985
which repeals the amendment referred to in para-
graph (1),
the amendment referred to in paragraph (1) shall not be
taken into account in applying section 767(d)(3)(A) of the
Uruguay Round Agreements Act, as amended by sub-
section (a).
SEC. 14242. MULTIPLE SALARY REDUCTION AGREEMENTS
PERMITTED UNDER SECTION 403(b).
(a) GENERAL RULE.—For purposes of section 403(b)
of the Internal Revenue Code of 1986, the frequency that
an employee is permitted to enter into a salary reduction
agreement, the salary to which such an agreement may
apply, and the ability to revoke such an agreement shall
be determined under the rules applicable to cash or de-
ferred elections under section 401(k) of such Code.
(b) EFFECTIVE DATE.—Subsection (a) shall apply to
taxable years beginning after December 31, 1995.
SEC. 14243. WAIVER OF MINIMUM PERIOD FOR JOINT AND
SURVIVOR ANNUITY EXPLANATION BEFORE
ANNUITY STARTING DATE.
(a) GENERAL
RULE.—For purposes of section
417(a)(3)(A) of the Internal Revenue Code of 1986 (relat-
ing to plan to provide written explanations), the minimum
period prescribed by the Secretary of the Treasury be-
tween the date that the explanation referred to in such
986
section is provided and the annuity starting date shall not
apply if waived by the participant and, if applicable, the
participant’s spouse.
(b) EFFECTIVE DATE.—Subsection (a) shall apply to
plan years beginning after December 31, 1995.
SEC. 14244. REPEAL OF LIMITATION IN CASE OF DEFINED
BENEFIT PLAN AND DEFINED CONTRIBUTION
PLAN FOR SAME EMPLOYEE.
(a) IN GENERAL.—Section 415(e) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 415(b)(5) is
amended by striking ‘‘and subsection (e)’’.
(2) Paragraph (1) of section 415(f) is amended
by striking ‘‘subsections (b), (c), and (e)’’ and in-
serting ‘‘subsections (b) and (c)’’.
(3) Subsection (g) of section 415 is amended by
striking ‘‘subsections (e) and (f)’’ in the last sen-
tence and inserting ‘‘subsection (f)’’.
(4) Clause (i) of section 415(k)(2)(A) is amend-
ed to read as follows:
‘‘(i) any contribution made directly by
an employee under such an arrangement
shall not be treated as an annual addition
for purposes of subsection (c), and’’.
987
(5) Clause (ii) of section 415(k)(2)(A) is
amended by striking ‘‘subsections (c) and (e)’’ and
inserting ‘‘subsection (c)’’.
(6) Section 416 is amended by striking sub-
section (h).
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to limitation years beginning after
December 31, 1996.
SEC. 14245. DATE FOR ADOPTION OF PLAN AMENDMENTS.
If any amendment made by this title requires an
amendment to any plan, such plan amendment shall not
be required to be made before the first day of the first
plan year beginning on or after January 1, 1997, if—
(1) during the period after such amendment
takes effect and before such first plan year, the plan
is operated in accordance with the requirements of
such amendment, and
(2) such plan amendment applies retroactively
to such period.
988
Subtitle C—Treatment of Large
Partnerships
PART I—GENERAL PROVISIONS
SEC. 14301. SIMPLIFIED FLOW-THROUGH FOR LARGE PART-
NERSHIPS.
(a) GENERAL RULE.—Subchapter K (relating to
partners and partnerships) is amended by adding at the
end the following new part:
‘‘PART IV—SPECIAL RULES FOR LARGE
PARTNERSHIPS
‘‘Sec. 771. Application of subchapter to large partnerships.
‘‘Sec. 772. Simplified flow-through.
‘‘Sec. 773. Computations at partnership level.
‘‘Sec. 774. Other modifications.
‘‘Sec. 775. Large partnership defined.
‘‘Sec. 776. Special rules for partnerships holding oil and gas prop-
erties.
‘‘Sec. 777. Regulations.
‘‘SEC. 771. APPLICATION OF SUBCHAPTER TO LARGE PART-
NERSHIPS.
‘‘The preceding provisions of this subchapter to the
extent inconsistent with the provisions of this part shall
not apply to a large partnership and its partners.
‘‘SEC. 772. SIMPLIFIED FLOW-THROUGH.
‘‘(a) GENERAL RULE.—In determining the income
tax of a partner of a large partnership, such partner shall
take into account separately such partner’s distributive
share of the partnership’s—
989
‘‘(1) taxable income or loss from passive loss
limitation activities,
‘‘(2) taxable income or loss from other activi-
ties,
‘‘(3) net capital gain (or net capital loss)—
‘‘(A) to the extent allocable to passive loss
limitation activities, and
‘‘(B) to the extent allocable to other activi-
ties,
‘‘(4) tax-exempt interest,
‘‘(5) applicable net AMT adjustment separately
computed for—
‘‘(A) passive loss limitation activities, and
‘‘(B) other activities,
‘‘(6) general credits,
‘‘(7) low-income housing credit determined
under section 42,
‘‘(8) rehabilitation credit determined under sec-
tion 47,
‘‘(9) foreign income taxes,
‘‘(10) the credit allowable under section 29, and
‘‘(11) other items to the extent that the Sec-
retary determines that the separate treatment of
such items is appropriate.
990
‘‘(b) SEPARATE COMPUTATIONS.—In determining
the amounts required under subsection (a) to be sepa-
rately taken into account by any partner, this section and
section 773 shall be applied separately with respect to
such partner by taking into account such partner’s dis-
tributive share of the items of income, gain, loss, deduc-
tion, or credit of the partnership.
‘‘(c) TREATMENT AT PARTNER LEVEL.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, rules similar to the rules of section
702(b) shall apply to any partner’s distributive share
of the amounts referred to in subsection (a).
‘‘(2) INCOME OR LOSS FROM PASSIVE LOSS LIM-
ITATION ACTIVITIES.—For purposes of this chapter,
any partner’s distributive share of any income or
loss described in subsection (a)(1) shall be treated as
an item of income or loss (as the case may be) from
the conduct of a trade or business which is a single
passive activity (as defined in section 469). A similar
rule shall apply to a partner’s distributive share of
amounts referred to in paragraphs (3)(A) and
(5)(A) of subsection (a).
‘‘(3) INCOME OR LOSS FROM OTHER ACTIVI-
TIES.—
992
shall be treated, for purposes of section 53, as an
adjustment or item of tax preference not specified in
section 53(d)(1)(B)(ii).
‘‘(6) GENERAL CREDITS.—A partner’s distribu-
tive share of the amount referred to in paragraph
(6) of subsection (a) shall be taken into account as
a current year business credit.
‘‘(d) OPERATING RULES.—For purposes of this sec-
tion—
‘‘(1) PASSIVE
LOSS
LIMITATION
ACTIVITY.—
The term ‘passive loss limitation activity’ means—
‘‘(A) any activity which involves the con-
duct of a trade or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term
‘trade or business’ includes any activity treated as a
trade or business under paragraph (5) or (6) of sec-
tion 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-
exempt interest’ means interest excludable from
gross income under section 103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
‘‘(A) IN
GENERAL.—The applicable net
AMT adjustment is—
993
‘‘(i) with respect to taxpayers other
than corporations, the net adjustment de-
termined by using the adjustments applica-
ble to individuals, and
‘‘(ii) with respect to corporations, the
net adjustment determined by using the
adjustments applicable to corporations.
‘‘(B) NET ADJUSTMENT.—The term ‘net
adjustment’ means the net adjustment in the
items attributable to passive loss activities or
other activities (as the case may be) which
would result if such items were determined with
the adjustments of sections 56, 57, and 58.
‘‘(4) TREATMENT
OF
CERTAIN
SEPARATELY
STATED ITEMS.—
‘‘(A) EXCLUSION
FOR
CERTAIN
PUR-
POSES.—In determining the amounts referred
to in paragraphs (1) and (2) of subsection (a),
any net capital gain or net capital loss (as the
case may be), and any item referred to in sub-
section (a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net cap-
ital gain shall be treated—
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
994
gain does not exceed the net capital gain
determined by only taking into account
gains and losses from sales and exchanges
of property used in connection with such
activities, and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount
allocated under clause (i).
A similar rule shall apply for purposes of allo-
cating any net capital loss.
‘‘(C) NET CAPITAL LOSS.—The term ‘net
capital loss’ means the excess of the losses from
sales or exchanges of capital assets over the
gains from sales or exchange of capital assets.
‘‘(5) GENERAL
CREDITS.—The term ‘general
credits’ means any credit other than the low-income
housing credit, the rehabilitation credit, the foreign
tax credit, and the credit allowable under section 29.
‘‘(6) FOREIGN INCOME TAXES.—The term ‘for-
eign income taxes’ means taxes described in section
901 which are paid or accrued to foreign countries
and to possessions of the United States.
‘‘(e) SPECIAL RULE
FOR UNRELATED BUSINESS
TAX.—In the case of a partner which is an organization
subject to tax under section 511, such partner’s distribu-
995
tive share of any items shall be taken into account sepa-
rately to the extent necessary to comply with the provi-
sions of section 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in a large
partnership other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
‘‘(2) such partner’s distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
a large partnership shall be computed in the same
manner as in the case of an individual except that—
‘‘(A) the items described in section 772(a)
shall be separately stated, and
‘‘(B) the modifications of subsection (b)
shall apply.
996
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of a large part-
nership or the computation of any credit of a large
partnership shall be made by the partnership; except
that the election under section 901, and any election
under section 108, shall be made by each partner
separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), all limitations and other pro-
visions affecting the computation of the taxable
income of a large partnership or the computa-
tion of any credit of a large partnership shall
be applied at the partnership level (and not at
the partner level).
‘‘(B) CERTAIN LIMITATIONS APPLIED AT
PARTNER
LEVEL.—The following provisions
shall be applied at the partner level (and not at
the partnership level):
‘‘(i) Section 68 (relating to overall
limitation on itemized deductions).
‘‘(ii) Sections 49 and 465 (relating to
at risk limitations).
‘‘(iii) Section 469 (relating to limita-
tion on passive activity losses and credits).
997
‘‘(iv) Any other provision specified in
regulations.
‘‘(4) COORDINATION
WITH
OTHER
PROVI-
SIONS.—Paragraphs (2) and (3) shall apply notwith-
standing any other provision of this chapter other
than this part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAX-
ABLE INCOME.—In determining the taxable income of a
large partnership—
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.—
The following deductions shall not be allowed:
‘‘(A) The deduction for personal exemp-
tions provided in section 151.
‘‘(B) The net operating loss deduction pro-
vided in section 172.
‘‘(C) The additional itemized deductions
for individuals provided in part VII of sub-
chapter B (other than section 212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determin-
ing the amount allowable under section 170, the lim-
itation of section 170(b)(2) shall apply.
‘‘(3) COORDINATION WITH SECTION 67.—In lieu
of applying section 67, 70 percent of the amount of
the miscellaneous itemized deductions shall be dis-
allowed.
999
‘‘(1) IN GENERAL.—In the case of a large part-
nership—
‘‘(A) any credit recapture shall be taken
into account by the partnership, and
‘‘(B) the amount of such recapture shall be
determined as if the credit with respect to
which the recapture is made had been fully uti-
lized to reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO AC-
COUNT.—A large partnership shall take into account
a credit recapture by reducing the amount of the ap-
propriate current year credit to the extent thereof,
and if such recapture exceeds the amount of such
current year credit, the partnership shall be liable to
pay such excess.
‘‘(3) DISPOSITIONS NOT TO TRIGGER RECAP-
TURE.—No credit recapture shall be required by rea-
son of any transfer of an interest in a large partner-
ship.
‘‘(4) CREDIT
RECAPTURE.—For purposes of
this subsection, the term ‘credit recapture’ means
any increase in tax under section 42(j) or 50(a).
‘‘(c) PARTNERSHIP NOT TERMINATED BY REASON
OF CHANGE IN OWNERSHIP.—Subparagraph (B) of sec-
tion 708(b)(1) shall not apply to a large partnership.
1000
‘‘(d) PARTNERSHIP ENTITLED TO CERTAIN CRED-
ITS.—The following shall be allowed to a large partnership
and shall not be taken into account by the partners of
such partnership:
‘‘(1) The credit provided by section 34.
‘‘(2) Any credit or refund under section
852(b)(3)(D).
‘‘(e) TREATMENT OF REMIC RESIDUALS.—For pur-
poses of applying section 860E(e)(6) to any large partner-
ship—
‘‘(1) all interests in such partnership shall be
treated as held by disqualified organizations,
‘‘(2) in lieu of applying subparagraph (C) of
section 860E(e)(6), the amount subject to tax under
section 860E(e)(6) shall be excluded from the gross
income of such partnership, and
‘‘(3) subparagraph (D) of section 860E(e)(6)
shall not apply.
‘‘(f) SPECIAL RULES FOR APPLYING CERTAIN IN-
STALLMENT SALE RULES.—In the case of a large partner-
ship—
‘‘(1) the provisions of sections 453(l)(3) and
453A shall be applied at the partnership level, and
‘‘(2) in determining the amount of interest pay-
able under such sections, such partnership shall be
1001
treated as subject to tax under this chapter at the
highest rate of tax in effect under section 1 or 11.
‘‘SEC. 775. LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section or section 776, the term ‘large
partnership’ means, with respect to any partnership
taxable year, any partnership if the number of per-
sons who were partners in such partnership in any
preceding partnership taxable year beginning after
December 31, 1995, equaled or exceeded 250. To
the extent provided in regulations, a partnership
shall cease to be treated as a large partnership for
any partnership taxable year if in such taxable year
fewer than 100 persons were partners in such part-
nership.
‘‘(2) ELECTION FOR PARTNERSHIPS WITH AT
LEAST 100 PARTNERS.—If a partnership makes an
election under this paragraph, paragraph (1) shall
be applied by substituting ‘100’ for ‘250’. Such an
election shall apply to the taxable year for which
made and all subsequent taxable years unless re-
voked with the consent of the Secretary.
‘‘(b) SPECIAL RULES FOR CERTAIN SERVICE PART-
NERSHIPS.—
1002
‘‘(1) CERTAIN PARTNERS NOT COUNTED.—For
purposes of this section, the term ‘partner’ does not
include any individual performing substantial serv-
ices in connection with the activities of the partner-
ship and holding an interest in such partnership, or
an individual who formerly performed substantial
services in connection with such activities and who
held an interest in such partnership at the time the
individual performed such services.
‘‘(2) EXCLUSION.—For purposes of this part,
the term ‘large partnership’ does not include any
partnership if substantially all the partners of such
partnership—
‘‘(A) are individuals performing substantial
services in connection with the activities of such
partnership or are personal service corporations
(as defined in section 269A(b)) the owner-em-
ployees (as defined in section 269A(b)) of which
perform such substantial services,
‘‘(B) are retired partners who had per-
formed such substantial services, or
‘‘(C) are spouses of partners who are per-
forming (or had previously performed) such
substantial services.
1003
‘‘(3) SPECIAL RULE FOR LOWER TIER PART-
NERSHIPS.—For purposes of this subsection, the ac-
tivities of a partnership shall include the activities of
any other partnership in which the partnership owns
directly an interest in the capital and profits of at
least 80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For pur-
poses of this part, the term ‘large partnership’ does not
include any partnership the principal activity of which is
the buying and selling of commodities (not described in
section 1221(1)), or options, futures, or forwards with re-
spect to such commodities.
‘‘(d) SECRETARY MAY RELY ON TREATMENT ON RE-
TURN.—If, on the partnership return of any partnership,
such partnership is treated as a large partnership, such
treatment shall be binding on such partnership and all
partners of such partnership but not on the Secretary.
‘‘SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING
OIL AND GAS PROPERTIES.
‘‘(a) EXCEPTION FOR PARTNERSHIPS HOLDING SIG-
NIFICANT OIL AND GAS PROPERTIES.—
‘‘(1) IN GENERAL.—For purposes of this part,
the term ‘large partnership’ shall not include any
partnership if the average percentage of assets (by
value) held by such partnership during the taxable
1004
year which are oil or gas properties is at least 25
percent. For purposes of the preceding sentence, any
interest held by a partnership in another partnership
shall be disregarded, except that the partnership
shall be treated as holding its proportionate share of
the assets of such other partnership.
‘‘(2) ELECTION
TO
WAIVE
EXCEPTION.—Any
partnership may elect to have paragraph (1) not
apply. Such an election shall apply to the partner-
ship taxable year for which made and all subsequent
partnership taxable years unless revoked with the
consent of the Secretary.
‘‘(b) SPECIAL RULES WHERE PART APPLIES.—
‘‘(1) COMPUTATION
OF
PERCENTAGE
DEPLE-
TION.—In the case of a large partnership, except as
provided in paragraph (2)—
‘‘(A) the allowance for depletion under sec-
tion 611 with respect to any partnership oil or
gas property shall be computed at the partner-
ship level without regard to any provision of
section 613A requiring such allowance to be
computed separately by each partner,
‘‘(B) such allowance shall be determined
without regard to the provisions of section
613A(c) limiting the amount of production for
1005
which percentage depletion is allowable and
without regard to paragraph (1) of section
613A(d), and
‘‘(C) paragraph (3) of section 705(a) shall
not apply.
‘‘(2) TREATMENT OF CERTAIN PARTNERS.—
‘‘(A) IN GENERAL.—In the case of a dis-
qualified person, the treatment under this chap-
ter of such person’s distributive share of any
item of income, gain, loss, deduction, or credit
attributable to any partnership oil or gas prop-
erty shall be determined without regard to this
part. Such person’s distributive share of any
such items shall be excluded for purposes of
making determinations under sections 772 and
773.
‘‘(B) DISQUALIFIED
PERSON.—For pur-
poses of subparagraph (A), the term ‘disquali-
fied person’ means, with respect to any partner-
ship taxable year—
‘‘(i) any person referred to in para-
graph (2) or (4) of section 613A(d) for
such person’s taxable year in which such
partnership taxable year ends, and
1006
‘‘(ii) any other person if such person’s
average daily production of domestic crude
oil and natural gas for such person’s tax-
able year in which such partnership tax-
able year ends exceeds 500 barrels.
‘‘(C) AVERAGE DAILY PRODUCTION.—For
purposes of subparagraph (B), a person’s aver-
age daily production of domestic crude oil and
natural gas for any taxable year shall be com-
puted as provided in section 613A(c)(2)—
‘‘(i) by taking into account all produc-
tion of domestic crude oil and natural gas
(including such person’s proportionate
share of any production of a partnership),
‘‘(ii) by treating 6,000 cubic feet of
natural gas as a barrel of crude oil, and
‘‘(iii) by treating as 1 person all per-
sons treated as 1 taxpayer under section
613A(c)(8) or among whom allocations are
required under such section.
‘‘SEC. 777. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as
may be appropriate to carry out the purposes of this
part.’’
1007
(b) CLERICAL AMENDMENT.—The table of parts for
subchapter K of chapter 1 is amended by adding at the
end the following new item:
‘‘Part IV. Special rules for large partnerships.’’
SEC. 14302. SIMPLIFIED AUDIT PROCEDURES FOR LARGE
PARTNERSHIPS.
(a) GENERAL RULE.—Chapter 63 is amended by
adding at the end the following new subchapter:
‘‘Subchapter D—Treatment of Large
Partnerships
‘‘Part I. Treatment of partnership items and adjustments.
‘‘Part II. Partnership level adjustments.
‘‘Part III. Definitions and special rules.
‘‘PART I—TREATMENT OF PARTNERSHIP ITEMS
AND ADJUSTMENTS
‘‘Sec. 6240. Application of subchapter.
‘‘Sec. 6241. Partner’s return must be consistent with partnership
return.
‘‘Sec. 6242. Procedures for taking partnership adjustments into
account.
‘‘SEC. 6240. APPLICATION OF SUBCHAPTER.
‘‘(a) GENERAL RULE.—This subchapter shall only
apply to large partnerships and partners in such partner-
ships.
‘‘(b) COORDINATION WITH OTHER PARTNERSHIP
AUDIT PROCEDURES.—
‘‘(1) IN GENERAL.—Subchapter C of this chap-
ter shall not apply to any large partnership other
1008
than in its capacity as a partner in another partner-
ship which is not a large partnership.
‘‘(2) TREATMENT WHERE PARTNER IN OTHER
PARTNERSHIP.—If a large partnership is a partner
in another partnership which is not a large partner-
ship—
‘‘(A) subchapter C of this chapter shall
apply to items of such large partnership which
are partnership items with respect to such other
partnership, but
‘‘(B) any adjustment under such sub-
chapter C shall be taken into account in the
manner provided by section 6242.
‘‘SEC. 6241. PARTNER’S RETURN MUST BE CONSISTENT
WITH PARTNERSHIP RETURN.
‘‘(a) GENERAL RULE.—A partner of any large part-
nership shall, on the partner’s return, treat each partner-
ship item attributable to such partnership in a manner
which is consistent with the treatment of such partnership
item on the partnership return.
‘‘(b) UNDERPAYMENT
DUE
TO
INCONSISTENT
TREATMENT
ASSESSED
AS
MATH
ERROR.—Any
underpayment of tax by a partner by reason of failing to
comply with the requirements of subsection (a) shall be
assessed and collected in the same manner as if such
1009
underpayment were on account of a mathematical or cleri-
cal error appearing on the partner’s return. Paragraph (2)
of section 6213(b) shall not apply to any assessment of
an underpayment referred to in the preceding sentence.
‘‘(c) ADJUSTMENTS NOT TO AFFECT PRIOR YEAR
OF PARTNERS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a) and (b) shall apply with-
out regard to any adjustment to the partnership
item under part II.
‘‘(2) CERTAIN
CHANGES
IN
DISTRIBUTIVE
SHARE TAKEN INTO ACCOUNT BY PARTNER.—
‘‘(A) IN
GENERAL.—To the extent that
any adjustment under part II involves a change
under section 704 in a partner’s distributive
share of the amount of any partnership item
shown on the partnership return, such adjust-
ment shall be taken into account in applying
this title to such partner for the partner’s tax-
able year for which such item was required to
be taken into account.
‘‘(B) COORDINATION
WITH
DEFICIENCY
PROCEDURES.—
‘‘(i) IN
GENERAL.—Subchapter B
shall not apply to the assessment or collec-
1010
tion of any underpayment of tax attrib-
utable to an adjustment referred to in sub-
paragraph (A).
‘‘(ii) 
ADJUSTMENT
NOT
PRE-
CLUDED.—Notwithstanding any other law
or rule of law, nothing in subchapter B (or
in any proceeding under subchapter B)
shall preclude the assessment or collection
of any underpayment of tax (or the allow-
ance of any credit or refund of any over-
payment of tax) attributable to an adjust-
ment referred to in subparagraph (A) and
such assessment or collection or allowance
(or any notice thereof) shall not preclude
any notice, proceeding, or determination
under subchapter B.
‘‘(C) PERIOD OF LIMITATIONS.—The pe-
riod for—
‘‘(i) assessing any underpayment of
tax, or
‘‘(ii) filing a claim for credit or refund
of any overpayment of tax,
attributable to an adjustment referred to in
subparagraph (A) shall not expire before the
close of the period prescribed by section 6248
1011
for making adjustments with respect to the
partnership taxable year involved.
‘‘(D) TIERED STRUCTURES.—If the part-
ner referred to in subparagraph (A) is another
partnership or an S corporation, the rules of
this paragraph shall also apply to persons hold-
ing interests in such partnership or S corpora-
tion (as the case may be); except that, if such
partner is a large partnership, the adjustment
referred to in subparagraph (A) shall be taken
into account in the manner provided by section
6242.
‘‘(d) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in case of partner’s disregard
of requirements of this section, see part II of sub-
chapter A of chapter 68.
‘‘SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP AD-
JUSTMENTS INTO ACCOUNT.
‘‘(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS
FOR YEAR IN WHICH ADJUSTMENT TAKES EFFECT.—
‘‘(1) IN GENERAL.—If any partnership adjust-
ment with respect to any partnership item takes ef-
fect (within the meaning of subsection (d)(2)) during
any partnership taxable year and if an election
under paragraph (2) does not apply to such adjust-
ment, such adjustment shall be taken into account
1012
in determining the amount of such item for the part-
nership taxable year in which such adjustment takes
effect. In applying this title to any person who is
(directly or indirectly) a partner in such partnership
during such partnership taxable year, such adjust-
ment shall be treated as an item actually arising
during such taxable year.
‘‘(2) 
PARTNERSHIP
LIABLE
IN
CERTAIN
CASES.—If—
‘‘(A) a partnership elects under this para-
graph to not take an adjustment into account
under paragraph (1),
‘‘(B) a partnership does not make such an
election but in filing its return for any partner-
ship taxable year fails to take fully into account
any partnership adjustment as required under
paragraph (1), or
‘‘(C) any partnership adjustment involves a
reduction in a credit which exceeds the
amount of such credit determined for the
partnership taxable year in which the adjust-
ment takes effect,
the partnership shall pay to the Secretary an
amount determined by applying the rules of sub-
section (b)(4) to the adjustments not so taken into
1013
account and any excess referred to in subparagraph
(C). A partnership may make an election under sub-
paragraph (A) only if such partnership meets such
requirements as the Secretary may prescribe to as-
sure payment of such amount.
‘‘(3) OFFSETTING ADJUSTMENTS TAKEN INTO
ACCOUNT.—If a partnership adjustment requires an-
other adjustment in a taxable year after the ad-
justed year and before the partnership taxable year
in which such partnership adjustment takes effect,
such other adjustment shall be taken into account
under this subsection for the partnership taxable
year in which such partnership adjustment takes ef-
fect.
‘‘(4) COORDINATION WITH PART II.—Amounts
taken into account under this subsection for any
partnership taxable year shall continue to be treated
as adjustments for the adjusted year for purposes of
determining whether such amounts may be read-
justed under part II.
‘‘(b) PARTNERSHIP LIABLE
FOR INTEREST
AND
PENALTIES.—
‘‘(1) IN
GENERAL.—If a partnership adjust-
ment takes effect during any partnership taxable
year and such adjustment results in an imputed
1014
underpayment for the adjusted year, the partner-
ship—
‘‘(A) shall pay to the Secretary interest
computed under paragraph (2), and
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in
paragraph (3).
‘‘(2) DETERMINATION OF AMOUNT OF INTER-
EST.—The interest computed under this paragraph
with respect to any partnership adjustment is the in-
terest which would be determined under chapter
67—
‘‘(A) on the imputed underpayment deter-
mined under paragraph (4) with respect to such
adjustment,
‘‘(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the part-
nership taxable year in which such adjustment
takes effect (or, if earlier, in the case of any ad-
justment to which subsection (a)(2) applies, the
date on which the payment under subsection
(a)(2) is made).
Proper adjustments in the amount determined under
the preceding sentence shall be made for adjust-
1015
ments required for partnership taxable years after
the adjusted year and before the year in which the
partnership adjustment takes effect by reason of
such partnership adjustment.
‘‘(3) PENALTIES.—A partnership shall be liable
for any penalty, addition to tax, or additional
amount for which it would have been liable if such
partnership had been an individual subject to tax
under chapter 1 for the adjusted year and the im-
puted underpayment determined under paragraph
(4) were an actual underpayment (or understate-
ment) for such year.
‘‘(4) IMPUTED UNDERPAYMENT.—For purposes
of this subsection, the imputed underpayment deter-
mined under this paragraph with respect to any
partnership adjustment is the underpayment (if any)
which would result—
‘‘(A) by netting all adjustments to items of
income, gain, loss, or deduction and by treating
any net increase in income as an underpayment
equal to the amount of such net increase multi-
plied by the highest rate of tax in effect under
section 1 or 11 for the adjusted year, and
1016
‘‘(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net de-
crease in a loss shall be treated as an increase in in-
come and a similar rule shall apply to a net increase
in a loss.
‘‘(c) ADMINISTRATIVE PROVISIONS.—
‘‘(1) IN GENERAL.—Any payment required by
subsection (a)(2) or (b)(1)(A)—
‘‘(A) shall be assessed and collected in the
same manner as if it were a tax imposed by
subtitle C, and
‘‘(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
‘‘(2) INTEREST.—For purposes of determining
interest, any payment required by subsection (a)(2)
or (b)(1)(A) shall be treated as an underpayment
of tax.
‘‘(3) PENALTIES.—
‘‘(A) IN
GENERAL.—In the case of any
failure by any partnership to pay on the date
prescribed therefor any amount required by
subsection (a)(2) or (b)(1)(A), there is hereby
1017
imposed on such partnership a penalty of 10
percent of the underpayment. For purposes of
the 
preceding 
sentence, 
the 
term
‘underpayment’ means the excess of any pay-
ment required under this section over the
amount (if any) paid on or before the date pre-
scribed therefor.
‘‘(B) ACCURACY-RELATED
AND
FRAUD
PENALTIES MADE APPLICABLE.—For purposes
of part II of subchapter A of chapter 68, any
payment required by subsection (a)(2) shall be
treated as an underpayment of tax.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) PARTNERSHIP
ADJUSTMENT.—The term
‘partnership adjustment’ means any adjustment in
the amount of any partnership item of a large part-
nership.
‘‘(2) WHEN ADJUSTMENT TAKES EFFECT.—A
partnership adjustment takes effect—
‘‘(A) in the case of an adjustment pursu-
ant to the decision of a court in a proceeding
brought under part II, when such decision be-
comes final,
1018
‘‘(B) in the case of an adjustment pursu-
ant to any administrative adjustment request
under section 6251, when such adjustment is
allowed by the Secretary, or
‘‘(C) in any other case, when such adjust-
ment is made.
‘‘(3) ADJUSTED
YEAR.—The term ‘adjusted
year’ means the partnership taxable year to which
the item being adjusted relates.
‘‘(4) RETURN
DUE
DATE.—The term ‘return
due date’ means, with respect to any taxable year,
the date prescribed for filing the partnership return
for such taxable year (determined without regard to
extensions).
‘‘(5) ADJUSTMENTS
INVOLVING
CHANGES
IN
CHARACTER.—Under regulations, appropriate ad-
justments in the application of this section shall be
made for purposes of taking into account partner-
ship adjustments which involve a change in the char-
acter of any item of income, gain, loss, or deduction.
‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction
shall be allowed under subtitle A for any payment required
to be made by a large partnership under this section.
‘‘PART II—PARTNERSHIP LEVEL ADJUSTMENTS
‘‘Subpart A. Adjustments by Secretary.
‘‘Subpart B. Claims for adjustments by partnership.
1019
‘‘Subpart A—Adjustments by Secretary
‘‘Sec. 6245. Secretarial authority.
‘‘Sec. 6246. Restrictions on partnership adjustments.
‘‘Sec. 6247. Judicial review of partnership adjustment.
‘‘Sec. 6248. Period of limitations for making adjustments.
‘‘SEC. 6245. SECRETARIAL AUTHORITY.
‘‘(a) GENERAL RULE.—The Secretary is authorized
and directed to make adjustments at the partnership level
in any partnership item to the extent necessary to have
such item be treated in the manner required.
‘‘(b) NOTICE OF PARTNERSHIP ADJUSTMENT.—
‘‘(1) IN GENERAL.—If the Secretary determines
that a partnership adjustment is required, the Sec-
retary is authorized to send notice of such adjust-
ment to the partnership by certified mail or reg-
istered mail. Such notice shall be sufficient if mailed
to the partnership at its last known address even if
the partnership has terminated its existence.
‘‘(2) FURTHER NOTICES RESTRICTED.—If the
Secretary mails a notice of a partnership adjustment
to any partnership for any partnership taxable year
and the partnership files a petition under section
6247 with respect to such notice, in the absence of
a showing of fraud, malfeasance, or misrepresenta-
tion of a material fact, the Secretary shall not mail
another such notice to such partnership with respect
to such taxable year.
1020
‘‘(3) AUTHORITY
TO
RESCIND
NOTICE
WITH
PARTNERSHIP CONSENT.—The Secretary may, with
the consent of the partnership, rescind any notice of
a partnership adjustment mailed to such partner-
ship. Any notice so rescinded shall not be treated as
a notice of a partnership adjustment, for purposes of
this section, section 6246, and section 6247, and the
taxpayer shall have no right to bring a proceeding
under section 6247 with respect to such notice.
Nothing in this subsection shall affect any suspen-
sion of the running of any period of limitations dur-
ing any period during which the rescinded notice
was outstanding.
‘‘SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this chapter, no adjustment to any partnership item
may be made (and no levy or proceeding in any court for
the collection of any amount resulting from such adjust-
ment may be made, begun or prosecuted) before—
‘‘(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was
mailed to the partnership, and
1021
‘‘(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
‘‘(b) PREMATURE ACTION MAY BE ENJOINED.—
Notwithstanding section 7421(a), any action which vio-
lates subsection (a) may be enjoined in the proper court,
including the Tax Court. The Tax Court shall have no ju-
risdiction to enjoin any action under this subsection unless
a timely petition has been filed under section 6247 and
then only in respect of the adjustments that are the sub-
ject of such petition.
‘‘(c) EXCEPTIONS
TO RESTRICTIONS
ON ADJUST-
MENTS.—
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR
CLERICAL ERRORS.—
‘‘(A) IN GENERAL.—If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
quired, rules similar to the rules of paragraphs
(1) and (2) of section 6213(b) shall apply to
such adjustment.
‘‘(B) SPECIAL RULE.—If a large partner-
ship is a partner in another large partnership,
any adjustment on account of such partner-
1022
ship’s failure to comply with the requirements
of section 6241(a) with respect to its interest in
such other partnership shall be treated as an
adjustment referred to in subparagraph (A), ex-
cept that paragraph (2) of section 6213(b) shall
not apply to such adjustment.
‘‘(2) 
PARTNERSHIP
MAY
WAIVE
RESTRIC-
TIONS.—The partnership shall at any time (whether
or not a notice of partnership adjustment has been
issued) have the right, by a signed notice in writing
filed with the Secretary, to waive the restrictions
provided in subsection (a) on the making of any
partnership adjustment.
‘‘(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no
proceeding under section 6247 is begun with respect to
any notice of a partnership adjustment during the 90-day
period described in subsection (a), the amount for which
the partnership is liable under section 6242 (and any in-
crease in any partner’s liability for tax under chapter 1
by reason of any adjustment under section 6242(a)) shall
not exceed the amount determined in accordance with such
notice.
1023
‘‘SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT.
‘‘(a) GENERAL RULE.—Within 90 days after the date
on which a notice of a partnership adjustment is mailed
to the partnership with respect to any partnership taxable
year, the partnership may file a petition for a readjust-
ment of the partnership items for such taxable year with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the partnership’s principal place
of business is located, or
‘‘(3) the Claims Court.
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING
ACTION IN DISTRICT COURT OR CLAIMS COURT.—
‘‘(1) IN
GENERAL.—A readjustment petition
under this section may be filed in a district court of
the United States or the Claims Court only if the
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the
amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing
of the petition) if the partnership items were ad-
justed as provided by the notice of partnership ad-
justment. The court may by order provide that the
jurisdictional requirements of this paragraph are
satisfied where there has been a good faith attempt
1024
to satisfy such requirement and any shortfall of the
amount required to be deposited is timely corrected.
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not
be treated as a payment of tax for purposes of this
title (other than chapter 67).
‘‘(c) SCOPE OF JUDICIAL REVIEW.—A court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items
of the partnership for the partnership taxable year to
which the notice of partnership adjustment relates and the
proper allocation of such items among the partners (and
the applicability of any penalty, addition to tax, or addi-
tional amount for which the partnership may be liable
under section 6242(b)).
‘‘(d) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this section shall have
the force and effect of a decision of the Tax Court or a
final judgment or decree of the district court or the Claims
Court, as the case may be, and shall be reviewable as such.
The date of any such determination shall be treated as
being the date of the court’s order entering the decision.
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If
an action brought under this section is dismissed other
than by reason of a rescission under section 6245(b)(3),
1025
the decision of the court dismissing the action shall be con-
sidered as its decision that the notice of partnership ad-
justment is correct, and an appropriate order shall be en-
tered in the records of the court.
‘‘SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, no adjustment under this subpart to any
partnership item for any partnership taxable year may be
made after the date which is 3 years after the later of—
‘‘(1) the date on which the partnership return
for such taxable year was filed, or
‘‘(2) the last day for filing such return for such
year (determined without regard to extensions).
‘‘(b) EXTENSION BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period
under this subsection) may be extended by an agreement
entered into by the Secretary and the partnership before
the expiration of such period.
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.—
‘‘(1) FALSE RETURN.—In the case of a false or
fraudulent partnership return with intent to evade
tax, the adjustment may be made at any time.
‘‘(2) SUBSTANTIAL OMISSION OF INCOME.—If
any partnership omits from gross income an amount
1026
properly includible therein which is in excess of 25
percent of the amount of gross income stated in its
return, subsection (a) shall be applied by substitut-
ing ‘6 years’ for ‘3 years’.
‘‘(3) NO RETURN.—In the case of a failure by
a partnership to file a return for any taxable year,
the adjustment may be made at any time.
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on be-
half of the partnership shall not be treated as a re-
turn of the partnership.
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE
OF ADJUSTMENT.—If notice of a partnership adjustment
with respect to any taxable year is mailed to the partner-
ship, the running of the period specified in subsection (a)
(as modified by the other provisions of this section) shall
be suspended—
‘‘(1) for the period during which an action may
be brought under section 6247 (and, if a petition is
filed under section 6247 with respect to such notice,
until the decision of the court becomes final), and
‘‘(2) for 1 year thereafter.
‘‘Subpart B—Claims for Adjustments by Partnership
‘‘Sec. 6251. Administrative adjustment requests.
‘‘Sec. 6252. Judicial review where administrative adjustment re-
quest is not allowed in full.
1027
‘‘SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
‘‘(a) GENERAL RULE.—A partnership may file a re-
quest for an administrative adjustment of partnership
items for any partnership taxable year at any time which
is—
‘‘(1) within 3 years after the later of—
‘‘(A) the date on which the partnership re-
turn for such year is filed, or
‘‘(B) the last day for filing the partnership
return for such year (determined without re-
gard to extensions), and
‘‘(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to
such taxable year.
‘‘(b) SECRETARIAL ACTION.—If a partnership files
an administrative adjustment request under subsection
(a), the Secretary may allow any part of the requested
adjustments.
‘‘(c) SPECIAL RULE IN CASE OF EXTENSION UNDER
SECTION
6248.—If the period described in section
6248(a) is extended pursuant to an agreement under sec-
tion 6248(b), the period prescribed by subsection (a)(1)
shall not expire before the date 6 months after the expira-
tion of the extension under section 6248(b).
1028
‘‘SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE AD-
JUSTMENT REQUEST IS NOT ALLOWED IN
FULL.
‘‘(a) IN GENERAL.—If any part of an administrative
adjustment request filed under section 6251 is not allowed
by the Secretary, the partnership may file a petition for
an adjustment with respect to the partnership items to
which such part of the request relates with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
‘‘(3) the Claims Court.
‘‘(b) PERIOD FOR FILING PETITION.—A petition may
be filed under subsection (a) with respect to partnership
items for a partnership taxable year only—
‘‘(1) after the expiration of 6 months from the
date of filing of the request under section 6251, and
‘‘(2) before the date which is 2 years after the
date of such request.
The 2-year period set forth in paragraph (2) shall be ex-
tended for such period as may be agreed upon in writing
by the partnership and the Secretary.
‘‘(c) COORDINATION WITH SUBPART A.—
‘‘(1) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
BEFORE FILING OF PETITION.—No petition may be
1029
filed under this section after the Secretary mails to
the partnership a notice of a partnership adjustment
for the partnership taxable year to which the request
under section 6251 relates.
‘‘(2) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
AFTER
FILING
BUT
BEFORE
HEARING
OF
PETI-
TION.—If the Secretary mails to the partnership a
notice of a partnership adjustment for the partner-
ship taxable year to which the request under section
6251 relates after the filing of a petition under this
subsection but before the hearing of such petition,
such petition shall be treated as an action brought
under section 6247 with respect to such notice, ex-
cept that subsection (b) of section 6247 shall not
apply.
‘‘(3) NOTICE MUST BE BEFORE EXPIRATION OF
STATUTE OF LIMITATIONS.—A notice of a partner-
ship adjustment for the partnership taxable year
shall be taken into account under paragraphs (1)
and (2) only if such notice is mailed before the expi-
ration of the period prescribed by section 6248 for
making adjustments to partnership items for such
taxable year.
‘‘(d) SCOPE OF JUDICIAL REVIEW.—Except in the
case described in paragraph (2) of subsection (c), a court
1030
with which a petition is filed in accordance with this sec-
tion shall have jurisdiction to determine only those part-
nership items to which the part of the request under sec-
tion 6251 not allowed by the Secretary relates and those
items with respect to which the Secretary asserts adjust-
ments as offsets to the adjustments requested by the part-
nership.
‘‘(e) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this subsection shall
have the force and effect of a decision of the Tax Court
or a final judgment or decree of the district court or the
Claims Court, as the case may be, and shall be reviewable
as such. The date of any such determination shall be
treated as being the date of the court’s order entering the
decision.
‘‘PART III—DEFINITIONS AND SPECIAL RULES
‘‘Sec. 6255. Definitions and special rules.
‘‘SEC. 6255. DEFINITIONS AND SPECIAL RULES.
‘‘(a) DEFINITIONS.—For purposes of this sub-
chapter—
‘‘(1) LARGE
PARTNERSHIP.—The term ‘large
partnership’ has the meaning given to such term by
section 775 without regard to section 776(a).
1031
‘‘(2) PARTNERSHIP ITEM.—The term ‘partner-
ship item’ has the meaning given to such term by
section 6231(a)(3).
‘‘(b) PARTNERS BOUND BY ACTIONS OF PARTNER-
SHIP, ETC.—
‘‘(1) DESIGNATION OF PARTNER.—Each large
partnership shall designate (in the manner pre-
scribed by the Secretary) a partner (or other person)
who shall have the sole authority to act on behalf of
such partnership under this subchapter. In any case
in which such a designation is not in effect, the Sec-
retary may select any partner as the partner with
such authority.
‘‘(2) BINDING
EFFECT.—A large partnership
and all partners of such partnership shall be
bound—
‘‘(A) by actions taken under this sub-
chapter by the partnership, and
‘‘(B) by any decision in a proceeding
brought under this subchapter.
‘‘(c) PARTNERSHIPS HAVING PRINCIPAL PLACE OF
BUSINESS OUTSIDE THE UNITED STATES.—For purposes
of sections 6247 and 6252, a principal place of business
located outside the United States shall be treated as lo-
cated in the District of Columbia.
1032
‘‘(d) TREATMENT WHERE PARTNERSHIP CEASES TO
EXIST.—If a partnership ceases to exist before a partner-
ship adjustment under this subchapter takes effect, such
adjustment shall be taken into account by the former part-
ners of such partnership under regulations prescribed by
the Secretary.
‘‘(e) DATE DECISION BECOMES FINAL.—For pur-
poses of this subchapter, the principles of section 7481(a)
shall be applied in determining the date on which a deci-
sion of a district court or the Claims Court becomes final.
‘‘(f) PARTNERSHIPS IN CASES UNDER TITLE 11 OF
THE UNITED STATES CODE.—The running of any period
of limitations provided in this subchapter on making a
partnership adjustment (or provided by section 6501 or
6502 on the assessment or collection of any amount re-
quired to be paid under section 6242) shall, in a case
under title 11 of the United States Code, be suspended
during the period during which the Secretary is prohibited
by reason of such case from making the adjustment (or
assessment or collection) and—
‘‘(1) for adjustment or assessment, 60 days
thereafter, and
‘‘(2) for collection, 6 months thereafter.
1033
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pro-
visions of this subchapter, including regulations—
‘‘(1) to prevent abuse through manipulation of
the provisions of this subchapter, and
‘‘(2) providing that this subchapter shall not
apply to any case described in section 6231(c)(1) (or
the regulations prescribed thereunder) where the ap-
plication of this subchapter to such a case would
interfere with the effective and efficient enforcement
of this title.
In any case to which this subchapter does not apply by
reason of paragraph (2), rules similar to the rules of sec-
tions 6229(f) and 6255(f) shall apply.’’
(b) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 63 is amended by adding at the end
the following new item:
‘‘SUBCHAPTER D. Treatment of large partnerships.’’
SEC. 14303. DUE DATE FOR FURNISHING INFORMATION TO
PARTNERS OF LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subsection (b) of section 6031
(relating to copies to partners) is amended by adding at
the end the following new sentence: ‘‘In the case of a large
partnership (as defined in sections 775 and 776(a)), such
information shall be furnished on or before the first March
15 following the close of such taxable year.’’
1034
(b) TREATMENT AS INFORMATION RETURN.—Sec-
tion 6724 is amended by adding at the end the following
new subsection:
‘‘(e) SPECIAL RULE FOR CERTAIN PARTNERSHIP RE-
TURNS.—If any partnership return under section 6031(a)
is required under section 6011(e) to be filed on magnetic
media or in other machine-readable form, for purposes of
this part, each schedule required to be included with such
return with respect to each partner shall be treated as a
separate information return.’’
SEC. 14304. RETURNS MAY BE REQUIRED ON MAGNETIC
MEDIA.
Paragraph (2) of section 6011(e) (relating to returns
on magnetic media) is amended by adding at the end the
following new sentence:
‘‘Notwithstanding the preceding sentence, the Sec-
retary shall require partnerships having more than
100 partners to file returns on magnetic media.’’
SEC. 14305. TREATMENT OF PARTNERSHIP ITEMS OF INDI-
VIDUAL RETIREMENT ACCOUNTS.
Subsection (b) of section 6012 is amended by adding
at the end the following new paragraph:
‘‘(6) IRA SHARE OF PARTNERSHIP INCOME.—
In the case of a trust which is exempt from taxation
under section 408(e), for purposes of this section,
1035
the trust’s distributive share of items of gross in-
come and gain of any partnership to which sub-
chapter C or D of chapter 63 applies shall be treat-
ed as equal to the trust’s distributive share of the
taxable income of such partnership.’’
SEC. 14306. EFFECTIVE DATE.
The amendments made by this part shall apply to
partnership taxable years beginning after December 31,
1995.
PART II—PROVISIONS RELATED TO CERTAIN
PARTNERSHIP PROCEEDINGS
SEC. 14311. TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY PROCEEDINGS.
(a) IN GENERAL.—Subchapter C of chapter 63 is
amended by adding at the end the following new section:
‘‘SEC. 
6234. 
DECLARATORY 
JUDGMENT 
RELATING 
TO
TREATMENT OF ITEMS OTHER THAN PART-
NERSHIP 
ITEMS 
WITH 
RESPECT 
TO 
AN
OVERSHELTERED RETURN.
‘‘(a) GENERAL RULE.—If—
‘‘(1) a taxpayer files an oversheltered return for
a taxable year,
‘‘(2) the Secretary makes a determination with
respect to the treatment of items (other than part-
1036
nership items) of such taxpayer for such taxable
year, and
‘‘(3) the adjustments resulting from such deter-
mination do not give rise to a deficiency (as defined
in section 6211) but would give rise to a deficiency
if there were no net loss from partnership items,
the Secretary is authorized to send a notice of adjustment
reflecting such determination to the taxpayer by certified
or registered mail.
‘‘(b) OVERSHELTERED RETURN.—For purposes of
this section, the term ‘oversheltered return’ means an in-
come tax return which—
‘‘(1) shows no taxable income for the taxable
year, and
‘‘(2) shows a net loss from partnership items.
‘‘(c) JUDICIAL REVIEW IN THE TAX COURT.—Within
90 days, or 150 days if the notice is addressed to a person
outside the United States, after the day on which the no-
tice of adjustment authorized in subsection (a) is mailed
to the taxpayer, the taxpayer may file a petition with the
Tax Court for redetermination of the adjustments. Upon
the filing of such a petition, the Tax Court shall have ju-
risdiction to make a declaration with respect to all items
(other than partnership items and affected items which
require partner level determinations as described in sec-
1037
tion 6230(a)(2)(A)(i)) for the taxable year to which the
notice of adjustment relates, in accordance with the prin-
ciples of section 6214(a). Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(d) FAILURE TO FILE PETITION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if the taxpayer does not file a petition
with the Tax Court within the time prescribed in
subsection (c), the determination of the Secretary
set forth in the notice of adjustment that was mailed
to the taxpayer shall be deemed to be correct.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply after the date that the taxpayer—
‘‘(A) files a petition with the Tax Court
within the time prescribed in subsection (c)
with respect to a subsequent notice of adjust-
ment relating to the same taxable year, or
‘‘(B) files a claim for refund of an overpay-
ment of tax under section 6511 for the taxable
year involved.
If a claim for refund is filed by the taxpayer, then
solely for purposes of determining (for the taxable
year involved) the amount of any computational ad-
justment in connection with a partnership proceed-
1038
ing under this subchapter (other than under this
section) or the amount of any deficiency attributable
to affected items in a proceeding under section
6230(a)(2), the items that are the subject of the no-
tice of adjustment shall be presumed to have been
correctly reported on the taxpayer’s return during
the pendency of the refund claim (and, if within the
time prescribed by section 6532 the taxpayer com-
mences a civil action for refund under section 7422,
until the decision in the refund action becomes
final).
‘‘(e) LIMITATIONS PERIOD.—
‘‘(1) IN GENERAL.—Any notice to a taxpayer
under subsection (a) shall be mailed before the expi-
ration of the period prescribed by section 6501 (re-
lating to the period of limitations on assessment).
‘‘(2) SUSPENSION WHEN SECRETARY MAILS NO-
TICE OF ADJUSTMENT.—If the Secretary mails a no-
tice of adjustment to the taxpayer for a taxable year,
the period of limitations on the making of assess-
ments shall be suspended for the period during
which the Secretary is prohibited from making the
assessment (and, in any event, if a proceeding in re-
spect of the notice of adjustment is placed on the
docket of the Tax Court, until the decision of the
1039
Tax Court becomes final), and for 60 days there-
after.
‘‘(3) RESTRICTIONS ON ASSESSMENT.—Except
as otherwise provided in section 6851, 6852, or
6861, no assessment of a deficiency with respect to
any tax imposed by subtitle A attributable to any
item (other than a partnership item or any item af-
fected by a partnership item) shall be made—
‘‘(A) until the expiration of the applicable
90-day or 150-day period set forth in sub-
section (c) for filing a petition with the Tax
Court, or
‘‘(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
‘‘(f) FURTHER
NOTICES
OF
ADJUSTMENT
RE-
STRICTED.—If the Secretary mails a notice of adjustment
to the taxpayer for a taxable year and the taxpayer files
a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such
notice to the taxpayer with respect to the same taxable
year in the absence of a showing of fraud, malfeasance,
or misrepresentation of a material fact.
‘‘(g) COORDINATION WITH OTHER PROCEEDINGS
UNDER THIS SUBCHAPTER.—
1040
‘‘(1) IN GENERAL.—The treatment of any item
that has been determined pursuant to subsection (c)
or (d) shall be taken into account in determining the
amount of any computational adjustment that is
made in connection with a partnership proceeding
under this subchapter (other than under this sec-
tion), or the amount of any deficiency attributable to
affected items in a proceeding under section
6230(a)(2), for the taxable year involved. Notwith-
standing any other law or rule of law pertaining to
the period of limitations on the making of assess-
ments, for purposes of the preceding sentence, any
adjustment made in accordance with this section
shall be taken into account regardless of whether
any assessment has been made with respect to such
adjustment.
‘‘(2) SPECIAL
RULE
IN
CASE
OF
COMPUTA-
TIONAL ADJUSTMENT.—In the case of a computa-
tional adjustment that is made in connection with a
partnership proceeding under this subchapter (other
than under this section), the provisions of paragraph
(1) shall apply only if the computational adjustment
is made within the period prescribed by section 6229
for assessing any tax under subtitle A which is at-
1041
tributable to any partnership item or affected item
for the taxable year involved.
‘‘(3) CONVERSION
TO
DEFICIENCY
PROCEED-
ING.—If—
‘‘(A) after the notice referred to in sub-
section (a) is mailed to a taxpayer for a taxable
year but before the expiration of the period for
filing a petition with the Tax Court under sub-
section (c) (or, if a petition is filed with the Tax
Court, before the Tax Court makes a declara-
tion for that taxable year), the treatment of any
partnership item for the taxable year is finally
determined, or any such item ceases to be a
partnership item pursuant to section 6231(b),
and
‘‘(B) as a result of that final determination
or cessation, a deficiency can be determined
with respect to the items that are the subject
of the notice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition
filed in respect of the notice shall be treated as an
action brought under section 6213.
1042
‘‘(4) FINALLY DETERMINED.—For purposes of
this subsection, the treatment of partnership items
shall be treated as finally determined if—
‘‘(A) the Secretary enters into a settlement
agreement (within the meaning of section 6224)
with the taxpayer regarding such items,
‘‘(B) a notice of final partnership adminis-
trative adjustment has been issued and—
‘‘(i) no petition has been filed under
section 6226 and the time for doing so has
expired, or
‘‘(ii) a petition has been filed under
section 6226 and the decision of the court
has become final, or
‘‘(C) the period within which any tax at-
tributable to such items may be assessed
against the taxpayer has expired.
‘‘(h) SPECIAL RULES IF SECRETARY INCORRECTLY
DETERMINES APPLICABLE PROCEDURE.—
‘‘(1) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF ADJUSTMENT.—If the
Secretary erroneously determines that subchapter B
does not apply to a taxable year of a taxpayer and
consistent with that determination timely mails a no-
tice of adjustment to the taxpayer pursuant to sub-
1043
section (a) of this section, the notice of adjustment
shall be treated as a notice of deficiency under sec-
tion 6212 and any petition that is filed in respect of
the notice shall be treated as an action brought
under section 6213.
‘‘(2) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY
MAILS
NOTICE
OF
DEFICIENCY.—If the
Secretary erroneously determines that subchapter B
applies to a taxable year of a taxpayer and consist-
ent with that determination timely mails a notice of
deficiency to the taxpayer pursuant to section 6212,
the notice of deficiency shall be treated as a notice
of adjustment under subsection (a) and any petition
that is filed in respect of the notice shall be treated
as an action brought under subsection (c).’’
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY
PROCEEDINGS.—Section 6211 (defining defi-
ciency) is amended by adding at the end the following new
subsection:
‘‘(c) COORDINATION WITH SUBCHAPTER C.—In de-
termining the amount of any deficiency for purposes of
this subchapter, adjustments to partnership items shall be
made only as provided in subchapter C.’’
1044
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter C of chapter 63 is amended by adding at
the end the following new item:
‘‘Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an
oversheltered return.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14312. PARTNERSHIP RETURN TO BE DETERMINATIVE
OF AUDIT PROCEDURES TO BE FOLLOWED.
(a) IN GENERAL.—Section 6231 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
‘‘(g) PARTNERSHIP RETURN TO BE DETERMINATIVE
OF WHETHER SUBCHAPTER APPLIES.—
‘‘(1) DETERMINATION THAT SUBCHAPTER AP-
PLIES.—If, on the basis of a partnership return for
a taxable year, the Secretary reasonably determines
that this subchapter applies to such partnership for
such year but such determination is erroneous, then
the provisions of this subchapter are hereby ex-
tended to such partnership (and its items) for such
taxable year and to partners of such partnership.
‘‘(2) DETERMINATION THAT SUBCHAPTER DOES
NOT APPLY.—If, on the basis of a partnership re-
turn for a taxable year, the Secretary reasonably de-
1045
termines that this subchapter does not apply to such
partnership for such year but such determination is
erroneous, then the provisions of this subchapter
shall not apply to such partnership (and its items)
for such taxable year or to partners of such partner-
ship.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14313. PROVISIONS RELATING TO STATUTE OF LIMITA-
TIONS.
(a) SUSPENSION OF STATUTE WHERE UNTIMELY
PETITION FILED.—Paragraph (1) of section 6229(d) (re-
lating to suspension where Secretary makes administrative
adjustment) is amended by striking all that follows ‘‘sec-
tion 6226’’ and inserting the following: ‘‘(and, if a petition
is filed under section 6226 with respect to such adminis-
trative adjustment, until the decision of the court becomes
final), and’’.
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY
PROCEEDING.—Section 6229 is amended by adding at the
end the following new subsection:
‘‘(h) SUSPENSION DURING PENDENCY
OF BANK-
RUPTCY PROCEEDING.—If a petition is filed naming a
partner as a debtor in a bankruptcy proceeding under title
1046
11 of the United States Code, the running of the period
of limitations provided in this section with respect to such
partner shall be suspended—
‘‘(1) for the period during which the Secretary
is prohibited by reason of such bankruptcy proceed-
ing from making an assessment, and
‘‘(2) for 60 days thereafter.’’
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Sec-
tion 6229(b) is amended by redesignating paragraph (2)
as paragraph (3) and by inserting after paragraph (1) the
following new paragraph:
‘‘(2) SPECIAL RULE WITH RESPECT TO DEBT-
ORS IN TITLE 11 CASES.—Notwithstanding any other
law or rule of law, if an agreement is entered into
under paragraph (1)(B) and the agreement is signed
by a person who would be the tax matters partner
but for the fact that, at the time that the agreement
is executed, the person is a debtor in a bankruptcy
proceeding under title 11 of the United States Code,
such agreement shall be binding on all partners in
the partnership unless the Secretary has been noti-
fied of the bankruptcy proceeding in accordance with
regulations prescribed by the Secretary.’’
(d) EFFECTIVE DATES.—
1047
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall apply
to partnership taxable years with respect to which
the period under section 6229 of the Internal Reve-
nue Code of 1986 for assessing tax has not expired
on or before the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendment made
by subsection (c) shall apply to agreements entered
into after the date of the enactment of this Act.
SEC. 14314. EXPANSION OF SMALL PARTNERSHIP EXCEP-
TION.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
6231(a)(1)(B) (relating to exception for small partner-
ships) is amended to read as follows:
‘‘(i) IN
GENERAL.—The term ‘part-
nership’ shall not include any partnership
having 10 or fewer partners each of whom
is an individual (other than a nonresident
alien), a C corporation, or an estate of a
deceased partner. For purposes of the pre-
ceding sentence, a husband and wife (and
their estates) shall be treated as 1 part-
ner.’’
1048
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14315. EXCLUSION OF PARTIAL SETTLEMENTS FROM
1-YEAR LIMITATION ON ASSESSMENT.
(a) IN GENERAL.—Subsection (f) of section 6229 (re-
lating to items becoming nonpartnership items) is amend-
ed—
(1) 
by 
striking 
‘‘(f) 
ITEMS
BECOMING
NONPARTNERSHIP ITEMS.—If’’ and inserting the
following:
‘‘(f) SPECIAL RULES.—
‘‘(1) 
ITEMS
BECOMING
NONPARTNERSHIP
ITEMS.—If’’,
(2) by moving the text of such subsection 2 ems
to the right, and
(3) by adding at the end the following new
paragraph:
‘‘(2) SPECIAL RULE FOR PARTIAL SETTLEMENT
AGREEMENTS.—If a partner enters into a settlement
agreement with the Secretary with respect to the
treatment of some of the partnership items in dis-
pute for a partnership taxable year but other part-
nership items for such year remain in dispute, the
period of limitations for assessing any tax attrib-
1049
utable to the settled items shall be determined as if
such agreement had not been entered into.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to settlements entered into after
the date of the enactment of this Act.
SEC. 14316. EXTENSION OF TIME FOR FILING A REQUEST
FOR ADMINISTRATIVE ADJUSTMENT.
(a) IN GENERAL.—Section 6227 (relating to admin-
istrative adjustment requests) is amended by redesignat-
ing subsections (b) and (c) as subsections (c) and (d), re-
spectively, and by inserting after subsection (a) the follow-
ing new subsection:
‘‘(b) SPECIAL RULE IN CASE OF EXTENSION OF PE-
RIOD OF LIMITATIONS UNDER SECTION 6229.—The pe-
riod prescribed by subsection (a)(1) for filing of a request
for an administrative adjustment shall be extended—
‘‘(1) for the period within which an assessment
may be made pursuant to an agreement (or any ex-
tension thereof) under section 6229(b), and
‘‘(2) for 6 months thereafter.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
1050
SEC. 14317. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN
CONTEXT OF PARTNERSHIP PROCEEDINGS.
(a) IN GENERAL.—Subsection (a) of section 6230 is
amended by adding at the end the following new para-
graph:
‘‘(3) SPECIAL RULE IN CASE OF ASSERTION BY
PARTNER’S
SPOUSE
OF
INNOCENT
SPOUSE
RE-
LIEF.—
‘‘(A) Notwithstanding section 6404(b), if
the spouse of a partner asserts that section
6013(e) applies with respect to a liability that
is attributable to any adjustment to a partner-
ship item, then such spouse may file with the
Secretary within 60 days after the notice of
computational adjustment is mailed to the
spouse a request for abatement of the assess-
ment specified in such notice. Upon receipt of
such request, the Secretary shall abate the as-
sessment. Any reassessment of the tax with re-
spect to which an abatement is made under this
subparagraph shall be subject to the deficiency
procedures prescribed by subchapter B. The pe-
riod for making any such reassessment shall
not expire before the expiration of 60 days after
the date of such abatement.
1051
‘‘(B) If the spouse files a petition with the
Tax Court pursuant to section 6213 with re-
spect to the request for abatement described in
subparagraph (A), the Tax Court shall only
have jurisdiction pursuant to this section to de-
termine whether the requirements of section
6013(e) have been satisfied. For purposes of
such determination, the treatment of partner-
ship items under the settlement, the final part-
nership administrative adjustment, or the deci-
sion of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.
‘‘(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.’’
(b) CLAIMS FOR REFUND.—Subsection (c) of section
6230 is amended by adding at the end the following new
paragraph:
‘‘(5) RULES FOR SEEKING INNOCENT SPOUSE
RELIEF.—
‘‘(A) IN GENERAL.—The spouse of a part-
ner may file a claim for refund on the ground
that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is at-
1052
tributable to an adjustment to a partnership
item.
‘‘(B) TIME FOR FILING CLAIM.—Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the Secretary
mails to the spouse the notice of computational
adjustment referred to in subsection (a)(3)(A).
‘‘(C) SUIT IF CLAIM NOT ALLOWED.—If
the claim under subparagraph (B) is not al-
lowed, the spouse may bring suit with respect
to the claim within the period specified in para-
graph (3).
‘‘(D) PRIOR DETERMINATIONS ARE BIND-
ING.—For purposes of any claim or suit under
this paragraph, the treatment of partnership
items under the settlement, the final partner-
ship administrative adjustment, or the decision
of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.’’
(c) TECHNICAL AMENDMENTS.—
(1) Paragraph (1) of section 6230(a) is amend-
ed by striking ‘‘paragraph (2)’’ and inserting ‘‘para-
graph (2) or (3)’’.
1053
(2) Subsection (a) of section 6503 is amended
by striking ‘‘section 6230(a)(2)(A)’’ and inserting
‘‘paragraph (2)(A) or (3) of section 6230(a)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 14318. DETERMINATION OF PENALTIES AT PARTNER-
SHIP LEVEL.
(a) IN GENERAL.—Section 6221 (relating to tax
treatment determined at partnership level) is amended by
striking ‘‘item’’ and inserting ‘‘item (and the applicability
of any penalty, addition to tax, or additional amount which
relates to an adjustment to a partnership item)’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (f) of section 6226 is amended—
(A) by striking ‘‘relates and’’ and inserting
‘‘relates,’’, and
(B) by inserting before the period ‘‘, and
the applicability of any penalty, addition to tax,
or additional amount which relates to an ad-
justment to a partnership item’’.
(2) Clause (i) of section 6230(a)(2)(A) is
amended to read as follows:
1054
‘‘(i) affected items which require part-
ner level determinations (other than pen-
alties, additions to tax, and additional
amounts that relate to adjustments to
partnership items), or’’.
(3)(A) Subparagraph (A) of section 6230(a)(3),
as added by section 14317, is amended by inserting
‘‘(including any liability for any penalty, addition to
tax, or additional amount relating to such adjust-
ment)’’ after ‘‘partnership item’’.
(B) Subparagraph (B) of such section is
amended by inserting ‘‘(and the applicability of any
penalties, additions to tax, or additional amounts)’’
after ‘‘partnership items’’.
(C) Subparagraph (A) of section 6230(c)(5), as
added by section 14317, is amended by inserting be-
fore the period ‘‘(including any liability for any pen-
alties, additions to tax, or additional amounts relat-
ing to such adjustment)’’.
(D) Subparagraph (D) of section 6230(c)(5), as
added by section 14317, is amended by inserting
‘‘(and the applicability of any penalties, additions to
tax, or additional amounts)’’ after ‘‘partnership
items’’.
1055
(4) Paragraph (1) of section 6230(c) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph
(B) and inserting ‘‘, or’’, and by adding at the end
the following new subparagraph:
‘‘(C) the Secretary erroneously imposed
any penalty, addition to tax, or additional
amount which relates to an adjustment to a
partnership item.’’
(5) So much of subparagraph (A) of section
6230(c)(2) as precedes ‘‘shall be filed’’ is amended
to read as follows:
‘‘(A) UNDER PARAGRAPH (1) (A) OR (C).—
Any claim under subparagraph (A) or (C) of
paragraph (1)’’.
(6) Paragraph (4) of section 6230(c) is amend-
ed by adding at the end the following: ‘‘In addition,
the determination under the final partnership ad-
ministrative adjustment or under the decision of the
court (whichever is appropriate) concerning the ap-
plicability of any penalty, addition to tax, or addi-
tional amount which relates to an adjustment to a
partnership item shall also be conclusive. Notwith-
standing the preceding sentence, the partner shall be
allowed to assert any partner level defenses that may
1056
apply or to challenge the amount of the computa-
tional adjustment.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14319. PROVISIONS RELATING TO COURT JURISDIC-
TION, ETC.
(a) TAX COURT JURISDICTION TO ENJOIN PRE-
MATURE ASSESSMENTS OF DEFICIENCIES ATTRIBUTABLE
TO PARTNERSHIP ITEMS.—Subsection (b) of section 6225
is amended by striking ‘‘the proper court.’’ and inserting
‘‘the proper court, including the Tax Court. The Tax
Court shall have no jurisdiction to enjoin any action or
proceeding under this subsection unless a timely petition
for a readjustment of the partnership items for the taxable
year has been filed and then only in respect of the adjust-
ments that are the subject of such petition.’’
(b) JURISDICTION TO CONSIDER STATUTE OF LIMI-
TATIONS WITH RESPECT TO PARTNERS.—Paragraph (1)
of section 6226(d) is amended by adding at the end the
following new sentence:
‘‘Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an action
shall be permitted to participate in such action (or
file a readjustment petition under subsection (b) or
1057
paragraph (2) of this subsection) solely for the pur-
pose of asserting that the period of limitations for
assessing any tax attributable to partnership items
has expired with respect to such person, and the
court having jurisdiction of such action shall have
jurisdiction to consider such assertion.’’
(c) TAX
COURT
JURISDICTION
TO
DETERMINE
OVERPAYMENTS ATTRIBUTABLE TO AFFECTED ITEMS.—
(1) Paragraph (6) of section 6230(d) is amend-
ed by striking ‘‘(or an affected item)’’.
(2) Paragraph (3) of section 6512(b) is amend-
ed by adding at the end the following new sentence:
‘‘In the case of a credit or refund relating to an af-
fected 
item 
(within 
the 
meaning 
of 
section
6231(a)(5)), the preceding sentence shall be applied
by substituting the periods under sections 6229 and
6230(d) for the periods under section 6511(b)(2),
(c), and (d).’’
(d) VENUE ON APPEAL.—
(1) Paragraph (1) of section 7482(b) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (D),
by striking the period at the end of subparagraph
(E) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (E) the following new subparagraph:
1058
‘‘(F) in the case of a petition under section
6234(c)—
‘‘(i) the legal residence of the peti-
tioner if the petitioner is not a corporation,
and
‘‘(ii) the place or office applicable
under subparagraph (B) if the petitioner is
a corporation.’’
(2) The last sentence of section 7482(b)(1) is
amended by striking ‘‘or 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(e) OTHER PROVISIONS.—
(1) Subsection (c) of section 7459 is amended
by striking ‘‘or section 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(2) Subsection (o) of section 6501 is amended
by adding at the end the following new paragraph:
‘‘(3) For declaratory judgment relating to treat-
ment of items other than partnership items with re-
spect to an oversheltered return, see section 6234.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
1059
SEC. 14320. TREATMENT OF PREMATURE PETITIONS FILED
BY 
NOTICE 
PARTNERS 
OR 
5-PERCENT
GROUPS.
(a) IN GENERAL.—Subsection (b) of section 6226
(relating to judicial review of final partnership administra-
tive adjustments) is amended by redesignating paragraph
(5) as paragraph (6) and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) 
TREATMENT
OF
PREMATURE
PETI-
TIONS.—If—
‘‘(A) a petition for a readjustment of part-
nership items for the taxable year involved is
filed by a notice partner (or a 5-percent group)
during the 90-day period described in sub-
section (a), and
‘‘(B) no action is brought under paragraph
(1) during the 60-day period described therein
with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of para-
graph (1) as filed on the last day of such 60-day
period.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to petitions filed after the date of
the enactment of this Act.
1060
SEC. 14321. BONDS IN CASE OF APPEALS FROM CERTAIN
PROCEEDING.
(a) IN GENERAL.—Subsection (b) of section 7485
(relating to bonds to stay assessment of collection) is
amended—
(1) by inserting ‘‘penalties,’’ after ‘‘any inter-
est,’’, and
(2) by striking ‘‘aggregate of such deficiencies’’
and inserting ‘‘aggregate liability of the parties to
the action’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 14322. SUSPENSION OF INTEREST WHERE DELAY IN
COMPUTATIONAL ADJUSTMENT RESULTING
FROM CERTAIN SETTLEMENTS.
(a) IN GENERAL.—Subsection (c) of section 6601
(relating to interest on underpayment, nonpayment, or ex-
tension of time for payment, of tax) is amended by adding
at the end the following new sentence: ‘‘In the case of a
settlement under section 6224(c) which results in the con-
version of partnership items to nonpartnership items pur-
suant to section 6231(b)(1)(C), the preceding sentence
shall apply to a computational adjustment resulting from
such settlement in the same manner as if such adjustment
1061
were a deficiency and such settlement were a waiver re-
ferred to in the preceding sentence.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to adjustments with respect to
partnership taxable years beginning after the date of the
enactment of this Act.
SEC. 14323. SPECIAL RULES FOR ADMINISTRATIVE ADJUST-
MENT REQUESTS WITH RESPECT TO BAD
DEBTS OR WORTHLESS SECURITIES.
(a) GENERAL RULE.—Section 6227 (relating to ad-
ministrative adjustment requests) is amended by adding
at the end the following new subsection:
‘‘(e) REQUESTS WITH RESPECT TO BAD DEBTS OR
WORTHLESS SECURITIES.—In the case of that portion of
any request for an administrative adjustment which re-
lates to the deductibility by the partnership under section
166 of a debt as a debt which became worthless, or under
section 165(g) of a loss from worthlessness of a security,
the period prescribed in subsection (a)(1) shall be 7 years
from the last day for filing the partnership return for the
year with respect to which such request is made (deter-
mined without regard to extensions).’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall take effect as if included in the
1062
amendments made by section 402 of the Tax Equity
and Fiscal Responsibility Act of 1982.
(2) TREATMENT OF REQUESTS FILED BEFORE
DATE OF ENACTMENT.—In the case of that portion
of any request (filed before the date of the enact-
ment of this Act) for an administrative adjustment
which relates to the deductibility of a debt as a debt
which became worthless or the deductibility of a loss
from the worthlessness of a security—
(A) paragraph (2) of section 6227(a) of
the Internal Revenue Code of 1986 shall not
apply,
(B) the period for filing a petition under
section 6228 of the Internal Revenue Code of
1986 with respect to such request shall not ex-
pire before the date 6 months after the date of
the enactment of this Act, and
(C) such a petition may be filed without
regard to whether there was a notice of the be-
ginning of an administrative proceeding or a
final partnership administrative adjustment.
1063
Subtitle D—Foreign Provisions
PART I—MODIFICATIONS TO TREATMENT OF
PASSIVE FOREIGN INVESTMENT COMPANIES
SEC. 14401. UNITED 
STATES 
SHAREHOLDERS 
OF 
CON-
TROLLED 
FOREIGN 
CORPORATIONS 
NOT
SUBJECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the
following new subsection:
‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLD-
ERS OF CONTROLLED FOREIGN CORPORATIONS.—
‘‘(1) IN GENERAL.—For purposes of this part,
a corporation shall not be treated with respect to a
shareholder as a passive foreign investment company
during the qualified portion of such shareholder’s
holding period with respect to stock in such corpora-
tion.
‘‘(2) QUALIFIED
PORTION.—For purposes of
this subsection, the term ‘qualified portion’ means
the portion of the shareholder’s holding period—
‘‘(A) which is after December 31, 1995,
and
‘‘(B) during which the shareholder is a
United States shareholder (as defined in section
951(b)) of the corporation and the corporation
is a controlled foreign corporation.
1064
‘‘(3) NEW HOLDING PERIOD IF QUALIFIED POR-
TION ENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), if the qualified portion of a
shareholder’s holding period with respect to any
stock ends after December 31, 1995, solely for
purposes of this part, the shareholder’s holding
period with respect to such stock shall be treat-
ed as beginning as of the first day following
such period.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if such stock was, with respect
to such shareholder, stock in a passive foreign
investment company at any time before the
qualified portion of the shareholder’s holding
period with respect to such stock and no elec-
tion under section 1298(b)(1) is made.’’
SEC. 14402. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK IN PASSIVE FOREIGN INVEST-
MENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chap-
ter 1 is amended by redesignating subpart C as subpart
D, by redesignating sections 1296 and 1297 as sections
1297 and 1298, respectively, and by inserting after sub-
part B the following new subpart:
1065
‘‘Subpart C—Election of Mark to Market For
Marketable Stock
‘‘Sec. 1296. Election of mark to market for marketable stock.
‘‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign investment company which is
owned (or treated under subsection (g) as owned) by a
United States person at the close of any taxable year of
such person, at the election of such person—
‘‘(1) If the fair market value of such stock as
of the close of such taxable year exceeds its adjusted
basis, such United States person shall include in
gross income for such taxable year an amount equal
to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close
of such taxable year, such United States person
shall be allowed a deduction for such taxable year
equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect
to such stock.
‘‘(b) BASIS ADJUSTMENTS.—
1066
‘‘(1) IN GENERAL.—The adjusted basis of stock
in a passive foreign investment company—
‘‘(A) shall be increased by the amount in-
cluded in the gross income of the United States
person under subsection (a)(1) with respect to
such stock, and
‘‘(B) shall be decreased by the amount al-
lowed as a deduction to the United States per-
son under subsection (a)(2) with respect to
such stock.
‘‘(2) SPECIAL
RULE
FOR
STOCK
CONSTRUC-
TIVELY OWNED.—In the case of stock in a passive
foreign investment company which the United States
person is treated as owning under subsection (g)—
‘‘(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent treat-
ment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
1067
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross
income under subsection (a)(1), and any gain
on the sale or other disposition of marketable
stock in a passive foreign investment company
(with respect to which an election under this
section is in effect), shall be treated as ordinary
income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction
under subsection (a)(2), and
‘‘(ii) loss on the sale or other disposi-
tion of marketable stock in a passive for-
eign investment company (with respect to
which an election under this section is in
effect) to the extent that the amount of
such loss does not exceed the unreversed
inclusions with respect to such stock,
shall be treated as an ordinary loss. The
amount so treated shall be treated as a deduc-
tion allowable in computing adjusted gross in-
come.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or
allowed as a deduction under subsection (a)(2)) shall
1068
be determined in the same manner as if such
amount were gain or loss (as the case may be) from
the sale of stock in the passive foreign investment
company.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign investment com-
pany, the excess (if any) of—
‘‘(1) the amount included in gross income of
the taxpayer under subsection (a)(1) with respect to
such stock for prior taxable years, over
‘‘(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income
under subsection (a)(1) with respect to such stock for any
prior taxable year but for section 1291.
‘‘(e) MARKETABLE STOCK.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘marketable
stock’ means—
‘‘(A) any stock which is regularly traded
on—
1069
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
ket system established pursuant to section
11A of the Securities and Exchange Act of
1934, or
‘‘(ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of this
part,
‘‘(B) to the extent provided in regulations,
stock in any foreign corporation which is com-
parable to a regulated investment company and
which offers for sale or has outstanding any
stock of which it is the issuer and which is re-
deemable at its net asset value, and
‘‘(C) to the extent provided in regulations,
any option on stock described in subparagraph
(A) or (B).
‘‘(2) SPECIAL RULE FOR REGULATED INVEST-
MENT COMPANIES.—In the case of any regulated in-
vestment company which is offering for sale or has
outstanding any stock of which it is the issuer and
which is redeemable at its net asset value, all stock
in a passive foreign investment company which it
1070
owns directly or indirectly shall be treated as mar-
ketable stock for purposes of this section. Except as
provided in regulations, similar treatment as mar-
ketable stock shall apply in the case of any other
regulated investment company which publishes net
asset valuations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH
ARE SHAREHOLDERS
IN PASSIVE
FOREIGN INVESTMENT COMPANIES.—In the case of a for-
eign corporation which is a controlled foreign corporation
and which owns (or is treated under subsection (g) as own-
ing) stock in a passive foreign investment company—
‘‘(1) this section (other than subsection (c)(2))
shall apply to such foreign corporation in the same
manner as if such corporation were a United States
person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
1071
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN
ENTITIES.—Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately
by its partners or beneficiaries. Stock considered to
be owned by a person by reason of the application
of the preceding sentence shall, for purposes of ap-
plying such sentence, be treated as actually owned
by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—
In any case in which a United States person is
treated as owning stock in a passive foreign invest-
ment company by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
1072
shall be treated as a disposition by the United
States person of the stock in the passive foreign in-
vestment company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For
purposes of paragraphs (2) and (3) of section 851(b), any
amount included in gross income under subsection (a)
shall be treated as a dividend.
‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the
case of stock of a passive foreign investment company
which is acquired by bequest, devise, or inheritance (or
by the decedent’s estate) and with respect to which an
election under this section was in effect as of the date of
the decedent’s death, notwithstanding section 1014, the
basis of such stock in the hands of the person so acquiring
it shall be the adjusted basis of such stock in the hands
of the decedent immediately before his death (or, if lesser,
the basis which would have been determined under section
1014 without regard to this subsection).
‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST
YEAR OF ELECTION.—
‘‘(1) TAXPAYERS OTHER THAN REGULATED IN-
VESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—If the taxpayer elects
the application of this section with respect to
any marketable stock in a corporation after the
1073
beginning of the taxpayer’s holding period in
such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall
apply to—
‘‘(i) any distributions with respect to,
or disposition of, such stock in the first
taxable year of the taxpayer for which such
election is made, and
‘‘(ii) any amount which, but for sec-
tion 1291, would have been included in
gross income under subsection (a) with re-
spect to such stock for such taxable year in
the same manner as if such amount were
gain on the disposition of such stock.
‘‘(B) REQUIREMENTS.—The requirements
of this subparagraph are met if, with respect to
each of such corporation’s taxable years for
which such corporation was a passive foreign
investment company and which begin after De-
cember 31, 1986, and included any portion of
the taxpayer’s holding period in such stock,
such corporation was treated as a qualified
electing fund under this part with respect to the
taxpayer.
1074
‘‘(2) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN GENERAL.—If a regulated invest-
ment company elects the application of this sec-
tion with respect to any marketable stock in a
corporation after the beginning of the tax-
payer’s holding period in such stock, then, with
respect to such company’s first taxable year for
which such company elects the application of
this section with respect to such stock—
‘‘(i) section 1291 shall not apply to
such stock with respect to any distribution
or disposition during, or amount included
in gross income under this section for,
such first taxable year, but
‘‘(ii) such regulated investment com-
pany’s tax under this chapter for such first
taxable year shall be increased by the ag-
gregate amount of interest which would
have 
been 
determined 
under 
section
1291(c)(3) if section 1291 were applied
without regard to this subparagraph.
Clause (ii) shall not apply if for the preceding
taxable year the company elected to mark to
1075
market the stock held by such company as of
the last day of such preceding taxable year.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
‘‘(k) ELECTION.—This section shall apply to market-
able stock in a passive foreign investment company which
is held by a United States person only if such person elects
to apply this section with respect to such stock. Such an
election shall apply to the taxable year for which made
and all subsequent taxable years unless—
‘‘(1) such stock ceases to be marketable stock,
or
‘‘(2) the Secretary consents to the revocation of
such election.
‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING
SUBJECT TO UNITED STATES TAX.—If any individual be-
comes a United States person in a taxable year beginning
after December 31, 1995, solely for purposes of this sec-
tion, the adjusted basis (before adjustments under sub-
section (b)) of any marketable stock in a passive foreign
investment company owned by such individual on the first
day of such taxable year shall be treated as being the
1076
greater of its fair market value on such first day or its
adjusted basis on such first day.’’
(b) COORDINATION
WITH
INTEREST
CHARGE,
ETC.—
(1) Paragraph (1) of section 1291(d) is amend-
ed by adding at the end the following new flush sen-
tence:
‘‘Except as provided in section 1296(j), this section
also shall not apply if an election under section
1296(k) is in effect for the taxpayer’s taxable year.’’
(2) The subsection heading for subsection (d) of
section 1291 is amended by striking ‘‘SUBPART B’’
and inserting ‘‘SUBPARTS B AND C’’.
(3) Subparagraph (A) of section 1291(a)(3) is
amended to read as follows:
‘‘(A) HOLDING
PERIOD.—The taxpayer’s
holding period shall be determined under sec-
tion 1223; except that—
‘‘(i) for purposes of applying this sec-
tion to an excess distribution, such holding
period shall be treated as ending on the
date of such distribution, and
‘‘(ii) if section 1296 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
1077
shall be treated as beginning on the first
day of the first taxable year beginning
after the last taxable year for which sec-
tion 1296 so applied.’’
(c) CONFORMING AMENDMENTS.—
(1) Sections 532(b)(4) and 542(c)(10) are each
amended by striking ‘‘section 1296’’ and inserting
‘‘section 1297’’.
(2) Subsection (f) of section 551 is amended by
striking ‘‘section 1297(b)(5)’’ and inserting ‘‘section
1298(b)(5)’’
(3) Subsections (a)(1) and (d) of section 1293
are each amended by striking ‘‘section 1297(a)’’ and
inserting ‘‘section 1298(a)’’.
(4) Paragraph (3) of section 1297(b), as redes-
ignated by subsection (a), is hereby repealed.
(5) The table of sections for subpart D of part
VI of subchapter P of chapter 1, as redesignated by
subsection (a), is amended to read as follows:
‘‘Sec. 1297. Passive foreign investment company.
‘‘Sec. 1298. Special rules.’’
(6) The table of subparts for part VI of sub-
chapter P of chapter 1 is amended by striking the
last item and inserting the following new items:
‘‘Subpart C. Election of mark to market for marketable stock.
‘‘Subpart D. General provisions.’’
1078
(d) CLARIFICATION OF GAIN RECOGNITION ELEC-
TION.—The last sentence of section 1298(b)(1), as so re-
designated, is amended by inserting ‘‘(determined without
regard to the preceding sentence)’’ after ‘‘investment com-
pany’’.
SEC. 14403. MODIFICATIONS TO DEFINITION OF PASSIVE
INCOME.
(a) EXCEPTION FOR SAME COUNTRY INCOME NOT
TO APPLY.—Paragraph (1) of section 1297(b) (defining
passive income), as redesignated by section 14402, is
amended by inserting before the period ‘‘without regard
to paragraph (3) thereof’’.
(b) PASSIVE INCOME NOT TO INCLUDE FSC IN-
COME.—Paragraph (2) of section 1297(b), as so redesig-
nated, is amended by striking ‘‘or’’ at the end of subpara-
graph (B), by striking the period at the end of subpara-
graph (C) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (C) the following new subparagraph:
‘‘(D) any foreign trade income of a FSC.’’
SEC. 14404. EFFECTIVE DATE.
The amendments made by this part shall apply to—
(1) taxable years of United States persons be-
ginning after December 31, 1995, and
1079
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
PART II—TREATMENT OF CONTROLLED FOREIGN
CORPORATIONS
SEC. 14411. GAIN ON CERTAIN STOCK SALES BY CON-
TROLLED FOREIGN CORPORATIONS TREAT-
ED AS DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
the following new subsection:
‘‘(e) GAIN
ON CERTAIN STOCK SALES
BY CON-
TROLLED FOREIGN CORPORATIONS TREATED AS DIVI-
DENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other for-
eign corporation, gain recognized on such sale or ex-
change shall be included in the gross income of such
controlled foreign corporation as a dividend to the
same extent that it would have been so included
under section 1248(a) if such controlled foreign cor-
poration were a United States person. For purposes
of determining the amount which would have been so
includible, the determination of whether such other
foreign corporation was a controlled foreign corpora-
1080
tion shall be made without regard to the preceding
sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA-
BLE.—Clause (i) of section 954(c)(3)(A) shall not
apply to any amount treated as a dividend by reason
of paragraph (1).
‘‘(3) CLARIFICATION OF DEEMED SALES.—For
purposes of this subsection, a controlled foreign cor-
poration shall be treated as having sold or ex-
changed any stock if, under any provision of this
subtitle, such controlled foreign corporation is treat-
ed as having gain from the sale or exchange of such
stock.’’
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of
section 904(d)(2)(E) is amended by striking ‘‘and except
as provided in regulations, the taxpayer was a United
States shareholder in such corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a)
shall apply to gain recognized on transactions occur-
ring after the date of the enactment of this Act.
(2) The amendment made by subsection (b)
shall apply to distributions after the date of the en-
actment of this Act.
1081
SEC. 14412. MISCELLANEOUS MODIFICATIONS TO SUBPART
F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN
DETERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F in-
come) is amended by adding at the end the following
new sentence: ‘‘For purposes of subparagraph (B),
any gain included in the gross income of any person
as a dividend under section 1248 shall be treated as
a distribution received by such person with respect
to the stock involved.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
1082
other controlled foreign corporation, adjustments similar
to the adjustments provided by subsections (a) and (b)
shall be made to the basis of such stock in the hands of
such other controlled foreign corporation, but only for the
purposes of determining the amount included under sec-
tion 951 in the gross income of such United States share-
holder (or any other United States shareholder who ac-
quires from any person any portion of the interest of such
United States shareholder by reason of which such share-
holder was treated as owning such stock, but only to the
extent of such portion, and subject to such proof of iden-
tity of such interest as the Secretary may prescribe by reg-
ulations).’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply for purposes of deter-
mining inclusions for taxable years of United States
shareholders beginning after December 31, 1995.
(c) DETERMINATION
OF PREVIOUSLY TAXED IN-
COME IN SECTION 304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings and profits) is amended by adding at the end
the following new subsection:
‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—
If by reason of—
1083
‘‘(1) a transaction to which section 304 applies,
‘‘(2) the structure of a United States sharehold-
er’s holdings in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income
(or an inclusion or exclusion without an appropriate basis
adjustment) by reason of this subpart, the Secretary may
prescribe regulations providing such modifications in the
application of this subpart as may be necessary to elimi-
nate such multiple inclusion or provide such basis adjust-
ment, as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of the
enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end the following
new sentence: ‘‘For purposes of this subsection, any
exemption (or reduction) with respect to the tax im-
posed by section 884 shall not be taken into ac-
count.’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
1084
SEC. 14413. INDIRECT FOREIGN TAX CREDIT ALLOWED
FOR CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN
GENERAL.—Subsection (b) of section
902 (relating to deemed taxes increased in case of
certain 2nd and 3rd tier foreign corporations) is
amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER-
TAIN LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have
paid the same proportion of such other member’s
post-1986 foreign income taxes as would be deter-
mined under subsection (a) if such foreign corpora-
tion were a domestic corporation.
‘‘(2) QUALIFIED
GROUP.—For purposes of
paragraph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
1085
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other 
foreign 
corporation 
indirectly
through a chain of foreign corporations
connected through stock ownership of at
least 10 percent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corpora-
tion in such chain, and
‘‘(iii) such other corporation is not
below the sixth tier in such chain.
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corpora-
tion is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a Unit-
ed States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall
apply to those taxes paid by a member of the quali-
fied group below the third tier only with respect to
periods during which it was a controlled foreign cor-
poration.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
1086
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corpora-
tion’’ and inserting ‘‘sixth tier foreign corpora-
tion’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC
CORPORATION
ACQUIRES
PERCENT
OF
FOREIGN
CORPORATION’’ and inserting
‘‘WHERE FOREIGN CORPORATION FIRST QUALI-
FIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits)
is amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under
section 951(a) in the gross income of a domestic cor-
poration any amount attributable to earnings and
1087
profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b))
with respect to the domestic corporation, then, ex-
cept to the extent provided in regulations, section
902 shall be applied as if the amount so included
were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accord-
ance with section 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxes of foreign corpora-
tions for taxable years of such corporations begin-
ning after the date of enactment of this Act.
(2) SPECIAL RULE.—In the case of any chain
of foreign corporations described in clauses (i) and
(ii) of section 902(b)(2)(B) of the Internal Revenue
Code of 1986 (as amended by this section), no liq-
uidation, reorganization, or similar transaction in a
taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting
taxes to be taken into account under section 902 of
the Internal Revenue Code of 1986 which could not
have been taken into account under such section but
for such transaction.
1088
SEC. 14414. REPEAL OF INCLUSION OF CERTAIN EARNINGS
INVESTED IN EXCESS PASSIVE ASSETS.
(a) IN GENERAL.—
(1) REPEAL OF INCLUSION.—Paragraph (1) of
section 951(a) (relating to amounts included in
gross income of United States shareholders) is
amended by striking subparagraph (C), by striking
‘‘; and’’ at the end of subparagraph (B) and insert-
ing a period, and by adding ‘‘and’’ at the end of
subparagraph (A).
(2) REPEAL OF INCLUSION AMOUNT.—Section
956A (relating to earnings invested in excess passive
assets) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (G) of section 904(d)(3) is
amended by striking ‘‘subparagraph (B) or (C) of
section 
951(a)(1)’’ 
and 
inserting 
‘‘section
951(a)(1)(B)’’.
(2) Paragraph (1) of section 956(b) is amended
to read as follows:
‘‘(1) APPLICABLE EARNINGS.—For purposes of
this section, the term ‘applicable earnings’ means,
with respect to any controlled foreign corporation,
the sum of—
‘‘(A) the amount (not including a deficit)
referred to in section 316(a)(1), and
1089
‘‘(B) the amount referred to in section
316(a)(2),
but reduced by distributions made during the tax-
able year.’’
(3) Paragraph (3) of section 956(b) is amended
to read as follows:
‘‘(3) SPECIAL
RULE
WHERE
CORPORATION
CEASES
TO
BE
CONTROLLED
FOREIGN
CORPORA-
TION.—If any foreign corporation ceases to be a
controlled foreign corporation during any taxable
year—
‘‘(A) the determination of any United
States shareholder’s pro rata share shall be
made on the basis of stock owned (within the
meaning of section 958(a)) by such shareholder
on the last day during the taxable year on
which the foreign corporation is a controlled
foreign corporation,
‘‘(B) the average referred to in subsection
(a)(1)(A) for such taxable year shall be deter-
mined by only taking into account quarters end-
ing on or before such last day, and
‘‘(C) in determining applicable earnings,
the amount taken into account by reason of
being described in paragraph (2) of section
1090
316(a) shall be the portion of the amount so
described which is allocable (on a pro rata
basis) to the part of such year during which the
corporation is a controlled foreign corporation.’’
(4) Subsection (a) of section 959 (relating to
exclusion from gross income of previously taxed
earnings and profits) is amended by adding ‘‘or’’ at
the end of paragraph (1), by striking ‘‘or’’ at the
end of paragraph (2), and by striking paragraph (3).
(5) Subsection (a) of section 959 is amended by
striking ‘‘paragraphs (2) and (3)’’ in the last sen-
tence and inserting ‘‘paragraph (2)’’.
(6) Subsection (c) of section 959 is amended by
adding at the end the following flush sentence:
‘‘References in this subsection to section 951(a)(1)(C) and
subsection (a)(3) shall be treated as references to such
provisions as in effect on the day before the date of the
enactment of the Tax Simplification Act of 1995.’’
(7) Paragraph (1) of section 959(f) is amended
to read as follows:
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, amounts that would be included under subpara-
graph (B) of section 951(a)(1) (determined without
regard to this section) shall be treated as attrib-
utable first to earnings described in subsection
1091
(c)(2), and then to earnings described in subsection
(c)(3).’’
(8) Paragraph (2) of section 959(f) is amended
by striking ‘‘subparagraphs (B) and (C) of section
951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.
(9) Subsection (b) of section 989 is amended by
striking ‘‘subparagraph (B) or (C) of section
951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.
(10) Paragraph (9) of section 1298(b), as re-
designated by section 14402, is amended by striking
‘‘subparagraph (B) or (C) of section 951(a)(1)’’ and
inserting ‘‘section 951(a)(1)(B)’’.
(11) Subsections (d)(3)(B) and (e)(2)(B)(ii) of
section 1298, as redesignated by section 14402, are
each amended by striking ‘‘or section 956A’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart F of part III of subchapter N of chapter 1
is amended by striking the item relating to section 956A.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years of foreign corpora-
tions beginning after September 30, 1995, and to taxable
years of United States shareholders within which or with
which such taxable years of foreign corporations end.
1092
PART III—OTHER PROVISIONS
SEC. 14421. EXCHANGE RATE USED IN TRANSLATING FOR-
EIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVER-
AGE RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to translation of foreign taxes) is
amended to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of
any foreign income taxes (and any adjustment
thereto) shall be translated into dollars by using
the average exchange rate for the taxable year
to which such taxes relate.
‘‘(B) EXCEPTION
FOR
TAXES
NOT
PAID
WITHIN FOLLOWING 2 YEARS.—
‘‘(i) Subparagraph (A) shall not apply
to any foreign income taxes paid after the
date 2 years after the close of the taxable
year to which such taxes relate.
1093
‘‘(ii) Subparagraph (A) shall not
apply to taxes paid before the beginning of
the taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—Subparagraph (A) shall not apply to
any foreign income taxes the liability for which
is denominated in any currency determined to
be an inflationary currency under regulations
prescribed by the Secretary.
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of de-
termining the amount of the foreign tax credit, in
the case of any foreign income taxes to which sub-
paragraph (A) of paragraph (1) does not apply—
‘‘(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
‘‘(B) any adjustment to the amount of
such taxes shall be translated into dollars
using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
1094
adjustment is paid to the foreign country
or possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes
of this subsection, the term ‘foreign income taxes’
means any income, war profits, or excess profits
taxes paid or accrued to any foreign country or to
any possession of the United States.’’
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2
YEARS AFTER YEAR TO WHICH TAXES RELATE.—
Subsection (c) of section 905 is amended to read as
follows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year
to which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
1095
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—In making the redetermination
under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in
subparagraph (B) of paragraph (1). Any such taxes
if subsequently paid shall be taken into account for
the taxable year in which paid and no redetermina-
tion under this section shall be made on account of
such payment.
‘‘(3) ADJUSTMENTS.—The amount of tax due
on any redetermination under paragraph (1) (if any)
shall be paid by the taxpayer on notice and demand
by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in
accordance with subchapter B of chapter 66 (section
6511 et seq.).
‘‘(4) BOND
REQUIREMENTS.—In the case of
any tax accrued but not paid, the Secretary, as a
condition precedent to the allowance of the credit
provided in this subpart, may require the taxpayer
to give a bond, with sureties satisfactory to and ap-
proved by the Secretary, in such sum as the Sec-
1096
retary may require, conditioned on the payment by
the taxpayer of any amount of tax found due on any
such redetermination. Any such bond shall contain
such further conditions as the Secretary may re-
quire.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of
the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of
the taxes refunded for which credit has been allowed
under this section shall be reduced by the amount of
any tax described in section 901 imposed by the for-
eign country or possession of the United States with
respect to such refund; but no credit under this sub-
part, or deduction under section 164, shall be al-
lowed for any taxable year with respect to any such
tax imposed on the refund. No interest shall be as-
sessed or collected on any amount of tax due on any
redetermination by the Secretary, resulting from a
refund to the taxpayer, for any period before the re-
ceipt of such refund, except to the extent interest
was paid by the foreign country or possession of the
United States on such refund for such period.’’
(b) AUTHORITY TO USE AVERAGE RATES.—
1097
(1) IN
GENERAL.—Subsection (a) of section
986 (as amended by subsection (a)) is amended by
redesignating paragraph (3) as paragraph (4) and
inserting after paragraph (2) the following new
paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in
such regulations) during which the taxes or adjust-
ment is paid may be used instead of the exchange
rate as of the time of such payment.’’
(2) DETERMINATION
OF
AVERAGE
RATES.—
Subsection (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ‘‘,
and’’, and by adding at the end the following new
paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘weight-
ed’’ each place it appears.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
1098
or accrued in taxable years beginning after Decem-
ber 31, 1995.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1995.
SEC. 14422. ELECTION TO USE SIMPLIFIED SECTION 904
LIMITATION FOR ALTERNATIVE MINIMUM
TAX.
(a) GENERAL RULE.—Subsection (a) of section 59
(relating to alternative minimum tax foreign tax credit)
is amended by adding at the end the following new para-
graph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
‘‘(ii) the limitation of section 904
shall be based on the proportion which—
‘‘(I) the taxpayer’s taxable in-
come (as determined for purposes of
the regular tax) from sources without
1099
the United States (but not in excess
of the taxpayer’s entire alternative
minimum taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
after December 31, 1995, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
‘‘(ii) ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with
the consent of the Secretary.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
1100
SEC. 14423. MODIFICATION OF SECTION 1491.
(a) GENERAL RULE.—So much of chapter 5 (relating
to tax on transfers to avoid income tax) as precedes sec-
tion 1492 is amended to read as follows:
‘‘CHAPTER 5—TREATMENT OF TRANSFERS
TO AVOID INCOME TAX
‘‘Sec. 1491. Recognition of gain.
‘‘Sec. 1492. Exceptions.
‘‘SEC. 1491. RECOGNITION OF GAIN.
‘‘In the case of any transfer of property by a United
States person to a foreign corporation as paid-in surplus
or as a contribution to capital, to a foreign estate or trust,
or to a foreign partnership, for purposes of this subtitle
(other than for purposes of section 679), such transfer
shall be treated as a sale or exchange for an amount equal
to the fair market value of the property transferred, and
the transferor shall recognize as gain the excess of—
‘‘(1) the fair market value of the property so
transferred, over
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the
transferor.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1057 is hereby repealed.
(2) Section 1492 is amended to read as follows:
1101
‘‘SEC. 1492. EXCEPTIONS.
‘‘The provisions of section 1491 shall not apply—
‘‘(1) If the transferee is an organization exempt
from income tax under part I of subchapter F of
chapter 1 (other than an organization described in
section 401(a)),
‘‘(2) To a transfer described in section 367, or
‘‘(3) To any other transfer, to the extent pro-
vided in regulations in accordance with principles
similar to the principles of section 367 or otherwise
consistent with the purpose of section 1491.’’
(3) Section 1494 is hereby repealed.
(4) Paragraph (8) of section 6501(c) is amend-
ed by inserting ‘‘or on any transfer by reason of sec-
tion 1491’’ after ‘‘section 367’’.
(5) Subsection (a) of section 6038B is amended
by striking ‘‘or’’ at the end of paragraph (1), by
adding ‘‘or’’ at the end of paragraph (2), and by in-
serting after paragraph (2) the following new para-
graph:
‘‘(3) makes any transfer described in section
1491,’’.
(6) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
1102
(7) The table of chapters for subtitle A is
amended by striking ‘‘Tax on’’ in the item relating
to chapter 5 and inserting ‘‘Treatment of’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after December 31,
1995.
SEC. 14424. MODIFICATION OF SECTION 367(b).
(a) GENERAL RULE.—Paragraph (1) of section
367(b) is amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any trans-
action described in section 332, 351, 354, 355, 356,
or 361 in which the status of a foreign corporation
as a corporation is a general condition for non-
recognition by 1 or more of the parties to the trans-
action, income shall be required to be recognized to
the extent provided in regulations prescribed by the
Secretary which are necessary or appropriate to pre-
vent the avoidance of Federal income taxes. This
subsection shall not apply to a transaction in which
the foreign corporation is not treated as a corpora-
tion under subsection (a)(1).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after December 31,
1995.
1103
SEC. 14425. INCREASE IN FILING THRESHOLDS FOR RE-
TURNS AS TO ORGANIZATION OF FOREIGN
CORPORATIONS 
AND 
ACQUISITIONS 
OF
STOCK IN SUCH CORPORATIONS.
(a) IN GENERAL.—Subsection (a) of section 6046
(relating to returns as to organization or reorganization
of foreign corporations and as to acquisitions of their
stock) is amended to read as follows:
‘‘(a) REQUIREMENT OF RETURN.—
‘‘(1) IN GENERAL.—A return complying with
the requirements of subsection (b) shall be made
by—
‘‘(A) each United States citizen or resident
who becomes an officer or director of a foreign
corporation if a United States person (as de-
fined in section 7701(a)(30)) meets the stock
ownership requirements of paragraph (2) with
respect to such corporation,
‘‘(B) each United States person—
‘‘(i) who acquires stock which, when
added to any stock owned on the date of
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation, or
‘‘(ii) who acquires stock which, with-
out regard to stock owned on the date of
1104
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation,
‘‘(C) each person (not described in sub-
paragraph (B)) who is treated as a United
States shareholder under section 953(c) with
respect to a foreign corporation, and
‘‘(D) each person who becomes a United
States person while meeting the stock owner-
ship requirements of paragraph (2) with respect
to stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States
shareholder under section 953(c), subparagraph (A)
shall be treated as including a reference to each
United States person who is an officer or director of
such corporation.
‘‘(2) STOCK
OWNERSHIP
REQUIREMENTS.—A
person meets the stock ownership requirements of
this paragraph with respect to any corporation if
such person owns 10 percent or more of—
‘‘(A) the total combined voting power of all
classes of stock of such corporation entitled to
vote, or
1105
‘‘(B) the total value of the stock of such
corporation.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on January 1, 1996.
SEC. 14426. APPLICATION OF UNIFORM CAPITALIZATION
RULES TO FOREIGN PERSONS.
(a) IN GENERAL.—Section 263A(c) (relating to ex-
ceptions) is amended by adding at the end the following
new paragraph:
‘‘(7) FOREIGN
PERSONS.—This section shall
apply to any taxpayer who is not a United States
person only for purposes of—
‘‘(A) tax liability with respect to income
which is effectively connected with the conduct
of a trade or business in the United States, and
‘‘(B) tax liability of a United States share-
holder (as defined in section 951(b)) with re-
spect to amounts includible in gross income
under section 951(a).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1995. Section 481 of the Internal Revenue
Code of 1986 shall not apply to any change in a method
of accounting by reason of such amendment.
1106
SEC. 14427. CERTAIN PRIZES AND AWARDS.
(a) IN GENERAL.—Section 863 (relating to special
rules for determining source) is amended by adding at the
end the following new subsection:
‘‘(f) CERTAIN PRIZES
AND AWARDS ASSOCIATED
WITH AMATEUR SPORTS COMPETITIONS.—
‘‘(1) IN GENERAL.—A prize or award received
by a nonresident alien by reason of participating in
an amateur sports competition in the United States
shall not be treated as derived from sources within
the United States if such alien performs no services
for such prize or award.
‘‘(2) AMATEUR
SPORTS
COMPETITION.—For
purposes of paragraph (1), the term ‘amateur sports
competition’ means any competition in which the
only prizes awarded by the sponsors of the competi-
tion are of nominal value.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to prizes and awards granted
after the date of the enactment of this Act.
SEC. 14428. TREATMENT FOR ESTATE TAX PURPOSES OF
SHORT-TERM OBLIGATIONS HELD BY NON-
RESIDENT ALIENS.
(a) IN GENERAL.—Subsection (b) of section 2105 is
amended by striking ‘‘and’’ at the end of paragraph (2),
by striking the period at the end of paragraph (3) and
1107
inserting ‘‘, and’’, and by inserting after paragraph (3)
the following new paragraph:
‘‘(4) obligations which would be original issue
discount obligations as defined in section 871(g)(1)
but for subparagraph (B)(i) thereof, if any interest
thereon (were such interest received by the decedent
at the time of his death) would not be effectively
connected with the conduct of a trade or business
within the United States.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
Subtitle E—Other Income Tax
Provisions
PART I—PROVISIONS RELATING TO S
CORPORATIONS
SEC. 14501. S CORPORATIONS PERMITTED TO HAVE 75
SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining
small business corporation) is amended by striking ‘‘35
shareholders’’ and inserting ‘‘75 shareholders’’.
SEC. 14502. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
1108
holders) is amended by inserting after clause (iv) the fol-
lowing new clause:
‘‘(v) An electing small business trust.’’
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—Subparagraph (B) of section 1361(c)(2) is
amended by adding at the end the following new clause:
‘‘(v) In the case of a trust described
in clause (v) of subparagraph (A), each po-
tential current beneficiary of such trust
shall be treated as a shareholder; except
that, if for any period there is no potential
current beneficiary of such trust, such
trust shall be treated as the shareholder
during such period.’’
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—
Section 1361 (defining S corporation) is amended by add-
ing at the end the following new subsection:
‘‘(e) ELECTING
SMALL
BUSINESS
TRUST
DE-
FINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small
business trust’ means any trust if—
1109
‘‘(i) such trust does not have as a
beneficiary any person other than (I) an
individual, (II) an estate, or (III) an orga-
nization described in paragraph (2), (3),
(4), or (5) of section 170(c) which holds a
contingent interest and is not a potential
current beneficiary,
‘‘(ii) no interest in such trust was ac-
quired by purchase, and
‘‘(iii) an election under this subsection
applies to such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—
The term ‘electing small business trust’ shall
not include—
‘‘(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an elec-
tion under subsection (d)(2) applies to any
corporation the stock of which is held by
such trust, and
‘‘(ii) any trust exempt from tax under
this subtitle.
‘‘(C) PURCHASE.—For purposes of sub-
paragraph (A), the term ‘purchase’ means any
acquisition if the basis of the property acquired
is determined under section 1012.
1110
‘‘(2) POTENTIAL CURRENT BENEFICIARY.—For
purposes of this section, the term ‘potential current
beneficiary’ means, with respect to any period, any
person who at any time during such period is enti-
tled to, or at the discretion of any person may re-
ceive, a distribution from the principal or income of
the trust. If a trust disposes of all of the stock which
it holds in an S corporation, then, with respect to
such corporation, the term ‘potential current bene-
ficiary’ does not include any person who first met
the requirements of the preceding sentence during
the 60-day period ending on the date of such dis-
position.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such elec-
tion shall apply to the taxable year of the trust for
which made and all subsequent taxable years of such
trust unless revoked with the consent of the Sec-
retary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
1111
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
S corporations shall be treated as a separate
trust, and
‘‘(B) the amount of the tax imposed by
this chapter on such separate trust shall be de-
termined with the modifications of paragraph
(2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (1), the modifications of this paragraph are
the following:
‘‘(A) Except as provided in section 1(h),
the amount of the tax imposed by section 1(e)
shall be determined by using the highest rate of
tax set forth in section 1(e).
‘‘(B) The exemption amount under section
55(d) shall be zero.
‘‘(C) The only items of income, loss, deduc-
tion, or credit to be taken into account are the
following:
1112
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the dis-
position of stock in an S corporation.
‘‘(iii) To the extent provided in regu-
lations, State or local income taxes or ad-
ministrative expenses to the extent alloca-
ble to items described in clauses (i) and
(ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be appor-
tioned to any beneficiary.
‘‘(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
‘‘(3) TREATMENT
OF
REMAINDER
OF
TRUST
AND
DISTRIBUTIONS.—For purposes of determin-
ing—
‘‘(A) the amount of the tax imposed by
this chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the
entire trust,
1113
the items referred to in paragraph (2)(C) shall be
excluded. Except as provided in the preceding sen-
tence, this subsection shall not affect the taxation of
any distribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE TERMINATION OF SEPARATE TRUST.—If a
portion of an electing small business trust ceases to
be treated as a separate trust under paragraph (1),
any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be
taken into account by the entire trust.
‘‘(5) ELECTING SMALL BUSINESS TRUST.—For
purposes of this subsection, the term ‘electing small
business trust’ has the meaning given such term by
section 1361(e)(1).’’
(e) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 1366(a) is amended by inserting ‘‘, or of a trust or
estate which terminates,’’ after ‘‘who dies’’.
SEC. 14503. EXPANSION OF POST-DEATH QUALIFICATION
FOR CERTAIN TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to
certain trusts permitted as shareholders) is amended—
(1) by striking ‘‘60-day period’’ each place it
appears in clauses (ii) and (iii) and inserting ‘‘2-year
period’’, and
1114
(2) by striking the last sentence in clause (ii).
SEC. 14504. FINANCIAL INSTITUTIONS PERMITTED TO
HOLD SAFE HARBOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining
straight debt) is amended by striking ‘‘or a trust described
in paragraph (2)’’ and inserting ‘‘a trust described in
paragraph (2), or a person which is actively and regularly
engaged in the business of lending money.’’
SEC. 14505. RULES RELATING TO INADVERTENT TERMI-
NATIONS AND INVALID ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.—If—
‘‘(1) an election under subsection (a) by any
corporation—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to ob-
tain shareholder consents, or
‘‘(B) was terminated under paragraph (2)
of subsection (d),
1115
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or ter-
mination were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were
taken—
‘‘(A) so that the corporation is a small
business corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with
the treatment of the corporation as an S corpora-
tion) as may be required by the Secretary with re-
spect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified
by the Secretary.’’
(b) LATE ELECTIONS.—Subsection (b) of section
1362 is amended by adding at the end the following new
paragraph:
1116
‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS
AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’
(c) EFFECTIVE DATE.—The amendments made by
subsection (a) and (b) shall apply with respect to elections
for taxable years beginning after December 31, 1982.
SEC. 14506. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro
rata share) is amended to read as follows:
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN
GENERAL.—Under regulations
prescribed by the Secretary, if any shareholder
terminates the shareholder’s interest in the cor-
poration during the taxable year and all af-
fected shareholders and the corporation agree
1117
to the application of this paragraph, paragraph
(1) shall be applied to the affected shareholders
as if the taxable year consisted of 2 taxable
years the first of which ends on the date of the
termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘af-
fected shareholders’ means the shareholder
whose interest is terminated and all sharehold-
ers to whom such shareholder has transferred
shares during the taxable year. If such share-
holder has transferred shares to the corpora-
tion, the term ‘affected shareholders’ shall in-
clude all persons who are shareholders during
the taxable year.’’
SEC. 14507. EXPANSION OF POST-TERMINATION TRANSI-
TION PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b)
(relating to post-termination transition period) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by re-
designating subparagraph (B) as subparagraph (C), and
by inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(B) the 120-day period beginning on the
date of any determination pursuant to an audit
1118
of the taxpayer which follows the termination of
the corporation’s election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of
section 1377(b) is amended by striking subparagraphs (A)
and (B), by redesignating subparagraph (C) as subpara-
graph (B), and by inserting before subparagraph (B) (as
so redesignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR
SUBCHAPTER S ITEMS.—
(1) GENERAL RULE.—Subchapter D of chapter
63 (relating to tax treatment of subchapter S items)
is hereby repealed.
(2) CONSISTENT TREATMENT REQUIRED.—Sec-
tion 6037 (relating to return of S corporation) is
amended by adding at the end the following new
subsection:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSIST-
ENT WITH CORPORATE RETURN OR SECRETARY NOTI-
FIED OF INCONSISTENCY.—
1119
‘‘(1) IN GENERAL.—A shareholder of an S cor-
poration shall, on such shareholder’s return, treat a
subchapter S item in a manner which is consistent
with the treatment of such item on the corporate re-
turn.
‘‘(2) NOTIFICATION OF INCONSISTENT TREAT-
MENT.—
‘‘(A) IN
GENERAL.—In the case of any
subchapter S item, if—
‘‘(i)(I) the corporation has filed a re-
turn but the shareholder’s treatment on
his return is (or may be) inconsistent with
the treatment of the item on the corporate
return, or
‘‘(II) the corporation has not filed a
return, and
‘‘(ii) the shareholder files with the
Secretary a statement identifying the in-
consistency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER
RECEIVING
INCOR-
RECT
INFORMATION.—A shareholder shall be
treated as having complied with clause (ii) of
subparagraph (A) with respect to a subchapter
S item if the shareholder—
1120
‘‘(i) demonstrates to the satisfaction
of the Secretary that the treatment of the
subchapter S item on the shareholder’s re-
turn is consistent with the treatment of the
item on the schedule furnished to the
shareholder by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I)
of paragraph (2), and
‘‘(B) in which the shareholder does not
comply with subparagraph (A)(ii) of paragraph
(2),
any adjustment required to make the treatment of
the items by such shareholder consistent with the
treatment of the items on the corporate return shall
be treated as arising out of mathematical or clerical
errors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sen-
tence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of
this subsection, the term ‘subchapter S item’ means
1121
any item of an S corporation to the extent that reg-
ulations prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appro-
priately determined at the corporation level than at
the shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COM-
PLY WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of sub-
chapter A of chapter 68.’’
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking
subsection (g).
(B) Subsection (b) of section 6233 is
amended to read as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a part-
nership return is filed for any taxable year but it is deter-
mined that there is no entity for such taxable year, to the
extent provided in regulations, rules similar to the rules
of subsection (a) shall apply.’’
(C) The table of subchapters for chapter
63 is amended by striking the item relating to
subchapter D.
1122
SEC. 14508. S CORPORATIONS PERMITTED TO HOLD SUB-
SIDIARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b)
(defining ineligible corporation) is amended by striking
subparagraph (A) and by redesignating subparagraphs
(B), (C), (D), and (E) as subparagraphs (A), (B), (C),
and (D), respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S
CORPORATION SUBSIDIARIES.—Section 1361(b) (defining
small business corporation) is amended by adding at the
end the following new paragraph:
‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED
SUBSIDIARIES.—
‘‘(A) IN GENERAL.—For purposes of this
title—
‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treat-
ed as a separate corporation, and
‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
1123
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
STA-
TUS.—For purposes of this title, if any corpora-
tion which was a qualified subchapter S subsidi-
ary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as
a new corporation acquiring all of its assets
(and assuming all of its liabilities) immediately
before such cessation from the S corporation in
exchange for its stock.’’
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE
INVESTMENT INCOME.—Paragraph (3) of section 1362(d)
is amended by adding at the end the following new sub-
paragraph:
‘‘(F) TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a
C corporation meeting the requirements of sec-
1124
tion 1504(a)(2), the term ‘passive investment
income’ shall not include dividends from such C
corporation to the extent such dividends are at-
tributable to the earnings and profits of such C
corporation derived from the active conduct of
a trade or business.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended
by striking paragraph (6).
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’
SEC. 14509. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1)
(relating to losses and deductions cannot exceed
shareholder’s basis in stock and debt) is amended by
striking ‘‘paragraph (1)’’ and inserting ‘‘paragraphs
(1) and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to
certain adjustments taken into account) is amended
by adding at the end the following new sentence:
1125
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined
with regard to the adjustments provided in paragraph (1)
of section 1367(a) for the taxable year.’’
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end the
following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net nega-
tive adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative
adjustment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’
1126
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
SEC. 14510. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to applica-
tion of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C
shall apply to an S corporation and its shareholders.’’
SEC. 14511. ELIMINATION OF CERTAIN EARNINGS AND
PROFITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business
corporation under subchapter S of chapter 1 of the
Internal Revenue Code of 1986 for any taxable year
beginning before January 1, 1983, and
(2) such corporation is an S corporation under
subchapter S of chapter 1 of such Code for its first
taxable year beginning after December 31, 1995,
1127
the amount of such corporation’s accumulated earnings
and profits (as of the beginning of such first taxable year)
shall be reduced by an amount equal to the portion (if
any) of such accumulated earnings and profits which were
accumulated in any taxable year beginning before January
1, 1983, for which such corporation was an electing small
business corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1362(d) is amend-
ed—
(A) by striking ‘‘SUBCHAPTER C’’ in the
paragraph heading and inserting ‘‘ACCUMU-
LATED’’,
(B) by striking ‘‘subchapter C’’ in sub-
paragraph (A)(i)(I) and inserting ‘‘accumu-
lated’’, and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amend-
ed by striking ‘‘subchapter C’’ in paragraph (1) and
inserting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amend-
ed to read as follows:
1128
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross re-
ceipts’ have the same respective meanings as when
used in paragraph (3) of section 1362(d).’’
(C) The section heading for section 1375 is
amended by striking ‘‘SUBCHAPTER C’’ and insert-
ing ‘‘ACCUMULATED’’.
(D) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking ‘‘sub-
chapter C’’ in the item relating to section 1375 and
inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is
amended by striking ‘‘section 1362(d)(3)(D)’’ and
inserting ‘‘section 1362(d)(3)(C)’’.
SEC. 14512. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carry-
over of disallowed losses and deductions to post-termi-
nation transition period) is amended by adding at the end
the following new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the ex-
tent that any increase in adjusted basis de-
scribed in subparagraph (B) would have in-
creased the shareholder’s amount at risk under
section 465 if such increase had occurred on
1129
S6201 the day preceding the commencement of the
post-termination transition period, rules similar
to the rules described in subparagraphs (A)
through (C) shall apply to any losses disallowed
by reason of section 465(a).’’
SEC. 14513. ADJUSTMENTS TO BASIS OF INHERITED S
STOCK TO REFLECT CERTAIN ITEMS OF IN-
COME.
(a) IN GENERAL.—Subsection (b) of section 1367
(relating to adjustments to basis of stock of shareholders,
etc.) is amended by adding at the end the following new
paragraph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the
death of a decedent or by bequest, devise, or in-
heritance, section 691 shall be applied with re-
spect to any item of income of the S corpora-
tion in the same manner as if the decedent had
held directly his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the por-
tion of the value of the stock which is attrib-
1130
utable to items constituting income in respect
of the decedent.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply in the case of decedents dying
after the date of the enactment of this Act.
SEC. 14514. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237
(relating to real property subdivided for sale) is amended
by striking ‘‘other than a corporation’’ in the material pre-
ceding paragraph (1) and inserting ‘‘other than a C cor-
poration’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A)
of section 1237(a)(2) is amended by inserting ‘‘an S cor-
poration which included the taxpayer as a shareholder,’’
after ‘‘controlled by the taxpayer,’’.
SEC. 14515. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this part, the amendments made by this part shall apply
to taxable years beginning after December 31, 1995.
(b) TREATMENT OF CERTAIN ELECTIONS UNDER
PRIOR LAW.—For purposes of section 1362(g) of the In-
ternal Revenue Code of 1986 (relating to election after
termination), any termination under section 1362(d) of
1131
such Code in a taxable year beginning before January 1,
1996, shall not be taken into account.
PART II—PROVISIONS RELATING TO REGULATED
INVESTMENT COMPANIES
SEC. 14521. REPEAL OF 30-PERCENT GROSS INCOME LIMI-
TATION.
(a) GENERAL RULE.—Subsection (b) of section 851
(relating to limitations) is amended by striking paragraph
(3), by adding ‘‘and’’ at the end of paragraph (2), and
by redesignating paragraph (4) as paragraph (3).
(b) TECHNICAL AMENDMENTS.—
(1) The material following paragraph (3) of sec-
tion 851(b) (as redesignated by subsection (a)) is
amended—
(A) by striking out ‘‘paragraphs (2) and
(3)’’ and inserting ‘‘paragraph (2)’’, and
(B) by striking out the last sentence there-
of.
(2) Subsection (c) of section 851 is amended by
striking ‘‘subsection (b)(4)’’ each place it appears
(including the heading) and inserting ‘‘subsection
(b)(3)’’.
(3) Subsection (d) of section 851 is amended by
striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
1132
(4) Paragraph (1) of section 851(e) is amended
by striking ‘‘subsection (b)(4)’’ and inserting ‘‘sub-
section (b)(3)’’.
(5) Paragraph (4) of section 851(e) is amended
by striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
(6) Section 851 is amended by striking sub-
section (g) and redesignating subsection (h) as sub-
section (g).
(7) Subsection (g) of section 851 (as redesig-
nated by paragraph (6)) is amended by striking
paragraph (3).
(8) Section 817(h)(2) is amended—
(A) by striking ‘‘851(b)(4)’’ in subpara-
graph (A) and inserting ‘‘851(b)(3)’’, and
(B) by striking ‘‘851(b)(4)(A)(i)’’ in sub-
paragraph (B) and inserting ‘‘851(b)(3)(A)(i)’’.
(9) Section 1092(f)(2) is amended by striking
‘‘Except for purposes of section 851(b)(3), the’’ and
inserting ‘‘The’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after the
date of the enactment of this Act.
1133
PART III—PROVISIONS RELATING TO REAL
ESTATE INVESTMENT TRUSTS
SEC. 14531. CLARIFICATION OF LIMITATION ON MAXIMUM
NUMBER OF SHAREHOLDERS.
(a) RULES RELATING TO DETERMINATION OF OWN-
ERSHIP.—
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND
LETTER NOT TO DISQUALIFY REIT.—Section 857(a)
(relating to requirements applicable to real estate in-
vestment trusts) is amended by striking paragraph
(2) and by redesignating paragraph (3) as para-
graph (2).
(2) SHAREHOLDER DEMAND LETTER REQUIRE-
MENT; PENALTY.—Section 857 (relating to taxation
of real estate investment trusts and their bene-
ficiaries) is amended by redesignating subsection (f)
as subsection (g) and by inserting after subsection
(e) the following new subsection:
‘‘(f) REAL ESTATE INVESTMENT TRUSTS TO ASCER-
TAIN OWNERSHIP.—
‘‘(1) IN
GENERAL.—Each real estate invest-
ment trust shall each taxable year comply with regu-
lations prescribed by the Secretary for the purposes
of ascertaining the actual ownership of the outstand-
ing shares, or certificates of beneficial interest, of
such trust.
1134
‘‘(2) FAILURE TO COMPLY.—
‘‘(A) IN GENERAL.—If a real estate invest-
ment trust fails to comply with the require-
ments of paragraph (1) for a taxable year, such
trust shall pay (on notice and demand by the
Secretary and in the same manner as tax) a
penalty of $25,000.
‘‘(B) INTENTIONAL
DISREGARD.—If any
failure under paragraph (1) is due to inten-
tional disregard of the requirement under para-
graph (1), the penalty under subparagraph (A)
shall be $50,000.
‘‘(C) FAILURE
TO
COMPLY
AFTER
NO-
TICE.—The Secretary may require a real estate
investment trust to take such actions as the
Secretary determines appropriate to ascertain
actual ownership if the trust fails to meet the
requirements of paragraph (1). If the trust fails
to take such actions, the trust shall pay (on no-
tice and demand by the Secretary and in the
same manner as tax) an additional penalty
equal to the penalty determined under subpara-
graph (A) or (B), whichever is applicable.
‘‘(D) REASONABLE
CAUSE.—No penalty
shall be imposed under this paragraph with re-
1135
spect to any failure if it is shown that such fail-
ure is due to reasonable cause and not to willful
neglect.’’
(b) COMPLIANCE WITH CLOSELY HELD PROHIBI-
TION.—
(1) IN GENERAL.—Section 856 (defining real
estate investment trust) is amended by adding at the
end the following new subsection:
‘‘(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY
HELD TREATED AS MET IN CERTAIN CASES.—A corpora-
tion, trust, or association—
‘‘(1) which for a taxable year meets the require-
ments of section 857(f)(1), and
‘‘(2) which does not know, or exercising reason-
able diligence would not have known, whether the
entity failed to meet the requirement of subsection
(a)(6),
shall be treated as having met the requirement of sub-
section (a)(6) for the taxable year.’’
(2) CONFORMING AMENDMENT.—Paragraph (6)
of section 856(a) is amended by inserting ‘‘subject
to the provisions of subsection (k),’’ before ‘‘which
is not’’.
1136
SEC. 14532. DE MINIMIS RULE FOR TENANT SERVICES IN-
COME.
(a) IN GENERAL.—Paragraph (2) of section 856(d)
(defining rents from real property) is amended by striking
subparagraph (C) and the last sentence and inserting:
‘‘(C) any impermissible tenant service in-
come (as defined in paragraph (7)).’’
(b) IMPERMISSIBLE TENANT SERVICE INCOME.—
Section 856(d) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) IMPERMISSIBLE
TENANT
SERVICE
IN-
COME.—For purposes of paragraph (2)(C)—
‘‘(A) IN GENERAL.—The term ‘impermis-
sible tenant service income’ means, with respect
to any real or personal property, any amount
received or accrued directly or indirectly by the
real estate investment trust for—
‘‘(i) services furnished or rendered by
the trust to the tenants of such property,
or
‘‘(ii) managing or operating such
property.
‘‘(B) DISQUALIFICATION OF ALL AMOUNTS
WHERE MORE THAN DE MINIMIS AMOUNT.—If
the amount described in subparagraph (A) with
respect to a property for any taxable year ex-
1137
ceeds 1 percent of all amounts received or ac-
crued during such taxable year directly or indi-
rectly by the real estate investment trust with
respect to such property, the impermissible ten-
ant service income of the trust with respect to
the property shall include all such amounts.
‘‘(C) EXCEPTIONS.—For purposes of sub-
paragraph (A)—
‘‘(i) services furnished or rendered, or
management 
or 
operation 
provided,
through an independent contractor from
whom the trust itself does not derive or re-
ceive any income shall not be treated as
furnished, rendered, or provided by the
trust, and
‘‘(ii) there shall not be taken into ac-
count any amount which would be excluded
from unrelated business taxable income
under section 512(b)(3) if received by an
organization 
described 
in 
section
511(a)(2).
‘‘(D) AMOUNT ATTRIBUTABLE TO IMPER-
MISSIBLE SERVICES.—For purposes of subpara-
graph (A), the amount treated as received for
any service (or management or operation) shall
1138
not be less than 150 percent of the direct cost
of the trust in furnishing or rendering the serv-
ice (or providing the management or operation).
‘‘(E) 
COORDINATION
WITH
LIMITA-
TIONS.—For purposes of paragraphs (2) and
(3) of subsection (c), amounts described in sub-
paragraph (A) shall be included in the gross in-
come of the corporation, trust, or association.’’
SEC. 14533. ATTRIBUTION RULES APPLICABLE TO TENANT
OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership
of stock) is amended by adding at the end the following:
‘‘For purposes of paragraph (2)(B), section 318(a)(3)(A)
shall be applied under the preceding sentence in the case
of a partnership by taking into account only partners who
own (directly or indirectly) 25 percent or more of the cap-
ital interest, or the profits interest, in the partnership.’’
SEC. 14534. CREDIT FOR TAX PAID BY REIT ON RETAINED
CAPITAL GAINS.
(a) GENERAL RULE.—Paragraph (3) of section
857(b) (relating to capital gains) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph:
1139
‘‘(D) TREATMENT BY SHAREHOLDERS OF
UNDISTRIBUTED CAPITAL GAINS.—
‘‘(i) Every shareholder of a real estate
investment trust at the close of the trust’s
taxable year shall include, in computing his
long-term capital gains in his return for
his taxable year in which the last day of
the trust’s taxable year falls, such amount
as the trust shall designate in respect of
such shares in a written notice mailed to
its shareholders at any time prior to the
expiration of 60 days after the close of its
taxable year (or mailed to its shareholders
or holders of beneficial interests with its
annual report for the taxable year), but the
amount so includible by any shareholder
shall not exceed that part of the amount
subjected to tax in subparagraph (A)(ii)
which he would have received if all of such
amount had been distributed as capital
gain dividends by the trust to the holders
of such shares at the close of its taxable
year.
‘‘(ii) For purposes of this title, every
such shareholder shall be deemed to have
1140
paid, for his taxable year under clause (i),
the tax imposed by subparagraph (A)(ii)
on the amounts required by this subpara-
graph to be included in respect of such
shares in computing his long-term capital
gains for that year; and such shareholders
shall be allowed credit or refund as the
case may be, for the tax so deemed to have
been paid by him.
‘‘(iii) The adjusted basis of such
shares in the hands of the holder shall be
increased with respect to the amounts re-
quired by this subparagraph to be included
in computing his long-term capital gains,
by the difference between the amount of
such includible gains and the tax deemed
paid by such shareholder in respect of such
shares under clause (ii).
‘‘(iv) In the event of such designation,
the tax imposed by subparagraph (A)(ii)
shall be paid by the real estate investment
trust within 30 days after the close of its
taxable year.
‘‘(v) The earnings and profits of such
real estate investment trust, and the earn-
1141
ings and profits of any such shareholder
which is a corporation, shall be appro-
priately adjusted in accordance with regu-
lations prescribed by the Secretary.
‘‘(vi) As used in this subparagraph,
the terms ‘shares’ and ‘shareholders’ shall
include beneficial interests and holders of
beneficial interests, respectively.’’
(b) CONFORMING AMENDMENTS.—
(1) Clause (i) of section 857(b)(7)(A) is amend-
ed by striking ‘‘subparagraph (B)’’ and inserting
‘‘subparagraph (B) or (D)’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘by 65 percent’’ and all that
follows and inserting ‘‘by the difference between the
amount of such includible gains and the tax deemed
paid by such shareholder in respect of such shares
under clause (ii).’’
SEC. 14535. REPEAL OF 30-PERCENT GROSS INCOME RE-
QUIREMENT.
(a) GENERAL RULE.—Subsection (c) of section 856
(relating to limitations) is amended—
(1) by adding ‘‘and’’ at the end of paragraph
(3),
(2) by striking paragraphs (4) and (8), and
1142
(3) by redesignating paragraphs (5), (6), and
(7) as paragraphs (4), (5), and (6), respectively.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (G) of section 856(c)(5), as
redesignated by subsection (a), is amended by strik-
ing ‘‘and such agreement shall be treated as a secu-
rity for purposes of paragraph (4)(A)’’.
(2) Paragraph (5) of section 857(b) is amended
by striking ‘‘section 856(c)(7)’’ and inserting ‘‘sec-
tion 856(c)(6)’’.
(3) Subparagraph (C) of section 857(b)(6) is
amended by striking ‘‘section 856(c)(6)(B)’’ and in-
serting ‘‘section 856(c)(5)(B)’’.
SEC. 14536. MODIFICATION OF EARNINGS AND PROFITS
RULES FOR DETERMINING WHETHER REIT
HAS EARNINGS AND PROFITS FROM NON-
REIT YEAR.
Subsection (d) of section 857 is amended by adding
at the end the following new paragraph:
‘‘(3) DISTRIBUTIONS TO MEET REQUIREMENTS
OF SUBSECTION (a)(2)(B).—Any distribution which
is made in order to comply with the requirements of
subsection (a)(2)(B)—
‘‘(A) shall be treated for purposes of this
subsection and subsection (a)(2)(B) as made
1143
from the earliest accumulated earnings and
profits (other than earnings and profits to
which subsection (a)(2)(A) applies) rather than
the most recently accumulated earnings and
profits, and
‘‘(B) to the extent treated under subpara-
graph (A) as made from accumulated earnings
and profits, shall not be treated as a distribu-
tion for purposes of subsection (b)(2)(B).’’
SEC. 14537. TREATMENT OF FORECLOSURE PROPERTY.
(a) GRACE PERIODS.—
(1) INITIAL PERIOD.—Paragraph (2) of section
856(e) (relating to special rules for foreclosure prop-
erty) is amended by striking ‘‘on the date which is
2 years after the date the trust acquired such prop-
erty’’ and inserting ‘‘as of the close of the 3d taxable
year following the taxable year in which the trust ac-
quired such property’’.
(2) EXTENSION.—Paragraph (3) of section
856(e) is amended—
(A) by striking ‘‘or more extensions’’ and
inserting ‘‘extension’’, and
(B) by striking the last sentence and in-
serting: ‘‘Any such extension shall not extend
the grace period beyond the close of the 3d tax-
1144
able year following the last taxable year in the
period under paragraph (2).’’
(b) REVOCATION OF ELECTION.—Paragraph (5) of
section 856(e) is amended by striking the last sentence
and inserting: ‘‘A real estate investment trust may revoke
any such election for a taxable year by filing the revocation
(in the manner provided by the Secretary) on or before
the due date (including any extension of time) for filing
its return of tax under this chapter for the taxable year.
If a trust revokes an election for any property, no election
may be made by the trust under this paragraph with re-
spect to the property for any subsequent taxable year.’’
(c) CERTAIN ACTIVITIES NOT TO DISQUALIFY PROP-
ERTY.—Paragraph (4) of section 856(e) is amended by
adding at the end the following new flush sentence:
‘‘For purposes of subparagraph (C), property shall
not be treated as used in a trade or business by rea-
son of any activities of the real estate investment
trust with respect to such property to the extent
that such activities would not result in amounts re-
ceived or accrued, directly or indirectly, with respect
to such property being treated as other than rents
from real property.’’
1145
SEC. 14538. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(5)(G) (relating to treatment of certain
interest rate agreements), as redesignated by section
14535, is amended to read as follows:
‘‘(G) TREATMENT OF CERTAIN HEDGING
INSTRUMENTS.—Except to the extent provided
by regulations, any—
‘‘(i) payment to a real estate invest-
ment trust under an interest rate swap or
cap agreement, option, futures contract,
forward rate agreement, or any similar fi-
nancial instrument, entered into by the
trust in a transaction to reduce the inter-
est rate risks with respect to any indebted-
ness incurred or to be incurred by the
trust to acquire or carry real estate assets,
and
‘‘(ii) gain from the sale or other dis-
position of any such investment,
shall be treated as income qualifying under
paragraph (2).’’
SEC. 14539. EXCESS NONCASH INCOME.
Section 857(e)(2) (relating to determination of
amount of excess noncash income) is amended—
(1) by striking subparagraph (B),
1146
(2) by striking the period at the end of sub-
paragraph (C) and inserting a comma,
(3) by redesignating subparagraph (C) (as
amended by paragraph (2)) as subparagraph (B),
and
(4) by adding at the end the following new sub-
paragraphs:
‘‘(C) the amount (if any) by which—
‘‘(i) the amounts includible in gross
income with respect to instruments to
which section 860E(a) or 1272 applies, ex-
ceed
‘‘(ii) the amount of money and the
fair market value of other property re-
ceived during the taxable year under such
instruments, and
‘‘(D) amounts includible in income by rea-
son of cancellation of indebtedness.’’
SEC. 14540. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to cer-
tain sales not to constitute prohibited transactions) is
amended by striking ‘‘(other than foreclosure property)’’
in subclauses (I) and (II) and inserting ‘‘(other than sales
of foreclosure property or sales to which section 1033 ap-
plies)’’.
1147
SEC. 14541. SHARED APPRECIATION MORTGAGES.
(a) BANKRUPTCY SAFE HARBOR.—Section 856(j)
(relating to treatment of shared appreciation mortgages)
is amended by redesignating paragraph (4) as paragraph
(5) and by inserting after paragraph (3) the following new
paragraph:
‘‘(4) COORDINATION WITH 4-YEAR HOLDING PE-
RIOD.—
‘‘(A) IN GENERAL.—For purposes of sec-
tion 857(b)(6)(C), if a real estate investment
trust is treated as having sold secured property
under paragraph (3)(A), the trust shall be
treated as having held such property for at
least 4 years if—
‘‘(i) the secured property is sold or
otherwise disposed of pursuant to a case
under title 11 of the United States Code,
‘‘(ii) the seller is under the jurisdic-
tion of the court in such case, and
‘‘(iii) the disposition is required by the
court or is pursuant to a plan approved by
the court.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if—
1148
‘‘(i) the secured property was acquired
by the trust with the intent to evict or
foreclose, or
‘‘(ii) the trust knew or had reason to
know that default on the obligation de-
scribed in paragraph (5)(A) would occur.’’
(b) CLARIFICATION OF DEFINITION OF SHARED AP-
PRECIATION
PROVISION.—Clause 
(ii) 
of 
section
856(j)(5)(A) is amended by inserting before the period ‘‘or
appreciation in value as of any specified date’’.
SEC. 14542. WHOLLY OWNED SUBSIDIARIES.
Section 856(i)(2) (defining qualified REIT subsidi-
ary) is amended by striking ‘‘at all times during the period
such corporation was in existence’’.
SEC. 14543. EFFECTIVE DATE.
The amendments made by this part shall apply to
taxable years beginning after the date of the enactment
of this Act.
PART IV—ACCOUNTING PROVISIONS
SEC. 14551. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CER-
TAIN CASES.—Subsection (b) of section 460 (relating to
percentage of completion method) is amended by adding
at the end the following new paragraph:
1149
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER
COMPLETION
OF
CONTRACT.—Para-
graph (1)(B) shall not apply with respect to
any taxable year (beginning after the taxable
year in which the contract is completed) if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
such taxable year, is within
‘‘(ii) 10 percent of the cumulative
look-back taxable income (or loss) under
the contract as of the close of the most re-
cent taxable year to which paragraph
(1)(B) applied (or would have applied but
for subparagraph (B)).
‘‘(B) DE MINIMIS DISCREPANCIES.—Para-
graph (1)(B) shall not apply in any case to
which it would otherwise apply if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
each prior contract year, is within
‘‘(ii) 10 percent of the cumulative
look-back income (or loss) under the con-
1150
tract as of the close of such prior contract
year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT
YEAR.—The term
‘contract year’ means any taxable year for
which income is taken into account under
the contract.
‘‘(ii) LOOK-BACK INCOME OR LOSS.—
The look-back income (or loss) is the
amount which would be the taxable income
(or loss) under the contract if the alloca-
tion method set forth in paragraph (2)(A)
were used in determining taxable income.
‘‘(iii) DISCOUNTING
NOT
APPLICA-
BLE.—The amounts taken into account
after the completion of the contract shall
be determined without regard to any dis-
counting under the 2nd sentence of para-
graph (2).
‘‘(D) CONTRACTS TO WHICH PARAGRAPH
APPLIES.—This paragraph shall only apply if
the taxpayer makes an election under this sub-
paragraph. Unless revoked with the consent of
the Secretary, such an election shall apply to all
1151
long-term contracts completed during the tax-
able year for which election is made or during
any subsequent taxable year.’’
(b) MODIFICATION OF INTEREST RATE.—
(1) IN GENERAL.—Subparagraph (C) of section
460(b)(2) is amended by striking ‘‘the overpayment
rate established by section 6621’’ and inserting ‘‘the
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED
OVERPAYMENT
RATE.—Sub-
section (b) of section 460 is amended by adding at
the end the following new paragraph:
‘‘(7) ADJUSTED OVERPAYMENT RATE.—
‘‘(A) IN GENERAL.—The adjusted overpay-
ment rate for any interest accrual period is the
overpayment rate in effect under section 6621
for the calendar quarter in which such interest
accrual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘inter-
est accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
1152
‘‘(ii) ending on the return due date
for the following taxable year.
For purposes of the preceding sentence, the
term ‘return due date’ means the date pre-
scribed for filing the return of the tax imposed
by this chapter (determined without regard to
extensions).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to contracts completed in taxable
years ending after the date of the enactment of this Act.
SEC. 14552. APPLICATION OF MARK TO MARKET ACCOUNT-
ING METHOD TO TRADERS IN SECURITIES.
(a) IN GENERAL.—Section 475 (relating to mark to
market accounting method for dealers in securities) is
amended by redesignating subsection (e) as subsection (f)
and by inserting after subsection (d) the following new
subsection:
‘‘(e) AUTHORITY TO EXTEND METHOD TO TRADERS
IN SECURITIES.—
‘‘(1) IN GENERAL.—A trader in securities may
elect to have the provisions of this section (other
than subsection (d)(3)) apply to securities held by
the trader. Such election may be made only with the
consent of the Secretary.
1153
‘‘(2) TRADER IN SECURITIES.—For purposes of
this subsection, the term ‘trader in securities’ means
a taxpayer who is regularly engaged in trading secu-
rities.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending on and
after December 31, 1995.
SEC. 14553. MODIFICATION OF RULING AMOUNTS FOR NU-
CLEAR DECOMMISSIONING COSTS.
(a) IN GENERAL.—Section 468A(d) (relating to rul-
ing amount) is amended by adding at the end the following
new paragraph:
‘‘(4) NONSUBSTANTIAL MODIFICATIONS.—
A taxpayer may modify a schedule of ruling
amounts under paragraph (1) without a review
under paragraph (3) if such modification does
not substantially modify the ruling amount. The
taxpayer shall notify the Secretary of any such
modification.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to modifications after the date of
the enactment of this Act.
1154
SEC. 14554. ELECTION OF ALTERNATIVE TAXABLE YEARS
BY PARTNERSHIPS AND S CORPORATIONS.
(a) REPEAL OF LIMITATION ON WHAT TAXABLE
YEAR MAY BE ELECTED.—
(1) IN GENERAL.—Section 444(b) (relating to
limitations on taxable years which may be elected) is
amended by adding at the end the following new
paragraph:
‘‘(5) LIMITATIONS NOT TO APPLY TO CERTAIN
PARTNERSHIPS AND S CORPORATIONS.—
‘‘(A) IN GENERAL.—In the case of a part-
nership or an S corporation, this subsection
shall not apply to an election under subsection
(a) for a taxable year beginning after December
31, 1996.
‘‘(B) SPECIAL RULE FOR EXISTING ELEC-
TIONS.—
‘‘(i) IN GENERAL.—If a partnership
or S corporation has an election in effect
for its last taxable year beginning before
January 1, 1997, the partnership or S cor-
poration may elect to have this paragraph
apply beginning with any taxable year be-
ginning after December 31, 1996. Such an
election may be made without the consent
of the Secretary and shall not be treated
1155
as a termination of an election for pur-
poses of subsection (d).
‘‘(ii) TREATMENT OF REQUIRED PAY-
MENTS.—A partnership or S corporation
making an election under clause (i) may
elect to have its net required payment bal-
ance (within the meaning of section
7519(e)(4))—
‘‘(I) credited against its first esti-
mated tax payment under section
6654A for its first full taxable year
for which such section applies, or
‘‘(II) refunded to it at the time
provided in section 7519(c)(3).’’
(2) EFFECT OF ELECTION.—Paragraph (1) of
section 444(c) (relating to effect of election) is
amended to read as follows:
‘‘(1) in the case of a partnership or S corpora-
tion, such entity shall—
‘‘(A) make the payments required by sec-
tion 7519, or
‘‘(B) if subsection (b)(5) applies to the
election, make the estimated tax payments de-
scribed in section 6654A, and’’.
1156
(b) ESTIMATED TAX
FOR PARTNERSHIPS
AND S
CORPORATIONS MAKING TAXABLE YEAR ELECTIONS.—
Part I of subchapter A of chapter 68 (relating to additions
to tax and additional amounts) is amended by inserting
after section 6654 the following new section:
‘‘SEC. 6654A. FAILURE BY ELECTING PARTNERSHIP OR S
CORPORATION TO PAY ESTIMATED TAX.
‘‘(a) PENALTY.—Except as otherwise provided in this
section, in the case of a partnership or S corporation with
respect to which an election to which section 444(b)(5)
applies is in effect (hereafter referred to as ‘the entity’),
there is hereby imposed a penalty for each quarter for
which there is an underpayment in an amount determined
by applying—
‘‘(1) the underpayment rate established under
section 6621,
‘‘(2) to the amount of the underpayment,
‘‘(3) for the period of the underpayment.
‘‘(b) AMOUNT
OF
UNDERPAYMENT; PERIOD
OF
UNDERPAYMENT.—For purposes of subsection (a)—
‘‘(1) 
AMOUNT.—The 
amount 
of 
the
underpayment shall be the excess of—
‘‘(A) the required installment, over
1157
‘‘(B) the amount (if any) of the install-
ment paid on or before the due date for the in-
stallment.
‘‘(2) PERIOD OF UNDERPAYMENT.—The period
of the underpayment shall run from the due date for
the installment to the earlier of—
‘‘(A) the first April 15 more than 3
months after the close of the taxable year, or
‘‘(B) with respect to any portion of the
underpayment, the date on which such portion
is paid.
‘‘(3) ORDER
OF
CREDITING
PAYMENTS.—For
purposes of paragraph (2)(B), a payment of esti-
mated tax shall be credited against unpaid required
installments in the order in which the installments
are required to be paid.
‘‘(c) REQUIRED INSTALLMENTS.—For purposes of
this section—
‘‘(1) NUMBER
AND
DATES.—An entity shall
make 4 required installments which shall be due on
the 15th day of the 3d, 5th, 8th, and 12th months
of the taxable year.
‘‘(2) NO REQUIRED PAYMENTS WHERE ENTI-
TY’S
LIABILITY
IS
LESS
THAN
$5,000.—An entity
shall not be required to make estimated payments
1158
under this section for any taxable year for which
(but for this paragraph) its aggregate liability under
this section would be less than $5,000.
‘‘(3) AMOUNT.—The amount of each required
installment shall be 25 percent of the product of—
‘‘(A) the entity’s applicable income deter-
mined under its applicable method for the quar-
ter for which the installment is being made, and
‘‘(B) the applicable rate.
‘‘(4) APPLICABLE RATE.—
‘‘(A) IN GENERAL.—The term ‘applicable
rate’ means 34 percent (39.6 percent in the
case of an entity described in subparagraph
(B)).
‘‘(B) HIGH AVERAGE INCOME ENTITY.—
‘‘(i) IN GENERAL.—An entity is de-
scribed in this subparagraph if—
‘‘(I) the average applicable in-
come of 2-percent owners of the entity
for its base year is $250,000 or more,
or
‘‘(II) in the case of a partner-
ship, its applicable income for the
base year is $10,000,000 or more.
1159
An entity shall not be treated as so de-
scribed if it has no base year.
‘‘(ii) 2-PERCENT OWNER.—The term
‘2-percent owner’ means—
‘‘(I) in the case of a partnership,
any person who owns (or is considered
as owning within the meaning of sec-
tion 318) on any day during the base
year more than 2 percent of the cap-
ital interests of the partnerships, and
‘‘(II) in the case of an S corpora-
tion, a 2-percent shareholder (as de-
fined in section 1372(b)).
‘‘(5) ADJUSTMENTS
UNDER
ANNUALIZED
IN-
COME METHOD.—An entity using the annualized in-
come method shall adjust its required installment for
any quarter to reflect any change in its required in-
stallment for any prior quarter in the taxable year
which would have been required if the annualized
applicable income for the current quarter had been
used for the prior quarter.
‘‘(d) APPLICABLE METHOD.—For purposes of this
section—
1160
‘‘(1) IN GENERAL.—An entity shall determine
its applicable income on the basis of the 100-percent
method.
‘‘(2) EXCEPTIONS.—
‘‘(A) ELECTIONS.—An entity may deter-
mine its applicable income—
‘‘(i) for all quarters in a taxable year
on the basis of the 110-percent method if
it elects such method on or before the due
date for the first quarterly installment, or
‘‘(ii) for any quarter in a taxable year
on the basis of the annualized income
method if it elects such method on or be-
fore the due date for the quarterly install-
ment for such quarter.
An election under clause (ii) shall apply for the
quarter for which made and all subsequent
quarters during the taxable year.
‘‘(B) LARGE INCREASE IN INCOME.—If an
entity’s applicable income for the taxable year
exceeds its applicable income for the base year
by more than $750,000, the entity may not use
the 110-percent method for the taxable year.
‘‘(3) METHODS.—
1161
‘‘(A) 100-PERCENT METHOD.—Under the
100-percent method, an entity’s applicable in-
come shall be its applicable income for the tax-
able year.
‘‘(B) 110-PERCENT METHOD.—Under the
110-percent method, an entity’s applicable in-
come shall be 110 percent of its applicable in-
come for the base year.
‘‘(C) ANNUALIZED
INCOME
METHOD.—
Under the annualized income method, the enti-
ty’s applicable income for purposes of determin-
ing the required installment for any quarter
shall be an amount equal to the product of—
‘‘(i) its applicable income for the pe-
riod consisting of the months in the tax-
able year ending before the due date for
the quarter, and
‘‘(ii) a percentage equal to 12 divided
by the number of such months.
‘‘(e) APPLICABLE INCOME.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the applicable income for any taxable year shall
be the net amount (not less than zero) determined—
‘‘(A) by taking into account the entity’s
items in the manner and with the exceptions
1162
provided in section 703(a) or 1363(b), as the
case may be, and
‘‘(B) by making the further adjustments
provided in paragraphs (2), (3), (4), and (5) of
this subsection.
‘‘(2) CERTAIN DEDUCTIONS ALLOWED.—In de-
termining applicable income, the following amounts
shall be allowed as deductions:
‘‘(A) The deduction allowable under section
170 for charitable contributions of the entity.
‘‘(B) The deduction allowable under sec-
tion 901 for taxes described in section 901(c)
paid or accrued to foreign countries or posses-
sions of the United States.
‘‘(3) CERTAIN
LIMITATIONS
DISREGARDED.—
For purposes of paragraphs (1) and (2), any limita-
tion on the amount of any item which may be taken
into account for purposes of computing the taxable
income of a partner or shareholder shall be dis-
regarded.
‘‘(4) GUARANTEED
PAYMENTS
TO
PARTNERS
NOT DEDUCTED.—In determining applicable income,
a guaranteed payment to a partner shall not be
treated as an item of deduction.
1163
‘‘(5) DISPROPORTIONATE
APPLICABLE
PAY-
MENTS DURING DEFERRAL PERIOD.—
‘‘(A) DEDUCTION NOT ALLOWED.—In de-
termining applicable income, no deduction shall
be allowed for disproportionate deferral period
applicable payments.
‘‘(B) DISPROPORTIONATE
DEFERRAL
PE-
RIOD APPLICABLE PAYMENTS.—For purposes of
subparagraph (A), the term ‘disproportionate
deferral period applicable payments’ means the
excess (if any) of—
‘‘(i) the product of the deferral ratio
and the aggregate applicable payments
made to owners during the entity’s entire
taxable year, over
‘‘(ii) the aggregate applicable pay-
ments made to owners during the deferral
period.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) the term ‘applicable payments’
has the meaning given to such term by sec-
tion 7519(d)(3), except that in the case of
an S corporation only payments to 2-per-
1164
cent shareholders (as defined in section
1372(b)) shall be taken into account,
‘‘(ii) the term ‘deferral period’ means
the months in the period beginning with
the first day of the entity’s taxable year
and ending on December 31, and
‘‘(iii) the term ‘deferral ratio’ means
the ratio which the number of months in
the deferral period bears to the total num-
ber of months in the taxable year.
‘‘(6) SPECIAL
RULE
WHERE
C
CORPORATION
FOR
BASE
YEAR.—In applying the 110-percent
method, if an S corporation was a C corporation for
the base year, the S corporation’s applicable income
shall be the taxable income of the C corporation for
the base year.
‘‘(f) COORDINATION BETWEEN ENTITY AND OWN-
ERS.—
‘‘(1) TREATMENT OF PAYMENTS OF REQUIRED
INSTALLMENTS.—
‘‘(A) IN GENERAL.—For purposes of this
title, an owner in an entity shall be treated as
having paid, for the owner’s first taxable year
ending with or after the close of the entity’s
taxable year, an amount of tax imposed by sec-
1192
‘‘SEC. 684. TREATMENT OF FUNERAL TRUSTS.
‘‘(a) IN GENERAL.—In the case of a qualified funeral
trust—
‘‘(1) subparts B, C, D, and E shall not apply,
and
‘‘(2) no deduction shall be allowed by section
642(b).
‘‘(b) QUALIFIED FUNERAL TRUST.—For purposes of
this subsection, the term ‘qualified funeral trust’ means
any trust (other than a foreign trust) if—
‘‘(1) the trust arises as a result of a contract
with a person engaged in the trade or business of
providing funeral or burial services or property nec-
essary to provide such services,
‘‘(2) the sole purpose of the trust is to hold, in-
vest, and reinvest funds in the trust and to use such
funds solely to make payments for such services or
property for the benefit of the beneficiaries of the
trust,
‘‘(3) the only beneficiaries of such trust are in-
dividuals who have entered into contracts described
in paragraph (1) to have such services or property
provided at their death,
‘‘(4) the only contributions to the trust are con-
tributions by or for the benefit of such beneficiaries,