299
‘‘(7) with respect to subsection (c)(8), the ex-
tent that beneficiary countries are meeting the inter-
nationally recognized worker rights criteria under
such subsection.
In the first report under this subsection, the President
shall include a review of the implementation of section
213(b), and his analysis of whether the benefits under
paragraphs (2) and (3) of such section further the objec-
tives of this title and whether such benefits should be con-
tinued.’’.
(d) CONFORMING AMENDMENT.—Section 213(a)(1)
of the Caribbean Basin Economic Recovery Act is amend-
ed by inserting ‘‘and except as provided in section
213(b)(2) and (3),’’ after ‘‘Tax Reform Act of 1986,’’.
SEC. 985. EFFECT OF NAFTA ON SUGAR IMPORTS FROM
BENEFICIARY COUNTRIES.
The President shall monitor the effects, if any, that
the implementation of the NAFTA has on the access of
beneficiary countries under the Caribbean Basin Economic
Recovery Act to the United States market for sugars, syr-
ups, and molasses. If the President considers that the im-
plementation of the NAFTA is affecting, or will likely af-
fect, in an adverse manner the access of such countries
to the United States market, the President shall prompt-
ly—
300
(1) take such actions, after consulting with in-
terested parties and with the appropriate committees
of the House of Representatives and the Senate, or
(2) propose to the Congress such legislative ac-
tions,
as may be necessary or appropriate to ameliorate such ad-
verse effect.
SEC. 986. DUTY-FREE TREATMENT FOR CERTAIN BEV-
ERAGES MADE WITH CARIBBEAN RUM.
Section 213(a) of the Caribbean Basin Economic Re-
covery Act (19 U.S.C. 2703(a)) is amended—
(1) in paragraph (5), by striking ‘‘chapter’’ and
inserting ‘‘title’’; and
(2) by adding at the end the following new
paragraph:
‘‘(6) Notwithstanding paragraph (1), the duty-free
treatment provided under this title shall apply to liqueurs
and spirituous beverages produced in the territory of Can-
ada from rum if—
‘‘(A) such rum is the growth, product, or manu-
facture of a beneficiary country or of the Virgin Is-
lands of the United States;
‘‘(B) such rum is imported directly from a ben-
eficiary country or the Virgin Islands of the United
States into the territory of Canada, and such li-
301
queurs and spirituous beverages are imported di-
rectly from the territory of Canada into the customs
territory of the United States;
‘‘(C) when imported into the customs territory
of the United States, such liqueurs and spirituous
beverages are classified in subheading 2208.90 or
2208.40 of the HTS; and
‘‘(D) such rum accounts for at least 90 percent
by volume of the alcoholic content of such liqueurs
and spiritous beverages.’’.
SEC. 987. MEETINGS OF TRADE MINISTERS AND USTR.
(a) SCHEDULE OF MEETINGS.—The President shall
take the necessary steps to convene a meeting with the
trade ministers of the partnership countries in order to
establish a schedule of regular meetings, to commence as
soon as is practicable, of the trade ministers and the
Trade Representative, for the purpose set forth in sub-
section (b).
(b) PURPOSE.—The purpose of the meetings sched-
uled under subsection (a) is to reach agreement between
the United States and partnership countries on the likely
timing and procedures for initiating negotiations for part-
nership to accede to the NAFTA, or to enter into mutually
advantageous free trade agreements with the United
States that contain provisions comparable to those in the
302
NAFTA and would make substantial progress in achieving
the negotiating objectives set forth in section 108(b)(5)
of the North American Free Trade Agreement Implemen-
tation Act (19 U.S.C. 3317(b)(5)).
SEC. 988. REPORT ON ECONOMIC DEVELOPMENT AND MAR-
KET ORIENTED REFORMS IN THE CARIB-
BEAN.
(a) IN GENERAL.—The Trade Representative shall
make an assessment of the economic development efforts
and market oriented reforms in each partnership country
and the ability of each such country, on the basis of such
efforts and reforms, to undertake the obligations of the
NAFTA. The Trade Representative shall, not later than
July 1, 1998, submit to the President and to the Commit-
tee on Finance of the Senate and the Committee on Ways
and Means of the House of Representatives a report on
that assessment.
(b) ACCESSION TO NAFTA.—
(1) ABILITY
OF
COUNTRIES
TO
IMPLEMENT
NAFTA.—The Trade Representative shall include in
the report under subsection (a) a discussion of pos-
sible timetables and procedures pursuant to which
partnership countries can complete the economic re-
forms necessary to enable them to negotiate acces-
sion to the NAFTA. The Trade Representative shall
303
also include an assessment of the potential phase-in
periods that may be necessary for those partnership
countries with less developed economies to imple-
ment the obligations of the NAFTA.
(2) FACTORS IN ASSESSING ABILITY TO IMPLE-
MENT NAFTA.—In assessing the ability of each part-
nership country to undertake the obligations of the
NAFTA, the Trade Representative should consider,
among other factors—
(A) whether the country has joined the
WTO;
(B) the extent to which the country pro-
vides equitable access to the markets of that
country;
(C) the degree to which the country uses
export subsidies or imposes export performance
requirements or local content requirements;
(D) macroeconomic reforms in the country
such as the abolition of price controls on traded
goods and fiscal discipline;
(E) progress the country has made in the
protection of intellectual property rights;
(F) progress the country has made in the
elimination of barriers to trade in services;
304
(G) whether the country provides national
treatment to foreign direct investment;
(H) the level of tariffs bound by the coun-
try under the WTO (if the country is a WTO
member);
(I) the extent to which the country has
taken other trade liberalization measures; and
(J) the extent which the country works to
accommodate market access objectives of the
United States.
(c) PARITY REVIEW IN THE EVENT A NEW COUNTRY
ACCEDES TO NAFTA.—If—
(1) a country or group of countries accedes to
the NAFTA, or
(2) the United States negotiates a comparable
free trade agreement with another country or group
of countries,
the Trade Representative shall provide to the committees
referred to in subsection (a) a separate report on the eco-
nomic impact of the new trade relationship on partnership
countries. The report shall include any measures the
Trade Representative proposes to minimize the potential
for the diversion of investment from partnership countries
to the new NAFTA member or free trade agreement part-
ner.
305
TITLE X—REVENUES
Subtitle A—Financial Products
SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRE-
CIATED FINANCIAL POSITIONS.
(a) IN GENERAL.—Part IV of subchapter P of chap-
ter 1 is amended by adding at the end the following new
section:
‘‘SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR AP-
PRECIATED FINANCIAL POSITIONS.
‘‘(a) IN GENERAL.—If there is a constructive sale of
an appreciated financial position—
‘‘(1) the taxpayer shall recognize gain as if such
position were sold, assigned, or otherwise terminated
at its fair market value on the date of such con-
structive sale (and any gain shall be taken into ac-
count for the taxable year which includes such date),
and
‘‘(2) for purposes of applying this title for peri-
ods after the constructive sale—
‘‘(A) proper adjustment shall be made in
the amount of any gain or loss subsequently re-
alized with respect to such position for any gain
taken into account by reason of paragraph (1),
and
306
‘‘(B) the holding period of such position
shall be determined as if such position were
originally acquired on the date of such con-
structive sale.
‘‘(b) APPRECIATED FINANCIAL POSITION.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘appreciated financial position’
means any position with respect to any stock, debt
instrument, or partnership interest if there would be
gain were such position sold, assigned, or otherwise
terminated at its fair market value.
‘‘(2) EXCEPTIONS.—The term ‘appreciated fi-
nancial position’ shall not include—
‘‘(A) any position with respect to straight
debt (as defined in section 1361(c)(5)(B) with-
out regard to clause (iii) thereof), and
‘‘(B) any position which is marked to mar-
ket under any provision of this title or the regu-
lations thereunder.
‘‘(3) POSITION.—The term ‘position’ means an
interest, including a futures or forward contract,
short sale, or option.
‘‘(c) CONSTRUCTIVE SALE.—For purposes of this
section—
307
‘‘(1) IN GENERAL.—A taxpayer shall be treated
as having made a constructive sale of an appreciated
financial position if the taxpayer (or a related per-
son)—
‘‘(A) enters into a short sale of the same
or substantially identical property,
‘‘(B) enters into an offsetting notional
principal contract with respect to the same or
substantially identical property,
‘‘(C) enters into a futures or forward con-
tract to deliver the same or substantially iden-
tical property,
‘‘(D) in the case of an appreciated finan-
cial position that is a short sale or a contract
described in subparagraph (B) or (C) with re-
spect to any property, acquires the same or
substantially identical property, or
‘‘(E) to the extent prescribed by the Sec-
retary in regulations, enters into 1 or more
other transactions (or acquires 1 or more posi-
tions) that have substantially the same effect as
a transaction described in any of the preceding
subparagraphs.
‘‘(2) EXCEPTION FOR SALES OF NONPUBLICLY
TRADED
PROPERTY.—The term ‘constructive sale’
308
shall not include any contract for sale of any stock,
debt instrument, or partnership interest which is not
a marketable security (as defined in section 453(f))
if the contract settles within 1 year after the date
such contract is entered into.
‘‘(3) EXCEPTION FOR CERTAIN CLOSED TRANS-
ACTIONS.—In applying this section, there shall be
disregarded any transaction (which would otherwise
be treated as a constructive sale) during the taxable
year if—
‘‘(A) such transaction is closed before the
end of the 30th day after the close of such tax-
able year, and
‘‘(B) in the case of a transaction which is
closed during the 90-day period ending on such
30th day—
‘‘(i) the taxpayer holds the appre-
ciated financial position throughout the 60-
day period beginning on the date such
transaction is closed, and
‘‘(ii) at no time during such 60-day
period is the taxpayer’s risk of loss with
respect to such position reduced by reason
of a circumstance which would be de-
309
scribed in section 246(c)(4) if references to
stock included references to such position.
‘‘(4) RELATED PERSON.—A person is related to
another person with respect to a transaction if—
‘‘(A) the relationship is described in sec-
tion 267 or 707(b), and
‘‘(B) such transaction is entered into with
a view toward avoiding the purposes of this sec-
tion.
‘‘(d) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) FORWARD CONTRACT.—The term ‘forward
contract’ means a contract to deliver a substantially
fixed amount of property for a substantially fixed
price.
‘‘(2) OFFSETTING NOTIONAL PRINCIPAL CON-
TRACT.—The term ‘offsetting notional principal con-
tract’ means, with respect to any property, an agree-
ment which includes—
‘‘(A) a requirement to pay (or provide
credit for) all or substantially all of the invest-
ment yield (including appreciation) on such
property for a specified period, and
310
‘‘(B) a right to be reimbursed for (or re-
ceive credit for) all or substantially all of any
decline in the value of such property.
‘‘(e) SPECIAL RULES.—
‘‘(1) TREATMENT
OF
SUBSEQUENT
SALE
OF
POSITION WHICH WAS DEEMED SOLD.—If—
‘‘(A) there is a constructive sale of any ap-
preciated financial position,
‘‘(B) such position is subsequently dis-
posed of, and
‘‘(C) at the time of such disposition, the
transaction resulting in the constructive sale of
such position is open with respect to the tax-
payer or any related person,
solely for purposes of determining whether the tax-
payer has entered into a constructive sale of any
other appreciated financial position held by the tax-
payer, the taxpayer shall be treated as entering into
such transaction immediately after such disposition.
For purposes of the preceding sentence, an assign-
ment or other termination shall be treated as a dis-
position.
‘‘(2) CERTAIN TRUST INSTRUMENTS TREATED
AS STOCK.—For purposes of this section, an interest
311
in a trust which is actively traded (within the mean-
ing of section 1092(d)(1)) shall be treated as stock.
‘‘(3) MULTIPLE POSITIONS IN PROPERTY.—If a
taxpayer holds multiple positions in property, the de-
termination of whether a specific transaction is a
constructive sale and, if so, which appreciated finan-
cial position is deemed sold shall be made in the
same manner as actual sales.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) ELECTION OF MARK TO MARKET FOR SECURI-
TIES TRADERS AND FOR TRADERS AND DEALERS IN COM-
MODITIES.—Subsection (d) of section 475 (relating to
mark to market accounting method for dealers in securi-
ties) is amended by adding at the end the following new
paragraph:
‘‘(4) ELECTION OF MARK TO MARKET FOR SE-
CURITIES TRADERS AND FOR TRADERS AND DEAL-
ERS IN COMMODITIES.—
‘‘(A) IN GENERAL.—In the case of a per-
son—
‘‘(i) who is engaged in a trade or busi-
ness to which this paragraph applies, and
312
‘‘(ii) who elects to be treated as a
dealer in securities for purposes of this
section with respect to such trade or busi-
ness,
subsections (a), (b)(3), (c)(3), and (e) and the
preceding provisions of this subsection (or, in
the case of a dealer in commodities, this sec-
tion) shall apply to all commodities and securi-
ties held by such person in any trade or busi-
ness with respect to which such election is in ef-
fect in the same manner as if such person were
a dealer in securities and all references to secu-
rities included references to commodities.
‘‘(B) APPLICATION OF PARAGRAPH.—This
paragraph shall apply to any active trade or
business—
‘‘(i) as a trader in securities, or
‘‘(ii) as a trader or dealer in commod-
ities.
‘‘(C) EXCEPTION FOR CERTAIN HOLDINGS
OF TRADERS.—In the case of a trader in securi-
ties or commodities, subsection (a) shall not
apply to any security or commodity (to which
subsection (a) would otherwise apply solely by
reason of this paragraph) if such security or
313
commodity is clearly identified in the trader’s
records (before the close of the day applicable
under subsection (b)(2)) as being held other
than in a trade or business to which the elec-
tion under subparagraph (A) is in effect. A se-
curity or commodity so identified shall be treat-
ed as described in subsection (b)(1).
‘‘(D) COMMODITY.—For purposes of this
paragraph, the term ‘commodities’ includes only
commodities of a kind customarily dealt in on
an organized commodity exchange.
‘‘(E) ELECTION.—An election under this
paragraph may be made separately for each
trade or business and without the consent of
the Secretary. Such an election, once made,
shall apply to the taxable year for which made
and all subsequent taxable years unless revoked
with the consent of the Secretary.’’
(c) CLERICAL AMENDMENT.—The table of sections
for part IV of subchapter P of chapter 1 is amended by
adding at the end the following new item:
‘‘Sec. 1259. Constructive sales treatment for appreciated financial
positions.’’
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
314
this section shall apply to any constructive sale after
June 8, 1997.
(2) EXCEPTION FOR SALES OF POSITIONS, ETC.
HELD BEFORE JUNE 9, 1997.—A constructive sale
before June 9, 1997, and the property to which the
position involved in the transaction relates, shall not
be taken into account in determining whether any
other constructive sale after June 8, 1997, has oc-
curred if, within before the close of the 30-day pe-
riod beginning on the date of the enactment of this
Act, such position and property are clearly identified
in the taxpayer’s records as offsetting. The preced-
ing sentence shall cease to apply as of the date the
taxpayer ceases to hold such position or property.
(3) SPECIAL RULE.—In the case of a decedent
dying after June 8, 1997, if—
(A) there was a constructive sale on or be-
fore such date of any appreciated financial posi-
tion,
(B) the transaction resulting in such con-
structive sale of such position remains open
(with respect to the decedent or any related
person) for not less than 2 years after the date
of such transaction (whether such period is be-
fore or after such date), and
315
(C) such transaction is not closed within
the 30-day period beginning on the date of the
enactment of this Act,
then, for purposes of such Code, such position (and
any property related thereto, as determined under
the principles of section 1259(d)(1) of such Code (as
so added)) shall be treated as property constituting
rights to receive an item of income in respect of a
decedent under section 691 of such Code.
(4) ELECTION OF SECURITIES TRADERS, AND
FOR TRADERS AND DEALERS IN COMMODITIES, TO
BE TREATED AS DEALERS IN SECURITIES.—
(A) IN GENERAL.—The amendment made
by subsection (b) shall apply to taxable years
ending after the date of the enactment of this
Act.
(B) 4-YEAR SPREAD OF ADJUSTMENTS.—
In the case of a taxpayer who elects under sec-
tion 475(d)(4) of the Internal Revenue Code of
1986 (as added by this section) to change its
method of accounting for its first taxable year
ending after the date of the enactment of this
Act, the net amount of the adjustments re-
quired to be taken into account by the taxpayer
under section 481 of the Internal Revenue Code
316
of 1986 shall be taken into account ratably over
the 4-taxable year period beginning with such
first taxable year.
SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT
COMPANIES UNDER SECTION 351.
(a) IN GENERAL.—Paragraph (1) of section 351(e)
(relating to exceptions) is amended by adding at the end
the following: ‘‘For purposes of the preceding sentence,
the determination of whether a company is an investment
company shall be made—
‘‘(A) by taking into account all stock and
securities held by the company, whether or not
readily marketable, and
‘‘(B) by treating all of the following as se-
curities:
‘‘(i) Money.
‘‘(ii) Any financial instrument (as de-
fined in section 731(c)(2)(C)).
‘‘(iii) Any foreign currency.
‘‘(iv) Any interest in a real estate in-
vestment trust, a common trust fund, a
regulated investment company, or a pub-
licly traded partnership (as defined in sec-
tion 7704(b)).
317
‘‘(v) Any interest described in clause
(iv), (v), or (vi) of section 731(c)(2)(B) (or
which would be so described without re-
gard to any reference to active trading or
marketability).
‘‘(vi) Any other asset specified in reg-
ulations prescribed by the Secretary.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall apply to transfers after June 8,
1997, in taxable years ending after such date.
(2) BINDING
CONTRACTS.—The amendment
made by subsection (a) shall not apply to any trans-
fer pursuant to a written binding contract in effect
on June 8, 1997, that provides for the transfer of
a fixed amount of property, and at all times there-
after before such transfer.
SEC. 1003. MODIFICATION OF RULES FOR ALLOCATING IN-
TEREST EXPENSE TO TAX-EXEMPT INTEREST.
(a) PRO RATA ALLOCATION RULES APPLICABLE TO
CORPORATIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
265(b) is amended by striking ‘‘In the case of a fi-
nancial institution’’ and inserting ‘‘In the case of a
corporation’’.
318
(2) ONLY OBLIGATIONS ACQUIRED AFTER JUNE
8, 1997, TAKEN INTO ACCOUNT.—Subparagraph (A)
of section 265(b)(2) is amended by striking ‘‘August
7, 1986’’ and inserting ‘‘June 8, 1997 (August 7,
1986, in the case of a financial institution)’’.
(3) 
SMALL
ISSUER
EXCEPTION
NOT
TO
APPLY.—Subparagraph (A) of section 265(b)(3) is
amended by striking ‘‘Any qualified’’ and inserting
‘‘In the case of a financial institution, any quali-
fied’’.
(4) EXCEPTION FOR CERTAIN BONDS ACQUIRED
ON SALE OF GOODS OR SERVICES.—Subparagraph
(B) of section 265(b)(4) is amended by adding at
the end the following new sentence: ‘‘In the case of
a taxpayer other than a financial institution, such
term shall not include a nonsalable obligation ac-
quired by such taxpayer in the ordinary course of
business as payment for goods or services provided
by such taxpayer to any State or local government.’’
(5) LOOK-THRU RULES FOR PARTNERSHIPS.—
Paragraph (6) of section 265(b) is amended by add-
ing at the end the following new subparagraph:
‘‘(C) LOOK-THRU
RULES
FOR
PARTNER-
SHIPS.—In the case of a corporation which is a
partner in a partnership, such corporation shall
319
be treated for purposes of this subsection as
holding directly its allocable share of the assets
of the partnership.’’
(6) APPLICATION OF PRO RATA DISALLOWANCE
ON
AFFILIATED
GROUP
BASIS.—Subsection (b) of
section 265 is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) APPLICATION OF DISALLOWANCE ON AF-
FILIATED GROUP BASIS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, all members of an affiliated group
filing a consolidated return under section 1501
shall be treated as 1 taxpayer.
‘‘(B) TREATMENT OF INSURANCE COMPA-
NIES.—This subsection shall not apply to an in-
surance company, and subparagraph (A) shall
be applied without regard to any member of an
affiliated group which is an insurance com-
pany.’’
(6) 
DE
MINIMIS
EXCEPTION
FOR
NON-
FINANCIAL
INSTITUTIONS.—Subsection (b) of sec-
tion 265 is amended by adding at the end the follow-
ing new paragraph:
‘‘(8) DE
MINIMIS
EXCEPTION
FOR
NON-
FINANCIAL
INSTITUTIONS.—In the case of a cor-
320
poration, paragraph (1) shall not apply for any tax-
able year if the amount described in paragraph
(2)(A) with respect to such corporation does not ex-
ceed the lesser of—
‘‘(A) 2 percent of the amount described in
paragraph (2)(B), or
‘‘(B) $1,000,000.
The preceding sentence shall not apply to a financial
institution or to a dealer in tax-exempt obligations.’’
(7) CLERICAL
AMENDMENT.—The subsection
heading for section 265(b) is amended by striking
‘‘FINANCIAL INSTITUTIONS’’ and inserting ‘‘COR-
PORATIONS’’.
(b) APPLICATION OF SECTION 265(a)(2) WITH RE-
SPECT TO CONTROLLED GROUPS.—Paragraph (2) of sec-
tion 265(a) is amended after ‘‘obligations’’ by inserting
‘‘held by the taxpayer (or any corporation which is a mem-
ber of a controlled group (as defined in section 267(f)(1))
which includes the taxpayer)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
321
SEC. 1004. GAINS AND LOSSES FROM CERTAIN TERMI-
NATIONS WITH RESPECT TO PROPERTY.
(a) APPLICATION OF CAPITAL TREATMENT TO PROP-
ERTY OTHER THAN PERSONAL PROPERTY.—
(1) IN
GENERAL.—Paragraph (1) of section
1234A (relating to gains and losses from certain ter-
minations) is amended by striking ‘‘personal prop-
erty (as defined in section 1092(d)(1))’’ and insert-
ing ‘‘property’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to terminations more
than 30 days after the date of the enactment of this
Act.
(b) APPLICATION OF CAPITAL TREATMENT, ETC. TO
OBLIGATIONS ISSUED BY NATURAL PERSONS.—
(1) IN GENERAL.—Section 1271(b) is amended
to read as follows:
‘‘(b) EXCEPTION FOR CERTAIN OBLIGATIONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to—
‘‘(A) any obligation issued by a natural
person before June 9, 1997, and
‘‘(B) any obligation issued before July 2,
1982, by an issuer which is not a corporation
and is not a government or political subdivision
thereof.
322
‘‘(2) TERMINATION.—Paragraph (1) shall not
apply to any obligation purchased (within the mean-
ing of section 179(d)(2)) after June 8, 1997.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of en-
actment of this Act.
SEC. 1005. DETERMINATION OF ORIGINAL ISSUE DISCOUNT
WHERE POOLED DEBT OBLIGATIONS SUB-
JECT TO ACCELERATION.
(a) IN GENERAL.—Subparagraph (C) of section
1272(a)(6) (relating to debt instruments to which the
paragraph applies) is amended by striking ‘‘or’’ at the end
of clause (i), by striking the period at the end of clause
(ii) and inserting ‘‘, or’’, and by inserting after clause (i)
the following:
‘‘(iii) any pool of debt instruments the
yield on which may be reduced by reason
of prepayments (or to the extent provided
in regulations, by reason of other events).
To the extent provided in regulations prescribed
by the Secretary, in the case of a small business
engaged in the trade or business of selling tan-
gible personal property at retail, clause (iii)
shall not apply to debt instruments incurred in
323
the ordinary course of such trade or business
while held by such business.’’
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to taxable years beginning
after the date of the enactment of this Act.
(2) CHANGE IN METHOD OF ACCOUNTING.—In
the case of any taxpayer required by this section to
change its method of accounting for its first taxable
year beginning after the date of the enactment of
this Act—
(A) such change shall be treated as initi-
ated by the taxpayer,
(B) such change shall be treated as made
with the consent of the Secretary, and
(C) the net amount of the adjustments re-
quired to be taken into account by the taxpayer
under section 481 of the Internal Revenue Code
of 1986 shall be taken into account ratably over
the 4-taxable year period beginning with such
first taxable year.
SEC. 1006. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN
DEBT INSTRUMENTS.
(a) IN GENERAL.—Section 163 (relating to deduction
for interest) is amended by redesignating subsection (k)
324
as subsection (l) and by inserting after subsection (j) the
following new subsection:
‘‘(k) DISALLOWANCE OF DEDUCTION ON CERTAIN
DEBT INSTRUMENTS OF CORPORATIONS.—
‘‘(1) IN GENERAL.—No deduction shall be al-
lowed under this chapter for any interest paid or ac-
crued on a disqualified debt instrument.
‘‘(2) DISQUALIFIED DEBT INSTRUMENT.—For
purposes of this subsection, the term ‘disqualified
debt instrument’ means any indebtedness of a cor-
poration which is payable in equity of the issuer or
a related party.
‘‘(3) SPECIAL RULES FOR AMOUNTS PAYABLE
IN EQUITY.—For purposes of paragraph (2), indebt-
edness shall be treated as payable in equity of the
issuer or a related party only if—
‘‘(A) a substantial amount of the principal
or interest is required to be paid or converted,
or at the option of the issuer or a related party
is payable in, or convertible into, such equity,
‘‘(B) a substantial amount of the principal
or interest is required to be determined, or at
the option of the issuer or a related party is de-
termined, by reference to the value of such eq-
uity, or
325
‘‘(C) the indebtedness is part of an ar-
rangement which is reasonably expected to re-
sult in a transaction described in subparagraph
(A) or (B).
For purposes of subparagraphs (A) and (B), prin-
cipal or interest shall be treated as required to be
so paid, converted, or determined if it may be re-
quired at the option of the holder or a related party
and there is a substantial certainty the option will
be exercised.
‘‘(4) RELATED PARTY.—For purposes of this
subsection, a person is a related party with respect
to another person if such person bears a relationship
to such other person described in section 267(b) or
707(b).
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations preventing avoidance
of this subsection through the use of an issuer other
than a corporation.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to disqualified debt instru-
ments issued after June 8, 1997.
326
(2) TRANSITION RULE.—The amendment made
by this section shall not apply to any instrument is-
sued after June 8, 1997, if such instrument is—
(A) issued pursuant to a written agree-
ment which was binding on such date and at all
times thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
Subtitle B—Corporate
Organizations and Reorganizations
SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY
DIVIDENDS.
(a) TREATMENT OF EXTRAORDINARY DIVIDENDS IN
EXCESS OF BASIS.—Paragraph (2) of section 1059(a) (re-
lating to corporate shareholder’s recognition of gain at-
tributable to nontaxed portion of extraordinary dividends)
is amended to read as follows:
‘‘(2) AMOUNTS IN EXCESS OF BASIS.—If the
nontaxed portion of such dividends exceeds such
basis, such excess shall be treated as gain from the
327
sale or exchange of such stock for the taxable year
in which the extraordinary dividend is received.’’
(b) TREATMENT OF REDEMPTIONS WHERE OPTIONS
INVOLVED.—Paragraph (1) of section 1059(e) (relating to
treatment of partial liquidations and non-pro rata redemp-
tions) is amended to read as follows:
‘‘(1) TREATMENT
OF
PARTIAL
LIQUIDATIONS
AND CERTAIN REDEMPTIONS.—Except as otherwise
provided in regulations—
‘‘(A) REDEMPTIONS.—In the case of any
redemption of stock—
‘‘(i) which is part of a partial liquida-
tion (within the meaning of section 302(e))
of the redeeming corporation,
‘‘(ii) which is not pro rata as to all
shareholders, or
‘‘(iii) which would not have been
treated (in whole or in part) as a dividend
if any options had not been taken into ac-
count under section 318(a)(4),
any amount treated as a dividend with respect
to such redemption shall be treated as an ex-
traordinary dividend to which paragraphs (1)
and (2) of subsection (a) apply without regard
to the period the taxpayer held such stock. In
328
the case of a redemption described in clause
(iii), only the basis in the stock redeemed shall
be taken into account under subsection (a).
‘‘(B) REORGANIZATIONS, 
ETC.—An ex-
change described in section 356 which is treat-
ed as a dividend shall be treated as a redemp-
tion of stock for purposes of applying subpara-
graph (A).’’
(c) TIME FOR REDUCTION.—Paragraph (1) of sec-
tion 1059(d) is amended to read as follows:
‘‘(1) TIME FOR REDUCTION.—Any reduction in
basis under subsection (a)(1) shall be treated as oc-
curring at the beginning of the ex-dividend date of
the extraordinary dividend to which the reduction re-
lates.’’
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to distributions after May 3,
1995.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion made pursuant to the terms of—
(A) a written binding contract in effect on
May 3, 1995, and at all times thereafter before
such distribution, or
329
(B) a tender offer outstanding on May 3,
1995.
(3) CERTAIN
DIVIDENDS
NOT
PURSUANT
TO
CERTAIN
REDEMPTIONS.—In determining whether
the amendment made by subsection (a) applies to
any extraordinary dividend other than a dividend
treated as an extraordinary dividend under section
1059(e)(1) of the Internal Revenue Code of 1986
(as amended by this Act), paragraphs (1) and (2)
shall be applied by substituting ‘‘September 13,
1995’’ for ‘‘May 3, 1995’’.
SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBU-
TIONS FOLLOWED BY ACQUISITIONS AND TO
INTRAGROUP TRANSACTIONS.
(a) DISTRIBUTIONS FOLLOWED BY ACQUISITIONS.—
Section 355 (relating to distribution of stock and securi-
ties of a controlled corporation) is amended by adding at
the end the following new subsection:
‘‘(e) RECOGNITION OF GAIN WHERE CERTAIN DIS-
TRIBUTIONS OF STOCK OR SECURITIES ARE FOLLOWED
BY ACQUISITION.—
‘‘(1) GENERAL RULE.—If there is a distribution
to which this subsection applies, the following rules
shall apply:
330
‘‘(A) ACQUISITION OF CONTROLLED COR-
PORATION.—If there is an acquisition described
in paragraph (2)(A)(ii) with respect to any con-
trolled corporation, any stock or securities in
the controlled corporation shall not be treated
as qualified property for purposes of subsection
(c)(2) of this section or section 361(c)(2).
‘‘(B) ACQUISITION OF DISTRIBUTING COR-
PORATION.—If there is an acquisition described
in paragraph (2)(A)(ii) with respect to the dis-
tributing corporation, the controlled corporation
shall recognize gain in an amount equal to the
amount of net gain which would be recognized
if all the assets of the distributing corporation
(immediately after the distribution) were sold
(at such time) for fair market value. Any gain
recognized under the preceding sentence shall
be treated as long-term capital gain and shall
be taken into account for the taxable year
which includes the day after the date of such
distribution.
‘‘(2) DISTRIBUTIONS
TO
WHICH
SUBSECTION
APPLIES.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any distribution—
331
‘‘(i) to which this section (or so much
of section 356 as relates to this section)
applies, and
‘‘(ii) which is part of a plan (or series
of related transactions) pursuant to which
1 or more persons acquire directly or indi-
rectly stock representing a 50-percent or
greater interest in the distributing corpora-
tion or any controlled corporation.
‘‘(B) PLAN PRESUMED TO EXIST IN CER-
TAIN CASES.—If 1 or more persons acquire di-
rectly or indirectly stock representing a 50-per-
cent or greater interest in the distributing cor-
poration or any controlled corporation during
the 4-year period beginning on the date which
is 2 years before the date of the distribution,
such acquisition shall be treated as pursuant to
a plan described in subparagraph (A)(ii) unless
it is established that the distribution and the
acquisition are not pursuant to a plan or series
of related transactions.
‘‘(C) COORDINATION
WITH
SUBSECTION
(d).—This subsection shall not apply to any
distribution to which subsection (d) applies.
332
‘‘(3) SPECIAL
RULES
RELATING
TO
ACQUISI-
TIONS.—
‘‘(A) CERTAIN ACQUISITIONS NOT TAKEN
INTO ACCOUNT.—Except as provided in regula-
tions, the following acquisitions shall not be
treated as described in paragraph (2)(A)(ii):
‘‘(i) The acquisition of stock in any
controlled corporation by the distributing
corporation.
‘‘(ii) The acquisition by a person of
stock in any controlled corporation by rea-
son of holding stock in the distributing
corporation.
‘‘(iii) The acquisition by a person of
stock in any successor corporation of the
distributing corporation or any controlled
corporation by reason of holding stock in
such distributing or controlled corporation.
‘‘(iv) The acquisition of stock in a cor-
poration if shareholders owning directly or
indirectly a 50-percent or greater interest
in the distributing corporation or any con-
trolled corporation before such acquisition
own indirectly a 50-percent or greater in-
333
terest in such distributing or controlled
corporation after such acquisition.
This subparagraph shall not apply to any acqui-
sition if the stock held before the acquisition
was acquired pursuant to a plan described in
subparagraph (A)(ii).
‘‘(B) ASSET
ACQUISITIONS.—Except as
provided in regulations, for purposes of this
subsection, if the assets of the distributing cor-
poration or any controlled corporation are ac-
quired by a successor corporation in a trans-
action described in subparagraph (A), (C), or
(D) of section 368(a)(1) or any other trans-
action specified in regulations by the Secretary,
the shareholders (immediately before the acqui-
sition) of the corporation acquiring such assets
shall be treated as acquiring stock in the cor-
poration from which the assets were acquired.
‘‘(4) DEFINITION
AND
SPECIAL
RULES.—For
purposes of this subsection—
‘‘(A) 50-PERCENT
OR
GREATER
INTER-
EST.—The term ‘50-percent or greater interest’
has the meaning given such term by subsection
(d)(4).
334
‘‘(B) DISTRIBUTIONS IN TITLE 11 OR SIMI-
LAR CASE.—Paragraph (1) shall not apply to
any distribution made in a title 11 or similar
case (as defined in section 368(a)(3)).
‘‘(C) AGGREGATION
AND
ATTRIBUTION
RULES.—
‘‘(i) AGGREGATION.—The rules of
paragraph (7)(A) of subsection (d) shall
apply.
‘‘(ii) 
ATTRIBUTION.—Section
355(d)(8)(A) shall apply in determining
whether a person holds stock or securities
in any corporation.
‘‘(D) SUCCESSORS AND PREDECESSORS.—
For purposes of this subsection, any reference
to a controlled corporation or a distributing cor-
poration shall include a reference to any prede-
cessor or successor of such corporation.
‘‘(E) STATUTE OF LIMITATIONS.—If there
is an acquisition to which paragraph (1) (A) or
(B) applies—
‘‘(i) the statutory period for the as-
sessment of any deficiency attributable to
any part of the gain recognized under this
subsection by reason of such acquisition
335
shall not expire before the expiration of 3
years from the date the Secretary is noti-
fied by the taxpayer (in such manner as
the Secretary may by regulations pre-
scribe) that such acquisition occurred, and
‘‘(ii) such deficiency may be assessed
before the expiration of such 3-year period
notwithstanding the provisions of any
other law or rule of law which would other-
wise prevent such assessment.
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry
out the purposes of this subsection, including regula-
tions—
‘‘(A) providing for the application of this
subsection where there is more than 1 con-
trolled corporation,
‘‘(B) treating 2 or more distributions as 1
distribution where necessary to prevent the
avoidance of such purposes, and
‘‘(C) providing for the application of rules
similar to the rules of subsection (d)(6) where
appropriate for purposes of paragraph (2)(B).’’
(b) SECTION
355 NOT TO APPLY
TO CERTAIN
INTRAGROUP TRANSACTIONS.—Section 355, as amended
336
by subsection (a), is amended by adding at the end the
following new subsection:
‘‘(f) SECTION
NOT
TO
APPLY
TO
CERTAIN
INTRAGROUP TRANSACTIONS.—Except as provided in reg-
ulations, this section shall not apply to the distribution
of stock from 1 member of an affiliated group filing a con-
solidated return to another member of such group, and
the Secretary shall provide proper adjustments for the
treatment of such distribution, including (if necessary) ad-
justments to—
‘‘(1) the adjusted basis of any stock which—
‘‘(A) is in a corporation which is a member
of such group, and
‘‘(B) is held by another member of such
group, and
‘‘(2) the earnings and profits of any member of
such group.’’
(c) DETERMINATION OF CONTROL IN CERTAIN DIVI-
SIVE TRANSACTIONS.—
(1) 
SECTION
351
TRANSACTIONS.—Section
351(c) (relating to special rule) is amended to read
as follows:
‘‘(c) SPECIAL RULES WHERE DISTRIBUTION
TO
SHAREHOLDERS.—
337
‘‘(1) IN GENERAL.—In determining control for
purposes of this section—
‘‘(A) the fact that any corporate transferor
distributes part or all of the stock in the cor-
poration which it receives in the exchange to its
shareholders shall not be taken into account,
and
‘‘(B) if the requirements of section 355 are
met with respect to such distribution, the share-
holders shall be treated as in control of such
corporation immediately after the exchange if
the shareholders hold at least a 50-percent in-
terest in such corporation immediately after the
distribution.
‘‘(2) 50-PERCENT INTEREST.—For purposes of
this subsection, the term ‘50-percent interest’ means
stock possessing 50 percent of the total combined
voting power of all classes of stock entitled to vote
and 50 percent of the total value of shares of all
classes of stock.’’
(2) 
D 
REORGANIZATIONS.—Section
368(a)(2)(H) (relating to special rule for determin-
ing whether certain transactions are qualified under
paragraph (1)(D)) is amended to read as follows:
338
‘‘(H) SPECIAL RULES FOR DETERMINING
WHETHER CERTAIN TRANSACTIONS ARE QUALI-
FIED UNDER PARAGRAPH (1)(D).—For purposes
of determining whether a transaction qualifies
under paragraph (1)(D)—
‘‘(i) in the case of a transaction with
respect to which the requirements of sub-
paragraphs 
(A) 
and 
(B) 
of 
section
354(b)(1) are met, the term ‘control’ has
the meaning given such term by section
304(c), and
‘‘(ii) in the case of a transaction with
respect to which the requirements of sec-
tion 355 are met, the shareholders de-
scribed in paragraph (1)(D) shall be treat-
ed as having control of the corporation to
which the assets are transferred if such
shareholders hold a 50-percent or greater
interest (as defined in section 351(c)(2)) in
such corporation immediately after the
transfer.’’
(d) EFFECTIVE DATES.—
(1) SECTION
355
RULES.—The amendments
made by subsections (a) and (b) shall apply to dis-
tributions after April 16, 1997.
339
(2) DIVISIVE
TRANSACTIONS.—The amend-
ments made by subsection (c) shall apply to trans-
fers after the date of the enactment of this Act.
(3) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion after April 16, 1997, if such distribution is—
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
This paragraph shall not apply to any written agree-
ment, ruling request, or public announcement or fil-
ing unless it identifies the unrelated acquirer of the
distributing corporation or of any controlled corpora-
tion, whichever is applicable.
SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING
RELATED CORPORATIONS.
(a) STOCK PURCHASES
BY RELATED CORPORA-
TIONS.—The last sentence of section 304(a)(1) (relating
340
to acquisition by related corporation other than subsidi-
ary) is amended to read as follows: ‘‘To the extent that
such distribution is treated as a distribution to which sec-
tion 301 applies, the transferor and the acquiring corpora-
tion shall be treated in the same manner as if the trans-
feror had transferred the stock so acquired to the acquir-
ing corporation in exchange for stock of the acquiring cor-
poration in a transaction to which section 351(a) applies,
and then the acquiring corporation had redeemed the
stock it was treated as issuing in such transaction.’’
(b) COORDINATION WITH SECTION 1059.—Clause
(iii) of section 1059(e)(1)(A), as amended by this title, is
amended to read as follows:
‘‘(iii) which would not have been
treated (in whole or in part) as a dividend
if—
‘‘(I) any options had not been
taken into account under section
318(a)(4), or
‘‘(II) section 304(a) had not ap-
plied,’’.
(c) SPECIAL RULE FOR ACQUISITIONS BY FOREIGN
CORPORATIONS.—Section 304(b) (relating to special rules
for application of subsection (a)) is amended by adding
at the end the following new paragraph:
341
‘‘(5) ACQUISITIONS
BY
FOREIGN
CORPORA-
TIONS.—
‘‘(A) IN GENERAL.—In the case of any ac-
quisition to which subsection (a) applies in
which the acquiring corporation is a foreign
corporation, the only earnings and profits taken
into account under paragraph (2)(A) shall be
those earnings and profits—
‘‘(i) which are attributable (under reg-
ulations prescribed by the Secretary) to
stock of the acquiring corporation owned
(within the meaning of section 958(a)) by
a corporation or individual which is—
‘‘(I) a United States shareholder
(within 
the 
meaning 
of 
section
951(b)) of the acquiring corporation,
and
‘‘(II) the transferor or a person
who bears a relationship to the trans-
feror described in section 267(b) or
707(b), and
‘‘(ii) which were accumulated during
the period or periods such stock was owned
by such person while the acquiring cor-
342
poration was a controlled foreign corpora-
tion.
‘‘(B) APPLICATION OF SECTION 1248.—For
purposes of subparagraph (A), the rules of sec-
tion 1248(d) shall apply except to the extent
otherwise provided by the Secretary.
‘‘(C) REGULATIONS.—The Secretary shall
prescribe such regulations as are appropriate to
carry out the purposes of this paragraph.’’
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to distributions and acquisi-
tions after June 8, 1997.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion or acquisition after June 8, 1997, if such dis-
tribution or acquisition is—
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
343
(C) described in a public announcement or
filing with the Securities and Exchange Com-
mission on or before such date.
SEC. 1014. MODIFICATION OF HOLDING PERIOD APPLICA-
BLE TO DIVIDENDS RECEIVED DEDUCTION.
(a) IN GENERAL.—Subparagraph (A) of section
246(c)(1) is amended to read as follows:
‘‘(A) which is held by the taxpayer for 45
days or less during the 90-day period beginning
on the date which is 45 days before the date on
which such share becomes ex-dividend with re-
spect to such dividend, or’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 246(c) is amended
to read as follows:
‘‘(2) 90-DAY RULE IN THE CASE OF CERTAIN
PREFERENCE DIVIDENDS.—In the case of stock hav-
ing preference in dividends, if the taxpayer receives
dividends with respect to such stock which are at-
tributable to a period or periods aggregating in ex-
cess of 366 days, paragraph (1)(A) shall be ap-
plied—
‘‘(A) by substituting ‘90 days’ for ‘45
days’ each place it appears, and
344
‘‘(B) by substituting ‘180-day period’ for
‘90-day period’.’’
(2) Paragraph (3) of section 246(c) is amended
by adding ‘‘and’’ at the end of subparagraph (A), by
striking subparagraph (B), and by redesignating
subparagraph (C) as subparagraph (B).
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dividends received or accrued
after the 30th day after the date of the enactment of this
Act.
Subtitle C—Other Corporate
Provisions
SEC. 1021. REGISTRATION AND OTHER PROVISIONS RELAT-
ING 
TO 
CONFIDENTIAL 
CORPORATE 
TAX
SHELTERS.
(a) IN GENERAL.—Section 6111 (relating to registra-
tion of tax shelters) is amended by redesignating sub-
sections (d) and (e) as subsections (e) and (f), respectively,
and by inserting after subsection (c) the following new
subsection:
‘‘(d) 
CERTAIN
CONFIDENTIAL
ARRANGEMENTS
TREATED AS TAX SHELTERS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘tax shelter’ includes any entity, plan,
arrangement, or transaction—
345
‘‘(A) a significant purpose of the structure
of which is the avoidance or evasion of Federal
income tax for a direct or indirect participant
which is a corporation,
‘‘(B) which is offered to any potential par-
ticipant under conditions of confidentiality, and
‘‘(C) for which the tax shelter promoters
may receive fees in excess of $100,000 in the
aggregate.
‘‘(2) CONDITIONS OF CONFIDENTIALITY.—For
purposes of paragraph (1)(B), an offer is under con-
ditions of confidentiality if—
‘‘(A) the potential participant to whom the
offer is made (or any other person acting on be-
half of such participant) has an understanding
or agreement with or for the benefit of any pro-
moter of the tax shelter that such participant
(or such other person) will limit disclosure of
the tax shelter or any significant tax features of
the tax shelter, or
‘‘(B) any promoter of the tax shelter—
‘‘(i) claims, knows, or has reason to
know,
346
‘‘(ii) knows or has reason to know
that any other person (other than the po-
tential participant) claims, or
‘‘(iii) causes another person to claim,
that the tax shelter (or any aspect thereof) is
proprietary to any person other than the poten-
tial participant or is otherwise protected from
disclosure to or use by others.
For purposes of this subsection, the term ‘promoter’
means any person or any related person (within the
meaning of section 267 or 707) who participates in
the organization, management, or sale of the tax
shelter.
‘‘(3) PERSONS
OTHER
THAN
PROMOTER
RE-
QUIRED TO REGISTER IN CERTAIN CASES.—
‘‘(A) IN GENERAL.—If—
‘‘(i) the requirements of subsection (a)
are not met with respect to any tax shelter
(as defined in paragraph (1)) by any tax
shelter promoter, and
‘‘(ii) no tax shelter promoter is a
United States person,
then each United States person who discussed
participation in such shelter shall register such
shelter under subsection (a).
347
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to a United States person who
discussed participation in a tax shelter if—
‘‘(i) such person notified the promoter
in writing (not later than the close of the
90th day after the day on which such dis-
cussions began) that such person would
not participate in such shelter, and
‘‘(ii) such person does not participate
in such shelter.
‘‘(4) OFFER
TO
PARTICIPATE
TREATED
AS
OFFER FOR SALE.—For purposes of subsections (a)
and (b), an offer to participate in a tax shelter (as
defined in paragraph (1)) shall be treated as an
offer for sale.’’
(b) PENALTY.—Subsection (a) of section 6707 (relat-
ing to failure to furnish information regarding tax shel-
ters) is amended by adding at the end the following new
paragraph:
‘‘(3) CONFIDENTIAL ARRANGEMENTS.—
‘‘(A) IN GENERAL.—In the case of a tax
shelter (as defined in section 6111(d)), the pen-
alty imposed under paragraph (1) shall be an
amount equal to the greater of—
348
‘‘(i) 50 percent of the fees paid to all
promoters of the tax shelter with respect to
offerings made before the date such shelter
is registered under section 6111, or
‘‘(ii) $10,000.
Clause (i) shall be applied by substituting ‘75
percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in paragraph (1).
‘‘(B) SPECIAL
RULE
FOR
PARTICIPANTS
REQUIRED
TO
REGISTER
SHELTER.—In the
case of a person required to register such a tax
shelter by reason of section 6111(d)(3)—
‘‘(i) such person shall be required to
pay the penalty under paragraph (1) only
if such person actually participated in such
shelter,
‘‘(ii) the amount of such penalty shall
be determined by taking into account
under subparagraph (A)(i) only the fees
paid by such person, and
‘‘(iii) such penalty shall be in addition
to the penalty imposed on any other person
for failing to register such shelter.’’
(c) MODIFICATIONS TO SUBSTANTIAL UNDERSTATE-
MENT PENALTY.—
349
(1) RESTRICTION ON REASONABLE BASIS FOR
CORPORATE UNDERSTATEMENT OF INCOME TAX.—
Subparagraph (B) of section 6662(d)(2) is amended
by adding at the end the following new flush sen-
tence:
‘‘For purposes of clause (ii)(II), in no event
shall a corporation be treated as having a rea-
sonable basis for its tax treatment of an item
attributable to a multiple-party financing trans-
action if such treatment does not clearly reflect
the income of the corporation.’’
(2) MODIFICATION
TO
DEFINITION
OF
TAX
SHELTER.—Clause (iii) of section 6662(d)(2)(C) is
amended by striking ‘‘the principal purpose’’ and in-
serting ‘‘a significant purpose’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 6707(a) is amend-
ed by striking ‘‘The penalty’’ and inserting ‘‘Except
as provided in paragraph (3), the penalty’’.
(2) Subparagraph (A) of section 6707(a)(1) is
amended by striking ‘‘paragraph (2)’’ and inserting
‘‘paragraph (2) or (3), as the case may be’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
350
shall apply to any tax shelter (as defined in section
6111(d) of the Internal Revenue Code of 1986, as
amended by this section) interests in which are of-
fered to potential participants after the Secretary of
the Treasury prescribes guidance with respect to
meeting requirements added by such amendments.
(2) MODIFICATIONS TO SUBSTANTIAL UNDER-
STATEMENT PENALTY.—The amendments made by
subsection (c) shall apply to items with respect to
transactions entered into after the date of the enact-
ment of this Act.
SEC. 1022. CERTAIN PREFERRED STOCK TREATED AS BOOT.
(a) SECTION 351.—Section 351 (relating to transfer
to corporation controlled by transferor) is amended by re-
designating subsection (g) as subsection (h) and by insert-
ing after subsection (f) the following new subsection:
‘‘(g) NONQUALIFIED
PREFERRED
STOCK
NOT
TREATED AS STOCK.—
‘‘(1) IN
GENERAL.—For purposes of sub-
sections (a) and (b), the term ‘stock’ shall not in-
clude nonqualified preferred stock.
‘‘(2) NONQUALIFIED PREFERRED STOCK.—For
purposes of paragraph (1)—
351
‘‘(A) 
IN
GENERAL.—The 
term 
‘non-
qualified preferred stock’ means preferred stock
if—
‘‘(i) the holder of such stock has the
right to require the issuer or a related per-
son to redeem or purchase the stock,
‘‘(ii) the issuer or a related person is
required to redeem or purchase such stock,
‘‘(iii) the issuer or a related person
has the right to redeem or purchase the
stock and, as of the issue date, it is more
likely than not that such right will be exer-
cised, or
‘‘(iv) the dividend rate on such stock
varies in whole or in part (directly or indi-
rectly) with reference to interest rates,
commodity prices, or other similar indices.
‘‘(B) LIMITATIONS.—Clauses (i), (ii), and
(iii) of subparagraph (A) shall apply only if the
right or obligation referred to therein may be
exercised within the 20-year period beginning
on the issue date of such stock and such right
or obligation is not subject to a contingency
which, as of the issue date, makes remote the
likelihood of the redemption or purchase.
352
‘‘(C) EXCEPTIONS
FOR
CERTAIN
RIGHTS
OR OBLIGATIONS.—
‘‘(i) IN GENERAL.—A right or obliga-
tion shall not be treated as described in
clause (i), (ii), or (iii) of subparagraph (A)
if—
‘‘(I) it may be exercised only
upon the death, disability, or mental
incompetency of the holder, or
‘‘(II) in the case of a right or ob-
ligation to redeem or purchase stock
transferred in connection with the
performance of services for the issuer
or a related person (and which rep-
resents reasonable compensation), it
may be exercised only upon the hold-
er’s separation from service from the
issuer or a related person.
‘‘(ii) EXCEPTION.—Clause (i)(I) shall
not apply if the stock relinquished in the
exchange, or the stock acquired in the ex-
change is in—
‘‘(I) a corporation if any class of
stock in such corporation or a related
party is readily tradable on an estab-
353
lished securities market or otherwise,
or
‘‘(II) any other corporation if
such exchange is part of a transaction
or series of transactions in which such
corporation is to become a corporation
described in subclause (I).
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) PREFERRED STOCK.—The term ‘pre-
ferred stock’ means stock which is limited and
preferred as to dividends and does not partici-
pate (including through a conversion privilege)
in corporate growth to any significant extent.
‘‘(B) RELATED PERSON.—A person shall
be treated as related to another person if they
bear a relationship to such other person de-
scribed in section 267(b) or 707(b).
‘‘(4) REGULATIONS.—The Secretary may pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section and sections 354(a)(2)(C), 355(a)(3)(D),
and 356(e). The Secretary may also prescribe regu-
lations, consistent with the treatment under this
subsection and such sections, for the treatment of
354
nonqualified preferred stock under other provisions
of this title.’’
(b) SECTION 354.—Paragraph (2) of section 354(a)
(relating to exchanges of stock and securities in certain
reorganizations) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(C) 
NONQUALIFIED
PREFERRED
STOCK.—
‘‘(i) IN GENERAL.—Nonqualified pre-
ferred 
stock 
(as 
defined 
in 
section
351(g)(2)) received in exchange for stock
other than nonqualified preferred stock (as
so defined) shall not be treated as stock or
securities.
‘‘(ii) RECAPITALIZATIONS OF FAMILY-
OWNED CORPORATIONS.—
‘‘(I) IN
GENERAL.—Clause (i)
shall not apply in the case of a recapi-
talization under section 368(a)(1)(E)
of a family-owned corporation.
‘‘(II) FAMILY-OWNED
CORPORA-
TION.—For purposes of this clause,
except as provided in regulations, the
term 
‘family-owned 
corporation’
means any corporation which is de-
355
scribed in clause (i) of section
447(d)(2)(C) throughout the 8-year
period beginning on the date which is
5 years before the date of the recapi-
talization. For purposes of the preced-
ing sentence, stock shall not be treat-
ed as owned by a family member dur-
ing any period described in section
355(d)(6)(B).’’
(c) SECTION 355.—Paragraph (3) of section 355(a)
is amended by adding at the end the following new sub-
paragraph:
‘‘(D) 
NONQUALIFIED
PREFERRED
STOCK.—Nonqualified preferred stock (as de-
fined in section 351(g)(2)) received in a dis-
tribution with respect to stock other than non-
qualified preferred stock (as so defined) shall
not be treated as stock or securities.’’
(d) SECTION 356.—Section 356 is amended by redes-
ignating subsections (e) and (f) as subsections (f) and (g),
respectively, and by inserting after subsection (d) the fol-
lowing new subsection:
‘‘(e) NONQUALIFIED PREFERRED STOCK TREATED
AS OTHER PROPERTY.—For purposes of this section—
356
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘other property’ includes non-
qualified preferred stock (as defined in section
351(g)(2)).
‘‘(2) EXCEPTION.—The term ‘other property’
does not include nonqualified preferred stock (as so
defined) to the extent that, under section 354 or
355, such preferred stock would be permitted to be
received without the recognition of gain.’’
(e) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 354(a)(2) and
subparagraph (C) of section 355(a)(3)(C) are each
amended by inserting ‘‘(including nonqualified pre-
ferred stock, as defined in section 351(g)(2))’’ after
‘‘stock’’.
(2) Subparagraph (A) of section 354(a)(3) and
subparagraph (A) of section 355(a)(4) are each
amended by inserting ‘‘nonqualified preferred stock
and’’ after ‘‘including’’.
(3) Section 1036 is amended by redesignating
subsection (b) as subsection (c) and by inserting
after subsection (a) the following new subsection:
‘‘(b) NONQUALIFIED
PREFERRED
STOCK
NOT
TREATED AS STOCK.—For purposes of this section, non-
357
qualified preferred stock (as defined in section 351(g)(2))
shall be treated as property other than stock.’’
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transactions after June 8,
1997.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any trans-
action after June 8, 1997, if such transaction is—
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
358
Subtitle D—Administrative
Provisions
SEC. 1031. REPORTING OF CERTAIN PAYMENTS MADE TO
ATTORNEYS.
(a) IN GENERAL.—Section 6045 (relating to returns
of brokers) is amended by adding at the end the following
new subsection:
‘‘(f) RETURN REQUIRED IN THE CASE OF PAYMENTS
TO ATTORNEYS.—
‘‘(1) IN GENERAL.—Any person engaged in a
trade or business and making a payment (in the
course of such trade or business) to which this sub-
section applies shall file a return under subsection
(a) and a statement under subsection (b) with re-
spect to such payment.
‘‘(2) APPLICATION OF SUBSECTION.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any payment to an attorney in connec-
tion with legal services (whether or not such
services are performed for the payor).
‘‘(B) EXCEPTION.—This subsection shall
not apply to the portion of any payment which
is required to be reported under section 6041(a)
(or would be so required but for the dollar limi-
tation contained therein) or section 6051.’’