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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 subsection
(a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net capital
gain shall be treated—
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
gain does not exceed the net capital gain de-
termined by only taking into account gains
and losses from sales and exchanges of prop-
erty used in connection with such activities,
and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount al-
located 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
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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 distributive
share of any items shall be taken into account separately
to the extent necessary to comply with the provisions of sec-
tion 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in an elect-
ing 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 part-
nership items allocable to passive loss limitation ac-
tivities shall be taken into account separately to the
extent necessary to comply with the provisions of sec-
tion 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
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‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
an electing 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.
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of an electing large
partnership or the computation of any credit of an
electing large partnership shall be made by the part-
nership; 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 an electing large partnership or the
computation of any credit of an electing large
partnership shall be applied at the partnership
level (and not at the partner level).
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‘‘(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 lim-
itation 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).
‘‘(iv) Any other provision specified in
regulations.
‘‘(4) COORDINATION WITH OTHER PROVISIONS.—
Paragraphs (2) and (3) shall apply notwithstanding
any other provision of this chapter other than this
part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAXABLE
INCOME.—In determining the taxable income of an electing
large partnership—
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.—The
following deductions shall not be allowed:
‘‘(A) The deduction for personal exemptions
provided in section 151.
‘‘(B) The net operating loss deduction pro-
vided in section 172.
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‘‘(C) The additional itemized deductions for
individuals provided in part VII of subchapter B
(other than section 212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determining
the amount allowable under section 170, the limita-
tion 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.
‘‘(c) SPECIAL RULES FOR INCOME FROM DISCHARGE
OF INDEBTEDNESS.—If an electing large partnership has
income from the discharge of any indebtedness—
‘‘(1) such income shall be excluded in determin-
ing the amounts referred to in section 772(a), and
‘‘(2) in determining the income tax of any part-
ner of such partnership—
‘‘(A) such income shall be treated as an
item required to be separately taken into account
under section 772(a), and
‘‘(B) the provisions of section 108 shall be
applied without regard to this part.
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‘‘SEC. 774. OTHER MODIFICATIONS.
‘‘(a) TREATMENT
OF CERTAIN OPTIONAL ADJUST-
MENTS, ETC.—In the case of an electing large partner-
ship—
‘‘(1) computations under section 773 shall be
made without regard to any adjustment under section
743(b) or 108(b), but
‘‘(2) a partner’s distributive share of any
amount referred to in section 772(a) shall be appro-
priately adjusted to take into account any adjustment
under section 743(b) or 108(b) with respect to such
partner.
‘‘(b) CREDIT RECAPTURE DETERMINED AT PARTNER-
SHIP LEVEL.—
‘‘(1) IN GENERAL.—In the case of an electing
large partnership—
‘‘(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 utilized to
reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO AC-
COUNT.—An electing large partnership shall take into
account a credit recapture by reducing the amount of
the appropriate current year credit to the extent
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thereof, and if such recapture exceeds the amount of
such current year credit, the partnership shall be lia-
ble 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 an electing large
partnership.
‘‘(4) CREDIT RECAPTURE.—For purposes of this
subsection, the term ‘credit recapture’ means any in-
crease in tax under section 42(j) or 50(a).
‘‘(c) PARTNERSHIP NOT TERMINATED BY REASON OF
CHANGE IN OWNERSHIP.—Subparagraph (B) of section
708(b)(1) shall not apply to an electing large partnership.
‘‘(d) PARTNERSHIP ENTITLED
TO CERTAIN CRED-
ITS.—The following shall be allowed to an electing large
partnership and shall not be taken into account by the part-
ners 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 electing large
partnership—
‘‘(1) all interests in such partnership shall be
treated as held by disqualified organizations,
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‘‘(2) in lieu of applying subparagraph (C) of sec-
tion 860E(e)(6), the amount subject to tax under sec-
tion 860E(e)(6) shall be excluded from the gross in-
come 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 an electing large
partnership—
‘‘(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
treated as subject to tax under this chapter at the
highest rate of tax in effect under section 1 or 11.
‘‘SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN
GENERAL.—The term ‘electing large
partnership’ means, with respect to any partnership
taxable year, any partnership if—
‘‘(A) the number of persons who were part-
ners in such partnership in the preceding part-
nership taxable year equaled or exceeded 100,
and
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‘‘(B) such partnership elects the application
of this part.
To the extent provided in regulations, a partnership
shall cease to be treated as an electing large partner-
ship for any partnership taxable year if in such tax-
able year fewer than 100 persons were partners in
such partnership.
‘‘(2) ELECTION.—The election under this sub-
section shall apply to the taxable year for which made
and all subsequent taxable years unless revoked with
the consent of the Secretary.
‘‘(b) SPECIAL RULES FOR CERTAIN SERVICE PART-
NERSHIPS.—
‘‘(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, an
election under subsection (a) shall not be effective
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with respect to 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 sub-
stantial services.
‘‘(3) SPECIAL RULE FOR LOWER TIER PARTNER-
SHIPS.—For purposes of this subsection, the activities
of a partnership shall include the activities of any
other partnership in which the partnership owns di-
rectly an interest in the capital and profits of at least
80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For pur-
poses of this part, an election under subsection (a) shall
not be effective with respect to any partnership the prin-
cipal activity of which is the buying and selling of commod-
ities (not described in section 1221(1)), or options, futures,
or forwards with respect to such commodities.
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‘‘(d) SECRETARY MAY RELY ON TREATMENT ON RE-
TURN.—If, on the partnership return of any partnership,
such partnership is treated as an electing 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, an
election under section 775(a) shall not be effective
with respect to any partnership if the average per-
centage of assets (by value) held by such partnership
during the taxable year which are oil or gas prop-
erties is at least 25 percent. For purposes of the pre-
ceding sentence, any interest held by a partnership in
another partnership shall be disregarded, except that
the partnership shall be treated as holding its propor-
tionate 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 con-
sent of the Secretary.
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‘‘(b) SPECIAL RULES WHERE PART APPLIES.—
‘‘(1) COMPUTATION
OF
PERCENTAGE
DEPLE-
TION.—In the case of an electing 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 sec-
tion 613A requiring such allowance to be com-
puted 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
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
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part. Such person’s distributive share of any
such items shall be excluded for purposes of mak-
ing determinations under sections 772 and 773.
‘‘(B) DISQUALIFIED PERSON.—For purposes
of subparagraph (A), the term ‘disqualified per-
son’ means, with respect to any partnership tax-
able 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 part-
nership taxable year ends, and
‘‘(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 taxable
year ends exceeds 500 barrels.
‘‘(C) AVERAGE
DAILY
PRODUCTION.—For
purposes of subparagraph (B), a person’s average
daily production of domestic crude oil and natu-
ral gas for any taxable year shall be computed
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),
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‘‘(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.’’
(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 electing large partnerships.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to partnership taxable years beginning
after December 31, 1995.
SEC. 11472. RETURNS MAY BE REQUIRED ON MAGNETIC
MEDIA.
(a) IN GENERAL.—Paragraph (2) of section 6011(e)
(relating to returns on magnetic media) is amended by add-
ing 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.’’
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to partnership taxable years beginning
after December 31, 1995.
CHAPTER 4—FOREIGN PROVISIONS
Subchapter A—Modifications to Treatment of
Passive Foreign Investment Companies
SEC. 11481. UNITED 
STATES 
SHAREHOLDERS 
OF 
CON-
TROLLED FOREIGN CORPORATIONS NOT SUB-
JECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the fol-
lowing new subsection:
‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLDERS
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 por-
tion 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
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951(b)) of the corporation and the corporation is
a controlled foreign corporation.
‘‘(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 treated
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 election under section
1298(b)(1) is made.’’
SEC. 11482. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK IN PASSIVE FOREIGN INVEST-
MENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chapter
1 is amended by redesignating subpart C as subpart D, by
redesignating sections 1296 and 1297 as sections 1297 and
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1298, respectively, and by inserting after subpart B the fol-
lowing new subpart:
‘‘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.
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‘‘(b) BASIS ADJUSTMENTS.—
‘‘(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 person
under subsection (a)(2) with respect to such
stock.
‘‘(2) SPECIAL RULE FOR STOCK CONSTRUCTIVELY
OWNED.—In the case of stock in a passive foreign in-
vestment 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 per-
son actually holding such stock but only for pur-
poses of determining the subsequent treatment
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.
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‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(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 foreign
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 re-
spect to such stock,
shall be treated as an ordinary loss. The amount
so treated shall be treated as a deduction allow-
able in computing adjusted gross income.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or al-
lowed as a deduction under subsection (a)(2)) shall be
determined in the same manner as if such amount
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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 company, 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 sec-
tion—
‘‘(1) IN GENERAL.—The term ‘marketable stock’
means—
‘‘(A) any stock which is regularly traded
on—
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
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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
owns directly or indirectly shall be treated as market-
able stock for purposes of this section. Except as pro-
vided in regulations, similar treatment as marketable
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stock shall apply in the case of any other regulated
investment company which publishes net asset valu-
ations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN CORPORA-
TIONS WHICH ARE SHAREHOLDERS IN PASSIVE FOREIGN
INVESTMENT COMPANIES.—In the case of a foreign corpora-
tion which is a controlled foreign corporation and which
owns (or is treated under subsection (g) as owning) 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 sub-
chapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income described
in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN EN-
TITIES.—Except as provided in regulations—
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‘‘(1) IN GENERAL.—For purposes of this section,
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 applying
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 treat-
ed as owning stock in a passive foreign investment
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,
shall be treated as a disposition by the United States
person of the stock in the passive foreign investment
company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For pur-
poses of paragraphs (2) and (3) of section 851(b), any
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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 dece-
dent’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 ad-
justed basis of such stock in the hands of the decedent imme-
diately 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
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—
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‘‘(i) any distributions with respect to,
or disposition of, such stock in the first tax-
able 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 in-
vestment company and which begin after Decem-
ber 31, 1986, and included any portion of the
taxpayer’s holding period in such stock, such cor-
poration was treated as a qualified electing fund
under this part with respect to the taxpayer.
‘‘(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 taxpayer’s
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holding period in such stock, then, with respect
to such company’s first taxable year for which
such company elects the application of this sec-
tion 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 compa-
ny’s tax under this chapter for such first
taxable year shall be increased by the aggre-
gate 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
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).
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‘‘(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 section,
the adjusted basis (before adjustments under subsection (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 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 amended
by adding at the end the following new flush sentence:
‘‘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.’’
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(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 section
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 shall
be treated as beginning on the first day of
the first taxable year beginning after the
last taxable year for which section 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’’.
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(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 redesig-
nated 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.’’
(d) CLARIFICATION
OF GAIN RECOGNITION ELEC-
TION.—The last sentence of section 1298(b)(1), as so redesig-
nated, is amended by inserting ‘‘(determined without re-
gard to the preceding sentence)’’ after ‘‘investment com-
pany’’.
SEC. 11483. MODIFICATIONS TO DEFINITION OF PASSIVE IN-
COME.
(a) EXCEPTION FOR SAME COUNTRY INCOME NOT TO
APPLY.—Paragraph (1) of section 1297(b) (defining passive
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income), as redesignated by section 11482, 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. 11484. EFFECTIVE DATE.
The amendments made by this subchapter shall apply
to—
(1) taxable years of United States persons begin-
ning after December 31, 1995, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
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Subchapter B—Treatment of Controlled
Foreign Corporations
SEC. 11486. GAIN ON CERTAIN STOCK SALES BY CON-
TROLLED FOREIGN CORPORATIONS TREATED
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 CONTROLLED
FOREIGN CORPORATIONS TREATED AS DIVIDENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other foreign
corporation, gain recognized on such sale or exchange
shall be included in the gross income of such con-
trolled foreign corporation as a dividend to the same
extent that it would have been so included under sec-
tion 1248(a) if such controlled foreign corporation
were a United States person. For purposes of deter-
mining the amount which would have been so includ-
ible, the determination of whether such other foreign
corporation was a controlled foreign corporation 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
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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 exchanged
any stock if, under any provision of this subtitle, such
controlled foreign corporation is treated 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 occurring
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 enactment
of this Act.
SEC. 11487. MISCELLANEOUS MODIFICATIONS TO SUBPART
F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN DE-
TERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F income)
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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 FOREIGN
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 controlled for-
eign corporation which is actually owned by another con-
trolled foreign corporation, adjustments similar to the ad-
justments provided by subsections (a) and (b) shall be made
to the basis of such stock in the hands of such other con-
trolled foreign corporation, but only for the purposes of de-
termining the amount included under section 951 in the
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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 eliminate
such multiple inclusion or provide such basis adjustment,
as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall take effect on the date of the en-
actment 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 exemp-
tion (or reduction) with respect to the tax imposed by
section 884 shall not be taken into account.’’.
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall apply to taxable years beginning
after December 31, 1986.
SEC. 11488. 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:
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‘‘(b) DEEMED TAXES INCREASED IN CASE OF CERTAIN
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 mem-
ber of such group from which it receives divi-
dends 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 determined under
subsection (a) if such foreign corporation were a do-
mestic corporation.
‘‘(2) QUALIFIED GROUP.—For purposes of para-
graph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
‘‘(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 per-
cent of their voting stock,
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‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corporation
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 corporation
is a controlled foreign corporation (as defined in sec-
tion 957) and the domestic corporation is a United
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 qualified
group below the third tier only with respect to periods
during which it was a controlled foreign corpora-
tion.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
(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.’’
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(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corporation’’
and inserting ‘‘sixth tier foreign corporation’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC CORPORATION ACQUIRES 10 PERCENT OF
FOREIGN CORPORATION’’ and inserting ‘‘WHERE
FOREIGN CORPORATION FIRST QUALIFIES’’.
(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 sec-
tion 951(a) in the gross income of a domestic corpora-
tion any amount attributable to earnings and profits
of a foreign corporation which is a member of a
qualified group (as defined in section 902(b)) with re-
spect to the domestic corporation, then, except 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 ap-
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plying section 902(c) in accordance 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 beginning
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 liquidation,
reorganization, or similar transaction in a taxable
year beginning after the date of the enactment 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.
SEC. 11489. 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
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end of subparagraph (B) and inserting a period, and
by adding ‘‘and’’ at the end of subparagraph (A).
(2) REPEAL
OF
INCLUSION
AMOUNT.—Section
956A (relating to earnings invested in excess passive
assets) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 956(b) is amended
to read as follows:
‘‘(1) APPLICABLE
EARNINGS.—For purposes of
this section, the term ‘applicable earnings’ means,
with respect to any controlled foreign corporation, the
sum of—
‘‘(A) the amount (not including a deficit)
referred to in section 316(a)(1), and
‘‘(B) the amount referred to in section
316(a)(2),
but reduced by distributions made during the taxable
year.’’
(2) 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 con-
trolled foreign corporation during any taxable year—
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‘‘(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
316(a) shall be the portion of the amount so de-
scribed which is allocable (on a pro rata basis)
to the part of such year during which the cor-
poration is a controlled foreign corporation.’’
(3) Subsection (a) of section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings 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).
(4) Subsection (a) of section 959 is amended by
striking ‘‘paragraphs (2) and (3)’’ in the last sentence
and inserting ‘‘paragraph (2)’’.
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(5) 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 provi-
sions as in effect on the day before the date of the enactment
of the Revenue Reconciliation Act of 1995.’’
(6) Paragraph (1) of section 959(f) is amended
to read as follows:
‘‘(1) IN GENERAL.—For purposes of this section,
amounts that would be included under subparagraph
(B) of section 951(a)(1) (determined without regard
to this section) shall be treated as attributable first to
earnings described in subsection (c)(2), and then to
earnings described in subsection (c)(3).’’
(7) 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)’’.
(8) 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)’’.
(9) Paragraph (9) of section 1298(b), as redesig-
nated by section 11482, is amended by striking ‘‘sub-
paragraph (B) or (C) of section 951(a)(1)’’ and in-
serting ‘‘section 951(a)(1)(B)’’.
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(10) Subsections (d)(3)(B) and (e)(2)(B)(ii) of
section 1298, as redesignated by section 11482, 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 corporations
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.
CHAPTER 5—OTHER INCOME TAX
PROVISIONS
Subchapter A—Provisions Relating to S
Corporations
SEC. 11501. 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. 11502. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
holders) is amended by inserting after clause (iv) the follow-
ing new clause:
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‘‘(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 poten-
tial 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 pe-
riod.’’
(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 DEFINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small busi-
ness trust’ means any trust if—
‘‘(i) such trust does not have as a bene-
ficiary any person other than (I) an indi-
vidual, (II) an estate, or (III) an organiza-
tion described in paragraph (2), (3), (4), or
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(5) of section 170(c) which holds a contin-
gent 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 in-
clude—
‘‘(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 subpara-
graph (A), the term ‘purchase’ means any acqui-
sition if the basis of the property acquired is de-
termined under section 1012.
‘‘(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 entitled
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to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust.
If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such cor-
poration, the term ‘potential current beneficiary’ does
not include any person who first met the requirements
of the preceding sentence during the 60-day period
ending on the date of such disposition.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such election
shall apply to the taxable year of the trust for which
made and all subsequent taxable years of such trust
unless revoked with the consent of the Secretary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
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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 deter-
mined 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:
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the disposi-
tion of stock in an S corporation.
‘‘(iii) To the extent provided in regula-
tions, State or local income taxes or admin-
istrative expenses to the extent allocable to
items described in clauses (i) and (ii).
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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 determining—
‘‘(A) the amount of the tax imposed by this
chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the en-
tire trust,
the items referred to in paragraph (2)(C) shall be ex-
cluded. Except as provided in the preceding sentence,
this subsection shall not affect the taxation of any dis-
tribution 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.
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‘‘(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. 11503. 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 ap-
pears in clauses (ii) and (iii) and inserting ‘‘2-year
period’’, and
(2) by striking the last sentence in clause (ii).
SEC. 11504. 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 para-
graph (2)’’ and inserting ‘‘a trust described in paragraph
(2), or a person which is actively and regularly engaged
in the business of lending money.’’
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SEC. 11505. 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 cor-
poration—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to obtain
shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or termi-
nation 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 busi-
ness corporation, or
‘‘(B) to acquire the required shareholder
consents, and
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‘‘(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 treat-
ment of the corporation as an S corporation) as may
be required by the Secretary with respect to such pe-
riod,
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 para-
graph:
‘‘(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,
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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 sub-
section (a) and (b) shall apply with respect to elections for
taxable years beginning after December 31, 1982.
SEC. 11506. 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.—If any shareholder ter-
minates the shareholder’s interest in the corpora-
tion during the taxable year and all affected
shareholders and the corporation agree to the ap-
plication of this paragraph, paragraph (1) shall
be applied to the affected shareholders as if the
taxable year consisted of 2 taxable years the first
of which ends on the date of the termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘affected
shareholders’ means the shareholder whose inter-
est is terminated and all shareholders to whom
such shareholder has transferred shares during
the taxable year. If such shareholder has trans-
ferred shares to the corporation, the term ‘af-
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fected shareholders’ shall include all persons who
are shareholders during the taxable year.’’
SEC. 11507. 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 redes-
ignating 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
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 sec-
tion 1377(b) is amended by striking subparagraphs (A) and
(B), by redesignating subparagraph (C) as subparagraph
(B), and by inserting before subparagraph (B) (as so redes-
ignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
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(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR SUB-
CHAPTER 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 sub-
section:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT
WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF
INCONSISTENCY.—
‘‘(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 sub-
chapter 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
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treatment of the item on the corporate re-
turn, or
‘‘(II) the corporation has not filed a re-
turn, and
‘‘(ii) the shareholder files with the Sec-
retary a statement identifying the inconsist-
ency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER RECEIVING INCORRECT
INFORMATION.—A shareholder shall be treated as
having complied with clause (ii) of subpara-
graph (A) with respect to a subchapter S item if
the shareholder—
‘‘(i) demonstrates to the satisfaction of
the Secretary that the treatment of the sub-
chapter S item on the shareholder’s return
is consistent with the treatment of the item
on the schedule furnished to the shareholder
by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
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‘‘(B) in which the shareholder does not com-
ply with subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the
items by such shareholder consistent with the treat-
ment of the items on the corporate return shall be
treated as arising out of mathematical or clerical er-
rors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sentence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of this
subsection, the term ‘subchapter S item’ means any
item of an S corporation to the extent that regula-
tions 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 COMPLY
WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of 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:
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‘‘(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 sub-
chapter D.
SEC. 11508. 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 COR-
PORATION 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—
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‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treated
as a separate corporation, and
‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
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
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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 subpara-
graph:
‘‘(F) 
TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a C
corporation meeting the requirements of section
1504(a)(2), the term ‘passive investment income’
shall not include dividends from such C corpora-
tion to the extent such dividends are attributable
to the earnings and profits of such C corporation
derived from the active conduct of a trade or
business.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended by
striking paragraph (6).
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’
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SEC. 11509. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1) (re-
lating to losses and deductions cannot exceed share-
holder’s basis in stock and debt) is amended by strik-
ing ‘‘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:
‘‘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 sec-
tion 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
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be determined without regard to any net negative
adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative ad-
justment’ 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.’’
(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. 11510. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to application
of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
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extent inconsistent with this subchapter, subchapter C shall
apply to an S corporation and its shareholders.’’
SEC. 11511. 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,
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 accumu-
lated 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’’,
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(B) by striking ‘‘subchapter C’’ in subpara-
graph (A)(i)(I) and inserting ‘‘accumulated’’,
and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amended
by striking ‘‘subchapter C’’ in paragraph (1) and in-
serting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amended
to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross receipts’
have the same respective meanings as when used in
paragraph (3) of section 1362(d).’’
(C) The section heading for section 1375 is
amended by striking ‘‘subchapter c’’ and inserting
‘‘accumulated’’.
(D) The table of sections for part III of 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 amend-
ed by striking ‘‘section 1362(d)(3)(D)’’ and inserting
‘‘section 1362(d)(3)(C)’’.
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SEC. 11512. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover
of disallowed losses and deductions to post-termination
transition period) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the extent
that any increase in adjusted basis described in
subparagraph (B) would have increased the
shareholder’s amount at risk under section 465 if
such increase had occurred on the day preceding
the commencement of the post-termination tran-
sition 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. 11513. ADJUSTMENTS TO BASIS OF INHERITED S
STOCK TO REFLECT CERTAIN ITEMS OF IN-
COME.
(a) IN GENERAL.—Subsection (b) of section 1367 (re-
lating to adjustments to basis of stock of shareholders, etc.)
is amended by adding at the end the following new para-
graph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
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‘‘(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 inherit-
ance, section 691 shall be applied with respect to
any item of income of the S corporation in the
same manner as if the decedent had held directly
his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the portion
of the value of the stock which is attributable to
items constituting income in respect of the dece-
dent.’’
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply in the case of decedents dying after
the date of the enactment of this Act.
SEC. 11514. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237 (re-
lating to real property subdivided for sale) is amended by
striking ‘‘other than a corporation’’ in the material preced-
ing paragraph (1) and inserting ‘‘other than a C corpora-
tion’’.
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(b) CONFORMING AMENDMENT.—Subparagraph (A) of
section 1237(a)(2) is amended by inserting ‘‘an S corpora-
tion which included the taxpayer as a shareholder,’’ after
‘‘controlled by the taxpayer,’’.
SEC. 11515. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this subchapter, the amendments made by this subchapter
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 Inter-
nal Revenue Code of 1986 (relating to election after termi-
nation), any termination under section 1362(d) of such
Code in a taxable year beginning before January 1, 1996,
shall not be taken into account.
Subchapter B—Repeal of 30-Percent Gross In-
come Limitation on Regulated Investment
Companies
SEC. 11521. REPEAL OF 30-PERCENT GROSS INCOME LIMITA-
TION.
(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.—
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(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 thereof.
(2) Subsection (c) of section 851 is amended by
striking ‘‘subsection (b)(4)’’ each place it appears (in-
cluding 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)’’.
(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 redesignated
by paragraph (6)) is amended by striking paragraph
(3).
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(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.
Subchapter C—Accounting Provisions
SEC. 11551. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CERTAIN
CASES.—Subsection (b) of section 460 (relating to percent-
age of completion method) is amended by adding at the end
the following new paragraph:
‘‘(6) ELECTION
TO
HAVE
LOOK-BACK
METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) 
AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER COMPLETION OF CONTRACT.—Paragraph
(1)(B) shall not apply with respect to any tax-
able year (beginning after the taxable year in
which the contract is completed) if—
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‘‘(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 con-
tract as of the close of the most recent tax-
able year to which paragraph (1)(B) ap-
plied (or would have applied but for sub-
paragraph (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 contract as
of the close of such prior contract year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT YEAR.—The term ‘con-
tract year’ means any taxable year for
which income is taken into account under
the contract.
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‘‘(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 allocation
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 discount-
ing under the 2nd sentence of paragraph
(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
long-term contracts completed during the taxable
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
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HR 2491 EAS
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED OVERPAYMENT RATE.—Subsection
(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 ac-
crual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘interest
accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
‘‘(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 prescribed for
filing the return of the tax imposed by this chap-
ter (determined without regard to extensions).’’
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(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. 11552. 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 sub-
section:
‘‘(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 trad-
er. Such election may be made only with the consent
of the Secretary.
‘‘(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.
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SEC. 11553. MODIFICATION OF RULING AMOUNTS FOR NU-
CLEAR DECOMMISSIONING COSTS.
(a) IN GENERAL.—Section 468A(d) (relating to ruling
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.
Subchapter D—Tax-Exempt Bond Provision
SEC. 11561. REPEAL OF DEBT SERVICE-BASED LIMITATION
ON INVESTMENT IN CERTAIN NONPURPOSE
INVESTMENTS.
(a) IN GENERAL.—Subsection (d) of section 148 (relat-
ing to special rules for reasonably required reserve or re-
placement fund) is amended by striking paragraph (3).
(b) EFFECTIVE DATE.—The amendments made by this
part shall apply to bonds issued after the date of the enact-
ment of this Act.
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Subchapter E—INSURANCE PROVISIONS
SEC. 11571. TREATMENT OF CERTAIN INSURANCE CON-
TRACTS ON RETIRED LIVES.
(a) GENERAL RULE.—
(1) Paragraph (2) of section 817(d) (defining
variable contract) is amended by striking ‘‘or’’ at the
end of subparagraph (A), by striking ‘‘and’’ at the
end of subparagraph (B) and inserting ‘‘or’’, and by
inserting after subparagraph (B) the following new
subparagraph:
‘‘(C) provides for funding of insurance on
retired lives as described in section 807(c)(6),
and’’.
(2) Paragraph (3) of section 817(d) is amended
by striking ‘‘or’’ at the end of subparagraph (A), by
striking the period at the end of subparagraph (B)
and inserting ‘‘, or’’, and by inserting after subpara-
graph (B) the following new subparagraph:
‘‘(C) in the case of funds held under a con-
tract described in paragraph (2)(C), the amounts
paid in, or the amounts paid out, reflect the in-
vestment return and the market value of the seg-
regated asset account.’’.
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1995.
SEC. 11572. TREATMENT OF MODIFIED GUARANTEED CON-
TRACTS.
(a) GENERAL RULE.—Subpart E of part I of sub-
chapter L of chapter 1 (relating to definitions and special
rules) is amended by inserting after section 817 the follow-
ing new section:
‘‘SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED
CONTRACTS.
‘‘(a) COMPUTATION OF RESERVES.—In the case of a
modified guaranteed contract, clause (ii) of section
807(e)(1)(A) shall not apply.
‘‘(b) SEGREGATED ASSETS UNDER MODIFIED GUAR-
ANTEED CONTRACTS MARKED TO MARKET.—
‘‘(1) IN GENERAL.—In the case of any life insur-
ance company, for purposes of this subtitle—
‘‘(A) Any gain or loss with respect to a seg-
regated asset shall be treated as ordinary income
or loss, as the case may be.
‘‘(B) If any segregated asset is held by such
company as of the close of any taxable year—
‘‘(i) such company shall recognize gain
or loss as if such asset were sold for its fair
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market value on the last business day of
such taxable year, and
‘‘(ii) any such gain or loss shall be
taken into account for such taxable year.
Proper adjustment shall be made in the amount
of any gain or loss subsequently realized for gain
or loss taken into account under the preceding
sentence. The Secretary may provide by regula-
tions for the application of this subparagraph at
times other than the times provided in this sub-
paragraph.
‘‘(2) SEGREGATED
ASSET.—For purposes of
paragraph (1), the term ‘segregated asset’ means any
asset held as part of a segregated account referred to
in subsection (d)(1) under a modified guaranteed con-
tract.
‘‘(c) SPECIAL RULE IN COMPUTING LIFE INSURANCE
RESERVES.—For purposes of applying section 816(b)(1)(A)
to any modified guaranteed contract, an assumed rate of
interest shall include a rate of interest determined, from
time to time, with reference to a market rate of interest.
‘‘(d) MODIFIED GUARANTEED CONTRACT DEFINED.—
For purposes of this section, the term ‘modified guaranteed
contract’ means a contract not described in section 817—
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‘‘(1) all or part of the amounts received under
which are allocated to an account which, pursuant to
State law or regulation, is segregated from the general
asset accounts of the company and is valued from
time to time with reference to market values,
‘‘(2) which—
‘‘(A) provides for the payment of annuities,
‘‘(B) is a life insurance contract, or
‘‘(C) is a pension plan contract which is
not a life, accident, or health, property, casualty,
or liability contract,
‘‘(3) for which reserves are valued at market for
annual statement purposes, and
‘‘(4) which provides for a net surrender value or
a policyholder’s fund (as defined in section 807(e)(1)).
If only a portion of a contract is not described in section
817, such portion shall be treated for purposes of this section
as a separate contract.
‘‘(e) REGULATIONS.—The Secretary may prescribe reg-
ulations—
‘‘(1) to provide for the treatment of market value
adjustments under sections 72, 7702, 7702A, and
807(e)(1)(B),
‘‘(2) to determine the interest rates applicable
under sections 807(c)(3), 807(d)(2)(B), and 812 with
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respect to a modified guaranteed contract annually,
in a manner appropriate for modified guaranteed
contracts and, to the extent appropriate for such a
contract, to modify or waive the applicability of sec-
tion 811(d),
‘‘(3) to provide rules to limit ordinary gain or
loss treatment to assets constituting reserves for modi-
fied guaranteed contracts (and not other assets) of the
company,
‘‘(4) to provide appropriate treatment of trans-
fers of assets to and from the segregated account, and
‘‘(5) as may be necessary or appropriate to carry
out the purposes of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections for
subpart E of part I of subchapter L of chapter 1 is amended
by inserting after the item relating to section 817 the follow-
ing new item:
‘‘Sec. 817A. Special rules for modified guaranteed contracts.’’.
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1995.
(2) TREATMENT OF NET ADJUSTMENTS.—In the
case of any taxpayer required by the amendments
made by this section to change its calculation of re-
serves to take into account market value adjustments
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and to mark segregated assets to market for any tax-
able year—
(A) such changes shall be treated as a
change in method of accounting initiated by the
taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the adjustments required by reason of
section 481 of the Internal Revenue Code of 1986
shall be taken into account as ordinary income
or loss by the taxpayer for the taxpayer’s first
taxable year beginning after December 31, 1995.
Subchapter F—Other Provisions
SEC. 11581. CLOSING OF PARTNERSHIP TAXABLE YEAR
WITH RESPECT TO DECEASED PARTNER, ETC.
(a) GENERAL RULE.—Subparagraph (A) of section
706(c)(2) (relating to disposition of entire interest) is
amended to read as follows:
‘‘(A) DISPOSITION OF ENTIRE INTEREST.—
The taxable year of a partnership shall close
with respect to a partner whose entire interest in
the partnership terminates (whether by reason of
death, liquidation, or otherwise).’’
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(b) CLERICAL AMENDMENT.—The paragraph heading
for paragraph (2) of section 706(c) is amended to read as
follows:
‘‘(2) TREATMENT OF DISPOSITIONS.—’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to partnership taxable years beginning
after December 31, 1995.
SEC. 11582. CREDIT FOR SOCIAL SECURITY TAXES PAID
WITH RESPECT TO EMPLOYEE CASH TIPS.
(a) REPORTING REQUIREMENT NOT CONSIDERED.—
Subparagraph (A) of section 45B(b)(1) (relating to excess
employer social security tax) is amended by inserting
‘‘(without regard to whether such tips are reported under
section 6053)’’ after ‘‘section 3121(q)’’.
(b) TAXES PAID.—Subsection (d) of section 13443 of
the Revenue Reconciliation Act of 1993 is amended by in-
serting ‘‘, with respect to services performed before, on, or
after such date’’ after ‘‘1993’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect as if included in the amendments
made by, and the provisions of, section 13443 of the Reve-
nue Reconciliation Act of 1993.
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SEC. 11583. DUE DATE FOR FIRST QUARTER ESTIMATED
TAX PAYMENTS BY PRIVATE FOUNDATIONS.
(a) IN GENERAL.—Paragraph (3) of section 6655(g)
is amended by inserting after subparagraph (C) the follow-
ing new subparagraph:
‘‘(D) In the case of any private foundation,
subsection (c)(2) shall be applied by substituting
‘May 15’ for ‘April 15 ’ ’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 1995.
CHAPTER 6—ESTATES AND TRUSTS
Subchapter A—Income Tax Provisions
SEC. 11601. CERTAIN REVOCABLE TRUSTS TREATED AS
PART OF ESTATE.
(a) IN GENERAL.—Subpart A of part I of subchapter
J (relating to estates, trusts, beneficiaries, and decedents)
is amended by adding at the end the following new section:
‘‘SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART
OF ESTATE.
‘‘(a) GENERAL RULE.—For purposes of this subtitle,
if both the executor (if any) of an estate and the trustee
of a qualified revocable trust elect the treatment provided
in this section, such trust shall be treated and taxed as part
of such estate (and not as a separate trust) for all taxable
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years of the estate ending after the date of the decedent’s
death and before the applicable date.
‘‘(b) DEFINITIONS.—For purposes of subsection (a)—
‘‘(1) QUALIFIED REVOCABLE TRUST.—The term
‘qualified revocable trust’ means any trust (or portion
thereof) which was treated under section 676 as
owned by the decedent of the estate referred to in sub-
section (a) by reason of a power in the grantor (deter-
mined without regard to section 672(e)).
‘‘(2) APPLICABLE DATE.—The term ‘applicable
date’ means—
‘‘(A) if no return of tax imposed by chapter
11 is required to be filed, the date which is 2
years after the date of the decedent’s death, and
‘‘(B) if such a return is required to be filed,
the date which is 6 months after the date of the
final determination of the liability for tax im-
posed by chapter 11.
‘‘(c) ELECTION.—The election under subsection (a)
shall be made not later than the time prescribed for filing
the return of tax imposed by this chapter for the first tax-
able year of the estate (determined with regard to exten-
sions) and, once made, shall be irrevocable.’’
(b) COMPARABLE TREATMENT UNDER GENERATION-
SKIPPING TAX.—Paragraph (1) of section 2652(b) is
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amended by adding at the end the following new sentence:
‘‘Such term shall not include any trust during any period
the trust is treated as part of an estate under section 646.’’
(c) CLERICAL AMENDMENT.—The table of sections for
such subpart A is amended by adding at the end the follow-
ing new item:
‘‘Sec. 646. Certain revocable trusts treated as part of estate.’’
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to estates of decedents dying
after the date of the enactment of this Act.
SEC. 11602. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAX-
ABLE YEAR OF ESTATE.
(a) IN GENERAL.—Subsection (b) of section 663 (relat-
ing to distributions in first 65 days of taxable year) is
amended by inserting ‘‘an estate or’’ before ‘‘a trust’’ each
place it appears.
(b) CONFORMING AMENDMENT.—Paragraph (2) of sec-
tion 663(b) is amended by striking ‘‘the fiduciary of such
trust’’ and inserting ‘‘the executor of such estate or the fidu-
ciary of such trust (as the case may be)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
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SEC. 
11603. 
SEPARATE 
SHARE 
RULES 
AVAILABLE 
TO
ESTATES.
(a) IN GENERAL.—Subsection (c) of section 663 (relat-
ing to separate shares treated as separate trusts) is amend-
ed—
(1) by inserting before the last sentence the fol-
lowing new sentence: ‘‘Rules similar to the rules of the
preceding provisions of this subsection shall apply to
treat substantially separate and independent shares of
different beneficiaries in an estate having more than
1 beneficiary as separate estates.’’, and
(2) by inserting ‘‘or estates’’ after ‘‘trusts’’ in the
last sentence.
(b) CONFORMING AMENDMENT.—The subsection head-
ing of section 663(c) is amended by inserting ‘‘ESTATES
OR’’ before ‘‘TRUSTS’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after the
date of the enactment of this Act.
SEC. 11604. EXECUTOR OF ESTATE AND BENEFICIARIES
TREATED AS RELATED PERSONS FOR DIS-
ALLOWANCE OF LOSSES, ETC.
(a) DISALLOWANCE OF LOSSES.—Subsection (b) of sec-
tion 267 (relating to losses, expenses, and interest with re-
spect to transactions between related taxpayers) is amended
by striking ‘‘or’’ at the end of paragraph (11), by striking
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the period at the end of paragraph (12) and inserting ‘‘;
or’’, and by adding at the end the following new paragraph:
‘‘(13) Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.’’
(b) ORDINARY INCOME FROM GAIN FROM SALE OF
DEPRECIABLE PROPERTY.—Subsection (b) of section 1239
is amended by striking the period at the end of paragraph
(2) and inserting ‘‘, and’’ and by adding at the end the
following new paragraph:
‘‘(3) except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 11605. LIMITATION ON TAXABLE YEAR OF ESTATES.
(a) IN GENERAL.—Section 645 (relating to taxable
year of trusts) is amended to read as follows:
‘‘SEC. 645. TAXABLE YEAR OF ESTATES AND TRUSTS.
‘‘(a) ESTATES.—For purposes of this subtitle, the tax-
able year of an estate shall be a year ending on October
31, November 30, or December 31.
‘‘(b) TRUSTS.—
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‘‘(1) IN GENERAL.—For purposes of this subtitle,
the taxable year of any trust shall be the calendar
year.
‘‘(2) EXCEPTION FOR TRUSTS EXEMPT FROM TAX
AND CHARITABLE TRUSTS.—Paragraph (1) shall not
apply to a trust exempt from taxation under section
501(a) or to a trust described in section 4947(a)(1).’’
(b) CLERICAL AMENDMENT.—The table of sections for
subpart A of part I of subchapter J of chapter 1 is amended
by striking the item relating to section 645 and inserting
the following new item:
‘‘Sec. 645. Taxable year of estates and trusts.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after the
date of the enactment of this Act.
SEC. 11606. TREATMENT OF FUNERAL TRUSTS.
(a) IN GENERAL.—Subpart F of part I of subchapter
J of chapter 1 is amended by adding at the end the follow-
ing new section:
‘‘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).
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‘‘(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 pro-
viding 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 indi-
viduals who have entered into contracts described in
paragraph (1) to have such services or property pro-
vided at their death,
‘‘(4) the only contributions to the trust are con-
tributions by or for the benefit of such beneficiaries,
‘‘(5) the trustee elects the application of this sub-
section, and
‘‘(6) the trust would (but for the election de-
scribed in paragraph (5)) be treated as owned by the
beneficiaries under subpart E.
‘‘(c) DOLLAR LIMITATION ON CONTRIBUTIONS.—
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uct, the living standards of its inhabitants, and any
other economic factors which the President deems ap-
propriate;
‘‘(3) whether or not other major developed coun-
tries are extending generalized preferential tariff
treatment to such country;
‘‘(4) the extent to which such country has as-
sured the United States that it will provide equitable
and reasonable access to the markets and basic com-
modity resources of such country and the extent to
which such country has assured the United States
that it will refrain from engaging in unreasonable ex-
port practices;
‘‘(5) the extent to which such country is provid-
ing adequate and effective protection of intellectual
property rights;
‘‘(6) the extent to which such country has taken
action to—
‘‘(A) reduce trade distorting investment
practices and policies (including export perform-
ance requirements); and
‘‘(B) reduce or eliminate barriers to trade
in services; and
‘‘(7) whether or not such country has taken or is
taking steps to afford to workers in that country (in-
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‘‘(b) ADMINISTRATIVE REVIEW
OF ADVERSE DECI-
SION.—
‘‘(1) IN
GENERAL.—Within 60 days after the
date a State receives notice under this section of an
adverse decision, the State may appeal the decision,
in whole or in part, to the Departmental Appeals
Board established in the Department of Health and
Human Services (in this section referred to as the
‘Board’) by filing an appeal with the Board.
‘‘(2) PROCEDURAL
RULES.—The Board shall
consider a State’s appeal on the basis of such docu-
mentation as the State may submit and as the Board
may require to support the final decision of the
Board. In deciding whether to uphold an adverse de-
cision or any portion of such a decision, the Board
shall conduct a thorough review of the issues and take
into account all relevant evidence. The Board shall
make a final determination with respect to an appeal
filed under this paragraph not less than 60 days after
the date the appeal is filed.
‘‘(c) JUDICIAL REVIEW OF ADVERSE DECISION.—
‘‘(1) IN
GENERAL.—Within 90 days after the
date of a final decision by the Board with respect to
an adverse decision regarding a State under this sec-
tion, the State may obtain judicial review of the final