II

105TH CONGRESS

1ST SESSION S. 20

To amend the Internal Revenue Code of 1986 to increase the rate and

spread the benefits of economic growth and for other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 21, 1997

Mr. DASCHLE (for himself, Mr. REID, Mr. LIEBERMAN, Mr. DORGAN, Mr.

BREAUX, Mr. KOHL, Mr. WYDEN, and Mr. BINGAMAN) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to increase

the rate and spread the benefits of economic growth

and for other purposes.

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

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Targeted Investment Incentive and Economic Growth

6 Act of 1997’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 TITLE I—TAXATION OF CAPITAL

5 GAINS AND LOSSES

6 SEC. 101. ROLLOVER OF CAPITAL GAINS ON CERTAIN

7 SMALL BUSINESS INVESTMENTS.

8 (a) IN GENERAL.—Part III of subchapter O of chap9 ter 1 (relating to common nontaxable exchanges) is

10 amended by adding at the end the following new section:

11 ‘‘SEC. 1045. ROLLOVER OF GAIN ON SMALL BUSINESS IN12 VESTMENTS.

13 ‘‘(a) NONRECOGNITION OF GAIN.—In the case of the

14 sale of any eligible small business investment with respect

15 to which the taxpayer elects the application of this section,

16 gain from such sale shall be recognized only to the extent

17 that the amount realized on such sale exceeds—

18 ‘‘(1) the cost of any other eligible small busi19 ness investment purchased by the taxpayer during

20 the 6-month period beginning on the date of such

21 sale, reduced by

22 ‘‘(2) any portion of such cost previously taken

23 into account under this section.

24 This section shall not apply to any gain which is treated

25 as ordinary income for purposes of this subtitle.
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1 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur2 poses of this section—

3 ‘‘(1) PURCHASE.—The term ‘purchase’ has the

4 meaning given such term by section 1043(b)(4).

5 ‘‘(2) ELIGIBLE SMALL BUSINESS INVEST6 MENT.—Except as otherwise provided in this sec7 tion, the term ‘eligible small business investment’

8 means any stock in a domestic corporation, and any

9 partnership interest in a domestic partnership,

10 which is originally issued after December 31, 1996,

11 if—

12 ‘‘(A) as of the date of issuance, such cor13 poration or partnership is a qualified small

14 business entity,

15 ‘‘(B) such stock or partnership interest is

16 acquired by the taxpayer at its original issue

17 (directly or through an underwriter)—

18 ‘‘(i) in exchange for money or other

19 property (not including stock), or

20 ‘‘(ii) as compensation for services

21 (other than services performed as an un22 derwriter of such stock or partnership in23 terest), and
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1 ‘‘(C) the taxpayer has held such stock or

2 interest at least 6 months as of the time of the

3 sale described in subsection (a).

4 A rule similar to the rule of section 1202(c)(3) shall

5 apply for purposes of this section.

6 ‘‘(3) ACTIVE BUSINESS REQUIREMENT.—Stock

7 in a corporation, and a partnership interest in a

8 partnership, shall not be treated as an eligible small

9 business investment unless, during substantially all

10 of the taxpayer’s holding period for such stock or

11 partnership interest, such corporation or partnership

12 meets the active business requirements of subsection

13 (c). A rule similar to the rule of section

14 1202(c)(2)(B) shall apply for purposes of this sec15 tion.

16 ‘‘(4) QUALIFIED SMALL BUSINESS ENTITY.—

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

18 small business entity’ means any domestic cor19 poration or partnership if—

20 ‘‘(i) such entity (and any predecessor

21 thereof) had aggregate gross assets (as de22 fined in section 1202(d)(2)) of less than

23 $25,000,000 at all times before the issu24 ance of the interest described in paragraph

25 (2), and
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1 ‘‘(ii) the aggregate gross assets (as so

2 defined) of the entity immediately after the

3 issuance (determined by taking into ac4 count amounts received in the issuance)

5 are less than $25,000,000.

6 ‘‘(B) AGGREGATION RULES.—Rules similar

7 to the rules of section 1202(d)(3) shall apply

8 for purposes of this paragraph.

9 ‘‘(c) ACTIVE BUSINESS REQUIREMENT.—

10 ‘‘(1) IN GENERAL.—For purposes of subsection

11 (b)(3), the requirements of this subsection are met

12 by a qualified small business entity for any period

13 if—

14 ‘‘(A) the entity is engaged in the active

15 conduct of a trade or business, and

16 ‘‘(B) at least 80 percent (by value) of the

17 assets of such entity are used in the active con18 duct of a qualified trade or business (within the

19 meaning of section 1202(e)(3)).

20 Such requirements shall not be treated as met for

21 any period if during such period the entity is de22 scribed in subparagraph (A), (B), (C), or (D) of sec23 tion 1202(e)(4).
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1 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI2 TIES.—For purposes of paragraph (1), if, in connec3 tion with any future trade or business, an entity is

4 engaged in—

5 ‘‘(A) startup activities described in section

6 195(c)(1)(A),

7 ‘‘(B) activities resulting in the payment or

8 incurring of expenditures which may be treated

9 as research and experimental expenditures

10 under section 174, or

11 ‘‘(C) activities with respect to in-house re12 search expenses described in section 41(b)(4),

13 such entity shall be treated with respect to such ac14 tivities as engaged in (and assets used in such activi15 ties shall be treated as used in) the active conduct

16 of a trade or business. Any determination under this

17 paragraph shall be made without regard to whether

18 the entity has any gross income from such activities

19 at the time of the determination.

20 ‘‘(3) CERTAIN RULES TO APPLY.—Rules similar

21 to the rules of paragraphs (5), (6), (7), and (8) of

22 section 1202(e) shall apply for purposes of this sub23 section.

24 ‘‘(d) CERTAIN OTHER RULES TO APPLY.—Rules

25 similar to the rules of subsections (f), (g), (h), and (j)
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1 of section 1202 shall apply for purposes of this section,

2 except that a 6-month holding period shall be substituted

3 for a 5-year holding period where applicable.

4 ‘‘(e) BASIS ADJUSTMENTS.—If gain from any sale is

5 not recognized by reason of subsection (a), such gain shall

6 be applied to reduce (in the order acquired) the basis for

7 determining gain or loss of any eligible small business in8 vestment which is purchased by the taxpayer during the

9 6-month period described in subsection (a).

10 ‘‘(f) STATUTE OF LIMITATIONS.—If any gain is real11 ized by the taxpayer on the sale or exchange of any eligible

12 small business investment and there is in effect an election

13 under subsection (a) with respect to such gain, then—

14 ‘‘(1) the statutory period for the assessment of

15 any deficiency with respect to such gain shall not ex16 pire before the expiration of 3 years from the date

17 the Secretary is notified by the taxpayer (in such

18 manner as the Secretary may by regulations pre19 scribe) of—

20 ‘‘(A) the taxpayer’s cost of purchasing

21 other eligible small business investments which

22 the taxpayer claims results in nonrecognition of

23 any part of such gain,

24 ‘‘(B) the taxpayer’s intention not to pur25 chase other eligible small business investments
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1 within the 6-month period described in sub2 section (a), or

3 ‘‘(C) a failure to make such purchase with4 in such 6-month period, and

5 ‘‘(2) such deficiency may be assessed before the

6 expiration of such 3-year period notwithstanding the

7 provisions of any other law or rule of law which

8 would otherwise prevent such assessment.

9 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

10 such regulations as may be appropriate to carry out the

11 purposes of this section, including regulations to prevent

12 the avoidance of the purposes of this section through

13 splitups, shell corporations, partnerships, or otherwise and

14 regulations to modify the application of section 1202 to

15 the extent necessary to apply such section to a partnership

16 rather than a corporation.’’

17 (b) CONFORMING AMENDMENT.—Paragraph (23) of

18 section 1016(a) is amended—

19 (1) by striking ‘‘or 1044’’ and inserting ‘‘,

20 1044, or 1045’’, and

21 (2) by striking ‘‘or 1044(d)’’ and inserting ‘‘,

22 1044(d), or 1045(e)’’.

23 (c) CLERICAL AMENDMENT.—The table of sections

24 for part III of subchapter O of chapter 1 is amended by

25 adding at the end the following new item:

‘‘Sec. 1045. Rollover of gain on small business investments.’’
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years ending after De3 cember 31, 1996.

4 SEC. 102. LOSSES ON ELIGIBLE SMALL BUSINESS INVEST5 MENTS.

6 (a) INCREASE IN MAXIMUM AMOUNT.—Section

7 1244(b) (relating to maximum amount for any taxable

8 year) is amended—

9 (1) by striking ‘‘$50,000’’ in paragraph (1) and

10 inserting ‘‘$150,000’’, and

11 (2) by striking ‘‘$100,000’’ in paragraph (2)

12 and inserting ‘‘$300,000’’.

13 (b) EXTENSION OF APPLICATION OF SECTION 1244

14 TO PARTNERSHIP INTEREST AND INCREASE IN VALUE OF

15 CORPORATIONS ELIGIBLE FOR APPLICATION.—

16 (1) EXTENSION TO PARTNERSHIPS.—So much

17 of section 1244(c) as precedes paragraph (2) is

18 amended to read as follows:

19 ‘‘(c) SECTION 1244 INTEREST DEFINED.—

20 ‘‘(1) SECTION 1244 INTEREST.—For purposes of

21 this section—

22 ‘‘(A) IN GENERAL.—The term ‘section

23 1244 interest’ means an eligible small business

24 investment (as defined in section 1045(b)(1)) in

25 a qualified small business entity (as defined in
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1 section 1045(b)(4)) if such entity, during the

2 period of its 5 most recent taxable years ending

3 before the date the loss on such investment was

4 sustained, derived more than 50 percent of its

5 aggregate gross receipts from sources other

6 than royalties, rents, dividends, interests, annu7 ities, and sales or exchanges of stocks or securi8 ties.

9 ‘‘(B) TRANSITION RULE.—Any stock in a

10 domestic corporation issued before January 1,

11 1997, which was section 1244 stock under this

12 section on December 31, 1996 (determined

13 under this section as in effect on such date),

14 shall be treated as a section 1244 interest for

15 purposes of this section.’’

16 (2) CONFORMING AMENDMENTS.—

17 (A) Section 1244(a) is amended by strik18 ing ‘‘section 1244 stock’’ and inserting ‘‘a sec19 tion 1244 interest’’.

20 (B) Section 1244(c)(2) is amended—

21 (i) by striking ‘‘PARAGRAPH (1)(C)’’ in

22 the heading and inserting ‘‘PARAGRAPH

23 (1)’’,
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1 (ii) by striking ‘‘paragraph (1)(C)’’

2 each place it appears and inserting ‘‘para3 graph (1)’’,

4 (iii) by striking ‘‘corporation’’ each

5 place it appears and inserting ‘‘entity’’,

6 and

7 (iv) by striking ‘‘Paragraph (1)(C)’’ in

8 subparagraph (C) and inserting ‘‘Para9 graph (1)’’.

10 (C) Section 1244(c) is amended by striking

11 paragraph (3).

12 (D) Section 1244(d) is amended—

13 (i) by striking ‘‘section 1244 stock’’

14 each place it appears and inserting ‘‘a sec15 tion 1244 interest’’,

16 (ii) by striking ‘‘stock’’ each place it

17 appears and inserting ‘‘interest’’,

18 (iii) by striking ‘‘paragraphs (1)(C)

19 and (3)(A) of subsection (c)’’ in paragraph

20 (2) and inserting ‘‘subsection (c)(1)’’, and

21 (iv) by striking ‘‘(other than subpara22 graph (C) thereof)’’ and inserting ‘‘(other

23 than the gross receipts test thereof)’’.
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1 (E)(i) The heading for section 1244 is

2 amended by striking ‘‘STOCK’’ and inserting

3 ‘‘INTEREST’’.

4 (ii) The item relating to section 1244 in

5 the table of sections for part IV of subchapter

6 P of chapter 1 is amended by striking ‘‘stocks’’

7 and inserting ‘‘interests’’.

8 (F) Section 165(m)(5) is amended by

9 striking ‘‘stock’’ and inserting ‘‘interests’’.

10 (G) Section 1274(c)(3)(A)(i) is amended—

11 (i) by inserting ‘‘, as in effect on the

12 day before the date of enactment of sub13 clause (IV)’’ after ‘‘section 1244(c)(3)’’ in

14 subclauses (II) and (III),

15 (ii) by striking ‘‘or’’ at the end of sub16 clause (II),

17 (iii) by striking the period at the end

18 of subclause (III) and inserting ‘‘, or’’, and

19 (iv) by adding at the end the following

20 new subclause:

21 ‘‘(IV) by a section 1244 interest

22 (as defined in section 1244(c)(1)).’’

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

24 this section shall apply to taxable years ending after De25 cember 31, 1996.
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1 SEC. 103. MODIFICATIONS TO EXCLUSION OF GAIN ON CER2 TAIN SMALL BUSINESS STOCK.

3 (a) EXCLUSION AVAILABLE TO CORPORATIONS.—

4 (1) IN GENERAL.—Subsection (a) of section

5 1202 is amended by striking ‘‘other than a corpora6 tion’’.

7 (2) TECHNICAL AMENDMENT.—Subsection (c)

8 of section 1202 is amended by adding at the end the

9 following new paragraph:

10 ‘‘(4) STOCK HELD AMONG MEMBERS OF CON11 TROLLED GROUP NOT ELIGIBLE.—Stock shall not be

12 treated as qualified small business stock if such

13 stock was at any time held by any member of the

14 parent-subsidiary controlled group (as defined in

15 subsection (d)(3)) which includes the qualified small

16 business.’’

17 (b) REPEAL OF MINIMUM TAX PREFERENCE.—

18 (1) IN GENERAL.—Section 57(a) is amended by

19 striking paragraph (7).

20 (2) TECHNICAL AMENDMENT.—Section

21 53(d)(1)(B)(ii)(II) is amended by striking ‘‘, (5),

22 and (7)’’ and inserting ‘‘and (5)’’.

23 (c) STOCK OF LARGER BUSINESSES ELIGIBLE FOR

24 EXCLUSION.—
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1 (1) Section 1202(d)(1) is amended by striking

2 ‘‘$50,000,000’’ each place it appears and inserting

3 ‘‘$100,000,000’’.

4 (2) Section 1202(d) is amended by adding at

5 the end the following new paragraph:

6 ‘‘(4) INFLATION ADJUSTMENT OF ASSET LIMI7 TATION.—In the case of stock issued in any calendar

8 year after 1997, the $100,000,000 amount con9 tained in paragraph (1) shall be increased by an

10 amount equal to—

11 ‘‘(A) such dollar amount, multiplied by

12 ‘‘(B) the cost-of-living adjustment deter13 mined under section 1(f)(3) for the calendar

14 year in which the taxable year begins, deter15 mined by substituting ‘calendar year 1996’ for

16 ‘calendar year 1992’ in subparagraph (B)

17 thereof.

18 If any amount as adjusted under the preceding sen19 tence is not a multiple of $1,000,000, such amount

20 shall be rounded to the next lower multiple of

21 $1,000,000.’’

22 (d) PER-ISSUER LIMITATION.—Section

23 1202(b)(1)(A) is amended by striking ‘‘$10,000,000’’ and

24 inserting ‘‘$20,000,000’’.

25 (e) OTHER MODIFICATIONS.—
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1 (1) WORKING CAPITAL LIMITATION.—Section

2 1202(e)(6) is amended by striking ‘‘2 years’’ each

3 place it appears and inserting ‘‘5 years’’.

4 (2) REDEMPTION RULES.—Section 1203(c)(3)

5 is amended by adding at the end the following new

6 subparagraph:

7 ‘‘(D) WAIVER WHERE BUSINESS PUR8 POSE.—A purchase of stock by the issuing cor9 poration shall be disregarded for purposes of

10 subparagraph (B) if the issuing corporation es11 tablishes that there was a business purpose for

12 such purchase and one of the principal purposes

13 of the purchase was not to avoid the limitation

14 of this section.’’

15 (f) EFFECTIVE DATES.—

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

17 this section shall apply to stock issued after the date

18 of the enactment of this Act.

19 (2) SPECIAL RULE.—The amendments made by

20 subsection (b), (d), and (e) shall apply to stock is21 sued after August 10, 1993.
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1 SEC. 104. EXEMPTION FROM TAX FOR GAIN ON SALE OF

2 PRINCIPAL RESIDENCE.

3 (a) IN GENERAL.—Section 121 (relating to one-time

4 exclusion of gain from sale of principal residence by indi5 vidual who has attained age 55) is amended to read as

6 follows:

7 ‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL

8 RESIDENCE.

9 ‘‘(a) EXCLUSION.—Gross income shall not include

10 gain from the sale or exchange of property if, during the

11 5-year period ending on the date of the sale or exchange,

12 such property has been owned and used by the taxpayer

13 as the taxpayer’s principal residence for periods aggregat14 ing 2 years or more.

15 ‘‘(b) LIMITATIONS.—

16 ‘‘(1) DOLLAR LIMITATION.—The amount of

17 gain excluded from gross income under subsection

18 (a) with respect to any sale or exchange shall not ex19 ceed $250,000 ($500,000 in the case of a joint re20 turn where both spouses meet the use requirement

21 of subsection (a)).

22 ‘‘(2) APPLICATION TO ONLY 1 SALE OR EX23 CHANGE EVERY 2 YEARS.—

24 ‘‘(A) IN GENERAL.—Subsection (a) shall

25 not apply to any sale or exchange by the tax26 payer if, during the 2-year period ending on the
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1 date of such sale or exchange, there was any

2 other sale or exchange by the taxpayer or his

3 spouse to which subsection (a) applied.

4 ‘‘(B) PREMARRIAGE SALES BY SPOUSE

5 NOT TAKEN INTO ACCOUNT.—If, but for this

6 subparagraph, subsection (a) would not apply

7 to a sale or exchange by a married individual

8 by reason of a sale or exchange by such individ9 ual’s spouse before their marriage—

10 ‘‘(i) subparagraph (A) shall be applied

11 without regard to the sale or exchange by

12 such individual’s spouse, but

13 ‘‘(ii) the amount of gain excluded

14 from gross income under subsection (a)

15 with respect to the sale or exchange by

16 such individual shall not exceed $250,000.

17 ‘‘(C) PRE-1997 SALES NOT TAKEN INTO AC18 COUNT.—Subparagraph (A) shall be applied

19 without regard to any sale or exchange before

20 January 1, 1997.

21 ‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET

22 CERTAIN REQUIREMENTS.—

23 ‘‘(1) IN GENERAL.—In the case of a sale or ex24 change to which this subsection applies, the owner25 ship and use requirements of subsection (a) shall not
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1 apply and subsection (b)(2) shall not apply; but the

2 amount of gain excluded from gross income under

3 subsection (a) with respect to such sale of exchange

4 shall not exceed—

5 ‘‘(A) the amount which bears the same

6 ratio to the amount which would be so excluded

7 if such requirements had been met, as

8 ‘‘(B) the shorter of—

9 ‘‘(i) the aggregate periods, during the

10 5-year period ending on the date of such

11 sale or exchange, such property has been

12 owned and used by the taxpayer as the

13 taxpayer’s principal residence, or

14 ‘‘(ii) the period after the date of the

15 most recent prior sale or exchange by the

16 taxpayer or his spouse to which subsection

17 (a) applied and before the date of such sale

18 or exchange,

19 bears to 2 years.

20 ‘‘(2) SALES AND EXCHANGES TO WHICH SUB21 SECTION APPLIES.—This subsection shall apply to

22 any sale or exchange if—

23 ‘‘(A) subsection (a) would not (but for this

24 subsection) apply to such sale or exchange by

25 reason of—
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1 ‘‘(i) a failure to meet the ownership

2 and use requirements of subsection (a), or

3 ‘‘(ii) subsection (b)(2), and

4 ‘‘(B) such sale or exchange is by reason of

5 a change in place of employment, health, or

6 other unforeseen circumstances.

7 ‘‘(d) SPECIAL RULES.—

8 ‘‘(1) JOINT RETURNS.—For purposes of this

9 section, if a husband and wife make a joint return

10 for the taxable year of the sale or exchange of prop11 erty, subsection (a) shall, subject to the provisions of

12 subsection (b), apply if either spouse meets the own13 ership and use requirements of subsection (a) with

14 respect to such property.

15 ‘‘(2) PROPERTY OF DECEASED SPOUSE.—For

16 purposes of this section, in the case of an unmarried

17 individual whose spouse is deceased on the date of

18 the sale or exchange of property, the period such un19 married individual owned such property shall include

20 the period such deceased spouse held such property

21 before death.

22 ‘‘(3) TENANT-STOCKHOLDER IN COOPERATIVE

23 HOUSING CORPORATION.—For purposes of this sec24 tion, if the taxpayer holds stock as a tenant-stock25 holder (as defined in section 216) in a cooperative
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1 housing corporation (as defined in such section),

2 then—

3 ‘‘(A) the holding requirements of sub4 section (a) shall be applied to the holding of

5 such stock, and

6 ‘‘(B) the use requirements of subsection

7 (a) shall be applied to the house or apartment

8 which the taxpayer was entitled to occupy as

9 such stockholder.

10 ‘‘(4) INVOLUNTARY CONVERSIONS.—

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

12 section, the destruction, theft, seizure, requisi13 tion, or condemnation of property shall be

14 treated as the sale of such property.

15 ‘‘(B) APPLICATION OF SECTION 1033.—In

16 applying section 1033 (relating to involuntary

17 conversions), the amount realized from the sale

18 or exchange of property shall be treated as

19 being the amount determined without regard to

20 this section, reduced by the amount of gain not

21 included in gross income pursuant to this sec22 tion.

23 ‘‘(C) PROPERTY ACQUIRED AFTER INVOL24 UNTARY CONVERSION.—If the basis of the

25 property sold or exchanged is determined (in
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1 whole or in part) under section 1033(b) (relat2 ing to basis of property acquired through invol3 untary conversion), then the holding and use by

4 the taxpayer of the converted property shall be

5 treated as holding and use by the taxpayer of

6 the property sold or exchanged.

7 ‘‘(5) RECOGNITION OF GAIN ATTRIBUTABLE TO

8 DEPRECIATION.—Subsection (a) shall not apply to

9 so much of the gain from the sale of any property

10 as does not exceed the portion of the depreciation

11 adjustments (as defined in section 1250(b)(3)) at12 tributable to periods after December 31, 1996, in re13 spect of such property.

14 ‘‘(6) DETERMINATION OF USE DURING PERIODS

15 OF OUT-OF-RESIDENCE CARE.—In the case of a tax16 payer who—

17 ‘‘(A) becomes physically or mentally in18 capable of self-care, and

19 ‘‘(B) owns property and uses such property

20 as the taxpayer’s principal residence during the

21 5-year period described in subsection (a) for pe22 riods aggregating at least 1 year,

23 then the taxpayer shall be treated as using such

24 property as the taxpayer’s principal residence during
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1 any time during such 5-year period in which the tax2 payer owns the property and resides in any facility

3 (including a nursing home) licensed by a State or

4 political subdivision to care for an individual in the

5 taxpayer’s condition.

6 ‘‘(7) DETERMINATION OF MARITAL STATUS.—

7 In the case of any sale or exchange, for purposes of

8 this section—

9 ‘‘(A) the determination of whether an indi10 vidual is married shall be made as of the date

11 of the sale or exchange, and

12 ‘‘(B) an individual legally separated from

13 his spouse under a decree of divorce or of sepa14 rate maintenance shall not be considered as

15 married.

16 ‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—

17 This section shall not apply to any sale or exchange by

18 an individual if the treatment provided by section

19 877(a)(1) applies to such individual.

20 ‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—

21 This section shall not apply to any sale or exchange with

22 respect to which the taxpayer elects not to have this sec23 tion apply.

24 ‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER

25 SECTION 1034.—For purposes of this section, in the case
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1 of property the acquisition of which by the taxpayer re2 sulted under section 1034 (as in effect on the day before

3 the date of the enactment of this sentence) in the non4 recognition of any part of the gain realized on the sale

5 or exchange of another residence, in determining the pe6 riod for which the taxpayer has owned and used such

7 property as the taxpayer’s principal residence, there shall

8 be included the aggregate periods for which such other

9 residence (and each prior residence taken into account

10 under section 1223(7) in determining the holding period

11 of such property) had been so owned and used.’’

12 (b) REPEAL OF NONRECOGNITION OF GAIN ON

13 ROLLOVER OF PRINCIPAL RESIDENCE.—Section 1034

14 (relating to rollover of gain on sale of principal residence)

15 is hereby repealed.

16 (c) CONFORMING AMENDMENTS.—

17 (1) The following provisions of the Internal

18 Revenue Code of 1986 are each amended by striking

19 ‘‘section 1034’’ and inserting ‘‘section 121’’: sections

20 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i),

21 143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I),

22 280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(3),

23 1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).

24 (2) Paragraph (4) of section 32(c) is amended

25 by striking ‘‘(as defined in section 1034(h)(3))’’ and
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1 by adding at the end the following new sentence:

2 ‘‘For purposes of the preceding sentence, the term

3 ‘extended active duty’ means any period of active

4 duty pursuant to a call or order to such duty for

5 a period in excess of 90 days or for an indefinite

6 period.’’

7 (3) Subparagraph (A) of 143(m)(6) is amended

8 by inserting ‘‘(as in effect on the day before the date

9 of the enactment of the Targeted Investment Incen10 tive and Economic Growth Act of 1997)’’ after

11 ‘‘1034(e)’’.

12 (4) Subsection (e) of section 216 is amended by

13 striking ‘‘such exchange qualifies for nonrecognition

14 of gain under section 1034(f)’’ and inserting ‘‘such

15 dwelling unit is used as his principal residence (with16 in the meaning of section 121)’’.

17 (5) Section 512(a)(3)(D) is amended by insert18 ing ‘‘(as in effect on the day before the date of the

19 enactment of the Targeted Investment Incentive and

20 Economic Growth Act of 1997)’’ after ‘‘1034’’.

21 (6) Paragraph (7) of section 1016(a) is amend22 ed by inserting ‘‘(as in effect on the day before the

23 date of the enactment of the Targeted Investment

24 Incentive and Economic Growth Act of 1997)’’ after
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1 ‘‘1034’’ and by inserting ‘‘(as so in effect)’’ after

2 ‘‘1034(e)’’.

3 (7) Paragraph (3) of section 1033(k) is amend4 ed to read as follows:

5 ‘‘(3) For exclusion from gross income of gain

6 from involuntary conversion of principal residence,

7 see section 121.’’

8 (8) Subsection (e) of section 1038 is amended

9 to read as follows:

10 ‘‘(e) PRINCIPAL RESIDENCES.—If—

11 ‘‘(1) subsection (a) applies to a reacquisition of

12 real property with respect to the sale of which gain

13 was not recognized under section 121 (relating to

14 gain on sale of principal residence); and

15 ‘‘(2) within 1 year after the date of the reacqui16 sition of such property by the seller, such property

17 is resold by him,

18 then, under regulations prescribed by the Secretary, sub19 sections (b), (c), and (d) of this section shall not apply

20 to the reacquisition of such property and, for purposes of

21 applying section 121, the resale of such property shall be

22 treated as a part of the transaction constituting the origi23 nal sale of such property.’’

24 (9) Paragraph (7) of section 1223 is amended

25 by inserting ‘‘(as in effect on the day before the date
26

•S 20 IS

1 of the enactment of the Targeted Investment Incen2 tive and Economic Growth Act of 1997)’’ after

3 ‘‘1034’’.

4 (10) Paragraph (7) of section 1250(d) is

5 amended to read as follows:

6 ‘‘(7) DISPOSITION OF PRINCIPAL RESIDENCE.—

7 Subsection (a) shall not apply to a disposition of

8 property to the extent used by the taxpayer as his

9 principal residence (within the meaning of section

10 121, relating to gain on sale of principal residence).’’

11 (11) Subsection (c) of section 6012 is amended

12 by striking ‘‘(relating to one-time exclusion of gain

13 from sale of principal residence by individual who

14 has attained age 55)’’ and inserting ‘‘(relating to

15 gain from sale of principal residence)’’.

16 (12) Paragraph (2) of section 6212(c) is

17 amended by striking subparagraph (C) and by redes18 ignating the succeeding subparagraphs accordingly.

19 (13) Section 6504 is amended by striking para20 graph (4) and by redesignating the succeeding para21 graphs accordingly.

22 (14) The item relating to section 121 in the

23 table of sections for part III of subchapter B of

24 chapter 1 is amended to read as follows:

‘‘Sec. 121. Exclusion of gain from sale of principal residence.’’
27

•S 20 IS

1 (15) The table of sections for part III of sub2 chapter O of chapter 1 of such Code is amended by

3 striking the item relating to section 1034.

4 (d) EFFECTIVE DATE.—

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

6 this section shall apply to sales and exchanges after

7 December 31, 1996.

8 (2) BINDING CONTRACTS, ETC.—At the election

9 of the taxpayer, the amendments made by this sec10 tion shall not apply to a sale or exchange after De11 cember 31, 1996, if—

12 (A) such sale or exchange is pursuant to a

13 contract which was binding on the date of the

14 enactment of this Act, or

15 (B) without regard to such amendments,

16 gain would not be recognized under section

17 1034 of the Internal Revenue Code of 1986 (as

18 in effect on the day before the date of the en19 actment of this Act) on such sale or exchange

20 by reason of a new residence acquired on or be21 fore such date.

22 This paragraph shall not apply to any sale or ex23 change by an individual if the treatment provided by

24 section 877(a)(1) of the Internal Revenue Code of

25 1986 applies to such individual.
28

•S 20 IS

1 TITLE II—RETIREMENT SAVINGS

2 SEC. 201. INCREASE IN DEDUCTION FOR CONTRIBUTIONS

3 TO INDIVIDUAL RETIREMENT PLANS.

4 (a) IN GENERAL.—Section 219(b)(1)(A) is amended

5 by striking ‘‘$2,000’’ and inserting ‘‘$2,500’’.

6 (b) CONFORMING AMENDMENTS.—Subsections

7 (a)(1), (b), and (j) of section 408 are each amended by

8 striking ‘‘$2,000’’ each place it appears and inserting

9 ‘‘$2,500’’.

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

11 this section shall apply to taxable years beginning after

12 December 31, 1996.

13 SEC. 202. ROLLOVER OF GAIN FROM SALE OF FARM ASSETS

14 TO INDIVIDUAL RETIREMENT PLANS.

15 (a) IN GENERAL.—Part III of subchapter O of chap16 ter 1 (relating to common nontaxable exchanges) is

17 amended by inserting after section 1034 the following new

18 section:

19 ‘‘SEC. 1034A. ROLLOVER OF GAIN ON SALE OF FARM ASSETS

20 INTO ASSET ROLLOVER ACCOUNT.

21 ‘‘(a) NONRECOGNITION OF GAIN.—Subject to the

22 limits of subsection (c), if a taxpayer has a qualified net

23 farm gain from the sale of a qualified farm asset, then,

24 at the election of the taxpayer, gain (if any) from such
29

•S 20 IS

1 sale shall be recognized only to the extent such gain ex2 ceeds the contributions to 1 or more asset rollover ac3 counts of the taxpayer for the taxable year in which such

4 sale occurs.

5 ‘‘(b) ASSET ROLLOVER ACCOUNT.—

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

7 this section, an asset rollover account shall be treat8 ed for purposes of this title in the same manner as

9 an individual retirement plan.

10 ‘‘(2) ASSET ROLLOVER ACCOUNT.—For pur11 poses of this title, the term ‘asset rollover account’

12 means an individual retirement plan which is des13 ignated at the time of the establishment of the plan

14 as an asset rollover account. Such designation shall

15 be made in such manner as the Secretary may pre16 scribe.

17 ‘‘(c) CONTRIBUTION RULES.—

18 ‘‘(1) NO DEDUCTION ALLOWED.—No deduction

19 shall be allowed under section 219 for a contribution

20 to an asset rollover account.

21 ‘‘(2) AGGREGATE CONTRIBUTION LIMITA22 TION.—Except in the case of rollover contributions,

23 the aggregate amount for all taxable years which
30

•S 20 IS

1 may be contributed to all asset rollover accounts es2 tablished on behalf of an individual shall not ex3 ceed—

4 ‘‘(A) $400,000 ($200,000 in the case of a

5 separate return by a married individual), re6 duced by

7 ‘‘(B) the amount by which the aggregate

8 value of the assets held by the individual (and

9 spouse) in individual retirement plans (other

10 than asset rollover accounts) exceeds $100,000.

11 The determination under subparagraph (B) shall be

12 made as of the close of the taxable year for which

13 the determination is being made.

14 ‘‘(3) ANNUAL CONTRIBUTION LIMITATIONS.—

15 ‘‘(A) GENERAL RULE.—The aggregate

16 contribution which may be made in any taxable

17 year to all asset rollover accounts shall not ex18 ceed the lesser of—

19 ‘‘(i) the qualified net farm gain for

20 the taxable year, or

21 ‘‘(ii) an amount determined by mul22 tiplying the number of years the taxpayer

23 is a qualified farmer by $10,000.

24 ‘‘(B) SPOUSE.—In the case of a married

25 couple filing a joint return under section 6013
31

•S 20 IS

1 for the taxable year, subparagraph (A) shall be

2 applied by substituting ‘$20,000’ for ‘$10,000’

3 for each year the taxpayer’s spouse is a quali4 fied farmer.

5 ‘‘(4) TIME WHEN CONTRIBUTION DEEMED

6 MADE.—For purposes of this section, a taxpayer

7 shall be deemed to have made a contribution to an

8 asset rollover account on the last day of the preced9 ing taxable year if the contribution is made on ac10 count of such taxable year and is made not later

11 than the time prescribed by law for filing the return

12 for such taxable year (not including extensions

13 thereof).

14 ‘‘(d) QUALIFIED NET FARM GAIN; ETC.—For pur15 poses of this section—

16 ‘‘(1) QUALIFIED NET FARM GAIN.—The term

17 ‘qualified net farm gain’ means the lesser of—

18 ‘‘(A) the net capital gain of the taxpayer

19 for the taxable year, or

20 ‘‘(B) the net capital gain for the taxable

21 year determined by only taking into account

22 gain (or loss) in connection with a disposition

23 of a qualified farm asset.

24 ‘‘(2) QUALIFIED FARM ASSET.—The term

25 ‘qualified farm asset’ means an asset used by a
32

•S 20 IS

1 qualified farmer in the active conduct of the trade

2 or business of farming (as defined in section

3 2032A(e)).

4 ‘‘(3) QUALIFIED FARMER.—

5 ‘‘(A) IN GENERAL.—The term ‘qualified

6 farmer’ means a taxpayer who—

7 ‘‘(i) during the 5-year period ending

8 on the date of the disposition of a qualified

9 farm asset materially participated in the

10 trade or business of farming, and

11 ‘‘(ii) owned (or who with the tax12 payer’s spouse owned) 50 percent or more

13 of such trade or business during such 5-

14 year period.

15 ‘‘(B) MATERIAL PARTICIPATION.—For

16 purposes of this paragraph, a taxpayer shall be

17 treated as materially participating in a trade or

18 business if the taxpayer meets the requirements

19 of section 2032A(e)(6).

20 ‘‘(4) ROLLOVER CONTRIBUTIONS.—Rollover

21 contributions to an asset rollover account may be

22 made only from other asset rollover accounts.

23 ‘‘(e) DISTRIBUTION RULES.—For purposes of this

24 title, the rules of paragraphs (1) and (2) of section 408(d)
33

•S 20 IS

1 shall apply to any distribution from an asset rollover ac2 count.

3 ‘‘(f) INDIVIDUAL REQUIRED TO REPORT QUALIFIED

4 CONTRIBUTIONS.—

5 ‘‘(1) IN GENERAL.—Any individual who—

6 ‘‘(A) makes a contribution to any asset

7 rollover account for any taxable year, or

8 ‘‘(B) receives any amount from any asset

9 rollover account for any taxable year,

10 shall include on the return of tax imposed by chap11 ter 1 for such taxable year and any succeeding tax12 able year (or on such other form as the Secretary

13 may prescribe) information described in paragraph

14 (2).

15 ‘‘(2) INFORMATION REQUIRED TO BE SUP16 PLIED.—The information described in this para17 graph is information required by the Secretary

18 which is similar to the information described in sec19 tion 408(o)(4)(B).

20 ‘‘(3) PENALTIES.—For penalties relating to re21 ports under this paragraph, see section 6693(b).’’

22 (b) CONTRIBUTIONS NOT DEDUCTIBLE.—Section

23 219(d) (relating to other limitations and restrictions) is

24 amended by adding at the end the following new para25 graph:
34

•S 20 IS

1 ‘‘(5) CONTRIBUTIONS TO ASSET ROLLOVER AC2 COUNTS.—No deduction shall be allowed under this

3 section with respect to a contribution under section

4 1034A.’’

5 (c) EXCESS CONTRIBUTIONS.—

6 (1) IN GENERAL.—Section 4973 (relating to

7 tax on excess contributions to individual retirement

8 accounts, certain section 403(b) contracts, and cer9 tain individual retirement annuities) is amended by

10 adding at the end the following new subsection:

11 ‘‘(e) ASSET ROLLOVER ACCOUNTS.—For purposes of

12 this section, in the case of an asset rollover account re13 ferred to in subsection (a)(1), the term ‘excess contribu14 tion’ means the excess (if any) of the amount contributed

15 for the taxable year to such account over the amount

16 which may be contributed under section 1034A.’’

17 (2) CONFORMING AMENDMENTS.—

18 (A) Section 4973(a)(1) is amended by in19 serting ‘‘an asset rollover account (within the

20 meaning of section 1034A),’’ after the comma

21 at the end.

22 (B) The heading for section 4973 is

23 amended by inserting ‘‘ASSET ROLLOVER AC24 COUNTS,’’ after ‘‘CONTRACTS’’.
35

•S 20 IS

1 (C) The table of sections for chapter 43 is

2 amended by inserting ‘‘asset rollover accounts,’’

3 after ‘‘contracts’’ in the item relating to section

4 4973.

5 (d) TECHNICAL AMENDMENTS.—

6 (1) Section 408(a)(1) (defining individual re7 tirement account) is amended by inserting ‘‘or a

8 qualified contribution under section 1034A,’’ before

9 ‘‘no contribution’’.

10 (2) Section 408(d)(5)(A) is amended by insert11 ing ‘‘or qualified contributions under section 1034A’’

12 after ‘‘rollover contributions’’.

13 (3)(A) Section 6693(b)(1)(A) is amended by in14 serting ‘‘or 1034A(f)(1)’’ after ‘‘408(o)(4)’’.

15 (B) Section 6693(b)(2) is amended by inserting

16 ‘‘or 1034A(f)(1)’’ after ‘‘408(o)(4)’’.

17 (4) The table of sections for part III of sub18 chapter O of chapter 1 is amended by inserting after

19 the item relating to section 1034 the following new

20 item:

‘‘Sec. 1034A. Rollover of gain on sale of farm assets into asset

rollover account.’’

21 (e) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to sales and exchanges after the

23 date of the enactment of this Act.
36

•S 20 IS

1 TITLE III—PERFORMANCE

2 STOCK OPTIONS

3 SEC. 301. PERFORMANCE STOCK OPTIONS.

4 (a) IN GENERAL.—Part II of subchapter D of chap5 ter 1 (relating to certain stock options) is amended by re6 designating section 424 as section 425 and by inserting

7 after section 423 the following new section:

8 ‘‘SEC. 424. PERFORMANCE STOCK OPTIONS.

9 ‘‘(a) IN GENERAL.—Section 421(a) shall apply with

10 respect to the transfer of a share of stock to any person

11 pursuant to the exercise of a performance stock option if

12 no disposition of such share is made by such person within

13 1 year after the transfer of such share to such person.

14 ‘‘(b) PERFORMANCE STOCK OPTION.—For purposes

15 of this part—

16 ‘‘(1) IN GENERAL.—The term ‘performance

17 stock option’ means an option to purchase stock of

18 any corporation described in paragraph (4) which is

19 granted to any person—

20 ‘‘(A) in connection with the performance of

21 services for an entity described in paragraph

22 (4), and

23 ‘‘(B) upon the attainment of performance

24 goals established by the entity.
37

•S 20 IS

1 ‘‘(2) ADDITIONAL REQUIREMENTS.—An option

2 shall not be treated as a performance stock option

3 unless the following requirements are met:

4 ‘‘(A) NONDISCRIMINATION.—Either—

5 ‘‘(i) the option is granted to an em6 ployee who, at the time of the grant, is not

7 a highly compensated employee, or

8 ‘‘(ii) immediately after the grant of

9 the option, employees who are not highly

10 compensated employees hold performance

11 share options which permit the acquisition

12 of at least 50 percent of all shares which

13 may be acquired pursuant to all perform14 ance stock options outstanding (whether or

15 not exercisable) as of such time.

16 For purposes of clause (ii), only that portion of

17 the options held by persons other than non18 highly compensated employees which results in

19 the requirements of clause (ii) not being met

20 shall be treated as options which are not per21 formance stock options, and such portion shall

22 be allocated among options held by such per23 sons in such manner as the Secretary may pre24 scribe.
38

•S 20 IS

1 ‘‘(B) SPECIFIC NUMBER OF OPTIONS.—

2 The option is granted pursuant to a plan that

3 includes either—

4 ‘‘(i) the aggregate number of shares

5 that may be issued under options granted

6 under the plan, or

7 ‘‘(ii) a method by which the aggregate

8 number of shares that may be issued under

9 options granted under the plan can be de10 termined (without regard to whether such

11 aggregate number may change under such

12 method),

13 and which is approved by the stockholders of

14 the granting corporation within 12 months be15 fore or after the date such plan is adopted.

16 ‘‘(C) TIME WHEN OPTION GRANTED.—The

17 option is granted within 10 years after the date

18 the plan described in subparagraph (B) is

19 adopted, or the date such plan is approved by

20 the stockholders, whichever is earlier.

21 ‘‘(D) TIME FOR EXERCISING OPTION.—

22 The option by its terms is not exercisable after

23 the expiration of 10 years from the date such

24 option is granted.
39

•S 20 IS

1 ‘‘(E) OPTION PRICE.—Except as provided

2 in paragraph (6) of subsection (c), the option

3 price is not less than the fair market value of

4 the stock at the time the option is granted.

5 ‘‘(F) TRANSFERABILITY.—The option by

6 its terms is not transferable by the person hold7 ing the option, other than—

8 ‘‘(i) in the case of an individual, by

9 will or the laws of descent and distribution,

10 or pursuant to a qualified domestic rela11 tions order (as defined in subsection (p) of

12 section 414), and

13 ‘‘(ii) in the case of any other person,

14 by any transaction in which gain or loss is

15 not recognized in whole or in part.

16 ‘‘(3) ELECTION NOT TO TREAT OPTION AS PER17 FORMANCE STOCK OPTION.—An option shall not be

18 treated as a performance stock option if—

19 ‘‘(A) as of the time the option is granted

20 the terms of such option provide that it will not

21 be treated as a performance stock option, or

22 ‘‘(B) as of the time such option is exer23 cised the grantor and holder agree that such

24 option will not be treated as a performance

25 stock option.
40

•S 20 IS

1 ‘‘(4) ENTITIES TO WHICH SECTION APPLIES.—

2 This section shall apply to an option granted to a

3 person who performs services for—

4 ‘‘(A) the corporation issuing the option, or

5 its parent or subsidiary corporation,

6 ‘‘(B) a partnership in which the corpora7 tion issuing the option holds (at the time of the

8 grant) a capital or profits interest representing

9 at least 20 percent of the total capital or profits

10 interest of the partnership, or

11 ‘‘(C) a corporation or a parent or subsidi12 ary corporation of such corporation issuing or

13 assuming a stock option in a transaction to

14 which section 425(a) applies.

15 ‘‘(5) HIGHLY COMPENSATED EMPLOYEE.—For

16 purposes of this subsection, the term ‘highly com17 pensated employee’ has the meaning given such term

18 by section 414(q).

19 ‘‘(c) SPECIAL RULES.—

20 ‘‘(1) GOOD FAITH EFFORTS TO VALUE

21 STOCK.—If a share of stock is acquired pursuant to

22 the exercise by any person of an option which would

23 fail to qualify as a performance stock option under

24 subsection (b) because there was a failure in an at25 tempt, made in good faith, to meet the requirement
41

•S 20 IS

1 of subparagraph (E) of subsection (b)(2), the re2 quirement of subparagraph (E) of subsection (b)(2)

3 shall be considered to have been met.

4 ‘‘(2) PERMISSIBLE PROVISIONS.—An option

5 that meets the requirements of subsection (b) shall

6 be treated as a performance stock option even if—

7 ‘‘(A) the option holder may pay for the

8 stock with stock of the corporation granting the

9 option,

10 ‘‘(B) the option holder has the right to re11 ceive property at the time of the exercise of the

12 option,

13 ‘‘(C) the right to exercise all or any por14 tion of a performance stock option may be sub15 ject to any condition, contingency or other cri16 teria (including, without limitation, the contin17 ued performance of services, achievement of

18 performance objectives, or the occurrence of any

19 event) which are determined in accordance with

20 the provisions of the plan or the terms of such

21 option, or

22 ‘‘(D) the option is subject to any condition

23 not inconsistent with the provisions of sub24 section (b).
42

•S 20 IS

1 ‘‘(3) FAIR MARKET VALUE.—For purposes of

2 this section, the fair market value of stock shall be

3 determined without regard to any restriction other

4 than a restriction that, by its terms, will never lapse.

5 ‘‘(4) DEFINITION OF PARENT AND SUBSIDIARY

6 CORPORATIONS.—For purposes of this section, the

7 terms ‘parent corporation’ and ‘subsidiary corpora8 tion’ have the meanings given such terms by sub9 sections (e) and (f) of section 425 except that such

10 subsections shall be applied by substituting ‘20 per11 cent’ for ‘50 percent’ each place it appears.

12 ‘‘(5) PERFORMANCE CRITERIA.—In the case of

13 a performance stock option that provides that its ex14 ercise is subject to any conditions or criteria de15 scribed in subparagraph (C) of paragraph (2), the

16 date or time the option is granted with respect to

17 each share that may be acquired shall be the date

18 or time the original performance share option is

19 granted and subject to the provisions of section

20 425(h), no portion of the option shall be treated as

21 granted at any other time.

22 ‘‘(6) CONVERSION OF OPTIONS.—If—

23 ‘‘(A) there is a transfer of an incentive

24 stock option in exchange for a performance

25 stock option, and
43

•S 20 IS

1 ‘‘(B) the number of shares that may be ac2 quired pursuant to such performance stock op3 tion and the transferred incentive stock option

4 are the same,

5 then the option acquired shall qualify as a perform6 ance stock option if the option price pursuant to the

7 performance share option is no less than the option

8 price under the transferred incentive stock option.’’

9 (b) CONFORMING AMENDMENTS.—

10 (1) Section 421(a) is amended by striking ‘‘or

11 423(a)’’ and inserting ‘‘, 423(a), or 424(a)’’.

12 (2) Section 421(b) is amended—

13 (A) by striking ‘‘or 423(a)’’ and inserting

14 ‘‘, 423(a), or 424(a)’’, and

15 (B) by striking ‘‘or 423(a)(1)’’ and insert16 ing ‘‘423(a)(1), or 424(a)’’.

17 (3) Section 421(c)(1)(A) is amended by insert18 ing ‘‘and the holding period requirement of section

19 424(a)’’ after ‘‘423(a)’’.

20 (4)(A) Sections 421(a)(2), 422(a)(2), and

21 423(a)(2) are each amended by striking ‘‘424(a)’’

22 and inserting ‘‘425(a)’’.

23 (B) Clause (ii) of section 402(e)(4)(E) is

24 amended by striking ‘‘424’’ and inserting ‘‘425’’.
44

•S 20 IS

1 (5) Section 423(b)(3) is amended by striking

2 ‘‘424(d)’’ and inserting ‘‘425(d)’’.

3 (6) Section 425(a), as redesignated by sub4 section (a), is amended by striking ‘‘424(a)’’ and in5 serting ‘‘425(a)’’.

6 (7) Section 425(c)(3)(A)(ii), as redesignated by

7 subsection (a), is amended by striking ‘‘or

8 423(a)(1)’’ and inserting ‘‘, 423(a)(1), or 424(a)’’.

9 (8) Section 425(g), as redesignated by sub10 section (a), is amended by striking ‘‘and 423(a)(2)’’

11 and inserting ‘‘, 423(a)(2) and 424(b)(4) (as modi12 fied by section 424(c)(4))’’.

13 (9) Section 425(j), as redesignated by sub14 section (a) (relating to cross-references), is amended

15 by inserting ‘‘performance stock option’’ after ‘‘em16 ployee stock purchase plans,’’.

17 (10) Section 1042(c)(1)(B)(ii) is amended by

18 striking ‘‘or 423’’ and inserting ‘‘423, or 424’’.

19 (11)(A) Section 6039(a)(1) is amended by in20 serting ‘‘or performance stock option’’ after ‘‘incen21 tive stock option’’.

22 (B) Section 6039(b)(1) is amended by inserting

23 ‘‘, performance share option,’’ after ‘‘incentive stock

24 option’’.
45

•S 20 IS

1 (C) Section 6039(c) is amended by striking

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

3 period at the end of paragraph (2) and inserting ‘‘,

4 and’’ and by adding at the end the following new

5 paragraph:

6 ‘‘(3) the term ‘performance share option’, see

7 424(b).’’

8 (12) The table of sections for part II of sub9 chapter D of chapter 1 is amended by striking the

10 item relating to section 424 and inserting the follow11 ing new items:

‘‘Sec. 424. Performance stock options.

‘‘Sec. 425. Definitions and special rules.’’

12 SEC. 302. TAX TREATMENT OF GAIN ON PERFORMANCE

13 SHARE OPTIONS.

14 (a) EXCLUSION.—

15 (1) IN GENERAL.—Part I of subchapter P of

16 chapter 1 (relating to capital gains and losses) is

17 amended by adding at the end the following new sec18 tion:

19 ‘‘SEC. 1203. 50-PERCENT EXCLUSION FOR GAIN FROM

20 STOCK ACQUIRED THROUGH PERFORMANCE

21 STOCK OPTIONS.

22 ‘‘(a) GENERAL RULE.—Gross income shall not in23 clude 50 percent of the gain from the disposition of any

24 stock acquired pursuant to the exercise of a performance
46

•S 20 IS

1 stock option if such disposition occurs more than 2 years

2 after the date on which such option was exercised with

3 respect to such stock.

4 ‘‘(b) DEFINITIONS AND RULES.—For purposes of

5 this section—

6 ‘‘(1) PERFORMANCE STOCK OPTION.—The term

7 ‘performance stock option’ has the meaning given

8 such term by section 424(b).

9 ‘‘(2) CERTAIN ACQUISITIONS DISREGARDED.—

10 If stock described in subsection (a) is disposed of

11 and the basis of the person acquiring the stock is de12 termined by reference to the basis of the stock in the

13 hands of the person who acquired it through exercise

14 of the performance stock option, such person shall

15 be treated as acquiring such stock pursuant to such

16 option on the date such stock was acquired pursuant

17 to the exercise of such option.

18 ‘‘(3) EXERCISE BY ESTATE.—If a performance

19 stock option is exercised after the death of an indi20 vidual holder by the estate of the decedent, or by a

21 person who acquired the right to exercise such op22 tion by bequest or inheritance or by reason of the

23 death of the decedent, the 2-year holding require24 ment of subsection (a) shall not apply to the disposi25 tion by such estate or person.’’
47

•S 20 IS

1 (2) CONFORMING AMENDMENTS.—

2 (A) Section 172(d)(2) (relating to modi3 fications with respect to net operating loss de4 duction) is amended to read as follows:

5 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX6 PAYERS OTHER THAN CORPORATIONS.—In the case

7 of a taxpayer other than a corporation—

8 ‘‘(A) the amount deductible on account of

9 losses from sales or exchanges of capital assets

10 shall not exceed the amount includable on ac11 count of gains from sales or exchanges of cap12 ital assets, and

13 ‘‘(B) the exclusion provided by section

14 1202 shall not be allowed.’’

15 (B) Paragraph (4) of section 642(c) is

16 amended to read as follows:

17 ‘‘(4) ADJUSTMENTS.—To the extent that the

18 amount otherwise allowable as a deduction under

19 this subsection consists of gain described in section

20 1202(a), proper adjustment shall be made for any

21 exclusion allowable to the estate or trust under sec22 tion 1202 or 1203. In the case of a trust, the deduc23 tion allowed by this subsection shall be subject to

24 section 681 (relating to unrelated business income).’’
48

•S 20 IS

1 (C) Paragraph (3) of section 643(a) is

2 amended by adding at the end thereof the fol3 lowing new sentence: ‘‘The exclusion under sec4 tion 1202 or 1203 shall not be taken into ac5 count.’’

6 (D) Paragraph (4) of section 691(c) is

7 amended by striking ‘‘1202, and 1211’’ and in8 serting ‘‘1202, 1203, and 1211’’.

9 (E) The second sentence of paragraph (2)

10 of section 871(a) is amended by inserting ‘‘such

11 gains and losses shall be determined without re12 gard to sections 1202 and 1203 and’’ after ‘‘ex13 cept that’’.

14 (F) The table of sections for part I of sub15 chapter P of chapter 1 is amended by adding

16 after the item relating to section 1202 the fol17 lowing new item:

‘‘Sec. 1203. 50-percent exclusion for gain from stock acquired

through performance stock options.’’

18 (b) TREATMENT FOR WAGE WITHHOLDING AND EM19 PLOYMENT TAXES.—

20 (1) FICA TAXES.—Section 3121(a) (defining

21 wages) is amended by striking ‘‘or’’ at the end of

22 paragraph (20), by striking the period at the end of

23 paragraph (21) and inserting ‘‘, or’’, and by adding

24 after paragraph (21) the following new paragraph:
49

•S 20 IS

1 ‘‘(22) any gain from the exercise of a perform2 ance stock option (as defined in section 424(b)) or

3 from the disposition of stock acquired pursuant to

4 the exercise of such a performance stock option.’’

5 (2) FUTA TAXES.—Section 3306(b) (defining

6 wages) is amended by striking ‘‘or’’ at the end of

7 paragraph (16), by striking the period at the end of

8 paragraph (17) and inserting ‘‘, or’’, and by adding

9 after paragraph (17) the following new paragraph:

10 ‘‘(18) any gain described in section

11 3121(a)(22).’’

12 (3) WAGE WITHHOLDING.—

13 (A) Section 3401(a) (defining wages) is

14 amended by striking ‘‘or’’ at the end of para15 graph (20), by striking the period at the end of

16 paragraph (21) and inserting ‘‘, or’’, and by

17 adding at the end the following new paragraph:

18 ‘‘(22) any gain from the exercise of a perform19 ance stock option (as defined in section 424(b)) or

20 from the disposition of stock acquired pursuant to

21 such a performance stock option.’’

22 (B) Section 421(b) (relating to effect of

23 disqualifying disposition) is amended by adding

24 at the end the following new sentence: ‘‘A de25 duction to the employer corporation in the case
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1 of a transfer pursuant to an option described in

2 section 422, 423, or 424 shall not be disallowed

3 by reason of a failure to withhold tax under

4 chapter 24 with respect to gain on stock ac5 quired in the transfer.’’

6 SEC. 303. EFFECTIVE DATE.

7 The amendments made by this title shall apply to op8 tions granted after the date of the enactment of this Act.

9 TITLE IV—EMPLOYER-PROVIDED

10 TRAINING

11 SEC. 401. EXTENSION OF EXCLUSION FOR EDUCATIONAL

12 ASSISTANCE PROGRAMS.

13 (a) IN GENERAL.—Section 127 is amended by strik14 ing subsection (d) and by redesignating subsection (e) as

15 subsection (d).

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

17 this section shall apply to taxable years beginning after

18 December 31, 1996.

19 SEC. 402. STUDY OF NONDISCRIMINATION RULES

20 APPLICABLE TO EDUCATIONAL ASSISTANCE

21 PROGRAMS.

22 (a) STUDY.—The Secretary of Labor, in consultation

23 with the Secretary of the Treasury, shall conduct a study

24 which examines—
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1 (1) the pattern in which taxpayers providing

2 job-related training and education assistance pro3 grams under section 127 of the Internal Revenue

4 Code of 1986 extend such benefits to highly com5 pensated employees and nonhighly compensated em6 ployees;

7 (2) the merits and administrative feasibility of

8 applying nondiscrimination rules to job-related train9 ing and educational assistance programs under sec10 tion 127 of the Internal Revenue Code of 1986

11 which are similar to the nondiscrimination rules ap12 plicable to employer-provided pension plans; and

13 (3) the merits and administrative feasibility of

14 conditioning the exclusion for job-related training

15 and section 127 assistance on an employee remain16 ing with the employer for at least 1 year after re17 ceiving the training or educational assistance.

18 (b) REPORT.—Not later than 9 months after the date

19 of the enactment of this Act, the Secretary of Labor shall

20 report to the Congress the results of the study conducted

21 under subsection (a), including any recommendations for

22 legislation as the Secretary determines appropriate.
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1 TITLE V—ESTATE TAX RELIEF

2 SEC. 501. FAMILY-OWNED BUSINESS EXCLUSION.

3 (a) IN GENERAL.—Part III of subchapter A of chap4 ter 11 (relating to gross estate) is amended by inserting

5 after section 2033 the following new section:

6 ‘‘SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

7 ‘‘(a) IN GENERAL.—In the case of an estate of a de8 cedent to which this section applies, the value of the gross

9 estate shall not include the lesser of—

10 ‘‘(1) the adjusted value of the qualified family11 owned business interests of the decedent otherwise

12 includible in the estate, or

13 ‘‘(2) $900,000, reduced by the amount of any

14 exclusion allowed under this section with respect to

15 the estate of a previously deceased spouse of the de16 cedent.

17 ‘‘(b) ESTATES TO WHICH SECTION APPLIES.—

18 ‘‘(1) IN GENERAL.—This section shall apply to

19 an estate if—

20 ‘‘(A) the decedent was (at the date of the

21 decedent’s death) a citizen or resident of the

22 United States,

23 ‘‘(B) the sum of—
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1 ‘‘(i) the adjusted value of the qualified

2 family-owned business interests described

3 in paragraph (2), plus

4 ‘‘(ii) the amount of the gifts of such

5 interests determined under paragraph (3),

6 exceeds 50 percent of the adjusted gross estate,

7 and

8 ‘‘(C) during the 8-year period ending on

9 the date of the decedent’s death there have

10 been periods aggregating 5 years or more dur11 ing which—

12 ‘‘(i) such interests were owned by the

13 decedent or a member of the decedent’s

14 family, and

15 ‘‘(ii) there was material participation

16 (within the meaning of section

17 2032A(e)(6)) by the decedent or a member

18 of the decedent’s family in the operation of

19 the business to which such interests relate.

20 ‘‘(2) INCLUDIBLE QUALIFIED FAMILY-OWNED

21 BUSINESS INTERESTS.—The qualified family-owned

22 business interests described in this paragraph are

23 the interests which—
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1 ‘‘(A) are included in determining the value

2 of the gross estate (without regard to this sec3 tion), and

4 ‘‘(B) are acquired by any qualified heir

5 from, or passed to any qualified heir from, the

6 decedent (within the meaning of section

7 2032A(e)(9)).

8 ‘‘(3) INCLUDIBLE GIFTS OF INTERESTS.—The

9 amount of the gifts of qualified family-owned busi10 ness interests determined under this paragraph is

11 the excess of—

12 ‘‘(A) the sum of—

13 ‘‘(i) the amount of such gifts from the

14 decedent to members of the decedent’s

15 family taken into account under subsection

16 2001(b)(1)(B), plus

17 ‘‘(ii) the amount of such gifts other18 wise excluded under section 2503(b),

19 to the extent such interests are continuously

20 held by members of such family (other than the

21 decedent’s spouse) between the date of the gift

22 and the date of the decedent’s death, over

23 ‘‘(B) the amount of such gifts from the de24 cedent to members of the decedent’s family oth25 erwise included in the gross estate.
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1 ‘‘(c) ADJUSTED GROSS ESTATE.—For purposes of

2 this section, the term ‘adjusted gross estate’ means the

3 value of the gross estate (determined without regard to

4 this section)—

5 ‘‘(1) reduced by any amount deductible under

6 paragraph (3) or (4) of section 2053(a), and

7 ‘‘(2) increased by the excess of—

8 ‘‘(A) the sum of—

9 ‘‘(i) the amount of gifts determined

10 under subsection (b)(3), plus

11 ‘‘(ii) the amount (if more than de

12 minimis) of other transfers from the dece13 dent to the decedent’s spouse (at the time

14 of the transfer) within 10 years of the date

15 of the decedent’s death, plus

16 ‘‘(iii) the amount of other gifts (not

17 included under clause (i) or (ii)) from the

18 decedent within 3 years of such date, other

19 than gifts to members of the decedent’s

20 family otherwise excluded under section

21 2503(b), over

22 ‘‘(B) the sum of the amounts described in

23 clauses (i), (ii), and (iii) of subparagraph (A)

24 which are otherwise includible in the gross es25 tate.
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1 For purposes of the preceding sentence, the Secretary may

2 provide that de minimis gifts to persons other than mem3 bers of the decedent’s family shall not be taken into ac4 count.

5 ‘‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY6 OWNED BUSINESS INTERESTS.—For purposes of this sec7 tion, the adjusted value of any qualified family-owned

8 business interest is the value of such interest for purposes

9 of this chapter (determined without regard to this sec10 tion), reduced by the excess of—

11 ‘‘(1) any amount deductible under paragraph

12 (3) or (4) of section 2053(a), over

13 ‘‘(2) the sum of—

14 ‘‘(A) any indebtedness on any qualified

15 residence of the decedent the interest on which

16 is deductible under section 163(h)(3), plus

17 ‘‘(B) any indebtedness to the extent the

18 taxpayer establishes that the proceeds of such

19 indebtedness were used for the payment of edu20 cational and medical expenses of the decedent,

21 the decedent’s spouse, or the decedent’s depend22 ents (within the meaning of section 152), plus

23 ‘‘(C) any indebtedness not described in

24 clause (i) or (ii), to the extent such indebted25 ness does not exceed $10,000.
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1 ‘‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTER2 EST.—

3 ‘‘(1) IN GENERAL.—For purposes of this sec4 tion, the term ‘qualified family-owned business inter5 est’ means—

6 ‘‘(A) an interest as a proprietor in a trade

7 or business carried on as a proprietorship, or

8 ‘‘(B) an interest in an entity carrying on

9 a trade or business, if—

10 ‘‘(i) at least—

11 ‘‘(I) 50 percent of such entity is

12 owned (directly or indirectly) by the

13 decedent and members of the dece14 dent’s family,

15 ‘‘(II) 70 percent of such entity is

16 so owned by members of 2 families, or

17 ‘‘(III) 90 percent of such entity

18 is so owned by members of 3 families,

19 and

20 ‘‘(ii) for purposes of subclause (II) or

21 (III) of clause (i), at least 30 percent of

22 such entity is so owned by the decedent

23 and members of the decedent’s family.

24 ‘‘(2) LIMITATION.—Such term shall not in25 clude—
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1 ‘‘(A) any interest in a trade or business

2 the principal place of business of which is not

3 located in the United States,

4 ‘‘(B) any interest in an entity, if the stock

5 or debt of such entity or a controlled group (as

6 defined in section 267(f)(1)) of which such en7 tity was a member was readily tradable on an

8 established securities market or secondary mar9 ket (as defined by the Secretary) at any time

10 within 3 years of the date of the decedent’s

11 death,

12 ‘‘(C) any interest in a trade or business

13 not described in section 542(c)(2), if more than

14 35 percent of the adjusted ordinary gross in15 come of such trade or business for the taxable

16 year which includes the date of the decedent’s

17 death would qualify as personal holding com18 pany income (as defined in section 543(a)),

19 ‘‘(D) that portion of an interest in a trade

20 or business that is attributable to—

21 ‘‘(i) cash or marketable securities, or

22 both, in excess of the reasonably expected

23 day-to-day working capital needs of such

24 trade or business, and
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1 ‘‘(ii) any other assets of the trade or

2 business (other than assets used in the ac3 tive conduct of a trade or business de4 scribed in section 542(c)(2)), the income of

5 which is described in section 543(a) or in

6 subparagraph (B), (C), (D), or (E) of sec7 tion 954(c)(1) (determined by substituting

8 ‘trade or business’ for ‘controlled foreign

9 corporation’).

10 ‘‘(3) RULES REGARDING OWNERSHIP.—

11 ‘‘(A) OWNERSHIP OF ENTITIES.—For pur12 poses of paragraph (1)(B)—

13 ‘‘(i) CORPORATIONS.—Ownership of a

14 corporation shall be determined by the

15 holding of stock possessing the appropriate

16 percentage of the total combined voting

17 power of all classes of stock entitled to vote

18 and the appropriate percentage of the total

19 value of shares of all classes of stock.

20 ‘‘(ii) PARTNERSHIPS.—Ownership of a

21 partnership shall be determined by the

22 owning of the appropriate percentage of

23 the capital interest in such partnership.

24 ‘‘(B) OWNERSHIP OF TIERED ENTITIES.—

25 For purposes of this section, if by reason of
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1 holding an interest in a trade or business, a de2 cedent, any member of the decedent’s family,

3 any qualified heir, or any member of any quali4 fied heir’s family is treated as holding an inter5 est in any other trade or business—

6 ‘‘(i) such ownership interest in the

7 other trade or business shall be dis8 regarded in determining if the ownership

9 interest in the first trade or business is a

10 qualified family-owned business interest,

11 and

12 ‘‘(ii) this section shall be applied sepa13 rately in determining if such interest in

14 any other trade or business is a qualified

15 family-owned business interest.

16 ‘‘(C) INDIVIDUAL OWNERSHIP RULES.—

17 For purposes of this section, an interest owned,

18 directly or indirectly, by or for an entity de19 scribed in paragraph (1)(B) shall be considered

20 as being owned proportionately by or for the en21 tity’s shareholders, partners, or beneficiaries. A

22 person shall be treated as a beneficiary of any

23 trust only if such person has a present interest

24 in such trust.
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1 ‘‘(f) TAX TREATMENT OF FAILURE TO MATERIALLY

2 PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTER3 ESTS.—

4 ‘‘(1) IN GENERAL.—There is imposed an addi5 tional estate tax if, within 10 years after the date

6 of the decedent’s death and before the date of the

7 qualified heir’s death—

8 ‘‘(A) the material participation require9 ments described in section 2032A(c)(6)(B) are

10 not met with respect to the qualified family11 owned business interest which was acquired (or

12 passed) from the decedent,

13 ‘‘(B) the qualified heir disposes of any por14 tion of a qualified family-owned business inter15 est (other than by a disposition to a member of

16 the qualified heir’s family or through a qualified

17 conservation contribution under section

18 170(h)),

19 ‘‘(C) the qualified heir loses United States

20 citizenship (within the meaning of section 877)

21 or with respect to whom an event described in

22 subparagraph (A) or (B) of section 877(e)(1)

23 occurs, and such heir does not comply with the

24 requirements of subsection (g), or
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1 ‘‘(D) the principal place of business of a

2 trade or business of the qualified family-owned

3 business interest ceases to be located in the

4 United States.

5 ‘‘(2) ADDITIONAL ESTATE TAX.—

6 ‘‘(A) IN GENERAL.—The amount of the

7 additional estate tax imposed by paragraph (1)

8 shall be equal to—

9 ‘‘(i) the applicable percentage of the

10 adjusted tax difference attributable to the

11 qualified family-owned business interest

12 (as determined under rules similar to the

13 rules of section 2032A(c)(2)(B)), plus

14 ‘‘(ii) interest on the amount deter15 mined under clause (i) at the underpay16 ment rate established under section 6621

17 for the period beginning on the date the

18 estate tax liability was due under this

19 chapter and ending on the date such addi20 tional estate tax is due.

21 ‘‘(B) APPLICABLE PERCENTAGE.—For

22 purposes of this paragraph, the applicable per23 centage shall be determined under the following

24 table:
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‘‘If the event described in

paragraph (1) occurs in

the following year of The applicable

material participation: percentage is:

1 through 6 .............................................................................. 100

7 ............................................................................................... 80

8 ............................................................................................... 60

9 ............................................................................................... 40

10 ............................................................................................. 20.

1 ‘‘(g) SECURITY REQUIREMENTS FOR NONCITIZEN

2 QUALIFIED HEIRS.—

3 ‘‘(1) IN GENERAL.—Except upon the applica4 tion of subparagraph (F) or (M) of subsection

5 (h)(3), if a qualified heir is not a citizen of the Unit6 ed States, any interest under this section passing to

7 or acquired by such heir (including any interest held

8 by such heir at a time described in subsection

9 (f)(1)(C)) shall be treated as a qualified family10 owned business interest only if the interest passes or

11 is acquired (or is held) in a qualified trust.

12 ‘‘(2) QUALIFIED TRUST.—The term ‘qualified

13 trust’ means a trust—

14 ‘‘(A) which is organized under, and gov15 erned by, the laws of the United States or a

16 State, and

17 ‘‘(B) except as otherwise provided in regu18 lations, with respect to which the trust instru19 ment requires that at least 1 trustee of the

20 trust be an individual citizen of the United

21 States or a domestic corporation.
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1 ‘‘(h) OTHER DEFINITIONS AND APPLICABLE

2 RULES.—For purposes of this section—

3 ‘‘(1) QUALIFIED HEIR.—The term ‘qualified

4 heir’—

5 ‘‘(A) has the meaning given to such term

6 by section 2032A(e)(1), and

7 ‘‘(B) includes any active employee of the

8 trade or business to which the qualified family9 owned business interest relates if such employee

10 has been employed by such trade or business

11 for a period of at least 10 years before the date

12 of the decedent’s death.

13 ‘‘(2) MEMBER OF THE FAMILY.—The term

14 ‘member of the family’ has the meaning given to

15 such term by section 2032A(e)(2).

16 ‘‘(3) APPLICABLE RULES.—Rules similar to the

17 following rules shall apply:

18 ‘‘(A) Section 2032A(b)(4) (relating to de19 cedents who are retired or disabled).

20 ‘‘(B) Section 2032A(b)(5) (relating to spe21 cial rules for surviving spouses).

22 ‘‘(C) Section 2032A(c)(2)(D) (relating to

23 partial dispositions).
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1 ‘‘(D) Section 2032A(c)(3) (relating to only

2 1 additional tax imposed with respect to any 1

3 portion).

4 ‘‘(E) Section 2032A(c)(4) (relating to due

5 date).

6 ‘‘(F) Section 2032A(c)(5) (relating to li7 ability for tax; furnishing of bond).

8 ‘‘(G) Section 2032A(c)(7) (relating to no

9 tax if use begins within 2 years; active manage10 ment by eligible qualified heir treated as mate11 rial participation).

12 ‘‘(H) Section 2032A(e)(10) (relating to

13 community property).

14 ‘‘(I) Section 2032A(e)(14) (relating to

15 treatment of replacement property acquired in

16 section 1031 or 1033 transactions).

17 ‘‘(J) Section 2032A(f) (relating to statute

18 of limitations).

19 ‘‘(K) Section 6166(b)(3) (relating to farm20 houses and certain other structures taken into

21 account).

22 ‘‘(L) Subparagraphs (B), (C), and (D) of

23 section 6166(g)(1) (relating to acceleration of

24 payment).
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1 ‘‘(M) Section 6324B (relating to special

2 lien for additional estate tax).’’.

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

4 for part III of subchapter A of chapter 11 is amended

5 by inserting after the item relating to section 2033 the

6 following new item:

‘‘Sec. 2033A. Family-owned business exclusion.’’.

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

8 this section shall apply to estates of decedents dying after

9 December 31, 1996.

10 SEC. 502. PORTION OF ESTATE TAX SUBJECT TO 4-PERCENT

11 INTEREST RATE INCREASED TO $1,600,000.

12 (a) IN GENERAL.—Subparagraph (B) of section

13 6601(j)(2) (defining 4-percent portion) is amended by

14 striking ‘‘$345,800’’ and inserting ‘‘$600,800’’.

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

16 this section shall apply to estates of decedents dying after

17 December 31, 1996.

18 SEC. 503. CERTAIN CASH RENTALS OF FARMLAND NOT TO

19 CAUSE RECAPTURE OF SPECIAL ESTATE TAX

20 VALUATION.

21 (a) IN GENERAL.—Subsection (c) of section 2032A

22 (relating to tax treatment of dispositions and failures to

23 use for qualified use) is amended by adding at the end

24 the following new paragraph:
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1 ‘‘(8) CERTAIN CASH RENTAL NOT TO CAUSE

2 RECAPTURE.—For purposes of this subsection, a

3 qualified heir shall not be treated as failing to use

4 property in a qualified use solely because such heir

5 rents such property on a net cash basis to a member

6 of the decedent’s family, but only if, during the pe7 riod of the lease, such member of the decedent’s

8 family uses such property in a qualified use.’’

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

10 subsection (a) shall apply with respect to rentals occurring

11 after December 31, 1976.

12 TITLE VI—TRANSPORTATION

13 INVESTMENT

14 SEC. 601. FINDINGS.

15 Congress finds that—

16 (1) decaying roads and bridges are clogging the

17 economic lifelines and hampering growth of commu18 nities around the country, costing nearly

19 $40,000,000,000 in annual losses from traffic con20 gestion alone;

21 (2) with ‘‘just-in-time’’ manufacturing a critical

22 aspect of our economic competitiveness, a modern,

23 efficient transportation system is more vital now

24 than ever;
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1 (3) user fee revenues continue to flow into our

2 transportation trust funds for their intended purpose

3 of infrastructure investment;

4 (4) Federal budget constraints have prevented

5 States from fully utilizing all amounts of the trans6 portation trust fund revenues made available to

7 them;

8 (5) at the same time, recent Federal initiatives

9 have equipped States with new infrastructure financ10 ing tools that help attract private investment, stimu11 late the Nation’s economy, and create jobs; and

12 (6) enabling States to use a portion of their un13 obligated balances of apportioned Highway Trust

14 Fund revenues via these new financing tools will

15 maximize the benefits of vitally needed infrastruc16 ture investments.

17 SEC. 602. PROGRAM STRUCTURE.

18 (a) IN GENERAL.—The Secretary of Transportation

19 (referred to in this title as the ‘‘Secretary’’) shall make

20 available to a State a portion of the State’s unobligated

21 balance in accordance with section 603.

22 (b) QUALIFYING PROJECT.—Federal funds made

23 available under this title may be used only to provide as24 sistance with respect to a project eligible for assistance

25 under section 133(b) of title 23, United States Code.
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1 (c) PROJECT ADMINISTRATION.—A project receiving

2 assistance under this title shall be carried out in accord3 ance with title 23, United States Code.

4 SEC. 603. FUNDING.

5 (a) UNOBLIGATED BALANCES.—

6 (1) IN GENERAL.—For each fiscal year, upon

7 the request of a State, the Secretary shall make

8 available to the State to carry out projects eligible

9 for assistance under this title an aggregate amount

10 not to exceed 10 percent, as of the last day of the

11 preceding fiscal year, of the funds that were appor12 tioned to the State under sections 104(b)(1),

13 104(b)(3), 104(b)(5), 144, and 160 of title 23, Unit14 ed States Code, and are not obligated.

15 (2) URBANIZED AREAS OVER 200,000.—Funds

16 that were apportioned to a State under section

17 104(b)(3) or 160 of title 23, United States Code,

18 and attributed to an urbanized area of the State

19 with an urbanized area population of over 200,000

20 under section 133(d)(3) of that title may be made

21 available by the Secretary under paragraph (1) only

22 if the metropolitan planning organization designated

23 for the area concurs, in writing, with that use.

24 (b) USE OF FUNDS.—

25 (1) STATE INFRASTRUCTURE BANKS.—
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1 (A) IN GENERAL.—A State shall contrib2 ute the amounts made available to the State

3 under subsection (a)(1) to the State infrastruc4 ture bank established by the State in accord5 ance with section 350 of the National Highway

6 System Designation Act of 1995 (23 U.S.C.

7 101 note; 109 Stat. 618). Federal funds con8 tributed to the bank under this subparagraph

9 shall constitute a capitalization grant for the in10 frastructure bank.

11 (B) DISBURSEMENTS.—The Secretary

12 shall ensure that the disbursements of the Fed13 eral funds referred to in subparagraph (A) to

14 the infrastructure bank shall be at a rate con15 sistent with historic rates for the Federal-aid

16 highway program.

17 (2) GRANTS.—In lieu of contributing the funds

18 to an infrastructure bank, and upon approval by the

19 Secretary, a State may obligate amounts made avail20 able to the State under subsection (a)(1) for a

21 project eligible for assistance under section 602(b).

22 (3) NO OBLIGATION LIMITATION.—No limita23 tion shall apply to obligations of amounts made

24 available under subsection (a)(1).

Æ