            (5) Section 103B of the Agricultural Act of 1949 (7 U.S.C. 
        1444-2) is amended in subsections (a)(5)(F)(v) and (n)(1)(C) by 
        striking ``503(d) of the Trade Act of 1974 (19 U.S.C. 2463(d))'' 
        and inserting ``503(b)(3) of the Trade Act of 1974''.

SEC. 2101. SHORT <<NOTE: Employee Commuting Flexibility Act of 1996.  29 
            USC 251 note.>>  TITLE.

    This section and sections 2102 and 2103 may be cited as the 
``Employee Commuting Flexibility Act of 1996''.
SEC. 2102. PROPER COMPENSATION FOR USE OF EMPLOYER VEHICLES.

    Section 4(a) of the Portal-to-Portal Act of 1947 (29 U.S.C. 254(a)) 
is amended by adding at the end the following: ``For purposes of this 
subsection, the use of an employer's vehicle for travel by an employee 
and activities performed by an employee which are incidental to the use 
of such vehicle for commuting shall not be considered part of the 
employee's principal activities if the use of such vehicle for travel is 
within the normal commuting area for the employer's business or 
establishment and the use of the employer's vehicle is subject to an 
agreement on the part of the employer and the employee or representative 
of such employee.''.

SEC. 2103. EFFECTIVE <<NOTE: 29 USC 254 note.>>  DATE.

    The amendment made by section 2101 shall take effect 
on the date of the enactment of this Act and shall apply in determining 
the application of section 4 of the Portal-to-Portal Act of 1947 to an 
employee in any civil action brought before such date of enactment but 
pending on such date.

SEC. 2104. MINIMUM <<NOTE: Minimum Wage Increase Act of 1996. 29 USC 201 
            note.>>  WAGE INCREASE.

    (a) Short Title.--This section may be cited as the ``Minimum Wage 
Increase Act of 1996''.
    (b) Amendment.--Paragraph (1) of section 6(a) of the Fair Labor 
Standards Act of 1938 (29 U.S.C. 206(a)) is amended to read as follows:

[[Page 110 STAT. 1929]]

            ``(1) except as otherwise provided in this section, not less 
        than $4.25 an hour during the period ending on September 30, 
        1996, not less than $4.75 an hour during the year beginning on 
        October 1, 1996, and not less than $5.15 an hour beginning 
        September 1, 1997;''.

    (c) Conforming Amendment.--Section 6 of such Act (29 U.S.C. 206) is 
amended by striking subsection (c).

SEC. 2105. FAIR LABOR STANDARDS ACT AMENDMENTS.

    (a) Computer Professionals.--Section 13(a) of the Fair Labor 
Standards Act of 1938 (29 U.S.C. 213(a)) is amended by striking the 
period at the end of paragraph (16) and inserting ``; or'' and by adding 
after that paragraph the following:
            ``(17) any employee who is a computer systems analyst, 
        computer programmer, software engineer, or other similarly 
        skilled worker, whose primary duty is--
                    ``(A) the application of systems analysis techniques 
                and procedures, including consulting with users, to 
                determine hardware, software, or system functional 
                specifications;
                    ``(B) the design, development, documentation, 
                analysis, creation, testing, or modification of computer 
                systems or programs, including prototypes, based on and 
                related to user or system design specifications;
                    ``(C) the design, documentation, testing, creation, 
                or modification of computer programs related to machine 
                operating systems; or
                    ``(D) a combination of duties described in 
                subparagraphs (A), (B), and (C) the performance of which 
                requires the same level of skills, and
        who, in the case of an employee who is compensated on an hourly 
        basis, is compensated at a rate of not less than $27.63 an 
        hour.''.

    (b) Tip Credit.--The last sentence of section 3(m) of the Fair Labor 
Standards Act of 1938 (29 U.S.C. 203(m)) is amended by striking 
``previous sentence'' and inserting ``preceding 2 sentences'' and by 
striking ``(1)'' and ``(2)'' and such section is amended by striking the 
next to last sentence and inserting the following: ``In determining the 
wage an employer is required to pay a tipped employee, the amount paid 
such employee by the employee's employer shall be an amount equal to--
            ``(1) the cash wage paid such employee which for purposes of 
        such determination shall be not less than the cash wage required 
        to be paid such an employee on the date of the enactment of this 
        paragraph; and
            ``(2) an additional amount on account of the tips received 
        by such employee which amount is equal to the difference between 
        the wage specified in paragraph (1) and the wage in effect under 
        section 6(a)(1).

The additional amount on account of tips may not exceed the value of the 
tips actually received by an employee.''.
    (c) Opportunity Wage.--Section 6 of the Fair Labor Standards Act of 
1938 (29 U.S.C. 206) is amended by adding at the end the following:
    ``(g)(1) In lieu of the rate prescribed by subsection (a)(1), any 
employer may pay any employee of such employer, during the first 90 
consecutive calendar days after such employee is initially

[[Page 110 STAT. 1930]]

employed by such employer, a wage which is not less than $4.25 an hour.
    ``(2) No employer may take any action to displace employees 
(including partial displacements such as reduction in hours, wages, or 
employment benefits) for purposes of hiring individuals at the wage 
authorized in paragraph (1).
    ``(3) Any employer who violates this subsection shall be considered 
to have violated section 15(a)(3).
    ``(4) This subsection shall only apply to an employee who has not 
attained the age of 20 years.''.

    Approved August 20, 1996.

LEGISLATIVE HISTORY--H.R. 3448:
---------------------------------------------------------------------------

HOUSE REPORTS: Nos. 104-586 (Comm. on Ways and Means) and 104-737 (Comm. 
of Conference).
SENATE REPORTS: No. 104-281 (Comm. on Finance).
CONGRESSIONAL RECORD, Vol. 142 (1996):
            May 22, considered and passed House.
            July 8, 9, considered and passed Senate, amended.
            Aug. 2, House and Senate agreed to conference report.
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 32 (1996):
            Aug. 20, Presidential remarks and statement.

                                  <all>
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