II
June 27, 1997
Ordered to be printed as passed
In the Senate of the United States,
June 27, 1997.
Resolved, That the bill from the House of Representa-
tives (H.R. 2014) entitled ‘‘An Act to provide for reconcili-
ation pursuant to subsections (b)(2) and (d) of section 105
of the concurrent resolution on the budget for fiscal year
1998.’’, do pass with the following
AMENDMENT:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;
TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Revenue Reconciliation Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as otherwise
expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
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(c) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I—CHILD TAX CREDIT AND OTHER FAMILY TAX RELIEF
Sec. 101. Child tax credit.
Sec. 102. Adjustment of minimum tax exemption amounts for taxpayers other
than corporations.
Sec. 103. Allowance of credit for employer expenses for child care assistance.
Sec. 104. Expansion of coordinated enforcement efforts of Internal Revenue Serv-
ice and HHS Office of Child Support Enforcement.
Sec. 105. Adoption expenses.
TITLE II—EDUCATION INCENTIVES
Subtitle A—Tax Benefits Relating to Education Expenses
Sec. 201. HOPE credit for higher education tuition and related expenses.
Sec. 202. Deduction for interest on education loans.
Sec. 203. Penalty-free withdrawals from individual retirement plans for higher
education expenses.
Subtitle B—Expanded Education Investment Savings Opportunities
PART I—QUALIFIED TUITION PROGRAMS
Sec. 211. Exclusion from gross income of education distributions from qualified
tuition programs.
Sec. 212. Eligible educational institutions permitted to maintain qualified tui-
tion programs; other modifications of qualified State tuition
programs.
PART II—EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS
Sec. 213. Education individual retirement accounts.
Subtitle C—Other Education Initiatives
Sec. 221. Extension of exclusion for employer-provided educational assistance.
Sec. 222. Repeal of limitation on qualified 501(c)(3) bonds other than hospital
bonds.
Sec. 223. Increase in arbitrage rebate exception for governmental bonds used to
finance education facilities.
Sec. 224. 2-percent floor on miscellaneous itemized deductions not to apply to cer-
tain continuing education expenses of elementary and secondary
school teachers.
Sec. 225. Treatment of cancellation of certain student loans.
TITLE III—SAVINGS AND INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
Sec. 301. Restoration of IRA deduction for certain taxpayers.
Sec. 302. Establishment of nondeductible tax-free individual retirement accounts.
Sec. 303. Distributions from certain plans may be used without penalty to pur-
chase first homes and when unemployed.
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Sec. 304. Certain bullion not treated as collectibles.
Subtitle B—Capital Gains
Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Modifications to exclusion of gain on certain small business stock.
Sec. 313. Rollover of gain from sale of qualified stock.
Sec. 314. Exemption from tax for gain on sale of principal residence.
TITLE IV—ESTATE, GIFT, AND GENERATION-SKIPPING TAX
PROVISIONS
Sec. 401. Cost-of-living adjustments relating to estate and gift tax provisions.
Sec. 402. Family-owned business exclusion.
Sec. 403. Treatment of land subject to a qualified conservation easement.
Sec. 404. 20-year installment payment where estate consists largely of interest in
closely held business.
Sec. 405. No interest on certain portion of estate tax extended under section 6166,
reduced interest on remaining portion, and no deduction for
such reduced interest.
Sec. 406. Extension of treatment of certain rents under section 2032A to lineal
descendants.
Sec. 407. Expansion of exception from generation-skipping transfer tax for trans-
fers to individuals with deceased parents.
TITLE V—EXTENSIONS
Sec. 501. Research tax credit.
Sec. 502. Contributions of stock to private foundations.
Sec. 503. Work opportunity tax credit.
Sec. 504. Orphan drug tax credit.
TITLE VI—INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF
COLUMBIA
Sec. 601. Tax incentives for revitalization of the District of Columbia.
TITLE VII—MISCELLANEOUS PROVISIONS
Subtitle A—Provisions Relating to Excise Taxes
Sec. 701. Repeal of tax on diesel fuel used in recreational boats.
Sec. 702. Intercity passenger rail fund.
Sec. 703. Modification of tax treatment of hard cider.
Sec. 704. General revenue portion of highway motor fuels taxes deposited into
Highway Trust Fund.
Sec. 705. Rate of tax on certain special fuels determined on basis of Btu equiva-
lency with gasoline.
Sec. 706. Study of feasibility of moving collection point for distilled spirits excise
tax.
Sec. 707. Extension and modification of subsidies for alcohol fuels.
Sec. 708. Clarification of authority to use semi-generic designations on wine la-
bels.
Subtitle B—Provisions Relating to Pensions and Fringe Benefits
Sec. 711. Treatment of multiemployer plans under section 415.
Sec. 712. Technical correction relating to partial termination of pension plans.
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Sec. 713. Increase in current liability funding limit.
Sec. 714. Spousal consent required for certain distributions and loans under
qualified cash or deferred arrangement.
Sec. 715. Special rules for church plans.
Sec. 716. Repeal of application of unrelated business income tax to ESOPs.
Sec. 717. Diversification in section 401(k) plan investments.
Subtitle C—Revisions Relating to Disasters
Sec. 721. Treatment of livestock sold on account of weather-related conditions.
Sec. 722. Gain or loss from sale of livestock disregarded for purposes of earned
income credit.
Sec. 723. Mortgage financing for residences located in disaster areas.
Sec. 724. Distributions from individual retirement accounts may be used without
penalty to replace or repair property damaged in presidentially
declared disaster areas.
Sec. 725. Elimination of 10 percent floor for disaster losses.
Sec. 726. Abatement of interest on underpayments by taxpayers in presidentially
declared disaster areas.
Subtitle D—Provisions Relating to Small Businesses
Sec. 731. Waiver of penalty through June 30, 1998, on small businesses failing
to make electronic fund transfers of taxes.
Sec. 732. Minimum tax not to apply to farmers’ installment sales.
Sec. 733. Increase in deduction for health insurance costs of self-employed indi-
viduals.
Sec. 734. Sense of the Senate with respect to self-employment tax of limited part-
ners.
Subtitle E—Foreign Provisions
PART I—GENERAL PROVISIONS
Sec. 741. Treatment of computer software as FSC export property.
Sec. 742. Denial of treaty benefits for certain payments through hybrid entities.
Sec. 743. United States property not to include certain assets acquired by dealers
in ordinary course of trade or business.
Sec. 744. Exemption for active financing income.
Sec. 745. Treatment of nonresident aliens engaged in international transpor-
tation services.
PART II—TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES
Sec. 751. United States shareholders of controlled foreign corporations not subject
to PFIC inclusion.
Sec. 752. Election of mark to market for marketable stock in passive foreign in-
vestment company.
Sec. 753. Effective date.
Subtitle F—Other Provisions
Sec. 761. Tax-exempt status for certain State worker’s compensation act compa-
nies.
Sec. 762. Election to continue exception from treatment of publicly traded part-
nerships as corporations.
Sec. 763. Exclusion from unrelated business taxable income for certain sponsor-
ship payments.
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Subtitle B—Corporate Organizations and Reorganizations
Sec. 811. Tax treatment of certain extraordinary dividends.
Sec. 812. Application of section 355 to distributions followed by acquisitions and
to intragroup transactions.
Sec. 813. Tax treatment of redemptions involving related corporations.
Sec. 814. Modification of holding period applicable to dividends received deduc-
tion.
Subtitle C—Other Corporate Provisions
Sec. 821. Registration and other provisions relating to confidential corporate tax
shelters.
Sec. 822. Certain preferred stock treated as boot.
Subtitle D—Administrative Provisions
Sec. 831. Decrease of threshold for reporting payments to corporations performing
services for Federal agencies.
Sec. 832. Disclosure of return information for administration of certain veterans
programs.
Sec. 833. Returns of beneficiaries of estates and trusts required to file returns con-
sistent with estate or trust return or to notify Secretary of in-
consistency.
Sec. 834. Continuous levy on certain payments.
Sec. 835. Modification of levy exemption.
Sec. 836. Confidentiality and disclosure of returns and return information.
Subtitle E—Excise Tax Provisions
Sec. 841. Extension and modification of Airport and Airway Trust Fund taxes.
Sec. 842. Restoration of Leaking Underground Storage Tank Trust Fund taxes.
Sec. 843. Application of communications tax to long-distance prepaid telephone
cards.
Sec. 844. Uniform rate of tax on vaccines.
Sec. 845. Credit for tire tax in lieu of exclusion of value of tires in computing
price.
Sec. 846. Increase in excise taxes on tobacco products.
Subtitle F—Provisions Relating to Tax-Exempt Entities
Sec. 851. Expansion of look-thru rule for interest, annuities, royalties, and rents
derived by subsidiaries of tax-exempt organizations.
Sec. 852. Limitation on increase in basis of property resulting from sale by tax-
exempt entity to a related person.
Sec. 853. Termination of exception from rules relating to exempt organizations
which provide commercial-type insurance.
Subtitle G—Foreign Provisions
Sec. 861. Definition of foreign personal holding company income.
Sec. 862. Personal property used predominantly in the United States treated as
not property of a like kind with respect to property used pre-
dominantly outside the United States.
Sec. 863. Holding period requirement for certain foreign taxes.
Sec. 864. Source rules for inventory property.
Sec. 865. Interest on underpayments not reduced by foreign tax credit carrybacks.
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Sec. 866. Clarification of period of limitations on claim for credit or refund at-
tributable to foreign tax credit carryforward.
Sec. 867. Modification to foreign tax credit carryback and carryover periods.
Sec. 868. Repeal of exception to alternative minimum foreign tax credit limit.
Subtitle H—Other Revenue Provisions
Sec. 871. Termination of suspense accounts for family corporations required to
use accrual method of accounting.
Sec. 872. Modification of taxable years to which net operating losses may be car-
ried.
Sec. 873. Expansion of denial of deduction for certain amounts paid in connec-
tion with insurance.
Sec. 874. Allocation of basis among properties distributed by partnership.
Sec. 875. Repeal of requirement that inventory be substantially appreciated.
Sec. 876. Limitation on property for which income forecast method may be used.
Sec. 877. Expansion of requirement that involuntarily converted property be re-
placed with property acquired from an unrelated person.
Sec. 878. Treatment of exception from installment sales rules for sales of property
by a manufacturer to a dealer.
Sec. 879. Minimum pension accrued benefit distributable without consent in-
creased to $5,000.
Sec. 880. Election to receive taxable cash compensation in lieu of nontaxable
parking benefits.
Sec. 881. Extension of temporary unemployment tax.
Sec. 882. Repeal of excess distribution and excess retirement accumulation tax.
Sec. 883. Limitation on charitable remainder trust eligibility for certain trusts.
Sec. 884. Increase in tax on prohibited transactions.
Sec. 885. Basis recovery rules for annuities over more than one life.
TITLE IX—FOREIGN-RELATED SIMPLIFICATION PROVISIONS
Subtitle A—General Provisions
Sec. 901. Certain individuals exempt from foreign tax credit limitation.
Sec. 902. Exchange rate used in translating foreign taxes.
Sec. 903. Election to use simplified section 904 limitation for alternative mini-
mum tax.
Sec. 904. Treatment of personal transactions by individuals under foreign cur-
rency rules.
Subtitle B—Treatment of Controlled Foreign Corporations
Sec. 911. Gain on certain stock sales by controlled foreign corporations treated as
dividends.
Sec. 912. Miscellaneous modifications to subpart F.
Sec. 913. Indirect foreign tax credit allowed for certain lower tier companies.
Subtitle C—Repeal of Excise Tax on Transfers to Foreign Entities
Sec. 921. Repeal of excise tax on transfers to foreign entities; recognition of gain
on certain transfers to foreign trusts and estates.
Subtitle D—Information Reporting
Sec. 931. Clarification of application of return requirement to foreign partner-
ships.
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Sec. 932. Controlled foreign partnerships subject to information reporting com-
parable to information reporting for controlled foreign corpora-
tions.
Sec. 933. Modifications relating to returns required to be filed by reason of
changes in ownership interests in foreign partnership.
Sec. 934. Transfers of property to foreign partnerships subject to information re-
porting comparable to information reporting for such transfers
to foreign corporations.
Sec. 935. Extension of statute of limitation for foreign transfers.
Sec. 936. Increase in filing thresholds for returns as to organization of foreign
corporations and acquisitions of stock in such corporations.
Subtitle E—Determination of Foreign or Domestic Status of Partnerships
Sec. 941. Determination of foreign or domestic status of partnerships.
Subtitle F—Other Simplification Provisions
Sec. 951. Transition rule for certain trusts.
Sec. 952. Repeal of stock and securities safe harbor requirement that principal of-
fice be outside the United States.
Sec. 953. Miscellaneous clarifications.
TITLE X—SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS
AND BUSINESSES
Subtitle A—Provisions Relating to Individuals
Sec. 1001. Basic standard deduction and minimum tax exemption amount for
certain dependents.
Sec. 1002. Increase in amount of tax exempt from estimated tax requirements.
Sec. 1003. Treatment of certain reimbursed expenses of rural mail carriers.
Sec. 1004. Treatment of traveling expenses of certain Federal employees engaged
in criminal investigations.
Subtitle B—Provisions Relating to Businesses Generally
Sec. 1011. Modifications to look-back method for long-term contracts.
Sec. 1012. Minimum tax treatment of certain property and casualty insurance
companies.
Sec. 1013. Use of estimates of shrinkage for inventory accounting.
Sec. 1014. Qualified lessee construction allowances for short-term leases.
Subtitle C—Simplification Relating to Electing Large Partnerships
PART I—GENERAL PROVISIONS
Sec. 1021. Simplified flow-through for electing large partnerships.
Sec. 1022. Simplified audit procedures for electing large partnerships.
Sec. 1023. Due date for furnishing information to partners of electing large part-
nerships.
Sec. 1024. Returns may be required on magnetic media.
Sec. 1025. Treatment of partnership items of individual retirement accounts.
Sec. 1026. Effective date.
PART II—PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
Sec. 1031. Treatment of partnership items in deficiency proceedings.
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Sec. 1032. Partnership return to be determinative of audit procedures to be fol-
lowed.
Sec. 1033. Provisions relating to statute of limitations.
Sec. 1034. Expansion of small partnership exception.
Sec. 1035. Exclusion of partial settlements from 1-year limitation on assessment.
Sec. 1036. Extension of time for filing a request for administrative adjustment.
Sec. 1037. Availability of innocent spouse relief in context of partnership proceed-
ings.
Sec. 1038. Determination of penalties at partnership level.
Sec. 1039. Provisions relating to court jurisdiction, etc.
Sec. 1040. Treatment of premature petitions filed by notice partners or 5-percent
groups.
Sec. 1041. Bonds in case of appeals from certain proceeding.
Sec. 1042. Suspension of interest where delay in computational adjustment re-
sulting from certain settlements.
Sec. 1043. Special rules for administrative adjustment requests with respect to
bad debts or worthless securities.
PART III—PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR
WITH RESPECT TO DECEASED PARTNER, ETC.
Sec. 1046. Closing of partnership taxable year with respect to deceased partner,
etc.
Subtitle D—Provisions Relating to Real Estate Investment Trusts
Sec. 1051. Clarification of limitation on maximum number of shareholders.
Sec. 1052. De minimis rule for tenant services income.
Sec. 1053. Attribution rules applicable to tenant ownership.
Sec. 1054. Credit for tax paid by REIT on retained capital gains.
Sec. 1055. Repeal of 30-percent gross income requirement.
Sec. 1056. Modification of earnings and profits rules for determining whether
REIT has earnings and profits from non-REIT year.
Sec. 1057. Treatment of foreclosure property.
Sec. 1058. Payments under hedging instruments.
Sec. 1059. Excess noncash income.
Sec. 1060. Prohibited transaction safe harbor.
Sec. 1061. Shared appreciation mortgages.
Sec. 1062. Wholly owned subsidiaries.
Sec. 1063. Effective date.
Subtitle E—Provisions Relating to Regulated Investment Companies
Sec. 1071. Repeal of 30-percent gross income limitation.
Subtitle F—Taxpayer Protections
Sec. 1081. Reasonable cause exception for certain penalties.
Sec. 1082. Clarification of period for filing claims for refunds.
Sec. 1083. Repeal of authority to disclose whether prospective juror has been au-
dited.
Sec. 1084. Clarification of statute of limitations.
Sec. 1085. Penalty for unauthorized inspection of tax returns or tax return infor-
mation.
Sec. 1086. Civil damages for unauthorized inspection of returns and return infor-
mation; notification of unlawful inspection or disclosure.
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TITLE XI—SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND
GIFT TAXES
Sec. 1101. Gifts to charities exempt from gift tax filing requirements.
Sec. 1102. Clarification of waiver of certain rights of recovery.
Sec. 1103. Transitional rule under section 2056A.
Sec. 1104. Treatment for estate tax purposes of short-term obligations held by
nonresident aliens.
Sec. 1105. Distributions during first 65 days of taxable year of estate.
Sec. 1106. Separate share rules available to estates.
Sec. 1107. Executor of estate and beneficiaries treated as related persons for dis-
allowance of losses, etc.
Sec. 1108. Treatment of funeral trusts.
Sec. 1109. Adjustments for gifts within 3 years of decedent’s death.
Sec. 1110. Clarification of treatment of survivor annuities under qualified ter-
minable interest rules.
Sec. 1111. Treatment under qualified domestic trust rules of forms of ownership
which are not trusts.
Sec. 1112. Opportunity to correct certain failures under section 2032A.
Sec. 1113. Authority to waive requirement of United States trustee for qualified
domestic trusts.
TITLE XII—SIMPLIFICATION PROVISIONS RELATING TO EXCISE
TAXES, TAX-EXEMPT BONDS, AND OTHER MATTERS
Subtitle A—Excise Tax Simplification
PART I—EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
Sec. 1201. Increase in de minimis limit for after-market alterations for heavy
trucks and luxury cars.
PART II—PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
Sec. 1211. Credit or refund for imported bottled distilled spirits returned to dis-
tilled spirits plant.
Sec. 1212. Authority to cancel or credit export bonds without submission of
records.
Sec. 1213. Repeal of required maintenance of records on premises of distilled
spirits plant.
Sec. 1214. Fermented material from any brewery may be received at a distilled
spirits plant.
Sec. 1215. Repeal of requirement for wholesale dealers in liquors to post sign.
Sec. 1216. Refund of tax to wine returned to bond not limited to unmerchantable
wine.
Sec. 1217. Use of additional ameliorating material in certain wines.
Sec. 1218. Domestically produced beer may be withdrawn free of tax for use of
foreign embassies, legations, etc.
Sec. 1219. Beer may be withdrawn free of tax for destruction.
Sec. 1220. Authority to allow drawback on exported beer without submission of
records.
Sec. 1221. Transfer to brewery of beer imported in bulk without payment of tax.
Sec. 1222. Transfer to bonded wine cellars of wine imported in bulk without pay-
ment of tax.
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PART III—OTHER EXCISE TAX PROVISIONS
Sec. 1231. Authority to grant exemptions from registration requirements.
Sec. 1232. Repeal of expired provisions.
Sec. 1233. Simplification of imposition of excise tax on arrows.
Sec. 1234. Modifications to retail tax on heavy trucks.
Sec. 1235. Skydiving flights exempt from tax on transportation of persons by air.
Sec. 1236. Allowance or credit of refund for tax-paid aviation fuel purchased by
registered producer of aviation fuel.
Subtitle B—Tax-Exempt Bond Provisions
Sec. 1241. Repeal of $100,000 limitation on unspent proceeds under 1-year excep-
tion from rebate.
Sec. 1242. Exception from rebate for earnings on bona fide debt service fund
under construction bond rules.
Sec. 1243. Repeal of debt service-based limitation on investment in certain non-
purpose investments.
Sec. 1244. Repeal of expired provisions.
Sec. 1245. Effective date.
Subtitle C—Tax Court Procedures
Sec. 1251. Overpayment determinations of tax court.
Sec. 1252. Redetermination of interest pursuant to motion.
Sec. 1253. Application of net worth requirement for awards of litigation costs.
Sec. 1254. Proceedings for determination of employment status.
Subtitle D—Other Provisions
Sec. 1261. Extension of due date of first quarter estimated tax payment by pri-
vate foundations.
Sec. 1262. Clarification of authority to withhold Puerto Rico income taxes from
salaries of Federal employees.
Sec. 1263. Certain notices disregarded under provision increasing interest rate on
large corporate underpayments.
TITLE XIII—PENSION SIMPLIFICATION
Sec. 1301. Matching contributions of self-employed individuals not treated as elec-
tive employer contributions.
Sec. 1302. Contributions to IRAs through payroll deductions.
Sec. 1303. Plans not disqualified merely by accepting rollover contributions.
Sec. 1304. Modification of prohibition of assignment or alienation.
Sec. 1305. Elimination of paperwork burdens on plans.
Sec. 1306. Modification of 403(b) exclusion allowance to conform to 415 modifica-
tions.
Sec. 1307. New technologies in retirement plans.
Sec. 1308. Extension of moratorium on application of certain nondiscrimination
rules to State and local governments.
Sec. 1309. Clarification of certain rules relating to employee stock ownership
plans of S corporations.
Sec. 1310. Modification of 10 percent tax for nondeductible contributions.
Sec. 1311. Modification of funding requirements for certain plans.
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TITLE XIV—TECHNICAL AMENDMENTS RELATED TO SMALL BUSI-
NESS JOB PROTECTION ACT OF 1996 AND OTHER LEGISLATION
Sec. 1401. Amendments related to Small Business Job Protection Act of 1996.
Sec. 1402. Amendments related to Health Insurance Portability and Accountabil-
ity Act of 1996.
Sec. 1403. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1404. Miscellaneous provisions.
TITLE XV—CHILDREN’S HEALTH INSURANCE INITIATIVES
Sec. 1501. Establishment of children’s health insurance initiatives.
Sec. 1502. Applicability.
TITLE XVI—BUDGET ENFORCEMENT
Subtitle A—Amendments to the Congressional Budget and Impoundment
Control Act of 1974
Sec. 1601. Amendments to section 201.
Sec. 1602. Amendments to section 202.
Sec. 1603. Amendment to section 300.
Sec. 1604. Amendments to section 301.
Sec. 1605. Amendments to section 302.
Sec. 1606. Amendments to section 303.
Sec. 1607. Amendment to section 305.
Sec. 1608. Amendment to section 308.
Sec. 1609. Amendments to section 311.
Sec. 1610. Amendment to section 312.
Sec. 1611. Adjustments.
Sec. 1612. Amendments to title V.
Sec. 1613. Repeal of title VI.
Sec. 1614. Amendments to section 904.
Sec. 1615. Repeal of sections 905 and 906.
Sec. 1616. Amendments to sections 1022 and 1024.
Sec. 1617. Amendment to section 1026.
Subtitle B—Amendments to the Balanced Budget and Emergency Deficit
Control Act of 1985
Sec. 1651. Purpose.
Sec. 1652. General statement and definitions.
Sec. 1653. Enforcing discretionary spending limits.
Sec. 1654. Violent Crime Reduction Trust Fund.
Sec. 1655. Enforcing pay-as-you-go.
Sec. 1656. Reports and orders.
Sec. 1657. Exempt programs and activities.
Sec. 1658. General and special sequestration rules.
Sec. 1659. The baseline.
Sec. 1660. Technical correction.
Sec. 1661. Judicial review.
Sec. 1662. Effective date.
Sec. 1663. Reduction of preexisting balances and exclusion of effects of this Act
from paygo scorecard.
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TITLE I—CHILD TAX CREDIT AND
OTHER FAMILY TAX RELIEF
SEC. 101. CHILD TAX CREDIT.
(a) IN GENERAL.—Subpart A of part IV of subchapter
A of chapter 1 (relating to nonrefundable personal credits)
is amended by inserting after section 23 the following new
section:
‘‘SEC. 24. CHILD TAX CREDIT.
‘‘(a) ALLOWANCE OF CREDIT.—There shall be allowed
as a credit against the tax imposed by this chapter for the
taxable year with respect to each qualifying child of the tax-
payer an amount equal to $500.
‘‘(b) LIMITATIONS.—
‘‘(1) CREDIT LIMITED TO EDUCATION SAVINGS
FOR CERTAIN CHILDREN.—In the case of a qualifying
child who has attained the age of 13 as of the close
of the calendar year in which the taxable year of the
taxpayer begins, the amount of the credit allowed
under subsection (a) for such taxable year with re-
spect to such child (after the application of para-
graphs (2) and (3)) shall not exceed the excess of—
‘‘(A) the aggregate amount contributed by
the taxpayer for such taxable year for the benefit
of such child to qualified tuition programs (as
defined in section 529) and education individual
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retirement accounts (as defined in section 530),
over
‘‘(B) the aggregate amount distributed dur-
ing such taxable year from such programs and
accounts (the beneficiary of which is such child)
which is subject to tax under section 529(f) or
530(c)(3).
‘‘(2) LIMITATION BASED ON ADJUSTED GROSS IN-
COME.—
‘‘(A) IN GENERAL.—The $500 amount in
subsection (a) shall be reduced (but not below
zero) by $25 for each $1,000 (or fraction thereof)
by which the taxpayer’s modified adjusted gross
income exceeds the threshold amount. For pur-
poses of the preceding sentence, the term ‘modi-
fied adjusted gross income’ means adjusted gross
income increased by any amount excluded from
gross income under section 911, 931, or 933.
‘‘(B) THRESHOLD AMOUNT.—For purposes
of subparagraph (A), the term ‘threshold amount’
means—
‘‘(i) $110,000 in the case of a joint re-
turn,
‘‘(ii) $75,000 in the case of an individ-
ual who is not married, and
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‘‘(iii) $55,000 in the case of a married
individual filing a separate return.
For purposes of this subparagraph, marital sta-
tus shall be determined under section 7703.
‘‘(3) LIMITATION BASED ON AMOUNT OF TAX.—
The aggregate credit allowed by subsection (a) (deter-
mined after paragraph (2)) shall not exceed the excess
(if any) of—
‘‘(A) the taxpayer’s regular tax liability for
the taxable year reduced by the credits allowable
against such tax under this subpart (other than
this section), over
‘‘(B) the sum of—
‘‘(i) the taxpayer’s tentative minimum
tax for such taxable year (determined with-
out regard to the alternative minimum tax
foreign tax credit), plus
‘‘(ii) 50 percent of the credit allowed
for the taxable year under section 32.
Any reduction in the credit otherwise allowable
by subsection (a) by reason of this paragraph
shall be allocated pro rata among all qualifying
children for purposes of applying paragraph (1).
‘‘(c) QUALIFYING CHILD.—For purposes of this sec-
tion—
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‘‘(1) IN GENERAL.—The term ‘qualifying child’
means any individual if—
‘‘(A) the taxpayer is allowed a deduction
under section 151 with respect to such individual
for the taxable year,
‘‘(B) such individual has not attained the
age of 17 (age of 18 in the case of taxable years
beginning after 2002) as of the close of the cal-
endar year in which the taxable year of the tax-
payer begins, and
‘‘(C) such individual bears a relationship to
the taxpayer described in section 32(c)(3)(B).
‘‘(2) EXCEPTION FOR CERTAIN NONCITIZENS.—
The term ‘qualifying child’ shall not include any in-
dividual who would not be a dependent if the first
sentence of section 152(b)(3) were applied without re-
gard to all that follows ‘resident of the United States’.
‘‘(d) TAXABLE
YEAR
MUST
BE
FULL
TAXABLE
YEAR.—Except in the case of a taxable year closed by rea-
son of the death of the taxpayer, no credit shall be allowable
under this section in the case of a taxable year covering
a period of less than 12 months.
‘‘(e) RECAPTURE OF CREDIT.—
‘‘(1) IN GENERAL.—If—
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‘‘(A) during any taxable year any amount
is withdrawn from a qualified tuition program
or an education individual retirement account
maintained for the benefit of a beneficiary and
such amount is subject to tax under section
529(f) or 530(c)(3), and
‘‘(B) the amount of the credit allowed under
this section for the prior taxable year was con-
tingent on a contribution being made to such a
program or account for the benefit of such bene-
ficiary,
the taxpayer’s tax imposed by this chapter for the
taxable year shall be increased by the lesser of the
amount described in subparagraph (A) or the credit
described in subparagraph (B).
‘‘(2) NO CREDITS AGAINST TAX, ETC.—Any in-
crease in tax under this subsection shall not be treated
as a tax imposed by this chapter for purposes of de-
termining—
‘‘(A) the amount of any credit under this
subpart or subpart B or D of this part, and
‘‘(B) the amount of the minimum tax im-
posed by section 55.
‘‘(f) OTHER DEFINITIONS.—For purposes of this sec-
tion, the terms ‘qualified tuition program’ and ‘education
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individual retirement account’ have the meanings given
such terms by section 529 and 530, respectively.
‘‘(g) PHASE-IN OF CREDIT.—In the case of taxable
years beginning in 1997—
‘‘(1) subsection (a)(1) shall be applied by sub-
stituting ‘$250’ for ‘$500’, and
‘‘(2) subsection (c)(1)(B) shall be applied by sub-
stituting ‘age of 13’ for ‘age of 17’.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 26 is amended by
inserting ‘‘(other than the credit allowed by section
24)’’ after ‘‘credits allowed by this subpart’’.
(2) The table of sections for subpart A of part IV
of subchapter A of chapter 1 is amended by inserting
after the item relating to section 23 the following new
item:
‘‘Sec. 24. Child tax credit.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 102. ADJUSTMENT OF MINIMUM TAX EXEMPTION
AMOUNTS FOR TAXPAYERS OTHER THAN
CORPORATIONS.
(a) IN GENERAL.—Subsection (d) of section 55 is
amended by adding at the end the following new paragraph:
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‘‘(4) ADJUSTMENT OF EXEMPTION AMOUNTS FOR
TAXPAYERS OTHER THAN CORPORATIONS.—
‘‘(A) TAXABLE
YEARS
BEGINNING
AFTER
DECEMBER
31, 2000
AND
BEFORE
JANUARY
1,
2003.—In the case of any calendar year after
2000 and before 2003—
‘‘(i) the dollar amount applicable
under paragraph (1)(A) for such a calendar
year shall be $600 greater than the dollar
amount applicable under paragraph (1)(A)
for the prior calendar year, and
‘‘(ii) the dollar amount applicable
under paragraph (1)(B) for such a calendar
year shall be $450 greater than the dollar
amount applicable under paragraph (1)(B)
for the prior calendar year.
‘‘(B) TAXABLE
YEARS
BEGINNING
AFTER
DECEMBER 31, 2002.—In the case of any calendar
year after 2002—
‘‘(i) the dollar amount applicable
under paragraph (1)(A) for such a calendar
year shall be $950 greater than the dollar
amount applicable under paragraph (1)(A)
for the prior calendar year, and
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‘‘(ii) the dollar amount applicable
under paragraph (1)(B) for such a calendar
year shall be $700 greater than the dollar
amount applicable under paragraph (1)(B)
for the prior calendar year.
‘‘(C) APPLICATION
OF
TAXABLE
YEARS.—
The dollar amount applicable under this para-
graph to any calendar year shall apply to tax-
able years beginning in such calendar year.
‘‘(D) ADJUSTMENT.—The Secretary shall
reduce the dollar amounts otherwise in effect
under this paragraph for any calendar year to
the extent necessary to increase Federal revenues
by the amount the Secretary estimates Federal
revenues will be reduced by reason of allowing
distributions from education individual retire-
ment accounts under section 530 to be used for
qualified elementary and secondary education
expenses described in section 530(b)(2)(A)(ii).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 55(d)(1) is
amended by striking ‘‘$22,500’’ and inserting ‘‘the
amount equal to 1⁄2 the dollar amount applicable
under subparagraph (A) for the taxable year’’.
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(2) The last sentence of section 55(d)(3) is
amended by striking ‘‘$165,000 or (ii) $22,500’’ and
inserting ‘‘the minimum amount of such income (as
so determined) for which the exemption amount under
paragraph (1)(C) is zero, or (ii) such exemption
amount (determined without regard to this para-
graph)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 103. ALLOWANCE OF CREDIT FOR EMPLOYER EX-
PENSES FOR CHILD CARE ASSISTANCE.
(a) IN GENERAL.—Subpart D of part IV of subchapter
A of chapter 1 (relating to business related credits) is
amended by adding at the end the following new section:
‘‘SEC. 45D. EMPLOYER-PROVIDED CHILD CARE CREDIT.
‘‘(a) IN GENERAL.—For purposes of section 38, the em-
ployer-provided child care credit determined under this sec-
tion for the taxable year is an amount equal to 50 percent
of the qualified child care expenditures of the taxpayer for
such taxable year.
‘‘(b) DOLLAR
LIMITATION.—The credit allowable
under subsection (a) for any taxable year shall not exceed
$150,000.
‘‘(c) DEFINITIONS.—For purposes of this section—
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‘‘(1) QUALIFIED CHILD CARE EXPENDITURE.—
The term ‘qualified child care expenditure’ means any
amount paid or incurred—
‘‘(A) to acquire, construct, rehabilitate, or
expand property—
‘‘(i) which is to be used as part of a
qualified child care facility of the taxpayer,
‘‘(ii) with respect to which a deduction
for depreciation (or amortization in lieu of
depreciation) is allowable, and
‘‘(iii) which does not constitute part of
the principal residence (within the meaning
of section 1034) of the taxpayer or any em-
ployee of the taxpayer,
‘‘(B) for the operating costs of a qualified
child care facility of the taxpayer, including
costs related to the training of employees, to
scholarship programs, and to the providing of
increased compensation to employees with higher
levels of child care training,
‘‘(C) under a contract with a qualified child
care facility to provide child care services to em-
ployees of the taxpayer,
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‘‘(D) under a contract to provide child care
resource and referral services to employees of the
taxpayer, or
‘‘(E) for the costs of seeking accreditation
from a child care credentialing or accreditation
entity.
‘‘(2) QUALIFIED CHILD CARE FACILITY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
child care facility’ means a facility—
‘‘(i) the principal use of which is to
provide child care assistance, and
‘‘(ii) which meets the requirements of
all applicable laws and regulations of the
State or local government in which it is lo-
cated, including, but not limited to, the li-
censing of the facility as a child care
facility.
Clause (i) shall not apply to a facility which is
the principal residence (within the meaning of
section 1034) of the operator of the facility.
‘‘(B) SPECIAL RULES WITH RESPECT TO A
TAXPAYER.—A facility shall not be treated as a
qualified child care facility with respect to a tax-
payer unless—
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years which would have resulted if the qualified
child care expenditures of the taxpayer described
in subsection (c)(1)(A) with respect to such facil-
ity had been zero.
‘‘(2) APPLICABLE RECAPTURE PERCENTAGE.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the applicable recapture percentage
shall be determined from the following table:
The applicable
recapture
‘‘If the recapture event occurs in:
percentage is:
Years 1–3 ........................................................................
100
Year 4 ..............................................................................
Year 5 ..............................................................................
Year 6 ..............................................................................
Year 7 ..............................................................................
Year 8 ..............................................................................
Years 9 and 10 ...............................................................
Years 11 and thereafter .................................................
0.
‘‘(B) YEARS.—For purposes of subpara-
graph (A), year 1 shall begin on the first day of
the taxable year in which the qualified child care
facility is placed in service by the taxpayer.
‘‘(3) RECAPTURE
EVENT
DEFINED.—For pur-
poses of this subsection, the term ‘recapture event’
means—
‘‘(A) CESSATION OF OPERATION.—The ces-
sation of the operation of the facility as a quali-
fied child care facility.
‘‘(B) CHANGE IN OWNERSHIP.—
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‘‘(i) IN GENERAL.—Except as provided
in clause (ii), the disposition of a tax-
payer’s interest in a qualified child care fa-
cility with respect to which the credit de-
scribed in subsection (a) was allowable.
‘‘(ii) AGREEMENT TO ASSUME RECAP-
TURE
LIABILITY.—Clause (i) shall not
apply if the person acquiring such interest
in the facility agrees in writing to assume
the recapture liability of the person dispos-
ing of such interest in effect immediately be-
fore such disposition. In the event of such
an assumption, the person acquiring the in-
terest in the facility shall be treated as the
taxpayer for purposes of assessing any re-
capture liability (computed as if there had
been no change in ownership).
‘‘(4) SPECIAL RULES.—
‘‘(A) TAX BENEFIT RULE.—The tax for the
taxable year shall be increased under paragraph
(1) only with respect to credits allowed by reason
of this section which were used to reduce tax li-
ability. In the case of credits not so used to re-
duce tax liability, the carryforwards and
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carrybacks under section 39 shall be appro-
priately adjusted.
‘‘(B) NO CREDITS AGAINST TAX.—Any in-
crease in tax under this subsection shall not be
treated as a tax imposed by this chapter for pur-
poses of determining the amount of any credit
under subpart A, B, or D of this part.
‘‘(C) NO RECAPTURE BY REASON OF CAS-
UALTY LOSS.—The increase in tax under this
subsection shall not apply to a cessation of oper-
ation of the facility as a qualified child care fa-
cility by reason of a casualty loss to the extent
such loss is restored by reconstruction or replace-
ment within a reasonable period established by
the Secretary.
‘‘(e) SPECIAL RULES.—For purposes of this section—
‘‘(1) AGGREGATION RULES.—All persons which
are treated as a single employer under subsections (a)
and (b) of section 52 shall be treated as a single tax-
payer.
‘‘(2) PASS-THRU IN THE CASE OF ESTATES AND
TRUSTS.—Under regulations prescribed by the Sec-
retary, rules similar to the rules of subsection (d) of
section 52 shall apply.
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‘‘(3) ALLOCATION
IN
THE
CASE
OF
PARTNER-
SHIPS.—In the case of partnerships, the credit shall
be allocated among partners under regulations pre-
scribed by the Secretary.
‘‘(f) NO DOUBLE BENEFIT.—
‘‘(1) REDUCTION IN BASIS.—For purposes of this
subtitle—
‘‘(A) IN
GENERAL.—If a credit is deter-
mined under this section with respect to any
property by reason of expenditures described in
subsection (c)(1)(A), the basis of such property
shall be reduced by the amount of the credit so
determined.
‘‘(B) CERTAIN
DISPOSITIONS.—If during
any taxable year there is a recapture amount de-
termined with respect to any property the basis
of which was reduced under subparagraph (A),
the basis of such property (immediately before
the event resulting in such recapture) shall be in-
creased by an amount equal to such recapture
amount. For purposes of the preceding sentence,
the term ‘recapture amount’ means any increase
in 
tax 
(or 
adjustment 
in 
carrybacks 
or
carryovers) determined under subsection (d).
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‘‘(2) OTHER DEDUCTIONS AND CREDITS.—No de-
duction or credit shall be allowed under any other
provision of this chapter with respect to the amount
of the credit determined under this section.
‘‘(g) TERMINATION.—This section shall not apply to
taxable years beginning after December 31, 1999.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 38(b) is amended—
(A) by striking out ‘‘plus’’ at the end of
paragraph (11),
(B) by striking out the period at the end of
paragraph (12), and inserting a comma and
‘‘plus’’, and
(C) by adding at the end the following new
paragraph:
‘‘(13) the employer-provided child care credit de-
termined under section 45D.’’.
(2) The table of sections for subpart D of part
IV of subchapter A of chapter 1 is amended by adding
at the end the following new item:
‘‘Sec. 45D. Employer-provided child care credit.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after
December 31, 1997.
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SEC. 104. EXPANSION OF COORDINATED ENFORCEMENT EF-
FORTS OF INTERNAL REVENUE SERVICE AND
HHS OFFICE OF CHILD SUPPORT ENFORCE-
MENT.
(a) STATE REPORTING OF CUSTODIAL DATA.—Section
454A(e)(4)(D) of the Social Security Act (42 U.S.C.
654(e)(4)(D)) is amended by striking ‘‘the birth date of any
child’’ and inserting ‘‘the birth date and custodial status
of any child’’.
(b) MATCHING PROGRAM BY IRS OF CUSTODIAL DATA
AND TAX STATUS INFORMATION.—
(1) NATIONAL DIRECTORY OF NEW HIRES.—Sec-
tion 453(i)(3) of the Social Security Act (42 U.S.C.
653(i)(3)) is amended by striking ‘‘a claim with re-
spect to employment in a tax return’’ and inserting
‘‘information which is required on a tax return’’.
(2) FEDERAL CASE REGISTRY OF CHILD SUP-
PORT ORDERS.—Section 453(h) of the such Act (42
U.S.C. 653(h)) is amended by adding at the end the
following:
‘‘(3) ADMINISTRATION OF FEDERAL TAX LAWS.—
The Secretary of the Treasury shall have access to the
information described in paragraph (2), consisting of
the names and social security numbers of the custo-
dial parents linked with the children in the custody
of such parents, for the purpose of administering
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those sections of the Internal Revenue Code of 1986
which grant tax benefits based on support and resi-
dence provided dependent children.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect on October 1, 1997.
SEC. 105. ADOPTION EXPENSES.
(a) DISTRIBUTIONS FROM CERTAIN PLANS MAY BE
USED WITHOUT PENALTY TO PAY ADOPTION EXPENSES.—
(1) IN GENERAL.—Section 72(t)(2) (relating to
exceptions to 10-percent additional tax on early dis-
tributions from qualified retirement plans) is amend-
ed by adding at the end the following:
‘‘(E) DISTRIBUTIONS FROM CERTAIN PLANS
FOR ADOPTION EXPENSES.—Distributions to an
individual from an individual retirement plan
of so much of the qualified adoption expenses (as
defined in section 23(d)(1)) of the individual as
does not exceed $2,000.’’.
(2) 
CONFORMING
AMENDMENT.—Section
72(t)(2)(B) is amended by striking ‘‘or (D)’’ and in-
serting ‘‘, (D) or (E)’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to payments and dis-
tributions after December 31, 1996.
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TITLE II—EDUCATION
INCENTIVES
Subtitle A—Tax Benefits Relating
to Education Expenses
SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION
AND RELATED EXPENSES.
(a) IN GENERAL.—Subpart A of part IV of subchapter
A of chapter 1 (relating to nonrefundable personal credits)
is amended by inserting after section 25 the following new
section:
‘‘SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EX-
PENSES.
‘‘(a) ALLOWANCE OF CREDIT.—
‘‘(1) IN GENERAL.—In the case of an individual,
there shall be allowed as a credit against the tax im-
posed by this chapter for the taxable year the amount
equal to 50 percent of qualified tuition and related
expenses paid by the taxpayer during such taxable
year for education furnished during any academic pe-
riod beginning in such year.
‘‘(2) SPECIAL RULE FOR EDUCATION AT COMMU-
NITY COLLEGES AND VOCATIONAL SCHOOLS.—In the
case of qualified tuition and related expenses for edu-
cation furnished at a community college or vocational
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school, paragraph (1) shall be applied by substituting
‘75 percent’ for ‘50 percent’.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR LIMITATION.—The amount allowed
as a credit under subsection (a) for any taxable year
with respect to the qualified tuition and related ex-
penses of any 1 individual shall not exceed $1,500.
‘‘(2) ELECTION REQUIRED.—
‘‘(A) IN GENERAL.—No credit shall be al-
lowed under subsection (a) for a taxable year
with respect to the qualified tuition and related
expenses of an individual unless the taxpayer
elects to have this section apply with respect to
such individual for such year.
‘‘(B) CREDIT ALLOWED ONLY FOR 2 TAX-
ABLE YEARS.—An election under this paragraph
shall not take effect with respect to an individual
for any taxable year if an election under this
paragraph (by the taxpayer or any other indi-
vidual) is in effect with respect to such individ-
ual for any 2 prior taxable years.
‘‘(C) COORDINATION
WITH
EXCLUSIONS.—
An election under this paragraph shall not take
effect with respect to an individual for any tax-
able year if there is in effect for such taxable
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year an election under section 529(c)(3)(B) or
530(c)(1) (by the taxpayer or any other individ-
ual) to exclude from gross income distributions
from a qualified tuition program or education
individual retirement account used to pay quali-
fied higher education expenses of the individual.
‘‘(3) CREDIT ALLOWED FOR YEAR ONLY IF INDI-
VIDUAL IS AT LEAST 1⁄2 TIME STUDENT FOR PORTION
OF
YEAR.—No credit shall be allowed under sub-
section (a) for a taxable year with respect to the
qualified tuition and related expenses of an individ-
ual unless such individual is an eligible student for
at least one academic period which begins during
such year.
‘‘(4) CREDIT
ALLOWED
ONLY
FOR
FIRST
TWO
YEARS
OF
POSTSECONDARY
EDUCATION.—No credit
shall be allowed under subsection (a) for a taxable
year with respect to the qualified tuition and related
expenses of an individual if the individual has com-
pleted (before the beginning of such taxable year) the
first 2 years of postsecondary education at an eligible
educational institution.
‘‘(c) LIMITATION BASED
ON MODIFIED ADJUSTED
GROSS INCOME.—
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‘‘(1) IN
GENERAL.—The amount which would
(but for this subsection) be taken into account under
subsection (a) for the taxable year shall be reduced
(but not below zero) by the amount determined under
paragraph (2).
‘‘(2) AMOUNT OF REDUCTION.—The amount de-
termined under this paragraph is the amount which
bears the same ratio to the amount which would be
so taken into account as—
‘‘(A) the excess of—
‘‘(i) the taxpayer’s modified adjusted
gross income for such taxable year, over
‘‘(ii) $40,000 ($80,000 in the case of a
joint return), bears to
‘‘(B) $10,000 ($20,000 in the case of a joint
return).
‘‘(3) MODIFIED ADJUSTED GROSS INCOME.—The
term ‘modified adjusted gross income’ means the ad-
justed gross income of the taxpayer for the taxable
year increased by any amount excluded from gross
income under section 911, 931, or 933.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
TUITION
AND
RELATED
EX-
PENSES.—
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‘‘(A) IN GENERAL.—The term ‘qualified tui-
tion and related expenses’ means tuition and fees
required for the enrollment or attendance of—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any dependent of the taxpayer
with respect to whom the taxpayer is al-
lowed a deduction under section 151,
at an eligible educational institution and books
required for courses of instruction of such indi-
vidual at such institution.
‘‘(B) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC.—Such term does not include
expenses with respect to any course or other edu-
cation involving sports, games, or hobbies, unless
such course or other education is part of the in-
dividual’s degree program.
‘‘(C) 
EXCEPTION
FOR
NONACADEMIC
FEES.—Such term does not include student ac-
tivity fees, athletic fees, insurance expenses, or
other expenses unrelated to an individual’s aca-
demic course of instruction.
‘‘(2) ELIGIBLE EDUCATIONAL INSTITUTION.—The
term ‘eligible educational institution’ means an insti-
tution—
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‘‘(A) which is described in section 481 of the
Higher Education Act of 1965 (20 U.S.C. 1088),
as in effect on the date of the enactment of this
section, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.
‘‘(3) ELIGIBLE
STUDENT.—The term ‘eligible
student’ means, with respect to any academic period,
a student who—
‘‘(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the date
of the enactment of this section, and
‘‘(B) is carrying at least 1⁄2 the normal full-
time work load for the course of study the stu-
dent is pursuing.
‘‘(4) COMMUNITY COLLEGE.—The term ‘commu-
nity college’ means any institution of higher edu-
cation (as defined in section 1201 of the Higher Edu-
cation Act of 1965 (20 U.S.C. 1141)) that awards an
associate’s degree.
‘‘(5) VOCATIONAL
SCHOOL.—The term ‘voca-
tional school’ means a postsecondary vocational insti-
tution (as defined in section 481 of such Act (20
U.S.C. 1088)).
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‘‘(e) TREATMENT OF EXPENSES PAID BY DEPEND-
ENT.—If a deduction under section 151 with respect to an
individual is allowed to another taxpayer for a taxable year
beginning in the calendar year in which such individual’s
taxable year begins—
‘‘(1) no credit shall be allowed under subsection
(a) to such individual for such individual’s taxable
year, and
‘‘(2) qualified tuition and related expenses paid
by such individual during such individual’s taxable
year shall be treated for purposes of this section as
paid by such other taxpayer.
‘‘(f) TREATMENT
OF
CERTAIN
PREPAYMENTS.—If
qualified tuition and related expenses are paid by the tax-
payer during a taxable year for an academic period which
begins during the first 3 months following such taxable
year, such academic period shall be treated for purposes of
this section as beginning during such taxable year.
‘‘(g) SPECIAL RULES.—
‘‘(1) IDENTIFICATION REQUIREMENT.—No credit
shall be allowed under subsection (a) to a taxpayer
with respect to the qualified tuition and related ex-
penses of an individual unless the taxpayer includes
the name and taxpayer identification number of such
individual on the return of tax for the taxable year.
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‘‘(2) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS,
ETC.—The amount of qualified tuition and related ex-
penses otherwise taken into account under subsection
(a) with respect to an individual for an academic pe-
riod shall be reduced (before the application of sub-
sections (b) and (c)) by the sum of any amounts paid
for the benefit of such individual which are allocable
to such period as—
‘‘(A) a qualified scholarship which is ex-
cludable from gross income under section 117,
‘‘(B) an educational assistance allowance
under chapter 30, 31, 32, 34, or 35 of title 38,
United States Code, or under chapter 1606 of
title 10, United States Code, and
‘‘(C) a payment (other than a gift, bequest,
devise, or inheritance within the meaning of sec-
tion 102(a)) for such individual’s educational ex-
penses, or attributable to such individual’s en-
rollment at an eligible educational institution,
which is excludable from gross income under any
law of the United States.
‘‘(3) DENIAL OF CREDIT IF STUDENT CONVICTED
OF A FELONY DRUG OFFENSE.—No credit shall be al-
lowed under subsection (a) for qualified tuition and
related expenses for the enrollment or attendance of a
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student for any academic period if such student has
been convicted of a Federal or State felony offense
consisting of the possession or distribution of a con-
trolled substance before the end of the taxable year
with or within which such period ends.
‘‘(4) DENIAL
OF
CREDIT
WHERE
NO
HIGH
SCHOOL DEGREE.—No credit shall be allowed under
subsection (a) for qualified tuition and related ex-
penses for the enrollment or attendance of a student
for any academic period if such student has not re-
ceived a high school degree (or its equivalent) before
the beginning of such period. This paragraph shall
not apply to a student if the student did not receive
such degree by reason of enrollment in an early ad-
mission program to an eligible educational institu-
tion.
‘‘(5) DENIAL OF DOUBLE BENEFIT.—No credit
shall be allowed under this section for any expense for
which a deduction is allowed under any other provi-
sion of this chapter.
‘‘(6) NO CREDIT FOR MARRIED INDIVIDUALS FIL-
ING SEPARATE RETURNS.—If the taxpayer is a mar-
ried individual (within the meaning of section 7703),
this section shall apply only if the taxpayer and the
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taxpayer’s spouse file a joint return for the taxable
year.
‘‘(7) NONRESIDENT ALIENS.—If the taxpayer is
a nonresident alien individual for any portion of the
taxable year, this section shall apply only if such in-
dividual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
‘‘(h) INFLATION ADJUSTMENTS.—
‘‘(1) DOLLAR LIMITATION ON AMOUNT OF CRED-
IT.—
‘‘(A) IN GENERAL.—In the case of a taxable
year beginning after 1998, the $1,500 amount in
subsection (b)(1) shall be increased by an
amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
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of $50, such amount shall be rounded to the next
lowest multiple of $50.
‘‘(2) INCOME LIMITS.—
‘‘(A) IN GENERAL.—In the case of a taxable
year beginning after 2000, the $40,000 and
$80,000 amounts in subsection (c)(2) shall each
be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1999’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $5,000, such amount shall be rounded to the
next lowest multiple of $5,000.
‘‘(i) REGULATIONS.—The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out this section, including regulations providing for
a recapture of credit allowed under this section in cases
where there is a refund in a subsequent taxable year of any
amount which was taken into account in determining the
amount of such credit.’’.
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(b) EXTENSION
OF PROCEDURES APPLICABLE
TO
MATHEMATICAL OR CLERICAL ERRORS.—Paragraph (2) of
section 6213(g) (relating to the definition of mathematical
or clerical errors) is amended by striking ‘‘and’’ at the end
of subparagraph (G), by striking the period at the end of
subparagraph (H) and inserting ‘‘, and’’, and by inserting
after subparagraph (H) the following new subparagraph:
‘‘(I) an omission of a correct TIN required
under section 25A(g)(1) (relating to higher edu-
cation tuition and related expenses) to be in-
cluded on a return.’’.
(c) RETURNS RELATING TO TUITION AND RELATED
EXPENSES.—
(1) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 (relating to information con-
cerning transactions with other persons) is amended
by inserting after section 6050R the following new
section:
‘‘SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION
TUITION AND RELATED EXPENSES.
‘‘(a) IN GENERAL.—Any person—
‘‘(1) which is an eligible educational institution
which receives payments for qualified tuition and re-
lated expenses with respect to any individual for any
calendar year, or
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‘‘(2) which is engaged in a trade or business and
which, in the course of such trade or business, makes
payments during any calendar year to any individ-
ual which constitute reimbursements or refunds (or
similar amounts) of qualified tuition and related ex-
penses of such individual,
shall make the return described in subsection (b) with re-
spect to the individual at such time as the Secretary may
by regulations prescribe.
‘‘(b) FORM AND MANNER OF RETURNS.—A return is
described in this subsection if such return—
‘‘(1) is in such form as the Secretary may pre-
scribe,
‘‘(2) contains—
‘‘(A) the name, address, and TIN of the in-
dividual with respect to whom payments de-
scribed in subsection (a) were received from (or
were paid to),
‘‘(B) the name, address, and TIN of any in-
dividual certified by the individual described in
subparagraph (A) as the taxpayer who will
claim the individual as a dependent for purposes
of the deduction allowable under section 151 for
any taxable year ending with or within the cal-
endar year, and
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‘‘(C) the—
‘‘(i) aggregate amount of payments for
qualified tuition and related expenses re-
ceived with respect to the individual de-
scribed in subparagraph (A) during the cal-
endar year, and
‘‘(ii) aggregate amount of reimburse-
ments or refunds (or similar amounts) paid
to such individual during the calendar
year, and
‘‘(D) such other information as the Sec-
retary may prescribe.
‘‘(c) APPLICATION TO GOVERNMENTAL UNITS.—For
purposes of this section—
‘‘(1) a governmental unit or any agency or in-
strumentality thereof shall be treated as a person, and
‘‘(2) any return required under subsection (a) by
such governmental entity shall be made by the officer
or employee appropriately designated for the purpose
of making such return.
‘‘(d) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required to be set forth in such return under subpara-
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graph (A) or (B) of subsection (b)(2) a written statement
showing—
‘‘(1) the name, address, and phone number of the
information contact of the person required to make
such return, and
‘‘(2) the aggregate amounts described in subpara-
graph (C) of subsection (b)(2).
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the year
following the calendar year for which the return under sub-
section (a) was required to be made.
‘‘(e) DEFINITIONS.—For purposes of this section, the
terms ‘eligible educational institution’ and ‘qualified tui-
tion and related expenses’ have the meanings given such
terms by section 25A.
‘‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE
MADE BY 2 OR MORE PERSONS.—Except to the extent pro-
vided in regulations prescribed by the Secretary, in the case
of any amount received by any person on behalf of another
person, only the person first receiving such amount shall
be required to make the return under subsection (a).
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the provi-
sions of this section. No penalties shall be imposed under
section 6724 with respect to any return or statement re-
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quired under this section until such time as such regula-
tions are issued.’’.
(2) ASSESSABLE PENALTIES.—
(A) Subparagraph (B) of section 6724(d)(1)
(relating to definitions) is amended by redesig-
nating clauses (ix) through (xiv) as clauses (x)
through (xv), respectively, and by inserting after
clause (viii) the following new clause:
‘‘(ix) section 6050S (relating to returns
relating to payments for qualified tuition
and related expenses),’’.
(B) Paragraph (2) of section 6724(d) is
amended by striking ‘‘or’’ at the end of the next
to last subparagraph, by striking the period at
the end of the last subparagraph and inserting
‘‘, or’’, and by adding at the end the following
new subparagraph:
‘‘(Z) section 6050S(d) (relating to returns
relating to qualified tuition and related ex-
penses).’’.
(3) CLERICAL AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of
chapter 61 is amended by inserting after the item re-
lating to section 6050R the following new item:
‘‘Sec. 6050S. Returns relating to higher education tuition and re-
lated expenses.’’.
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(d) COORDINATION WITH SECTION 135.—Subsection
(d) of section 135 is amended by redesignating paragraphs
(2) and (3) as paragraphs (3) and (4), respectively, and
by inserting after paragraph (1) the following new para-
graph:
‘‘(2) COORDINATION WITH HIGHER EDUCATION
CREDIT.—The amount of the qualified higher edu-
cation expenses otherwise taken into account under
subsection (a) with respect to the education of an in-
dividual shall be reduced (before the application of
subsection (b)) by the amount of such expenses which
are taken into account in determining the credit al-
lowable to the taxpayer or any other person under
section 25A with respect to such expenses.’’.
(e) CLERICAL AMENDMENT.—The table of sections for
subpart A of part IV of subchapter A of chapter 1 is amend-
ed by inserting after the item relating to section 25 the fol-
lowing new item:
‘‘Sec. 25A. Higher education tuition and related expenses.’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to expenses paid after December 31,
1997 (in taxable years ending after such date), for edu-
cation furnished in academic periods beginning after such
date.
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SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION
LOANS.
(a) IN GENERAL.—Part VII of subchapter B of chapter
1 (relating to additional itemized deductions for individ-
uals) is amended by redesignating section 221 as section
222 and by inserting after section 220 the following new
section:
‘‘SEC. 221. INTEREST ON EDUCATION LOANS.
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an
individual, there shall be allowed as a deduction for the tax-
able year an amount equal to the interest paid by the tax-
payer during the taxable year on any qualified education
loan.
‘‘(b) MAXIMUM DEDUCTION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the deduction allowed by subsection (a) for
the taxable year shall not exceed $2,500.
‘‘(2) LIMITATION BASED ON MODIFIED ADJUSTED
GROSS INCOME.—
‘‘(A) IN
GENERAL.—The amount which
would (but for this paragraph) be allowable as a
deduction under this section shall be reduced
(but not below zero) by the amount determined
under paragraph (2).
‘‘(B) AMOUNT OF REDUCTION.—The amount
determined under this paragraph is the amount
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which bears the same ratio to the amount which
would be so taken into account as—
‘‘(i) the excess of—
‘‘(I) the taxpayer’s modified ad-
justed gross income for such taxable
year, over
‘‘(II) $40,000 ($80,000 in the case
of a joint return), bears to
‘‘(ii) $10,000 ($20,000 in the case of a
joint return).
‘‘(C) 
MODIFIED
ADJUSTED
GROSS
IN-
COME.—The term ‘modified adjusted gross in-
come’ means adjusted gross income determined—
‘‘(i) without regard to this section and
sections 135, 911, 931, and 933, and
‘‘(ii) after application of sections 86,
219, and 469.
For purposes of sections 86, 135, 219, and 469,
adjusted gross income shall be determined with-
out regard to the deduction allowed under this
section.
‘‘(c) DEPENDENTS NOT ELIGIBLE FOR DEDUCTION.—
No deduction shall be allowed by this section to an individ-
ual for the taxable year if a deduction under section 151
with respect to such individual is allowed to another tax-
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payer for the taxable year beginning in the calendar year
in which such individual’s taxable year begins.
‘‘(d) LIMIT ON PERIOD DEDUCTION ALLOWED.—A de-
duction shall be allowed under this section only with respect
to interest paid on any qualified education loan during the
first 60 months (whether or not consecutive) in which inter-
est payments are required. For purposes of this paragraph,
any loan and all refinancings of such loan shall be treated
as 1 loan.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
EDUCATION
LOAN.—The term
‘qualified education loan’ means any indebtedness in-
curred to pay qualified higher education expenses—
‘‘(A) which are incurred on behalf of the
taxpayer, the taxpayer’s spouse, or any depend-
ent of the taxpayer as of the time the indebted-
ness was incurred,
‘‘(B) which are paid or incurred within a
reasonable period of time before or after the in-
debtedness is incurred, and
‘‘(C) which are attributable to education
furnished during a period during which the re-
cipient was an eligible student.
Such term includes indebtedness used to refinance in-
debtedness which qualifies as a qualified education
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loan. The term ‘qualified education loan’ shall not in-
clude any indebtedness owed to a person who is relat-
ed (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer.
‘‘(2) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the cost of attendance (as defined in
section 472 of the Higher Education Act of 1965, 20
U.S.C. 1087ll, as in effect on the day before the date
of the enactment of this Act) at an eligible edu-
cational institution, reduced by the sum of—
‘‘(A) the amount excluded from gross in-
come under section 135, 529, or 530 by reason
of such expenses, and
‘‘(B) the amount of any scholarship, allow-
ance, or payment described in section 25A(g)(2).
For purposes of the preceding sentence, the term ‘eli-
gible educational institution’ has the same meaning
given such term by section 25A(d)(2), except that such
term shall also include an institution conducting an
internship or residency program leading to a degree
or certificate awarded by an institution of higher edu-
cation, a hospital, or a health care facility which of-
fers postgraduate training.
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‘‘(3) ELIGIBLE
STUDENT.—The term ‘eligible
student’ has the meaning given such term by section
25A(d)(3).
‘‘(4) DEPENDENT.—The term ‘dependent’ has the
meaning given such term by section 152.
‘‘(f) SPECIAL RULES.—
‘‘(1) DENIAL OF DOUBLE BENEFIT.—No deduc-
tion shall be allowed under this section for any
amount for which a deduction is allowable under any
other provision of this chapter.
‘‘(2) MARRIED COUPLES MUST FILE JOINT RE-
TURN.—If the taxpayer is married at the close of the
taxable year, the deduction shall be allowed under
subsection (a) only if the taxpayer and the taxpayer’s
spouse file a joint return for the taxable year.
‘‘(3) MARITAL STATUS.—Marital status shall be
determined in accordance with section 7703.
‘‘(g) INFLATION ADJUSTMENTS.—
‘‘(1) DOLLAR LIMITATION ON AMOUNT OF CRED-
IT.—
‘‘(A) IN GENERAL.—In the case of a taxable
year beginning after 1998, the $2,500 amount in
subsection (b)(1) shall be increased by an
amount equal to—
‘‘(i) such dollar amount, multiplied by
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‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $50, such amount shall be rounded to the next
lowest multiple of $50.
‘‘(2) INCOME LIMITS.—In the case of a taxable
year beginning in a calendar year after 2000, the
$40,000 and $80,000 amounts in subsection (b)(2)
shall each be increased by the amount the $40,000
and $80,000 amounts under section 25A(c)(2) are in-
creased for taxable years beginning in such calendar
year.’’.
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of
section 62 is amended by inserting after paragraph (16)
the following new paragraph:
‘‘(17) INTEREST ON EDUCATION LOANS.—The de-
duction allowed by section 221.’’.
(c) REPORTING REQUIREMENT.—
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(1) IN GENERAL.—Section 6050S(a)(2) (relating
to returns relating to higher education tuition and re-
lated expenses) is amended to read as follows:
‘‘(2) which is engaged in a trade or business and
which, in the course of such trade or business—
‘‘(A) makes payments during any calendar
year to any individual which constitutes reim-
bursements or refunds (or similar amounts) of
qualified tuition and related expenses of such in-
dividual, or
‘‘(B) except as provided in regulations, re-
ceives from any individual interest aggregating
$600 or more for any calendar year on 1 or
more qualified education loans,’’.
(2) INFORMATION.—Section 
6050S(b)(2) 
is
amended—
(A) by inserting ‘‘or interest’’ after ‘‘pay-
ments’’ in subparagraph (A), and
(B) in subparagraph (C), by striking ‘‘and’’
at the end of clause (i), by inserting ‘‘and’’ at
the end of clause (ii), and by inserting after
clause (ii) the following:
‘‘(iii) aggregate amount of interest re-
ceived for the calendar year from such indi-
vidual,’’.
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(3) DEFINITION.—Section 6050S(e) is amended
by inserting ‘‘, and except as provided in regulations,
the term ‘qualified education loan’ has the meaning
given such term by section 221(e)(1)’’ after ‘‘section
25A’’.
(d) CLERICAL AMENDMENT.—The table of sections for
part VII of subchapter B of chapter 1 is amended by strik-
ing the last item and inserting the following new items:
‘‘Sec. 221. Interest on education loans.
‘‘Sec. 222. Cross reference.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to any qualified education loan (as de-
fined in section 221(e)(1) of the Internal Revenue Code of
1986, as added by this section) incurred on, before, or after
the date of the enactment of this Act, but only with respect
to—
(1) any loan interest payment due after Decem-
ber 31, 1996, and
(2) the portion of the 60-month period referred
to in section 221(d) of the Internal Revenue Code of
1986 (as added by this section) after December 31,
1996.
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SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL
RETIREMENT 
PLANS 
FOR 
HIGHER 
EDU-
CATION EXPENSES.
(a) IN GENERAL.—Paragraph (2) of section 72(t) (re-
lating to exceptions to 10-percent additional tax on early
distributions from qualified retirement plans) is amended
by adding at the end the following new subparagraph:
‘‘(E) DISTRIBUTIONS FROM INDIVIDUAL RE-
TIREMENT PLANS FOR HIGHER EDUCATION EX-
PENSES.—Distributions to an individual from
an individual retirement plan to the extent such
distributions do not exceed the qualified higher
education expenses (as defined in paragraph (7))
of the taxpayer for the taxable year. Distribu-
tions shall not be taken into account under the
preceding sentence if such distributions are de-
scribed in subparagraph (A), (C), or (D) or to
the extent paragraph (1) does not apply to such
distributions by reason of subparagraph (B).’’.
(b) DEFINITION.—Section 72(t) is amended by adding
at the end the following new paragraph:
‘‘(7) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means qualified high-
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er education expenses (as defined in section
529(e)(3)) for education furnished to—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any child (as defined in section
151(c)(3)) or grandchild of the taxpayer or
the taxpayer’s spouse,
at an eligible educational institution (as defined
in section 529(e)(5)).
‘‘(B) COORDINATION
WITH
OTHER
BENE-
FITS.—The amount of qualified higher education
expenses for any taxable year shall be reduced as
provided in section 25A(g)(2).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to distributions after December 31, 1997,
with respect to expenses paid after such date (in taxable
years ending after such date), for education furnished in
academic periods beginning after such date.
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Subtitle B—Expanded Education
Investment Savings Opportunities
PART I—QUALIFIED TUITION PROGRAMS
SEC. 211. EXCLUSION FROM GROSS INCOME OF EDUCATION
DISTRIBUTIONS FROM QUALIFIED TUITION
PROGRAMS.
(a) IN
GENERAL.—Subparagraph (B) of section
529(c)(3) (relating to distributions) is amended to read as
follows:
‘‘(B) DISTRIBUTIONS FOR QUALIFIED HIGH-
ER
EDUCATION
EXPENSES.—If a distributee
elects the application of this subparagraph for
any taxable year—
‘‘(i) no amount shall be includible in
gross income by reason of a distribution
which consists of providing a benefit to the
distributee which, if paid for by the dis-
tributee, would constitute payment of a
qualified higher education expense, and
‘‘(ii) the amount which (but for the
election) would be includible in gross in-
come by reason of any other distribution
shall not be so includible in an amount
which bears the same ratio to the amount
which would be so includible as the amount
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of the qualified higher education expenses of
the distributee bears to the amount of the
distribution.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to distributions after December 31, 1997,
for education furnished in academic periods beginning after
such date.
SEC. 212. ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION
PROGRAMS; 
OTHER 
MODIFICATIONS 
OF
QUALIFIED STATE TUITION PROGRAMS.
(a) ELIGIBLE
EDUCATIONAL
INSTITUTIONS
PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
Paragraph (1) of section 529(b) (defining qualified State
tuition program) is amended by inserting ‘‘or by one or
more eligible educational institutions’’ after ‘‘maintained
by a State or agency or instrumentality thereof’’.
(b) QUALIFIED HIGHER EDUCATION EXPENSES TO IN-
CLUDE ROOM
AND BOARD.—Paragraph (3) of section
529(e) (defining qualified higher education expenses) is
amended to read as follows:
‘‘(3) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means tuition, fees,
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books, supplies, and equipment required for the
enrollment or attendance of a designated bene-
ficiary at an eligible education institution.
‘‘(B) ROOM
AND
BOARD
INCLUDED
FOR
STUDENTS WHO ARE AT LEAST HALF-TIME.—In
the case of an individual who is an eligible stu-
dent (as defined in section 25A(d)(3)) for any
academic period, such term shall also include
reasonable costs for such period (as determined
under the qualified tuition program) incurred by
the designated beneficiary for room and board
while attending such institution. The amount
treated as qualified higher education expenses by
reason of the preceding sentence shall not exceed
the minimum amount (applicable to the student)
included for room and board for such period in
the cost of attendance (as defined in section 472
of the Higher Education Act of 1965, 20 U.S.C.
1087ll, as in effect on the date of the enactment
of this paragraph) for the eligible educational in-
stitution for such period.’’.
(c) ADDITIONAL MODIFICATIONS.—
(1) MEMBER OF FAMILY.—Paragraph (2) of sec-
tion 529(e) (relating to other definitions and special
rules) is amended to read as follows:
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‘‘(2) MEMBER OF FAMILY.—The term ‘member of
the family’ means—
‘‘(A) an individual who bears a relationship
to another individual which is a relationship de-
scribed in paragraphs (1) through (8) of section
152(a), and
‘‘(B) the spouse of any individual described
in subparagraph (A).’’.
(2) ELIGIBLE EDUCATIONAL INSTITUTION.—Sec-
tion 529(e) is amended by adding at the end the fol-
lowing:
‘‘(5) ELIGIBLE EDUCATIONAL INSTITUTION.—The
term ‘eligible educational institution’ means an insti-
tution—
‘‘(A) which is described in section 481 of the
Higher Education Act of 1965 (20 U.S.C. 1088),
as in effect on the date of the enactment of this
paragraph, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.’’.
(3) NO CONTRIBUTIONS AFTER BENEFICIARY AT-
TAINS AGE 18; DISTRIBUTIONS REQUIRED IN CERTAIN
CASES.—
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(A) IN GENERAL.—Subsection (b) of section
529 is amended by adding at the end the follow-
ing new paragraph:
‘‘(8) RESTRICTIONS RELATING TO AGE OF BENE-
FICIARY; COMPLETION OF EDUCATION.—
‘‘(A) IN
GENERAL.—A program shall be
treated as a qualified tuition program only if—
‘‘(i) no contribution is accepted on be-
half of a designated beneficiary after the
date on which such beneficiary attains age
18, and
‘‘(ii) any balance to the credit of a des-
ignated beneficiary (if any) on the account
termination date shall be distributed within
30 days after such date to such beneficiary
(or in the case of death, the estate of the
beneficiary).
‘‘(B) ACCOUNT
TERMINATION
DATE.—For
purposes of subparagraph (A), the term ‘account
termination date’ means whichever of the follow-
ing dates is the earliest:
‘‘(i) The date on which the designated
beneficiary attains age 30.
‘‘(ii) The date on which the designated
beneficiary dies.’’.
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(B) 
ROLLOVERS.—Section 
529(c)(3) 
is
amended by adding at the end the following:
‘‘(E) ROLLOVERS TO IRA PLUS ACCOUNTS
AT AGE 30.—Subparagraph (A) shall not apply
to any distribution to the designated beneficiary
required under subsection (b)(8) by reason of the
beneficiary attaining age 30 to the extent the
beneficiary, within 60 days of the distribution,
transfers such distribution to an IRA Plus ac-
count established on the individual’s behalf.’’.
(C) CONFORMING AMENDMENTS.—
(i) Section 408(a)(1) is amended by
striking 
‘‘or 
403(b)(8)’’ 
and 
inserting
‘‘403(b)(8), or 529(c)(3)(E)’’.
(ii) Subparagraph (A) of section
4973(b)(1) is amended by striking ‘‘or
408(b)(3)’’ and inserting ‘‘408(b)(3), or
529(c)(3)(E)’’.
(4) ESTATE AND GIFT TAX TREATMENT.—
(A) GIFT TAX TREATMENT.—
(i) Paragraph (2) of section 529(c) is
amended to read as follows:
‘‘(2) GIFT
TAX
TREATMENT
OF
CONTRIBU-
TIONS.—For purposes of chapters 12 and 13, any
contribution to a qualified tuition program on behalf
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of any designated beneficiary shall not be treated as
a taxable gift.’’.
(ii) Paragraph (5) of section 529(c) is
amended to read as follows:
‘‘(5) OTHER GIFT TAX RULES.—For purposes of
chapters 12 and 13—
‘‘(A) TREATMENT
OF
DISTRIBUTIONS.—In
no event shall a distribution from a qualified
tuition program be treated as a taxable gift.
‘‘(B) TREATMENT OF DESIGNATION OF NEW
BENEFICIARY.—The taxes imposed by chapters
12 and 13 shall apply to a transfer by reason of
a change in the designated beneficiary under the
program (or a rollover to the account of a new
beneficiary) only if the new beneficiary is a gen-
eration below the generation of the old bene-
ficiary (determined in accordance with section
2651).’’.
(B) ESTATE TAX TREATMENT.—Paragraph
(4) of section 529(c) is amended to read as fol-
lows:
‘‘(4) ESTATE TAX TREATMENT.—
‘‘(A) IN GENERAL.—No amount shall be in-
cludible in the gross estate of any individual for
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purposes of chapter 11 by reason of an interest
in a qualified tuition program.
‘‘(B) AMOUNTS INCLUDIBLE IN ESTATE OF
DESIGNATED BENEFICIARY IN CERTAIN CASES.—
Subparagraph (A) shall not apply to amounts
distributed on account of the death of a bene-
ficiary.’’.
(5) LIMITATION ON CONTRIBUTIONS TO QUALI-
FIED
TUITION
PROGRAMS
NOT
MAINTAINED
BY
A
STATE.—Subsection (b) of section 529 is amended by
adding at the end the following new paragraph:
‘‘(9) LIMITATION ON CONTRIBUTIONS TO QUALI-
FIED
TUITION
PROGRAMS
NOT
MAINTAINED
BY
A
STATE.—In the case of a program not maintained by
a State or agency or instrumentality thereof, such
program shall not be treated as a qualified tuition
program unless it limits the annual contribution to
the program on behalf of a designated beneficiary to
the sum of $2,000 plus the amount of the credit allow-
able under section 25A for 1 qualifying child.’’.
(d) ADDITIONAL TAX ON AMOUNTS NOT USED FOR
HIGHER EDUCATION EXPENSES.—Section 529 is amended
by adding at the end the following new subsection:
‘‘(f) IMPOSITION OF ADDITIONAL TAX.—
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‘‘(1) IN GENERAL.—In the case of a qualified
tuition program not maintained by a State or any
agency or instrumentality thereof, the tax imposed by
this chapter for any taxable year on any taxpayer
who receives a payment or distribution from such
program which is includible in gross income shall be
increased by 10 percent of the amount which is so in-
cludible.
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply if the payment or distribution is—
‘‘(A) made to a beneficiary (or to the estate
of the designated beneficiary) on or after the
death of the designated beneficiary,
‘‘(B) attributable to the designated bene-
ficiary’s being disabled (within the meaning of
section 72(m)(7)), or
‘‘(C) made on account of a scholarship, al-
lowance, or payment described in section
25A(g)(2) received by the account holder to the
extent the amount of the payment or distribution
does not exceed the amount of the scholarship, al-
lowance, or payment.
‘‘(3) EXCESS
CONTRIBUTIONS
RETURNED
BE-
FORE DUE DATE OF RETURN.—In the case of a quali-
fied tuition program not maintained by a State or
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any agency or instrumentality thereof, paragraph (1)
shall not apply to the distribution to a contributor of
any contribution made during a taxable year on be-
half of a designated beneficiary to the extent that such
contribution exceeds the limitation in section 4973(e)
if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such contributor’s return
for such taxable year, and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such ex-
cess contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the contributor for
the taxable year in which such excess contribution
was made.’’.
(e) 
COORDINATION
WITH
EDUCATION
SAVINGS
BOND.—Section 135(c)(2) (defining qualified higher edu-
cation expenses) is amended by adding at the end the fol-
lowing:
‘‘(C) CONTRIBUTIONS
TO
QUALIFIED
TUI-
TION PROGRAM.—Such term shall include any
contribution to a qualified tuition program (as
defined in section 529) on behalf of a designated
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beneficiary (as defined in such section) who is
an individual described in subparagraph (A);
but there shall be no increase in the investment
in the contract for purposes of applying section
72 by reason of any portion of such contribution
which is not includible in gross income by reason
of this subparagraph.’’.
(f) TAX ON EXCESS CONTRIBUTIONS.—
(1) IN GENERAL.—Subsection (a) of section 4973
is amended by striking ‘‘or’’ at the end of paragraph
(2) and by inserting after paragraph (3) the following
new paragraphs:
‘‘(4) a qualified tuition program (as defined in
section 529) not maintained by a State or any agency
or instrumentality thereof, or
‘‘(5) an education individual retirement account
(as defined in section 530),’’.
(2) EXCESS CONTRIBUTIONS DEFINED.—Section
4973 is amended by adding at the end the following
new subsection:
‘‘(e) EXCESS CONTRIBUTIONS TO PRIVATE QUALIFIED
TUITION PROGRAM AND EDUCATION INDIVIDUAL RETIRE-
MENT ACCOUNTS.—For purposes of this section—
‘‘(1) IN GENERAL.—In the case of private edu-
cation investment accounts maintained for the benefit
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of any 1 beneficiary, the term ‘excess contributions’
means the amount by which the amount contributed
for the taxable year to such accounts exceeds the sum
of $2,000 plus the amount of the credit allowed under
section 25A for such beneficiary for such taxable year.
‘‘(2) PRIVATE
EDUCATION
INVESTMENT
AC-
COUNT.—For purposes of paragraph (1), the term
‘private education investment account’ means—
‘‘(A) a qualified tuition program (as de-
fined in section 529) not maintained by a State
or any agency or instrumentality thereof, and
‘‘(B) an education individual retirement ac-
count (as defined in section 530).
‘‘(3) SPECIAL
RULES.—For purposes of para-
graph (1), the following contributions shall not be
taken into account:
‘‘(A) Any contribution which is distributed
out of the education individual retirement ac-
count in a distribution to which section
530(c)(3)(B) applies.
‘‘(B) Any contribution to a qualified tuition
program (as so defined) described in section
530(b)(2)(B) from any such account.
‘‘(C) Any rollover contribution.’’.
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(g) CLARIFICATION
OF
TAXATION
OF
DISTRIBU-
TIONS.—Subparagraph (A) of section 529(c)(3) is amended
to read as follows:
‘‘(A) IN GENERAL.—Any distribution from
a qualified tuition program—
‘‘(i) shall be includible in the gross in-
come of the distributee to the extent alloca-
ble to income under the program, and
‘‘(ii) shall not be includible in gross
income to the extent allocable to the invest-
ment in the contract.
For purposes of the preceding sentence, rules
similar to the rules of section 72(e)(3) shall
apply.’’.
(h) TECHNICAL AMENDMENTS.—
(1) Paragraph (2) of section 26(b) is amended by
redesignating subparagraphs (E) through (P) as sub-
paragraphs (F) through (Q), respectively, and by in-
serting after subparagraph (D) the following new sub-
paragraph:
‘‘(E) section 529(f) (relating to additional
tax on certain distributions from qualified tui-
tion programs),’’.
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(2) The text of section 529 is amended by strik-
ing ‘‘qualified State tuition program’’ each place it
appears and inserting ‘‘qualified tuition program’’.
(3)(A) The section heading of section 529 is
amended to read as follows:
‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’.
(B) The item relating to section 529 in the table
of sections for part VIII of subchapter F of chapter
1 is amended by striking ‘‘State’’.
(4)(A) The heading for part VIII of subchapter
F of chapter 1 is amended to read as follows:
‘‘PART VIII—HIGHER EDUCATION SAVINGS
ENTITIES’’.
(B) The table of parts for subchapter F of chap-
ter 1 is amended by striking the item relating to part
VIII and inserting:
‘‘Part VIII. Higher education savings entities.’’.
(5)(A) Section 529(d) is amended to read as fol-
lows:
‘‘(d) REPORTS.—Each officer or employee having con-
trol of the qualified tuition program or their designee shall
make such reports regarding such program to the Secretary
and to designated beneficiaries with respect to contribu-
tions, distributions, and such other matters as the Secretary
may require under regulations. The reports required by this
subsection shall be filed at such time and in such manner
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and furnished to such individuals at such time and in such
manner as may be required by those regulations.’’.
(B) Paragraph (2) of section 6693(a) (relating to
failure to provide reports on individual retirement
accounts or annuities) is amended by striking ‘‘and’’
at the end of subparagraph (A), by striking the period
at the end of subparagraph (B) and inserting ‘‘,
and’’, and by adding at the end the following new
subparagraph:
‘‘(C) Section 529(d) (relating to qualified
tuition programs).’’.
(C) The section heading for section 6693 is
amended by striking ‘‘INDIVIDUAL RETIREMENT’’
and inserting ‘‘CERTAIN TAX-FAVORED’’.
(D) The item relating to section 6693 in the
table of sections for part I of subchapter B of chapter
68 is amended by striking ‘‘individual retirement’’
and inserting ‘‘certain tax-favored’’.
(i) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as otherwise provided
in this subsection, the amendments made by this sec-
tion shall take effect on January 1, 1998.
(2) EXPENSES TO INCLUDE ROOM AND BOARD,
ETC.—The amendments made by subsection (b) and
(c)(2) shall apply to distributions after December 31,
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1997, with respect to expenses paid after such date
(in taxable years ending after such date), for edu-
cation furnished in academic periods beginning after
such date.
(3) COORDINATION
WITH
EDUCATION
SAVINGS
BONDS.—The amendment made by subsection (e) shall
apply to taxable years beginning after December 31,
1997.
(4) ESTATE AND GIFT TAX CHANGES.—
(A) GIFT TAX CHANGES.—Paragraphs (2)
and (5) of section 529(c) of the Internal Revenue
Code of 1986, as amended by this section, shall
apply to transfers (including designations of new
beneficiaries) made after the date of the enact-
ment of this Act.
(B) ESTATE TAX CHANGES.—Paragraph (4)
of such section 529(c) shall apply to estates of de-
cedents dying after June 8, 1997.
(5) REPORTING.—The amendments made by sub-
section (g) shall apply after June 16, 1997.
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PART II—EDUCATION INDIVIDUAL RETIREMENT
ACCOUNTS
SEC. 
213. 
EDUCATION 
INDIVIDUAL 
RETIREMENT 
AC-
COUNTS.
(a) IN GENERAL.—Part VIII of subchapter F of chap-
ter 1 (relating to qualified State tuition programs) is
amended by adding at the end the following new section:
‘‘SEC. 
530. 
EDUCATION 
INDIVIDUAL 
RETIREMENT 
AC-
COUNTS.
‘‘(a) GENERAL RULE.—An education individual re-
tirement account shall be exempt from taxation under this
subtitle. Notwithstanding the preceding sentence, the edu-
cation individual retirement account shall be subject to the
taxes imposed by section 511 (relating to imposition of tax
on unrelated business income of charitable organizations).
‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EDUCATION INDIVIDUAL RETIREMENT AC-
COUNT.—The term ‘education individual retirement
account’ means a trust created or organized in the
United States exclusively for the purpose of paying
the qualified education expenses of the account holder,
but only if the written governing instrument creating
the trust meets the following requirements:
‘‘(A) No contribution will be accepted—
‘‘(i) unless it is in cash,
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‘‘(ii) after the date on which the ac-
count holder attains age 18, or
‘‘(iii) except in the case of rollover con-
tributions, if such contribution would result
in aggregate contributions for the taxable
year exceeding the sum of—
‘‘(I) $2,000, plus
‘‘(II) the amount of the credit al-
lowable under section 25A for the tax-
able year for 1 qualifying child.
‘‘(B) The trustee is a bank (as defined in
section 408(n)) or another person who dem-
onstrates to the satisfaction of the Secretary that
the manner in which that person will administer
the trust will be consistent with the requirements
of this section.
‘‘(C) No part of the trust assets will be in-
vested in life insurance contracts.
‘‘(D) The assets of the trust shall not be
commingled with other property except in a com-
mon trust fund or common investment fund.
‘‘(E) Upon the death of the account holder,
any balance in the account will be distributed as
required under section 529(b)(8) (as if such ac-
count were a qualified tuition program).
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‘‘(F) The account becomes an IRA Plus as
of the date the account holder attains age 30
(and meets all requirements for an IRA Plus on
and after such date), unless the account holder
elects to have sections 529(b)(8) apply as of such
date (as if such account were a qualified tuition
program).
‘‘(2) QUALIFIED EDUCATION EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
education expenses’ means—
‘‘(i) qualified higher education ex-
penses (as defined in section 529(e)(3), and
‘‘(ii) in the case of taxable years begin-
ning after December 31, 2000, qualified ele-
mentary and secondary education expenses
(as defined in paragraph (5)).
‘‘(B) QUALIFIED
TUITION
PROGRAMS.—
Such term shall include amounts paid or in-
curred to purchase tuition credits or certificates,
or to make contributions to an account, under a
qualified tuition program (as defined in section
529(b)) for the benefit of the account holder.
‘‘(3) ELIGIBLE EDUCATIONAL INSTITUTION.—The
term ‘eligible educational institution’ has the mean-
ing given such term by section 529(e)(5).
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‘‘(4) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual for whose benefit the
education individual retirement account is estab-
lished.
‘‘(5) QUALIFIED ELEMENTARY AND SECONDARY
EDUCATION EXPENSES.—
‘‘(A) IN GENERAL.—The term ‘qualified ele-
mentary and secondary education expenses’
means tuition, fees, tutoring, special needs serv-
ices, books, supplies, equipment, transportation,
and supplementary expenses required for the en-
rollment or attendance at a public, private, or
sectarian school of any dependent of the taxpayer
with respect to whom the taxpayer is allowed a
deduction under section 151.
‘‘(B) 
SPECIAL
RULE
FOR
HOMESCHOOLING.—Such term shall include ex-
penses described in subparagraph (A) required
for education provided for homeschooling if the
requirements of any applicable State or local law
are met with respect to such education.
‘‘(C) SCHOOL.—The term ‘school’ means
any school which provides elementary education
or secondary education (through grade 12), as
determined under State law.
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‘‘(c) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Any amount paid or distrib-
uted shall be includible in gross income to the extent
required by section 529(c)(3) (determined as if such
account were a qualified tuition program and as if
qualified higher education expenses include qualified
education expenses).
‘‘(2) SPECIAL RULES FOR APPLYING ESTATE AND
GIFT
TAXES
WITH
RESPECT
TO
ACCOUNT.—Rules
similar to the rules of paragraphs (2), (4), and (5)
of section 529(c) shall apply for purposes of this sec-
tion.
‘‘(3) ADDITIONAL TAX FOR DISTRIBUTIONS NOT
USED FOR EDUCATIONAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by sec-
tion 529(f) shall apply to payments and dis-
tributions from an education individual retire-
ment account in the same manner as such tax
applies to qualified tuition programs (as defined
in section 529), except that section 529(f) shall
be applied by reference to qualified education ex-
penses.
‘‘(B) EXCESS
CONTRIBUTIONS
RETURNED
BEFORE DUE DATE OF RETURN.—Subparagraph
(A) shall not apply to the distribution to a con-
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tributor of any contribution paid during a tax-
able year to an education individual retirement
account to the extent that such contribution ex-
ceeds the limitation in section 4973(e) if such
distribution (and the net income with respect to
such excess contribution) meet requirements com-
parable to the requirements of section 529(f)(3).
‘‘(4) ROLLOVER
CONTRIBUTIONS.—Paragraph
(1) shall not apply to any amount paid or distributed
from an education individual retirement account to
the extent that the amount received is paid into an-
other education individual retirement account for the
benefit of the account holder or a member of the fam-
ily (within the meaning of section 529(e)(2)) of the
account holder not later than the 60th day after the
date of such payment or distribution. The preceding
sentence shall not apply to any payment or distribu-
tion if it applied to any prior payment or distribu-
tion during the 12-month period ending on the date
of the payment or distribution.
‘‘(5) 
CHANGE
IN
ACCOUNT
HOLDER.—Any
change in the account holder of an education individ-
ual retirement account shall not be treated as a dis-
tribution for purposes of paragraph (1) if the new ac-
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count holder is a member of the family (as so defined)
of the old account holder.
‘‘(6) SPECIAL
RULES
FOR
DEATH
AND
DI-
VORCE.—Rules similar to the rules of paragraphs (7)
and (8) of section 220(f) shall apply.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—Rules similar
to the rules of paragraphs (2) and (4) of section 408(e) shall
apply to any education individual retirement account.
‘‘(e) COMMUNITY PROPERTY LAWS.—This section shall
be applied without regard to any community property laws.
‘‘(f) CUSTODIAL ACCOUNTS.—For purposes of this sec-
tion, a custodial account shall be treated as a trust if the
assets of such account are held by a bank (as defined in
section 408(n)) or another person who demonstrates, to the
satisfaction of the Secretary, that the manner in which he
will administer the account will be consistent with the re-
quirements of this section, and if the custodial account
would, except for the fact that it is not a trust, constitute
an account described in subsection (b)(1). For purposes of
this title, in the case of a custodial account treated as a
trust by reason of the preceding sentence, the custodian of
such account shall be treated as the trustee thereof.
‘‘(g) REPORTS.—The trustee of an education individ-
ual retirement account shall make such reports regarding
such account to the Secretary and to the account holder with
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respect to contributions, distributions, and such other mat-
ters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals
at such time and in such manner as may be required by
those regulations.’’.
(b) TAX ON PROHIBITED TRANSACTIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
4975(e) (relating to prohibited transactions) is
amended by striking ‘‘or’’ at the end of subparagraph
(D), by redesignating subparagraph (E) as subpara-
graph (F), and by inserting after subparagraph (D)
the following new subparagraph:
‘‘(E) an education individual retirement ac-
count described in section 530, or’’.
(2) SPECIAL
RULE.—Subsection (c) of section
4975 is amended by adding at the end of subsection
(c) the following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION INDIVIDUAL
RETIREMENT
ACCOUNTS.—An individual for whose
benefit an education individual retirement account is
established and any contributor to such account shall
be exempt from the tax imposed by this section with
respect to any transaction concerning such account
(which would otherwise be taxable under this section)
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if section 530(d) applies with respect to such trans-
action.’’.
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION
INDIVIDUAL RETIREMENT ACCOUNTS.—Paragraph (2) of
section 6693(a) (relating to failure to provide reports on
individual retirement accounts or annuities) is amended by
striking ‘‘and’’ at the end of subparagraph (B), by striking
the period at the end of subparagraph (C) and inserting
‘‘, and’’, and by adding at the end the following new sub-
paragraph:
‘‘(D) Section 530(g) (relating to education
individual retirement accounts).’’.
(d) TECHNICAL AMENDMENTS.—
(1) Subparagraph (F) of section 26(b)(2), as
added by the preceding section, is amended by insert-
ing before the comma ‘‘and section 530(c)(3) (relating
to additional tax on certain distributions from edu-
cation individual retirement accounts)’’.
(2) Subparagraph (C) of section 135(c)(2), as
added by the preceding section, is amended by insert-
ing ‘‘, or to an education individual retirement ac-
count (as defined in section 530) on behalf of an ac-
count holder (as defined in such section),’’ after ‘‘(as
defined in such section)’’.
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(3) The table of sections for part VIII of sub-
chapter F of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 530. Education individual retirement accounts.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
Subtitle C—Other Education
Initiatives
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PRO-
VIDED EDUCATIONAL ASSISTANCE.
(a) IN GENERAL.—Section 127 (relating to edu-
cational assistance programs) is amended by striking sub-
section (d) and by redesignating subsection (e) as subsection
(d).
(b) REPEAL
OF LIMITATION
ON GRADUATE EDU-
CATION.—The last sentence of section 127(c)(1) is amended
by striking ‘‘, and such term also does not include any pay-
ment for, or the provision of any benefits with respect to,
any graduate level course of a kind normally taken by an
individual pursuing a program leading to a law, business,
medical, or other advanced academic or professional de-
gree’’.
(c) EFFECTIVE DATES.—
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(1) EXTENSION.—The amendments made by sub-
section (a) shall apply to taxable years beginning
after December 31, 1996.
(2) GRADUATE
EDUCATION.—The amendment
made by subsection (b) shall apply with respect to ex-
penses relating to courses beginning after December
31, 1996.
SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(c)(3)
BONDS OTHER THAN HOSPITAL BONDS.
Section 145(b) (relating to qualified 501(c)(3) bond)
is amended by adding at the end the following new para-
graph:
‘‘(5) TERMINATION OF LIMITATION.—This sub-
section shall not apply with respect to bonds issued
after the date of the enactment of this paragraph to
finance capital expenditures incurred after such
date.’’.
SEC. 223. INCREASE IN ARBITRAGE REBATE EXCEPTION
FOR GOVERNMENTAL BONDS USED TO FI-
NANCE EDUCATION FACILITIES.
(a) IN GENERAL.—Section 148(f)(4)(D) (relating to
exception for governmental units issuing $5,000,000 or less
of bonds) is amended by adding at the end the following
new clause:
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‘‘(vii) INCREASE
IN
EXCEPTION
FOR
BONDS FINANCING PUBLIC SCHOOL CAPITAL
EXPENDITURES.—Each of the $5,000,000
amounts in the preceding provisions of this
subparagraph shall be increased by the less-
er of $5,000,000 or so much of the aggregate
face amount of the bonds as are attributable
to financing the construction (within the
meaning of subparagraph (C)(iv)) of public
school facilities.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to bonds issued after December 31, 1997.
SEC. 224. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED
DEDUCTIONS NOT TO APPLY TO CERTAIN
CONTINUING EDUCATION EXPENSES OF ELE-
MENTARY AND SECONDARY SCHOOL TEACH-
ERS.
(a) IN GENERAL.—Section 67(b) (defining miscellane-
ous itemized deductions) is amended by striking ‘‘and’’ at
the end of paragraph (11), by striking the period at the
end of paragraph (12) and inserting ‘‘, and’’, and by add-
ing at the end the following:
‘‘(13) any deduction allowable for the qualified
professional development expenses of an eligible teach-
er.’’.
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(b) DEFINITIONS.—Section 67 is amended by adding
at the end the following new subsection:
‘‘(g) QUALIFIED PROFESSIONAL DEVELOPMENT EX-
PENSES OF ELIGIBLE TEACHERS.—For purposes of sub-
section (b)(13)—
‘‘(1) QUALIFIED
PROFESSIONAL
DEVELOPMENT
EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
professional development expenses’ means ex-
penses—
‘‘(i) for tuition, fees, books, supplies,
equipment, and transportation required for
the enrollment or attendance of an individ-
ual in a qualified course of instruction, and
‘‘(ii) with respect to which a deduction
is allowable under section 162 (determined
without regard to this section).
‘‘(B) QUALIFIED
COURSE
OF
INSTRUC-
TION.—The term ‘qualified course of instruction’
means a course of instruction which—
‘‘(i) is at an institution of higher edu-
cation (as defined in section 481 of the
Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the enact-
ment of this subsection), and
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‘‘(ii) is part of a program of profes-
sional development which is approved and
certified by the appropriate local edu-
cational agency as directly related to—
‘‘(I) an increase in the individ-
ual’s knowledge of content areas the in-
dividual is required to teach,
‘‘(II) the improvement of the indi-
vidual’s capacity to teach students to
the standards of the local educational
agency, or
‘‘(III) the improvement of the in-
dividual’s capacity to use learning
technology in teaching.
‘‘(C) LOCAL EDUCATIONAL AGENCY.—The term
‘local educational agency’ has the meaning given such
term by section 14101 of the Elementary and Second-
ary Education Act of 1965, as so in effect.
‘‘(2) ELIGIBLE TEACHER.—
‘‘(A) IN
GENERAL.—The term ‘eligible
teacher’ means an individual who—
‘‘(i) is a kindergarten through grade 12
teacher in an elementary or secondary
school, and
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‘‘(ii) has completed at least 2 academic
years as a teacher described in subpara-
graph (A) before the qualified professional
development expenses of the individual have
been incurred.
‘‘(B) 
ELEMENTARY
OR
SECONDARY
SCHOOL.—The terms ‘elementary school’ and
‘secondary school’ have the meanings given such
terms by section 14101 of the Elementary and
Secondary Education Act of 1965 (20 U.S.C.
8801), as so in effect.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 225. TREATMENT OF CANCELLATION OF CERTAIN STU-
DENT LOANS.
(a) CERTAIN LOANS BY EXEMPT ORGANIZATIONS.—
(1) IN
GENERAL.—Paragraph (2) of section
108(f) (defining student loan) is amended by striking
‘‘or’’ at the end of subparagraph (B) and by striking
subparagraph (D) and inserting the following:
‘‘(D) any educational organization de-
scribed in section 170(b)(1)(A)(ii) if such loan is
made—
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‘‘(i) pursuant to an agreement with
any entity described in subparagraph (A),
(B), or (C) under which the funds from
which the loan was made were provided to
such educational organization, or
‘‘(ii) pursuant to a program of such
educational organization which is designed
to encourage its students to serve in occupa-
tions with unmet needs or in areas with
unmet needs and under which the services
provided by the students (or former stu-
dents) are for or under the direction of a
governmental unit or an organization de-
scribed in section 501(c)(3) and exempt
from tax under section 501(a).
The term ‘student loan’ includes any loan made by
an educational organization so described or by an or-
ganization exempt from tax under section 501(a) to
refinance a loan meeting the requirements of the pre-
ceding sentence.’’.
(2) EXCEPTION FOR DISCHARGES ON ACCOUNT
OF SERVICES PERFORMED FOR CERTAIN LENDERS.—
Subsection (f) of section 108 is amended by adding at
the end the following new paragraph:
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‘‘(3) EXCEPTION FOR DISCHARGES ON ACCOUNT
OF SERVICES PERFORMED FOR CERTAIN LENDERS.—
Paragraph (1) shall not apply to the discharge of a
loan made by an organization described in paragraph
(2)(D) (or by an organization described in paragraph
(2)(E) from funds provided by an organization de-
scribed in paragraph (2)(D)) if the discharge is on
account of services performed for either such organiza-
tion.’’.
(b) CERTAIN STUDENT LOANS THE REPAYMENT OF
WHICH IS INCOME CONTINGENT.—Paragraph (1) of section
108(f) is amended by striking ‘‘any student loan if’’ and
all that follows and inserting ‘‘any student loan if—
‘‘(A) such discharge was pursuant to a pro-
vision of such loan under which all or part of the
indebtedness of the individual would be dis-
charged if the individual worked for a certain
period of time in certain professions for any of
a broad class of employers, or
‘‘(B) in the case of a loan made under part
D of title IV of the Higher Education Act of
1965 which has a repayment schedule established
under section 455(e)(4) of such Act (relating to
income contingent repayments), such discharge is
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after the maximum repayment period under such
loan (as prescribed under such part).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to discharges of indebtedness after the
date of the enactment of this Act.
TITLE III—SAVINGS AND
INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
SEC. 301. RESTORATION OF IRA DEDUCTION FOR CERTAIN
TAXPAYERS.
(a) INCREASE IN INCOME LIMITS APPLICABLE TO AC-
TIVE PARTICIPANTS.—
(1) IN GENERAL.—Subparagraph (B) of section
219(g)(3) (relating to applicable dollar amount) is
amended to read as follows:
‘‘(B) APPLICABLE
DOLLAR
AMOUNT.—The
term ‘applicable dollar amount’ means the fol-
lowing:
‘‘(i) In the case of a taxpayer filing a
joint return:
The applicable
‘‘For taxable years beginning in:
dollar amount is:
1998 or 1999 ..................................................................................
$50,000
2000 or 2001 ..................................................................................
$60,000
2002 or 2003 ..................................................................................
$70,000
2004 and thereafter ........................................................................
$80,000.
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‘‘(ii) In the case of any other taxpayer
(other than a married individual filing a
separate return):
The applicable
‘‘For taxable years beginning in:
dollar amount is:
1998 or 1999 ..................................................................................
$30,000
2000 or 2001 ..................................................................................
$35,000
2002 or 2003 ..................................................................................
$40,000
2004 and thereafter ........................................................................
$50,000.
‘‘(iii) In the case of a married individ-
ual filing a separate return, zero.’’.
(2) INCREASE IN PHASE-OUT RANGE FOR JOINT
RETURNS.—Clause (ii) of section 219(g)(2)(A) is
amended by inserting ‘‘($20,000 in the case of a joint
return for a taxable year beginning after December
31, 2003)’’.
(b) LIMITATIONS
FOR ACTIVE PARTICIPATION NOT
BASED ON SPOUSE’S PARTICIPATION.—Paragraph (1) of
section 219(g) (relating to limitation on deduction for ac-
tive participants in certain pension plans) is amended by
striking ‘‘or the individual’s spouse’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 302. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE
INDIVIDUAL RETIREMENT ACCOUNTS.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 (relating to pension, profit-sharing, stock
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bonus plans, etc.) is amended by inserting after section 408
the following new section:
‘‘SEC. 408A. IRA PLUS ACCOUNTS.
‘‘(a) GENERAL RULE.—Except as provided in this sec-
tion, an IRA Plus account shall be treated for purposes of
this title in the same manner as an individual retirement
plan.
‘‘(b) IRA PLUS ACCOUNT.—For purposes of this title,
the term ‘IRA Plus account’ means an individual retire-
ment plan (as defined in section 7701(a)(37)) which is des-
ignated (in such manner as the Secretary may prescribe)
at the time of establishment of the plan as an IRA Plus
account. Such designation shall be made in such manner
as the Secretary may prescribe.
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed under section 219 for a contribution
to an IRA Plus account.
‘‘(2) 
CONTRIBUTION
LIMIT.—The 
aggregate
amount of contributions for any taxable year to all
IRA Plus accounts maintained for the benefit of an
individual shall not exceed the excess (if any) of—
‘‘(A) the maximum amount allowable as a
deduction under section 219 with respect to such
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individual for such taxable year (computed with-
out regard to subsection (g) of such section), over
‘‘(B) the amount so allowed.
‘‘(3) CONTRIBUTIONS
PERMITTED
AFTER
AGE
701⁄2.—Contributions to an IRA Plus account may be
made even after the individual for whom the account
is maintained has attained age 701⁄2.
‘‘(4) MANDATORY DISTRIBUTION RULES NOT TO
APPLY, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), subsections (a)(6) and (b)(3)
of section 408 (relating to required distributions)
and section 4974 (relating to excise tax on cer-
tain accumulations in qualified retirement
plans) shall not apply to any IRA Plus account.
‘‘(B) POST-DEATH
DISTRIBUTIONS.—Rules
similar to the rules of section 401(a)(9) (other
than subparagraph (A) thereof) shall apply for
purposes of this section.
‘‘(5) ROLLOVER CONTRIBUTIONS.—
‘‘(A) IN
GENERAL.—No rollover contribu-
tion may be made to an IRA Plus account unless
it is a qualified rollover contribution.
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‘‘(B) COORDINATION WITH LIMIT.—A quali-
fied rollover contribution shall not be taken into
account for purposes of paragraph (2).
‘‘(6) TIME
WHEN
CONTRIBUTIONS
MADE.—For
purposes of this section, the rule of section 219(f)(3)
shall apply.
‘‘(d) DISTRIBUTION RULES.—For purposes of this
title—
‘‘(1) GENERAL RULES.—
‘‘(A) EXCLUSIONS FROM GROSS INCOME.—
Any qualified distribution from an IRA Plus ac-
count shall not be includible in gross income.
‘‘(B) NONQUALIFIED
DISTRIBUTIONS.—In
applying section 72 to any distribution from an
IRA Plus account which is not a qualified dis-
tribution, such distribution shall be treated as
made from contributions to the IRA Plus ac-
count to the extent that such distribution, when
added to all previous distributions from the IRA
Plus account, does not exceed the aggregate
amount of contributions to the IRA Plus ac-
count. For purposes of the preceding sentence, all
IRA Plus accounts maintained for the benefit of
an individual shall be treated as 1 account.
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‘‘(2) QUALIFIED
DISTRIBUTION.—For purposes
of this subsection—
‘‘(A) IN GENERAL.—The term ‘qualified dis-
tribution’ means any payment or distribution—
‘‘(i) made on or after the date on
which the individual attains age 591⁄2,
‘‘(ii) made to a beneficiary (or to the
estate of the individual) on or after the
death of the individual,
‘‘(iii) attributable to the individual’s
being disabled (within the meaning of sec-
tion 72(m)(7)), or
‘‘(iv) which is a qualified special pur-
pose distribution.
‘‘(B) CERTAIN
DISTRIBUTIONS
WITHIN
YEARS.—A payment or distribution shall not be
treated as a qualified distribution under sub-
paragraph (A) if—
‘‘(i) it is made within the 5-taxable
year period beginning with the 1st taxable
year for which the individual made a con-
tribution to an IRA Plus account (or such
individual’s spouse made a contribution to
an IRA Plus account) established for such
individual, or
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‘‘(ii) in the case of a payment or dis-
tribution properly allocable (as determined
in the manner prescribed by the Secretary)
to a qualified rollover contribution (or in-
come allocable thereto), it is made within
the 5-taxable year period beginning with the
taxable year in which the rollover contribu-
tion was made.
Clause (ii) shall not apply to a qualified rollover
contribution from an IRA plus account.
‘‘(3) ROLLOVERS.—
‘‘(A) IN GENERAL.—Any distribution which
is transferred in a qualified rollover contribution
to an IRA Plus account shall not be included in
gross income.
‘‘(B) INCOME
INCLUSION
FOR
ROLLOVERS
FROM NON-PLUS IRAS.—
‘‘(i) IN GENERAL.—In the case of any
distribution to which this subparagraph ap-
plies—
‘‘(I) sections 72(t) and 408(d)(3)
shall not apply, and
‘‘(II) any amount required to be
included in gross income by reason of
this paragraph shall be so included
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ratably over the 4-taxable year period
beginning with the taxable year in
which the payment or distribution is
made.
‘‘(ii) DISTRIBUTIONS TO WHICH SUB-
PARAGRAPH
APPLIES.—This subparagraph
shall apply to a distribution from an indi-
vidual retirement plan (other than an IRA
Plus account) maintained for the benefit of
an individual to an IRA Plus account
maintained for the benefit of such individ-
ual if such distribution would be a qualified
rollover contribution were such individual
retirement plan an IRA Plus account.
Clause (i)(II) shall only apply to distribu-
tions before January 1, 1999.
‘‘(iii) CONVERSIONS.—The conversion
of an individual retirement plan (other
than an IRA Plus account) to an IRA Plus
account shall be treated for purposes of this
subparagraph as a distribution from such
plan to such IRA Plus account.
‘‘(C) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—The Secretary shall require that trust-
ees of IRA Plus accounts, trustees of individual
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retirement plans, or both, whichever is appro-
priate, shall include such additional information
in reports required under section 408(i) as is
necessary to ensure that amounts required to be
included in gross income under subparagraph
(B) are so included.
‘‘(4) COORDINATION WITH INDIVIDUAL RETIRE-
MENT ACCOUNTS.—Section 408(d)(2) shall not apply
to IRA Plus accounts.
‘‘(5) QUALIFIED
SPECIAL
PURPOSE
DISTRIBU-
TION.—For purposes of this section, the term ‘quali-
fied special purpose distribution’ means any distribu-
tion to which subparagraph (D) or (F) of section
72(t)(2) applies.
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For pur-
poses of this section, the term ‘qualified rollover contribu-
tion’ means a rollover contribution to an IRA Plus account
from another such account, or from an individual retire-
ment plan, but only if such rollover contribution meets the
requirements of section 408(d)(3). For purposes of section
408(d)(3)(B), there shall be disregarded any qualified roll-
over contribution from an individual retirement plan (other
than an IRA Plus account) to an IRA Plus account.’’.
(b) EXCESS CONTRIBUTIONS.—
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(1) Section 4973 is amended by adding at the
end the following new subsection:
‘‘(f) EXCESS CONTRIBUTIONS
TO IRA PLUS AC-
COUNTS.—For purposes of this section, in the case of IRA
Plus accounts, the term ‘excess contributions’ means the
amount by which the amount contributed for the taxable
year to such accounts exceeds the limitation in section
408A(c)(2).’’.
(2) Subsection (b) of section 4973 is amended by
adding at the end the following new sentence: ‘‘For
purposes of this subsection, an IRA Plus account shall
not be treated as an individual retirement plan.’’.
(c) SPOUSAL IRA.—Clause (ii) of section 219(c)(1)(B)
is amended to read as follows:
‘‘(ii) the compensation includible in
the gross income of such individual’s spouse
for the taxable year reduced by—
‘‘(I) the amount allowed as a de-
duction under subsection (a) to such
spouse for such taxable year, and
‘‘(II) the amount of any contribu-
tion on behalf of such spouse to an IRA
Plus account under section 408A for
such taxable year.’’.
(d) REPEAL OF NONDEDUCTIBLE CONTRIBUTIONS.—
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(1) Subsection (f) of section 219 is amended by
striking paragraph (7).
(2) Paragraph (5) of section 408(d) is amended
by striking the last sentence.
(3) Section 408(o) is amended by adding at the
end the following new paragraph:
‘‘(5) TERMINATION.—This subsection shall not
apply to any designated nondeductible contribution
for any taxable year beginning after December 31,
1997.’’.
(4) Section 4973(b) is amended by striking the
last sentence.
(e) CONFORMING AMENDMENT.—The table of sections
for subpart A of part I of subchapter D of chapter 1 is
amended by inserting after the item relating to section 408
the following new item:
‘‘Sec. 408A. IRA Plus accounts.’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 303. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE
USED 
WITHOUT 
PENALTY 
TO 
PURCHASE
FIRST HOMES AND WHEN UNEMPLOYED.
(a) FIRST HOMES.—
(1) IN GENERAL.—Paragraph (2) of section 72(t)
(relating to exceptions to 10-percent additional tax on
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early distributions from qualified retirement plans),
as amended by section 203, is amended by adding at
the end the following new subparagraph:
‘‘(F) DISTRIBUTIONS FROM CERTAIN PLANS
FOR FIRST HOME PURCHASES.—Distributions to
an individual from an individual retirement
plan which are qualified first-time homebuyer
distributions (as defined in paragraph (8)). Dis-
tributions shall not be taken into account under
the preceding sentence if such distributions are
described in subparagraph (A), (C), (D), or (E)
or to the extent paragraph (1) does not apply to
such distributions by reason of subparagraph
(B).’’.
(2) DEFINITIONS.—Section 72(t), as amended by
section 203, is amended by adding at the end the fol-
lowing new paragraphs:
‘‘(8) QUALIFIED
FIRST-TIME
HOMEBUYER
DIS-
TRIBUTIONS.—For purposes of paragraph (2)(F)—
‘‘(A) IN
GENERAL.—The term ‘qualified
first-time homebuyer distribution’ means any
payment or distribution received by an individ-
ual to the extent such payment or distribution is
used by the individual before the close of the
120th day after the day on which such payment
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or distribution is received to pay qualified acqui-
sition costs with respect to a principal residence
of a first-time homebuyer who is such individual,
the spouse of such individual, or any child,
grandchild, or ancestor of such individual or the
individual’s spouse.
‘‘(B) LIFETIME DOLLAR LIMITATION.—The
aggregate amount of payments or distributions
received by an individual which may be treated
as qualified first-time homebuyer distributions
for any taxable year shall not exceed the excess
(if any) of—
‘‘(i) $10,000, over
‘‘(ii) the aggregate amounts treated as
qualified first-time homebuyer distributions
with respect to such individual for all prior
taxable years.
‘‘(C) QUALIFIED ACQUISITION COSTS.—For
purposes of this paragraph, the term ‘qualified
acquisition costs’ means the costs of acquiring,
constructing, or reconstructing a residence. Such
term includes any usual or reasonable settlement,
financing, or other closing costs.
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‘‘(D) 
FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For 
purposes 
of 
this 
para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual if—
‘‘(I) such individual (and if mar-
ried, such individual’s spouse) had no
present ownership interest in a prin-
cipal residence during the 2-year pe-
riod ending on the date of acquisition
of the principal residence to which this
paragraph applies, and
‘‘(II) subsection (h) or (k) of sec-
tion 1034 (as in effect on the day be-
fore the date of the enactment of this
paragraph) did not suspend the run-
ning of any period of time specified in
section 1034 (as so in effect) with re-
spect to such individual on the day be-
fore the date the distribution is applied
pursuant to subparagraph (A).
‘‘(ii) 
PRINCIPAL
RESIDENCE.—The
term ‘principal residence’ has the same
meaning as when used in section 121.
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‘‘(iii) DATE
OF
ACQUISITION.—The
term ‘date of acquisition’ means the date—
‘‘(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is en-
tered into, or
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced.
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—If any distribution from any indi-
vidual retirement plan fails to meet the require-
ments of subparagraph (A) solely by reason of a
delay or cancellation of the purchase or construc-
tion of the residence, the amount of the distribu-
tion may be contributed to an individual retire-
ment plan as provided in section 408(d)(3)(A)(i)
(determined by substituting ‘120 days’ for ‘60
days’ in such section), except that—
‘‘(i) section 408(d)(3)(B) shall not be
applied to such contribution, and
‘‘(ii) such amount shall not be taken
into account in determining whether section
408(d)(3)(A)(i) applies 
to 
any 
other
amount.’’.
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(b) PENALTY-FREE DISTRIBUTIONS FOR CERTAIN UN-
EMPLOYED INDIVIDUALS.—Subparagraph (D) of section
72(t)(2) is amended—
(1) in clause (i), by inserting ‘‘and’’ at the end
of subclause (I), by striking ‘‘, and’’ at the end of sub-
clause (II) and inserting a period, and by striking
subclause (III), and
(2) by striking ‘‘FOR HEALTH INSURANCE PRE-
MIUMS’’ in the heading thereof.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to payments and distributions in tax-
able years beginning after December 31, 1997.
SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECT-
IBLES.
(a) IN GENERAL.—Paragraph (3) of section 408(m)
(relating to exception for certain coins) is amended to read
as follows:
‘‘(3) EXCEPTION FOR CERTAIN COINS AND BUL-
LION.—For purposes of this subsection, the term ‘col-
lectible’ shall not include—
‘‘(A) any coin which is—
‘‘(i) a gold coin described in paragraph
(7), (8), (9), or (10) of section 5112(a) of
title 31, United States Code,
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‘‘(ii) a silver coin described in section
5112(e) of title 31, United States Code,
‘‘(iii) a platinum coin described in sec-
tion 5112(k) of title 31, United States Code,
or
‘‘(iv) a coin issued under the laws of
any State, or
‘‘(B) any gold, silver, platinum, or palla-
dium bullion of a fineness equal to or exceeding
the minimum fineness required for metals which
may be delivered in satisfaction of a regulated
futures contract subject to regulation by the
Commodity Futures Trading Commission under
the Commodity Exchange Act,
if such bullion is in the physical possession of a trust-
ee described under subsection (a) of this section.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
Subtitle B—Capital Gains
SEC. 311. 20-PERCENT MAXIMUM CAPITAL GAINS RATE FOR
INDIVIDUALS.
(a) IN GENERAL.—Subsection (h) of section 1 (relating
to maximum capital gains rate) is amended to read as fol-
lows:
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‘‘(h) MAXIMUM CAPITAL GAINS RATE.—
‘‘(1) IN GENERAL.—If a taxpayer has a net cap-
ital gain for any taxable year, the tax imposed by
this section for such taxable year shall not exceed the
sum of—
‘‘(A) a tax computed at the rates and in the
same manner as if this subsection had not been
enacted on the greater of—
‘‘(i) taxable income reduced by the net
capital gain, or
‘‘(ii) the amount of taxable income
taxed at a rate below 28 percent, plus
‘‘(B) 24 percent of the lesser of—
‘‘(i) the unrecaptured section 1250
gain, or
‘‘(ii) the amount of taxable income in
excess of the sum of the amount on which
tax is determined under subparagraph (A)
plus the net capital gain determined with-
out regard to unrecaptured section 1250
gain, plus
‘‘(C) 28 percent of the amount of taxable in-
come in excess of the sum of—
‘‘(i) the adjusted net capital gain, plus
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‘‘(ii) the sum of the amounts on which
tax is determined under subparagraphs (A)
and (B), plus
‘‘(D) 10 percent of so much of the tax-
payer’s adjusted net capital gain (or, if less, tax-
able income) as does not exceed the excess (if
any) of—
‘‘(i) the amount of taxable income
which would (without regard to this para-
graph) be taxed at a rate of 15 percent or
less, over
‘‘(ii) the taxable income reduced by the
adjusted net capital gain, plus
‘‘(E) 20 percent of the taxpayer’s adjusted
net capital gain (or, if less, taxable income) in
excess of the amount on which a tax is deter-
mined under subparagraph (D).
‘‘(2) NET CAPITAL GAIN TAKEN INTO ACCOUNT AS
INVESTMENT
INCOME.—For purposes of this sub-
section, the net capital gain for any taxable year
shall be reduced (but not below zero) by the amount
which the taxpayer takes into account as investment
income under section 163(d)(4)(B)(iii).
‘‘(3) ADJUSTED NET CAPITAL GAIN.—For pur-
poses of this subsection, the term ‘adjusted net capital
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gain’ means net capital gain determined without re-
gard to—
‘‘(A) collectibles gain, and
‘‘(B) unrecaptured section 1250 gain.
‘‘(4) COLLECTIBLES
GAIN.—For purposes of
paragraph (3)—
‘‘(A) IN
GENERAL.—The term ‘collectibles
gain’ means gain from the sale or exchange of a
collectible (as defined in section 408(m) without
regard to paragraph (3) thereof) which is a cap-
ital asset held for more than 1 year but only to
the extent such gain is taken into account in
computing gross income.
‘‘(B) PARTNERSHIPS, ETC.—For purposes of
subparagraph (A), any gain from the sale of an
interest in a partnership, S corporation, or trust
which is attributable to unrealized appreciation
in the value of collectibles shall be treated as
gain from the sale or exchange of a collectible.
Rules similar to the rules of section 751 shall
apply for purposes of the preceding sentence.
‘‘(5) UNRECAPTURED SECTION 1250 GAIN.—For
purposes of this subsection, the term ‘unrecaptured
section 1250 gain’ means the excess (if any) of—
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‘‘(A) the amount which would be treated as
ordinary income under section 1245 if all section
1250 property disposed of by the taxpayer were
section 1245 property, over
‘‘(B) the amount treated as ordinary in-
come under section 1250.
In the case of a taxable year which includes May 7,
1997, unrecaptured section 1250 gain shall be deter-
mined by taking into account only the gain properly
taken into account for the portion of the taxable year
after May 6, 1997.
‘‘(6) PRE-EFFECTIVE DATE GAIN.—
‘‘(A) IN GENERAL.—In the case of a taxable
year which includes May 7, 1997, adjusted net
capital gain shall be determined without regard
to pre-May 7, 1997, gain.
‘‘(B) PRE-MAY
7, 1997, GAIN.—The term
‘pre-May 7, 1997, gain’ means the amount which
would be adjusted net capital gain for the tax-
able year if adjusted net capital gain were deter-
mined by taking into account only the gain or
loss properly taken into account for the portion
of the taxable year before May 7, 1997.
‘‘(C) SPECIAL RULES FOR PASS-THRU ENTI-
TIES.—In applying subparagraph (A) with re-
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spect to any pass-thru entity, the determination
of when gains and loss are properly taken into
account shall be made at the entity level.
‘‘(D) PASS-THRU
ENTITY
DEFINED.—For
purposes of subparagraph (C), the term ‘pass-
thru entity’ means—
‘‘(i) a regulated investment company,
‘‘(ii) a real estate investment trust,
‘‘(iii) an S corporation,
‘‘(iv) a partnership,
‘‘(v) an estate or trust, and
‘‘(vi) a common trust fund.’’.
(b) MINIMUM TAX.—
(1) IN GENERAL.—Subsection (b) of section 55 is
amended by adding at the end the following new
paragraph:
‘‘(3) MAXIMUM RATE OF TAX ON NET CAPITAL
GAIN OF NONCORPORATE TAXPAYERS.—The amount
determined under the first sentence of paragraph
(1)(A)(i) shall not exceed the sum of—
‘‘(A) the amount determined under such
first sentence computed at the rates and in the
same manner as if this paragraph had not been
enacted on the taxable excess reduced by the ex-
cess of the net capital gain over the sum of the
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collectibles gain (as defined in section 1(h)(4))
and the pre-effective date gain (as defined in sec-
tion 1(h)(6)), plus
‘‘(B) 24 percent of the lesser of—
‘‘(i) the unrecaptured section 1250
gain (as defined in section 1(h)(5)), or
‘‘(ii) the amount of taxable excess in
excess of the sum of—
‘‘(I) the adjusted net capital gain,
plus
‘‘(II) the amount on which a tax
is determined under subparagraph (A),
plus
‘‘(C) 10 percent of so much of the taxpayer’s
adjusted net capital gain (or, if less, taxable ex-
cess) as does not exceed the amount on which a
tax is determined under section 1(h)(1)(B), plus
‘‘(D) 20 percent of the taxpayer’s adjusted
net capital gain (or, if less, taxable excess) in ex-
cess of the amount on which tax is determined
under subparagraph (C).’’.
(2) CONFORMING
AMENDMENT.—Clause (ii) of
section 55(b)(1)(A) is amended by striking ‘‘clause
(i)’’ and inserting ‘‘this subsection’’.
(c) OTHER CONFORMING AMENDMENTS.—
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(1) Subsection (d) of section 291 is amended by
inserting at the end the following new sentence: ‘‘Any
capital gain dividend treated as having been paid out
of such difference to a shareholder which is not a cor-
poration retains its characters as unrecaptured sec-
tion 1250 gain for purposes of applying section 1(h)
to such shareholder.’’.
(2) Paragraph (1) of section 1445(e) is amended
by striking ‘‘28 percent’’ and inserting ‘‘20 percent’’.
(3) The second sentence of section 7518(g)(6)(A),
and the second sentence of section 607(h)(6)(A) of the
Merchant Marine Act, 1936, are each amended by
striking ‘‘28 percent’’ and inserting ‘‘20 percent’’.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years ending after May 6, 1997.
(2) WITHHOLDING.—The amendment made by
subsection (c)(2) shall apply only to amounts paid
after the date of the enactment of this Act.
SEC. 312. MODIFICATIONS TO EXCLUSION OF GAIN ON CER-
TAIN SMALL BUSINESS STOCK.
(a) EXCLUSION AVAILABLE TO CORPORATIONS.—
(1) IN GENERAL.—Subsection (a) of section 1202
is amended by striking ‘‘In the case of a taxpayer
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other than a corporation, gross’’ and inserting
‘‘Gross’’.
(2) TECHNICAL AMENDMENT.—Subsection (c) of
section 1202 is amended by adding at the end the fol-
lowing new paragraph:
‘‘(4) STOCK
HELD
AMONG
MEMBERS
OF
CON-
TROLLED GROUP NOT ELIGIBLE.—Stock of a member
of a parent-subsidiary controlled group (as defined in
subsection (c)(3)) shall not be treated as qualified
small business stock while held by another member of
such group.’’.
(b) REPEAL OF MINIMUM TAX PREFERENCE.—
(1) Subsection (a) of section 57 is amended by
striking paragraph (7).
(2) Subclause (II) of section 53(d)(1)(B)(ii) is
amended by striking ‘‘, (5), and (7)’’ and inserting
‘‘and (5)’’.
(c) STOCK OF LARGER BUSINESSES ELIGIBLE FOR
REDUCED RATES.—Paragraph (1) of section 1202(d) is
amended by striking ‘‘$50,000,000’’ each place it appears
and inserting ‘‘$100,000,000’’.
(d) REPEAL
OF PER-ISSUER LIMITATION.—Section
1202 is amended by striking subsection (b).
(e) OTHER MODIFICATIONS.—
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(1) REPEAL
OF
WORKING
CAPITAL
LIMITA-
TION.—Paragraph (6) of section 1202(e) is amend-
ed—
(A) by striking ‘‘2 years’’ in subparagraph
(B) and inserting ‘‘5 years’’, and
(B) by striking the last sentence.
(2) EXCEPTION
FROM
REDEMPTION
RULES
WHERE BUSINESS PURPOSE.—Paragraph (3) of sec-
tion 1202(c) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) WAIVER
WHERE
BUSINESS
PUR-
POSE.—A purchase of stock by the issuing cor-
poration shall be disregarded for purposes of sub-
paragraph (B) if the issuing corporation estab-
lishes that there was a business purpose for such
purchase and one of the principal purposes of the
purchase was not to avoid the limitations of this
section.’’.
(f) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1202 is amended by
striking ‘‘subsections (f) and (h)’’ and inserting ‘‘sub-
sections (e) and (g)’’.
(2) Paragraph (2) of section 1202(c) is amend-
ed—
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(A) by striking ‘‘subsection (e)’’ each place
it appears and inserting ‘‘subsection (d)’’, and
(B) by striking ‘‘subsection (e)(4)’’ in sub-
paragraph (B)(ii) and inserting ‘‘subsection
(d)(4)’’.
(3) Paragraph (1) of section 1202(e) is amended
by striking ‘‘subsection (c)(2)’’ and inserting ‘‘sub-
section (b)(2)’’.
(4) Paragraph (1) of section 1202(g) is amended
to read as follows:
‘‘(1) IN GENERAL.—If any amount included in
gross income by reason of holding an interest in a
pass-thru entity meets the requirements of paragraph
(2), such amount shall be treated as gain from the
sale or exchange of any qualified small business stock
held for more than 5 years.’’.
(5) Section 1202, as amended by the preceding
provisions of this section, is amended by redesignat-
ing subsections (c) through (k) as subsections (b)
through (j), respectively.
(6) So much of paragraph (2) of section 172(d)
as precedes subparagraph (A) thereof is amended to
read as follows:
‘‘(2) CAPITAL GAINS AND LOSSES.—In the case of
any taxpayer—’’.
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(g) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to stock issued after August 10, 1993.
(2) SUBSECTIONS (a) and (c).—The amendments
made by subsections (a) and (c) shall apply to stock
issued after the date of the enactment of this Act.
SEC. 313. ROLLOVER OF GAIN FROM SALE OF QUALIFIED
STOCK.
(a) IN GENERAL.—Part III of subchapter O of chapter
1 is amended by adding at the end the following new sec-
tion:
‘‘SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL
BUSINESS STOCK TO ANOTHER QUALIFIED
SMALL BUSINESS STOCK.
‘‘(a) NONRECOGNITION OF GAIN.—In the case of any
sale of qualified small business stock with respect to which
the taxpayer elects the application of this section, eligible
gain from such sale shall be recognized only to the extent
that the amount realized on such sale exceeds—
‘‘(1) the cost of any qualified small business
stock purchased by the taxpayer during the 60-day
period beginning on the date of such sale, reduced by
‘‘(2) any portion of such cost previously taken
into account under this section.
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This section shall not apply to any gain which is treated
as ordinary income for purposes of this title.
‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) QUALIFIED SMALL BUSINESS STOCK.—The
term ‘qualified small business stock’ has the meaning
given such term by section 1202(b).
‘‘(2) ELIGIBLE GAIN.—The term ‘eligible gain’
means any gain from the sale or exchange of qualified
small business stock held for more than 5 years.
‘‘(3) PURCHASE.—A taxpayer shall be treated as
having purchased any property if, but for paragraph
(4), the unadjusted basis of such property in the
hands of the taxpayer would be its cost (within the
meaning of section 1012).
‘‘(4) BASIS ADJUSTMENTS.—If gain from any
sale is not recognized by reason of subsection (a), such
gain shall be applied to reduce (in the order acquired)
the basis for determining gain or loss of any qualified
small business stock which is purchased by the tax-
payer during the 60-day period described in sub-
section (a).
‘‘(c) SPECIAL RULES FOR TREATMENT OF REPLACE-
MENT STOCK.—
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‘‘(1) HOLDING PERIOD FOR ACCRUED GAIN.—For
purposes of this chapter, gain from the disposition of
any replacement qualified small business stock shall
be treated as gain from the sale or exchange of quali-
fied small business stock held more than 5 years to the
extent that the amount of such gain does not exceed
the amount of the reduction in the basis of such stock
by reason of subsection (b)(4).
‘‘(2) TACKING OF HOLDING PERIOD FOR PUR-
POSES OF DEFERRAL.—Solely for purposes of apply-
ing this section, if any replacement qualified small
business stock is disposed of before the taxpayer has
held such stock for more than 5 years, gain from such
stock shall be treated eligible gain for purposes of sub-
section (a).
‘‘(3) REPLACEMENT QUALIFIED SMALL BUSINESS
STOCK.—For purposes of this subsection, the term ‘re-
placement qualified small business stock’ means any
qualified small business stock the basis of which was
reduced under subsection (b)(4).’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 1016(a)(23) is amended—
(A) by striking ‘‘or 1044’’ and inserting ‘‘,
1044, or 1045’’, and
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(B) by striking ‘‘or 1044(d)’’ and inserting
‘‘, 1044(d), or 1045(b)(4)’’.
(2) The table of sections for part III of sub-
chapter O of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 1045. Rollover of gain from qualified small business stock to
another qualified small business stock.’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to stock issued after August 10, 1993.
(2) STOCK HELD BY A CORPORATION.—In the
case of stock held by a corporation, the amendments
made by this section shall apply to stock issued after
the date of the enactment of this Act.
SEC. 314. EXEMPTION FROM TAX FOR GAIN ON SALE OF
PRINCIPAL RESIDENCE.
(a) IN GENERAL.—Section 121 (relating to one-time
exclusion of gain from sale of principal residence by indi-
vidual who has attained age 55) is amended to read as fol-
lows:
‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
‘‘(a) EXCLUSION.—Gross income shall not include
gain from the sale or exchange of property if, during the
5-year period ending on the date of the sale or exchange,
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such property has been owned and used by the taxpayer
as the taxpayer’s principal residence for periods aggregat-
ing 2 years or more.
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—The amount of gain excluded
from gross income under subsection (a) with respect
to any sale or exchange shall not exceed $250,000.
‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT
RETURNS.—Paragraph (1) shall be applied by sub-
stituting ‘$500,000’ for ‘$250,000’ if—
‘‘(A) a husband and wife make a joint re-
turn for the taxable year of the sale or exchange
of the property,
‘‘(B) either spouse meets the ownership re-
quirements of subsection (a) with respect to such
property,
‘‘(C) both spouses meet the use requirements
of subsection (a) with respect to such property,
and
‘‘(D) neither spouse is ineligible for the ben-
efits of subsection (a) with respect to such prop-
erty by reason of paragraph (3).
‘‘(3) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
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‘‘(A) IN GENERAL.—Subsection (a) shall not
apply to any sale or exchange by the taxpayer
if, during the 2-year period ending on the date
of such sale or exchange, there was any other sale
or exchange by the taxpayer to which subsection
(a) applied.
‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN
INTO ACCOUNT.—Subparagraph (A) shall be ap-
plied without regard to any sale or exchange be-
fore May 7, 1997.
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the ownership
and use requirements of subsection (a) shall not apply
and subsection (b)(3) shall not apply; but the amount
of gain excluded from gross income under subsection
(a) with respect to such sale or exchange shall not ex-
ceed—
‘‘(A) the amount which bears the same ratio
to the amount which would be so excluded if such
requirements had been met, as
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the
5-year period ending on the date of such
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sale or exchange, such property has been
owned and used by the taxpayer as the tax-
payer’s principal residence, or
‘‘(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer to which subsection (a) applied
and before the date of such sale or exchange,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION
APPLIES.—This subsection shall apply to
any sale or exchange if—
‘‘(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of—
‘‘(i) a failure to meet the ownership
and use requirements of subsection (a), or
‘‘(ii) subsection (b)(3), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) PROPERTY
OF
DECEASED
SPOUSE.—For
purposes of this section, in the case of an unmarried
individual whose spouse is deceased on the date of the
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sale or exchange of property, the period such unmar-
ried individual owned such property shall include the
period such deceased spouse owned such property be-
fore death.
‘‘(2) PROPERTY OWNED BY SPOUSE OR FORMER
SPOUSE.—For purposes of this section—
‘‘(A) PROPERTY TRANSFERRED TO INDIVID-
UAL FROM SPOUSE OR FORMER SPOUSE.—In the
case of an individual holding property trans-
ferred to such individual in a transaction de-
scribed in section 1041(a), the period such indi-
vidual owns such property shall include the pe-
riod the transferor owned the property.
‘‘(B) PROPERTY USED BY FORMER SPOUSE
PURSUANT
TO
DIVORCE
DECREE, ETC.—Solely
for purposes of this section, an individual shall
be treated as using property as such individual’s
principal residence during any period of owner-
ship while such individual’s spouse or former
spouse is granted use of the property under a di-
vorce or separation instrument (as defined in
section 71(b)(2)).
‘‘(3) TENANT-STOCKHOLDER
IN
COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
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holder (as defined in section 216) in a cooperative
housing corporation (as defined in such section),
then—
‘‘(A) the holding requirements of subsection
(a) shall be applied to the holding of such stock,
and
‘‘(B) the use requirements of subsection (a)
shall be applied to the house or apartment which
the taxpayer was entitled to occupy as such
stockholder.
‘‘(4) INVOLUNTARY CONVERSIONS.—
‘‘(A) IN
GENERAL.—For purposes of this
section, the destruction, theft, seizure, requisition,
or condemnation of property shall be treated as
the sale of such property.
‘‘(B) APPLICATION
OF
SECTION
1033.—In
applying section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as being
the amount determined without regard to this
section, reduced by the amount of gain not in-
cluded in gross income pursuant to this section.
‘‘(C) PROPERTY ACQUIRED AFTER INVOLUN-
TARY CONVERSION.—If the basis of the property
sold or exchanged is determined (in whole or in
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part) under section 1033(b) (relating to basis of
property acquired through involuntary conver-
sion), then the holding and use by the taxpayer
of the converted property shall be treated as hold-
ing and use by the taxpayer of the property sold
or exchanged.
‘‘(5) RECOGNITION OF GAIN ATTRIBUTABLE TO
DEPRECIATION.—Subsection (a) shall not apply to so
much of the gain from the sale of any property as
does not exceed the portion of the depreciation adjust-
ments (as defined in section 1250(b)(3)) attributable
to periods after May 6, 1997, in respect of such prop-
erty.
‘‘(6) DETERMINATION OF USE DURING PERIODS
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable of self-care, and
‘‘(B) owns property and uses such property
as the taxpayer’s principal residence during the
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year,
then the taxpayer shall be treated as using such prop-
erty as the taxpayer’s principal residence during any
time during such 5-year period in which the taxpayer
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owns the property and resides in any facility (includ-
ing a nursing home) licensed by a State or political
subdivision to care for an individual in the tax-
payer’s condition.
‘‘(7) DETERMINATION OF MARITAL STATUS.—In
the case of any sale or exchange, for purposes of this
section—
‘‘(A) the determination of whether an indi-
vidual is married shall be made as of the date
of the sale or exchange, and
‘‘(B) an individual legally separated from
his spouse under a decree of divorce or of sepa-
rate maintenance shall not be considered as mar-
ried.
‘‘(8) SALES
OF
REMAINDER
INTERESTS.—For
purposes of this section—
‘‘(A) IN GENERAL.—At the election of the
taxpayer, this section shall not fail to apply to
the sale or exchange of an interest in a principal
residence by reason of such interest being a re-
mainder interest in such residence, but this sec-
tion shall not apply to any other interest in such
residence which is sold or exchanged separately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
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any sale to, or exchange with, any person who
bears a relationship to the taxpayer which is de-
scribed in section 267(b) or 707(b).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—This
section shall not apply to any sale or exchange by an indi-
vidual if the treatment provided by section 877(a)(1) ap-
plies to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—This
section shall not apply to any sale or exchange with respect
to which the taxpayer elects not to have this section apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
sulted under section 1034 (as in effect on the day before
the date of the enactment of this section) in the nonrecogni-
tion of any part of the gain realized on the sale or exchange
of another residence, in determining the period for which
the taxpayer has owned and used such property as the tax-
payer’s principal residence, there shall be included the ag-
gregate periods for which such other residence (and each
prior residence taken into account under section 1223(7)
in determining the holding period of such property) had
been so owned and used.’’.
(b) REPEAL OF NONRECOGNITION OF GAIN ON ROLL-
OVER OF PRINCIPAL RESIDENCE.—Section 1034 (relating
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to rollover of gain on sale of principal residence) is hereby
repealed.
(c) EXCEPTION FROM REPORTING.—Subsection (e) of
section 6045 (relating to return required in the case of real
estate transactions) is amended by adding at the end the
following new paragraph:
‘‘(5) EXCEPTION FOR SALES OR EXCHANGES OF
CERTAIN PRINCIPAL RESIDENCES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any sale or exchange of a residence
for $250,000 or less if the person referred to in
paragraph (2) receives written assurance in a
form acceptable to the Secretary from the seller
that—
‘‘(i) such residence is the principal res-
idence (within the meaning of section 121)
of the seller,
‘‘(ii) if the Secretary requires the in-
clusion on the return under subsection (a)
of information as to whether there is feder-
ally subsidized mortgage financing assist-
ance with respect to the mortgage on resi-
dences, that there is no such assistance with
respect to the mortgage on such residence,
and
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‘‘(iii) the full amount of the gain on
such sale or exchange is excludable from
gross income under section 121.
If such assurance includes an assurance that the
seller is married, the preceding sentence shall be
applied by substituting ‘$500,000’ for ‘$250,000’.
‘‘(B) SELLER.—For purposes of this para-
graph, the term ‘seller’ includes the person relin-
quishing the residence in an exchange.’’.
(d) CONFORMING AMENDMENTS.—
(1) The following provisions of the Internal Rev-
enue Code of 1986 are each amended by striking ‘‘sec-
tion 1034’’ and inserting ‘‘section 121’’: sections
25(e)(7), 
56(e)(1)(A), 
56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A),
464(f)(3)(B)(i), 
1033(h)(4), 
1274(c)(3)(B),
6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) is amended by
striking ‘‘(as defined in section 1034(h)(3))’’ and by
adding at the end the following new sentence: ‘‘For
purposes of the preceding sentence, the term ‘extended
active duty’ means any period of active duty pursu-
ant to a call or order to such duty for a period in
excess of 90 days or for an indefinite period.’’.
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(3) Subparagraph (A) of 143(m)(6) is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Revenue Reconciliation Act of
1997)’’ after ‘‘1034(e)’’.
(4) Subsection (e) of section 216 is amended by
striking ‘‘such exchange qualifies for nonrecognition
of gain under section 1034(f)’’ and inserting ‘‘such
dwelling unit is used as his principal residence (with-
in the meaning of section 121)’’.
(5) Section 512(a)(3)(D) is amended by insert-
ing ‘‘(as in effect on the day before the date of the en-
actment of the Revenue Reconciliation Act of 1997)’’
after ‘‘1034’’.
(6) Paragraph (7) of section 1016(a) is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Revenue Reconciliation Act of
1997)’’ after ‘‘1034’’ and by inserting ‘‘(as so in ef-
fect)’’ after ‘‘1034(e)’’.
(7) Paragraph (3) of section 1033(k) is amended
to read as follows:
‘‘(3) For exclusion from gross income of gain
from involuntary conversion of principal residence,
see section 121.’’.
(8) Subsection (e) of section 1038 is amended to
read as follows:
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‘‘(e) PRINCIPAL RESIDENCES.—If—
‘‘(1) subsection (a) applies to a reacquisition of
real property with respect to the sale of which gain
was not recognized under section 121 (relating to
gain on sale of principal residence); and
‘‘(2) within 1 year after the date of the reacqui-
sition of such property by the seller, such property is
resold by him,
then, under regulations prescribed by the Secretary, sub-
sections (b), (c), and (d) of this section shall not apply to
the reacquisition of such property and, for purposes of ap-
plying section 121, the resale of such property shall be treat-
ed as a part of the transaction constituting the original
sale of such property.’’.
(9) Paragraph (7) of section 1223 is amended by
inserting ‘‘(as in effect on the day before the date of
the enactment of the Revenue Reconciliation Act of
1997)’’ after ‘‘1034’’.
(10)(A) Subsection (d) of section 1250 is amend-
ed by striking paragraph (7) and by redesignating
paragraphs (9) and (10) as paragraphs (7) and (8),
respectively.
(B) Subsection (e) of section 1250 is amended by
striking paragraph (3).
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(11) Subsection (c) of section 6012 is amended
by striking ‘‘(relating to one-time exclusion of gain
from sale of principal residence by individual who
has attained age 55)’’ and inserting ‘‘(relating to
gain from sale of principal residence)’’.
(12) Paragraph (2) of section 6212(c) is amend-
ed by striking subparagraph (C) and by redesignating
the succeeding subparagraphs accordingly.
(13) Section 6504 is amended by striking para-
graph (4) and by redesignating the succeeding para-
graphs accordingly.
(14) The item relating to section 121 in the table
of sections for part III of subchapter B of chapter 1
is amended to read as follows:
‘‘Sec. 121. Exclusion of gain from sale of principal residence.’’.
(15) The table of sections for part III of sub-
chapter O of chapter 1 of such Code is amended by
striking the item relating to section 1034.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to sales and exchanges after
May 6, 1997.
(2) SALES BEFORE DATE OF ENACTMENT.—At
the election of the taxpayer, the amendments made by
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this section shall not apply to any sale or exchange
before the date of the enactment of this Act.
(3) BINDING CONTRACTS.—At the election of the
taxpayer, the amendments made by this section shall
not apply to a sale or exchange after the date of the
enactment of this Act, if—
(A) such sale or exchange is pursuant to a
contract which was binding on such date, or
(B) without regard to such amendments,
gain would not be recognized under section 1034
of the Internal Revenue Code of 1986 (as in ef-
fect on the day before the date of the enactment
of this Act) on such sale or exchange by reason
of a new residence acquired on or before such
date or with respect to the acquisition of which
by the taxpayer a binding contract was in effect
on such date.
This paragraph shall not apply to any sale or ex-
change by an individual if the treatment provided by
section 877(a)(1) of the Internal Revenue Code of
1986 applies to such individual.
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TITLE IV—ESTATE, GIFT, AND
GENERATION-SKIPPING 
TAX
PROVISIONS
SEC. 401. COST-OF-LIVING ADJUSTMENTS RELATING TO ES-
TATE AND GIFT TAX PROVISIONS.
(a) INCREASE IN UNIFIED ESTATE AND GIFT TAX
CREDIT.—
(1) ESTATE TAX CREDIT.—
(A) IN GENERAL.—Subsection (a) of section
2010 (relating to unified credit against estate
tax) is amended by striking ‘‘$192,800’’ and in-
serting ‘‘the applicable credit amount’’.
(B) APPLICABLE CREDIT AMOUNT.—Section
2010 is amended by redesignating subsection (c)
as subsection (d) and by inserting after sub-
section (b) the following new subsection:
‘‘(c) APPLICABLE CREDIT AMOUNT.—For purposes of
this section—
‘‘(1) IN GENERAL.—For purposes of this section,
the applicable credit amount is the amount of the ten-
tative tax which would be determined under the rate
schedule set forth in section 2001(c) if the amount
with respect to which such tentative tax is to be com-
puted were the applicable exclusion amount deter-
mined in accordance with the following table:
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‘‘In the case of estates of decedents
The applicable
dying, and gifts made, during:
exclusion amount is:
1998 ............................................................................
$ 625,000
1999 ............................................................................
$ 640,000
2000 ............................................................................
$ 660,000
2001 ............................................................................
$ 675,000
2002 ............................................................................
$ 725,000
2003 ............................................................................
$ 750,000
2004 ............................................................................
$ 800,000
2005 ............................................................................
$ 900,000
2006 or thereafter .......................................................
$1,000,000.
‘‘(2) COST-OF-LIVING ADJUSTMENT.—In the case
of any decedent dying, and gift made, in a calendar
year after 2006, the $1,000,000 amount set forth in
paragraph (1) shall be increased by an amount equal
to—
‘‘(A) $1,000,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 2005’ for
‘calendar year 1992’ in subparagraph (B) there-
of.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount shall
be rounded to the next lowest multiple of $10,000.’’.
(C) ESTATE TAX RETURNS.—Paragraph (1)
of section 6018(a) is amended by striking
‘‘$600,000’’ and inserting ‘‘the applicable exclu-
sion amount in effect under section 2010(c) for
the calendar year which includes the date of
death’’.
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(D) PHASEOUT OF GRADUATED RATES AND
UNIFIED
CREDIT.—Paragraph (2) of section
2001(c) is amended by striking ‘‘$21,040,000’’
and inserting ‘‘the amount at which the average
tax rate under this section is 55 percent’’.
(E) ESTATES OF NONRESIDENTS NOT CITI-
ZENS.—Subparagraph (A) of section 2102(c)(3)
is amended by striking ‘‘$192,800’’ and inserting
‘‘the applicable credit amount in effect under sec-
tion 2010(c) for the calendar year which includes
the date of death’’.
(2) UNIFIED GIFT TAX CREDIT.—Paragraph (1)
of section 2505(a) is amended by striking ‘‘$192,800’’
and inserting ‘‘the applicable credit amount in effect
under section 2010(c) for such calendar year’’.
(b) ALTERNATE VALUATION OF CERTAIN FARM, ETC.,
REAL PROPERTY.—Subsection (a) of section 2032A is
amended by adding at the end the following new paragraph:
‘‘(3) INFLATION ADJUSTMENT.—In the case of es-
tates of decedents dying in a calendar year after
1998, the $750,000 amount contained in paragraph
(2) shall be increased by an amount equal to—
‘‘(A) $750,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
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year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B) there-
of.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount shall
be rounded to the next lowest multiple of $10,000.’’.
(c) ANNUAL GIFT TAX EXCLUSION.—Subsection (b) of
section 2503 is amended—
(1) by striking the subsection heading and in-
serting the following:
‘‘(b) EXCLUSIONS FROM GIFTS.—
‘‘(1) IN GENERAL.—’’,
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new para-
graph:
‘‘(2) INFLATION
ADJUSTMENT.—In the case of
gifts made in a calendar year after 1998, the $10,000
amount contained in paragraph (1) shall be increased
by an amount equal to—
‘‘(A) $10,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B) there-
of.
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If any amount as adjusted under the preceding sen-
tence is not a multiple of $1,000, such amount shall
be rounded to the next lowest multiple of $1,000.’’.
(d) EXEMPTION FROM GENERATION-SKIPPING TAX.—
Section 2631 (relating to GST exemption) is amended by
adding at the end the following new subsection:
‘‘(c) INFLATION ADJUSTMENT.—In the case of an indi-
vidual who dies in any calendar year after 1998, the
$1,000,000 amount contained in subsection (a) shall be in-
creased by an amount equal to—
‘‘(1) $1,000,000, multiplied by
‘‘(2) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by sub-
stituting ‘calendar year 1997’ for ‘calendar year
1992’ in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is
not a multiple of $10,000, such amount shall be rounded
to the next lowest multiple of $10,000.’’.
(e) AMOUNT SUBJECT TO REDUCED RATE WHERE EX-
TENSION
OF TIME
FOR PAYMENT
OF ESTATE TAX
ON
CLOSELY HELD BUSINESS.—Subsection (j) of section 6601
is amended by redesignating paragraph (3) as paragraph
(4) and by inserting after paragraph (2) the following new
paragraph:
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‘‘(3) INFLATION ADJUSTMENT.—In the case of es-
tates of decedents dying in a calendar year after
1998, the $1,000,000 amount contained in paragraph
(2)(A) shall be increased by an amount equal to—
‘‘(A) $1,000,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B) there-
of.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount shall
be rounded to the next lowest multiple of $10,000.’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to the estates of decedents dying, and
gifts made, after December 31, 1997.
SEC. 402. FAMILY-OWNED BUSINESS EXCLUSION.
(a) IN GENERAL.—Part III of subchapter A of chapter
11 (relating to gross estate) is amended by inserting after
section 2033 the following new section:
‘‘SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.
‘‘(a) IN GENERAL.—In the case of an estate of a dece-
dent to which this section applies, the value of the gross
estate shall not include the lesser of—
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‘‘(1) the adjusted value of the qualified family-
owned business interests of the decedent otherwise in-
cludible in the estate, or
‘‘(2) $1,000,000.
‘‘(b) ESTATES TO WHICH SECTION APPLIES.—
‘‘(1) IN GENERAL.—This section shall apply to
an estate if—
‘‘(A) the decedent was (at the date of the de-
cedent’s death) a citizen or resident of the United
States,
‘‘(B) the executor elects the application of
this section and files the agreement referred to in
subsection (h),
‘‘(C) the sum of—
‘‘(i) the adjusted value of the qualified
family-owned business interests described in
paragraph (2), plus
‘‘(ii) the amount of the gifts of such in-
terests determined under paragraph (3),
exceeds 50 percent of the adjusted gross estate,
and
‘‘(D) during the 8-year period ending on the
date of the decedent’s death there have been peri-
ods aggregating 5 years or more during which—
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‘‘(i) such interests were owned by the
decedent or a member of the decedent’s fam-
ily, and
‘‘(ii) there was material participation
(within the meaning of section 2032A(e)(6))
by the decedent or a member of the dece-
dent’s family in the operation of the busi-
ness to which such interests relate.
‘‘(2) INCLUDIBLE
QUALIFIED
FAMILY-OWNED
BUSINESS
INTERESTS.—The qualified family-owned
business interests described in this paragraph are the
interests which—
‘‘(A) are included in determining the value
of the gross estate (without regard to this sec-
tion), and
‘‘(B) are acquired by any qualified heir
from, or passed to any qualified heir from, the
decedent 
(within 
the 
meaning 
of 
section
2032A(e)(9)).
‘‘(3) INCLUDIBLE
GIFTS
OF
INTERESTS.—The
amount of the gifts of qualified family-owned business
interests determined under this paragraph is the ex-
cess of—
‘‘(A) the sum of—
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‘‘(i) the amount of such gifts from the
decedent to members of the decedent’s family
taken 
into 
account 
under 
subsection
2001(b)(1)(B), plus
‘‘(ii) the amount of such gifts otherwise
excluded under section 2503(b),
to the extent such interests are continuously held
by members of such family (other than the dece-
dent’s spouse) between the date of the gift and the
date of the decedent’s death, over
‘‘(B) the amount of such gifts from the dece-
dent to members of the decedent’s family other-
wise included in the gross estate.
‘‘(c) ADJUSTED GROSS ESTATE.—For purposes of this
section, the term ‘adjusted gross estate’ means the value of
the gross estate (determined without regard to this sec-
tion)—
‘‘(1) reduced by any amount deductible under
paragraph (3) or (4) of section 2053(a), and
‘‘(2) increased by the excess of—
‘‘(A) the sum of—
‘‘(i) the amount of gifts determined
under subsection (b)(3), plus
‘‘(ii) the amount (if more than de
minimis) of other transfers from the dece-
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dent to the decedent’s spouse (at the time of
the transfer) within 10 years of the date of
the decedent’s death, plus
‘‘(iii) the amount of other gifts (not in-
cluded under clause (i) or (ii)) from the de-
cedent within 3 years of such date, other
than gifts to members of the decedent’s fam-
ily 
otherwise 
excluded 
under 
section
2503(b), over
‘‘(B) the sum of the amounts described in
clauses (i), (ii), and (iii) of subparagraph (A)
which are otherwise includible in the gross estate.
For purposes of the preceding sentence, the Secretary may
provide that de minimis gifts to persons other than members
of the decedent’s family shall not be taken into account.
‘‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY-
OWNED BUSINESS INTERESTS.—For purposes of this sec-
tion, the adjusted value of any qualified family-owned busi-
ness interest is the value of such interest for purposes of
this chapter (determined without regard to this section), re-
duced by the excess of—
‘‘(1) any amount deductible under paragraph (3)
or (4) of section 2053(a), over
‘‘(2) the sum of—
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‘‘(A) any indebtedness on any qualified res-
idence of the decedent the interest on which is de-
ductible under section 163(h)(3), plus
‘‘(B) any indebtedness to the extent the tax-
payer establishes that the proceeds of such in-
debtedness were used for the payment of edu-
cational and medical expenses of the decedent,
the decedent’s spouse, or the decedent’s depend-
ents (within the meaning of section 152), plus
‘‘(C) any indebtedness not described in sub-
paragraph (A) or (B), to the extent such indebt-
edness does not exceed $10,000.
‘‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTER-
EST.—
‘‘(1) IN GENERAL.—For purposes of this section,
the term ‘qualified family-owned business interest’
means—
‘‘(A) an interest as a proprietor in a trade
or business carried on as a proprietorship, or
‘‘(B) an interest in an entity carrying on
a trade or business, if—
‘‘(i) at least—
‘‘(I) 50 percent of such entity is
owned (directly or indirectly) by the
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decedent and members of the decedent’s
family,
‘‘(II) 70 percent of such entity is
so owned by members of 2 families, or
‘‘(III) 90 percent of such entity is
so owned by members of 3 families,
and
‘‘(ii) for purposes of subclause (II) or
(III) of clause (i), at least 30 percent of
such entity is so owned by the decedent and
members of the decedent’s family.
‘‘(2) LIMITATION.—Such term shall not in-
clude—
‘‘(A) any interest in a trade or business the
principal place of business of which is not lo-
cated in the United States,
‘‘(B) any interest in an entity, if the stock
or debt of such entity or a controlled group (as
defined in section 267(f)(1)) of which such entity
was a member was readily tradable on an estab-
lished securities market or secondary market (as
defined by the Secretary) at any time within 3
years of the date of the decedent’s death,
‘‘(C) any interest in a trade or business not
described in section 542(c)(2), if more than 35
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percent of the adjusted ordinary gross income of
such trade or business for the taxable year which
includes the date of the decedent’s death would
qualify as personal holding company income (as
defined in section 543(a)),
‘‘(D) that portion of an interest in a trade
or business that is attributable to—
‘‘(i) cash or marketable securities, or
both, in excess of the reasonably expected
day-to-day working capital needs of such
trade or business, and
‘‘(ii) any other assets of the trade or
business (other than assets used in the ac-
tive conduct of a trade or business described
in section 542(c)(2)), which produce, or are
held for the production of, income of which
is described in section 543(a) or in section
954(c)(1) (determined without regard to
subparagraph (A) thereof and by substitut-
ing ‘trade or business’ for ‘controlled foreign
corporation’).
‘‘(3) RULES REGARDING OWNERSHIP.—
‘‘(A) OWNERSHIP OF ENTITIES.—For pur-
poses of paragraph (1)(B)—
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‘‘(i) CORPORATIONS.—Ownership of a
corporation shall be determined by the hold-
ing of stock possessing the appropriate per-
centage of the total combined voting power
of all classes of stock entitled to vote and the
appropriate percentage of the total value of
shares of all classes of stock.
‘‘(ii) PARTNERSHIPS.—Ownership of a
partnership shall be determined by the own-
ing of the appropriate percentage of the
capital interest in such partnership.
‘‘(B) OWNERSHIP OF TIERED ENTITIES.—
For purposes of this section, if by reason of hold-
ing an interest in a trade or business, a dece-
dent, any member of the decedent’s family, any
qualified heir, or any member of any qualified
heir’s family is treated as holding an interest in
any other trade or business—
‘‘(i) such ownership interest in the
other trade or business shall be disregarded
in determining if the ownership interest in
the first trade or business is a qualified
family-owned business interest, and
‘‘(ii) this section shall be applied sepa-
rately in determining if such interest in
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any other trade or business is a qualified
family-owned business interest.
‘‘(C) INDIVIDUAL OWNERSHIP RULES.—For
purposes of this section, an interest owned, di-
rectly or indirectly, by or for an entity described
in paragraph (1)(B) shall be considered as being
owned proportionately by or for the entity’s
shareholders, partners, or beneficiaries. A person
shall be treated as a beneficiary of any trust
only if such person has a present interest in such
trust.
‘‘(f) TAX TREATMENT OF FAILURE TO MATERIALLY
PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTER-
ESTS.—
‘‘(1) IN GENERAL.—There is imposed an addi-
tional estate tax if, within 10 years after the date of
the decedent’s death and before the date of the quali-
fied heir’s death—
‘‘(A) the material participation require-
ments described in section 2032A(c)(6)(B) are
not met with respect to the qualified family-
owned business interest which was acquired (or
passed) from the decedent,
‘‘(B) the qualified heir disposes of any por-
tion of a qualified family-owned business interest
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(other than by a disposition to a member of the
qualified heir’s family or through a qualified
conservation contribution under section 170(h)),
‘‘(C) the qualified heir loses United States
citizenship (within the meaning of section 877)
or with respect to whom an event described in
subparagraph (A) or (B) of section 877(e)(1) oc-
curs, and such heir does not comply with the re-
quirements of subsection (g), or
‘‘(D) the principal place of business of a
trade or business of the qualified family-owned
business interest ceases to be located in the Unit-
ed States.
‘‘(2) ADDITIONAL ESTATE TAX.—
‘‘(A) IN GENERAL.—The amount of the ad-
ditional estate tax imposed by paragraph (1)
shall be equal to—
‘‘(i) the applicable percentage of the
adjusted tax difference attributable to the
qualified family-owned business interest (as
determined under rules similar to the rules
of section 2032A(c)(2)(B)), plus
‘‘(ii) interest on the amount deter-
mined under clause (i) at the underpay-
ment rate established under section 6621 for
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the period beginning on the date the estate
tax liability was due under this chapter
and ending on the date such additional es-
tate tax is due.
‘‘(B) APPLICABLE PERCENTAGE.—For pur-
poses of this paragraph, the applicable percent-
age shall be determined under the following table:
‘‘If the event described in
paragraph (1) occurs in
the following year of
The applicable
material participation:
percentage is:
1 through 6 .....................................................................................
100
7 ......................................................................................................
8 ......................................................................................................
9 ......................................................................................................
10 ....................................................................................................
20.
‘‘(g) SECURITY
REQUIREMENTS
FOR
NONCITIZEN
QUALIFIED HEIRS.—
‘‘(1) IN GENERAL.—Except upon the application
of subparagraph (F) or (M) of subsection (i)(3), if a
qualified heir is not a citizen of the United States,
any interest under this section passing to or acquired
by such heir (including any interest held by such heir
at a time described in subsection (f)(1)(C)) shall be
treated as a qualified family-owned business interest
only if the interest passes or is acquired (or is held)
in a qualified trust.
‘‘(2) QUALIFIED
TRUST.—The term ‘qualified
trust’ means a trust—
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‘‘(A) which is organized under, and gov-
erned by, the laws of the United States or a
State, and
‘‘(B) except as otherwise provided in regula-
tions, with respect to which the trust instrument
requires that at least 1 trustee of the trust be an
individual citizen of the United States or a do-
mestic corporation.
‘‘(h) AGREEMENT.—The agreement referred to in this
subsection is a written agreement signed by each person in
being who has an interest (whether or not in possession)
in any property designated in such agreement consenting
to the application of subsection (f) with respect to such
property.
‘‘(i) OTHER DEFINITIONS AND APPLICABLE RULES.—
For purposes of this section—
‘‘(1) QUALIFIED
HEIR.—The term ‘qualified
heir’—
‘‘(A) has the meaning given to such term by
section 2032A(e)(1), and
‘‘(B) includes any active employee of the
trade or business to which the qualified family-
owned business interest relates if such employee
has been employed by such trade or business for
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a period of at least 10 years before the date of
the decedent’s death.
‘‘(2) MEMBER OF THE FAMILY.—The term ‘mem-
ber of the family’ has the meaning given to such term
by section 2032A(e)(2).
‘‘(3) APPLICABLE RULES.—Rules similar to the
following rules shall apply:
‘‘(A) Section 2032A(b)(4) (relating to dece-
dents who are retired or disabled).
‘‘(B) Section 2032A(b)(5) (relating to spe-
cial rules for surviving spouses).
‘‘(C) Section 2032A(c)(2)(D) (relating to
partial dispositions).
‘‘(D) Section 2032A(c)(3) (relating to only
1 additional tax imposed with respect to any 1
portion).
‘‘(E) Section 2032A(c)(4) (relating to due
date).
‘‘(F) Section 2032A(c)(5) (relating to liabil-
ity for tax; furnishing of bond).
‘‘(G) Section 2032A(c)(7) (relating to no
tax if use begins within 2 years; active manage-
ment by eligible qualified heir treated as mate-
rial participation).
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‘‘(H) Paragraphs (1) and (3) of section
2032A(d) (relating to election; agreement).
‘‘(I) Section 2032A(e)(10) (relating to com-
munity property).
‘‘(J) Section 2032A(e)(14) (relating to
treatment of replacement property acquired in
section 1031 or 1033 transactions).
‘‘(K) Section 2032A(f) (relating to statute of
limitations).
‘‘(L) Section 6166(b)(3) (relating to farm-
houses and certain other structures taken into
account).
‘‘(M) Subparagraphs (B), (C), and (D) of
section 6166(g)(1) (relating to acceleration of
payment).
‘‘(N) Section 6324B (relating to special lien
for additional estate tax).’’.
(b) CLERICAL AMENDMENT.—The table of sections for
part III of subchapter A of chapter 11 is amended by insert-
ing after the item relating to section 2033 the following new
item:
‘‘Sec. 2033A. Family-owned business exclusion.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after De-
cember 31, 1997.
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SEC. 403. TREATMENT OF LAND SUBJECT TO A QUALIFIED
CONSERVATION EASEMENT.
(a) ESTATE TAX WITH RESPECT TO LAND SUBJECT
TO A QUALIFIED CONSERVATION EASEMENT.—Section 2031
(relating to the definition of gross estate) is amended by
redesignating subsection (c) as subsection (d) and by insert-
ing after subsection (b) the following new subsection:
‘‘(c) ESTATE TAX WITH RESPECT TO LAND SUBJECT
TO A QUALIFIED CONSERVATION EASEMENT.—
‘‘(1) IN
GENERAL.—If the executor makes the
election described in paragraph (4), then, except as
otherwise provided in this subsection, there shall be
excluded from the gross estate the lesser of—
‘‘(A) the applicable percentage of the value
of land subject to a qualified conservation ease-
ment, reduced by the amount of any deduction
under section 2055(f) with respect to such land,
or
‘‘(B) the excess (if any) of—
‘‘(i) $1,000,000, over
‘‘(ii) the exclusion allowed with respect
to the qualified family-owned business in-
terests of the decedent under section 2033A.
‘‘(2) APPLICABLE
PERCENTAGE.—For purposes
of paragraph (1), the term ‘applicable percentage’
means 40 percent reduced (but not below zero) by 2
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percentage points for each percentage point (or frac-
tion thereof) by which the value of the qualified con-
servation easement is less than 30 percent of the value
of the land (determined without regard to the value
of such easement and reduced by the value of any re-
tained development right (as defined in paragraph
(4)).
‘‘(3) TREATMENT OF CERTAIN INDEBTEDNESS.—
‘‘(A) IN GENERAL.—The exclusion provided
in paragraph (1) shall not apply to the extent
that the land is debt-financed property.
‘‘(B) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) DEBT-FINANCED PROPERTY.—The
term ‘debt-financed property’ means any
property with respect to which there is an
acquisition indebtedness (as defined in
clause (ii)) on the date of the decedent’s
death.
‘‘(ii) ACQUISITION
INDEBTEDNESS.—
The term ‘acquisition indebtedness’ means,
with respect to debt-financed property, the
unpaid amount of—
‘‘(I) the indebtedness incurred by
the donor in acquiring such property,
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‘‘(II) the indebtedness incurred be-
fore the acquisition of such property if
such indebtedness would not have been
incurred but for such acquisition,
‘‘(III) the indebtedness incurred
after the acquisition of such property if
such indebtedness would not have been
incurred but for such acquisition and
the incurrence of such indebtedness was
reasonably foreseeable at the time of
such acquisition, and
‘‘(IV) the extension, renewal, or
refinancing of an acquisition indebted-
ness.
‘‘(4) TREATMENT OF RETAINED DEVELOPMENT
RIGHT.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to the value of any development right
retained by the donor in the conveyance of a
qualified conservation easement.
‘‘(B) TERMINATION OF RETAINED DEVELOP-
MENT RIGHT.—If every person in being who has
an interest (whether or not in possession) in the
land executes an agreement to extinguish perma-
nently some or all of any development rights (as
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defined in subparagraph (D)) retained by the
donor on or before the date for filing the return
of the tax imposed by section 2001, then any tax
imposed by section 2001 shall be reduced accord-
ingly. Such agreement shall be filed with the re-
turn of the tax imposed by section 2001. The
agreement shall be in such form as the Secretary
shall prescribe.
‘‘(C) ADDITIONAL TAX.—Any failure to im-
plement the agreement described in subpara-
graph (B) not later than the earlier of—
‘‘(i) the date which is 2 years after the
date of the decedent’s death, or
‘‘(ii) the date of the sale of such land
subject to the qualified conservation ease-
ment,
shall result in the imposition of an additional
tax in the amount of the tax which would have
been due on the retained development rights sub-
ject to such agreement. Such additional tax shall
be due and payable on the last day of the 6th
month following such date.
‘‘(D) DEVELOPMENT RIGHT DEFINED.—For
purposes of this paragraph, the term ‘develop-
ment right’ means any right to use the land sub-
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ject to the qualified conservation easement in
which such right is retained for any commercial
purpose which is not subordinate to and directly
supportive of the use of such land as a farm for
farming purposes (within the meaning of section
6420(c)).
‘‘(4) ELECTION.—The election under this sub-
section shall be made on the return of the tax imposed
by section 2001. Such an election, once made, shall be
irrevocable.
‘‘(5) CALCULATION OF ESTATE TAX DUE.—An
executor making the election described in paragraph
(4) shall, for purposes of calculating the amount of
tax imposed by section 2001, include the value of any
development right (as defined in paragraph (3)) re-
tained by the donor in the conveyance of such quali-
fied conservation easement. The computation of tax
on any retained development right prescribed in this
paragraph shall be done in such manner and on such
forms as the Secretary shall prescribe.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) LAND SUBJECT TO A QUALIFIED CON-
SERVATION EASEMENT.—The term ‘land subject
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to a qualified conservation easement’ means
land—
‘‘(i) which is located—
‘‘(I) in or within 25 miles of an
area which, on the date of the dece-
dent’s death, is a metropolitan area (as
defined by the Office of Management
and Budget),
‘‘(II) in or within 25 miles of an
area which, on the date of the dece-
dent’s death, is a national park or wil-
derness area designated as part of the
National Wilderness Preservation Sys-
tem (unless it is determined by the
Secretary that land in or within 25
miles of such a park or wilderness area
is not under significant development
pressure), or
‘‘(III) in or within 10 miles of an
area which, on the date of the dece-
dent’s death, is an Urban National
Forest (as designated by the Forest
Service),
‘‘(ii) which was owned by the decedent
or a member of the decedent’s family at all
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times during the 3-year period ending on
the date of the decedent’s death, and
‘‘(iii) with respect to which a qualified
conservation easement has been made by the
decedent or a member of the decedent’s fam-
ily.
‘‘(B) 
QUALIFIED
CONSERVATION
EASE-
MENT.—The term ‘qualified conservation ease-
ment’ means a qualified conservation contribu-
tion (as defined in section 170(h)(1)) of a quali-
fied real property interest (as defined in section
170(h)(2)(C)), except that clause (iv) of section
170(h)(4)(A) shall not apply, and the restriction
on the use of such interest described in section
170(h)(2)(C) shall include a prohibition on com-
mercial recreational activity.
‘‘(C) MEMBER OF FAMILY.—The term ‘mem-
ber of the decedent’s family’ means any member
of the family (as defined in section 2032A(e)(2))
of the decedent.
‘‘(7) APPLICATION OF THIS SECTION TO INTER-
ESTS
IN
PARTNERSHIPS, 
CORPORATIONS, 
AND
TRUSTS.—This section shall apply to an interest in
a partnership, corporation, or trust if at least 30 per-
cent of the entity is owned (directly or indirectly) by
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the decedent, as determined under the rules described
in section 2033A(e)(3).’’.
(b) CARRYOVER BASIS.—Section 1014(a) (relating to
basis of property acquired from a decedent), as amended
by section 502(b), is amended by striking the period at the
end of paragraph (4) and inserting ‘‘, or’’ and by adding
at the end the following new paragraph:
‘‘(5) to the extent of the applicability of the ex-
clusion described in section 2031(c), the basis in the
hands of the decedent.’’.
(c) QUALIFIED CONSERVATION CONTRIBUTION IS NOT
A DISPOSITION.—Subsection (c) of section 2032A (relating
to alternative valuation method) is amended by adding at
the end the following new paragraph:
‘‘(8) QUALIFIED
CONSERVATION
CONTRIBUTION
IS NOT A DISPOSITION.—A qualified conservation con-
tribution (as defined in section 170(h)) by gift or oth-
erwise shall not be deemed a disposition under sub-
section (c)(1)(A).’’.
(d) QUALIFIED CONSERVATION CONTRIBUTION WHERE
SURFACE AND MINERAL RIGHTS ARE SEPARATED.—Sec-
tion 170(h)(5)(B)(ii) (relating to special rule) is amended
to read as follows:
‘‘(ii) SPECIAL RULE.—With respect to any con-
tribution of property in which the ownership of the
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surface estate and mineral interests has been and re-
mains separated, subparagraph (A) shall be treated as
met if the probability of surface mining occurring on
such property is so remote as to be negligible.’’.
(e) EFFECTIVE DATES.—
(1) EXCLUSION.—The amendments made by sub-
sections (a) and (b) shall apply to estates of decedents
dying after December 31, 1997.
(2) EASEMENTS.—The amendments made by
subsections (c) and (d) shall apply to easements
granted after December 31, 1997.
SEC. 404. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSE-
LY HELD BUSINESS.
(a) IN GENERAL.—Section 6166(a) (relating to exten-
sion of time for payment of estate tax where estate consists
largely of interest in closely held business) is amended by
striking ‘‘10’’ in paragraph (1) and the heading thereof and
inserting ‘‘20’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after De-
cember 31, 1997.
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SEC. 405. NO INTEREST ON CERTAIN PORTION OF ESTATE
TAX EXTENDED UNDER SECTION 6166, RE-
DUCED INTEREST ON REMAINING PORTION,
AND NO DEDUCTION FOR SUCH REDUCED IN-
TEREST.
(a) NO INTEREST AND REDUCED INTEREST.—
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 6601(j) (relating to 4-percent rate on certain
portion of estate tax extended under section 6166), as
amended by section 501(e), are amended to read as
follows:
‘‘(1) IN GENERAL.—If the time for payment of
an amount of tax imposed by chapter 11 is extended
as provided in section 6166, then in lieu of the an-
nual rate provided by subsection (a)—
‘‘(A) no interest shall be paid on the no-in-
terest portion of such amount, and
‘‘(B) interest on so much of such amount as
exceeds such no-interest portion shall be paid at
a rate equal to 45 percent of the annual rate
provided by subsection (a).
For purposes of this subsection, the amount of any de-
ficiency which is prorated to installments payable
under section 6166 shall be treated as an amount of
tax payable in installments under such section.
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‘‘(2) NO-INTEREST
PORTION.—For purposes of
this section, the term ‘no-interest portion’ means the
lesser of—
‘‘(A)(i) the amount of the tentative tax
which would be determined under the rate sched-
ule set forth in section 2001(c) if the amount
with respect to which such tentative tax is to be
computed were the sum of $1,000,000 and the
applicable exclusion amount in effect under sec-
tion 2010(c), reduced by
‘‘(ii) the applicable credit amount in effect
under section 2010(c), or
‘‘(B) the amount of the tax imposed by
chapter 11 which is extended as provided in sec-
tion 6166.’’.
(2) CONFORMING AMENDMENTS.—
(A) Section 6601(j), as amended by section
501, is amended—
(i) by striking ‘‘4-percent’’ each place
it appears in paragraph (3) and inserting
‘‘no-interest’’, and
(ii) by striking ‘‘4-PERCENT RATE ON
CERTAIN PORTION OF’’ in the heading and
inserting ‘‘RATE ON’’.
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(B) Section 6166(b)(7)(A)(iii) is amended
to read as follows:
‘‘(iii) for purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’.
(C) Section 6166(b)(8)(A)(iii) is amended
to read as follows:
‘‘(iii) NO-INTEREST PORTION NOT TO
APPLY.—For purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’.
(b) DISALLOWANCE OF INTEREST DEDUCTION.—
(1) ESTATE
TAX.—Paragraph (1) of section
2053(c) is amended by adding at the end the follow-
ing new subparagraph:
‘‘(D) SECTION 6166 INTEREST.—No deduc-
tion shall be allowed under this section for any
interest payable under section 6601 on any un-
paid portion of the tax imposed by section 2001
for the period during which an extension of time
for payment of such tax is in effect under section
6166.’’.
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(2) INCOME TAX.—Subparagraph (E) of section
163(h)(2) is amended by striking ‘‘or 6166’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after De-
cember 31, 1997.
SEC. 406. EXTENSION OF TREATMENT OF CERTAIN RENTS
UNDER SECTION 2032A TO LINEAL DESCEND-
ANTS.
(a) GENERAL
RULE.—Paragraph (7) of section
2032A(c) (relating to special rules for tax treatment of dis-
positions and failures to use for qualified use) is amended
by adding at the end the following new subparagraph:
‘‘(E) CERTAIN RENTS TREATED AS QUALI-
FIED USE.—For purposes of this subsection, a
surviving spouse or lineal descendant of the dece-
dent shall not be treated as failing to use quali-
fied real property in a qualified use solely be-
cause such spouse or descendant rents such prop-
erty to a member of the family of such spouse or
descendant on a net cash basis. For purposes of
the preceding sentence, a legally adopted child of
an individual shall be treated as the child of
such individual by blood.’’.
(b) 
CONFORMING
AMENDMENT.—Section
2032A(b)(5)(A) is amended by striking the last sentence.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to leases entered into after
December 31, 1976.
SEC. 407. EXPANSION OF EXCEPTION FROM GENERATION-
SKIPPING TRANSFER TAX FOR TRANSFERS TO
INDIVIDUALS WITH DECEASED PARENTS.
(a) IN GENERAL.—Section 2651 (relating to genera-
tion assignment) is amended by redesignating subsection (e)
as subsection (f), and by inserting after subsection (d) the
following new subsection:
‘‘(e) SPECIAL RULE FOR PERSONS WITH A DECEASED
PARENT.—
‘‘(1) IN GENERAL.—For purposes of determining
whether any transfer is a generation-skipping trans-
fer, if—
‘‘(A) an individual is a descendant of a
parent of the transferor (or the transferor’s
spouse or former spouse), and
‘‘(B) such individual’s parent who is a lin-
eal descendant of the parent of the transferor (or
the transferor’s spouse or former spouse) is dead
at the time the transfer (from which an interest
of such individual is established or derived) is
subject to a tax imposed by chapter 11 or 12
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to terminations, distributions, and
transfers occurring after December 31, 1997.
TITLE V—EXTENSIONS
SEC. 501. RESEARCH TAX CREDIT.
(a) IN GENERAL.—Paragraph (1) of section 41(h) (re-
lating to termination) is amended—
(1) by striking ‘‘May 31, 1997’’ and inserting
‘‘May 31, 1999’’, and
(2) by striking in the last sentence ‘‘during the
first 11 months of such taxable year.’’ and inserting
‘‘during the 35-month period beginning with the first
month of such year. The 35 months referred to in the
preceding sentence shall be reduced by the number of
full months after June 1996 (and before the first
month of such first taxable year) during which the
taxpayer paid or incurred any amount which is
taken into account in determining the credit under
this section.’’.
(b) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 41(c)(4) is
amended to read as follows:
‘‘(B) ELECTION.—An election under this
paragraph shall apply to the taxable year for
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which made and all succeeding taxable years un-
less revoked with the consent of the Secretary.’’.
(2) Paragraph (1) of section 45C(b) is amended
by striking ‘‘May 31, 1997’’ and inserting ‘‘May 31,
1999’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred after May
31, 1997.
SEC. 502. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDA-
TIONS.
(a) IN GENERAL.—Clause (ii) of section 170(e)(5)(D)
(relating to termination) is amended by striking ‘‘May 31,
1997’’ and inserting ‘‘May 31, 1999’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to contributions made after May 31,
1997.
SEC. 503. WORK OPPORTUNITY TAX CREDIT.
(a) 
EXTENSION.—Subparagraph 
(B) 
of 
section
51(c)(4) (relating to termination) is amended by striking
‘‘September 30, 1997’’ and inserting ‘‘May 31, 1999’’.
(b) MODIFICATION
OF ELIGIBILITY REQUIREMENT
BASED ON PERIOD ON WELFARE.—
(1) IN GENERAL.—Subparagraph (A) of section
51(d)(2) (defining qualified IV–A recipient) is
amended by striking all that follows ‘‘a IV–A pro-
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gram’’ and inserting ‘‘for any 9 months during the
18-month period ending on the hiring date.’’.
(2) CONFORMING
AMENDMENT.—Subparagraph
(A) of section 51(d)(3) is amended to read as follows:
‘‘(A) IN GENERAL.—The term ‘qualified vet-
eran’ means any veteran who is certified by the
designated local agency as being a member of a
family receiving assistance under a food stamp
program under the Food Stamp Act of 1977 for
at least a 3-month period ending during the 12-
month period ending on the hiring date.’’.
(c) QUALIFIED SSI RECIPIENTS TREATED AS MEM-
BERS OF TARGETED GROUPS.—
(1) IN GENERAL.—Section 51(d)(1) (relating to
members of targeted groups) is amended by striking
‘‘or’’ at the end of subparagraph (F), by striking the
period at the end of subparagraph (G) and inserting
‘‘, or’’, and by adding at the end the following new
subparagraph:
‘‘(H) a qualified SSI recipient.’’.
(2) QUALIFIED SSI RECIPIENTS.—Section 51(d)
is amended by redesignating paragraphs (9), (10),
and (11) as paragraphs (10), (11), and (12), respec-
tively, and by inserting after paragraph (8) the fol-
lowing new paragraph:
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‘‘(9) QUALIFIED
SSI
RECIPIENT.—The term
‘qualified SSI recipient’ means any individual who is
certified by the designated local agency as receiving
supplemental security income benefits under title XVI
of the Social Security Act (including supplemental se-
curity income benefits of the type described in section
1616 of such Act or section 212 of Public Law 93–
66) for any month ending within the 60-day period
ending on the hiring date.’’.
(d) PERCENTAGE OF WAGES ALLOWED AS CREDIT.—
(1) IN GENERAL.—Subsection (a) of section 51
(relating to determination of amount) is amended by
striking ‘‘35 percent’’ and inserting ‘‘40 percent’’.
(2) APPLICATION OF CREDIT FOR INDIVIDUALS
PERFORMING
FEWER
THAN
400
HOURS
OF
SERV-
ICES.—Paragraph (3) of section 51(i) is amended to
read as follows:
‘‘(3) INDIVIDUALS NOT MEETING MINIMUM EM-
PLOYMENT PERIODS.—
‘‘(A) REDUCTION OF CREDIT FOR INDIVID-
UALS PERFORMING FEWER THAN 400 HOURS OF
SERVICES.—In the case of an individual who has
completed at least 120 hours, but less than 400
hours, of services performed for the employer,
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subsection (a) shall be applied by substituting
‘25 percent’ for ‘40 percent’.
‘‘(B) DENIAL OF CREDIT FOR INDIVIDUALS
PERFORMING FEWER THAN 120 HOURS OF SERV-
ICES.—No wages shall be taken into account
under subsection (a) with respect to any individ-
ual unless such individual has completed at least
120 hours of services performed for the em-
ployer.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to individuals who begin work for the
employer after September 30, 1997.
SEC. 504. ORPHAN DRUG TAX CREDIT.
(a) IN GENERAL.—Section 45C (relating to clinical
testing expenses for certain drugs for rare diseases or condi-
tions) is amended by striking subsection (e).
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to amounts paid or incurred after
May 31, 1997.
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TITLE VI—INCENTIVES FOR RE-
VITALIZATION OF THE DIS-
TRICT OF COLUMBIA
SEC. 601. TAX INCENTIVES FOR REVITALIZATION OF THE
DISTRICT OF COLUMBIA.
(a) IN GENERAL.—Chapter 1 is amended by adding
at the end the following new subchapter:
‘‘Subchapter W—Incentives for the
Revitalization of the District of Columbia
‘‘Sec. 1400.
First-time homebuyer credit for District of Columbia.
‘‘Sec. 1400A. Credit for equity investments in and loans to District
of Columbia businesses.
‘‘Sec. 1400B. Zero percent capital gains rate.
‘‘Sec. 1400C. Trust Fund for DC schools.
‘‘SEC. 1400. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT
OF COLUMBIA.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an indi-
vidual who is a first-time homebuyer of a principal resi-
dence in the District of Columbia during any taxable year,
there shall be allowed as a credit against the tax imposed
by this chapter for the taxable year an amount equal to
so much of the purchase price of the residence as does not
exceed $5,000.
‘‘(b) FIRST-TIME HOMEBUYER.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘first-time home-
buyer’ has the same meaning as when used in section
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72(t)(8)(D)(i), except that ‘principal residence in the
District of Columbia during the 1-year period’ shall
be substituted for ‘principal residence during the 2-
year period’ in subclause (I) thereof.
‘‘(2) ONE-TIME ONLY.—If an individual is treat-
ed as a first-time homebuyer with respect to any
principal residence, such individual may not be treat-
ed as a first-time homebuyer with respect to any other
principal residence.
‘‘(3) PRINCIPAL
RESIDENCE.—The term ‘prin-
cipal residence’ has the same meaning as when used
in section 121.
‘‘(4) DATE OF ACQUISITION.—The term ‘date of
acquisition’ has the same meaning as when used in
section 72t(8)(D)(iii).
‘‘(c) CARRYOVER OF CREDIT.—If the credit allowable
under subsection (a) exceeds the limitation imposed by sec-
tion 26(a) for such taxable year reduced by the sum of the
credits allowable under subpart A of part IV of subchapter
A (other than this section and section 25), such excess shall
be carried to the succeeding taxable year and added to the
credit allowable under subsection (a) for such taxable year.
‘‘(d) SPECIAL RULES.—For purposes of this section—
‘‘(1) ALLOCATION OF DOLLAR LIMITATION.—
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‘‘(A) MARRIED INDIVIDUALS FILING JOINT-
LY.—In the case of a husband and wife who file
a joint return, the $5,000 limitation under sub-
section (a) shall apply to the joint return.
‘‘(B) MARRIED INDIVIDUALS FILING SEPA-
RATELY.—In the case of a married individual
filing a separate return, subsection (a) shall be
applied by substituting ‘$2,500’ for ‘$5,000’.
‘‘(C) OTHER TAXPAYERS.—If 2 or more in-
dividuals who are not married purchase a prin-
cipal residence, the amount of the credit allowed
under subsection (a) shall be allocated among
such individuals in such manner as the Sec-
retary may prescribe, except that the total
amount of the credits allowed to all such individ-
uals shall not exceed $5,000.
‘‘(2) PURCHASE.—The term ‘purchase’ means
any acquisition, but only if—
‘‘(A) the property is not acquired from a
person whose relationship to the person acquir-
ing it would result in the disallowance of losses
under section 267 or 707(b) (but, in applying
section 267 (b) and (c) for purposes of this sec-
tion, paragraph (4) of section 267(c) shall be
treated as providing that the family of an indi-