Calendar No. 426
105TH CONGRESS
2D SESSION
H. R. 4579
[Report No. 105–739]
A BILL
To provide tax relief for individuals, families, and
farming and other small businesses, to provide
tax incentives for education, to extend certain ex-
piring provisions, and for other purposes.
SEPTEMBER 23, 1998
Reported with an amendment, committed to the Commit-
tee of the Whole House on the State of the Union, and
ordered to be printed
IB
Union Calendar No. 426
105TH CONGRESS
2D SESSION
H. R. 4579
[Report No. 105–739]
To provide tax relief for individuals, families, and farming and other small
businesses, to provide tax incentives for education, to extend certain
expiring provisions, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
SEPTEMBER 16, 1998
Mr. ARCHER introduced the following bill; which was referred to the
Committee on Ways and Means
SEPTEMBER 23, 1998
Additional sponsors: Mr. CRANE, Mr. THOMAS, Mr. SHAW, Mr. BUNNING, Mr.
HOUGHTON, Mr. HERGER, Mr. MCCRERY, Mr. CAMP, Mr. RAMSTAD, Mr.
SAM JOHNSON of Texas, Ms. DUNN, Mr. COLLINS, Mr. PORTMAN, Mr.
ENGLISH of Pennsylvania, Mr. ENSIGN, Mr. CHRISTENSEN, Mr. WAT-
KINS, Mr. HAYWORTH, Mr. WELLER, Mr. HULSHOF, Mr. GALLEGLY, Mr.
GREENWOOD, and Mr. BLILEY
SEPTEMBER 23, 1998
Reported with an amendment, committed to the Committee of the Whole
House on the State of the Union, and ordered to be printed
[Strike out all after the enacting clause and insert the part printed in italic]
[For text of introduced bill, see copy of bill as introduced on September 16, 1998]
A BILL
To provide tax relief for individuals, families, and farming
and other small businesses, to provide tax incentives
for education, to extend certain expiring provisions, and
for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE, ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Taxpayer Relief Act of 1998’’.
(b) AMENDMENT OF 1986 CODE.—Except as otherwise
expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title, etc.
TITLE I—PROVISIONS PRIMARILY AFFECTING INDIVIDUALS AND
FAMILIES
Subtitle A—General Provisions
Sec. 101. Elimination of marriage penalty in standard deduction.
Sec. 102. Exemption of certain interest and dividend income from tax.
Sec. 103. Nonrefundable personal credits allowed against alternative minimum
tax.
Sec. 104. 100 percent deduction for health insurance costs of self-employed indi-
viduals.
Sec. 105. Special rule for members of uniformed services and Foreign Service in
determining exclusion of gain from sale of principal residence.
Sec. 106. $1,000,000 exemption from estate and gift taxes.
Subtitle B—Provisions Relating to Education
Sec. 111. Eligible educational institutions permitted to maintain qualified tui-
tion programs.
Sec. 112. Modification of arbitrage rebate rules applicable to public school con-
struction bonds.
Subtitle C—Provisions Relating to Social Security
Sec. 121. Increases in the social security earnings limit for individuals who have
attained retirement age.
Sec. 122. Recomputation of benefits after normal retirement age.
TITLE II—PROVISIONS PRIMARILY AFFECTING FARMING AND
OTHER BUSINESSES
Subtitle A—Increase in Expense Treatment for Small Businesses
Sec. 201. Increase in expense treatment for small businesses.
Subtitle B—Provisions Relating to Farmers
Sec. 211. Income averaging for farmers made permanent.
Sec. 212. 5-year net operating loss carryback for farming losses.
Sec. 213. Production flexibility contract payments.
Subtitle C—Increase in Volume Cap on Private Activity Bonds
Sec. 221. Increase in volume cap on private activity bonds.
TITLE III—EXTENSION AND MODIFICATION OF CERTAIN EXPIRING
PROVISIONS
Subtitle A—Tax Provisions
Sec. 301. Research credit.
Sec. 302. Work opportunity credit.
Sec. 303. Welfare-to-work credit.
Sec. 304. Contributions of stock to private foundations; expanded public inspec-
tion of private foundations’ annual returns.
Sec. 305. Subpart F exemption for active financing income.
Subtitle B—Generalized System of Preferences
Sec. 311. Extension of Generalized System of Preferences.
TITLE IV—REVENUE OFFSET
Sec. 401. Treatment of certain deductible liquidating distributions of regulated
investment companies and real estate investment trusts.
TITLE V—TECHNICAL CORRECTIONS
Sec. 501. Definitions; coordination with other titles.
Sec. 502. Amendments related to Internal Revenue Service Restructuring and Re-
form Act of 1998.
Sec. 503. Amendments related to Taxpayer Relief Act of 1997.
Sec. 504. Amendments related to Tax Reform Act of 1984.
Sec. 505. Other amendments.
TITLE VI—AMERICAN COMMUNITY RENEWAL ACT OF 1998
Sec. 601. Short title.
Sec. 602. Designation of and tax incentives for renewal communities.
Sec. 603. Extension of expensing of environmental remediation costs to renewal
communities.
Sec. 604. Extension of work opportunity tax credit for renewal communities
Sec. 605. Conforming and clerical amendments.
Sec. 606. Evaluation and reporting requirements.
TITLE 
I—PROVISIONS 
PRI-
MARILY AFFECTING INDIVID-
UALS AND FAMILIES
Subtitle A—General Provisions
SEC. 101. ELIMINATION OF MARRIAGE PENALTY IN STAND-
ARD DEDUCTION.
(a) IN GENERAL.—Paragraph (2) of section 63(c) (re-
lating to standard deduction) is amended—
(1) by striking ‘‘$5,000’’ in subparagraph (A)
and inserting ‘‘twice the dollar amount in effect
under subparagraph (C) for the taxable year’’,
(2) by adding ‘‘or’’ at the end of subparagraph
(B),
(3) by striking ‘‘in the case of’’ and all that fol-
lows in subparagraph (C) and inserting ‘‘in any
other case.’’, and
(4) by striking subparagraph (D).
(b) ADDITIONAL STANDARD DEDUCTION FOR AGED
AND BLIND TO BE THE SAME FOR MARRIED AND UNMAR-
RIED INDIVIDUALS.—
(1) Paragraphs (1) and (2) of section 63(f) are
each amended by striking ‘‘$600’’ and inserting
‘‘$750’’.
(2) Subsection (f) of section 63 is amended by
striking paragraph (3) and by redesignating para-
graph (4) as paragraph (3).
(c) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 1(f)(6) is
amended by striking ‘‘(other than with’’ and all that
follows through ‘‘shall be applied’’ and inserting
‘‘(other than with respect to sections 63(c)(4) and
151(d)(4)(A)) shall be applied’’.
(2) Paragraph (4) of section 63(c) is amended by
adding at the end the following flush sentence:
‘‘The preceding sentence shall not apply to the
amount referred to in paragraph (2)(A).’’
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
SEC. 102. EXEMPTION OF CERTAIN INTEREST AND DIVI-
DEND INCOME FROM TAX.
(a) IN GENERAL.—Part III of subchapter B of chapter
1 (relating to amounts specifically excluded from gross in-
come) is amended by inserting after section 115 the follow-
ing new section:
‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER-
EST RECEIVED BY INDIVIDUALS.
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include dividends and interest received dur-
ing the taxable year by an individual.
‘‘(b) LIMITATIONS.—
‘‘(1) MAXIMUM AMOUNT.—The aggregate amount
excluded under subsection (a) for any taxable year
shall not exceed $200 ($400 in the case of a joint re-
turn).
‘‘(2) CERTAIN
DIVIDENDS
EXCLUDED.—Sub-
section (a) shall not apply to any dividend from a
corporation which, for the taxable year of the corpora-
tion in which the distribution is made, or for the next
preceding taxable year of the corporation, is a cor-
poration exempt from tax under section 501 (relating
to certain charitable, etc., organization) or section
521 (relating to farmers’ cooperative associations).
‘‘(c) SPECIAL RULES.—For purposes of this section—
‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL GAIN
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPA-
NIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘For treatment of capital gain dividends, see sec-
tions 854(a) and 857(c).
‘‘(2) CERTAIN NONRESIDENT ALIENS INELIGIBLE
FOR EXCLUSION.—In the case of a nonresident alien
individual, subsection (a) shall apply only—
‘‘(A) in determining the tax imposed for the
taxable year pursuant to section 871(b)(1) and
only in respect of dividends and interest which
are effectively connected with the conduct of a
trade or business within the United States, or
‘‘(B) in determining the tax imposed for the
taxable year pursuant to section 877(b).
‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWNER-
SHIP PLANS.—Subsection (a) shall not apply to any
dividend described in section 404(k).’’
(b) CONFORMING AMENDMENTS.—
(1)(A) Subparagraph (A) of section 135(c)(4) is
amended by inserting ‘‘116,’’ before ‘‘137’’.
(B) Subsection (d) of section 135 is amended by
redesignating paragraph (4) as paragraph (5) and by
inserting after paragraph (3) the following new para-
graph:
‘‘(4) COORDINATION
WITH
SECTION
116.—This
section shall be applied before section 116.’’
(2) Paragraph (2) of section 265(a) is amended
by inserting before the period ‘‘, or to purchase or
carry obligations or shares, or to make deposits, to the
extent the interest thereon is excludable from gross in-
come under section 116’’.
(3) Subsection (c) of section 584 is amended by
adding at the end thereof the following new flush sen-
tence:
‘‘The proportionate share of each participant in the amount
of dividends or interest received by the common trust fund
and to which section 116 applies shall be considered for
purposes of such section as having been received by such
participant.’’
(4) Subsection (a) of section 643 is amended by
redesignating paragraph (7) as paragraph (8) and by
inserting after paragraph (6) the following new para-
graph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’
(5) Section 854(a) is amended by inserting ‘‘sec-
tion 116 (relating to partial exclusion of dividends
and interest received by individuals) and’’ after ‘‘For
purposes of’’.
(6) Section 857(c) is amended to read as follows:
‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) TREATMENT FOR SECTION 116.—For pur-
poses of section 116 (relating to partial exclusion of
dividends and interest received by individuals), a
capital gain dividend (as defined in subsection
(b)(3)(C)) received from a real estate investment trust
which meets the requirements of this part shall not be
considered as a dividend.
‘‘(2) TREATMENT FOR SECTION 243.—For pur-
poses of section 243 (relating to deductions for divi-
dends received by corporations), a dividend received
from a real estate investment trust which meets the
requirements of this part shall not be considered as a
dividend.’’
(7) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting after
the item relating to section 115 the following new
item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
SEC. 103. NONREFUNDABLE PERSONAL CREDITS ALLOWED
AGAINST ALTERNATIVE MINIMUM TAX.
(a) IN GENERAL.—Subsection (a) of section 26 is
amended to read as follows:
‘‘(a) LIMITATION BASED ON AMOUNT OF TAX.—The
aggregate amount of credits allowed by this subpart for the
taxable year shall not exceed the sum of—
‘‘(1) the taxpayer’s regular tax liability for the
taxable year, and
‘‘(2) the tax imposed for the taxable year by sec-
tion 55(a).
For purposes of applying the preceding sentence, paragraph
(2) shall be treated as being zero for any taxable year begin-
ning during 1998.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 24 is amended by
striking paragraph (2) and by redesignating para-
graph (3) as paragraph (2).
(2) Section 32 is amended by striking subsection
(h).
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 104. 100 PERCENT DEDUCTION FOR HEALTH INSUR-
ANCE COSTS OF SELF-EMPLOYED INDIVID-
UALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l) (re-
lating to special rules for health insurance costs of self-em-
ployed individuals) is amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—In the case of
an individual who is an employee within the mean-
ing of section 401(c)(1), there shall be allowed as a
deduction under this section an amount equal to 100
percent of the amount paid during the taxable year
for insurance which constitutes medical care for the
taxpayer, his spouse, and dependents.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
SEC. 105. SPECIAL RULE FOR MEMBERS OF UNIFORMED
SERVICES AND FOREIGN SERVICE IN DETER-
MINING EXCLUSION OF GAIN FROM SALE OF
PRINCIPAL RESIDENCE.
(a) IN GENERAL.—Subsection (d) of section 121 (relat-
ing to exclusion of gain from sale of principal residence)
is amended by adding at the end the following new para-
graph:
‘‘(9) MEMBERS OF UNIFORMED SERVICES AND
FOREIGN SERVICE.—
‘‘(A) IN GENERAL.—The running of the 5-
year period described in subsection (a) shall be
suspended with respect to an individual during
any time that such individual or such individ-
ual’s spouse is serving on qualified official ex-
tended duty as a member of the uniformed serv-
ices or of the Foreign Service.
‘‘(B) 
QUALIFIED
OFFICIAL
EXTENDED
DUTY.—For purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘qualified
official extended duty’ means any period of
extended duty as a member of the uniformed
services or a member of the Foreign Service
during which the member serves at a duty
station which is at least 50 miles from such
property or is under Government orders to
reside in Government quarters.
‘‘(ii) 
UNIFORMED
SERVICES.—The
term ‘uniformed services’ has the meaning
given such term by section 101(a)(5) of title
10, United States Code, as in effect on the
date of the enactment of the Taxpayer Relief
Act of 1998.
‘‘(iii) FOREIGN
SERVICE
OF
THE
UNITED STATES.—The term ‘member of the
Foreign Service’ has the meaning given the
term ‘member of the Service’ by paragraph
(1), (2), (3), (4), or (5) of section 103 of the
Foreign Service Act of 1980, as in effect on
the date of the enactment of the Taxpayer
Relief Act of 1998.
‘‘(iv) EXTENDED DUTY.—The term ‘ex-
tended duty’ means any period of active
duty pursuant to a call or order to such
duty for a period in excess of 90 days or for
an indefinite period.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to sales and exchanges after the date
of the enactment of this Act.
SEC. 106. $1,000,000 EXEMPTION FROM ESTATE AND GIFT
TAXES.
(a) IN GENERAL.—Subsection (c) of section 2010 (re-
lating to applicable credit amount) is amended to read as
follows:
‘‘(c) APPLICABLE CREDIT AMOUNT.—
‘‘(1) IN GENERAL.—For purposes of this section,
the applicable credit amount is $345,800.
‘‘(2) APPLICABLE
EXCLUSION
AMOUNT.—For
purposes of the provisions of this title which refer to
this subsection, the applicable exclusion amount is
$1,000,000.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to estates of decedents dying, and gifts
made, after December 31, 1998.
Subtitle B—Provisions Relating to
Education
SEC. 111. ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION
PROGRAMS.
(a) IN GENERAL.—Paragraph (1) of section 529(b)
(defining qualified State tuition program) is amended by
inserting ‘‘or by 1 or more eligible educational institutions’’
after ‘‘maintained by a State or agency or instrumentality
thereof’’.
(b) TECHNICAL AMENDMENTS.—
(1) The texts of sections 72(e)(9), 135(c)(2)(C),
135(d)(1)(D), 529, 530, and 4973(e)(1)(B) are each
amended by striking ‘‘qualified State tuition pro-
gram’’ each place it appears and inserting ‘‘qualified
tuition program’’.
(2) The paragraph heading for paragraph (9) of
section 72(e) and the subparagraph heading for sub-
paragraph (B) of section 530(b)(2) are each amended
by striking ‘‘STATE’’.
(3) The subparagraph heading for subparagraph
(C) of section 135(c)(2) is amended by striking
‘‘QUALIFIED STATE TUITION PROGRAM’’ and inserting
‘‘QUALIFIED TUITION PROGRAMS’’.
(4) Sections 529(c)(3)(D)(i) and 6693(a)(2)(C)
are each amended by striking ‘‘qualified State tuition
programs’’ and inserting ‘‘qualified tuition pro-
grams’’.
(5)(A) The section heading of section 529 is
amended to read as follows:
‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’.
(B) The item relating to section 529 in the table
of sections for part VIII of subchapter F of chapter
1 is amended by striking ‘‘State’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect on January 1, 1999.
SEC. 112. MODIFICATION OF ARBITRAGE REBATE RULES AP-
PLICABLE TO PUBLIC SCHOOL CONSTRUC-
TION BONDS.
(a) IN
GENERAL.—Subparagraph (C) of section
148(f)(4) is amended by adding at the end the following
new clause:
‘‘(xviii) 4-YEAR
SPENDING
REQUIRE-
MENT FOR PUBLIC SCHOOL CONSTRUCTION
ISSUE.—
‘‘(I) IN GENERAL.—In the case of
a public school construction issue, the
spending requirements of clause (ii)
shall be treated as met if at least 10
percent of the available construction
proceeds of the construction issue are
spent for the governmental purposes of
the issue within the 1-year period be-
ginning on the date the bonds are
issued, 30 percent of such proceeds are
spent for such purposes within the 2-
year period beginning on such date, 50
percent of such proceeds are spent for
such purposes within the 3-year period
beginning on such date, and 100 per-
cent of such proceeds are spent for such
purposes within the 4-year period be-
ginning on such date.
‘‘(II) PUBLIC SCHOOL CONSTRUC-
TION
ISSUE.—For purposes of this
clause, the term ‘public school construc-
tion issue’ means any construction
issue if no bond which is part of such
issue is a private activity bond and all
of the available construction proceeds
of such issue are to be used for the con-
struction (as defined in clause (iv)) of
public school facilities to provide edu-
cation or training below the post-
secondary level or for the acquisition of
land that is functionally related and
subordinate to such facilities.
‘‘(III) OTHER RULES TO APPLY.—
Rules similar to the rules of the preced-
ing provisions of this subparagraph
which apply to clause (ii) also apply
to this clause.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to obligations issued after December 31,
1998.
Subtitle C—Provisions Relating to
Social Security
SEC. 121. INCREASES IN THE SOCIAL SECURITY EARNINGS
LIMIT FOR INDIVIDUALS WHO HAVE AT-
TAINED RETIREMENT AGE.
(a) IN GENERAL.—Section 203(f)(8)(D) of the Social
Security Act (42 U.S.C. 403(f)(8)(D)) is amended by strik-
ing clauses (iv) through (vii) and inserting the following
new clauses:
‘‘(iv) for each month of any taxable year
ending after 1998 and before 2000, $1,416.662⁄3,
‘‘(v) for each month of any taxable year
ending after 1999 and before 2001, $1,541.662⁄3,
‘‘(vi) for each month of any taxable year
ending after 2000 and before 2002, $2,166.662⁄3,
‘‘(vii) for each month of any taxable year
ending after 2001 and before 2003, $2,500.00,
‘‘(viii) for each month of any taxable year
ending after 2002 and before 2004, $2,608.331⁄3,
‘‘(ix) for each month of any taxable year
ending after 2003 and before 2005, $2,833.331⁄3,
‘‘(x) for each month of any taxable year
ending after 2004 and before 2006, $2,950.00,
‘‘(xi) for each month of any taxable year
ending after 2005 and before 2007, $3,066.662⁄3,
‘‘(xii) for each month of any taxable year
ending after 2006 and before 2008, $3,195.831⁄3,
and
‘‘(xiii) for each month of any taxable year
ending after 2007 and before 2009, $3,312.50.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 203(f)(8)(B)(ii) of such Act (42
U.S.C. 403(f)(8)(B)(ii)) is amended—
(A) by striking ‘‘after 2001 and before
2003’’ and inserting ‘‘after 2007 and before
2009’’; and
(B) in subclause (II), by striking ‘‘2000’’
and inserting ‘‘2006’’.
(2) The second sentence of section 223(d)(4)(A) of
such Act (42 U.S.C. 423(d)(4)(A)) is amended by in-
serting ‘‘and section 121 of the Taxpayer Relief Act
of 1998’’ after ‘‘1996’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to taxable years ending
after 1998.
SEC. 122. RECOMPUTATION OF BENEFITS AFTER NORMAL
RETIREMENT AGE.
(a) IN GENERAL.—Section 215(f)(2)(D)(i) of the So-
cial Security Act (42 U.S.C. 415(f)(2)(D)(i)) is amended
to read as follows:
‘‘(i) in the case of an individual who did not die
in the year with respect to which the recomputation
is made, for monthly benefits beginning with benefits
for January of—
‘‘(I) the second year following the year with
respect to which the recomputation is made, in
any such case in which the individual is entitled
to old-age insurance benefits, the individual has
attained retirement age (as defined in section
216(l)) as of the end of the year preceding the
year with respect to which the recomputation is
made, and the year with respect to which the re-
computation is made would not be substituted in
recomputation under this subsection for a benefit
computation year in which no wages or self-em-
ployment income have been credited previously
to such individual, or
‘‘(II) the first year following the year with
respect to which the recomputation is made, in
any other such case; or’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 215(f)(7) of such Act (42 U.S.C.
415(f)(7)) is amended by inserting ‘‘, and as amend-
ed by section 122(b)(2) of the Taxpayer Relief Act of
1998,’’ after ‘‘This subsection as in effect in December
1978’’.
(2) Subparagraph (A) of section 215(f)(2) of the
Social Security Act as in effect in December 1978 and
applied in certain cases under the provisions of such
Act as in effect after December 1978 is amended—
(A) by striking ‘‘in the case of an individ-
ual who did not die’’ and all that follows and in-
serting ‘‘in the case of an individual who did not
die in the year with respect to which the re-
computation is made, for monthly benefits begin-
ning with benefits for January of—’’; and
(B) by adding at the end the following:
‘‘(i) the second year following the year with
respect to which the recomputation is made, in
any such case in which the individual is entitled
to old-age insurance benefits, the individual has
attained age 65 as of the end of the year preced-
ing the year with respect to which the recompu-
tation is made, and the year with respect to
which the recomputation is made would not be
substituted in recomputation under this sub-
section for a benefit computation year in which
no wages or self-employment income have been
credited previously to such individual, or
‘‘(ii) the first year following the year with
respect to which the recomputation is made, in
any other such case; or’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to recomputations of pri-
mary insurance amounts based on wages paid and self em-
ployment income derived after 1997 and with respect to
benefits payable after December 31, 1998.
TITLE 
II—PROVISIONS 
PRI-
MARILY AFFECTING FARMING
AND OTHER BUSINESSES
Subtitle A—Increase in Expense
Treatment for Small Businesses
SEC. 201. 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 $25,000.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
Subtitle B—Provisions Relating to
Farmers
SEC. 211. INCOME AVERAGING FOR FARMERS MADE PERMA-
NENT.
Subsection (c) of section 933 of the Taxpayer Relief
Act of 1997 is amended by striking ‘‘, and before January
1, 2001’’.
SEC. 212. 5-YEAR NET OPERATING LOSS CARRYBACK FOR
FARMING LOSSES.
(a) IN GENERAL.—Paragraph (1) of section 172(b)
(relating to net operating loss deduction) is amended by
adding at the end the following new subparagraph:
‘‘(G) FARMING LOSSES.—In the case of a
taxpayer which has a farming loss (as defined in
subsection (i)) for a taxable year, such farming
loss shall be a net operating loss carryback to
each of the 5 taxable years preceding the taxable
year of such loss.’’
(b) FARMING LOSS.—Section 172 is amended by redes-
ignating subsection (i) as subsection (j) and by inserting
after subsection (h) the following new subsection:
‘‘(i) RULES RELATING TO FARMING LOSSES.—For
purposes of this section—
‘‘(1) IN
GENERAL.—The term ‘farming loss’
means the lesser of—
‘‘(A) the amount which would be the net op-
erating loss for the taxable year if only income
and deductions attributable to farming busi-
nesses (as defined in section 263A(e)(4)) are
taken into account, or
‘‘(B) the amount of the net operating loss
for such taxable year.
‘‘(2) COORDINATION WITH SUBSECTION (b)(2).—
For purposes of applying subsection (b)(2), a farming
loss for any taxable year shall be treated in a manner
similar to the manner in which a specified liability
loss is treated.
‘‘(3) ELECTION.—Any taxpayer entitled to a 5-
year carryback under subsection (b)(1)(G) from any
loss year may elect to have the carryback period with
respect to such loss year determined without regard to
subsection (b)(1)(G). Such election shall be made in
such manner as may be prescribed by the Secretary
and shall be made by the due date (including exten-
sions of time) for filing the taxpayer’s return for the
taxable year of the net operating loss. Such election,
once made for any taxable year, shall be irrevocable
for such taxable year.’’
(c) COORDINATION WITH FARM DISASTER LOSSES.—
Clause (ii) of section 172(b)(1)(F) is amended by adding
at the end the following flush sentence:
‘‘Such term shall not include any farming
loss (as defined in subsection (i)).’’
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to net operating losses for taxable years
beginning after December 31, 1997.
SEC. 213. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.
The option under section 112(d)(3) of the Federal Ag-
riculture Improvement and Reform Act of 1996 (7 U.S.C.
7212(d)(3)) shall be disregarded in determining the taxable
year for which the payment for fiscal year 1999 under a
production flexibility contract under subtitle B of title I
of such Act is properly includible in gross income for pur-
poses of the Internal Revenue Code of 1986.
Subtitle C—Increase in Volume Cap
on Private Activity Bonds
SEC. 221. INCREASE IN VOLUME CAP ON PRIVATE ACTIVITY
BONDS.
(a) IN GENERAL.—Subsection (d) of section 146 (relat-
ing to volume cap) is amended by striking paragraph (2),
by redesignating paragraphs (3) and (4) as paragraphs (2)
and (3), respectively, and by striking paragraph (1) and
inserting the following new paragraph:
‘‘(1) IN GENERAL.—The State ceiling applicable
to any State for any calendar year shall be the great-
er of—
‘‘(A) an amount equal to $75 multiplied by
the State population, or
‘‘(B) $225,000,000.
Subparagraph (B) shall not apply to any possession
of the United States.’’
(b) CONFORMING AMENDMENT.—Sections 25(f)(3) and
42(h)(3)(E)(iii) are each amended by striking ‘‘section
146(d)(3)(C)’’ and inserting ‘‘section 146(d)(2)(C)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to calendar years after 1998.
TITLE 
III—EXTENSION 
AND
MODIFICATION OF CERTAIN
EXPIRING PROVISIONS
Subtitle A—Tax Provisions
SEC. 301. RESEARCH CREDIT.
(a) TEMPORARY EXTENSION.—
(1) IN
GENERAL.—Paragraph (1) of section
41(h) (relating to termination) is amended—
(A) by striking ‘‘June 30, 1998’’ and insert-
ing ‘‘February 29, 2000’’,
(B) by striking ‘‘24-month’’ and inserting
‘‘44-month’’, and
(C) by striking ‘‘24 months’’ and inserting
‘‘44 months’’.
(2) 
TECHNICAL
AMENDMENT.—Subparagraph
(D) of section 45C(b)(1) is amended by striking
‘‘June 30, 1998’’ and inserting ‘‘February 29, 2000’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to amounts paid or in-
curred after June 30, 1998.
(b) INCREASE IN PERCENTAGES UNDER ALTERNATIVE
INCREMENTAL CREDIT.—
(1) IN GENERAL.—Subparagraph (A) of section
41(c)(4) is amended—
(A) by striking ‘‘1.65 percent’’ and insert-
ing ‘‘2.65 percent’’,
(B) by striking ‘‘2.2 percent’’ and inserting
‘‘3.2 percent’’, and
(C) by striking ‘‘2.75 percent’’ and insert-
ing ‘‘3.75 percent’’.
(2) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to taxable years begin-
ning after June 30, 1998.
SEC. 302. WORK OPPORTUNITY CREDIT.
(a) TEMPORARY EXTENSION.—Subparagraph (B) of
section 51(c)(4) (relating to termination) is amended by
striking ‘‘June 30, 1998’’ and inserting ‘‘February 29,
2000’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to individuals who begin work for the
employer after June 30, 1998.
SEC. 303. WELFARE-TO-WORK CREDIT.
Subsection (f) of section 51A (relating to termination)
is amended by striking ‘‘April 30, 1999’’ and inserting
‘‘February 29, 2000’’.
SEC. 304. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDA-
TIONS; EXPANDED PUBLIC INSPECTION OF
PRIVATE FOUNDATIONS’ ANNUAL RETURNS.
(a) SPECIAL RULE FOR CONTRIBUTIONS OF STOCK
MADE PERMANENT.—
(1) IN
GENERAL.—Paragraph (5) of section
170(e) is amended by striking subparagraph (D) (re-
lating to termination).
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall apply to contributions made after
June 30, 1998.
(b) EXPANDED
PUBLIC
INSPECTION
OF
PRIVATE
FOUNDATIONS’ ANNUAL RETURNS, ETC.—
(1) IN GENERAL.—Section 6104 (relating to pub-
licity of information required from certain exempt or-
ganizations and certain trusts) is amended by strik-
ing subsections (d) and (e) and inserting after sub-
section (c) the following new subsection:
‘‘(d) PUBLIC INSPECTION OF CERTAIN ANNUAL RE-
TURNS AND APPLICATIONS FOR EXEMPTION.—
‘‘(1) IN GENERAL.—In the case of an organiza-
tion described in subsection (c) or (d) of section 501
and exempt from taxation under section 501(a)—
‘‘(A) a copy of—
‘‘(i) the annual return filed under sec-
tion 6033 (relating to returns by exempt or-
ganizations) by such organization, and
‘‘(ii) if the organization filed an appli-
cation for recognition of exemption under
section 501, the exempt status application
materials of such organization,
shall be made available by such organization for
inspection during regular business hours by any
individual at the principal office of such organi-
zation and, if such organization regularly main-
tains 1 or more regional or district offices hav-
ing 3 or more employees, at each such regional
or district office, and
‘‘(B) upon request of an individual made at
such principal office or such a regional or dis-
trict office, a copy of such annual return and ex-
empt status application materials shall be pro-
vided to such individual without charge other
than a reasonable fee for any reproduction and
mailing costs.
The request described in subparagraph (B) must be
made in person or in writing. If such request is made
in person, such copy shall be provided immediately
and, if made in writing, shall be provided within 30
days.
‘‘(2) 3-YEAR LIMITATION ON INSPECTION OF RE-
TURNS.—Paragraph (1) shall apply to an annual re-
turn filed under section 6033 only during the 3-year
period beginning on the last day prescribed for filing
such return (determined with regard to any extension
of time for filing).
‘‘(3) EXCEPTIONS FROM DISCLOSURE REQUIRE-
MENT.—
‘‘(A) NONDISCLOSURE
OF
CONTRIBUTORS,
ETC.—Paragraph (1) shall not require the disclo-
sure of the name or address of any contributor
to the organization. In the case of an organiza-
tion described in section 501(d), subparagraph
(A) shall not require the disclosure of the copies
referred to in section 6031(b) with respect to
such organization.
‘‘(B) NONDISCLOSURE OF CERTAIN OTHER
INFORMATION.—Paragraph (1) shall not require
the disclosure of any information if the Secretary
withheld such information from public inspec-
tion under subsection (a)(1)(D).
‘‘(4) LIMITATION ON PROVIDING COPIES.—Para-
graph (1)(B) shall not apply to any request if, in ac-
cordance with regulations promulgated by the Sec-
retary, the organization has made the requested docu-
ments widely available, or the Secretary determines,
upon application by an organization, that such re-
quest is part of a harassment campaign and that
compliance with such request is not in the public in-
terest.
‘‘(5) 
EXEMPT
STATUS
APPLICATION
MATE-
RIALS.—For purposes of paragraph (1), the term ‘ex-
empt status applicable materials’ means the applica-
tion for recognition of exemption under section 501
and any papers submitted in support of such applica-
tion and any letter or other document issued by the
Internal Revenue Service with respect to such appli-
cation.’’
(2) CONFORMING AMENDMENTS.—
(A) Subsection (c) of section 6033 is amend-
ed by adding ‘‘and’’ at the end of paragraph (1),
by striking paragraph (2), and by redesignating
paragraph (3) as paragraph (2).
(B) Subparagraph (C) of section 6652(c)(1)
is amended by striking ‘‘subsection (d) or (e)(1)
of section 6104 (relating to public inspection of
annual returns)’’ and inserting ‘‘section 6104(d)
with respect to any annual return’’.
(C) Subparagraph (D) of section 6652(c)(1)
is amended by striking ‘‘section 6104(e)(2) (re-
lating to public inspection of applications for ex-
emption)’’ and inserting ‘‘section 6104(d) with
respect to any exempt status application mate-
rials (as defined in such section)’’.
(D) Section 6685 is amended by striking
‘‘or (e)’’.
(E) Section 7207 is amended by striking
‘‘or (e)’’.
(3) EFFECTIVE DATE.—
(A) IN GENERAL.—Except as provided in
subparagraph (B), the amendments made by this
subsection shall apply to requests made after the
later of December 31, 1998, or the 60th day after
the Secretary of the Treasury first issues the reg-
ulations referred to such section 6104(d)(4) of the
Internal Revenue Code of 1986, as amended by
this section.
(B) PUBLICATION OF ANNUAL RETURNS.—
Section 6104(d) of such Code, as in effect before
the amendments made by this subsection, shall
not apply to any return the due date for which
is after the date such amendments take effect
under subparagraph (A).
SEC. 305. SUBPART F EXEMPTION FOR ACTIVE FINANCING
INCOME.
(a) INCOME DERIVED FROM BANKING, FINANCING OR
SIMILAR BUSINESSES.—Section 954(h) (relating to income
derived in the active conduct of banking, financing, or simi-
lar businesses) is amended to read as follows:
‘‘(h) SPECIAL RULE FOR INCOME DERIVED IN THE AC-
TIVE CONDUCT OF BANKING, FINANCING, OR SIMILAR BUSI-
NESSES.—
‘‘(1) IN GENERAL.—For purposes of subsection
(c)(1), foreign personal holding company income shall
not include qualified banking or financing income of
an eligible controlled foreign corporation.
‘‘(2) ELIGIBLE CONTROLLED FOREIGN CORPORA-
TION.—For purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘eligible con-
trolled foreign corporation’ means a controlled
foreign corporation which—
‘‘(i) is predominantly engaged in the
active conduct of a banking, financing, or
similar business, and
‘‘(ii) conducts substantial activity with
respect to such business.
‘‘(B) PREDOMINANTLY
ENGAGED.—A con-
trolled foreign corporation shall be treated as
predominantly engaged in the active conduct of
a banking, financing, or similar business if—
‘‘(i) more than 70 percent of the gross
income of the controlled foreign corporation
is derived directly from the active and regu-
lar conduct of a lending or finance business
from transactions with customers which are
not related persons,
‘‘(ii) it is engaged in the active con-
duct of a banking business and is an insti-
tution licensed to do business as a bank in
the United States (or is any other corpora-
tion not so licensed which is specified by the
Secretary in regulations), or
‘‘(iii) it is engaged in the active con-
duct of a securities business and is reg-
istered as a securities broker or dealer under
section 15(a) of the Securities Exchange Act
of 1934 or is registered as a Government se-
curities broker or dealer under section
15C(a) of such Act (or is any other corpora-
tion not so registered which is specified by
the Secretary in regulations).
‘‘(3) QUALIFIED
BANKING
OR
FINANCING
IN-
COME.—For purposes of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
banking or financing income’ means income of
an 
eligible 
controlled 
foreign 
corporation
which—
‘‘(i) is derived in the active conduct of
a banking, financing, or similar business
by—
‘‘(I) such eligible controlled for-
eign corporation, or
‘‘(II) a qualified business unit of
such eligible controlled foreign corpora-
tion,
‘‘(ii) is derived from 1 or more trans-
actions—
‘‘(I) with customers located in a
country other than the United States,
and
‘‘(II) substantially all of the ac-
tivities in connection with which are
conducted directly by the corporation
or unit in its home country, and
‘‘(iii) is treated as earned by such cor-
poration or unit in its home country for
purposes of such country’s tax laws.
‘‘(B) LIMITATION ON NONBANKING AND NON-
SECURITIES BUSINESSES.—No income of an eli-
gible controlled foreign corporation not described
in clause (ii) or (iii) of paragraph (2)(B) (or of
a qualified business unit of such corporation)
shall be treated as qualified banking or financing
income unless more than 30 percent of such cor-
poration’s or unit’s gross income is derived di-
rectly from the active and regular conduct of a
lending or finance business from transactions
with customers which are not related persons
and which are located within such corporation’s
or unit’s home country.
‘‘(C) SUBSTANTIAL ACTIVITY REQUIREMENT
FOR CROSS BORDER INCOME.—The term ‘quali-
fied banking or financing income’ shall not in-
clude income derived from 1 or more trans-
actions with customers located in a country other
than the home country of the eligible controlled
foreign corporation or a qualified business unit
of such corporation unless such corporation or
unit conducts substantial activity with respect to
a banking, financing, or similar business in its
home country.
‘‘(D) 
DETERMINATIONS
MADE
SEPA-
RATELY.—For purposes of this paragraph, the
qualified banking or financing income of an eli-
gible controlled foreign corporation and each
qualified business unit of such corporation shall
be determined separately for such corporation
and each such unit by taking into account—
‘‘(i) in the case of the eligible controlled
foreign corporation, only items of income,
deduction, gain, or loss and activities of
such corporation not properly allocable or
attributable to any qualified business unit
of such corporation, and
‘‘(ii) in the case of a qualified business
unit, only items of income, deduction, gain,
or loss and activities properly allocable or
attributable to such unit.
‘‘(4) LENDING OR FINANCE BUSINESS.—For pur-
poses of this subsection, the term ‘lending or finance
business’ means the business of—
‘‘(A) making loans,
‘‘(B) purchasing or discounting accounts re-
ceivable, notes, or installment obligations,
‘‘(C) engaging in leasing (including enter-
ing into leases and purchasing, servicing, and
disposing of leases and leased assets),
‘‘(D) issuing letters of credit or providing
guarantees,
‘‘(E) providing charge and credit card serv-
ices, or
‘‘(F) rendering services or making facilities
available in connection with activities described
in subparagraphs (A) through (E) carried on
by—
‘‘(i) the corporation (or qualified busi-
ness unit) rendering services or making fa-
cilities available, or
‘‘(ii) another corporation (or qualified
business unit of a corporation) which is a
member of the same affiliated group (as de-
fined in section 1504, but determined with-
out regard to section 1504(b)(3)).
‘‘(5) OTHER DEFINITIONS.—For purposes of this
subsection—
‘‘(A) 
CUSTOMER.—The 
term 
‘customer’
means, with respect to any controlled foreign
corporation or qualified business unit, any per-
son which has a customer relationship with such
corporation or unit and which is acting in its
capacity as such.
‘‘(B) HOME COUNTRY.—Except as provided
in regulations—
‘‘(i) CONTROLLED FOREIGN CORPORA-
TION.—The term ‘home country’ means,
with respect to any controlled foreign cor-
poration, the country under the laws of
which the corporation was created or orga-
nized.
‘‘(ii) QUALIFIED BUSINESS UNIT.—The
term ‘home country’ means, with respect to
any qualified business unit, the country in
which such unit maintains its principal of-
fice.
‘‘(C) 
LOCATED.—The 
determination 
of
where a customer is located shall be made under
rules prescribed by the Secretary.
‘‘(D) QUALIFIED
BUSINESS
UNIT.—The
term ‘qualified business unit’ has the meaning
given such term by section 989(a).
‘‘(E) RELATED PERSON.—The term ‘related
person’ has the meaning given such term by sub-
section (d)(3).
‘‘(6) COORDINATION WITH EXCEPTION FOR DEAL-
ERS.—Paragraph (1) shall not apply to income de-
scribed in subsection (c)(2)(C)(ii) of a dealer in secu-
rities (within the meaning of section 475) which is an
eligible controlled foreign corporation described in
paragraph (2)(B)(iii).
‘‘(7) ANTI-ABUSE RULES.—For purposes of ap-
plying this subsection and subsection (c)(2)(C)(ii)—
‘‘(A) there shall be disregarded any item of
income, gain, loss, or deduction with respect to
any transaction or series of transactions one of
the principal purposes of which is qualifying in-
come or gain for the exclusion under this section,
including any transaction or series of trans-
actions a principal purpose of which is the accel-
eration or deferral of any item in order to claim
of such corporation or unit with respect to any
transaction shall not be so treated if a principal
purpose of such transaction is to satisfy any re-
quirement of this subsection.
‘‘(8) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection,
subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and
the last sentence of subsection (e)(2).
‘‘(9) APPLICATION.—This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection (e)(2)
shall apply only to the first taxable year of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2000, and to taxable years of
United States shareholders with or within which such
taxable year of such foreign corporation ends.’’
(b) INCOME DERIVED FROM INSURANCE BUSINESS.—
(1) INCOME ATTRIBUTABLE TO ISSUANCE OR RE-
INSURANCE.—
(A) IN GENERAL.—Section 953(a) (defining
insurance income) is amended to read as follows:
‘‘(a) INSURANCE INCOME.—
‘‘(1) IN
GENERAL.—For purposes of section
952(a)(1), the term ‘insurance income’ means any in-
come which—
‘‘(A) is attributable to the issuing (or rein-
suring) of an insurance or annuity contract, and
‘‘(B) would (subject to the modifications
provided by subsection (b)) be taxed under sub-
chapter L of this chapter if such income were the
income of a domestic insurance company.
‘‘(2) EXCEPTION.—Such term shall not include
any exempt insurance income (as defined in sub-
section (e)).’’
(B) EXEMPT INSURANCE INCOME.—Section
953 (relating to insurance income) is amended
by adding at the end the following new sub-
section:
‘‘(e) EXEMPT INSURANCE INCOME.—For purposes of
this section—
‘‘(1) EXEMPT INSURANCE INCOME DEFINED.—
‘‘(A) IN GENERAL.—The term ‘exempt in-
surance income’ means income derived by a
qualifying insurance company which—
‘‘(i) is attributable to the issuing (or
reinsuring) of an exempt contract by such
company or a qualifying insurance com-
pany branch of such company, and
‘‘(ii) is treated as earned by such com-
pany or branch in its home country for
purposes of such country’s tax laws.
‘‘(B) EXCEPTION
FOR
CERTAIN
ARRANGE-
MENTS.—Such term shall not include income at-
tributable to the issuing (or reinsuring) of an ex-
empt contract as the result of any arrangement
whereby another corporation receives a substan-
tially equal amount of premiums or other con-
sideration in respect of issuing (or reinsuring) a
contract which is not an exempt contract.
‘‘(C) 
DETERMINATIONS
MADE
SEPA-
RATELY.—For purposes of this subsection and
section 954(i), the exempt insurance income and
exempt contracts of a qualifying insurance com-
pany or any qualifying insurance company
branch of such company shall be determined sep-
arately for such company and each such branch
by taking into account—
‘‘(i) in the case of the qualifying insur-
ance company, only items of income, deduc-
tion, gain, or loss, and activities of such
company not properly allocable or attrib-
utable to any qualifying insurance com-
pany branch of such company, and
‘‘(ii) in the case of a qualifying insur-
ance company branch, only items of income,
deduction, gain, or loss and activities prop-
erly allocable or attributable to such unit.
‘‘(2) EXEMPT CONTRACT.—
‘‘(A) IN GENERAL.—The term ‘exempt con-
tract’ means an insurance or annuity contract
issued or reinsured by a qualifying insurance
company or qualifying insurance company
branch in connection with property in, liability
arising out of activity in, or the lives or health
of residents of, a country other than the United
States.
‘‘(B) MINIMUM HOME COUNTRY INCOME RE-
QUIRED.—
‘‘(i) IN GENERAL.—No contract of a
qualifying insurance company or of a
qualifying insurance company branch shall
be treated as an exempt contract unless such
company or branch derives more than 30
percent of its net written premiums from
exempt contracts (determined without re-
gard to this subparagraph)—
‘‘(I) which cover applicable home
country risks, and
‘‘(II) with respect to which no
policyholder, insured, annuitant, or
beneficiary is a related person (as de-
fined in section 954(d)(3)).
‘‘(ii) 
APPLICABLE
HOME
COUNTRY
RISKS.—The term ‘applicable home country
risks’ means risks in connection with prop-
erty in, liability arising out of activity in,
or the lives or health of residents of, the
home country of the qualifying insurance
company or qualifying insurance company
branch, as the case may be, issuing or rein-
suring the contract covering the risks.
‘‘(C) 
SUBSTANTIAL
ACTIVITY
REQUIRE-
MENTS FOR CROSS BORDER RISKS.—A contract
issued by a qualifying insurance company or
qualifying insurance company branch which cov-
ers risks other than applicable home country
risks (as defined in subparagraph (B)(ii)) shall
not be treated as an exempt contract unless such
company or branch, as the case may be—
‘‘(i) conducts substantial activity with
respect to an insurance business in its home
country, and
‘‘(ii) performs in its home country sub-
stantially all of the activities necessary to
give rise to the income generated by such
contract.
‘‘(3) QUALIFYING
INSURANCE
COMPANY.—The
term ‘qualifying insurance company’ means any con-
trolled foreign corporation which—
‘‘(A) is subject to regulation as an insur-
ance (or reinsurance) company by its home
country, and is licensed, authorized, or regulated
by the applicable insurance regulatory body for
its home country to sell insurance, reinsurance,
or annuity contracts to persons other than relat-
ed persons (within the meaning of section
954(d)(3)) in such home country,
‘‘(B) derives more than 50 percent of its ag-
gregate net written premiums from the issuance
or reinsurance by such controlled foreign cor-
poration and each of its qualifying insurance
company branches of contracts—
‘‘(i) covering applicable home country
risks (as defined in paragraph (2)) of such
corporation or branch, as the case may be,
and
‘‘(ii) with respect to which no policy-
holder, insured, annuitant, or beneficiary is
a related person (as defined in section
954(d)(3)),
except that in the case of a branch, such pre-
miums shall only be taken into account to the ex-
tent such premiums are treated as earned by
such branch in its home country for purposes of
such country’s tax laws, and
‘‘(C) is engaged in the insurance business
and would be subject to tax under subchapter L
if it were a domestic corporation.
‘‘(4) 
QUALIFYING
INSURANCE
COMPANY
BRANCH.—The term ‘qualifying insurance company
branch’ means a qualified business unit (within the
meaning of section 989(a)) of a controlled foreign cor-
poration if—
‘‘(A) such unit is licensed, authorized, or
regulated by the applicable insurance regulatory
body for its home country to sell insurance, rein-
surance, or annuity contracts to persons other
than related persons (within the meaning of sec-
tion 954(d)(3)) in such home country, and
‘‘(B) such controlled foreign corporation is
a qualifying insurance company, determined
under paragraph (3) as if such unit were a
qualifying insurance company branch.
‘‘(5) LIFE INSURANCE OR ANNUITY CONTRACT.—
For purposes of this section and section 954, the de-
termination of whether a contract issued by a con-
trolled foreign corporation or a qualified business
unit (within the meaning of section 989(a)) is a life
insurance contract or an annuity contract shall be
made without regard to sections 72(s), 101(f), 817(h),
and 7702 if—
‘‘(A) such contract is regulated as a life in-
surance or annuity contract by the corporation’s
or unit’s home country, and
‘‘(B) no policyholder, insured, annuitant, or
beneficiary with respect to the contract is a
United States person.
‘‘(6) HOME COUNTRY.—For purposes of this sub-
section, except as provided in regulations—
‘‘(A) 
CONTROLLED
FOREIGN
CORPORA-
TION.—The term ‘home country’ means, with re-
spect to a controlled foreign corporation, the
country in which such corporation is created or
organized.
‘‘(B) 
QUALIFIED
BUSINESS
UNIT.—The
term ‘home country’ means, with respect to a
qualified business unit (as defined in section
989(a)), the country in which the principal office
of such unit is located and in which such unit
is licensed, authorized, or regulated by the appli-
cable insurance regulatory body to sell insurance,
reinsurance, or annuity contracts to persons
other than related persons (as defined in section
954(d)(3)) in such country.
‘‘(7) ANTI-ABUSE RULES.—For purposes of ap-
plying this subsection and section 954(i)—
‘‘(A) the rules of section 954(h)(7) (other
than subparagraph (B) thereof) shall apply,
‘‘(B) there shall be disregarded any item of
income, gain, loss, or deduction of, or derived
from, an entity which is not engaged in regular
and continuous transactions with persons which
are not related persons,
‘‘(C) there shall be disregarded any change
in the method of computing reserves a principal
purpose of which is the acceleration or deferral
of any item in order to claim the benefits of this
subsection or section 954(i),
‘‘(D) a contract of insurance or reinsurance
shall not be treated as an exempt contract (and
premiums from such contract shall not be taken
into account for purposes of paragraph (2)(B) or
(3)) if—
‘‘(i) any policyholder, insured, annu-
itant, or beneficiary is a resident of the
United States and such contract was mar-
keted to such resident and was written to
cover a risk outside the United States, or
‘‘(ii) the contract covers risks located
within and without the United States and
the qualifying insurance company or quali-
fying insurance company branch does not
maintain such contemporaneous records,
and file such reports, with respect to such
contract as the Secretary may require,
‘‘(E) the Secretary may prescribe rules for
the allocation of contracts (and income from con-
tracts) among 2 or more qualifying insurance
company branches of a qualifying insurance
company in order to clearly reflect the income of
such branches, and
‘‘(F) premiums from a contract shall not be
taken into account for purposes of paragraph
(2)(B) or (3) if such contract reinsures a con-
tract issued or reinsured by a related person (as
defined in section 954(d)(3)).
For purposes of subparagraph (D), the determination
of where risks are located shall be made under the
principles of section 953.
‘‘(8) COORDINATION WITH SUBSECTION (c).—In
determining insurance income for purposes of sub-
section (c), exempt insurance income shall not include
income derived from exempt contracts which cover
risks other than applicable home country risks.
‘‘(9) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection and
section 954(i).
‘‘(10) APPLICATION.—This subsection and sec-
tion 954(i) shall apply only to the first taxable year
of a foreign corporation beginning after December 31,
1998, and before January 1, 2000, and to taxable
years of United States shareholders with or within
which such taxable year of such foreign corporation
ends.
‘‘(11) CROSS REFERENCE.—
‘‘For income exempt from foreign personal holding
company income, see section 954(i).’’
(2) EXEMPTION FROM FOREIGN PERSONAL HOLD-
ING COMPANY INCOME.—Section 954 (defining foreign
base company income) is amended by adding at the
end the following new subsection:
‘‘(i) SPECIAL RULE FOR INCOME DERIVED IN THE AC-
TIVE CONDUCT OF INSURANCE BUSINESS.—
‘‘(1) IN GENERAL.—For purposes of subsection
(c)(1), foreign personal holding company income shall
not include qualified insurance income of a qualify-
ing insurance company.
‘‘(2) QUALIFIED INSURANCE INCOME.—The term
‘qualified insurance income’ means income of a quali-
fying insurance company which is—
‘‘(A) received from a person other than a re-
lated person (within the meaning of subsection
(d)(3)) and derived from the investments made
by a qualifying insurance company or a qualify-
ing insurance company branch of its reserves al-
locable to exempt contracts or of 80 percent of its
unearned premiums from exempt contracts (as
both are determined in the manner prescribed
under paragraph (4)), or
‘‘(B) received from a person other than a re-
lated person (within the meaning of subsection
(d)(3)) and derived from investments made by a
qualifying insurance company or a qualifying
insurance company branch of an amount of its
assets allocable to exempt contracts equal to—
‘‘(i) in the case of property, casualty,
or health insurance contracts, one-third of
its premiums earned on such insurance con-
tracts during the taxable year (as defined in
section 832(b)(4)), and
‘‘(ii) in the case of life insurance or
annuity contracts, 10 percent of the reserves
described in subparagraph (A) for such con-
tracts.
‘‘(3) PRINCIPLES FOR DETERMINING INSURANCE
INCOME.—Except as provided by the Secretary, for
purposes of subparagraphs (A) and (B) of paragraph
(2)—
‘‘(A) in the case of any contract which is a
separate account-type contract (including any
variable contract not meeting the requirements of
section 817), income credited under such contract
shall be allocable only to such contract, and
‘‘(B) income not allocable under subpara-
graph (A) shall be allocated ratably among con-
tracts not described in subparagraph (A).
‘‘(4) METHODS
FOR
DETERMINING
UNEARNED
PREMIUMS AND RESERVES.—For purposes of para-
graph (2)(A)—
‘‘(A) 
PROPERTY
AND
CASUALTY
CON-
TRACTS.—The unearned premiums and reserves
of a qualifying insurance company or a qualify-
ing insurance company branch with respect to
property, casualty, or health insurance contracts
shall be determined using the same methods and
interest rates which would be used if such com-
pany or branch were subject to tax under sub-
chapter L, except that—
‘‘(i) the interest rate determined for the
functional currency of the company or
branch, and which, except as provided by
the Secretary, is calculated in the same
manner as the Federal mid-term rate under
section 1274(d), shall be substituted for the
applicable Federal interest rate, and
‘‘(ii) such company or branch shall use
the appropriate foreign loss payment pat-
tern.
‘‘(B) LIFE INSURANCE AND ANNUITY CON-
TRACTS.—The amount of the reserve of a qualify-
ing insurance company or qualifying insurance
company branch for any life insurance or annu-
ity contract shall be equal to the greater of—
‘‘(i) the net surrender value of such
contract 
(as 
defined 
in 
section
807(e)(1)(A)), or
‘‘(ii) the reserve determined under
paragraph (5).
‘‘(C) LIMITATION
ON
RESERVES.—In no
event shall the reserve determined under this
paragraph for any contract as of any time ex-
ceed the amount which would be taken into ac-
count with respect to such contract as of such
time in determining foreign statement reserves
(less any catastrophe, deficiency, equalization, or
similar reserves).
‘‘(5) AMOUNT OF RESERVE.—The amount of the
reserve determined under this paragraph with respect
to any contract shall be determined in the same man-
ner as it would be determined if the qualifying insur-
ance company or qualifying insurance company
branch were subject to tax under subchapter L, except
that in applying such subchapter—
‘‘(A) the interest rate determined for the
functional currency of the company or branch,
and which, except as provided by the Secretary,
is calculated in the same manner as the Federal
mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest
rate,
‘‘(B) the highest assumed interest rate per-
mitted to be used in determining foreign state-
ment reserves shall be substituted for the prevail-
ing State assumed interest rate, and
‘‘(C) tables for mortality and morbidity
which reasonably reflect the current mortality
and morbidity risks in the company’s or
branch’s home country shall be substituted for
the mortality and morbidity tables otherwise
used for such subchapter.
The Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying insur-
ance company may be used for 1 or more of its quali-
fying insurance company branches when appropriate.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section, any term used in this subsection which is also
used in section 953(e) shall have the meaning given
such term by section 953.’’
(3) RESERVES.—Section 953(b) is amended by
redesignating paragraph (3) as paragraph (4) and by
inserting after paragraph (2) the following new para-
graph:
‘‘(3) Reserves for any insurance or annuity con-
tract shall be determined in the same manner as
under section 954(i).’’
(c) 
SPECIAL
RULES
FOR
DEALERS.—Section
954(c)(2)(C) is amended to read as follows:
‘‘(C) EXCEPTION FOR DEALERS.—Except as
provided by regulations, in the case of a regular
dealer in property which is property described in
paragraph (1)(B), forward contracts, option con-
tracts, or similar financial instruments (includ-
ing notional principal contracts and all instru-
ments referenced to commodities), there shall not
be taken into account in computing foreign per-
sonal holding company income—
‘‘(i) any item of income, gain, deduc-
tion, or loss (other than any item described
in subparagraph (A), (E), or (G) of para-
graph (1)) from any transaction (including
hedging transactions) entered into in the or-
dinary course of such dealer’s trade or busi-
ness as such a dealer, and
‘‘(ii) if such dealer is a dealer in secu-
rities (within the meaning of section 475),
any interest or dividend or equivalent
amount described in subparagraph (E) or
(G) of paragraph (1) from any transaction
(including any hedging transaction or
transaction 
described 
in 
section
956(c)(2)(J)) entered into in the ordinary
course of such dealer’s trade or business as
such a dealer in securities, but only if the
income from the transaction is attributable
to activities of the dealer in the country
under the laws of which the dealer is created
or organized (or in the case of a qualified
business unit described in section 989(a), is
attributable to activities of the unit in the
country in which the unit both maintains
its principal office and conducts substantial
business activity).’’
(d) EXEMPTION FROM FOREIGN BASE COMPANY SERV-
ICES INCOME.—Paragraph (2) of section 954(e) is amended
by inserting ‘‘or’’ at the end of subparagraph (A), by strik-
ing ‘‘, or’’ at the end of subparagraph (B) and inserting
a period, by striking subparagraph (C), and by adding at
the end the following new flush sentence:
‘‘Paragraph (1) shall also not apply to income which
is exempt insurance income (as defined in section
953(e)) or which is not treated as foreign personal
a State (or local government) and neighborhood
organizations, which evidences a partnership be-
tween such State or government and community-
based organizations and which commits each sig-
natory to specific and measurable goals, actions,
and timetables. Such course of action shall in-
clude at least five of the following:
‘‘(i) A reduction of tax rates or fees ap-
plying within the renewal community.
‘‘(ii) An increase in the level of effi-
ciency of local services within the renewal
community.
‘‘(iii) Crime reduction strategies, such
as crime prevention (including the provi-
sion of such services by nongovernmental
entities).
‘‘(iv) Actions to reduce, remove, sim-
plify, or streamline governmental require-
ments applying within the renewal commu-
nity.
‘‘(v) Involvement in the program by
private entities, organizations, neighborhood
organizations, and community groups, par-
ticularly those in the renewal community,
including a commitment from such private