PUBLIC LAW 104–188—AUG. 20, 1996 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.

Be it enacted by the Senate and House of Representatives of

the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; 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 dieselpowered motorboats.

Subtitle C—Provisions Relating to S Corporations

Sec. 1301. S corporations permitted to have 75 shareholders.

Sec. 1302. Electing small business trusts.

26 USC 1 note.

Small Business

Job Protection

Act of 1996.

Aug. 20, 1996

[H.R. 3448]
110 STAT. 1756 PUBLIC LAW 104–188—AUG. 20, 1996

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.
PUBLIC LAW 104–188—AUG. 20, 1996 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.
110 STAT. 1758 PUBLIC LAW 104–188—AUG. 20, 1996

Sec. 1902. Comparable penalties for failure to file return relating to transfers to

foreign entities.

Sec. 1903. Modifications of rules relating to foreign trusts having one or more

United States beneficiaries.

Sec. 1904. Foreign persons not to be treated as owners under grantor trust rules.

Sec. 1905. Information reporting regarding foreign gifts.

Sec. 1906. Modification of rules relating to foreign trusts which are not grantor

trusts.

Sec. 1907. Residence of trusts, etc.

Subtitle J—Generalized System of Preferences

Sec. 1951. Short title.

Sec. 1952. Generalized System of Preferences.

Sec. 1953. Effective date.

Sec. 1954. Conforming amendments.

TITLE II—PAYMENT OF WAGES

Sec. 2101. Short title.

Sec. 2102. Proper compensation for use of employer vehicles.

Sec. 2103. Effective date.

Sec. 2104. Minimum wage increase.

Sec. 2105. Fair Labor Standards Act Amendments.

TITLE I—SMALL BUSINESS AND OTHER

TAX PROVISIONS

SEC. 1101. AMENDMENT OF 1986 CODE.

Except as otherwise expressly provided, whenever in this title

an amendment or repeal is expressed in terms of an amendment

to, or repeal of, a section or other provision, the reference shall

be considered to be made to a section or other provision of the

Internal Revenue Code of 1986.

SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX.

No addition to the tax shall be made under section 6654 or

6655 of the Internal Revenue Code of 1986 (relating to failure

to pay estimated tax) with respect to any underpayment of an

installment required to be paid before the date of the enactment

of this Act to the extent such underpayment was created or

increased by any provision of this title.

Subtitle A—Expensing; Etc.

SEC. 1111. INCREASE IN EXPENSE TREATMENT FOR SMALL

BUSINESSES.

(a) GENERAL RULE.—Paragraph (1) of section 179(b) (relating

to dollar limitation) is amended to read as follows:

‘‘(1) DOLLAR LIMITATION.—The aggregate cost which may

be taken into account under subsection (a) for any taxable

year shall not exceed the following applicable amount:

‘‘If the taxable year The applicable

begins in: amount is:

1997 ....................................................................................... 18,000

1998 ....................................................................................... 18,500

1999 ....................................................................................... 19,000

2000 ....................................................................................... 20,000

2001 or 2002 ......................................................................... 24,000

2003 or thereafter ................................................................ 25,000.’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to taxable years beginning after December 31, 1996.

26 USC 179 note.

26 USC 179.

26 USC 6654

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 (d) of section 13443 of the

Revenue Reconciliation Act of 1993 is amended by inserting

‘‘, with respect to services performed before, on, or after such

date’’ after ‘‘1993’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall take effect as if included in the amendments

made by, and the provisions of, section 13443 of the Revenue

Reconciliation Act of 1993.

(b) TIPS FOR EMPLOYEES DELIVERING FOOD OR BEVERAGES.—

(1) IN GENERAL.—Paragraph (2) of section 45B(b) is

amended to read as follows:

‘‘(2) ONLY TIPS RECEIVED FOR FOOD OR BEVERAGES TAKEN

INTO ACCOUNT.—In applying paragraph (1), there shall be taken

into account only tips received from customers in connection

with the providing, delivering, or serving of food or beverages

for consumption if the tipping of employees delivering or serving

food or beverages by customers is customary.’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall apply to tips received for services performed after

December 31, 1996.

SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES.

(a) IN GENERAL.—Paragraph (2) of section 280A(c) is amended

by striking ‘‘inventory’’ and inserting ‘‘inventory or product samples’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to taxable years beginning after December 31, 1995.

SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS.

(a) GENERAL RULE.—Section 501 (relating to exemption from

tax on corporations, certain trusts, etc.) is amended by redesignating

subsection (n) as subsection (o) and by inserting after subsection

(m) the following new subsection:

‘‘(n) CHARITABLE RISK POOLS.—

‘‘(1) IN GENERAL.—For purposes of this title—

‘‘(A) a qualified charitable risk pool shall be treated

as an organization organized and operated exclusively for

charitable purposes, and

‘‘(B) subsection (m) shall not apply to a qualified charitable risk pool.

‘‘(2) QUALIFIED CHARITABLE RISK POOL.—For purposes of

this subsection, the term ‘qualified charitable risk pool’ means

any organization—

‘‘(A) which is organized and operated solely to pool

insurable risks of its members (other than risks related

to medical malpractice) and to provide information to its

members with respect to loss control and risk management,

‘‘(B) which is comprised solely of members that are

organizations described in subsection (c)(3) and exempt

from tax under subsection (a), and

26 USC 280A

note.

26 USC 45B note.

26 USC 45B note.

26 USC 38 note.
110 STAT. 1760 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(C) which meets the organizational requirements of

paragraph (3).

‘‘(3) ORGANIZATIONAL REQUIREMENTS.—An organization

(hereinafter in this subsection referred to as the ‘risk pool’)

meets the organizational requirements of this paragraph if—

‘‘(A) such risk pool is organized as a nonprofit organization under State law provisions authorizing risk pooling

arrangements for charitable organizations,

‘‘(B) such risk pool is exempt from any income tax

imposed by the State (or will be so exempt after such

pool qualifies as an organization exempt from tax under

this title),

‘‘(C) such risk pool has obtained at least $1,000,000

in startup capital from nonmember charitable organizations,

‘‘(D) such risk pool is controlled by a board of directors

elected by its members, and

‘‘(E) the organizational documents of such risk pool

require that—

‘‘(i) each member of such pool shall at all times

be an organization described in subsection (c)(3) and

exempt from tax under subsection (a),

‘‘(ii) any member which receives a final determination that it no longer qualifies as an organization

described in subsection (c)(3) shall immediately notify

the pool of such determination and the effective date

of such determination, and

‘‘(iii) each policy of insurance issued by the risk

pool shall provide that such policy will not cover the

insured with respect to events occurring after the date

such final determination was issued to the insured.

An organization shall not cease to qualify as a qualified charitable risk pool solely by reason of the failure of any of its

members to continue to be an organization described in subsection (c)(3) if, within a reasonable period of time after such

pool is notified as required under subparagraph (C)(ii), such

pool takes such action as may be reasonably necessary to

remove such member from such pool.

‘‘(4) OTHER DEFINITIONS.—For purposes of this subsection—

‘‘(A) STARTUP CAPITAL.—The term ‘startup capital’

means any capital contributed to, and any program-related

investments (within the meaning of section 4944(c)) made

in, the risk pool before such pool commences operations.

‘‘(B) NONMEMBER CHARITABLE ORGANIZATION.—The

term ‘nonmember charitable organization’ means any

organization which is described in subsection (c)(3) and

exempt from tax under subsection (a) and which is not

a member of the risk pool and does not benefit (directly

or indirectly) from the insurance coverage provided by the

pool to its members.’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to taxable years beginning after the date of the enactment of this Act.

26 USC 501 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

26 USC 512 note.
110 STAT. 1762 PUBLIC LAW 104–188—AUG. 20, 1996

to the reclassification of membership dues for purposes

of the tax on unrelated business income.

(C) Long-standing recognized practice of agricultural

or horticultural organizations.

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

(a) CLARIFICATION OF EMPLOYMENT TAX STATUS.—

(1) AMENDMENTS OF INTERNAL REVENUE CODE OF 1986.—

(A) DETERMINATION OF SIZE OF CREW.—Subsection (b)

of section 3121 (defining employment) is amended by adding at the end the following new sentence:

‘‘For purposes of paragraph (20), the operating crew of a boat

shall be treated as normally made up of fewer than 10 individuals

if the average size of the operating crew on trips made during

the preceding 4 calendar quarters consisted of fewer than 10 individuals.’’.

(B) CERTAIN CASH REMUNERATION PERMITTED.—

Subparagraph (A) of section 3121(b)(20) is amended to

read as follows:

‘‘(A) such individual does not receive any cash remuneration other than as provided in subparagraph (B) and

other than cash remuneration—

‘‘(i) which does not exceed $100 per trip;

‘‘(ii) which is contingent on a minimum catch; and

‘‘(iii) which is paid solely for additional duties (such

as mate, engineer, or cook) for which additional cash

remuneration is traditional in the industry,’’.

(C) CONFORMING AMENDMENT.—Section 6050A(a) is

amended by striking ‘‘and’’ at the end of paragraph (3),

by striking the period at the end of paragraph (4) and

inserting ‘‘; and’’, and by adding at the end the following

new paragraph:

‘‘(5) any cash remuneration described in section

3121(b)(20)(A).’’.

(2) AMENDMENT OF SOCIAL SECURITY ACT.—

(A) DETERMINATION OF SIZE OF CREW.—Subsection (a)

of section 210 of the Social Security Act is amended by

adding at the end the following new sentence:

‘‘For purposes of paragraph (20), the operating crew of a boat

shall be treated as normally made up of fewer than 10 individuals

if the average size of the operating crew on trips made during

the preceding 4 calendar quarters consisted of fewer than 10 individuals.’’.

(B) CERTAIN CASH REMUNERATION PERMITTED.—

Subparagraph (A) of section 210(a)(20) of such Act is

amended to read as follows:

‘‘(A) such individual does not receive any additional

compensation other than as provided in subparagraph (B)

and other than cash remuneration—

‘‘(i) which does not exceed $100 per trip;

‘‘(ii) which is contingent on a minimum catch; and

‘‘(iii) which is paid solely for additional duties (such

as mate, engineer, or cook) for which additional cash

remuneration is traditional in the industry,’’.

26 USC 3121 (3) EFFECTIVE DATES.— note.

42 USC 410.
PUBLIC LAW 104–188—AUG. 20, 1996 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.’’.
110 STAT. 1764 PUBLIC LAW 104–188—AUG. 20, 1996

(2) TECHNICAL AMENDMENTS.—

(A) Subparagraph (A) of section 6724(d)(1) is amended

by striking ‘‘or’’ at the end of clause (vi), by striking ‘‘and’’

at the end of clause (vii) and inserting ‘‘or’’, and by adding

at the end the following new clause:

‘‘(viii) section 6050R (relating to returns relating

to certain purchases of fish), and’’.

(B) Paragraph (2) of section 6724(d) is amended by

redesignating subparagraphs (R) through (U) as subparagraphs (S) through (V), respectively, and by inserting after

subparagraph (Q) the following new subparagraph:

‘‘(R) section 6050R(c) (relating to returns relating to

certain purchases of fish),’’.

(C) The table of sections for subpart B of part III

of subchapter A of chapter 68 is amended by inserting

after the item relating to 6050Q the following new item:

‘‘Sec. 6050R. Returns relating to certain purchases of fish.’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to payments made after December 31, 1997.

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

(a) ACQUISITION FROM RELATED PERSON ALLOWED.—Section

147(c)(2) (relating to exception for first-time farmers) is amended

by adding at the end the following new subparagraph:

‘‘(G) ACQUISITION FROM RELATED PERSON.—For purposes of this paragraph and section 144(a), the acquisition

by a first-time farmer of land or personal property from

a related person (within the meaning of section 144(a)(3))

shall not be treated as an acquisition from a related person,

if—

‘‘(i) the acquisition price is for the fair market

value of such land or property, and

‘‘(ii) subsequent to such acquisition, the related

person does not have a financial interest in the farming

operation with respect to which the bond proceeds are

to be used.’’.

(b) SUBSTANTIAL FARMLAND AMOUNT DOUBLED.—Clause (i) of

section 147(c)(2)(E) (defining substantial farmland) is amended by

striking ‘‘15 percent’’ and inserting ‘‘30 percent’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to bonds issued after the date of the enactment of

this Act.

SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.

(a) IN GENERAL.—Section 3508(b)(2)(A) is amended by striking

‘‘or’’ at the end of clause (i), by inserting ‘‘or’’ at the end of clause

(ii), and by inserting after clause (ii) the following new clause:

‘‘(iii) is engaged in the trade or business of the

delivering or distribution of newspapers or shopping

news (including any services directly related to such

trade or business),’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to services performed after December 31, 1995.

26 USC 3508

note.

26 USC 147 note.

26 USC 6050R

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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) PRIN- CIPAL RESIDENCES.—’’.

(c) EXPANSION OF OKLAHOMA CITY ENTERPRISE COMMUNITY.— Notwithstanding sections 1391 and 1392(a)(3)(D) of the Internal

Revenue Code of 1986, the boundaries of the enterprise community

for Oklahoma City, Oklahoma, designated by the Secretary of Housing and Urban Development on December 21, 1994, may be

extended with respect to census tracts located in the area damaged

due to the bombing of the Alfred P. Murrah Federal Building

in Oklahoma City on April 19, 1995, primarily in the area bounded

on the south by Robert S. Kerr Avenue, on the north by North

13th Street, on the east by Oklahoma Avenue, and on the west

by Shartel Avenue.

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section

shall apply to disasters declared after December 31, 1994, in

taxable years ending after such date.

(2) SUBSECTION (c).—Subsection (c) shall take effect on

the date of the enactment of this Act.

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

SIMILAR STRUCTURES.

(a) IN GENERAL.—Section 168(e)(3)(E) (classifying certain property as 15-year property) is amended by striking ‘‘and’’ at the

end of clause (i), by striking the period at the end of clause (ii)

and inserting ‘‘, and’’, and by adding at the end the following

new clause:

‘‘(iii) any section 1250 property which is a retail

motor fuels outlet (whether or not food or other convenience items are sold at the outlet).’’.

(b) CONFORMING AMENDMENT.—Subparagraph (B) of section

168(g)(3) is amended by inserting after the item relating to subparagraph (E)(ii) in the table contained therein the following new item:

‘‘(E)(iii) . . . . . . . . . . . . . . . . . 20’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to property which is placed in service on or after

the date of the enactment of this Act and to which section 168

of the Internal Revenue Code of 1986 applies after the amendment

made by section 201 of the Tax Reform Act of 1986. A taxpayer

26 USC 168 note.

26 USC 1033

note.
110 STAT. 1766 PUBLIC LAW 104–188—AUG. 20, 1996

may elect (in such form and manner as the Secretary of the Treasury may prescribe) to have such amendments apply with respect

to any property placed in service before such date and to which

such section so applies.

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

(a) IN GENERAL.—Paragraph (8) of section 168(i) is amended

to read as follows:

‘‘(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.— ‘‘(A) IN GENERAL.—In the case of any building erected

(or improvements made) on leased property, if such building

or improvement is property to which this section applies,

the depreciation deduction shall be determined under the

provisions of this section.

‘‘(B) TREATMENT OF LESSOR IMPROVEMENTS WHICH ARE

ABANDONED AT TERMINATION OF LEASE.—An improvement—

‘‘(i) which is made by the lessor of leased property

for the lessee of such property, and

‘‘(ii) which is irrevocably disposed of or abandoned

by the lessor at the termination of the lease by such

lessee,

shall be treated for purposes of determining gain or loss

under this title as disposed of by the lessor when so disposed of or abandoned.’’.

(b) EFFECTIVE DATE.—Subparagraph (B) of section 168(i)(8)

of the Internal Revenue Code of 1986, as added by the amendment

made by subsection (a), shall apply to improvements disposed of

or abandoned after June 12, 1996.

SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER

INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF

EMPLOYMENT TAXES.

(a) IN GENERAL.—Section 530 of the Revenue Act of 1978 is

amended by adding at the end the following new subsection:

‘‘(e) SPECIAL RULES FOR APPLICATION OF SECTION.— ‘‘(1) NOTICE OF AVAILABILITY OF SECTION.—An officer or

employee of the Internal Revenue Service shall, before or at

the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services

for the taxpayer, provide the taxpayer with a written notice

of the provisions of this section.

‘‘(2) RULES RELATING TO STATUTORY STANDARDS.—For purposes of subsection (a)(2)—

‘‘(A) a taxpayer may not rely on an audit commenced

after December 31, 1996, for purposes of subparagraph

(B) thereof unless such audit included an examination for

employment tax purposes of whether the individual

involved (or any individual holding a position substantially

similar to the position held by the individual involved)

should be treated as an employee of the taxpayer,

‘‘(B) in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require

a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking into account

the taxpayer), and

‘‘(C) in applying the long-standing recognized practice

requirement of subparagraph (C) thereof—

26 USC 3401

note.

26 USC 168 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 longstanding merely because such practice began after

1978.

‘‘(3) AVAILABILITY OF SAFE HARBORS.—Nothing in this section shall be construed to provide that subsection (a) only

applies where the individual involved is otherwise an employee

of the taxpayer.

‘‘(4) BURDEN OF PROOF.—

‘‘(A) IN GENERAL.—If—

‘‘(i) a taxpayer establishes a prima facie case that

it was reasonable not to treat an individual as an

employee for purposes of this section, and

‘‘(ii) the taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or

his delegate,

then the burden of proof with respect to such treatment

shall be on the Secretary.

‘‘(B) EXCEPTION FOR OTHER REASONABLE BASIS.—In the

case of any issue involving whether the taxpayer had a

reasonable basis not to treat an individual as an employee

for purposes of this section, subparagraph (A) shall only

apply for purposes of determining whether the taxpayer

meets the requirements of subparagraph (A), (B), or (C)

of subsection (a)(2).

‘‘(5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR.—If—

‘‘(A) an individual would (but for the treatment referred

to in subparagraph (B)) be deemed not to be an employee

of the taxpayer under subsection (a) for any prior period,

and

‘‘(B) such individual is treated by the taxpayer as an

employee for employment tax purposes for any subsequent

period,

then, for purposes of applying such taxes for such prior period

with respect to the taxpayer, the individual shall be deemed

not to be an employee.

‘‘(6) SUBSTANTIALLY SIMILAR POSITION.—For purposes of

this section, the determination as to whether an individual

holds a position substantially similar to a position held by

another individual shall include consideration of the relationship between the taxpayer and such individuals.’’.

(b) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendment made by this section

shall apply to periods after December 31, 1996.

(2) NOTICE BY INTERNAL REVENUE SERVICE.—Section

530(e)(1) of the Revenue Act of 1978 (as added by subsection

(a)) shall apply to audits which commence after December

31, 1996.

(3) BURDEN OF PROOF.—

(A) IN GENERAL.—Section 530(e)(4) of the Revenue Act

of 1978 (as added by subsection (a)) shall apply to disputes

involving periods after December 31, 1996.

(B) NO INFERENCE.—Nothing in the amendments made

by this section shall be construed to infer the proper treat26 USC 3401

note.
110 STAT. 1768 PUBLIC LAW 104–188—AUG. 20, 1996

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 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 assist26 USC 119 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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.—
110 STAT. 1770 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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).
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

Contracts.
110 STAT. 1772 PUBLIC LAW 104–188—AUG. 20, 1996

received by the employer shall not be treated as qualified

wages.

‘‘(C) EXPLANATION OF DENIAL OF REQUEST.—If a designated local agency denies a request for certification of

membership in a targeted group, such agency shall provide

to the person making such request a written explanation

of the reasons for such denial.’’.

(c) MINIMUM EMPLOYMENT PERIOD.—Paragraph (3) of section

51(i) (relating to certain individuals ineligible) is amended to read

as follows:

‘‘(3) INDIVIDUALS NOT MEETING MINIMUM EMPLOYMENT

PERIOD.—No wages shall be taken into account under subsection (a) with respect to any individual unless such individual

either—

‘‘(A) is employed by the employer at least 180 days

(20 days in the case of a qualified summer youth employee),

or

‘‘(B) has completed at least 400 hours (120 hours in

the case of a qualified summer youth employee) of services

performed for the employer.’’.

(d) TERMINATION.—Paragraph (4) of section 51(c) (relating to

wages defined) is amended to read as follows:

‘‘(4) TERMINATION.—The term ‘wages’ shall not include any

amount paid or incurred to an individual who begins work

for the employer—

‘‘(A) after December 31, 1994, and before October 1,

1996, or

‘‘(B) after September 30, 1997.’’.

(e) REDESIGNATION OF CREDIT.—

(1) Sections 38(b)(2), 41(b)(2)(D)(iii), 45A(b)(1)(B), 51 (a)

and (g), and 196(c) are each amended in the text by striking

‘‘targeted jobs credit’’ each place it appears and inserting ‘‘work

opportunity credit’’.

(2) The subpart heading for subpart F of part IV of subchapter A of chapter 1 is amended by striking ‘‘Targeted

Jobs Credit’’ and inserting ‘‘Work Opportunity Credit’’.

(3) The table of subparts for such part IV is amended

by striking ‘‘targeted jobs credit’’ and inserting ‘‘work opportunity credit’’.

(4) The headings for sections 41(b)(2)(D)(iii) and 1396(c)(3)

are each amended by striking ‘‘TARGETED JOBS CREDIT’’ and

inserting ‘‘WORK OPPORTUNITY CREDIT’’.

(5) The heading for subsection (j) of section 51 is amended

by striking ‘‘TARGETED JOBS CREDIT’’ and inserting ‘‘WORK

OPPORTUNITY CREDIT’’.

(f) TECHNICAL AMENDMENT.—Paragraph (1) of section 51(c) is

amended by striking ‘‘, subsection (d)(8)(D),’’.

(g) EFFECTIVE DATE.—The amendments made by this section

shall apply to individuals who begin work for the employer after

September 30, 1996.

SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

(a) EXTENSION.—Subsection (d) of section 127 (relating to educational assistance programs) is amended by striking ‘‘December

31, 1994.’’ and inserting ‘‘May 31, 1997. In the case of any taxable

year beginning in 1997, only expenses paid with respect to courses

26 USC 38 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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:

26 USC 127 note.
110 STAT. 1774 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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.’’.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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’’

26 USC 41 note.
110 STAT. 1776 PUBLIC LAW 104–188—AUG. 20, 1996

and inserting ‘‘For purposes of section 38, the credit determined

under this section for the taxable year is’’.

(2) Section 45C(d), as so redesignated, is amended by striking paragraph (2) and by redesignating paragraphs (3), (4),

and (5) as paragraphs (2), (3), and (4).

(3) Section 29(b)(6)(A) is amended by striking ‘‘sections

27 and 28’’ and inserting ‘‘section 27’’.

(4) Section 30(b)(3)(A) is amended by striking ‘‘sections

27, 28, and 29’’ and inserting ‘‘sections 27 and 29’’.

(5) Section 53(d)(1)(B) is amended—

(A) by striking ‘‘or not allowed under section 28 solely

by reason of the application of section 28(d)(2)(B),’’ in clause

(iii), and

(B) by striking ‘‘or not allowed under section 28 solely

by reason of the application of section 28(d)(2)(B)’’ in clause

(iv)(II).

(6) Section 55(c)(2) is amended by striking ‘‘28(d)(2),’’.

(7) Section 280C(b) is amended—

(A) by striking ‘‘section 28(b)’’ in paragraph (1) and

inserting ‘‘section 45C(b)’’,

(B) by striking ‘‘section 28’’ in paragraphs (1) and (2)(A)

and inserting ‘‘section 45C’’, and

(C) by striking ‘‘subsection (d)(2) thereof’’ in paragraphs

(1) and (2)(A) and inserting ‘‘section 38(c)’’.

(e) EFFECTIVE DATE.—The amendments made by this section

shall apply to amounts paid or incurred in taxable years ending

after June 30, 1996.

SEC. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

(a) IN GENERAL.—Subparagraph (D) of section 170(e)(5) (relating to special rule for contributions of stock for which market

quotations are readily available) is amended to read as follows:

‘‘(D) TERMINATION.—This paragraph shall not apply

to contributions made—

‘‘(i) after December 31, 1994, and before July 1,

1996, or

‘‘(ii) after May 31, 1997.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to contributions made after June 30, 1996.

SEC. 1207. EXTENSION OF BINDING CONTRACT DATE FOR BIOMASS

AND COAL FACILITIES.

(a) IN GENERAL.—Subparagraph (A) of section 29(g)(1) (relating

to extension of certain facilities) is amended by striking ‘‘January

1, 1997’’ and inserting ‘‘July 1, 1998’’ and by striking ‘‘January

1, 1996’’ and inserting ‘‘January 1, 1997’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall take effect on the date of the enactment of this Act.

SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR

USE OR USED IN DIESEL-POWERED MOTORBOATS.

Subparagraph (D) of section 4041(a)(1) (relating to the imposition of tax on diesel fuel and special motor fuels) is amended

by redesignating clauses (i) and (ii) as clauses (ii) and (iii), respectively, and by inserting before clause (ii) (as redesignated) the

following new clause:

‘‘(i) no tax shall be imposed by subsection (a) or

(d)(1) during the period beginning on the date which

26 USC 29 note.

26 USC 170 note.

26 USC 29 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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,
110 STAT. 1778 PUBLIC LAW 104–188—AUG. 20, 1996

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 DISTRIBU- TIONS.—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,
PUBLIC LAW 104–188—AUG. 20, 1996 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,
110 STAT. 1780 PUBLIC LAW 104–188—AUG. 20, 1996

then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an

S corporation during the period specified by the Secretary.’’.

(b) LATE ELECTIONS, ETC.—Subsection (b) of section 1362 is

amended by adding at the end the following new paragraph:

‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS, ETC., AS

TIMELY.—If—

‘‘(A) an election under subsection (a) is made for any

taxable year (determined without regard to paragraph (3))

after the date prescribed by this subsection for making

such election for such taxable year or no such election

is made for any taxable year, and

‘‘(B) the Secretary determines that there was reasonable cause for the failure to timely make such election,

the Secretary may treat such an election as timely made for

such taxable year (and paragraph (3) shall not apply).’’.

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

26 USC 1362

note.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1781

‘‘(A) a determination as defined in section 1313(a),

or’’.

(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR SUBCHAPTER S ITEMS.—

(1) GENERAL RULE.—Subchapter D of chapter 63 (relating

to tax treatment of subchapter S items) is hereby repealed.

(2) CONSISTENT TREATMENT REQUIRED.—Section 6037

(relating to return of S corporation) is amended by adding

at the end the following new subsection:

‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.—

‘‘(1) IN GENERAL.—A shareholder of an S corporation shall,

on such shareholder’s return, treat a subchapter S item in

a manner which is consistent with the treatment of such item

on the corporate return.

‘‘(2) NOTIFICATION OF INCONSISTENT TREATMENT.—

‘‘(A) IN GENERAL.—In the case of any subchapter S

item, if—

‘‘(i)(I) the corporation has filed a return but the

shareholder’s treatment on his return is (or may be)

inconsistent with the treatment of the item on the

corporate return, or

‘‘(II) the corporation has not filed a return, and

‘‘(ii) the shareholder files with the Secretary a

statement identifying the inconsistency,

paragraph (1) shall not apply to such item.

‘‘(B) SHAREHOLDER RECEIVING INCORRECT INFORMATION.—A shareholder shall be treated as having complied

with clause (ii) of subparagraph (A) with respect to a subchapter S item if the shareholder—

‘‘(i) demonstrates to the satisfaction of the Secretary that the treatment of the subchapter S item

on the shareholder’s return is consistent with the treatment of the item on the schedule furnished to the

shareholder by the corporation, and

‘‘(ii) elects to have this paragraph apply with

respect to that item.

‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any case—

‘‘(A) described in subparagraph (A)(i)(I) of paragraph

(2), and

‘‘(B) in which the shareholder does not comply with

subparagraph (A)(ii) of paragraph (2),

any adjustment required to make the treatment of the items

by such shareholder consistent with the treatment of the items

on the corporate return shall be treated as arising out of

mathematical or clerical errors and assessed according to section 6213(b)(1). Paragraph (2) of section 6213(b) shall not apply

to any assessment referred to in the preceding sentence.

‘‘(4) SUBCHAPTER S ITEM.—For purposes of this subsection,

the term ‘subchapter S item’ means any item of an S corporation

to the extent that regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more

appropriately determined at the corporation level than at the

shareholder level.

26 USC 6241 et

seq.
110 STAT. 1782 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SECTION.—

‘‘For addition to tax in the case of a shareholder’s negligence in

connection with, or disregard of, the requirements of this section,

see part II of subchapter A of chapter 68.’’.

(3) CONFORMING AMENDMENTS.—

(A) Section 1366 is amended by striking subsection (g).

(B) Subsection (b) of section 6233 is amended to read

as follows:

‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a partnership return

is filed for any taxable year but it is determined that there is

no entity for such taxable year, to the extent provided in regulations,

rules similar to the rules of subsection (a) shall apply.’’.

(C) The table of subchapters for chapter 63 is amended

by striking the item relating to subchapter D.

SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

(a) IN GENERAL.—Paragraph (2) of section 1361(b) (defining

ineligible corporation) is amended by striking subparagraph (A)

and by redesignating subparagraphs (B), (C), (D), and (E) as subparagraphs (A), (B), (C), and (D), respectively.

(b) TREATMENT OF CERTAIN WHOLLY OWNED S CORPORATION

SUBSIDIARIES.—Section 1361(b) (defining small business corporation) is amended by adding at the end the following new paragraph:

‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.—

‘‘(A) IN GENERAL.—For purposes of this title—

‘‘(i) a corporation which is a qualified subchapter

S subsidiary shall not be treated as a separate corporation, and

‘‘(ii) all assets, liabilities, and items of income,

deduction, and credit of a qualified subchapter S

subsidiary shall be treated as assets, liabilities, and

such items (as the case may be) of the S corporation.

‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDIARY.—For purposes of this paragraph, the term ‘qualified subchapter

S subsidiary’ means any domestic corporation which is

not an ineligible corporation (as defined in paragraph (2)),

if—

‘‘(i) 100 percent of the stock of such corporation

is held by the S corporation, and

‘‘(ii) the S corporation elects to treat such corporation as a qualified subchapter S subsidiary.

‘‘(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUBCHAPTER S SUBSIDIARY STATUS.—For purposes of this title,

if any corporation which was a qualified subchapter S

subsidiary ceases to meet the requirements of subparagraph (B), such corporation shall be treated as a new

corporation acquiring all of its assets (and assuming all

of its liabilities) immediately before such cessation from

the S corporation in exchange for its stock.

‘‘(D) ELECTION AFTER TERMINATION.—If a corporation’s

status as a qualified subchapter S subsidiary terminates,

such corporation (and any successor corporation) shall not

be eligible to make—
PUBLIC LAW 104–188—AUG. 20, 1996 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—
110 STAT. 1784 PUBLIC LAW 104–188—AUG. 20, 1996

(1) by striking ‘‘as provided in subparagraph (B)’’ and

inserting ‘‘as otherwise provided in this paragraph’’, and

(2) by striking ‘‘section 1367(b)(2)(A)’’ and inserting ‘‘section

1367(a)(2)’’.

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

Subsection (a) of section 1371 (relating to application of subchapter C rules) is amended to read as follows:

‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Except as otherwise provided in this title, and except to the extent inconsistent

with this subchapter, subchapter C shall apply to an S corporation

and its shareholders.’’.

SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROFITS.

(a) IN GENERAL.—If—

(1) a corporation was an electing small business corporation

under subchapter S of chapter 1 of the Internal Revenue Code

of 1986 for any taxable year beginning before January 1, 1983,

and

(2) such corporation is an S corporation under subchapter

S of chapter 1 of such Code for its first taxable year beginning

after December 31, 1996,

the amount of such corporation’s accumulated earnings and profits

(as of the beginning of such first taxable year) shall be reduced

by an amount equal to the portion (if any) of such accumulated

earnings and profits which were accumulated in any taxable year

beginning before January 1, 1983, for which such corporation was

an electing small business corporation under such subchapter S.

(b) CONFORMING AMENDMENTS.— (1) Paragraph (3) of section 1362(d), as amended by section

1308, is amended—

(A) by striking ‘‘SUBCHAPTER C’’ in the paragraph heading and inserting ‘‘ACCUMULATED’’,

(B) by striking ‘‘subchapter C’’ in subparagraph (A)(i)(I)

and inserting ‘‘accumulated’’, and

(C) by striking subparagraph (B) and redesignating

the following subparagraphs accordingly.

(2)(A) Subsection (a) of section 1375 is amended by striking

‘‘subchapter C’’ in paragraph (1) and inserting ‘‘accumulated’’.

(B) Paragraph (3) of section 1375(b) is amended to read

as follows:

‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The terms ‘passive

investment income’ and ‘gross receipts’ have the same respective meanings as when used in paragraph (3) of section

1362(d).’’.

(C) The section heading for section 1375 is amended by

striking ‘‘subchapter C’’ and inserting ‘‘accumulated’’.

(D) The table of sections for part III of subchapter S of

chapter 1 is amended by striking ‘‘subchapter C’’ in the item

relating to section 1375 and inserting ‘‘accumulated’’.

(3) Clause (i) of section 1042(c)(4)(A) is amended by striking

‘‘section 1362(d)(3)(D)’’ and inserting ‘‘section 1362(d)(3)(C)’’.

SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS

UNDER AT-RISK RULES ALLOWED.

Paragraph (3) of section 1366(d) (relating to carryover of disallowed losses and deductions to post-termination transition period)

is amended by adding at the end the following new subparagraph:

26 USC 1361

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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 organiza26 USC 1367

note.
110 STAT. 1786 PUBLIC LAW 104–188—AUG. 20, 1996

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’’.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1787

(f) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1997.

SEC. 1317. EFFECTIVE DATE.

(a) IN GENERAL.—Except as otherwise provided in this subtitle,

the amendments made by this subtitle shall apply to taxable years

beginning after December 31, 1996.

(b) TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAW.— For purposes of section 1362(g) of the Internal Revenue Code of

1986 (relating to election after termination), any termination under

section 1362(d) of such Code in a taxable year beginning before

January 1, 1997, shall not be taken into account.

Subtitle D—Pension Simplification

CHAPTER 1—SIMPLIFIED DISTRIBUTION RULES

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

DISTRIBUTIONS.

(a) IN GENERAL.—Subsection (d) of section 402 (relating to

taxability of beneficiary of employees’ trust) is amended to read

as follows:

‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOREIGN SITUS

TRUSTS.—For purposes of subsections (a), (b), and (c), a stock bonus,

pension, or profit-sharing trust which would qualify for exemption

from tax under section 501(a) except for the fact that it is a

trust created or organized outside the United States shall be treated

as if it were a trust exempt from tax under section 501(a).’’.

(b) CONFORMING AMENDMENTS.— (1) Subparagraph (D) of section 402(e)(4) (relating to other

rules applicable to exempt trusts) is amended to read as follows:

‘‘(D) LUMP-SUM DISTRIBUTION.—For purposes of this

paragraph—

‘‘(i) IN GENERAL.—The term ‘lump-sum distribution’

means the distribution or payment within one taxable

year of the recipient of the balance to the credit of

an employee which becomes payable to the recipient—

‘‘(I) on account of the employee’s death,

‘‘(II) after the employee attains age 591⁄2, ‘‘(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)).

26 USC 1362

note.

26 USC 641 note.

26 USC 170 note.
110 STAT. 1788 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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)’’.

26 USC 402 note.
110 STAT. 1790 PUBLIC LAW 104–188—AUG. 20, 1996

(2) Sections 406(e) and 407(e) are each amended by striking

paragraph (2) and by redesignating paragraph (3) as paragraph

(2).

(3) Section 7701(a)(20) is amended by striking ‘‘, for the

purpose of applying the provisions of section 101(b) with respect

to employees’ death benefits’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply with respect to decedents dying after the date of the

enactment of this Act.

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

(a) GENERAL RULE.—Subsection (d) of section 72 (relating to

annuities; certain proceeds of endowment and life insurance contracts) is amended to read as follows:

‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER RETIREMENT

PLANS.—‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY PAYMENTS.— ‘‘(A) IN GENERAL.—In the case of any amount received

as an annuity under a qualified employer retirement plan—

‘‘(i) subsection (b) shall not apply, and

‘‘(ii) the investment in the contract shall be recovered as provided in this paragraph.

‘‘(B) METHOD OF RECOVERING INVESTMENT IN

CONTRACT.—

‘‘(i) IN GENERAL.—Gross income shall not include

so much of any monthly annuity payment under a

qualified employer retirement plan as does not exceed

the amount obtained by dividing—

‘‘(I) the investment in the contract (as of the

annuity starting date), by

‘‘(II) the number of anticipated payments

determined under the table contained in clause

(iii) (or, in the case of a contract to which subsection (c)(3)(B) applies, the number of monthly

annuity payments under such contract).

‘‘(ii) CERTAIN RULES MADE APPLICABLE.—Rules

similar to the rules of paragraphs (2) and (3) of subsection (b) shall apply for purposes of this paragraph.

‘‘(iii) NUMBER OF ANTICIPATED PAYMENTS.—

‘‘If the age of the

primary annuitant on The 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 CONNEC- TION 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—

26 USC 101 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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 701⁄2, 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 701⁄2, 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 701⁄2, the employee’s accrued

benefit shall be actuarially increased to take into

account the period after age 701⁄2 in which the

employee was not receiving any benefits under the

plan.

26 USC 72 note.
110 STAT. 1792 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH

PLANS.—Clauses (ii) and (iii) shall not apply in the

case of a governmental plan or church plan. For purposes of this clause, the term ‘church plan’ means

a plan maintained by a church for church employees,

and the term ‘church’ means any church (as defined

in section 3121(w)(3)(A)) or qualified church-controlled

organization (as defined in section 3121(w)(3)(B)).’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to years beginning after December 31, 1996.

CHAPTER 2—INCREASED ACCESS TO RETIREMENT

PLANS

Subchapter A—Simple Savings Plans

SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS

FOR EMPLOYEES OF SMALL EMPLOYERS.

(a) IN GENERAL.—Section 408 (relating to individual retirement

accounts) is amended by redesignating subsection (p) as subsection

(q) and by inserting after subsection (o) the following new subsection:

‘‘(p) SIMPLE RETIREMENT ACCOUNTS.—

‘‘(1) IN GENERAL.—For purposes of this title, the term ‘simple retirement account’ means an individual retirement plan

(as defined in section 7701(a)(37))—

‘‘(A) with respect to which the requirements of paragraphs (3), (4), and (5) are met; and

‘‘(B) with respect to which the only contributions

allowed are contributions under a qualified salary reduction

arrangement.

‘‘(2) QUALIFIED SALARY REDUCTION ARRANGEMENT.—

‘‘(A) IN GENERAL.—For purposes of this subsection, the

term ‘qualified salary reduction arrangement’ means a written arrangement of an eligible employer under which—

‘‘(i) an employee eligible to participate in the

arrangement may elect to have the employer make

payments—

‘‘(I) as elective employer contributions to a

simple retirement account on behalf of the

employee, or

‘‘(II) to the employee directly in cash,

‘‘(ii) the amount which an employee may elect

under clause (i) for any year is required to be expressed

as a percentage of compensation and may not exceed

a total of $6,000 for any year,

‘‘(iii) the employer is required to make a matching

contribution to the simple retirement account for any

year in an amount equal to so much of the amount

the employee elects under clause (i)(I) as does not

exceed the applicable percentage of compensation for

the year, and

‘‘(iv) no contributions may be made other than

contributions described in clause (i) or (iii).

‘‘(B) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE

CONTRIBUTION.—

26 USC 401 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1794 PUBLIC LAW 104–188—AUG. 20, 1996

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
PUBLIC LAW 104–188—AUG. 20, 1996 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.—
110 STAT. 1796 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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—
PUBLIC LAW 104–188—AUG. 20, 1996 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:
110 STAT. 1798 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—The term ‘topheavy plan’ shall not include a simple retirement account

under section 408(p).’’.

(8) EMPLOYMENT TAXES.—

(A) Paragraph (5) of section 3121(a) is amended by

striking ‘‘or’’ at the end of subparagraph (F), by inserting

‘‘or’’ at the end of subparagraph (G), and by adding at

the end the following new subparagraph:

‘‘(H) under an arrangement to which section 408(p)

applies, other than any elective contributions under paragraph (2)(A)(i) thereof,’’.

(B) Section 209(a)(4) of the Social Security Act is

amended by inserting ‘‘; or (J) under an arrangement to

which section 408(p) of such Code applies, other than any

elective contributions under paragraph (2)(A)(i) thereof’’

before the semicolon at the end thereof.

(C) Paragraph (5) of section 3306(b) is amended by

striking ‘‘or’’ at the end of subparagraph (F), by inserting

‘‘or’’ at the end of subparagraph (G), and by adding at

the end the following new subparagraph:

‘‘(H) under an arrangement to which section 408(p)

applies, other than any elective contributions under paragraph (2)(A)(i) thereof,’’.

(D) Paragraph (12) of section 3401(a) is amended by

adding the following new subparagraph:

‘‘(D) under an arrangement to which section 408(p)

applies; or’’.

(9) CONFORMING AMENDMENTS.—

(A) Section 280G(b)(6) is amended by striking ‘‘or’’ at

the end of subparagraph (B), by striking the period at

the end of subparagraph (C) and inserting ‘‘, or’’ and by

adding after subparagraph (C) the following new subparagraph:

‘‘(D) a simple retirement account described in section

408(p).’’.

(B) Section 402(g)(3) is amended by striking ‘‘and’’ at

the end of subparagraph (B), by striking the period at

the end of subparagraph (C) and inserting ‘‘, and’’, and

by adding after subparagraph (C) the following new

subparagraph:

‘‘(D) any elective employer contribution under section

408(p)(2)(A)(i).’’.

(C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of section 414 are each amended by inserting ‘‘408(p),’’ after

‘‘408(k),’’.

(D) Section 4972(d)(1)(A) is amended by striking ‘‘and’’

at the end of clause (ii), by striking the period at the

end of clause (iii) and inserting ‘‘, and’’, and by adding

after clause (iii) the following new clause:

‘‘(iv) any simple retirement account (within the

meaning of section 408(p)).’’.

(c) REPEAL OF SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSIONS.—Section 408(k)(6) is amended by adding at the end the

following new subparagraph:

‘‘(H) TERMINATION.—This paragraph shall not apply

to years beginning after December 31, 1996. The preceding

sentence shall not apply to a simplified employee pension

26 USC 409.
PUBLIC LAW 104–188—AUG. 20, 1996 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.’’.
110 STAT. 1800 PUBLIC LAW 104–188—AUG. 20, 1996

(e) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1996.

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

(a) ALTERNATIVE METHOD OF SATISFYING SECTION 401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred

arrangements) is amended by adding at the end the following

new paragraph:

‘‘(11) ADOPTION OF SIMPLE PLAN TO MEET NONDISCRIMINATION TESTS.—

‘‘(A) IN GENERAL.—A cash or deferred arrangement

maintained by an eligible employer shall be treated as

meeting the requirements of paragraph (3)(A)(ii) if such

arrangement meets—

‘‘(i) the contribution requirements of subparagraph

(B),

‘‘(ii) the exclusive plan requirements of subparagraph (C), and

‘‘(iii) the vesting requirements of section 408(p)(3).

‘‘(B) CONTRIBUTION REQUIREMENTS.—

‘‘(i) IN GENERAL.—The requirements of this

subparagraph are met if, under the arrangement—

‘‘(I) an employee may elect to have the

employer make elective contributions for the year

on behalf of the employee to a trust under the

plan in an amount which is expressed as a percentage of compensation of the employee but which

in no event exceeds $6,000,

‘‘(II) the employer is required to make a matching contribution to the trust for the year in an

amount equal to so much of the amount the

employee elects under subclause (I) as does not

exceed 3 percent of compensation for the year,

and

‘‘(III) no other contributions may be made

other than contributions described in subclause

(I) or (II).

‘‘(ii) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE

CONTRIBUTION.—An employer shall be treated as meeting the requirements of clause (i)(II) for any year if,

in lieu of the contributions described in such clause,

the employer elects (pursuant to the terms of the

arrangement) to make nonelective contributions of 2

percent of compensation for each employee who is

eligible to participate in the arrangement and who

has at least $5,000 of compensation from the employer

for the year. If an employer makes an election under

this subparagraph for any year, the employer shall

notify employees of such election within a reasonable

period of time before the 60th day before the beginning

of such year.

‘‘(C) EXCLUSIVE PLAN REQUIREMENT.—The requirements of this subparagraph are met for any year to which

this paragraph applies if no contributions were made, or

benefits were accrued, for services during such year under

any qualified plan of the employer on behalf of any

employee eligible to participate in the cash or deferred

26 USC 72 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

26 USC 401 note.
110 STAT. 1802 PUBLIC LAW 104–188—AUG. 20, 1996

part by any of the foregoing may include a qualified

cash or deferred arrangement as part of a plan maintained by the employer.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to plan years beginning after December 31, 1996, but

shall not apply to any cash or deferred arrangement to which

clause (i) of section 1116(f)(2)(B) of the Tax Reform Act of 1986

applies.

SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUCTION.

(a) SPOUSAL IRA COMPUTED ON BASIS OF COMPENSATION OF

BOTH SPOUSES.—Subsection (c) of section 219 (relating to special

rules for certain married individuals) is amended to read as follows:

‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVIDUALS.—

‘‘(1) IN GENERAL.—In the case of an individual to whom

this paragraph applies for the taxable year, the limitation of

paragraph (1) of subsection (b) shall be equal to the lesser

of—

‘‘(A) the dollar amount in effect under subsection

(b)(1)(A) for the taxable year, or

‘‘(B) the sum of—

‘‘(i) the compensation includible in such individual’s gross income for the taxable year, plus

‘‘(ii) the compensation includible in the gross

income of such individual’s spouse for the taxable year

reduced by the amount allowed as a deduction under

subsection (a) to such spouse for such taxable year.

‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1) APPLIES.—Paragraph (1) shall apply to any individual if—

‘‘(A) such individual files a joint return for the taxable

year, and

‘‘(B) the amount of compensation (if any) includible

in such individual’s gross income for the taxable year is

less than the compensation includible in the gross income

of such individual’s spouse for the taxable year.’’.

(b) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 219(f) (relating to other definitions and special rules) is amended by striking ‘‘subsections

(b) and (c)’’ and inserting ‘‘subsection (b)’’.

(2) Section 219(g)(1) is amended by striking ‘‘(c)(2)’’ and

inserting ‘‘(c)(1)(A)’’.

(3) Section 408(d)(5) is amended by striking ‘‘$2,250’’ and

inserting ‘‘the dollar amount in effect under section

219(b)(1)(A)’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1996.

CHAPTER 3—NONDISCRIMINATION PROVISIONS

SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES;

REPEAL OF FAMILY AGGREGATION.

(a) IN GENERAL.—Paragraph (1) of section 414(q) (defining

highly compensated employee) is amended to read as follows:

‘‘(1) IN GENERAL.—The term ‘highly compensated employee’

means any employee who—

‘‘(A) was a 5-percent owner at any time during the

year or the preceding year, or

26 USC 219 note.

26 USC 401 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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(c)(4) of the Tax Reform Act of 1986 is

amended by adding at the end the following new sentence:

‘‘Any reference in this paragraph to section 414(q) shall be

treated as a reference to such section as in effect on the day

before the date of the enactment of the Small Business Job

Protection Act of 1996.’’.

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section

shall apply to years beginning after December 31, 1996, except

that in determining whether an employee is a highly compensated employee for years beginning in 1997, such amendments shall be treated as having been in effect for years beginning in 1996.

(2) FAMILY AGGREGATION.—The amendments made by subsection (b) shall apply to years beginning after December 31,

1996.

SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIREMENTS.

(a) GENERAL RULE.—Section 401(a)(26)(A) (relating to additional participation requirements) is amended to read as follows:

‘‘(A) IN GENERAL.—In the case of a trust which is

a part of a defined benefit plan, such trust shall not constitute a qualified trust under this subsection unless on

26 USC 414 note.

26 USC 414 note.
110 STAT. 1804 PUBLIC LAW 104–188—AUG. 20, 1996

each day of the plan year such trust benefits at least

the lesser of—

‘‘(i) 50 employees of the employer, or

‘‘(ii) the greater of—

‘‘(I) 40 percent of all employees of the

employer, or

‘‘(II) 2 employees (or if there is only 1

employee, such employee).’’.

(b) SEPARATE LINE OF BUSINESS TEST.—Section 401(a)(26)(G)

(relating to separate line of business) is amended by striking ‘‘paragraph (7)’’ and inserting ‘‘paragraph (2)(A) or (7)’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 1996.

SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR

DEFERRED ARRANGEMENTS AND MATCHING CONTRIBUTIONS.

(a) ALTERNATIVE METHODS OF SATISFYING SECTION 401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred

arrangements), as amended by section 1422, is amended by adding

at the end the following new paragraph:

‘‘(12) ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.—

‘‘(A) IN GENERAL.—A cash or deferred arrangement

shall be treated as meeting the requirements of paragraph

(3)(A)(ii) if such arrangement—

‘‘(i) meets the contribution requirements of

subparagraph (B) or (C), and

‘‘(ii) meets the notice requirements of subparagraph (D).

‘‘(B) MATCHING CONTRIBUTIONS.—

‘‘(i) IN GENERAL.—The requirements of this

subparagraph are met if, under the arrangement, the

employer makes matching contributions on behalf of

each employee who is not a highly compensated

employee in an amount equal to—

‘‘(I) 100 percent of the elective contributions

of the employee to the extent such elective contributions do not exceed 3 percent of the employee’s

compensation, and

‘‘(II) 50 percent of the elective contributions

of the employee to the extent that such elective

contributions exceed 3 percent but do not exceed

5 percent of the employee’s compensation.

‘‘(ii) RATE FOR HIGHLY COMPENSATED EMPLOYEES.—

The requirements of this subparagraph are not met

if, under the arrangement, the rate of matching contribution with respect to any elective contribution of

a highly compensated employee at any rate of elective

contribution is greater than that with respect to an

employee who is not a highly compensated employee.

‘‘(iii) ALTERNATIVE PLAN DESIGNS.—If the rate of

any matching contribution with respect to any rate

of elective contribution is not equal to the percentage

required under clause (i), an arrangement shall not

be treated as failing to meet the requirements of clause

(i) if—

26 USC 401 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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:
110 STAT. 1806 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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—
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATES.—

(1) IN GENERAL.—The amendments made by this section

shall apply to years beginning after December 31, 1998.

(2) EXCEPTIONS.—The amendments made by subsections

(c), (d), and (e) shall apply to years beginning after December

31, 1996.

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

(a) GENERAL RULE.—Section 415(c)(3) (defining participant’s

compensation) is amended by adding at the end the following new

subparagraph:

‘‘(D) CERTAIN DEFERRALS INCLUDED.—The term ‘participant’s compensation’ shall include—

‘‘(i) any elective deferral (as defined in section

402(g)(3)), and

‘‘(ii) any amount which is contributed or deferred

by the employer at the election of the employee and

which is not includible in the gross income of the

employee by reason of section 125 or 457.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 414(q)(4), as redesignated by section 1431, is

amended to read as follows:

‘‘(4) COMPENSATION.—For purposes of this subsection, the

term ‘compensation’ has the meaning given such term by section

415(c)(3).’’.

(2) Section 414(s)(2) is amended by inserting ‘‘not’’ after

‘‘elect’’ in the text and heading thereof.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 1997.

26 USC 414 note.

26 USC 401 note.
110 STAT. 1808 PUBLIC LAW 104–188—AUG. 20, 1996

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 owneremployees) 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 owneremployee may be made only with respect to the earned income

of such owner-employee which is derived from the trade or business

with respect to which such plan is established.’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 1996.

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

(a) AMENDMENTS TO 1986 CODE.—Paragraph (2) of section

411(a) (relating to minimum vesting standards) is amended—

(1) by striking ‘‘subparagraph (A), (B), or (C)’’ and inserting

‘‘subparagraph (A) or (B)’’; and

(2) by striking subparagraph (C).

(b) AMENDMENTS TO ERISA.—Paragraph (2) of section 203(a)

of the Employee Retirement Income Security Act of 1974 (29 U.S.C.

1053(a)) is amended—

(1) by striking ‘‘subparagraph (A), (B), or (C)’’ and inserting

‘‘subparagraph (A) or (B)’’; and

(2) by striking subparagraph (C).

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning on or after the earlier of—

(1) the later of—

(A) January 1, 1997, or

(B) the date on which the last of the collective bargaining agreements pursuant to which the plan is maintained

terminates (determined without regard to any extension

thereof after the date of the enactment of this Act), or

(2) January 1, 1999.

Such amendments shall not apply to any individual who does not

have more than 1 hour of service under the plan on or after

the 1st day of the 1st plan year to which such amendments apply.

SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS.

(a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A CERTAIN AGE.—

Section 401(k)(7) is amended by adding at the end the following

new subparagraph:

‘‘(C) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS.—A

rural cooperative plan which includes a qualified cash or

deferred arrangement shall not be treated as violating the

requirements of section 401(a) or of paragraph (2) merely

by reason of a hardship distribution or a distribution to

a participant after attainment of age 591⁄2. For purposes

of this section, the term ‘hardship distribution’ means a

distribution described in paragraph (2)(B)(i)(IV) (without

26 USC 411 note.

26 USC 401 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

26 USC 401 note.
110 STAT. 1810 PUBLIC LAW 104–188—AUG. 20, 1996

exempt from tax under this chapter and which does not meet

the requirements for qualification under section 401.

‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGE- MENT.—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
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—

(1) IN GENERAL.—The amendments made by subsections

(a), (b), and (c) shall apply to years beginning after December

31, 1994. The amendments made by subsection (d) shall apply

with respect to revocations adopted after the date of the enactment of this Act.

(2) TREATMENT FOR YEARS BEGINNING BEFORE JANUARY 1,

1995.—Nothing in the amendments made by this section shall

be construed to imply that a governmental plan (as defined

in section 414(d) of the Internal Revenue Code of 1986) fails

to satisfy the requirements of section 415 of such Code for

any taxable year beginning before January 1, 1995.

SEC. 1445. UNIFORM RETIREMENT AGE.

(a) DISCRIMINATION TESTING.—Paragraph (5) of section 401(a)

(relating to special rules relating to nondiscrimination requirements) is amended by adding at the end the following new subparagraph:

‘‘(F) SOCIAL SECURITY RETIREMENT AGE.—For purposes

of testing for discrimination under paragraph (4)—

‘‘(i) the social security retirement age (as defined

in section 415(b)(8)) shall be treated as a uniform

retirement age, and

‘‘(ii) subsidized early retirement benefits and joint

and survivor annuities shall not be treated as being

unavailable to employees on the same terms merely

because such benefits or annuities are based in whole

or in part on an employee’s social security retirement

age (as so defined).’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 1996.

SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES.

(a) ALL DISABLED PARTICIPANTS RECEIVING CONTRIBUTIONS.—

Section 415(c)(3)(C) is amended by adding at the end the following:

‘‘If a defined contribution plan provides for the continuation of

contributions on behalf of all participants described in clause (i)

for a fixed or determinable period, this subparagraph shall be

applied without regard to clauses (ii) and (iii).’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 1996.

26 USC 415 note.

26 USC 401 note.

26 USC 415 note.
110 STAT. 1812 PUBLIC LAW 104–188—AUG. 20, 1996

SEC. 1447. TREATMENT OF DEFERRED COMPENSATION PLANS OF

STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT

ORGANIZATIONS.

(a) SPECIAL RULES FOR PLAN DISTRIBUTIONS.—Paragraph (9)

of section 457(e) (relating to other definitions and special rules)

is amended to read as follows:

‘‘(9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON

OF CERTAIN ELECTIONS, ETC.—

‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500 OR LESS.—The

total amount payable to a participant under the plan

shall not be treated as made available merely because

the participant may elect to receive such amount (or the

plan may distribute such amount without the participant’s

consent) if—

‘‘(i) such amount does not exceed $3,500, and

‘‘(ii) such amount may be distributed only if—

‘‘(I) no amount has been deferred under the

plan with respect to such participant during the

2-year period ending on the date of the distribution, and

‘‘(II) there has been no prior distribution under

the plan to such participant to which this subparagraph applied.

A plan shall not be treated as failing to meet the distribution requirements of subsection (d) by reason of a distribution to which this subparagraph applies.

‘‘(B) ELECTION TO DEFER COMMENCEMENT OF DISTRIBUTIONS.—The total amount payable to a participant under

the plan shall not be treated as made available merely

because the participant may elect to defer commencement

of distributions under the plan if—

‘‘(i) such election is made after amounts may be

available under the plan in accordance with subsection

(d)(1)(A) and before commencement of such distributions, and

‘‘(ii) the participant may make only 1 such election.’’.

(b) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL

AMOUNT.—Subsection (e) of section 457, as amended by section

1444(b)(2) (relating to governmental plans), is amended by adding

at the end the following new paragraph:

‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL

AMOUNT.—The Secretary shall adjust the $7,500 amount specified in subsections (b)(2) and (c)(1) at the same time and in

the same manner as under section 415(d), except that the

base period shall be the calendar quarter ending September

30, 1994, and any increase under this paragraph which is

not a multiple of $500 shall be rounded to the next lowest

multiple of $500.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1996.

SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION

PLANS OF STATE AND LOCAL GOVERNMENTS.

(a) IN GENERAL.—Section 457 is amended by adding at the

end the following new subsection:

26 USC 457 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to assets and

income described in section 457(b)(6) of the Internal Revenue

Code of 1986 held by a plan on and after the date of the

enactment of this Act.

(2) TRANSITION RULE.—In the case of a plan in existence

on the date of the enactment of this Act, a trust need not

be established by reason of the amendments made by this

section before January 1, 1999.

SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS

UNDER SECTION 415 LIMITATIONS.

(a) IN GENERAL.—Subparagraph (A) of section 767(d)(3) of the

Uruguay Round Agreements Act is amended to read as follows:

‘‘(A) EXCEPTION.—A plan that was adopted and in effect

before December 8, 1994, shall not be required to apply

the amendments made by subsection (b) with respect to

benefits accrued before the earlier of—

‘‘(i) the later of the date a plan amendment applying the amendments made by subsection (b) is adopted

or made effective, or

‘‘(ii) the first day of the first limitation year beginning after December 31, 1999.

Determinations under section 415(b)(2)(E) of the Internal

Revenue Code of 1986 before such earlier date shall be

made with respect to such benefits on the basis of such

section as in effect on December 7, 1994 (except that the

modification made by section 1449(b) of the Small Business

Job Protection Act of 1996 shall be taken into account),

and the provisions of the plan as in effect on December

7, 1994, but only if such provisions of the plan meet the

requirements of such section (as so in effect).’’.

26 USC 411 note.

26 USC 457 note.
110 STAT. 1814 PUBLIC LAW 104–188—AUG. 20, 1996

(b) MODIFICATION OF CERTAIN ASSUMPTIONS FOR ADJUSTING

BENEFITS OF DEFINED BENEFIT PLANS FOR EARLY RETIREES.— Subparagraph (E) of section 415(b)(2) (relating to limitation on

certain assumptions) is amended—

(1) by striking ‘‘Except as provided in clause (ii), for purposes of adjusting any benefit or limitation under subparagraph

(B) or (C),’’ in clause (i) and inserting ‘‘For purposes of adjusting

any limitation under subparagraph (C) and, except as provided

in clause (ii), for purposes of adjusting any benefit under

subparagraph (B),’’, and

(2) by striking ‘‘For purposes of adjusting the benefit or

limitation of any form of benefit subject to section 417(e)(3),’’

in clause (ii) and inserting ‘‘For purposes of adjusting any

benefit under subparagraph (B) for any form of benefit subject

to section 417(e)(3),’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall take effect as if included in the provisions of section 767

of the Uruguay Round Agreements Act.

(d) TRANSITIONAL RULE.—In the case of a plan that was adopted

and in effect before December 8, 1994, if—

(1) a plan amendment was adopted or made effective on

or before the date of the enactment of this Act applying the

amendments made by section 767 of the Uruguay Round Agreements Act, and

(2) within 1 year after the date of the enactment of this

Act, a plan amendment is adopted which repeals the amendment referred to in paragraph (1),

the amendment referred to in paragraph (1) shall not be taken

into account in applying section 767(d)(3)(A) of the Uruguay Round

Agreements Act, as amended by subsection (a).

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

(a) MULTIPLE SALARY REDUCTION AGREEMENTS PERMITTED.—

(1) GENERAL RULE.—For purposes of section 403(b) of the

Internal Revenue Code of 1986, the frequency that an employee

is permitted to enter into a salary reduction agreement, the

salary to which such an agreement may apply, and the ability

to revoke such an agreement shall be determined under the

rules applicable to cash or deferred elections under section

401(k) of such Code.

(2) CONSTRUCTIVE RECEIPT.—Section 402(e)(3) is amended

by inserting ‘‘or which is part of a salary reduction agreement

under section 403(b)’’ after ‘‘section 401(k)(2))’’.

(3) EFFECTIVE DATE.—This subsection shall apply to taxable

years beginning after December 31, 1995.

(b) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.—

(1) IN GENERAL.—In the case of any contract purchased

in a plan year beginning before January 1, 1995, section 403(b)

of the Internal Revenue Code of 1986 shall be applied as

if any reference to an employer described in section 501(c)(3)

of the Internal Revenue Code of 1986 which is exempt from

tax under section 501 of such Code included a reference to

an employer which is an Indian tribal government (as defined

by section 7701(a)(40) of such Code), a subdivision of an Indian

tribal government (determined in accordance with section

7871(d) of such Code), an agency or instrumentality of an

Indian tribal government or subdivision thereof, or a corpora26 USC 403 note.

26 USC 411 note.

26 USC 415 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—The amendment made by this subsection shall apply to years beginning after December 31, 1995,

except a contract shall not be required to meet any change

in any requirement by reason of such amendment before the

90th day after the date of the enactment of this Act.

SEC. 1451. SPECIAL RULES RELATING TO JOINT AND SURVIVOR

ANNUITY EXPLANATIONS.

(a) AMENDMENT TO INTERNAL REVENUE CODE.—Section 417(a)

is amended by adding at the end the following new paragraph:

‘‘(7) SPECIAL RULES RELATING TO TIME FOR WRITTEN EXPLANATION.—Notwithstanding any other provision of this subsection—

‘‘(A) EXPLANATION MAY BE PROVIDED AFTER ANNUITY

STARTING DATE.—

‘‘(i) IN GENERAL.—A plan may provide the written

explanation described in paragraph (3)(A) after the

annuity starting date. In any case to which this

subparagraph applies, the applicable election period

under paragraph (6) shall not end before the 30th

day after the date on which such explanation is provided.

‘‘(ii) REGULATORY AUTHORITY.—The Secretary may

by regulations limit the application of clause (i), except

that such regulations may not limit the period of time

by which the annuity starting date precedes the provision of the written explanation other than by providing

that the annuity starting date may not be earlier than

termination of employment.

‘‘(B) WAIVER OF 30-DAY PERIOD.—A plan may permit

a participant to elect (with any applicable spousal consent)

to waive any requirement that the written explanation

be provided at least 30 days before the annuity starting

date (or to waive the 30-day requirement under subparagraph (A)) if the distribution commences more than 7 days

after such explanation is provided.’’.

(b) AMENDMENT TO ERISA.—Section 205(c) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)) is

amended by adding at the end the following new paragraph:

‘‘(8) Notwithstanding any other provision of this subsection—

‘‘(A)(i) A plan may provide the written explanation

described in paragraph (3)(A) after the annuity starting

26 USC 403 note.
110 STAT. 1816 PUBLIC LAW 104–188—AUG. 20, 1996

date. In any case to which this subparagraph applies, the

applicable election period under paragraph (7) shall not

end before the 30th day after the date on which such

explanation is provided.

‘‘(ii) The Secretary may by regulations limit the

application of clause (i), except that such regulations may

not limit the period of time by which the annuity starting

date precedes the provision of the written explanation other

than by providing that the annuity starting date may not

be earlier than termination of employment.

‘‘(B) A plan may permit a participant to elect (with

any applicable spousal consent) to waive any requirement

that the written explanation be provided at least 30 days

before the annuity starting date (or to waive the 30-day

requirement under subparagraph (A)) if the distribution

commences more than 7 days after such explanation is

provided.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 1996.

SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT

PLAN AND DEFINED CONTRIBUTION PLAN FOR SAME

EMPLOYEE; EXCESS DISTRIBUTIONS.

(a) IN GENERAL.—Section 415(e) is repealed.

(b) EXCESS DISTRIBUTIONS.—Section 4980A is amended by adding at the end the following new subsection:

‘‘(g) LIMITATION ON APPLICATION.—This section shall not apply

to distributions during years beginning after December 31, 1996,

and before January 1, 2000, and such distributions shall be treated

as made first from amounts not described in subsection (f).’’.

(c) CONFORMING AMENDMENTS.—

(1) Paragraph (1) of section 415(a) is amended—

(A) by adding ‘‘or’’ at the end of subparagraph (A),

(B) by striking ‘‘, or’’ at the end of subparagraph (B)

and inserting a period, and

(C) by striking subparagraph (C).

(2) Subparagraph (B) of section 415(b)(5) is amended by

striking ‘‘and subsection (e)’’.

(3) Paragraph (1) of section 415(f) is amended by striking

‘‘subsections (b), (c), and (e)’’ and inserting ‘‘subsections (b)

and (c)’’.

(4) Subsection (g) of section 415 is amended by striking

‘‘subsections (e) and (f)’’ in the last sentence and inserting

‘‘subsection (f)’’.

(5) Clause (i) of section 415(k)(2)(A) is amended to read

as follows:

‘‘(i) any contribution made directly by an employee

under such an arrangement shall not be treated as

an annual addition for purposes of subsection (c), and’’.

(6) Clause (ii) of section 415(k)(2)(A) is amended by striking

‘‘subsections (c) and (e)’’ and inserting ‘‘subsection (c)’’.

(7) Section 416 is amended by striking subsection (h).

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to limitation

years beginning after December 31, 1999.

26 USC 415 note.

26 USC 417 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—The amendment made by this section

shall apply to prohibited transactions occurring after the date of

the enactment of this Act.

SEC. 1454. TREATMENT OF LEASED EMPLOYEES.

(a) GENERAL RULE.—Subparagraph (C) of section 414(n)(2)

(defining leased employee) is amended to read as follows:

‘‘(C) such services are performed under primary direction or control by the recipient.’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to years beginning after December 31, 1996, but shall

not apply to any relationship determined under an Internal Revenue

Service ruling issued before the date of the enactment of this

Act pursuant to section 414(n)(2)(C) of the Internal Revenue Code

of 1986 (as in effect on the day before such date) not to involve

a leased employee.

SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN

PENSION REPORTING REQUIREMENTS.

(a) PENALTIES.—

(1) STATEMENTS.—Paragraph (1) of section 6724(d) is

amended by striking ‘‘and’’ at the end of subparagraph (A),

by striking the period at the end of subparagraph (B) and

inserting ‘‘, and’’, and by inserting after subparagraph (B) the

following new subparagraph:

‘‘(C) any statement of the amount of payments to

another person required to be made to the Secretary

under—

‘‘(i) section 408(i) (relating to reports with respect

to individual retirement accounts or annuities), or

‘‘(ii) section 6047(d) (relating to reports by employers, plan administrators, etc.).’’.

(2) REPORTS.—Paragraph (2) of section 6724(d) is amended

by striking ‘‘or’’ at the end of subparagraph (U), by striking

the period at the end of subparagraph (V) and inserting a

comma, and by inserting after subparagraph (V) the following

new subparagraphs:

‘‘(W) section 408(i) (relating to reports with respect

to individual retirement plans) to any person other than

the Secretary with respect to the amount of payments

made to such person, or

‘‘(X) section 6047(d) (relating to reports by plan

administrators) to any person other than the Secretary

with respect to the amount of payments made to such

person.’’.

(b) MODIFICATION OF REPORTABLE DESIGNATED DISTRIBUTIONS.—

(1) SECTION 408.—Subsection (i) of section 408 (relating

to individual retirement account reports) is amended by inserting ‘‘aggregating $10 or more in any calendar year’’ after ‘‘distributions’’.

26 USC 414 note.

26 USC 4975

note.
110 STAT. 1818 PUBLIC LAW 104–188—AUG. 20, 1996

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

amended by adding at the end the following new sentence:

‘‘No return or report may be required under the preceding

sentence with respect to distributions to any person during

any year unless such distributions aggregate $10 or more.’’.

(c) QUALIFYING ROLLOVER DISTRIBUTIONS.—Section 6652(i) is

amended—

(1) by striking ‘‘the $10’’ and inserting ‘‘$100’’, and

(2) by striking ‘‘$5,000’’ and inserting ‘‘$50,000’’.

(d) CONFORMING AMENDMENTS.— (1) Paragraph (1) of section 6047(f) is amended to read

as follows:

‘‘(1) For provisions relating to penalties for failures to file returns

and reports required under this section, see sections 6652(e), 6721,

and 6722.’’.

(2) Subsection (e) of section 6652 is amended by adding

at the end the following new sentence: ‘‘This subsection shall

not apply to any return or statement which is an information

return described in section 6724(d)(1)(C)(ii) or a payee statement described in section 6724(d)(2)(X).’’.

(3) Subsection (a) of section 6693 is amended by adding

at the end the following new sentence: ‘‘This subsection shall

not apply to any report which is an information return described

in section 6724(d)(1)(C)(i) or a payee statement described in

section 6724(d)(2)(W).’’.

(e) EFFECTIVE DATE.—The amendments made by this section

shall apply to returns, reports, and other statements the due date

for which (determined without regard to extensions) is after December 31, 1996.

SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO

TAX ON NET EARNINGS FROM SELF-EMPLOYMENT.

(a) IN GENERAL.—Section 1402(a)(8) (defining net 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 DATE.—The amendments made by this section

shall apply to years beginning before, on, or after December 31,

1994.

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

(a) DEVELOPMENT OF SAMPLE LANGUAGE.—Not later than January 1, 1997, the Secretary of the Treasury shall develop—

(1) sample language for inclusion in a form for the spousal

consent required under section 417(a)(2) of the Internal Revenue Code of 1986 and section 205(c)(2) of the Employee Retirement Income Security Act of 1974 which—

(A) is written in a manner calculated to be understood

by the average person, and

(B) discloses in plain form—

(i) whether the waiver to which the spouse consents is irrevocable, and

26 USC 414 note.

26 USC 1402

note.

26 USC 408 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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.—
110 STAT. 1820 PUBLIC LAW 104–188—AUG. 20, 1996

(1) Subsection (a)(5) of section 3121, as amended by section

1421, is amended by striking ‘‘(or)’’ at the end of subparagraph

(G), by inserting ‘‘or’’ at the end of subparagraph (H), and

by adding at the end the following new subparagraph:

‘‘(I) under a plan described in section 457(e)(11)(A)(ii)

and maintained by an eligible employer (as defined in

section 457(e)(1)).’’.

(2) Section 209(a)(4) of the Social Security Act is amended

by inserting ‘‘; or (K) under a plan described in section

457(e)(11)(A)(ii) of the Internal Revenue Code of 1986 and

maintained by an eligible employer (as defined in section

457(e)(1) of such Code)’’ before the semicolon at the end thereof.

(c) EFFECTIVE DATE.— (1) SUBSECTION (a).—The amendment made by subsection

(a) shall apply to accruals of length of service awards after

December 31, 1996.

(2) SUBSECTION (b).—The amendments made by subsection

(b) shall apply to remuneration paid after December 31, 1996.

SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN

PLANS THAT PROVIDE FOR EARLY PARTICIPATION.

(a) CASH OR DEFERRED ARRANGEMENTS.—Paragraph (3) of section 401(k) (relating to application of participation and discrimination standards), as amended by section 1433(d)(1) of this Act, is

amended by adding at the end the following new subparagraph:

‘‘(F) SPECIAL RULE FOR EARLY PARTICIPATION.—If an

employer elects to apply section 410(b)(4)(B) in determining

whether a cash or deferred arrangement meets the requirements of subparagraph (A)(i), the employer may, in determining whether the arrangement meets the requirements

of subparagraph (A)(ii), exclude from consideration all

eligible employees (other than highly compensated employees) who have not met the minimum age and service

requirements of section 410(a)(1)(A).’’.

(b) MATCHING CONTRIBUTIONS.—Paragraph (5) of section 401(m)

(relating to employees taken into consideration) is amended by

adding at the end the following new subparagraph:

‘‘(C) SPECIAL RULE FOR EARLY PARTICIPATION.—If an

employer elects to apply section 410(b)(4)(B) in determining

whether a plan meets the requirements of section 410(b),

the employer may, in determining whether the plan meets

the requirements of paragraph (2), exclude from consideration all eligible employees (other than highly compensated

employees) who have not met the minimum age and service

requirements of section 410(a)(1)(A).’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 1998.

SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE

COMPANY GENERAL ACCOUNTS.

(a) IN GENERAL.—Section 401 of the Employee Retirement

Income Security Act of 1974 (29 U.S.C. 1101) is amended by adding

at the end the following new subsection:

‘‘(c)(1)(A) Not later than June 30, 1997, the Secretary shall

issue proposed regulations to provide guidance for the purpose

of determining, in cases where an insurer issues 1 or more policies

to or for the benefit of an employee benefit plan (and such policies

are supported by assets of such insurer’s general account), which

Proposed

regulations.

26 USC 401 note.

26 USC 3121

note.

26 USC 457 note.

42 USC 409.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

Regulations.
110 STAT. 1822 PUBLIC LAW 104–188—AUG. 20, 1996

prevailing that a prudent man acting in a like capacity and

familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims, taking into

account all obligations supported by such enterprise.

‘‘(4) Compliance by the insurer with all requirements of the

regulations issued by the Secretary pursuant to paragraph (1) shall

be deemed compliance by such insurer with sections 404, 406,

and 407 with respect to those assets of the insurer’s general account

which support a policy described in paragraph (3).

‘‘(5)(A) Subject to subparagraph (B), any regulations issued

under paragraph (1) shall not take effect before the date on which

such regulations become final.

‘‘(B) No person shall be subject to liability under this part

or section 4975 of the Internal Revenue Code of 1986 for conduct

which occurred before the date which is 18 months following the

date described in subparagraph (A) on the basis of a claim that

the assets of an insurer (other than plan assets held in a separate

account) constitute assets of the plan, except—

‘‘(i) as otherwise provided by the Secretary in regulations

intended to prevent avoidance of the regulations issued under

paragraph (1), or

‘‘(ii) as provided in an action brought by the Secretary

pursuant to paragraph (2) or (5) of section 502(a) for a breach

of fiduciary responsibilities which would also constitute a violation of Federal or State criminal law.

The Secretary shall bring a cause of action described in clause

(ii) if a participant, beneficiary, or fiduciary demonstrates to the

satisfaction of the Secretary that a breach described in clause

(ii) has occurred.

‘‘(6) Nothing in this subsection shall preclude the application

of any Federal criminal law.

‘‘(7) For purposes of this subsection, the term ‘policy’ includes

a contract.’’.

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendment made by this section shall take effect on January

1, 1975.

(2) CIVIL ACTIONS.—The amendment made by this section

shall not apply to any civil action commenced before November

7, 1995.

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

MINISTERS.

(a) IN GENERAL.—Section 414(e) (defining church plan) is

amended by adding at the end the following new paragraph:

‘‘(5) SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED

MINISTERS.—

‘‘(A) CERTAIN MINISTERS MAY PARTICIPATE.—For purposes of this part—

‘‘(i) IN GENERAL.—An employee of a church or a

convention or association of churches shall include a

duly ordained, commissioned, or licensed minister of

a church who, in connection with the exercise of his

or her ministry—

‘‘(I) is a self-employed individual (within the

meaning of section 401(c)(1)(B)), or

29 USC 1101

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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, profitsharing, or annuity plan (including an annuity described

in section 403(b) or a retirement income account described

in section 403(b)(9)). The Secretary shall prescribe such

regulations as may be necessary or appropriate to carry

out the purpose of, and prevent the abuse of, this

subparagraph.

‘‘(D) COMPENSATION TAKEN INTO ACCOUNT ONLY

ONCE.—If any compensation is taken into account in determining the amount of any contributions made to, or benefits

to be provided under, any church plan, such compensation

shall not also be taken into account in determining the

amount of any contributions made to, or benefits to be

provided under, any other stock bonus, pension, profitsharing, 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:

Regulations.
110 STAT. 1824 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(10) CONTRIBUTIONS BY CERTAIN MINISTERS TO RETIREMENT

INCOME ACCOUNTS.—In the case of contributions made by a

minister described in section 414(e)(5) to a retirement income

account described in section 403(b)(9) and not by a person

other than such minister, such contributions—

‘‘(A) shall be treated as made to a trust which is

exempt from tax under section 501(a) and which is part

of a plan which is described in section 401(a), and

‘‘(B) shall be deductible under this subsection to the

extent such contributions do not exceed the limit on elective

deferrals under section 402(g), the exclusion allowance

under section 403(b)(2), or the limit on annual additions

under section 415.

For purposes of this paragraph, all plans in which the minister

is a participant shall be treated as one plan.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 1996.

SEC. 1462. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE FOR

PRE-ERISA RULES FOR CHURCH PLANS.

(a) IN GENERAL.—Section 414(q) (defining highly compensated

employee), as amended by section 1431(c)(1)(A) of this Act, is

amended by adding at the end the following new paragraph:

‘‘(7) CERTAIN EMPLOYEES NOT CONSIDERED HIGHLY COMPENSATED AND EXCLUDED EMPLOYEES UNDER PRE-ERISA RULES

FOR CHURCH PLANS.—In the case of a church plan (as defined

in subsection (e)), no employee shall be considered an officer,

a person whose principal duties consist of supervising the work

of other employees, or a highly compensated employee for any

year unless such employee is a highly compensated employee

under paragraph (1) for such year.’’.

(b) SAFEHARBOR AUTHORITY.—The Secretary of the Treasury

may design nondiscrimination and coverage safe harbors for church

plans.

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

(a) shall apply to years beginning after December 31, 1996.

SEC. 1463. RULE RELATING TO INVESTMENT IN CONTRACT NOT TO

APPLY TO FOREIGN MISSIONARIES.

(a) IN GENERAL.—The last sentence of section 72(f) is amended

by inserting ‘‘, or to the extent such credits are attributable to

services performed as a foreign missionary (within the meaning

of section 403(b)(2)(D)(iii))’’ before the last period.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to taxable years beginning after December 31, 1996.

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

SHORTFALL.

(a) IN GENERAL.—Section 4971(f) (relating to failure to pay

liquidity shortfall) is amended by adding at the end the following

new paragraph:

‘‘(4) WAIVER BY SECRETARY.—If the taxpayer establishes

to the satisfaction of the Secretary that—

‘‘(A) the liquidity shortfall described in paragraph (1)

was due to reasonable cause and not willful neglect, and

‘‘(B) reasonable steps have been taken to remedy such

liquidity shortfall,

26 USC 72 note.

26 USC 414 note.

26 USC 414 note.

26 USC 404 note.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1825

the Secretary may waive all or part of the tax imposed by

this subsection.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall take effect as if included in the amendment made by clause

(ii) of section 751(a)(9)(B) of the Retirement Protection Act of 1994

(108 Stat. 5020).

SEC. 1465. DATE FOR ADOPTION OF PLAN AMENDMENTS.

If any amendment made by this subtitle requires an amendment to any plan or annuity contract, such amendment shall not

be required to be made before the first day of the first plan year

beginning on or after January 1, 1998, if—

(1) during the period after such amendment takes effect

and before such first plan year, the plan or contract is operated

in accordance with the requirements of such amendment, and

(2) such amendment applies retroactively to such period.

In the case of a governmental plan (as defined in section 414(d)

of the Internal Revenue Code of 1986), this section shall be applied

by substituting ‘‘2000’’ for ‘‘1998’’.

Subtitle E—Foreign Simplification

SEC. 1501. REPEAL OF INCLUSION OF CERTAIN EARNINGS INVESTED

IN EXCESS PASSIVE ASSETS.

(a) IN GENERAL.—

(1) REPEAL OF INCLUSION.—Paragraph (1) of section 951(a)

(relating to amounts included in gross income of United States

shareholders) is amended by striking subparagraph (C), by

striking ‘‘; and’’ at the end of subparagraph (B) and inserting

a period, and by adding ‘‘and’’ at the end of subparagraph

(A).

(2) REPEAL OF INCLUSION AMOUNT.—Section 956A (relating

to earnings invested in excess passive assets) is repealed.

(b) CONFORMING AMENDMENTS.—

(1) Subparagraph (G) of section 904(d)(3), as amended by

section 1703(i)(1), is amended by striking ‘‘subparagraph (B)

or (C) of section 951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.

(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 share26 USC 401 note.

26 USC 4971

note.
110 STAT. 1826 PUBLIC LAW 104–188—AUG. 20, 1996

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 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.

26 USC 904 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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)—
110 STAT. 1828 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1830 PUBLIC LAW 104–188—AUG. 20, 1996

shall be made with such annualizations as the Secretary shall

prescribe.

‘‘(8) SPECIAL RULES FOR CERTAIN POSSESSIONS.—

‘‘(A) IN GENERAL.—In the case of an existing credit

claimant with respect to an applicable possession, this section (other than the preceding paragraphs of this subsection) shall apply to such claimant with respect to such

applicable possession for taxable years beginning after

December 31, 1995, and before January 1, 2006.

‘‘(B) APPLICABLE POSSESSION.—For purposes of this

paragraph, the term ‘applicable possession’ means Guam,

American Samoa, and the Commonwealth of the Northern

Mariana Islands.

‘‘(9) EXISTING CREDIT CLAIMANT.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘existing credit claimant’

means a corporation—

‘‘(i)(I) which was actively conducting a trade or

business in a possession on October 13, 1995, and

‘‘(II) with respect to which an election under this

section is in effect for the corporation’s taxable year

which includes October 13, 1995, or

‘‘(ii) which acquired all of the assets of a trade

or business of a corporation which—

‘‘(I) satisfied the requirements of subclause (I)

of clause (i) with respect to such trade or business, and

‘‘(II) satisfied the requirements of subclause

(II) of clause (i).

‘‘(B) NEW LINES OF BUSINESS PROHIBITED.—If, after

October 13, 1995, a corporation which would (but for this

subparagraph) be an existing credit claimant adds a

substantial new line of business (other than in an acquisition described in subparagraph (A)(ii)), such corporation

shall cease to be treated as an existing credit claimant

as of the close of the taxable year ending before the date

of such addition.

‘‘(C) BINDING CONTRACT EXCEPTION.—If, on October 13,

1995, and at all times thereafter, there is in effect with

respect to a corporation a binding contract for the acquisition of assets to be used in, or for the sale of assets

to be produced from, a trade or business, the corporation

shall be treated for purposes of this paragraph as actively

conducting such trade or business on October 13, 1995.

The preceding sentence shall not apply if such trade or

business is not actively conducted before January 1, 1996.

‘‘(10) SEPARATE APPLICATION TO EACH POSSESSION.—For

purposes of determining—

‘‘(A) whether a taxpayer is an existing credit claimant, and

‘‘(B) the amount of the credit allowed under this

section,

this subsection (and so much of this section as relates to this

subsection) shall be applied separately with respect to each

possession.’’.

(b) ECONOMIC ACTIVITY CREDIT FOR PUERTO RICO.—
PUBLIC LAW 104–188—AUG. 20, 1996 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 determining—

‘‘(A) whether a taxpayer is an existing credit claimant

with respect to Puerto Rico, and

‘‘(B) the amount of the credit allowed under this

section,

this section (and so much of section 936 as relates to this

section) shall be applied separately with respect to Puerto Rico.

‘‘(b) CONDITIONS WHICH MUST BE SATISFIED.—The conditions

referred to in subsection (a) are—

‘‘(1) 3-YEAR PERIOD.—If 80 percent or more of the gross

income of the qualified domestic corporation for the 3-year

period immediately preceding the close of the taxable year

(or for such part of such period immediately preceding the

close of such taxable year as may be applicable) was derived

from sources within a possession (determined without regard

to section 904(f)).

‘‘(2) TRADE OR BUSINESS.—If 75 percent or more of the

gross income of the qualified domestic corporation for such

period or such part thereof was derived from the active conduct

of a trade or business within a possession.

‘‘(c) CREDIT NOT ALLOWED AGAINST CERTAIN TAXES.—The credit

provided by subsection (a) shall not be allowed against the tax

imposed by—

‘‘(1) section 59A (relating to environmental tax),
110 STAT. 1832 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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)’’.
PUBLIC LAW 104–188—AUG. 20, 1996 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 CORPORA- TIONS.—References in this clause to section 936

shall be treated as including references to section

30A.’’.

(D) Subsection (b) of section 59 is amended by striking

‘‘section 936,’’ and all that follows and inserting ‘‘section

30A or 936, alternative minimum taxable income shall

not include any income with respect to which a credit

is determined under section 30A or 936.’’.

(E) The table of sections for subpart B of part IV

of subchapter A of chapter 1 is amended by adding at

the end the following new item:

‘‘Sec. 30A. Puerto Rican economic activity credit.’’.

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

‘‘Subpart B—Other Credits’’.

(ii) The table of subparts for part IV of subchapter

A of chapter 1 is amended by striking the item relating

to subpart B and inserting the following new item:

‘‘Subpart B. Other credits.’’.

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

beginning after December 31, 1995.

(2) SPECIAL RULE FOR QUALIFIED POSSESSION SOURCE

INVESTMENT INCOME.—The amendments made by this section

shall not apply to qualified possession source investment income

received or accrued before July 1, 1996, without regard to

the taxable year in which received or accrued.

(3) SPECIAL TRANSITION RULE FOR PAYMENT OF ESTIMATED

TAX INSTALLMENT.—In determining the amount of any installment due under section 6655 of the Internal Revenue Code

of 1986 after the date of the enactment of this Act and before

October 1, 1996, only 1⁄2 of any increase in tax (for the taxable

year for which such installment is made) by reason of the

amendments made by subsections (a) and (b) shall be taken

into account. Any reduction in such installment by reason of

the preceding sentence shall be recaptured by increasing the

next required installment for such year by the amount of such

reduction.

SEC. 1602. REPEAL OF EXCLUSION FOR INTEREST ON LOANS USED

TO ACQUIRE EMPLOYER SECURITIES.

(a) IN GENERAL.—Section 133 (relating to interest on certain

loans used to acquire employer securities) is hereby repealed.

(b) CONFORMING AMENDMENTS.—

(1) Subparagraph (B) of section 291(e)(1) is amended

by striking clause (iv) and by redesignating clause (v) as clause

(iv).

(2) Section 812 is amended by striking subsection (g).

(3) Paragraph (5) of section 852(b) is amended by striking

subparagraph (C).

26 USC 30A note.
110 STAT. 1834 PUBLIC LAW 104–188—AUG. 20, 1996

(4) Paragraph (2) of section 4978(b) is amended by striking

subparagraph (A) and all that follows and inserting the

following:

‘‘(A) first from qualified securities to which section

1042 applied acquired during the 3-year period ending

on the date of the disposition, beginning with the securities

first so acquired, and

‘‘(B) then from any other employer securities.

If subsection (d) applies to a disposition, the disposition shall

be treated as made from employer securities in the opposite

order of the preceding sentence.’’.

(5)(A) Section 4978B (relating to tax on disposition of

employer securities to which section 133 applied) is hereby

repealed.

(B) The table of sections for chapter 43 is amended by

striking the item relating to section 4978B.

(6) Subsection (e) of section 6047 is amended by striking

paragraphs (1), (2), and (3) and inserting the following new

paragraphs:

‘‘(1) any employer maintaining, or the plan administrator

(within the meaning of section 414(g)) of, an employee stock

ownership plan which holds stock with respect to which section

404(k) applies to dividends paid on such stock, or

‘‘(2) both such employer or plan administrator,’’.

(7) Subsection (f) of section 7872 is amended by striking

paragraph (12).

(8) The table of sections for part III of subchapter B of

chapter 1 is amended by striking the item relating to section

133.

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section

shall apply to loans made after the date of the enactment

of this Act.

(2) REFINANCINGS.—The amendments made by this section

shall not apply to loans made after the date of the enactment

of this Act to refinance securities acquisition loans (determined

without regard to section 133(b)(1)(B) of the Internal Revenue

Code of 1986, as in effect on the day before the date of the

enactment of this Act) made on or before such date or to

refinance loans described in this paragraph if—

(A) the refinancing loans meet the requirements of

section 133 of such Code (as so in effect),

(B) immediately after the refinancing the principal

amount of the loan resulting from the refinancing does

not exceed the principal amount of the refinanced loan

(immediately before the refinancing), and

(C) the term of such refinancing loan does not extend

beyond the last day of the term of the original securities

acquisition loan.

For purposes of this paragraph, the term ‘‘securities acquisition

loan’’ includes a loan from a corporation to an employee stock

ownership plan described in section 133(b)(3) of such Code

(as so in effect).

(3) EXCEPTION.—Any loan made pursuant to a binding

written contract in effect before June 10, 1996, and at all

times thereafter before such loan is made, shall be treated

26 USC 133 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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.’’.
110 STAT. 1836 PUBLIC LAW 104–188—AUG. 20, 1996

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to amounts included in gross income in any taxable

year beginning after December 31, 1995.

SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD.

(a) GENERAL RULE.—Section 167 (relating to depreciation) is

amended by redesignating subsection (g) as subsection (h) and

by inserting after subsection (f) the following new subsection:

‘‘(g) DEPRECIATION UNDER INCOME FORECAST METHOD.—

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

under this section to any taxpayer with respect to any property

is determined under the income forecast method or any similar

method—

‘‘(A) the income from the property to be taken into

account in determining the depreciation deduction under

such method shall be equal to the amount of income earned

in connection with the property before the close of the

10th taxable year following the taxable year in which the

property was placed in service,

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

include amounts with respect to which the requirements

of section 461(h) are satisfied,

‘‘(C) the depreciation deduction under such method

for the 10th taxable year beginning after the taxable year

in which the property was placed in service shall be equal

to the adjusted basis of such property as of the beginning

of such 10th taxable year, and

‘‘(D) such taxpayer shall pay (or be entitled to receive)

interest computed under the look-back method of paragraph

(2) for any recomputation year.

‘‘(2) LOOK-BACK METHOD.—The interest computed under

the look-back method of this paragraph for any recomputation

year shall be determined by—

‘‘(A) first determining the depreciation deductions

under this section with respect to such property which

would have been allowable for prior taxable years if the

determination of the amounts so allowable had been made

on the basis of the sum of the following (instead of the

estimated income from such property)—

‘‘(i) the actual income earned in connection with

such property for periods before the close of the recomputation year, and

‘‘(ii) an estimate of the future income to be earned

in connection with such property for periods after the

recomputation year and before the close of the 10th

taxable year following the taxable year in which the

property was placed in service,

‘‘(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of

tax for each such prior taxable year which would result

solely from the application of subparagraph (A), and

‘‘(C) then using the adjusted overpayment rate (as

defined in section 460(b)(7)), compounded daily, on the

overpayment or underpayment determined under subparagraph (B).

For purposes of the preceding sentence, any cost incurred after

the property is placed in service (which is not treated as a

26 USC 512 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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)
110 STAT. 1838 PUBLIC LAW 104–188—AUG. 20, 1996

for any recomputation year shall be treated as an increase

in the tax imposed by this chapter for such year.

‘‘(E) DETERMINATIONS.—For purposes of paragraph (2),

determinations of the amount of income earned in connection with any property shall be made in the same manner

as for purposes of applying the income forecast method;

except that any income from the disposition of such property shall be taken into account.

‘‘(F) TREATMENT OF PASS-THRU ENTITIES.—Rules similar to the rules of section 460(b)(4) shall apply for purposes

of this subsection.’’

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a)

shall apply to property placed in service after September 13,

1995.

(2) BINDING CONTRACTS.—The amendment made by subsection (a) shall not apply to any property produced or acquired

by the taxpayer pursuant to a written contract which was

binding on September 13, 1995, and at all times thereafter

before such production or acquisition.

(3) UNDERPAYMENTS OF INCOME TAX.—No addition to tax

shall be made under section 6662 of such Code as a result

of the application of subsection (d) of that section (relating

to substantial understatements of income tax) with respect

to any underpayment of income tax for any taxable year ending

before such date of enactment, to the extent such underpayment

was created or increased by the amendments made by subsection (a).

SEC. 1605. REPEAL OF EXCLUSION FOR PUNITIVE DAMAGES AND FOR

DAMAGES NOT ATTRIBUTABLE TO PHYSICAL INJURIES

OR SICKNESS.

(a) IN GENERAL.—Paragraph (2) of section 104(a) (relating to

compensation for injuries or sickness) is amended to read as follows:

‘‘(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether

as lump sums or as periodic payments) on account of personal

physical injuries or physical sickness;’’.

(b) EMOTIONAL DISTRESS AS SUCH TREATED AS NOT PHYSICAL

INJURY OR PHYSICAL SICKNESS.—Section 104(a) is amended by striking the last sentence and inserting the following new sentence:

‘‘For purposes of paragraph (2), emotional distress shall not be

treated as a physical injury or physical sickness. The preceding

sentence shall not apply to an amount of damages not in excess

of the amount paid for medical care (described in subparagraph

(A) or (B) of section 213(d)(1)) attributable to emotional distress.’’.

(c) APPLICATION OF PRIOR LAW FOR STATES IN WHICH ONLY

PUNITIVE DAMAGES MAY BE AWARDED IN WRONGFUL DEATH

ACTIONS.—Section 104 is amended by redesignating subsection (c)

as subsection (d) and by inserting after subsection (b) the following

new subsection:

‘‘(c) APPLICATION OF PRIOR LAW IN CERTAIN CASES.—The phrase

‘(other than punitive damages)’ shall not apply to punitive damages

awarded in a civil action—

‘‘(1) which is a wrongful death action, and

‘‘(2) with respect to which applicable State law (as in effect

on September 13, 1995 and without regard to any modification

26 USC 167 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to amounts

received after the date of the enactment of this Act, in taxable

years ending after such date.

(2) EXCEPTION.—The amendments made by this section

shall not apply to any amount received under a written binding

agreement, court decree, or mediation award in effect on (or

issued on or before) September 13, 1995.

SEC. 1606. REPEAL OF DIESEL FUEL TAX REBATE TO PURCHASERS

OF DIESEL-POWERED AUTOMOBILES AND LIGHT TRUCKS.

(a) IN GENERAL.—Section 6427 (relating to fuels not used for

taxable purposes) is amended by striking subsection (g).

(b) CONFORMING AMENDMENTS.—

(1) Paragraph (3) of section 34(a) is amended to read as

follows:

‘‘(3) under section 6427 with respect to fuels used for nontaxable purposes or resold during the taxable year (determined

without regard to section 6427(k)).’’.

(2) Paragraphs (1) and (2)(A) of section 6427(i) are each

amended—

(A) by striking ‘‘(g),’’, and

(B) by striking ‘‘(or a qualified diesel powered highway

vehicle purchased)’’ each place it appears.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to vehicles purchased after the date of the enactment

of this Act.

SEC. 1607. EXTENSION AND PHASEDOWN OF LUXURY PASSENGER

AUTOMOBILE TAX.

(a) EXTENSION.—Subsection (f) of section 4001 is amended by

striking ‘‘1999’’ and inserting ‘‘2002’’.

(b) PHASEDOWN.—Section 4001 is amended by redesignating

subsection (f) (as amended by subsection (a) of this section) as

subsection (g) and by inserting after subsection (e) the following

new subsection:

‘‘(f) PHASEDOWN.—For sales occurring in calendar years after

1995 and before 2003, subsection (a) shall be applied by substituting

for ‘10 percent’ the percentage determined in accordance with the

following table:

‘‘If the calendar year is: The percentage is:

1996 ..................................................................................................... 9 percent

1997 ..................................................................................................... 8 percent

1998 ..................................................................................................... 7 percent

1999 ..................................................................................................... 6 percent

2000 ..................................................................................................... 5 percent

2001 ..................................................................................................... 4 percent

2002 ..................................................................................................... 3 percent .’’.

26 USC 34 note.

26 USC 104 note.
110 STAT. 1840 PUBLIC LAW 104–188—AUG. 20, 1996

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply with respect to sales occurring after the date which

is 7 days after the date of the enactment of this Act.

SEC. 1608. TERMINATION OF FUTURE TAX-EXEMPT BOND FINANCING

FOR LOCAL FURNISHERS OF ELECTRICITY AND GAS.

(a) IN GENERAL.—Section 142(f) (relating to local furnishing

of electric energy or gas) is amended by adding at the end the

following new paragraphs:

‘‘(3) TERMINATION OF FUTURE FINANCING.—For purposes

of this section, no bond may be issued as part of an issue

described in subsection (a)(8) with respect to a facility for

the local furnishing of electric energy or gas on or after the

date of the enactment of this paragraph unless—

‘‘(A) the facility will—

‘‘(i) be used by a person who is engaged in the

local furnishing of that energy source on January 1,

1997, and

‘‘(ii) be used to provide service within the area

served by such person on January 1, 1997, (or within

a county or city any portion of which is within such

area), or

‘‘(B) the facility will be used by a successor in interest

to such person for the same use and within the same

service area as described in subparagraph (A).

‘‘(4) ELECTION TO TERMINATE TAX-EXEMPT BOND FINANCING

BY CERTAIN FURNISHERS.—

‘‘(A) IN GENERAL.—In the case of a facility financed

with bonds issued before the date of the enactment of

this paragraph which would cease to be tax-exempt by

reason of the failure to meet the local furnishing requirement of subsection (a)(8) as a result of a service area

expansion, such bonds shall not cease to be tax-exempt

bonds (and section 150(b)(4) shall not apply) if the person

engaged in such local furnishing by such facility makes

an election described in subparagraph (B).

‘‘(B) ELECTION.—An election is described in this

subparagraph if it is an election made in such manner

as the Secretary prescribes, and such person (or its predecessor in interest) agrees that—

‘‘(i) such election is made with respect to all facilities for the local furnishing of electric energy or gas,

or both, by such person,

‘‘(ii) no bond exempt from tax under section 103

and described in subsection (a)(8) may be issued on

or after the date of the enactment of this paragraph

with respect to all such facilities of such person,

‘‘(iii) any expansion of the service area—

‘‘(I) is not financed with the proceeds of any

exempt facility bond described in subsection (a)(8),

and

‘‘(II) is not treated as a nonqualifying use

under the rules of paragraph (2), and

‘‘(iv) all outstanding bonds used to finance the

facilities for such person are redeemed not later than

6 months after the later of—

26 USC 4001

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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.’’.

26 USC 142 note.
110 STAT. 1842 PUBLIC LAW 104–188—AUG. 20, 1996

(3) Subsection (d) of section 9502 is amended by adding

at the end the following new paragraph:

‘‘(5) TRANSFERS FROM AIRPORT AND AIRWAY TRUST FUND

ON ACCOUNT OF REFUNDS OF TAXES ON TRANSPORTATION BY

AIR.—The Secretary of the Treasury shall pay from time to

time from the Airport and Airway Trust Fund into the general

fund of the Treasury amounts equivalent to the amounts paid

after December 31, 1995, under section 6402 (relating to authority to make credits or refunds) or section 6415 (relating to

credits or refunds to persons who collected certain taxes) in

respect of taxes under sections 4261 and 4271.’’.

(d) EXCISE TAX EXEMPTION FOR CERTAIN EMERGENCY MEDICAL

TRANSPORTATION BY AIR AMBULANCE.—Subsection (f) of section

4261 (relating to imposition of tax on transportation by air) is

amended to read as follows:

‘‘(f) EXEMPTION FOR AIR AMBULANCES PROVIDING CERTAIN

EMERGENCY MEDICAL TRANSPORTATION.—No tax shall be imposed

under this section or section 4271 on any air transportation for

the purpose of providing emergency medical services—

‘‘(1) by helicopter, or

‘‘(2) by a fixed-wing aircraft equipped for and exclusively

dedicated to acute care emergency medical services.’’.

(e) EXEMPTION FOR CERTAIN HELICOPTER USES.—Subsection

(e) of section 4261 is amended by adding at the end the following

new sentence: ‘‘In the case of helicopter transportation described

in paragraph (1), this subsection shall be applied by treating each

flight segment as a distinct flight.’’.

(f) FLIGHT-BY-FLIGHT DETERMINATION OF AVAILABILITY FOR

HIRE FOR AFFILIATED GROUPS.—Section 4282 is amended by

redesignating subsection (b) as subsection (c) and by inserting after

subsection (a) the following new subsection:

‘‘(b) AVAILABILITY FOR HIRE.—For purposes of subsection (a),

the determination of whether an aircraft is available for hire by

persons who are not members of an affiliated group shall be made

on a flight-by-flight basis.’’

(g) CONSOLIDATION OF TAXES ON AVIATION GASOLINE.—

(1) IN GENERAL.—Subparagraph (A) of section 4081(a)(2)

(relating to imposition of tax on gasoline and diesel fuel) is

amended by redesignating clause (ii) as clause (iii) and by

striking clause (i) and inserting the following:

‘‘(i) in the case of gasoline other than aviation

gasoline, 18.3 cents per gallon,

‘‘(ii) in the case of aviation gasoline, 19.3 cents

per gallon, and’’.

(2) TERMINATION.—Subsection (d) of section 4081 is

amended by redesignating paragraph (2) as paragraph (3) and

by inserting after paragraph (1) the following new paragraph:

‘‘(2) AVIATION GASOLINE.—On and after January 1, 1997,

the rate specified in subsection (a)(2)(A)(ii) shall be 4.3 cents

per gallon.’’

(3) REPEAL OF RETAIL LEVEL TAX.—

(A) Subsection (c) of section 4041 is amended by striking paragraphs (2) and (3) and by redesignating paragraphs

(4) and (5) as paragraphs (2) and (3), respectively.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

26 USC 4091

note.
110 STAT. 1844 PUBLIC LAW 104–188—AUG. 20, 1996

held by such person on such date does not exceed 2,000

gallons. The preceding sentence shall apply only if such

person submits to the Secretary (at the time and in the

manner required by the Secretary) such information as

the Secretary shall require for purposes of this paragraph.

(B) EXEMPT FUEL.—For purposes of subparagraph (A),

there shall not be taken into account fuel held by any

person which is exempt from the tax imposed by paragraph

(1) by reason of paragraph (4).

(C) CONTROLLED GROUPS.—For purposes of this paragraph—

(i) CORPORATIONS.—

(I) IN GENERAL.—All persons treated as a controlled group shall be treated as 1 person.

(II) CONTROLLED GROUP.—The term ‘‘controlled group’’ has the meaning given to such term

by subsection (a) of section 1563 of such Code;

except that for such purposes the phrase ‘‘more

than 50 percent’’ shall be substituted for the

phrase ‘‘at least 80 percent’’ each place it appears

in such subsection.

(ii) NONINCORPORATED PERSONS UNDER COMMON

CONTROL.—Under regulations prescribed by the Secretary, principles similar to the principles of clause

(i) shall apply to a group of persons under common

control where 1 or more of such persons is not a

corporation.

(6) OTHER LAW APPLICABLE.—All provisions of law, including penalties, applicable with respect to the taxes imposed

by section 4091 of such Code shall, insofar as applicable and

not inconsistent with the provisions of this subsection, apply

with respect to the floor stock taxes imposed by paragraph

(1) to the same extent as if such taxes were imposed by such

section 4091.

(i) EFFECTIVE DATE.—The amendments made by this section

shall take effect on the 7th calendar day after the date of the

enactment of this Act, except that the amendments made by subsection (b) shall not apply to any amount paid before such date.

SEC. 1610. BASIS ADJUSTMENT TO PROPERTY HELD BY CORPORATION WHERE STOCK IN CORPORATION IS REPLACEMENT

PROPERTY UNDER INVOLUNTARY CONVERSION RULES.

(a) IN GENERAL.—Subsection (b) of section 1033 is amended

to read as follows:

‘‘(b) BASIS OF PROPERTY ACQUIRED THROUGH INVOLUNTARY

CONVERSION.—

‘‘(1) CONVERSIONS DESCRIBED IN SUBSECTION (a)(1).—If the

property was acquired as the result of a compulsory or involuntary conversion described in subsection (a)(1), the basis shall

be the same as in the case of the property so converted—

‘‘(A) decreased in the amount of any money received

by the taxpayer which was not expended in accordance

with the provisions of law (applicable to the year in which

such conversion was made) determining the taxable status

of the gain or loss upon such conversion, and

‘‘(B) increased in the amount of gain or decreased

in the amount of loss to the taxpayer recognized upon

26 USC 4041

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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

26 USC 1033

note.
110 STAT. 1846 PUBLIC LAW 104–188—AUG. 20, 1996

inserting ‘‘or’’, and by inserting after subparagraph (B) the

following new subparagraph:

‘‘(C) provides for funding of insurance on retired lives

as described in section 807(c)(6), and’’.

(2) Paragraph (3) of section 817(d) is amended by striking

‘‘or’’ at the end of subparagraph (A), by striking the period

at the end of subparagraph (B) and inserting ‘‘, or’’, and by

inserting after subparagraph (B) the following new subparagraph:

‘‘(C) in the case of funds held under a contract described

in paragraph (2)(C), the amounts paid in, or the amounts

paid out, reflect the investment return and the market

value of the segregated asset account.’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1995.

SEC. 1612. TREATMENT OF MODIFIED GUARANTEED CONTRACTS.

(a) GENERAL RULE.—Subpart E of part I of subchapter L of

chapter 1 (relating to definitions and special rules) is amended

by inserting after section 817 the following new section:

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

‘‘(a) COMPUTATION OF RESERVES.—In the case of a modified

guaranteed contract, clause (ii) of section 807(e)(1)(A) shall not

apply.

‘‘(b) SEGREGATED ASSETS UNDER MODIFIED GUARANTEED CONTRACTS MARKED TO MARKET.—

‘‘(1) IN GENERAL.—In the case of any life insurance company, for purposes of this subtitle—

‘‘(A) Any gain or loss with respect to a segregated

asset shall be treated as ordinary income or loss, as the

case may be.

‘‘(B) If any segregated asset is held by such company

as of the close of any taxable year—

‘‘(i) such company shall recognize gain or loss as

if such asset were sold for its fair market value on

the last business day of such taxable year, and

‘‘(ii) any such gain or loss shall be taken into

account for such taxable year.

Proper adjustment shall be made in the amount of any

gain or loss subsequently realized for gain or loss taken

into account under the preceding sentence. The Secretary

may provide by regulations for the application of this

subparagraph at times other than the times provided in

this subparagraph.

‘‘(2) SEGREGATED ASSET.—For purposes of paragraph (1),

the term ‘segregated asset’ means any asset held as part of

a segregated account referred to in subsection (d)(1) under

a modified guaranteed contract.

‘‘(c) SPECIAL RULE IN COMPUTING LIFE INSURANCE RESERVES.—

For purposes of applying section 816(b)(1)(A) to any modified

guaranteed contract, an assumed rate of interest shall include a

rate of interest determined, from time to time, with reference to

a market rate of interest.

‘‘(d) MODIFIED GUARANTEED CONTRACT DEFINED.—For purposes

of this section, the term ‘modified guaranteed contract’ means a

contract not described in section 817—

26 USC 817 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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.—

26 USC 817A

note.
110 STAT. 1848 PUBLIC LAW 104–188—AUG. 20, 1996

(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:
PUBLIC LAW 104–188—AUG. 20, 1996 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 construction,

‘‘(B) in the case of contribution of property other than

water or sewerage disposal facilities, such amount meets

the requirements of the expenditure rule of paragraph (2),

and

‘‘(C) such amount (or any property acquired or constructed with such amount) is not included in the taxpayer’s

rate base for ratemaking purposes.

‘‘(2) EXPENDITURE RULE.—An amount meets the requirements of this paragraph if—

‘‘(A) an amount equal to such amount is expended

for the acquisition or construction of tangible property

described in section 1231(b)—

‘‘(i) which is the property for which the contribution was made or is of the same type as such property,

and

‘‘(ii) which is used predominantly in the trade or

business of furnishing water or sewerage disposal

services,

‘‘(B) the expenditure referred to in subparagraph (A)

occurs before the end of the second taxable year after

the year in which such amount was received, and

‘‘(C) accurate records are kept of the amounts contributed and expenditures made, the expenditures to which

contributions are allocated, and the year in which the

contributions and expenditures are received and made.

‘‘(3) DEFINITIONS.—For purposes of this subsection—

‘‘(A) CONTRIBUTION IN AID OF CONSTRUCTION.—The

term ‘contribution in aid of construction’ shall be defined

by regulations prescribed by the Secretary, except that

such term shall not include amounts paid as service charges

for starting or stopping services.

‘‘(B) PREDOMINANTLY.—The term ‘predominantly’

means 80 percent or more.

‘‘(C) REGULATED PUBLIC UTILITY.—The term ‘regulated

public utility’ has the meaning given such term by section

7701(a)(33), except that such term shall not include any

utility which is not required to provide water or sewerage

disposal services to members of the general public in its

service area.

‘‘(4) DISALLOWANCE OF DEDUCTIONS AND CREDITS; ADJUSTED

BASIS.—Notwithstanding any other provision of this subtitle,

no deduction or credit shall be allowed for, or by reason of,

any expenditure which constitutes a contribution in aid of

construction to which this subsection applies. The adjusted

basis of any property acquired with contributions in aid of

construction to which this subsection applies shall be zero.
110 STAT. 1850 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(d) STATUTE OF LIMITATIONS.—If the taxpayer for any taxable

year treats an amount as a contribution to the capital of the

taxpayer described in subsection (c), then—

‘‘(1) the statutory period for the assessment of any deficiency attributable to any part of such amount shall not expire

before the expiration of 3 years from the date the Secretary

is notified by the taxpayer (in such manner as the Secretary

may prescribe) of—

‘‘(A) the amount of the expenditure referred to in

subparagraph (A) of subsection (c)(2),

‘‘(B) the taxpayer’s intention not to make the expenditures referred to in such subparagraph, or

‘‘(C) a failure to make such expenditure within the

period described in subparagraph (B) of subsection (c)(2),

and

‘‘(2) such deficiency may be assessed before the expiration

of such 3-year period notwithstanding the provisions of any

other law or rule of law which would otherwise prevent such

assessment.’’.

(2) CONFORMING AMENDMENT.—Section 118(b) is amended

by inserting ‘‘except as provided in subsection (c),’’ before ‘‘the

term’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to amounts received after June 12, 1996.

(b) RECOVERY METHOD AND PERIOD FOR WATER UTILITY

PROPERTY.—

(1) REQUIREMENT TO USE STRAIGHT LINE METHOD.—Section

168(b)(3) is amended by adding at the end the following new

subparagraph:

‘‘(F) Water utility property described in subsection

(e)(5).’’.

(2) 25-YEAR RECOVERY PERIOD.—The table contained in section 168(c)(1) is amended by inserting the following item after

the item relating to 20-year property:

‘‘Water utility property .................................................................... 25 years’’.

(3) WATER UTILITY PROPERTY.— (A) IN GENERAL.—Section 168(e) is amended by adding

at the end the following new paragraph:

‘‘(5) WATER UTILITY PROPERTY.—The term ‘water utility

property’ means property—

‘‘(A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property,

and

‘‘(B) any municipal sewer.’’.

(B) CONFORMING AMENDMENTS.—Section 168 is

amended—

(i) by striking subparagraph (F) of subsection

(e)(3), and

(ii) by striking the item relating to subparagraph

(F) in the table in subsection (g)(3).

(4) ALTERNATIVE SYSTEM.—Clause (iv) of section

168(g)(2)(C) is amended by inserting ‘‘or water utility property’’

after ‘‘tunnel bore’’.

(5) EFFECTIVE DATE.—The amendments made by this subsection shall apply to property placed in service after June

12, 1996, other than property placed in service pursuant to

26 USC 168 note.

26 USC 118 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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.
110 STAT. 1852 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—The amendment made by this section

shall take effect on the date of the enactment of this Act.

SEC. 1615. CERTAIN TAX BENEFITS DENIED TO INDIVIDUALS FAILING

TO PROVIDE TAXPAYER IDENTIFICATION NUMBERS.

(a) PERSONAL EXEMPTION.—

(1) IN GENERAL.—Section 151 (relating to allowance of

deductions for personal exemptions) is amended by adding at

the end the following new subsection:

‘‘(e) IDENTIFYING INFORMATION REQUIRED.—No exemption shall

be allowed under this section with respect to any individual unless

the TIN of such individual is included on the return claiming

the exemption.’’.

(2) CONFORMING AMENDMENTS.—

(A) Subsection (e) of section 6109 is repealed.

(B) Section 6724(d)(3) is amended by adding ‘‘and’’

at the end of subparagraph (C), by striking subparagraph

(D), and by redesignating subparagraph (E) as subparagraph (D).

(b) DEPENDENT CARE CREDIT.—Subsection (e) of section 21

(relating to expenses for household and dependent care services

necessary for gainful employment) is amended by adding at the

end the following new paragraph:

‘‘(10) IDENTIFYING INFORMATION REQUIRED WITH RESPECT

TO QUALIFYING INDIVIDUALS.—No credit shall be allowed under

this section with respect to any qualifying individual unless

the TIN of such individual is included on the return claiming

the credit.’’.

(c) EXTENSION OF PROCEDURES APPLICABLE TO MATHEMATICAL

OR CLERICAL ERRORS.—Section 6213(g)(2) (relating to the definition

of mathematical or clerical errors), as amended by the Personal

Responsibility and Work Opportunity Reconciliation Act of 1996,

is amended by striking ‘‘and’’ at the end of subparagraph (F),

by striking the period at the end of subparagraph (G) and inserting

‘‘, and’’, and by inserting at the end the following new subparagraph:

‘‘(H) an omission of a correct TIN required under section 21 (relating to expenses for household and dependent

care services necessary for gainful employment) or section

151 (relating to allowance of deductions for personal exemptions).’’.

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section

shall apply with respect to returns the due date for which

(without regard to extensions) is on or after the 30th day

after the date of the enactment of this Act.

(2) SPECIAL RULE FOR 1995 AND 1996.—In the case of returns

for taxable years beginning in 1995 or 1996, a taxpayer shall

not be required by the amendments made by this section to

provide a taxpayer identification number for a child who is

born after October 31, 1995, in the case of a taxable year

26 USC 21 note.

26 USC 150 note.
110 STAT. 1854 PUBLIC LAW 104–188—AUG. 20, 1996

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
PUBLIC LAW 104–188—AUG. 20, 1996 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.
110 STAT. 1856 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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’’.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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.

26 USC 593 note.
110 STAT. 1858 PUBLIC LAW 104–188—AUG. 20, 1996

(2) SUBSECTION (b)(7)(B).—The amendments made by subsection (b)(7)(B) shall not apply to any distribution with respect

to preferred stock if—

(A) such stock is outstanding at all times after October

31, 1995, and before the distribution, and

(B) such distribution is made before the date which

is 1 year after the date of the enactment of this Act (or,

in the case of stock which may be redeemed, if later,

the date which is 30 days after the earliest date that

such stock may be redeemed).

(3) SUBSECTION (b)(8).—The amendment made by subsection (b)(8) shall apply to property acquired in taxable years

beginning after December 31, 1995.

(4) SUBSECTION (b)(10).—The amendments made by subsection (b)(10) shall not apply to any residual interest held

by a taxpayer if such interest has been held by such taxpayer

at all times after October 31, 1995.

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

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

energy conservation measure) is amended by striking ‘‘energy

demand—’’ and all that follows and inserting ‘‘energy demand with

respect to a dwelling unit.’’.

(b) CONFORMING AMENDMENTS.—

(1) Subsection (a) of section 136 is amended to read as

follows:

‘‘(a) EXCLUSION.—Gross income shall not include the value of

any subsidy provided (directly or indirectly) by a public utility

to a customer for the purchase or installation of any energy conservation measure.’’.

(2) Paragraph (2) of section 136(c) is amended—

(A) by striking subparagraph (A) and by redesignating

subparagraphs (B) and (C) as subparagraphs (A) and (B),

respectively, and

(B) by striking ‘‘AND SPECIAL RULES’’ in the paragraph

heading.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to amounts received after December 31, 1996, unless

received pursuant to a written binding contract in effect on September 13, 1995, and at all times thereafter.

PART II—FINANCIAL ASSET SECURITIZATION

INVESTMENTS

SEC. 1621. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS.

(a) IN GENERAL.—Subchapter M of chapter 1 is amended by

adding at the end the following new part:

‘‘PART V—FINANCIAL ASSET SECURITIZATION

INVESTMENT TRUSTS

‘‘Sec. 860H. Taxation of a FASIT; other general rules.

‘‘Sec. 860I. Gain recognition on contributions to a FASIT and in other

cases. ‘‘Sec. 860J. Non-FASIT losses not to offset certain FASIT inclusions.

‘‘Sec. 860K. Treatment of transfers of high-yield interests to disqualified

holders.

26 USC 136 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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—
110 STAT. 1860 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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
PUBLIC LAW 104–188—AUG. 20, 1996 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 highyield 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—
110 STAT. 1862 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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 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, substanRegulations.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1864 PUBLIC LAW 104–188—AUG. 20, 1996

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—
PUBLIC LAW 104–188—AUG. 20, 1996 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.
110 STAT. 1866 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(B) SUBSTITUTION OF DEBT INSTRUMENTS; REDUCTION

OF OVER-COLLATERALIZATION.—Paragraph (2)(B) shall not

apply to—

‘‘(i) the substitution of a debt instrument described

in subsection (c)(1)(B) for another debt instrument

which is a permitted asset, or

‘‘(ii) the distribution of a debt instrument contributed by the holder of the ownership interest to

such holder in order to reduce over-collateralization

of the FASIT,

but only if a principal purpose of acquiring the debt

instrument which is disposed of was not the recognition

of gain (or the reduction of a loss) as a result of an increase

in the market value of the debt instrument after its acquisition by the FASIT.

‘‘(C) LIQUIDATION OF CLASS OF REGULAR INTERESTS.—

Paragraph (2)(B) shall not apply to the complete liquidation

of any class of regular interests.

‘‘(4) NET INCOME.—For purposes of this subsection, net

income shall be determined in accordance with section

860F(a)(3).

‘‘(f) COORDINATION WITH OTHER PROVISIONS.—

‘‘(1) WASH SALES RULES.—Rules similar to the rules of

section 860F(d) shall apply to the ownership interest in a

FASIT.

‘‘(2) SECTION 475.—Except as provided by the Secretary

by regulations, if any security which is sold or contributed

to a FASIT by the holder of the ownership interest in such

FASIT was required to be marked-to-market under section

475 by such holder, section 475 shall continue to apply to

such security; except that in applying section 475 while such

security is held by the FASIT, the fair market value of such

security for purposes of section 475 shall not be less than

its value under section 860I(d).

‘‘(g) RELATED PERSON.—For purposes of this part, a person

(hereinafter in this subsection referred to as the ‘related person’)

is related to any person if—

‘‘(1) the related person bears a relationship to such person

specified in section 267(b) or section 707(b)(1), or

‘‘(2) the related person and such person are engaged in

trades or businesses under common control (within the meaning

of subsections (a) and (b) of section 52).

For purposes of paragraph (1), in applying section 267(b) or

707(b)(1), ‘20 percent’ shall be substituted for ‘50 percent’.

‘‘(h) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes

of this part, including regulations to prevent the abuse of the

purposes of this part through transactions which are not primarily

related to securitization of debt instruments by a FASIT.’’.

(b) TECHNICAL AMENDMENTS.—

(1) Paragraph (2) of section 26(b) is amended by striking

‘‘and’’ at the end of subparagraph (M), by striking the period

at the end of subparagraph (N) and inserting ‘‘, and’’, and

by adding at the end the following new subparagraph:

‘‘(O) section 860K (relating to treatment of transfers

of high-yield interests to disqualified holders).’’.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—The amendments made by this section

shall take effect on September 1, 1997.

(e) TREATMENT OF EXISTING SECURITIZATION ENTITIES.— (1) IN GENERAL.—In the case of the holder of the ownership

interest in a pre-effective date FASIT—

(A) gain shall not be recognized under section

860L(d)(2) of the Internal Revenue Code of 1986 on property deemed contributed to the FASIT, and

(B) gain shall not be recognized under section 860I

of such Code on property contributed to such FASIT,

until such property (or portion thereof) ceases to be properly

allocable to a pre-FASIT interest.

(2) ALLOCATION OF PROPERTY TO PRE-FASIT INTEREST.—For

purposes of paragraph (1), property shall be allocated to a

pre-FASIT interest in such manner as the Secretary of the

Treasury may prescribe, except that all property in a FASIT

26 USC 860I

note.

26 USC 26 note.
110 STAT. 1868 PUBLIC LAW 104–188—AUG. 20, 1996

shall be treated as properly allocable to pre-FASIT interests

if the fair market value of all such property does not exceed

107 percent of the aggregate principal amount of all outstanding

pre-FASIT interests.

(3) DEFINITIONS.—For purposes of this subsection—

(A) PRE-EFFECTIVE DATE FASIT.—The term ‘‘pre-effective date FASIT’’ means any FASIT if the entity (with

respect to which the election under section 860L(a)(3) of

such Code was made) is in existence on August 31, 1997.

(B) PRE-FASIT INTEREST.—The term ‘‘pre-FASIT

interest’’ means any interest in the entity referred to in

subparagraph (A) which was issued before the startup day

(other than any interest held by the holder of the ownership

interest in the FASIT).

Subtitle G—Technical Corrections

SEC. 1701. COORDINATION WITH OTHER SUBTITLES.

For purposes of applying the amendments made by any subtitle

of this title other than this subtitle, the provisions of this subtitle

shall be treated as having been enacted immediately before the

provisions of such other subtitles.

SEC. 1702. AMENDMENTS RELATED TO REVENUE RECONCILIATION

ACT OF 1990.

(a) AMENDMENTS RELATED TO SUBTITLE A.—

(1) Subparagraph (B) of section 59(j)(3) is amended by

striking ‘‘section 1(i)(3)(B)’’ and inserting ‘‘section 1(g)(3)(B)’’.

(2) Clause (i) of section 151(d)(3)(C) is amended by striking

‘‘joint of a return’’ and inserting ‘‘joint return’’.

(b) AMENDMENTS RELATED TO SUBTITLE B.—

(1) Paragraph (1) of section 11212(e) of the Revenue

Reconciliation Act of 1990 is amended by striking ‘‘Paragraph

(1) of section 6724(d)’’ and inserting ‘‘Subparagraph (B) of section 6724(d)(1)’’.

(2)(A) Subparagraph (B) of section 4093(c)(2), as in effect

before the amendments made by the Revenue Reconciliation

Act of 1993, is amended by inserting before the period ‘‘unless

such fuel is sold for exclusive use by a State or any political

subdivision thereof’’.

(B) Paragraph (4) of section 6427(l), as in effect before

the amendments made by the Revenue Reconciliation Act of

1993, is amended by inserting before the period ‘‘unless such

fuel was used by a State or any political subdivision thereof’’.

(3) Paragraph (1) of section 6416(b) is amended by striking

‘‘chapter 32 or by section 4051’’ and inserting ‘‘chapter 31

or 32’’.

(4) Section 7012 is amended—

(A) by striking ‘‘production or importation of gasoline’’

in paragraph (3) and inserting ‘‘taxes on gasoline and diesel

fuel’’, and

(B) by striking paragraph (4) and redesignating paragraphs (5) and (6) as paragraphs (4) and (5), respectively.

(5) Subsection (c) of section 5041 is amended by striking

paragraph (6) and by inserting the following new paragraphs:

‘‘(6) CREDIT FOR TRANSFEREE IN BOND.—If—

26 USC 6724.

26 USC 1 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 inserting ‘‘, 22,’’ after ‘‘chapters 21’’.

(4) The earnings and profits of any insurance company

to which section 11305(c)(3) of the Revenue Reconciliation Act

of 1990 applies shall be determined without regard to any

deduction allowed under such section; except that, for purposes of applying sections 56 and 902, and subpart F of part

III of subchapter N of chapter 1 of the Internal Revenue Code

of 1986, such deduction shall be taken into account.

(5) Subparagraph (D) of section 6038A(e)(4) is amended—

(A) by striking ‘‘any transaction to which the summons

relates’’ and inserting ‘‘any affected taxable year’’, and

(B) by adding at the end thereof the following new

sentence: ‘‘For purposes of this subparagraph, the term

‘affected taxable year’ means any taxable year if the determination of the amount of tax imposed for such taxable

26 USC 832 note.
110 STAT. 1870 PUBLIC LAW 104–188—AUG. 20, 1996

year is affected by the treatment of the transaction to

which the summons relates.’’.

(6) Subparagraph (A) of section 6621(c)(2) is amended by

adding at the end thereof the following new flush sentence:

‘‘The preceding sentence shall be applied without regard

to any such letter or notice which is withdrawn by the

Secretary.’’.

(7) Clause (i) of section 6621(c)(2)(B) is amended by striking

‘‘this subtitle’’ and inserting ‘‘this title’’.

(d) AMENDMENTS RELATED TO SUBTITLE D.—

(1) Notwithstanding section 11402(c) of the Revenue

Reconciliation Act of 1990, the amendment made by section

11402(b)(1) of such Act shall apply to taxable years ending

after December 31, 1989.

(2) Clause (ii) of section 143(m)(4)(C) is amended—

(A) by striking ‘‘any month of the 10-year period’’ and

inserting ‘‘any year of the 4-year period’’,

(B) by striking ‘‘succeeding months’’ and inserting

‘‘succeeding years’’, and

(C) by striking ‘‘over the remainder of such period

(or, if lesser, 5 years)’’ and inserting ‘‘to zero over the

succeeding 5 years’’.

(e) AMENDMENTS RELATED TO SUBTITLE E.—

(1)(A) Clause (ii) of section 56(d)(1)(B) is amended to read

as follows:

‘‘(ii) appropriate adjustments in the application of

section 172(b)(2) shall be made to take into account

the limitation of subparagraph (A).’’.

(B) For purposes of applying sections 56(g)(1) and 56(g)(3)

of the Internal Revenue Code of 1986 with respect to taxable

years beginning in 1991 and 1992, the reference in such sections

to the alternative tax net operating loss deduction shall be

treated as including a reference to the deduction under section

56(h) of such Code as in effect before the amendments made

by section 1915 of the Energy Policy Act of 1992.

(2) Clause (i) of section 613A(c)(3)(A) is amended by striking

‘‘the table contained in’’.

(3) Section 6501 is amended—

(A) by striking subsection (m) (relating to deficiency

attributable to election under section 44B) and by

redesignating subsections (n) and (o) as subsections (m)

and (n), respectively, and

(B) by striking ‘‘section 40(f) or 51(j)’’ in subsection

(m) (as redesignated by subparagraph (A)) and inserting

‘‘section 40(f), 43, or 51(j)’’.

(4) Subparagraph (C) of section 38(c)(2) (as in effect on

the day before the date of the enactment of the Revenue Reconciliation Act of 1990) is amended by inserting before the

period at the end of the first sentence the following: ‘‘and

without regard to the deduction under section 56(h)’’.

(5) The amendment made by section 1913(b)(2)(C)(i) of

the Energy Policy Act of 1992 shall apply to taxable years

beginning after December 31, 1990.

(f) AMENDMENTS RELATED TO SUBTITLE F.—

(1)(A) Section 2701(a)(3) is amended by adding at the end

thereof the following new subparagraph:

26 USC 53 note.

26 USC 56 note.

26 USC 41 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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’’.

26 USC 2701

note.
110 STAT. 1872 PUBLIC LAW 104–188—AUG. 20, 1996

(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:
PUBLIC LAW 104–188—AUG. 20, 1996 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 shareholder, and

‘‘(B) then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation

(whichever is appropriate).

The amount of gain recognized by such 10-percent corporate

shareholder under the preceding sentence shall not exceed the

amount treated as a dividend under this section.’’.

(2) Section 897 is amended by striking subsection (f).

(3) Paragraph (13) of section 4975(d) is amended by striking

‘‘section 408(b)’’ and inserting ‘‘section 408(b)(12)’’.

(4) Clause (iii) of section 56(g)(4)(D) is amended by

inserting ‘‘, but only with respect to taxable years beginning

after December 31, 1989’’ before the period at the end thereof.

(5)(A) Paragraph (11) of section 11701(a) of the Revenue

Reconciliation Act of 1990 (and the amendment made by such

paragraph) are hereby repealed, and section 7108(r)(2) of the

Revenue Reconciliation Act of 1989 shall be applied as if such

paragraph (and amendment) had never been enacted.

(B) Subparagraph (A) shall not apply to any building if

the owner of such building establishes to the satisfaction of

the Secretary of the Treasury or his delegate that such owner

reasonably relied on the amendment made by such paragraph

(11).

(h) AMENDMENTS RELATED TO SUBTITLE H.—

(1)(A) Clause (vi) of section 168(e)(3)(B) is amended by

striking ‘‘or’’ at the end of subclause (I), by striking the period

at the end of subclause (II) and inserting ‘‘, or’’, and by adding

at the end thereof the following new subclause:

‘‘(III) is described in section 48(l)(3)(A)(ix) (as

in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).’’.

(B) Subparagraph (B) of section 168(e)(3) (relating to

5-year property) is amended by adding at the end the following

flush sentence:

‘‘Nothing in any provision of law shall be construed to

treat property as not being described in clause (vi)(I) (or

the corresponding provisions of prior law) by reason of

being public utility property (within the meaning of section

48(a)(3)).’’.

(C) Subparagraph (K) of section 168(g)(4) is amended by

striking ‘‘section 48(a)(3)(A)(iii)’’ and inserting ‘‘section

48(l)(3)(A)(ix) (as in effect on the day before the date of the

enactment of the Revenue Reconciliation Act of 1990)’’.

(2) Clause (ii) of section 172(b)(1)(E) is amended by striking

‘‘subsection (m)’’ and inserting ‘‘subsection (h)’’.

(3) Sections 805(a)(4)(E), 832(b)(5)(C)(ii)(II), and

832(b)(5)(D)(ii)(II) are each amended by striking ‘‘243(b)(5)’’ and

inserting ‘‘243(b)(2)’’.

(4) Subparagraph (A) of section 243(b)(3) is amended by

inserting ‘‘of’’ after ‘‘In the case’’.

26 USC 42 note.
110 STAT. 1874 PUBLIC LAW 104–188—AUG. 20, 1996

(5) The subsection heading for subsection (a) of section

280F is amended by striking ‘‘INVESTMENT TAX CREDIT AND’’.

(6) Clause (i) of section 1504(c)(2)(B) is amended by inserting ‘‘section’’ before ‘‘243(b)(2)’’.

(7) Paragraph (3) of section 341(f) is amended by striking

‘‘351, 361, 371(a), or 374(a)’’ and inserting ‘‘351, or 361’’.

(8) Paragraph (2) of section 243(b) is amended to read

as follows:

‘‘(2) AFFILIATED GROUP.—For purposes of this subsection:

‘‘(A) IN GENERAL.—The term ‘affiliated group’ has the

meaning given such term by section 1504(a), except that

for such purposes sections 1504(b)(2), 1504(b)(4), and

1504(c) shall not apply.

‘‘(B) GROUP MUST BE CONSISTENT IN FOREIGN TAX

TREATMENT.—The requirements of paragraph (1)(A) shall

not be treated as being met with respect to any dividend

received by a corporation if, for any taxable year which

includes the day on which such dividend is received—

‘‘(i) 1 or more members of the affiliated group

referred to in paragraph (1)(A) choose to any extent

to take the benefits of section 901, and

‘‘(ii) 1 or more other members of such group claim

to any extent a deduction for taxes otherwise creditable

under section 901.’’.

(9) The amendment made by section 11813(b)(17) of the

Revenue Reconciliation Act of 1990 shall be applied as if the

material stricken by such amendment included the closing

parenthesis after ‘‘section 48(a)(5)’’.

(10) Paragraph (1) of section 179(d) is amended by striking

‘‘in a trade or business’’ and inserting ‘‘a trade or business’’.

(11) Subparagraph (E) of section 50(a)(2) is amended by

striking ‘‘section 48(a)(5)(A)’’ and inserting ‘‘section 48(a)(5)’’.

(12) The amendment made by section 11801(c)(9)(G)(ii) of

the Revenue Reconciliation Act of 1990 shall be applied as

if it struck ‘‘Section 422A(c)(2)’’ and inserted ‘‘Section 422(c)(2)’’.

(13) Subparagraph (B) of section 424(c)(3) is amended by

striking ‘‘a qualified stock option, an incentive stock option,

an option granted under an employee stock purchase plan,

or a restricted stock option’’ and inserting ‘‘an incentive stock

option or an option granted under an employee stock purchase

plan’’.

(14) Subparagraph (E) of section 1367(a)(2) is amended

by striking ‘‘section 613A(c)(13)(B)’’ and inserting ‘‘section

613A(c)(11)(B)’’.

(15) Subparagraph (B) of section 460(e)(6) is amended by

striking ‘‘section 167(k)’’ and inserting ‘‘section 168(e)(2)(A)(ii)’’.

(16) Subparagraph (C) of section 172(h)(4) is amended by

striking ‘‘subsection (b)(1)(M)’’ and inserting ‘‘subsection

(b)(1)(E)’’.

(17) Section 6503 is amended—

(A) by redesignating the subsection relating to extension in case of certain summonses as subsection (j), and

(B) by redesignating the subsection relating to cross

references as subsection (k).

(18) Paragraph (4) of section 1250(e) is hereby repealed.

(19) Paragraph (1) of section 179(d) is amended by adding

at the end the following new sentence: ‘‘Such term shall not

26 USC 56.

26 USC 861.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1875

include any property described in section 50(b) and shall not

include air conditioning or heating units.’’.

‘‘(i) EFFECTIVE DATE.—Except as otherwise expressly provided,

any amendment made by this section shall take effect as if included

in the provision of the Revenue Reconciliation Act of 1990 to which

such amendment relates.’’.

SEC. 1703. AMENDMENTS RELATED TO REVENUE RECONCILIATION

ACT OF 1993.

(a) AMENDMENT RELATED TO SECTION 13114.—Paragraph (2)

of section 1044(c) is amended to read as follows:

‘‘(2) PURCHASE.—The taxpayer shall be considered to have

purchased any property if, but for subsection (d), the unadjusted

basis of such property would be its cost within the meaning

of section 1012.’’.

(b) AMENDMENTS RELATED TO SECTION 13142.—

(1) Subparagraph (B) of section 13142(b)(6) of the Revenue

Reconciliation Act of 1993 is amended to read as follows:

‘‘(B) FULL-TIME STUDENTS, WAIVER AUTHORITY, AND

PROHIBITED DISCRIMINATION.—The amendments made by

paragraphs (2), (3), and (4) shall take effect on the date

of the enactment of this Act.’’.

(2) Subparagraph (C) of section 13142(b)(6) of such Act

is amended by striking ‘‘paragraph (2)’’ and inserting ‘‘paragraph (5)’’.

(c) AMENDMENT RELATED TO SECTION 13161.—

(1) IN GENERAL.—Subsection (e) of section 4001 (relating

to inflation adjustment) is amended to read as follows:

‘‘(e) INFLATION ADJUSTMENT.—

‘‘(1) IN GENERAL.—The $30,000 amount in subsection (a)

and section 4003(a) shall be increased by an amount equal

to—

‘‘(A) $30,000, multiplied by

‘‘(B) the cost-of-living adjustment under section 1(f)(3)

for the calendar year in which the vehicle is sold, determined by substituting ‘calendar year 1990’ for ‘calendar

year 1992’ in subparagraph (B) thereof.

‘‘(2) ROUNDING.—If any amount as adjusted under paragraph (1) is not a multiple of $2,000, such amount shall be

rounded to the next lowest multiple of $2,000.’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect on the date of the enactment of this Act.

(d) AMENDMENT RELATED TO SECTION 13201.—Clause (ii) of

section 135(b)(2)(B) is amended by inserting before the period at

the end thereof the following: ‘‘, determined by substituting ‘calendar year 1989’ for ‘calendar year 1992’ in subparagraph (B)

thereof’’.

(e) AMENDMENTS RELATED TO SECTION 13203.—Subsection (a)

of section 59 is amended—

(1) by striking ‘‘the amount determined under section

55(b)(1)(A)’’ in paragraph (1)(A) and (2)(A)(i) and inserting ‘‘the

pre-credit tentative minimum tax’’,

(2) by striking ‘‘specified in section 55(b)(1)(A)’’ in paragraph (1)(C) and inserting ‘‘specified in subparagraph (A)(i)

or (B)(i) of section 55(b)(1) (whichever applies)’’,

26 USC 59.

26 USC 135.

26 USC 4001

note.

26 USC 4001.

26 USC 42 note.

26 USC 1044.

26 USC 38 note.
110 STAT. 1876 PUBLIC LAW 104–188—AUG. 20, 1996

(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:
PUBLIC LAW 104–188—AUG. 20, 1996 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 Act of 1993

is amended by striking ‘‘by the taxpayer’’ and inserting ‘‘by the

taxpayer or a related person’’.

(m) AMENDMENT RELATED TO SECTION 13301.—Subparagraph

(B) of section 1397B(d)(5) is amended by striking ‘‘preceding’’.

(n) CLERICAL AMENDMENTS.—

(1) Subsection (d) of section 39 is amended—

(A) by striking ‘‘45’’ in the heading of paragraph (5)

and inserting ‘‘45A’’, and

(B) by striking ‘‘45’’ in the heading of paragraph (6)

and inserting ‘‘45B’’.

(2) Subparagraph (A) of section 108(d)(9) is amended by

striking ‘‘paragraph (3)(B)’’ and inserting ‘‘paragraph (3)(C)’’.

(3) Subparagraph (C) of section 143(d)(2) is amended by

striking the period at the end thereof and inserting a comma.

(4) Clause (ii) of section 163(j)(6)(E) is amended by striking

‘‘which is a’’ and inserting ‘‘which is’’.

(5) Subparagraph (A) of section 1017(b)(4) is amended by

striking ‘‘subsection (b)(2)(D)’’ and inserting ‘‘subsection

(b)(2)(E)’’.

(6) So much of section 1245(a)(3) as precedes subparagraph

(A) thereof is amended to read as follows:

‘‘(3) SECTION 1245 PROPERTY.—For purposes of this section,

the term ‘section 1245 property’ means any property which

is or has been property of a character subject to the allowance

for depreciation provided in section 167 and is either—’’.

(7) Paragraph (2) of section 1394(e) is amended—

(A) by striking ‘‘(i)’’ and inserting ‘‘(A)’’, and

(B) by striking ‘‘(ii)’’ and inserting ‘‘(B)’’.

(8) Subsection (m) of section 6501 (as redesignated by section 1602) is amended by striking ‘‘or 51(j)’’ and inserting

‘‘45B, or 51(j)’’.

(9)(A) The section 6714 added by section 13242(b)(1) of

the Revenue Reconciliation Act of 1993 is hereby redesignated

as section 6715.

(B) The table of sections for part I of subchapter B of

chapter 68 is amended by striking ‘‘6714’’ in the item added

by such section 13242(b)(2) of such Act and inserting ‘‘6715’’.

(10) Paragraph (2) of section 9502(b) is amended by inserting ‘‘and before’’ after ‘‘1982,’’.

(11) Subsection (a)(3) of section 13206 of the Revenue

Reconciliation Act of 1993 is amended by striking ‘‘this section’’

and inserting ‘‘this subsection’’.

(12) Paragraph (1) of section 13215(c) of the Revenue

Reconciliation Act of 1993 is amended by striking ‘‘Public Law

92–21’’ and inserting ‘‘Public Law 98–21’’.

(13) Paragraph (2) of section 13311(e) of the Revenue

Reconciliation Act of 1993 is amended by striking ‘‘section

1393(a)(3)’’ and inserting ‘‘section 1393(a)(2)’’.

26 USC 38 note.

42 USC 401 note.

26 USC 1258

note.

26 USC 197 note.
110 STAT. 1878 PUBLIC LAW 104–188—AUG. 20, 1996

(14) Subparagraph (B) of section 117(d)(2) is amended by

striking ‘‘section 132(f)’’ and inserting ‘‘section 132(h)’’.

(o) EFFECTIVE DATE.—Any amendment made by this section

shall take effect as if included in the provision of the Revenue

Reconciliation Act of 1993 to which such amendment relates.

SEC. 1704. MISCELLANEOUS PROVISIONS.

(a) APPLICATION OF AMENDMENTS MADE BY TITLE XII OF OMNIBUS BUDGET RECONCILIATION ACT OF 1990.—Except as otherwise

expressly provided, whenever in title XII of the Omnibus Budget

Reconciliation Act of 1990 an amendment or repeal is expressed

in terms of an amendment to, or repeal of, a section or other

provision, the reference shall be considered to be made to a section

or other provision of the Internal Revenue Code of 1986.

(b) TREATMENT OF CERTAIN AMOUNTS UNDER HEDGE BOND

RULES.—

(1) IN GENERAL.—Clause (iii) of section 149(g)(3)(B) is

amended to read as follows:

‘‘(iii) AMOUNTS HELD PENDING REINVESTMENT OR

REDEMPTION.—Amounts held for not more than 30 days

pending reinvestment or bond redemption shall be

treated as invested in bonds described in clause (i).’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect as if included in the amendments made

by section 7651 of the Omnibus Budget Reconciliation Act of

1989.

(c) TREATMENT OF CERTAIN DISTRIBUTIONS UNDER SECTION

1445.—

(1) IN GENERAL.—Paragraph (3) of section 1445(e) is

amended by adding at the end thereof the following new sentence: ‘‘Rules similar to the rules of the preceding provisions

of this paragraph shall apply in the case of any distribution

to which section 301 applies and which is not made out of

the earnings and profits of such a domestic corporation.’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall apply to distributions after the date of the enactment

of this Act.

(d) TREATMENT OF CERTAIN CREDITS UNDER SECTION 469.—

(1) IN GENERAL.—Subparagraph (B) of section 469(c)(3) is

amended by adding at the end thereof the following new sentence: ‘‘If the preceding sentence applies to the net income

from any property for any taxable year, any credits allowable

under subpart B (other than section 27(a)) or D of part IV

of subchapter A for such taxable year which are attributable

to such property shall be treated as credits not from a passive

activity to the extent the amount of such credits does not

exceed the regular tax liability of the taxpayer for the taxable

year which is allocable to such net income.’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall apply to taxable years beginning after December 31,

1986.

(e) TREATMENT OF DISPOSITIONS UNDER PASSIVE LOSS RULES.—

(1) IN GENERAL.—Subparagraph (A) of section 469(g)(1)

is amended to read as follows:

‘‘(A) IN GENERAL.—If all gain or loss realized on such

disposition is recognized, the excess of—

26 USC 469 note.

26 USC 1445

note.

26 USC 149 note.

26 USC 401, 420,

4980.

26 USC 39 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATE.—The amendment made by paragraph

(1) shall apply to taxable years beginning after December 31,

1986.

(f) MISCELLANEOUS AMENDMENTS TO FOREIGN PROVISIONS.—

(1) COORDINATION OF UNIFIED ESTATE TAX CREDIT WITH

TREATIES.—Subparagraph (A) of section 2102(c)(3) is amended

by adding at the end thereof the following new sentence: ‘‘For

purposes of the preceding sentence, property shall not be

treated as situated in the United States if such property is

exempt from the tax imposed by this subchapter under any

treaty obligation of the United States.’’.

(2) TREATMENT OF CERTAIN INTEREST PAID TO RELATED

PERSON.—

(A) Subparagraph (B) of section 163(j)(1) is amended

by inserting before the period at the end thereof the following: ‘‘(and clause (ii) of paragraph (2)(A) shall not apply

for purposes of applying this subsection to the amount

so treated)’’.

(B) Subsection (j) of section 163 is amended by

redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

‘‘(7) COORDINATION WITH PASSIVE LOSS RULES, ETC.—This

subsection shall be applied before sections 465 and 469.’’.

(C) The amendments made by this paragraph shall

apply as if included in the amendments made by section

7210(a) of the Revenue Reconciliation Act of 1989.

(3) TREATMENT OF INTEREST ALLOCABLE TO EFFECTIVELY

CONNECTED INCOME.—

(A) IN GENERAL.—

(i) Subparagraph (B) of section 884(f)(1) is

amended by striking ‘‘to the extent’’ and all that follows

down through ‘‘subparagraph (A)’’ and inserting ‘‘to

the extent that the allocable interest exceeds the

interest described in subparagraph (A)’’.

(ii) The second sentence of section 884(f)(1) is

amended by striking ‘‘reasonably expected’’ and all that

follows down through the period at the end thereof

and inserting ‘‘reasonably expected to be allocable

interest.’’.

(iii) Paragraph (2) of section 884(f) is amended

to read as follows:

‘‘(2) ALLOCABLE INTEREST.—For purposes of this subsection,

the term ‘allocable interest’ means any interest which is allocable to income which is effectively connected (or treated as

effectively connected) with the conduct of a trade or business

in the United States.’’.

(B) EFFECTIVE DATE.—The amendments made by

subparagraph (A) shall take effect as if included in the

26 USC 884 note.

26 USC 163 note.

26 USC 469 note.
110 STAT. 1880 PUBLIC LAW 104–188—AUG. 20, 1996

amendments made by section 1241(a) of the Tax Reform

Act of 1986.

(4) CLARIFICATION OF SOURCE RULE.—

(A) IN GENERAL.—Paragraph (2) of section 865(b) is

amended by striking ‘‘863(b)’’ and inserting ‘‘863’’.

(B) EFFECTIVE DATE.—The amendment made by

subparagraph (A) shall take effect as if included in the

amendments made by section 1211 of the Tax Reform Act

of 1986.

(5) REPEAL OF OBSOLETE PROVISIONS.—

(A) Paragraph (1) of section 6038(a) is amended by

striking ‘‘, and’’ at the end of subparagraph (E) and inserting a period, and by striking subparagraph (F).

(B) Subsection (b) of section 6038A is amended by

adding ‘‘and’’ at the end of paragraph (2), by striking

‘‘, and’’ at the end of paragraph (3) and inserting a period,

and by striking paragraph (4).

(g) CLARIFICATION OF TREATMENT OF MEDICARE ENTITLEMENT

UNDER COBRA PROVISIONS.—

(1) IN GENERAL.—

(A) Subclause (V) of section 4980B(f)(2)(B)(i) is

amended to read as follows:

‘‘(V) MEDICARE ENTITLEMENT FOLLOWED BY

QUALIFYING EVENT.—In the case of a qualifying

event described in paragraph (3)(B) that occurs

less than 18 months after the date the covered

employee became entitled to benefits under title

XVIII of the Social Security Act, the period of

coverage for qualified beneficiaries other than the

covered employee shall not terminate under this

clause before the close of the 36-month period

beginning on the date the covered employee

became so entitled.’’.

(B) Clause (v) of section 602(2)(A) of the Employee

Retirement Income Security Act of 1974 is amended to

read as follows:

‘‘(v) MEDICARE ENTITLEMENT FOLLOWED BY

QUALIFYING EVENT.—In the case of a qualifying event

described in section 603(2) that occurs less than 18

months after the date the covered employee became

entitled to benefits under title XVIII of the Social

Security Act, the period of coverage for qualified beneficiaries other than the covered employee shall not

terminate under this subparagraph before the close

of the 36-month period beginning on the date the covered employee became so entitled.’’.

(C) Clause (iv) of section 2202(2)(A) of the Public

Health Service Act is amended to read as follows:

‘‘(iv) MEDICARE ENTITLEMENT FOLLOWED BY

QUALIFYING EVENT.—In the case of a qualifying event

described in section 2203(2) that occurs less than 18

months after the date the covered employee became

entitled to benefits under title XVIII of the Social

Security Act, the period of coverage for qualified beneficiaries other than the covered employee shall not

terminate under this subparagraph before the close

42 USC 300bb–2.

29 USC 1162.

26 USC 865 note.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1881

of the 36-month period beginning on the date the covered employee became so entitled.’’.

(2) EFFECTIVE DATE.—The amendments made by this subsection shall apply to plan years beginning after December

31, 1989.

(h) TREATMENT OF CERTAIN REMIC INCLUSIONS.—

(1) IN GENERAL.—Subsection (a) of section 860E is amended

by adding at the end thereof the following new paragraph:

‘‘(6) COORDINATION WITH MINIMUM TAX.—For purposes of

part VI of subchapter A of this chapter—

‘‘(A) the reference in section 55(b)(2) to taxable income

shall be treated as a reference to taxable income determined without regard to this subsection,

‘‘(B) the alternative minimum taxable income of any

holder of a residual interest in a REMIC for any taxable

year shall in no event be less than the excess inclusion

for such taxable year, and

‘‘(C) any excess inclusion shall be disregarded for purposes of computing the alternative tax net operating loss

deduction.

The preceding sentence shall not apply to any organization

to which section 593 applies, except to the extent provided

in regulations prescribed by the Secretary under paragraph

(2).’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect as if included in the amendments made

by section 671 of the Tax Reform Act of 1986 unless the taxpayer elects to apply such amendment only to taxable years

beginning after the date of the enactment of this Act.

(i) EXEMPTION FROM HARBOR MAINTENANCE TAX FOR CERTAIN

PASSENGERS.—

(1) IN GENERAL.—Subparagraph (D) of section 4462(b)(1)

(relating to special rule for Alaska, Hawaii, and possessions)

is amended by inserting before the period the following:

‘‘, or passengers transported on United States flag vessels

operating solely within the State waters of Alaska or Hawaii

and adjacent international waters’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect as if included in the amendments made

by section 1402(a) of the Harbor Maintenance Revenue Act

of 1986.

(j) AMENDMENTS RELATED TO REVENUE PROVISIONS OF ENERGY

POLICY ACT OF 1992.—

(1) Effective with respect to taxable years beginning after

December 31, 1990, subclause (II) of section 53(d)(1)(B)(iv) is

amended to read as follows:

‘‘(II) the adjusted net minimum tax for any

taxable year is the amount of the net minimum

tax for such year increased in the manner provided

in clause (iii).’’.

(2) Subsection (g) of section 179A is redesignated as subsection (f).

(3) Subparagraph (E) of section 6724(d)(3) is amended by

striking ‘‘section 6109(f)’’ and inserting ‘‘section 6109(h)’’.

(4)(A) Subsection (d) of section 30 is amended—

26 USC 4462

note.

26 USC 860E

note.

26 USC 4980B

note.
110 STAT. 1882 PUBLIC LAW 104–188—AUG. 20, 1996

(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 (1) of section 1917(b) of the Energy Policy

Act of 1992 shall be applied as if ‘‘at a rate’’ appeared instead

of ‘‘at the rate’’ in the material proposed to be stricken.

(7) Paragraph (2) of section 1921(b) of the Energy Policy

Act of 1992 shall be applied as if a comma appeared after

‘‘(2)’’ in the material proposed to be stricken.

(8) Subsection (a) of section 1937 of the Energy Policy

Act of 1992 shall be applied as if ‘‘Subpart B’’ appeared instead

of ‘‘Subpart C’’.

(k) TREATMENT OF QUALIFIED FOOTBALL COACHES PLAN.—

(1) IN GENERAL.—For purposes of the Internal Revenue

Code of 1986, a qualified football coaches plan—

(A) shall be treated as a multiemployer collectively

bargained plan, and

(B) notwithstanding section 401(k)(4)(B) of such Code,

may include a qualified cash and deferred arrangement

under section 401(k) of such Code.

(2) QUALIFIED FOOTBALL COACHES PLAN.—For purposes of

this subsection, the term ‘‘qualified football coaches plan’’ means

any defined contribution plan which is established and maintained by an organization—

(A) which is described in section 501(c) of such Code,

(B) the membership of which consists entirely of

individuals who primarily coach football as full-time

employees of 4-year colleges or universities described in

section 170(b)(1)(A)(ii) of such Code, and

(C) which was in existence on September 18, 1986.

(3) EFFECTIVE DATE.—This subsection shall apply to years

beginning after December 22, 1987.

(l) DETERMINATION OF UNRECOVERED INVESTMENT IN ANNUITY

CONTRACT.—

(1) IN GENERAL.—Subparagraph (A) of section 72(b)(4) is

amended by inserting ‘‘(determined without regard to subsection (c)(2))’’ after ‘‘contract’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect as if included in the amendments made

by section 1122(c) of the Tax Reform Act of 1986.

(m) MODIFICATIONS TO ELECTION TO INCLUDE CHILD’S INCOME

ON PARENT’S RETURN.—

(1) ELIGIBILITY FOR ELECTION.—Clause (ii) of section

1(g)(7)(A) (relating to election to include certain unearned

income of child on parent’s return) is amended to read as

follows:

26 USC 72 note.

26 USC 401 note.

26 USC 737.

26 USC 142.

26 USC 468A.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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.—

26 USC 1 note.
110 STAT. 1884 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1886 PUBLIC LAW 104–188—AUG. 20, 1996

individual would have been permitted or required to

contribute had the individual remained continuously

employed by the employer throughout the period of qualified military service. Any payment to such plan shall be

made during the period beginning with the date of

reemployment and whose duration is 3 times the period

of the qualified military service (but not greater than 5

years).

‘‘(9) PLANS NOT SUBJECT TO TITLE 38.—This subsection shall

not apply to any retirement plan to which chapter 43 of title

38, United States Code, does not apply.

‘‘(10) REFERENCES.—For purposes of this section, any reference to chapter 43 of title 38, United States Code, shall

be treated as a reference to such chapter as in effect on December 12, 1994 (without regard to any subsequent amendment).’’.

(2) AMENDMENT TO ERISA.—Section 408(b)(1) of the

Employee Retirement Income Security Act of 1974 (29 U.S.C.

1148(b)) is amended by adding at the end the following new

sentence: ‘‘A loan made by a plan shall not fail to meet the

requirements of the preceding sentence by reason of a loan

repayment suspension described under section 414(u)(4) of the

Internal Revenue Code of 1986.’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall be effective as of December 12, 1994.

(o) REPORTING OF REAL ESTATE TRANSACTIONS.—

(1) IN GENERAL.—Paragraph (3) of section 6045(e) (relating

to prohibition of separate charge for filing return) is amended

by adding at the end the following new sentence: ‘‘Nothing

in this paragraph shall be construed to prohibit the real estate

reporting person from taking into account its cost of complying

with such requirement in establishing its charge (other than

a separate charge for complying with such requirement) to

any customer for performing services in the case of a real

estate transaction.’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph

(1) shall take effect as if included in section 1015(e)(2)(A) of

the Technical and Miscellaneous Revenue Act of 1988.

(p) CLARIFICATION OF DENIAL OF DEDUCTION FOR STOCK

REDEMPTION EXPENSES.

(1) IN GENERAL.—Paragraph (1) of section 162(k) is

amended by striking ‘‘the redemption of its stock’’ and inserting

‘‘the reacquisition of its stock or of the stock of any related

person (as defined in section 465(b)(3)(C))’’.

(2) CERTAIN DEDUCTIONS PERMITTED.—Subparagraph (A)

of section 162(k)(2) is amended by striking ‘‘or’’ at the end

of clause (i), by redesignating clause (ii) as clause (iii), and

by inserting after clause (i) the following new clause:

‘‘(ii) deduction for amounts which are properly

allocable to indebtedness and amortized over the term

of such indebtedness, or’’.

(3) CLERICAL AMENDMENT.—The subsection heading for

subsection (k) of section 162 is amended by striking ‘‘REDEMPTION’’ and inserting ‘‘REACQUISITION’’.

(4) EFFECTIVE DATE.—

(A) IN GENERAL.—Except as provided in subparagraph

(B), the amendments made by this subsection shall apply

26 USC 162 note.

26 USC 6045

note.

26 USC 414 note.

29 USC 1108.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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 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 subparagraph (B).

(3) Paragraph (2) of section 86(b) is amended by striking

‘‘adusted’’ and inserting ‘‘adjusted’’.

(4)(A) The heading for section 112 is amended by striking

‘‘COMBAT PAY’’ and inserting ‘‘COMBAT ZONE COMPENSATION’’.

(B) The item relating to section 112 in the table of sections

for part III of subchapter B of chapter 1 is amended by striking

‘‘combat pay’’ and inserting ‘‘combat zone compensation’’.

(C) Paragraph (1) of section 3401(a) is amended by striking

‘‘combat pay’’ and inserting ‘‘combat zone compensation’’.

(5) Clause (i) of section 172(h)(3)(B) is amended by striking

the comma at the end thereof and inserting a period.

(6) Clause (ii) of section 543(a)(2)(B) is amended by striking

‘‘section 563(c)’’ and inserting ‘‘section 563(d)’’.

(7) Paragraph (1) of section 958(a) is amended by striking

‘‘sections 955(b)(1) (A) and (B), 955(c)(2)(A)(ii), and 960(a)(1)’’

and inserting ‘‘section 960(a)(1)’’.

(8) Subsection (g) of section 642 is amended by striking

‘‘under 2621(a)(2)’’ and inserting ‘‘under section 2621(a)(2)’’.

(9) Section 1463 is amended by striking ‘‘this subsection’’

and inserting ‘‘this section’’.

26 USC 1296

note.

26 USC 404 note.
110 STAT. 1888 PUBLIC LAW 104–188—AUG. 20, 1996

(10) Subsection (k) of section 3306 is amended by inserting

a period at the end thereof.

(11) The item relating to section 4472 in the table of

sections for subchapter B of chapter 36 is amended by striking

‘‘and special rules’’.

(12) Paragraph (3) of section 5134(c) is amended by striking

‘‘section 6662(a)’’ and inserting ‘‘section 6665(a)’’.

(13) Paragraph (2) of section 5206(f) is amended by striking

‘‘section 5(e)’’ and inserting ‘‘section 105(e)’’.

(14) Paragraph (1) of section 6050B(c) is amended by striking ‘‘section 85(c)’’ and inserting ‘‘section 85(b)’’.

(15) Subsection (k) of section 6166 is amended by striking

paragraph (6).

(16) Subsection (e) of section 6214 is amended to read

as follows:

‘‘(e) CROSS REFERENCE.—

‘‘For provision giving Tax Court jurisdiction to order a refund of

an overpayment and to award sanctions, see section 6512(b)(2).’’.

(17) The section heading for section 6043 is amended by

striking the semicolon and inserting a comma.

(18) The item relating to section 6043 in the table of

sections for subpart B of part III of subchapter A of chapter

61 is amended by striking the semicolon and inserting a comma.

(19) The table of sections for part I of subchapter A of

chapter 68 is amended by striking the item relating to section

6662.

(20)(A) Section 7232 is amended—

(i) by striking ‘‘LUBRICATING OIL,’’ in the

heading, and

(ii) by striking ‘‘lubricating oil,’’ in the text.

(B) The table of sections for part II of subchapter A of

chapter 75 is amended by striking ‘‘lubricating oil,’’ in the

item relating to section 7232.

(21) Paragraph (1) of section 6701(a) of the Omnibus Budget

Reconciliation Act of 1989 is amended by striking ‘‘subclause

(IV)’’ and inserting ‘‘subclause (V)’’.

(22) Clause (ii) of section 7304(a)(2)(D) of such Act is

amended by striking ‘‘subsection (c)(2)’’ and inserting ‘‘subsection (c)’’.

(23) Paragraph (1) of section 7646(b) of such Act is amended

by striking ‘‘section 6050H(b)(1)’’ and inserting ‘‘section

6050H(b)(2)’’.

(24) Paragraph (10) of section 7721(c) of such Act is

amended by striking ‘‘section 6662(b)(2)(C)(ii)’’ and inserting

‘‘section 6661(b)(2)(C)(ii)’’.

(25) Subparagraph (A) of section 7811(i)(3) of such Act

is amended by inserting ‘‘the first place it appears’’ before

‘‘in clause (i)’’.

(26) Paragraph (10) of section 7841(d) of such Act is

amended by striking ‘‘section 381(a)’’ and inserting ‘‘section

381(c)’’.

(27) Paragraph (2) of section 7861(c) of such Act is amended

by inserting ‘‘the second place it appears’’ before ‘‘and inserting’’.

(28) Paragraph (1) of section 460(b) is amended by striking

‘‘the look-back method of paragraph (3)’’ and inserting ‘‘the

look-back method of paragraph (2)’’.

26 USC 401 note.

26 USC 381.

26 USC 954.

26 USC 461.

26 USC 6050H.

26 USC 4979A.

26 USC 4980B.
PUBLIC LAW 104–188—AUG. 20, 1996 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 (d) of section 11231 of the

Revenue Reconciliation Act of 1990 shall be applied as if

‘‘comma’’ appeared instead of ‘‘period’’ and as if the paragraph

(9) proposed to be added ended with a comma.

(45) Paragraph (1) of section 11303(b) of the

Revenue Reconciliation Act of 1990 shall be applied as if ‘‘paragraph’’ appeared instead of ‘‘subparagraph’’ in the material

proposed to be stricken.

(46) Subsection (f) of section 11701 of the

Revenue Reconciliation Act of 1990 is amended by inserting

‘‘(relating to definitions)’’ after ‘‘section 6038(e)’’.

(47) Subsection (i) of section 11701 of the

Revenue Reconciliation Act of 1990 shall be applied as if ‘‘subsection’’ appeared instead of ‘‘section’’ in the material proposed

to be stricken.

(48) Subparagraph (B) of section 11801(c)(2) of the Revenue

Reconciliation Act of 1990 shall be applied as if ‘‘section 56(g)’’

appeared instead of ‘‘section 59(g)’’.

26 USC 56.

26 USC 1253.

26 USC 6038.

26 USC 832.

26 USC 9507

note.
110 STAT. 1890 PUBLIC LAW 104–188—AUG. 20, 1996

(49) Subparagraph (C) of section 11801(c)(8) of the Revenue

Reconciliation Act of 1990 shall be applied as if ‘‘reorganizations’’ appeared instead of ‘‘reorganization’’ in the material proposed to be stricken.

(50) Subparagraph (H) of section 11801(c)(9) of the Revenue

Reconciliation Act of 1990 shall be applied as if ‘‘section

1042(c)(1)(B)’’ appeared instead of ‘‘section 1042(c)(2)(B)’’.

(51) Subparagraph (F) of section 11801(c)(12) of the

Revenue Reconciliation Act of 1990 shall be applied as if ‘‘and

(3)’’ appeared instead of ‘‘and (E)’’.

(52) Subparagraph (A) of section 11801(c)(22) of the

Revenue Reconciliation Act of 1990 shall be applied as if ‘‘chapters 21’’ appeared instead of ‘‘chapter 21’’ in the material proposed to be stricken.

(53) Paragraph (3) of section 11812(b) of the

Revenue Reconciliation Act of 1990 shall be applied by not

executing the amendment therein to the heading of section

42(d)(5)(B).

(54) Clause (i) of section 11813(b)(9)(A) of the Revenue

Reconciliation Act of 1990 shall be applied as if a comma

appeared after ‘‘(3)(A)(ix)’’ in the material proposed to be

stricken.

(55) Subparagraph (F) of section 11813(b)(13) of the

Revenue Reconciliation Act of 1990 shall be applied as if ‘‘tax’’

appeared after ‘‘investment’’ in the material proposed to be

stricken.

(56) Paragraph (19) of section 11813(b) of the Revenue

Reconciliation Act of 1990 shall be applied as if ‘‘Paragraph

(20) of section 1016(a), as redesignated by section 11801,’’

appeared instead of ‘‘Paragraph (21) of section 1016(a)’’.

(57) Paragraph (5) section 8002(a) of the Surface Transportation Revenue Act of 1991 shall be applied as if ‘‘4481(e)’’

appeared instead of ‘‘4481(c)’’.

(58) Section 7872 is amended—

(A) by striking ‘‘foregone’’ each place it appears in

subsections (a) and (e)(2) and inserting ‘‘forgone’’, and

(B) by striking ‘‘FOREGONE’’ in the heading for subsection (e) and the heading for paragraph (2) of subsection

(e) and inserting ‘‘FORGONE’’.

(59) Paragraph (7) of section 7611(h) is amended by striking

‘‘approporiate’’ and inserting ‘‘appropriate’’.

(60) The heading of paragraph (3) of section 419A(c) is

amended by striking ‘‘SEVERENCE’’ and inserting ‘‘SEVERANCE’’.

(61) Clause (ii) of section 807(d)(3)(B) is amended by

striking ‘‘Commissoners’ ’’ and inserting ‘‘Commissioners’ ’’.

(62) Subparagraph (B) of section 1274A(c)(1) is amended

by striking ‘‘instument’’ and inserting ‘‘instrument’’.

(63) Subparagraph (B) of section 724(d)(3) by striking

‘‘Subparagaph’’ and inserting ‘‘Subparagraph’’.

(64) The last sentence of paragraph (2) of section 42(c)

is amended by striking ‘‘of 1988’’.

(65) Paragraph (1) of section 9707(d) is amended by striking

‘‘diligence,’’ and inserting ‘‘diligence’’.

(66) Subsection (c) of section 4977 is amended by striking

‘‘section 132(i)(2)’’ and inserting ‘‘section 132(h)’’.

(67) The last sentence of section 401(a)(20) is amended

by striking ‘‘section 211’’ and inserting ‘‘section 521’’.

26 USC 4481.

26 USC 1016.

26 USC prec.

261.

26 USC 168.

26 USC 42.

26 USC 6302.

26 USC 593.

26 USC 1042.

26 USC 247.
PUBLIC LAW 104–188—AUG. 20, 1996 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 (41) of section 521(b) of the Unemployment

Compensation Amendments of 1992 shall be applied as if ‘‘section’’ appeared instead of ‘‘sections’’ in the material proposed

to be stricken.

(73) Paragraph (27) of section 521(b) of the Unemployment

Compensation Amendments of 1992 shall be applied as if ‘‘Section 691(c)(5)’’ appeared instead of ‘‘Section 691(c)’’.

(74) Paragraph (5) of section 860F(a) is amended by striking

‘‘paragraph (1)’’ and inserting ‘‘paragraph (2)’’.

(75) Paragraph (1) of section 415(k) is amended by adding

‘‘or’’ at the end of subparagraph (C), by striking subparagraphs

(D) and (E), and by redesignating subparagraph (F) as subparagraph (D).

(76) Paragraph (2) of section 404(a) is amended by striking

‘‘(18),’’.

(77) Clause (ii) of section 72(p)(4)(A) is amended to read

as follows:

‘‘(ii) SPECIAL RULE.—The term ‘qualified employer

plan’ shall include any plan which was (or was determined to be) a qualified employer plan or a government

plan.’’.

(78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each

amended by striking ‘‘section 6662(d)(2)(C)(ii)’’ and inserting

‘‘section 6662(d)(2)(C)(iii)’’.

(79) Subsection (a) of section 164 is amended by striking

the paragraphs relating to the generation-skipping tax

and the environmental tax imposed by section 59A and by

inserting after paragraph (3) the following new paragraphs:

‘‘(4) The GST tax imposed on income distributions.

‘‘(5) The environmental tax imposed by section 59A.’’.

(80) Subclause (I) of section 936(a)(4)(A)(ii) is amended

by striking ‘‘deprecation’’ and inserting ‘‘depreciation’’.

Subtitle H—Other Provisions

SEC. 1801. EXEMPTION FROM DIESEL FUEL DYEING REQUIREMENTS

WITH RESPECT TO CERTAIN STATES.

(a) IN GENERAL.—Section 4082 (relating to exemptions for diesel

fuel) is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection

(b) the following new subsection:

‘‘(c) EXCEPTION TO DYEING REQUIREMENTS.—Paragraph (2) of

subsection (a) shall not apply with respect to any diesel fuel—

‘‘(1) removed, entered, or sold in a State for ultimate sale

or use in an area of such State during the period such area

is exempted from the fuel dyeing requirements under subsection

(i) of section 211 of the Clean Air Act (as in effect on the

date of the enactment of this subsection) by the Administrator

26 USC 691.

26 USC 4973.
110 STAT. 1892 PUBLIC LAW 104–188—AUG. 20, 1996

of the Environmental Protection Agency under paragraph (4)

of such subsection (i) (as so in effect), and

‘‘(2) the use of which is certified pursuant to regulations

issued by the Secretary.’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply with respect to fuel removed, entered, or sold on or

after the first day of the first calendar quarter beginning after

the date of the enactment of this Act.

SEC. 1802. TREATMENT OF CERTAIN UNIVERSITY ACCOUNTS.

(a) IN GENERAL.—For purposes of subsection (s) of section 3121

of the Internal Revenue Code of 1986 (relating to concurrent employment by 2 or more employers)—

(1) the following entities shall be deemed to be related

corporations that concurrently employ the same individual:

(A) a State university which employs health professionals as faculty members at a medical school, and

(B) an agency account of a State university which

is described in subparagraph (A) and from which

there is distributed to such faculty members payments

forming a part of the compensation that the State, or

such State university, as the case may be, agrees to pay

to such faculty members, but only if—

(i) such agency account is authorized by State law

and receives the funds for such payments from a

faculty practice plan described in section 501(c)(3) of

such Code and exempt from tax under section 501(a)

of such Code,

(ii) such payments are distributed by such agency

account to such faculty members who render patient

care at such medical school, and

(iii) such faculty members comprise at least 30

percent of the membership of such faculty practice

plan, and

(2) remuneration which is disbursed by such agency account

to any such faculty member of the medical school described

in paragraph (1)(A) shall be deemed to have been actually

disbursed by the State, or such State university, as the case

may be, as a common paymaster and not to have been actually

disbursed by such agency account.

(b) EFFECTIVE DATE.—The provisions of subsection (a) shall

apply to remuneration paid after December 31, 1996.

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

CHEMICALS.

(a) RECYCLED HALON.—

(1) IN GENERAL.—Section 4682(d)(1) (relating to recycling)

is amended by inserting ‘‘, or on any recycled halon imported

from any country which is a signatory to the Montreal Protocol

on Substances that Deplete the Ozone Layer’’ before the period

at the end.

(2) CERTIFICATION SYSTEM.—The Secretary of the Treasury,

after consultation with the Administrator of the Environmental

Protection Agency, shall develop a certification system to ensure

compliance with the recycling requirement for imported halon

under section 4682(d)(1) of the Internal Revenue Code of 1986,

as amended by paragraph (1).

26 USC 4682

note.

26 USC 3121

note.

26 USC 4082

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 DATES.—

(1) RECYCLED HALON.—

(A) IN GENERAL.—Except as provided in subparagraph

(B), the amendment made by subsection (a)(1) shall take

effect on January 1, 1997.

(B) HALON-1211.—In the case of Halon-1211, the

amendment made by subsection (a)(1) shall take effect

on January 1, 1998.

(2) METERED-DOSE INHALERS.—The amendment made by

subsection (b) shall take effect on the 7th day after the date

of the enactment of this Act.

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

ADMINISTRATION FACILITY.

Sections 142(f)(3) (as added by section 1608) and 147(d) of

the Internal Revenue Code of 1986 shall not apply in determining

whether any private activity bond issued after the date of the

enactment of this Act and used to finance the acquisition of the

Snettisham hydroelectric project from the Alaska Power Administration is a qualified bond for purposes of such Code.

26 USC 142 note.

26 USC 4682

note.
110 STAT. 1894 PUBLIC LAW 104–188—AUG. 20, 1996

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
PUBLIC LAW 104–188—AUG. 20, 1996 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 aggregate of—

‘‘(I) any liability of the common trust fund

assumed by any regulated investment company

in connection with the transfer referred to in paragraph (1)(A), and

‘‘(II) any liability to which property so transferred is subject.

‘‘(4) COMMON TRUST FUND MUST MEET DIVERSIFICATION

RULES.—This subsection shall not apply to any common trust

fund which would not meet the requirements of section

368(a)(2)(F)(ii) if it were a corporation. For purposes of the

preceding sentence, Government securities shall not be treated

as securities of an issuer in applying the 25-percent and 50-

percent test and such securities shall not be excluded for purposes of determining total assets under clause (iv) of section

368(a)(2)(F).’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to transfers after December 31, 1995.

SEC. 1806. QUALIFIED STATE TUITION PROGRAMS.

(a) IN GENERAL.—Subchapter F of chapter 1 (relating to exempt

organizations) is amended by adding at the end the following new

part:

‘‘PART VIII—QUALIFIED STATE TUITION

PROGRAMS

‘‘Sec. 529. Qualified State tuition programs.

‘‘SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

‘‘(a) GENERAL RULE.—A qualified State tuition program shall

be exempt from taxation under this subtitle. Notwithstanding the

preceding sentence, such program shall be subject to the taxes

imposed by section 511 (relating to imposition of tax on unrelated

business income of charitable organizations).

‘‘(b) QUALIFIED STATE TUITION PROGRAM.—For purposes of this

section—

‘‘(1) IN GENERAL.—The term ‘qualified State tuition program’ means a program established and maintained by a State

or agency or instrumentality thereof—

‘‘(A) under which a person—

‘‘(i) may purchase tuition credits or certificates

on behalf of a designated beneficiary which entitle

the beneficiary to the waiver or payment of qualified

higher education expenses of the beneficiary, or

26 USC 584 note.
110 STAT. 1896 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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
PUBLIC LAW 104–188—AUG. 20, 1996 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 individual with respect to an interest in a qualified State tuition

program during any calendar year, each officer or employee

having control of the qualified State tuition program or their

designee shall make such reports as the Secretary may require

regarding such distribution to the Secretary and to the designated beneficiary or the individual to whom the distribution

was made. Any such report shall include such information

as the Secretary may prescribe.

‘‘(2) TIMING OF REPORTS.—Any report required by this subsection—

‘‘(A) shall be filed at such time and in such matter

as the Secretary prescribes, and
110 STAT. 1898 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(B) shall be furnished to individuals not later than

January 31 of the calendar year following the calendar

year to which such report relates.

‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes

of this section—

‘‘(1) DESIGNATED BENEFICIARY.—The term ‘designated beneficiary’ means—

‘‘(A) the individual designated at the commencement

of participation in the qualified State tuition program as

the beneficiary of amounts paid (or to be paid) to the

program,

‘‘(B) in the case of a change in beneficiaries described

in subsection (c)(2)(C), the individual who is the new beneficiary, and

‘‘(C) in the case of an interest in a qualified State

tuition program purchased by a State or local government

or an organization described in section 501(c)(3) and exempt

from taxation under section 501(a) as part of a scholarship

program operated by such government or organization, the

individual receiving such interest as a scholarship.

‘‘(2) MEMBER OF FAMILY.—The term ‘member of the family’

has the same meaning given such term as section 2032A(e)(2).

‘‘(3) QUALIFIED HIGHER EDUCATION EXPENSES.—The term

‘qualified higher education expenses’ means tuition, fees, books,

supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational

institution (as defined in section 135(c)(3)).

‘‘(4) APPLICATION OF SECTION 514.—An interest in a qualified State tuition program shall not be treated as debt for

purposes of section 514.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 135(d)(1) is amended by striking ‘‘or’’ at the

end of subparagraph (B), by striking the period at the end

of subparagraph (C) and inserting ‘‘, or’’, and by adding at

the end the following new subparagraph:

‘‘(D) a payment, waiver, or reimbursement of qualified

higher education expenses under a qualified State tuition

program (within the meaning of section 529(b)).’’.

(2) The table of parts for subchapter F of chapter 1 is

amended by adding at the end the following new item:

‘‘Part VIII. Qualified State tuition programs.’’.

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section

shall apply to taxable years ending after the date of the enactment of this Act.

(2) TRANSITION RULE.—If—

(A) a State or agency or instrumentality thereof maintains, on the date of the enactment of this Act, a program

under which persons may purchase tuition credits or certificates on behalf of, or make contributions for education

expenses of, a designated beneficiary, and

(B) such program meets the requirements of a qualified

State tuition program before the later of—

(i) the date which is 1 year after such date of

enactment, or

26 USC 529 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 paragraph (1)) as—

‘‘(i) the amount (if any) by which the taxpayer’s adjusted gross income exceeds $75,000, bears to ‘‘(ii) $40,000.

‘‘(B) DETERMINATION OF ADJUSTED GROSS INCOME.— For purposes of subparagraph (A), adjusted gross income

shall be determined—

‘‘(i) without regard to sections 911, 931, and

933, and

‘‘(ii) after the application of sections 86, 135, 137,

219, and 469.

‘‘(3) DENIAL OF DOUBLE BENEFIT.— ‘‘(A) IN GENERAL.—No credit shall be allowed under

subsection (a) for any expense for which a deduction or

credit is allowed under any other provision of this chapter.
110 STAT. 1900 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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))—
PUBLIC LAW 104–188—AUG. 20, 1996 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—
110 STAT. 1902 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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.’’.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1903

(d) STUDY AND REPORT.—The Secretary of the Treasury shall

study the effect on adoptions of the tax credit and gross income

exclusion established by the amendments made by this section

and shall submit a report regarding the study to the Committee

on Finance of the Senate and the Committee on Ways and Means

of the House of Representatives not later than January 1, 2000.

(e) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 1996.

SEC. 1808. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

(a) STATE PLAN REQUIREMENTS.—Section 471(a) of the Social

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

(1) by striking ‘‘and’’ at the end of paragraph (16);

(2) by striking the period at the end of paragraph (17)

and inserting ‘‘; and’’; and

(3) by adding at the end the following:

‘‘(18) not later than January 1, 1997, provides that neither

the State nor any other entity in the State that receives funds

from the Federal Government and is involved in adoption or

foster care placements may—

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

an adoptive or a foster parent, on the basis of the race,

color, or national origin of the person, or of the child,

involved; or

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

or into foster care, on the basis of the race, color, or

national origin of the adoptive or foster parent, or the

child, involved.’’.

(b) ENFORCEMENT.—Section 474 of such Act (42 U.S.C. 674)

is amended by adding at the end the following:

‘‘(d)(1) If, during any quarter of a fiscal year, a State’s program

operated under this part is found, as a result of a review conducted

under section 1123A, or otherwise, to have violated section

471(a)(18) with respect to a person or to have failed to implement

a corrective action plan within a period of time not to exceed

6 months with respect to such violation, then, notwithstanding

subsection (a) of this section and any regulations promulgated under

section 1123A(b)(3), the Secretary shall reduce the amount otherwise payable to the State under this part, for that fiscal year

quarter and for any subsequent quarter of such fiscal year, until

the State program is found, as a result of a subsequent review

under section 1123A, to have implemented a corrective action plan

with respect to such violation, by—

‘‘(A) 2 percent of such otherwise payable amount, in the

case of the 1st such finding for the fiscal year with respect

to the State;

‘‘(B) 3 percent of such otherwise payable amount, in the

case of the 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

26 USC 23 note.
110 STAT. 1904 PUBLIC LAW 104–188—AUG. 20, 1996

fiscal year quarter with respect to any person shall remit to the

Secretary all funds that were paid by the State to the entity

during the quarter from such funds.

‘‘(3)(A) Any individual who is aggrieved by a violation of section

471(a)(18) by a State or other entity may bring an action seeking

relief from the State or other entity in any United States district

court.

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

than 2 years after the date the alleged violation occurred.

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

(c) CIVIL RIGHTS.—

(1) PROHIBITED CONDUCT.—A person or government that

is involved in adoption or foster care placements may not—

(A) deny to any individual the opportunity to become

an adoptive or a foster parent, on the basis of the race,

color, or national origin of the individual, or of the child,

involved; or

(B) delay or deny the placement of a child for adoption

or into foster care, on the basis of the race, color, or

national origin of the adoptive or foster parent, or the

child, involved.

(2) ENFORCEMENT.—Noncompliance with paragraph (1) is

deemed a violation of title VI of the Civil Rights Act of 1964.

(3) NO EFFECT ON THE INDIAN CHILD WELFARE ACT OF

1978.—This subsection shall not be construed to affect the

application of the Indian Child Welfare Act of 1978.

(d) CONFORMING AMENDMENT.—Section 553 of the Howard M.

Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 5115a)

is repealed.

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

REQUIREMENT.

Notwithstanding any other provision of law, the increase in

the applicable required percentages for fiscal year 1997 in clauses

(i)(IV) and (ii)(IV) of section 6302(h)(2)(C) of the Internal Revenue

Code of 1986 shall not take effect before July 1, 1997.

Subtitle I—Foreign Trust Tax Compliance

SEC. 1901. IMPROVED INFORMATION REPORTING ON FOREIGN

TRUSTS.

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

foreign trusts) is amended to read as follows:

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

TRUSTS.

‘‘(a) NOTICE OF CERTAIN EVENTS.—

‘‘(1) GENERAL RULE.—On or before the 90th day (or such

later day as the Secretary may prescribe) after any reportable

event, the responsible party shall provide written notice of

such event to the Secretary in accordance with paragraph (2).

‘‘(2) CONTENTS OF NOTICE.—The notice required by paragraph (1) shall contain such information as the Secretary may

prescribe, including—

26 USC 6302

note.

42 USC 1996b.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1906 PUBLIC LAW 104–188—AUG. 20, 1996

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
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1908 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(2) subsection (a) shall be applied by substituting ‘5 percent’ for ‘35 percent’.

‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes of subsection

(a), the term ‘gross reportable amount’ means—

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

(determined as of the date of the event) in the case of a

failure relating to section 6048(a),

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

at the close of the year treated as owned by the United States

person in the case of a failure relating to section 6048(b)(1),

and

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

a failure relating to section 6048(c).

‘‘(d) REASONABLE CAUSE EXCEPTION.—No penalty shall be

imposed by this section on any failure which is shown to be due

to reasonable cause and not due to willful neglect. The fact that

a foreign jurisdiction would impose a civil or criminal penalty

on the taxpayer (or any other person) for disclosing the required

information is not reasonable cause.

‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B

of chapter 63 (relating to deficiency procedures for income, estate,

gift, and certain excise taxes) shall not apply in respect of the

assessment or collection of any penalty imposed by subsection (a).’’.

(c) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 6724(d) is amended by striking

‘‘or’’ at the end of subparagraph (S), by striking the period

at the end of subparagraph (T) and inserting ‘‘, or’’, and by

inserting after subparagraph (T) the following new subparagraph:

‘‘(U) section 6048(b)(1)(B) (relating to foreign trust

reporting requirements).’’.

(2) The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by striking the item relating

to section 6048 and inserting the following new item:

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

(3) The table of sections for part I of subchapter B of

chapter 68 is amended by striking the item relating to section

6677 and inserting the following new item:

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

(d) EFFECTIVE DATES.—

(1) REPORTABLE EVENTS.—To the extent related to subsection (a) of section 6048 of the Internal Revenue Code of

1986, as amended by this section, the amendments made by

this section shall apply to reportable events (as defined in

such section 6048) occurring after the date of the enactment

of this Act.

(2) GRANTOR TRUST REPORTING.—To the extent related to

subsection (b) of such section 6048, the amendments made

by this section shall apply to taxable years of United States

persons beginning after December 31, 1995.

(3) REPORTING BY UNITED STATES BENEFICIARIES.—To the

extent related to subsection (c) of such section 6048, the amendments made by this section shall apply to distributions received

after the date of the enactment of this Act.

26 USC 6048

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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:

26 USC 1494

note.
110 STAT. 1910 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN GRANTOR WHO

LATER BECOMES A UNITED STATES PERSON.— ‘‘(A) IN GENERAL.—If a nonresident alien individual

has a residency starting date within 5 years after directly

or indirectly transferring property to a foreign trust,

this section and section 6048 shall be applied as if such

individual transferred to such trust on the residency starting date an amount equal to the portion of such trust

attributable to the property transferred by such individual

to such trust in such transfer.

‘‘(B) TREATMENT OF UNDISTRIBUTED INCOME.—For purposes of this section, undistributed net income for periods

before such individual’s residency starting date shall be

taken into account in determining the portion of the trust

which is attributable to property transferred by such

individual to such trust but shall not otherwise be taken

into account.

‘‘(C) RESIDENCY STARTING DATE.—For purposes of this

paragraph, an individual’s residency starting date is the

residency starting date determined under section

7701(b)(2)(A).

‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—

‘‘(A) an individual who is a citizen or resident of the

United States transferred property to a trust which was

not a foreign trust, and

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

individual is alive,

then this section and section 6048 shall be applied as if such

individual transferred to such trust on the date such trust

becomes a foreign trust an amount equal to the portion of

such trust attributable to the property previously transferred

by such individual to such trust. A rule similar to the rule

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

(d) MODIFICATIONS RELATING TO WHETHER TRUST HAS UNITED

STATES BENEFICIARIES.—Subsection (c) of section 679 is amended

by adding at the end the following new paragraph:

‘‘(3) CERTAIN UNITED STATES BENEFICIARIES DISREGARDED.—

A beneficiary shall not be treated as a United States person

in applying this section with respect to any transfer of property

to foreign trust if such beneficiary first became a United States

person more than 5 years after the date of such transfer.’’.

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

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

‘‘(A) in the case of a foreign corporation, such corporation is a controlled foreign corporation (as defined in section

957(a)),’’.

(f) REGULATIONS.—Section 679 is amended by adding at the

end the following new subsection:

‘‘(d) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes

of this section.’’.

(g) EFFECTIVE DATE.—The amendments made by this section

shall apply to transfers of property after February 6, 1995.

SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS

UNDER GRANTOR TRUST RULES.

(a) GENERAL RULE.—

26 USC 679 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1912 PUBLIC LAW 104–188—AUG. 20, 1996

the purposes of this subsection, including regulations providing

that paragraph (1) shall not apply in appropriate cases.’’.

(2) The last sentence of subsection (c) of section 672 is

amended by inserting ‘‘subsection (f) and’’ before ‘‘sections 674’’.

(b) CREDIT FOR CERTAIN TAXES.—

(1) Paragraph (2) of section 665(d) is amended by adding

at the end the following new sentence: ‘‘Under rules or regulations prescribed by the Secretary, in the case of any foreign

trust of which the settlor or another person would be treated

as owner of any portion of the trust under subpart E but

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

the allocable amount of any income, war profits, and excess

profits taxes imposed by any foreign country or possession

of the United States on the settlor or such other person in

respect of trust income.’’.

(2) Paragraph (5) of section 901(b) is amended by adding

at the end the following new sentence: ‘‘Under rules or regulations prescribed by the Secretary, in the case of any foreign

trust of which the settlor or another person would be treated

as owner of any portion of the trust under subpart E but

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

profits, and excess profits taxes imposed by any foreign country

or possession of the United States on the settlor or such other

person in respect of trust income.’’.

(c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH

NOMINEES.—

(1) Section 643 is amended by adding at the end the following new subsection:

‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH

NOMINEES.—For purposes of this part, any amount paid to a United

States person which is derived directly or indirectly from a foreign

trust of which the payor is not the grantor shall be deemed in

the year of payment to have been directly paid by the foreign

trust to such United States person.’’.

(2) Section 665 is amended by striking subsection (c).

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided by paragraph (2),

the amendments made by this section shall take effect

on the date of the enactment of this Act.

(2) EXCEPTION FOR CERTAIN TRUSTS.—The amendments

made by this section shall not apply to any trust—

(A) which is treated as owned by the grantor under

section 676 or 677 (other than subsection (a)(3) thereof)

of the Internal Revenue Code of 1986, and

(B) which is in existence on September 19, 1995.

The preceding sentence shall not apply to the portion of any

such trust attributable to any transfer to such trust after

September 19, 1995.

(e) TRANSITIONAL RULE.—If—

(1) by reason of the amendments made by this section,

any person other than a United States person ceases to be

treated as the owner of a portion of a domestic trust, and

(2) before January 1, 1997, such trust becomes a foreign

trust, or the assets of such trust are transferred to a foreign

trust,

26 USC 1491

note.

26 USC 643 note.
PUBLIC LAW 104–188—AUG. 20, 1996 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 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.

26 USC 6039F

note.
110 STAT. 1914 PUBLIC LAW 104–188—AUG. 20, 1996

SEC. 1906. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS

WHICH ARE NOT GRANTOR TRUSTS.

(a) MODIFICATION OF INTEREST CHARGE ON ACCUMULATION DIS- TRIBUTIONS.—Subsection (a) of section 668 (relating to interest

charge on accumulation distributions from foreign trusts) is

amended to read as follows:

‘‘(a) GENERAL RULE.—For purposes of the tax determined under

section 667(a)—

‘‘(1) INTEREST DETERMINED USING UNDERPAYMENT RATES.— The interest charge determined under this section with respect

to any distribution is the amount of interest which would

be determined on the partial tax computed under section 667(b)

for the period described in paragraph (2) using the rates and

the method under section 6621 applicable to underpayments

of tax.

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

described in this paragraph is the period which begins on

the date which is the applicable number of years before the

date of the distribution and which ends on the date of the

distribution.

‘‘(3) APPLICABLE NUMBER OF YEARS.—For purposes of paragraph (2)—

‘‘(A) IN GENERAL.—The applicable number of years

with respect to a distribution is the number determined

by dividing—

‘‘(i) the sum of the products described in subparagraph (B) with respect to each undistributed income

year, by

‘‘(ii) the aggregate undistributed net income.

The quotient determined under the preceding sentence

shall be rounded under procedures prescribed by the Secretary.

‘‘(B) PRODUCT DESCRIBED.—For purposes of subparagraph (A), the product described in this subparagraph

with respect to any undistributed income year is the product of—

‘‘(i) the undistributed net income for such year,

and

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

between such year and the taxable year of the distribution (counting in each case the undistributed income

year but not counting the taxable year of the distribution).

‘‘(4) UNDISTRIBUTED INCOME YEAR.—For purposes of this

subsection, the term ‘undistributed income year’ means any

prior taxable year of the trust for which there is undistributed

net income, other than a taxable year during all of which

the beneficiary receiving the distribution was not a citizen

or resident of the United States.

‘‘(5) DETERMINATION OF UNDISTRIBUTED NET INCOME.—Notwithstanding section 666, for purposes of this subsection, an

accumulation distribution from the trust shall be treated as

reducing proportionately the undistributed net income for

undistributed income years.

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

period described in paragraph (2) which occurs before January

1, 1996, shall be determined—
PUBLIC LAW 104–188—AUG. 20, 1996 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.’’.
110 STAT. 1916 PUBLIC LAW 104–188—AUG. 20, 1996

(2) TECHNICAL AMENDMENT.—Paragraph (8) of section

7872(f) is amended by inserting ‘‘, 643(i),’’ before ‘‘or 1274’’

each place it appears.

(d) EFFECTIVE DATES.—

(1) INTEREST CHARGE.—The amendment made by subsection (a) shall apply to distributions after the date of the

enactment of this Act.

(2) ABUSIVE TRANSACTIONS.—The amendment made by subsection (b) shall take effect on the date of the enactment of

this Act.

(3) LOANS FROM TRUSTS.—The amendment made by subsection (c) shall apply to loans of cash or marketable securities

made after September 19, 1995.

SEC. 1907. RESIDENCE OF TRUSTS, ETC.

(a) TREATMENT AS UNITED STATES PERSON.—

(1) IN GENERAL.—Paragraph (30) of section 7701(a) is

amended by striking ‘‘and’’ at the end of subparagraph (C)

and by striking subparagraph (D) and by inserting the following

new subparagraphs:

‘‘(D) any estate (other than a foreign estate, within

the meaning of paragraph (31)), and

‘‘(E) any trust if—

‘‘(i) a court within the United States is able to

exercise primary supervision over the administration

of the trust, and

‘‘(ii) one or more United States fiduciaries have

the authority to control all substantial decisions of

the trust.’’.

(2) CONFORMING AMENDMENT.—Paragraph (31) of section

7701(a) is amended to read as follows:

‘‘(31) FOREIGN ESTATE OR TRUST.—

‘‘(A) FOREIGN ESTATE.—The term ‘foreign estate’ means

an estate the income of which, from sources without the

United States which is not effectively connected with the

conduct of a trade or business within the United States,

is not includible in gross income under subtitle A.

‘‘(B) FOREIGN TRUST.—The term ‘foreign trust’ means

any trust other than a trust described in subparagraph

(E) of paragraph (30).’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply—

(A) to taxable years beginning after December 31,

1996, or

(B) at the election of the trustee of a trust, to taxable

years ending after the date of the enactment of this Act.

Such an election, once made, shall be irrevocable.

(b) DOMESTIC TRUSTS WHICH BECOME FOREIGN TRUSTS.—

(1) IN GENERAL.—Section 1491 (relating to imposition of

tax on transfers to avoid income tax) is amended by adding

at the end the following new flush sentence:

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

such trust shall be treated for purposes of this section as having

transferred, immediately before becoming a foreign trust, all of

its assets to a foreign trust.’’.

26 USC 7701

note.

26 USC 643 note.

26 USC 643 note.

26 USC 668 note.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1917

(2) EFFECTIVE DATE.—The amendment made by this

subsection shall take effect on the date of the enactment of

this Act.

Subtitle J—Generalized System of

Preferences

SEC. 1951. SHORT TITLE.

This subtitle may be cited as the ‘‘GSP Renewal Act of 1996’’.

SEC. 1952. GENERALIZED SYSTEM OF PREFERENCES.

(a) IN GENERAL.—Title V of the Trade Act of 1974 is amended

to read as follows:

‘‘TITLE V—GENERALIZED SYSTEM OF

PREFERENCES

‘‘SEC. 501. AUTHORITY TO EXTEND PREFERENCES.

‘‘The President may provide duty-free treatment for any eligible

article from any beneficiary developing country in accordance with

the provisions of this title. In taking any such action, the President

shall have due regard for—

‘‘(1) the effect such action will have on furthering the

economic development of developing countries through the

expansion of their exports;

‘‘(2) the extent to which other major developed countries

are undertaking a comparable effort to assist developing countries by granting generalized preferences with respect to

imports of products of such countries;

‘‘(3) the anticipated impact of such action on United States

producers of like or directly competitive products; and

‘‘(4) the extent of the beneficiary developing country’s

competitiveness with respect to eligible articles.

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

‘‘(a) AUTHORITY TO DESIGNATE COUNTRIES.— ‘‘(1) BENEFICIARY DEVELOPING COUNTRIES.—The President

is authorized to designate countries as beneficiary developing

countries for purposes of this title.

‘‘(2) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUN- TRIES.—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.

19 USC 2462.

19 USC 2461.

19 USC 2101

note.

GSP Renewal Act

of 1996.

26 USC 1491

note.
110 STAT. 1918 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(H) Norway.

‘‘(I) Switzerland.

‘‘(2) OTHER BASES FOR INELIGIBILITY.—The President shall

not designate any country a beneficiary developing country

under this title if any of the following applies:

‘‘(A) Such country is a Communist country, unless—

‘‘(i) the products of such country receive nondiscriminatory treatment,

‘‘(ii) such country is a WTO Member (as such term

is defined in section 2(10) of the Uruguay Round Agreements Act) (19 U.S.C. 3501(10)) and a member of the

International Monetary Fund, and

‘‘(iii) such country is not dominated or controlled

by international communism.

‘‘(B) Such country is a party to an arrangement of

countries and participates in any action pursuant to such

arrangement, the effect of which is—

‘‘(i) to withhold supplies of vital commodity

resources from international trade or to raise the price

of such commodities to an unreasonable level, and

‘‘(ii) to cause serious disruption of the world

economy.

‘‘(C) Such country affords preferential treatment to

the products of a developed country, other than the United

States, which has, or is likely to have, a significant adverse

effect on United States commerce.

‘‘(D)(i) Such country—

‘‘(I) has nationalized, expropriated, or otherwise

seized ownership or control of property, including

patents, trademarks, or copyrights, owned by a United

States citizen or by a corporation, partnership, or

association which is 50 percent or more beneficially

owned by United States citizens,

‘‘(II) has taken steps to repudiate or nullify an

existing contract or agreement with a United States

citizen or a corporation, partnership, or association

which is 50 percent or more beneficially owned by

United States citizens, the effect of which is to nationalize, expropriate, or otherwise seize ownership or

control of property, including patents, trademarks, or

copyrights, so owned, or

‘‘(III) has imposed or enforced taxes or other

exactions, restrictive maintenance or operational conditions, or other measures with respect to property,

including patents, trademarks, or copyrights, so owned,

the effect of which is to nationalize, expropriate, or

otherwise seize ownership or control of such property,

unless clause (ii) applies.

‘‘(ii) This clause applies if the President determines

that—

‘‘(I) prompt, adequate, and effective compensation

has been or is being made to the citizen, corporation,

partnership, or association referred to in clause (i),

‘‘(II) good faith negotiations to provide prompt,

adequate, and effective compensation under the

applicable provisions of international law are in

progress, or the country described in clause (i) is otherPresident.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1920 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(B) reduce or eliminate barriers to trade in services;

and

‘‘(7) whether or not such country has taken or is taking

steps to afford to workers in that country (including any designated zone in that country) internationally recognized worker

rights.

‘‘(d) WITHDRAWAL, SUSPENSION, OR LIMITATION OF COUNTRY

DESIGNATION.—

‘‘(1) IN GENERAL.—The President may withdraw, suspend,

or limit the application of the duty-free treatment accorded

under this title with respect to any country. In taking any

action under this subsection, the President shall consider the

factors set forth in section 501 and subsection (c) of this section.

‘‘(2) CHANGED CIRCUMSTANCES.—The President shall, after

complying with the requirements of subsection (f)(2), withdraw

or suspend the designation of any country as a beneficiary

developing country if, after such designation, the President

determines that as the result of changed circumstances such

country would be barred from designation as a beneficiary

developing country under subsection (b)(2). Such country shall

cease to be a beneficiary developing country on the day on

which the President issues an Executive order or Presidential

proclamation revoking the designation of such country under

this title.

‘‘(3) ADVICE TO CONGRESS.—The President shall, as necessary, advise the Congress on the application of section 501

and subsection (c) of this section, and the actions the President

has taken to withdraw, to suspend, or to limit the application

of duty-free treatment with respect to any country which has

failed to adequately take the actions described in subsection

(c).

‘‘(e) MANDATORY GRADUATION OF BENEFICIARY DEVELOPING

COUNTRIES.—If the President determines that a beneficiary developing country has become a ‘high income’ country, as defined by

the official statistics of the International Bank for Reconstruction

and Development, then the President shall terminate the designation of such country as a beneficiary developing country for purposes

of this title, effective on January 1 of the second year following

the year in which such determination is made.

‘‘(f) CONGRESSIONAL NOTIFICATION.—

‘‘(1) NOTIFICATION OF DESIGNATION.—

‘‘(A) IN GENERAL.—Before the President designates any

country as a beneficiary developing country under this

title, the President shall notify the Congress of the President’s intention to make such designation, together with

the considerations entering into such decision.

‘‘(B) DESIGNATION AS LEAST-DEVELOPED BENEFICIARY

DEVELOPING COUNTRY.—At least 60 days before the President designates any country as a least-developed beneficiary developing country, the President shall notify the

Congress of the President’s intention to make such designation.

‘‘(2) NOTIFICATION OF TERMINATION.—If the President has

designated any country as a beneficiary developing country

under this title, the President shall not terminate such designation unless, at least 60 days before such termination, the President has notified the Congress and has notified such country

President.
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1921

of the President’s intention to terminate such designation,

together with the considerations entering into such decision.

‘‘SEC. 503. DESIGNATION OF ELIGIBLE ARTICLES.

‘‘(a) ELIGIBLE ARTICLES.—

‘‘(1) DESIGNATION.—

‘‘(A) IN GENERAL.—Except as provided in subsection

(b), the President is authorized to designate articles as

eligible articles from all beneficiary developing countries

for purposes of this title by Executive order or Presidential

proclamation after receiving the advice of the International

Trade Commission in accordance with subsection (e).

‘‘(B) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUNTRIES.—Except for articles described in subparagraphs (A),

(B), and (E) of subsection (b)(1) and articles described in

paragraphs (2) and (3) of subsection (b), the President

may, in carrying out section 502(d)(1) and subsection (c)(1)

of this section, designate articles as eligible articles only

for countries designated as least-developed beneficiary

developing countries under section 502(a)(2) if, after receiving the advice of the International Trade Commission in

accordance with subsection (e) of this section, the President

determines that such articles are not import-sensitive in

the context of imports from least-developed beneficiary

developing countries.

‘‘(C) THREE-YEAR RULE.—If, after receiving the advice

of the International Trade Commission under subsection

(e), an article has been formally considered for designation

as an eligible article under this title and denied such

designation, such article may not be reconsidered for

such designation for a period of 3 years after such denial.

‘‘(2) RULE OF ORIGIN.—

‘‘(A) GENERAL RULE.—The duty-free treatment provided

under this title shall apply to any eligible article which

is the growth, product, or manufacture of a beneficiary

developing country if—

‘‘(i) that article is imported directly from a beneficiary developing country into the customs territory

of the United States; and

‘‘(ii) the sum of—

‘‘(I) the cost or value of the materials produced

in the beneficiary developing country or any two

or more such countries that are members of the

same association of countries and are treated as

one country under section 507(2), plus

‘‘(II) the direct costs of processing operations

performed in such beneficiary developing country

or such member countries, is not less than 35

percent of the appraised value of such article at

the time it is entered.

‘‘(B) EXCLUSIONS.—An article shall not be treated as

the growth, product, or manufacture of a beneficiary developing country by virtue of having merely undergone—

‘‘(i) simple combining or packaging operations, or

‘‘(ii) mere dilution with water or mere dilution

with another substance that does not materially alter

the characteristics of the article.

19 USC 2463.
110 STAT. 1922 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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).
PUBLIC LAW 104–188—AUG. 20, 1996 110 STAT. 1923

‘‘(2) COMPETITIVE NEED LIMITATION.— ‘‘(A) BASIS FOR WITHDRAWAL OF DUTY-FREE TREAT- MENT.— ‘‘(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 leastdeveloped 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—
110 STAT. 1924 PUBLIC LAW 104–188—AUG. 20, 1996

‘‘(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-
PUBLIC LAW 104–188—AUG. 20, 1996 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 dutyfree under this title that had an aggregate appraised

value of more than 10 percent of the aggregate

appraised value of all articles that entered duty-free

under this title during that year.

‘‘(C) CALCULATION OF LIMITATIONS.—There shall be

counted against the limitations imposed under subparagraphs (A) and (B) for any calendar year only that value

of any eligible article of any country that—

‘‘(i) entered duty-free under this title during such

calendar year; and

‘‘(ii) is in excess of the value of that article that

would have been so entered during such calendar year

if the limitations under subsection (c)(2)(A) applied.

‘‘(5) EFFECTIVE PERIOD OF WAIVER.—Any waiver granted

under this subsection shall remain in effect until the President

determines that such waiver is no longer warranted due to

changed circumstances.

‘‘(e) INTERNATIONAL TRADE COMMISSION ADVICE.—Before designating articles as eligible articles under subsection (a)(1), the

President shall publish and furnish the International Trade

Commission with lists of articles which may be considered

for designation as eligible articles for purposes of this title. The

provisions of sections 131, 132, 133, and 134 shall be complied

with as though action under section 501 and this section were

action under section 123 to carry out a trade agreement entered

into under section 123.

‘‘(f) SPECIAL RULE CONCERNING PUERTO RICO.—No action under

this title may affect any tariff duty imposed by the Legislature

of Puerto Rico pursuant to section 319 of the Tariff Act of 1930

on coffee imported into Puerto Rico.

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

‘‘The President shall submit an annual report to the Congress

on the status of internationally recognized worker rights within

each beneficiary developing country.

‘‘SEC. 505. DATE OF TERMINATION.

‘‘No duty-free treatment provided under this title shall remain

in effect after May 31, 1997.

‘‘SEC. 506. AGRICULTURAL EXPORTS OF BENEFICIARY DEVELOPING

COUNTRIES.

‘‘The appropriate agencies of the United States shall assist

beneficiary developing countries to develop and implement meas19 USC 2466.

19 USC 2465.

President.

19 USC 2464.
110 STAT. 1926 PUBLIC LAW 104–188—AUG. 20, 1996

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.

‘‘For purposes of this title:

‘‘(1) BENEFICIARY DEVELOPING COUNTRY.—The term ‘beneficiary developing country’ means any country with respect

to which there is in effect an Executive order or Presidential

proclamation by the President designating such country as

a beneficiary developing country for purposes of this title.

‘‘(2) COUNTRY.—The term ‘country’ means any foreign country or territory, including any overseas dependent territory

or possession of a foreign country, or the Trust Territory of

the Pacific Islands. In the case of an association of countries

which is a free trade area or customs union, or which is contributing to comprehensive regional economic integration among

its members through appropriate means, including, but not

limited to, the reduction of duties, the President may by Executive order or Presidential proclamation provide that all members of such association other than members which are barred

from designation under section 502(b) shall be treated as one

country for purposes of this title.

‘‘(3) ENTERED.—The term ‘entered’ means entered, or withdrawn from warehouse for consumption, in the customs territory of the United States.

‘‘(4) INTERNATIONALLY RECOGNIZED WORKER RIGHTS.—The

term ‘internationally recognized worker rights’ includes—

‘‘(A) the right of association;

‘‘(B) the right to organize and bargain collectively;

‘‘(C) a prohibition on the use of any form of forced

or compulsory labor;

‘‘(D) a minimum age for the employment of children; and

‘‘(E) acceptable conditions of work with respect to

minimum wages, hours of work, and occupational safety

and health.

‘‘(5) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUNTRY.—The term ‘least-developed beneficiary developing country’

means a beneficiary developing country that is designated as

a least-developed beneficiary developing country under section

502(a)(2).’’.

(b) TABLE OF CONTENTS.—The items relating to title V in the

table of contents of the Trade Act of 1974 are amended to read

as follows:

‘‘TITLE V—GENERALIZED SYSTEM OF PREFERENCES

‘‘Sec. 501. Authority to extend preferences.

‘‘Sec. 502. Designation of beneficiary developing countries.

‘‘Sec. 503. Designation of eligible articles.

‘‘Sec. 504. Review and reports to Congress.

‘‘Sec. 505. Date of termination.

‘‘Sec. 506. Agricultural exports of beneficiary developing countries.

‘‘Sec. 507. Definitions.’’.

SEC. 1953. EFFECTIVE DATE.

(a) IN GENERAL.—The amendments made by this subtitle apply

to articles entered on or after October 1, 1996.

(b) RETROACTIVE APPLICATION.—

19 USC 2461

note.

19 USC 2467.
PUBLIC LAW 104–188—AUG. 20, 1996 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’’.
110 STAT. 1928 PUBLIC LAW 104–188—AUG. 20, 1996

(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 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 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 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:

Minimum Wage

Increase Act of

1996.

29 USC 201 note.

29 USC 254 note.

Employee

Commuting

Flexibility Act of

1996.

29 USC 251

note.
PUBLIC LAW 104–188—AUG. 20, 1996 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
110 STAT. 1930 PUBLIC LAW 104–188—AUG. 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.

Æ

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.