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and (5), respectively, and by adding at the end the following
new paragraph:
‘‘(6) TERMINATION.—
‘‘(A) IN
GENERAL.—No suspense account
may be established under this subsection by any
corporation required by this section to change its
method of accounting for any taxable year end-
ing after June 8, 1997.
‘‘(B) PHASEOUT
OF
EXISTING
SUSPENSE
ACCOUNTS.—
‘‘(i) IN GENERAL.—Each suspense ac-
count under this subsection shall be reduced
(but not below zero) for each taxable year
beginning after June 8, 1997, by an amount
equal to the lesser of—
‘‘(I) the applicable portion of such
account, or
‘‘(II) 50 percent of the taxable in-
come of the corporation for the taxable
year, or, if the corporation has no tax-
able income for such year, the amount
of any net operating loss (as defined in
section 172(c)) for such taxable year.
For purposes of the preceding sentence, the
amount of taxable income and net operating
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loss shall be determined without regard to
this paragraph.
‘‘(ii) COORDINATION WITH OTHER RE-
DUCTIONS.—The amount of the applicable
portion for any taxable year shall be re-
duced (but not below zero) by the amount of
any reduction required for such taxable
year under any other provision of this sub-
section.
‘‘(iv) INCLUSION IN INCOME.—Any re-
duction in a suspense account under this
paragraph shall be included in gross income
for the taxable year of the reduction.
‘‘(C) APPLICABLE PORTION.—For purposes
of subparagraph (B), the term ‘applicable por-
tion’ means, for any taxable year, the amount
which would ratably reduce the amount in the
account (after taking into account prior reduc-
tions) to zero over the period consisting of such
taxable year and the remaining taxable years in
such first 20 taxable years.
‘‘(D) AMOUNTS
AFTER
20TH
YEAR.—Any
amount in the account as of the close of the 20th
year referred to in subparagraph (C) shall be
treated as the applicable portion for each suc-
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ceeding year thereafter to the extent not reduced
under this paragraph for any prior taxable year
after such 20th year.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years ending after June 8,
1997.
SEC. 872. MODIFICATION OF TAXABLE YEARS TO WHICH
NET OPERATING LOSSES MAY BE CARRIED.
(a) IN
GENERAL.—Subparagraph (A) of section
172(b)(1) (relating to years to which loss may be carried)
is amended—
(1) by striking ‘‘3’’ in clause (i) and inserting
‘‘2’’, and
(2) by striking ‘‘15’’ in clause (ii) and inserting
‘‘20’’.
(b) RETENTION OF 3-YEAR CARRYBACK FOR CASUALTY
LOSSES OF INDIVIDUALS.—Paragraph (1) of section 172(b)
is amended by adding at the end the following new subpara-
graph:
‘‘(F) RETENTION OF 3-YEAR CARRYBACK IN
CERTAIN CASES.—
‘‘(i) 
IN
GENERAL.—Subparagraph
(A)(i) shall be applied by substituting ‘3
years’ for ‘2 years’ with respect to the por-
tion of the net operating loss for the taxable
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year which is an eligible loss with respect to
the taxpayer.
‘‘(ii) ELIGIBLE LOSS.—For purposes of
clause (i), the term ‘eligible loss’ means—
‘‘(I) in the case of an individual,
losses of property arising from fire,
storm, shipwreck, or other casualty, or
from theft,
‘‘(II) in the case of a taxpayer
which is a small business, losses attrib-
utable to Presidentially declared disas-
ters (as defined in section 1033(h)(3)),
and
‘‘(III) in the case of a taxpayer
engaged in the trade or business of
farming 
(as 
defined 
in 
section
263A(e)(4)), losses attributable to such
Presidentially declared disasters.
‘‘(iii) SMALL BUSINESS.—For purposes
of this subparagraph, the term ‘small busi-
ness’ means a corporation or partnership
which meets the gross receipts test of section
448(c) for the taxable year in which the loss
arose (or, in the case of a sole proprietor-
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ship, which would meet such test if such
proprietorship were a corporation).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to net operating losses for taxable years
beginning after the date of the enactment of this Act.
SEC. 873. EXPANSION OF DENIAL OF DEDUCTION FOR CER-
TAIN AMOUNTS PAID IN CONNECTION WITH
INSURANCE.
(a) DENIAL OF DEDUCTION FOR PREMIUMS.—Para-
graph (1) of section 264(a) is amended to read as follows:
‘‘(1) Premiums on any life insurance policy, or
endowment or annuity contract, if the taxpayer is di-
rectly or indirectly a beneficiary under the policy or
contract.’’.
(b) INTEREST ON POLICY LOANS.—Paragraph (4) of
section 264(a) is amended by striking ‘‘individual, who’’
and all that follows and inserting ‘‘individual.’’.
(c) PRO RATA ALLOCATION OF INTEREST EXPENSE TO
POLICY CASH VALUES.—Section 264 is amended by adding
at the end the following new subsection:
‘‘(e) PRO RATA ALLOCATION OF INTEREST EXPENSE
TO POLICY CASH VALUES.—
‘‘(1) IN
GENERAL.—No deduction shall be al-
lowed for that portion of the taxpayer’s interest ex-
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pense which is allocable to unborrowed policy cash
values.
‘‘(2) ALLOCATION.—For purposes of paragraph
(1), the portion of the taxpayer’s interest expense
which is allocable to unborrowed policy cash values is
an amount which bears the same ratio to such inter-
est expense as—
‘‘(A) the taxpayer’s average unborrowed pol-
icy cash values of life insurance policies, and an-
nuity and endowment contracts, issued after
June 8, 1997, bears to
‘‘(B) the average adjusted bases (within the
meaning of section 1016) for all assets of the tax-
payer.
‘‘(3) UNBORROWED POLICY CASH VALUES.—The
term ‘unborrowed policy cash value’ means, with re-
spect to any life insurance policy or annuity or en-
dowment contract, the excess of—
‘‘(A) the cash surrender value of such policy
or contract determined without regard to any
surrender charge, over
‘‘(B) the amount of any loan in respect of
such policy or contract.
‘‘(4) EXCEPTION
FOR
CERTAIN
POLICIES
AND
CONTRACTS
COVERING
OFFICERS, DIRECTORS, AND
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EMPLOYEES.—Paragraph (1) shall not apply to any
policy or contract owned by an entity engaged in a
trade or business which covers any individual who is
an officer, director, or employee of such trade or busi-
ness at the time first covered by the policy or con-
tract, and such policies and contracts shall not be
taken into account under paragraph (2).
‘‘(5) EXCEPTION FOR POLICIES AND CONTRACTS
HELD BY NATURAL PERSONS; TREATMENT OF PART-
NERSHIPS AND S CORPORATIONS.—
‘‘(A) POLICIES AND CONTRACTS HELD BY
NATURAL PERSONS.—
‘‘(i) IN
GENERAL.—This subsection
shall not apply to any policy or contract
held by a natural person.
‘‘(ii) EXCEPTION WHERE BUSINESS IS
BENEFICIARY.—If a trade or business is di-
rectly or indirectly the beneficiary under
any policy or contract, to the extent of the
unborrowed cash value of such policy or
contract, such policy or contract shall be
treated as held by such trade or business
and not by a natural person.
‘‘(iii) SPECIAL RULES.—
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‘‘(I) CERTAIN TRADES OR BUSI-
NESSES NOT TAKEN INTO ACCOUNT.—
Clause (ii) shall not apply to any
trade or business carried on as a sole
proprietorship and to any trade or
business performing services as an em-
ployee.
‘‘(II) 
LIMITATION
ON
UNBORROWED
CASH
VALUE.—The
amount of the unborrowed cash value
of any policy or contract which is
taken into account by reason of clause
(ii) shall not exceed the benefit to
which the trade or business is entitled
under the policy or contract.
‘‘(iv) 
REPORTING.—The 
Secretary
shall require such reporting from policy-
holders and issuers as is necessary to carry
out clause (ii). Any report required under
the preceding sentence shall be treated as a
statement referred to in section 6724(d)(1).
‘‘(B) TREATMENT OF PARTNERSHIPS AND S
CORPORATIONS.—In the case of a partnership or
S corporation, this subsection shall be applied at
the partnership and corporate levels.
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‘‘(6) SPECIAL RULES.—
‘‘(A) COORDINATION WITH SUBSECTION (a)
AND SECTION 265.—If interest on any indebted-
ness is disallowed under subsection (a) or section
265—
‘‘(i) such disallowed interest shall not
be taken into account for purposes of apply-
ing this subsection, and
‘‘(ii) for purposes of applying para-
graph (2)(B), the adjusted bases otherwise
taken into account shall be reduced (but not
below zero) by the amount of such indebted-
ness.
‘‘(B) COORDINATION WITH SECTION 263A.—
This subsection shall be applied before the appli-
cation of section 263A (relating to capitalization
of certain expenses where taxpayer produces
property).’’.
‘‘(7) INTEREST EXPENSE.—The term ‘interest ex-
pense’ means the aggregate amount allowable to the
taxpayer as a deduction for interest (within the
meaning of section 265(b)(4)) for the taxable year (de-
termined without regard to this subsection, section
265(b), and section 291).
‘‘(8) AGGREGATION RULES.—
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‘‘(A) IN GENERAL.—All members of a con-
trolled group (within the meaning of subsection
(d)(5)(B)) shall be treated as 1 taxpayer for pur-
poses of this subsection.
‘‘(B) TREATMENT
OF
INSURANCE
COMPA-
NIES.—This subsection shall not apply to an in-
surance company, and subparagraph (A) shall be
applied without regard to any insurance com-
pany.’’.
(b) TREATMENT OF INSURANCE COMPANIES.—
(1) Clause (ii) of section 805(a)(4)(C) is amend-
ed by inserting ‘‘, or out of the increase for the tax-
able year in policy cash values (within the meaning
of section 264(e)(3)(A)) of life insurance policies and
annuity and endowment contracts to which section
264(e) applies’’ after ‘‘tax-exempt interest’’.
(2) Clause (iii) of section 805(a)(4)(D) is
amended by striking ‘‘and’’ and inserting ‘‘, the in-
crease for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life
insurance policies and annuity and endowment con-
tracts to which section 264(e) applies, and’’.
(3) Subparagraph (B) of section 807(a)(2) is
amended by striking ‘‘interest,’’ and inserting ‘‘inter-
est and the amount of the policyholder’s share of the
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increase for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life
insurance policies and annuity and endowment con-
tracts to which section 264(e) applies,’’.
(4) Subparagraph (B) of section 807(b)(1) is
amended by striking ‘‘interest,’’ and inserting ‘‘inter-
est and the amount of the policyholder’s share of the
increase for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life
insurance policies and annuity and endowment con-
tracts to which section 264(e) applies,’’.
(5) Paragraph (1) of section 812(d) 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 subparagraph:
‘‘(D) the increase for any taxable year in
the policy cash values (within the meaning of
section 264(e)(3)(A)) of life insurance policies
and annuity and endowment contracts to which
section 264(e) applies.’’.
(6) Subparagraph (B) of section 832(b)(5) is
amended by striking ‘‘and’’ at the end of clause (i),
by striking the period at the end of clause (ii) and
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inserting ‘‘, and’’, and by adding at the end the fol-
lowing new clause:
‘‘(iii) the increase for the taxable year
in policy cash values (within the meaning
of section 264(e)(3)(A)) of life insurance
policies and annuity and endowment con-
tracts to which section 264(e) applies.’’.
(c) CONFORMING AMENDMENT.—Subparagraph (A) of
section 265(b)(4) is amended by inserting ‘‘, section 264,’’
before ‘‘and section 291’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to contracts issued after June 8, 1997,
in taxable years ending after such date. For purposes of
the preceding sentence, any material increase in the death
benefit or other material change in the contract shall be
treated as a new contract but the addition of covered lives
shall be treated as a new contract only with respect to such
additional covered lives. For purposes of this subsection, an
increase in the death benefit under a policy or contract is-
sued in connection with a lapse described in section
501(d)(2) of the Health Insurance Portability and Account-
ability Act of 1996 shall not be treated as a new contract.
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SEC. 874. ALLOCATION OF BASIS AMONG PROPERTIES DIS-
TRIBUTED BY PARTNERSHIP.
(a) IN GENERAL.—Subsection (c) of section 732 is
amended to read as follows:
‘‘(c) ALLOCATION OF BASIS.—
‘‘(1) IN
GENERAL.—The basis of distributed
properties to which subsection (a)(2) or (b) is appli-
cable shall be allocated—
‘‘(A)(i) first to any unrealized receivables
(as defined in section 751(c)) and inventory
items (as defined in section 751(d)(2)) in an
amount equal to the adjusted basis of each such
property to the partnership, and
‘‘(ii) if the basis to be allocated is less than
the sum of the adjusted bases of such properties
to the partnership, then, to the extent any de-
crease is required in order to have the adjusted
bases of such properties equal the basis to be allo-
cated, in the manner provided in paragraph (3),
and
‘‘(B) to the extent of any basis not allocated
under subparagraph (A), to other distributed
properties—
‘‘(i) first by assigning to each such
other property such other property’s ad-
justed basis to the partnership, and
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‘‘(ii) then, to the extent any increase or
decrease in basis is required in order to
have the adjusted bases of such other distrib-
uted properties equal such remaining basis,
in the manner provided in paragraph (2)
or (3), whichever is appropriate.
‘‘(2) METHOD OF ALLOCATING INCREASE.—Any
increase required under paragraph (1)(B) shall be al-
located among the properties—
‘‘(A) first to properties with unrealized ap-
preciation in proportion to their respective
amounts of unrealized appreciation before such
increase (but only to the extent of each property’s
unrealized appreciation), and
‘‘(B) then, to the extent such increase is not
allocated under subparagraph (A), in proportion
to their respective fair market values.
‘‘(3) METHOD OF ALLOCATING DECREASE.—Any
decrease required under paragraph (1)(A) or (1)(B)
shall be allocated—
‘‘(A) first to properties with unrealized de-
preciation in proportion to their respective
amounts of unrealized depreciation before such
decrease (but only to the extent of each property’s
unrealized depreciation), and
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‘‘(B) then, to the extent such decrease is not
allocated under subparagraph (A), in proportion
to their respective adjusted bases (as adjusted
under subparagraph (A)).’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to distributions after the date of the
enactment of this Act.
SEC. 875. REPEAL OF REQUIREMENT THAT INVENTORY BE
SUBSTANTIALLY APPRECIATED.
(a) IN GENERAL.—Paragraph (2) of section 751(a) is
amended to read as follows:
‘‘(2) inventory items of the partnership,’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 751 is amended to
read as follows:
‘‘(d) INVENTORY ITEMS.—For purposes of this sub-
chapter, the term ‘inventory items’ means—
‘‘(1) property of the partnership of the kind de-
scribed in section 1221(1),
‘‘(2) any other property of the partnership
which, on sale or exchange by the partnership, would
be considered property other than a capital asset and
other than property described in section 1231,
‘‘(3) any other property of the partnership
which, if sold or exchanged by the partnership, would
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result in a gain taxable under subsection (a) of sec-
tion 1246 (relating to gain on foreign investment
company stock), and
‘‘(4) any other property held by the partnership
which, if held by the selling or distributee partner,
would be considered property of the type described in
paragraph (1), (2), or (3).’’.
(2) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6),
732(c)(1)(A) (as amended by the preceding section),
735(a)(2), and 735(c)(1) are each amended by strik-
ing ‘‘section 751(d)(2)’’ and inserting ‘‘section
751(d)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to sales, exchanges, and distributions
after the date of the enactment of this Act.
SEC. 876. LIMITATION ON PROPERTY FOR WHICH INCOME
FORECAST METHOD MAY BE USED.
(a) LIMITATION.—Subsection (g) of section 167 is
amended by adding at the end the following new paragraph:
‘‘(6) LIMITATION ON PROPERTY FOR WHICH IN-
COME FORECAST METHOD MAY BE USED.—The depre-
ciation deduction allowable under this section may be
determined under the income forecast method or any
similar method only with respect to—
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‘‘(A) property described in paragraph (3) or
(4) of section 168(f),
‘‘(B) copyrights,
‘‘(C) books,
‘‘(D) patents, and
‘‘(E) other property specified in regulations.
Such methods may not be used with respect to any
amortizable section 197 intangible (as defined in sec-
tion 197(c)).’’.
(b) DEPRECIATION PERIOD FOR RENT-TO-OWN PROP-
ERTY.—
(1) IN GENERAL.—Subparagraph (A) of section
168(e)(3) (relating to 3-year property) is amended by
striking ‘‘and’’ at the end of clause (i), by striking the
period at the end of clause (ii) and inserting ‘‘, and’’,
and by adding at the end the following new clause:
‘‘(iii) any qualified rent-to-own prop-
erty.’’.
(2) 4-YEAR CLASS LIFE.—The table contained in
section 168(g)(3)(B) is amended by inserting before
the first item the following new item:
‘‘(A)(iii) .......................................................................................
4’’.
(3) DEFINITION
OF
QUALIFIED
RENT-TO-OWN
PROPERTY.—Subsection (i) of section 168 is amended
by adding at the end the following new paragraph:
‘‘(14) QUALIFIED RENT-TO-OWN PROPERTY.—
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‘‘(A) IN
GENERAL.—The term ‘qualified
rent-to-own property’ means property held by a
rent-to-own dealer for purposes of being subject
to a rent-to-own contract.
‘‘(B) RENT-TO-OWN
DEALER.—The term
‘rent-to-own dealer’ means a person that, in the
ordinary course of business, regularly enters into
rent-to-own contracts with customers for the use
of consumer property, if a substantial portion of
those contracts terminate and the property is re-
turned to such person before the receipt of all
payments required to transfer ownership of the
property from such person to the customer.
‘‘(C) CONSUMER
PROPERTY.—The term
‘consumer property’ means tangible personal
property of a type generally used within the
home. Such term shall not include cellular tele-
phones and any computer or peripheral equip-
ment (as defined in section 168(i)).
‘‘(D) RENT-TO-OWN CONTRACT.—The term
‘rent-to-own contract’ means any lease for the
use of consumer property between a rent-to-own
dealer and a customer who is an individual
which—
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‘‘(i) is titled ‘Rent-to-Own Agreement’
or ‘Lease Agreement with Ownership Op-
tion,’ or uses other similar language,
‘‘(ii) provides for level, regular periodic
payments (for a payment period which is a
week or month),
‘‘(iii) provides that legal title to such
property remains with the rent-to-own deal-
er until the customer makes all the pay-
ments described in clause (ii) or early pur-
chase payments required under the contract
to acquire legal title to the item of property,
‘‘(iv) provides a beginning date and a
maximum period of time for which the con-
tract may be in effect that does not exceed
156 weeks or 36 months from such begin-
ning date (including renewals or options to
extend),
‘‘(v) provides for level payments within
the 156-week or 36-month period that, in
the aggregate, generally exceed the normal
retail price of the consumer property plus
interest,
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‘‘(vi) provides for payments under the
contract that, in the aggregate, do not ex-
ceed $10,000 per item of consumer property,
‘‘(vii) provides that the customer does
not have any legal obligation to make all
the payments referred to in clause (ii) set
forth under the contract, and that at the
end of each payment period the customer
may either continue to use the consumer
property by making the payment for the
next payment period or return such prop-
erty to the rent-to-own dealer in good work-
ing order, in which case the customer does
not incur any further obligations under the
contract and is not entitled to a return of
any payments previously made under the
contract, and
‘‘(viii) provides that the customer has
no right to sell, sublease, mortgage, pawn,
pledge, encumber, or otherwise dispose of the
consumer property until all the payments
stated in the contract have been made.’’.
(c) EFFECTIVE DATE.—The amendment made by this
section shall apply to property placed in service after the
date of the enactment of this Act.
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SEC. 877. EXPANSION OF REQUIREMENT THAT INVOLUN-
TARILY 
CONVERTED 
PROPERTY 
BE 
RE-
PLACED WITH PROPERTY ACQUIRED FROM
AN UNRELATED PERSON.
(a) IN GENERAL.—Subsection (i) of section 1033 is
amended to read as follows:
‘‘(i) REPLACEMENT PROPERTY MUST BE ACQUIRED
FROM UNRELATED PERSON IN CERTAIN CASES.—
‘‘(1) IN GENERAL.—If the property which is in-
voluntarily converted is held by a taxpayer to which
this subsection applies, subsection (a) shall not apply
if the replacement property or stock is acquired from
a related person. The preceding sentence shall not
apply to the extent that the related person acquired
the replacement property or stock from an unrelated
person during the period applicable under subsection
(a)(2)(B).
‘‘(2) TAXPAYERS
TO
WHICH
SUBSECTION
AP-
PLIES.—This subsection shall apply to—
‘‘(A) a C corporation,
‘‘(B) a partnership in which 1 or more C
corporations own, directly or indirectly (deter-
mined in accordance with section 707(b)(3)),
more than 50 percent of the capital interest, or
profits interest, in such partnership at the time
of the involuntary conversion, and
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‘‘(C) any other taxpayer if, with respect to
property which is involuntarily converted during
the taxable year, the aggregate of the amount of
realized gain on such property on which there is
realized gain exceeds $100,000.
In the case of a partnership, subparagraph (C) shall
apply with respect to the partnership and with re-
spect to each partner. A similar rule shall apply in
the case of an S corporation and its shareholders.
‘‘(3) RELATED PERSON.—For purposes of this
subsection, a person is related to another person if the
person bears a relationship to the other person de-
scribed in section 267(b) or 707(b)(1).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to involuntary conversions occurring
after June 8, 1997.
SEC. 878. TREATMENT OF EXCEPTION FROM INSTALLMENT
SALES RULES FOR SALES OF PROPERTY BY A
MANUFACTURER TO A DEALER.
(a) IN GENERAL.—Paragraph (2) of section 811(c) of
the Tax Reform Act of 1986 is hereby repealed.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendment made by this
section shall apply to taxable years beginning more
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than 1 year after the date of the enactment of this
Act.
(2) COORDINATION WITH SECTION 481.—In the
case of any taxpayer required by this section to
change its method of accounting for any taxable
year—
(A) such changes shall be treated as initi-
ated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the net amount of the adjustments re-
quired to be taken into account under section
481(a) of the Internal Revenue Code of 1986
shall be taken into account ratably over the 4
taxable year period beginning with the first tax-
able year beginning after the date of the enact-
ment of this Act.
SEC. 879. MINIMUM PENSION ACCRUED BENEFIT DISTRIB-
UTABLE WITHOUT CONSENT INCREASED TO
$5,000.
(a) AMENDMENT TO 1986 CODE.—
(1) IN GENERAL.—Subparagraph (A) of section
411(a)(11) (relating to restrictions on certain manda-
tory distributions) is amended by striking ‘‘$3,500’’
and inserting ‘‘the applicable limit’’.
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(2) APPLICABLE LIMIT.—Paragraph (11) of sec-
tion 411(a) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) APPLICABLE LIMIT.—
‘‘(i) IN
GENERAL.—For purposes of
subparagraph (A), the applicable limit is
$5,000.
‘‘(ii) INFLATION ADJUSTMENT.—In the
case of plan years beginning in a calendar
year after 1997, the dollar amount con-
tained in clause (i) shall be increased by an
amount equal to—
‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting ‘cal-
endar year 1996’ for ‘calendar year
1992’ in subparagraph (B) thereof.
If any amount as adjusted under the pre-
ceding sentence is not a multiple of $50,
such amount shall be rounded to the next
lowest multiple of $50.’’.
(3) CONFORMING AMENDMENTS.—
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(A) Section 411(a)(7)(B), paragraphs (1)
and (2) of section 417(e), and section 457(e)(9)
are each amended by striking ‘‘$3,500’’ each
place it appears (other than the headings) and
inserting ‘‘the applicable limit under section
411(a)(11)(D)’’.
(B) The headings for paragraphs (1) and
(2) of section 417(e) and subparagraph (A) of
section 457(e)(9) are each amended by striking
‘‘$3,500’’ and inserting ‘‘APPLICABLE LIMIT’’.
(b) AMENDMENTS TO ERISA.—
(1) IN GENERAL.—Section 203(e)(1) of the Em-
ployee Retirement Income Security Act of 1974 (29
U.S.C. 1053(e)(1)) is amended by striking ‘‘$3,500’’
and inserting ‘‘the applicable limit under section
411(a)(11) of the Internal Revenue Code of 1986 for
the plan year’’.
(2) 
CONFORMING
AMENDMENTS.—Sections
204(d)(1) and 205(g) (1) and (2) (29 U.S.C.
1054(d)(1) and 1055(g) (1) and (2)) are each amend-
ed by striking ‘‘$3,500’’ and inserting ‘‘the applicable
limit under section 411(a)(11) of the Internal Reve-
nue Code of 1986 for the plan year’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning after the date
of the enactment of this Act.
SEC. 880. ELECTION TO RECEIVE TAXABLE CASH COM-
PENSATION IN LIEU OF NONTAXABLE PARK-
ING BENEFITS.
(a) IN GENERAL.—Section 132(f)(4) (relating to bene-
fits not in lieu of compensation) is amended by adding at
the end the following new sentence: ‘‘This paragraph shall
not apply to any qualified parking provided in lieu of com-
pensation which otherwise would have been includible in
gross income of the employee, and no amount shall be in-
cluded in the gross income of the employee solely because
the employee may choose between the qualified parking and
compensation.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 881. EXTENSION OF TEMPORARY UNEMPLOYMENT
TAX.
Section 3301 (relating to rate of unemployment tax)
is amended—
(1) by striking ‘‘1998’’ in paragraph (1) and in-
serting ‘‘2007’’, and
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(2) by striking ‘‘1999’’ in paragraph (2) and in-
serting ‘‘2008’’.
SEC. 882. REPEAL OF EXCESS DISTRIBUTION AND EXCESS
RETIREMENT ACCUMULATION TAX.
(a) REPEAL OF EXCESS DISTRIBUTION AND EXCESS
RETIREMENT ACCUMULATION TAX.—Section 4980A (relat-
ing to excess distributions from qualified retirement plans)
is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Section 691(c)(1) is amended by striking
subparagraph (C).
(2) Section 2013 is amended by striking sub-
section (g).
(3) Section 2053(c)(1)(B) is amended by striking
the last sentence.
(4) Section 6018(a) is amended by striking
paragraph (4).
(c) EFFECTIVE DATES.—
(1) EXCESS DISTRIBUTION TAX REPEAL.—Except
as provided in paragraph (2), the repeal made by
subsection (a) shall apply to excess distributions re-
ceived after December 31, 1996.
(2) EXCESS
RETIREMENT
ACCUMULATION
TAX
REPEAL.—The repeal made by subsection (a) with re-
spect to section 4980A(d) of the Internal Revenue
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Code of 1986 and the amendments made by subsection
(b) shall apply to estates of decedents dying after De-
cember 31, 1996.
SEC. 883. LIMITATION ON CHARITABLE REMAINDER TRUST
ELIGIBILITY FOR CERTAIN TRUSTS.
(a) IN GENERAL.—Paragraphs (1)(A) and (2)(A) of
section 664(d) (relating to charitable remainder annuity
trust) are each amended by inserting ‘‘nor more than 50
percent’’ after ‘‘not less than 5 percent’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transfers in trust after June 18, 1997.
SEC. 884. INCREASE IN TAX ON PROHIBITED TRANS-
ACTIONS.
(a) IN GENERAL.—Section 4975(a) is amended by
striking ‘‘10 percent’’ and inserting ‘‘15 percent’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to prohibited transactions occurring
after the date of the enactment of this Act.
SEC. 885. BASIS RECOVERY RULES FOR ANNUITIES OVER
MORE THAN ONE LIFE.
(a) IN GENERAL.—Section 72(d)(1)(B) is amended by
adding at the end the following new clause:
‘‘(iv) NUMBER OF ANTICIPATED PAY-
MENTS WHERE MORE THAN ONE LIFE.—If
the annuity is payable over the lives of
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more than 1 individual, the number of an-
ticipated payments shall be determined as
follows:
‘‘If the combined ages of an-
nuitants are:
The number is:
Not more than 110 .........................................................................
410
More than 110 but not more than 120 .........................................
360
More than 120 but not more than 130 .........................................
310
More than 130 but not more than 140 .........................................
260
More than 140 ................................................................................
210.’’.
(b) 
CONFORMING
AMENDMENT.—Section
72(d)(1)(B)(iii) is amended—
(1) by inserting ‘‘If the annuity is payable over
the life of a single individual, the number of antici-
pated payments shall be determined as follows:’’ after
the heading and before the table, and
(2) by striking ‘‘primary’’ in the table.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to annuity starting dates
beginning after December 31, 1997.
TITLE IX—FOREIGN-RELATED
SIMPLIFICATION PROVISIONS
Subtitle A—General Provisions
SEC. 901. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN
TAX CREDIT LIMITATION.
(a) GENERAL RULE.—Section 904 (relating to limita-
tions on foreign tax credit) is amended by redesignating
subsection (j) as subsection (k) and by inserting after sub-
section (i) the following new subsection:
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‘‘(j) CERTAIN INDIVIDUALS EXEMPT.—
‘‘(1) IN GENERAL.—In the case of an individual
to whom this subsection applies for any taxable
year—
‘‘(A) the limitation of subsection (a) shall
not apply,
‘‘(B) no taxes paid or accrued by the indi-
vidual during such taxable year may be deemed
paid or accrued under subsection (c) in any
other taxable year, and
‘‘(C) no taxes paid or accrued by the indi-
vidual during any other taxable year may be
deemed paid or accrued under subsection (c) in
such taxable year.
‘‘(2) INDIVIDUALS
TO
WHOM
SUBSECTION
AP-
PLIES.—This subsection shall apply to an individual
for any taxable year if—
‘‘(A) the entire amount of such individual’s
gross income for the taxable year from sources
without the United States consists of qualified
passive income,
‘‘(B) the amount of the creditable foreign
taxes paid or accrued by the individual during
the taxable year does not exceed $300 ($600 in
the case of a joint return), and
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‘‘(C) such individual elects to have this sub-
section apply for the taxable year.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) QUALIFIED
PASSIVE
INCOME.—The
term ‘qualified passive income’ means any item
of gross income if—
‘‘(i) such item of income is passive in-
come (as defined in subsection (d)(2)(A)
without regard to clause (iii) thereof), and
‘‘(ii) such item of income is shown on
a payee statement furnished to the individ-
ual.
‘‘(B) CREDITABLE
FOREIGN
TAXES.—The
term ‘creditable foreign taxes’ means any taxes
for which a credit is allowable under section 901;
except that such term shall not include any tax
unless such tax is shown on a payee statement
furnished to such individual.
‘‘(C) PAYEE STATEMENT.—The term ‘payee
statement’ has the meaning given to such term
by section 6724(d)(2).
‘‘(D) ESTATES
AND
TRUSTS
NOT
ELIGI-
BLE.—This subsection shall not apply to any es-
tate or trust.’’.
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(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 1997.
SEC. 902. EXCHANGE RATE USED IN TRANSLATING FOR-
EIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVERAGE
RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN GENERAL.—Subsection (a) of section 986
(relating to translation of foreign taxes) is amended
to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of
any foreign income taxes (and any adjustment
thereto) shall be translated into dollars by using
the average exchange rate for the taxable year to
which such taxes relate.
‘‘(B) EXCEPTION
FOR
CERTAIN
TAXES.—
Subparagraph (A) shall not apply to any foreign
income taxes—
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‘‘(i) paid after the date 2 years after
the close of the taxable year to which such
taxes relate, or
‘‘(ii) paid before the beginning of the
taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—Subparagraph (A) shall not apply to
any foreign income taxes the liability for which
is denominated in any inflationary currency (as
determined under regulations).
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of deter-
mining the amount of the foreign tax credit, in the
case of any foreign income taxes to which subpara-
graph (A) of paragraph (1) does not apply—
‘‘(A) such taxes shall be translated into dol-
lars using the exchange rates as of the time such
taxes were paid to the foreign country or posses-
sion of the United States, and
‘‘(B) any adjustment to the amount of such
taxes shall be translated into dollars using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
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adjustment is paid to the foreign country or
possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes of
this subsection, the term ‘foreign income taxes’ means
any income, war profits, or excess profits taxes paid
or accrued to any foreign country or to any posses-
sion of the United States.’’.
(2) ADJUSTMENT
WHEN
NOT
PAID
WITHIN
YEARS AFTER YEAR TO WHICH TAXES RELATE.—Sub-
section (c) of section 905 is amended to read as fol-
lows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year to
which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
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the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or years
affected. The Secretary may prescribe adjustments to
the pools of post-1986 foreign income taxes under sec-
tions 902 and 960 in lieu of the redetermination
under the preceding sentence.
‘‘(2) SPECIAL RULE FOR TAXES NOT PAID WITH-
IN 2 YEARS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), in making the redetermina-
tion under paragraph (1), no credit shall be al-
lowed for accrued taxes not paid before the date
referred to in subparagraph (B) of paragraph
(1).
‘‘(B) TAXES
SUBSEQUENTLY
PAID.—Any
such taxes if subsequently paid—
‘‘(i) shall be taken into account—
‘‘(I) in the case of taxes deemed
paid under section 902 or section 960,
for the taxable year in which paid
(and no redetermination shall be made
under this section by reason of such
payment), and
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‘‘(II) in any other case, for the
taxable year to which such taxes relate,
and
‘‘(ii) shall be translated as provided in
section 986(a)(2)(A).
‘‘(3) ADJUSTMENTS.—The amount of tax (if
any) due on any redetermination under paragraph
(1) shall be paid by the taxpayer on notice and de-
mand by the Secretary, and the amount of tax over-
paid (if any) shall be credited or refunded to the tax-
payer in accordance with subchapter B of chapter 66
(section 6511 et seq.).
‘‘(4) BOND REQUIREMENTS.—In the case of any
tax accrued but not paid, the Secretary, as a condi-
tion precedent to the allowance of the credit provided
in this subpart, may require the taxpayer to give a
bond, with sureties satisfactory to and approved by
the Secretary, in such sum as the Secretary may re-
quire, conditioned on the payment by the taxpayer of
any amount of tax found due on any such redeter-
mination. Any such bond shall contain such further
conditions as the Secretary may require.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of the
amount of tax due from the taxpayer for the year or
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years affected by a refund, the amount of the taxes re-
funded for which credit has been allowed under this
section shall be reduced by the amount of any tax de-
scribed in section 901 imposed by the foreign country
or possession of the United States with respect to such
refund; but no credit under this subpart, or deduction
under section 164, shall be allowed for any taxable
year with respect to any such tax imposed on the re-
fund. No interest shall be assessed or collected on any
amount of tax due on any redetermination by the
Secretary, resulting from a refund to the taxpayer, for
any period before the receipt of such refund, except to
the extent interest was paid by the foreign country or
possession of the United States on such refund for
such period.’’.
(b) AUTHORITY TO USE AVERAGE RATES.—
(1) IN GENERAL.—Subsection (a) of section 986
(as amended by subsection (a)) is amended by redes-
ignating paragraph (3) as paragraph (4) and insert-
ing after paragraph (2) the following new paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in such
regulations) during which the taxes or adjustment is
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paid may be used instead of the exchange rate as of
the time of such payment.’’.
(2) DETERMINATION OF AVERAGE RATES.—Sub-
section (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the pe-
riod at the end of paragraph (5) and inserting ‘‘,
and’’, and by adding at the end thereof the following
new paragraph:
‘‘(6) setting forth procedures for determining the
average exchange rate for any period.’’.
(3) CONFORMING AMENDMENTS.—Subsection (b)
of section 989 is amended by striking ‘‘weighted’’ each
place it appears.
(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
or accrued in taxable years beginning after December
31, 1997.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1997.
SEC. 903. ELECTION TO USE SIMPLIFIED SECTION 904 LIMI-
TATION FOR ALTERNATIVE MINIMUM TAX.
(a) GENERAL RULE.—Subsection (a) of section 59 (re-
lating to alternative minimum tax foreign tax credit) is
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amended by adding at the end thereof the following new
paragraph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION 904
LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
‘‘(ii) the limitation of section 904 shall
be based on the proportion which—
‘‘(I) the taxpayer’s taxable income
(as determined for purposes of the reg-
ular tax) from sources without the
United States (but not in excess of the
taxpayer’s entire alternative minimum
taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
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after December 31, 1997, and for which the
taxpayer claims an alternative minimum
tax foreign tax credit.
‘‘(ii) 
ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with the
consent of the Secretary.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 904. TREATMENT OF PERSONAL TRANSACTIONS BY IN-
DIVIDUALS 
UNDER 
FOREIGN 
CURRENCY
RULES.
(a) GENERAL RULE.—Subsection (e) of section 988
(relating to application to individuals) is amended to read
as follows:
‘‘(e) APPLICATION TO INDIVIDUALS.—
‘‘(1) IN GENERAL.—The preceding provisions of
this section shall not apply to any section 988 trans-
action entered into by an individual which is a per-
sonal transaction.
‘‘(2) EXCLUSION FOR CERTAIN PERSONAL TRANS-
ACTIONS.—If—
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‘‘(A) nonfunctional currency is disposed of
by an individual in any transaction, and
‘‘(B) such transaction is a personal trans-
action,
no gain shall be recognized for purposes of this sub-
title by reason of changes in exchange rates after such
currency was acquired by such individual and before
such disposition. The preceding sentence shall not
apply if the gain which would otherwise be recognized
on the transaction exceeds $200.
‘‘(3) PERSONAL TRANSACTIONS.—For purposes of
this subsection, the term ‘personal transaction’ means
any transaction entered into by an individual, except
that such term shall not include any transaction to
the extent that expenses properly allocable to such
transaction meet the requirements of section 162 or
212 (other than that part of section 212 dealing with
expenses incurred in connection with taxes).’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
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Subtitle B—Treatment of
Controlled Foreign Corporations
SEC. 911. GAIN ON CERTAIN STOCK SALES BY CONTROLLED
FOREIGN CORPORATIONS TREATED AS DIVI-
DENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
thereof the following new subsection:
‘‘(e) GAIN ON CERTAIN STOCK SALES BY CONTROLLED
FOREIGN CORPORATIONS TREATED AS DIVIDENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other foreign
corporation, gain recognized on such sale or exchange
shall be included in the gross income of such con-
trolled foreign corporation as a dividend to the same
extent that it would have been so included under sec-
tion 1248(a) if such controlled foreign corporation
were a United States person. For purposes of deter-
mining the amount which would have been so includ-
ible, the determination of whether such other foreign
corporation was a controlled foreign corporation shall
be made without regard to the preceding sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA-
BLE.—Clause (i) of section 954(c)(3)(A) shall not
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apply to any amount treated as a dividend by reason
of paragraph (1).
‘‘(3) CLARIFICATION
OF
DEEMED
SALES.—For
purposes of this subsection, a controlled foreign cor-
poration shall be treated as having sold or exchanged
any stock if, under any provision of this subtitle, such
controlled foreign corporation is treated as having
gain from the sale or exchange of such stock.’’.
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of
section 904(d)(2)(E) is amended by striking ‘‘and except
as provided in regulations, the taxpayer was a United
States shareholder in such corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a) shall
apply to gain recognized on transactions occurring
after the date of the enactment of this Act.
(2) The amendment made by subsection (b) shall
apply to distributions after the date of the enactment
of this Act.
SEC. 912. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN DE-
TERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F income)
is amended by adding at the end thereof the following
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new sentence: ‘‘For purposes of subparagraph (B),
any gain included in the gross income of any person
as a dividend under section 1248 shall be treated as
a distribution received by such person with respect to
the stock involved.’’.
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN
CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end thereof the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by the
Secretary, if a United States shareholder is treated under
section 958(a)(2) as owning any stock in a controlled for-
eign corporation which is actually owned by another con-
trolled foreign corporation, adjustments similar to the ad-
justments provided by subsections (a) and (b) shall be made
to the basis of such stock in the hands of such other con-
trolled foreign corporation, but only for the purposes of de-
termining the amount included under section 951 in the
gross income of such United States shareholder (or any
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other United States shareholder who acquires from any per-
son any portion of the interest of such United States share-
holder by reason of which such shareholder was treated as
owning such stock, but only to the extent of such portion,
and subject to such proof of identity of such interest as the
Secretary may prescribe by regulations).’’.
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall apply for purposes of determin-
ing inclusions for taxable years of United States
shareholders beginning after December 31, 1997.
(c) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN GENERAL.—Subsection (b) of section 952
is amended by adding at the end thereof the following
new sentence: ‘‘For purposes of this subsection, any
exemption (or reduction) with respect to the tax im-
posed by section 884 shall not be taken into account.’’.
(2) EFFECTIVE DATE.—The amendment made by
paragraph (1) shall apply to taxable years beginning
after December 31, 1986.
SEC. 913. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR
CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN GENERAL.—Subsection (b) of section 902
(relating to deemed taxes increased in case of certain
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2nd and 3rd tier foreign corporations) is amended to
read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CERTAIN
LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another mem-
ber of such group from which it receives divi-
dends in any taxable year,
such foreign corporation shall be deemed to have paid
the same proportion of such other member’s post-1986
foreign income taxes as would be determined under
subsection (a) if such foreign corporation were a do-
mestic corporation.
‘‘(2) QUALIFIED GROUP.—For purposes of para-
graph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other foreign corporation indirectly through
a chain of foreign corporations connected
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through stock ownership of at least 10 per-
cent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corporation
in such chain, and
‘‘(iii) such other corporation is not
below the sixth tier in such chain.
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corporation
is a controlled foreign corporation (as defined in sec-
tion 957) and the domestic corporation is a United
States shareholder (as defined in section 951(b)) in
such foreign corporation. Paragraph (1) shall apply
to those taxes paid by a member of the qualified
group below the third tier only with respect to periods
during which it was a controlled foreign corpora-
tion.’’.
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
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‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’.
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corporation’’
and inserting ‘‘sixth tier foreign corporation’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC CORPORATION ACQUIRES 10 PERCENT OF
FOREIGN CORPORATION’’ and inserting ‘‘WHERE
FOREIGN CORPORATION FIRST QUALIFIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits) is
amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under sec-
tion 951(a) in the gross income of a domestic corpora-
tion any amount attributable to earnings and profits
of a foreign corporation which is a member of a
qualified group (as defined in section 902(b)) with re-
spect to the domestic corporation, then, except to the
extent provided in regulations, section 902 shall be
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applied as if the amount so included were a dividend
paid by such foreign corporation (determined by ap-
plying section 902(c) in accordance with section
904(d)(3)(B)).’’.
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxes of foreign corpora-
tions for taxable years of such corporations beginning
after the date of enactment of this Act.
(2) SPECIAL RULE.—In the case of any chain of
foreign corporations described in clauses (i) and (ii)
of section 902(b)(2)(B) of the Internal Revenue Code
of 1986 (as amended by this section), no liquidation,
reorganization, or similar transaction in a taxable
year beginning after the date of the enactment of this
Act shall have the effect of permitting taxes to be
taken into account under section 902 of the Internal
Revenue Code of 1986 which could not have been
taken into account under such section but for such
transaction.
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Subtitle C—Repeal of Excise Tax on
Transfers to Foreign Entities
SEC. 921. REPEAL OF EXCISE TAX ON TRANSFERS TO FOR-
EIGN ENTITIES; RECOGNITION OF GAIN ON
CERTAIN TRANSFERS TO FOREIGN TRUSTS
AND ESTATES.
(a) REPEAL OF EXCISE TAX.—Chapter 5 (relating to
transfers to avoid income tax) is hereby repealed.
(b) RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO FOREIGN TRUSTS AND ESTATES.—Subpart F of part
I of subchapter J of chapter 1 is amended by adding at
the end the following new section:
‘‘SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO CERTAIN FOREIGN TRUSTS AND ESTATES.
‘‘(a) IN GENERAL.—Except as provided in regulations,
in the case of any transfer of property by a United States
person to a foreign estate or trust, for purposes of this sub-
title, such transfer shall be treated as a sale or exchange
for an amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the
excess of—
‘‘(1) the fair market value of the property so
transferred, over
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‘‘(2) the adjusted basis (for purposes of determin-
ing gain) of such property in the hands of the trans-
feror.
‘‘(b) EXCEPTION.—Subsection (a) shall not apply to
a transfer to a trust by a United States person to the extent
that any person is treated as the owner of such trust under
section 671.’’.
(b) OTHER ANTI-AVOIDANCE PROVISIONS REPLACING
REPEALED EXCISE TAX.—
(1) GAIN RECOGNITION ON EXCHANGES INVOLV-
ING FOREIGN PERSONS.—Section 1035 is amended by
redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new sub-
section:
‘‘(c) EXCHANGES INVOLVING FOREIGN PERSONS.—To
the extent provided in regulations, subsection (a) shall not
apply to any exchange having the effect of transferring
property to any person other than a United States person.’’.
(2) TRANSFERS TO FOREIGN CORPORATIONS.—
Section 367 is amended by adding at the end the fol-
lowing new subsection:
‘‘(f) OTHER TRANSFERS.—To the extent provided in
regulations, if a United States person transfers property to
a foreign corporation as paid-in surplus or as a contribu-
tion to capital (in a transaction not otherwise described in
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this section), such foreign corporation shall not, for pur-
poses of determining the extent to which gain shall be recog-
nized on such transfer, be considered to be a corporation.’’.
(3) CERTAIN TRANSFERS TO PARTNERSHIPS.—
Section 721 is amended by adding at the end the fol-
lowing new subsection:
‘‘(c) REGULATIONS RELATING TO CERTAIN TRANS-
FERS TO PARTNERSHIPS.—The Secretary may provide by
regulations that subsection (a) shall not apply to gain real-
ized on the transfer of property to a partnership if such
gain, when recognized, will be includible in the gross income
of a person other than a United States person.’’.
(4) REPEAL OF UNITED STATES SOURCE TREAT-
MENT OF DEEMED ROYALTIES.—Subparagraph (C) of
section 367(d)(2) is amended to read as follows:
‘‘(C) AMOUNTS RECEIVED TREATED AS OR-
DINARY INCOME.—For purposes of this chapter,
any amount included in gross income by reason
of this subsection shall be treated as ordinary in-
come.’’.
(5) TRANSFERS OF INTANGIBLES TO PARTNER-
SHIPS.—
(A) Subsection (d) of section 367 is amend-
ed by adding at the end the following new para-
graph:
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‘‘(3) REGULATIONS RELATING TO TRANSFERS OF
INTANGIBLES TO PARTNERSHIPS.—The Secretary may
provide by regulations that the rules of paragraph (2)
also apply to the transfer of intangible property by
a United States person to a partnership in cir-
cumstances consistent with the purposes of this sub-
section.’’.
(B) Section 721 is amended by adding at
the end the following new subsection:
‘‘(d) TRANSFERS OF INTANGIBLES.—
‘‘For regulatory authority to treat intangibles
transferred to a partnership as sold, see section
367(d)(3).’’.
(c) TECHNICAL AND CONFORMING AMENDMENTS.—
(1) Subsection (h) of section 814 is amended by
striking ‘‘or 1491’’.
(2) Section 1057 (relating to election to treat
transfer to foreign trust, etc., as taxable exchange) is
hereby repealed.
(3) Section 6422 is amended by striking para-
graph (5) and by redesignating paragraphs (6)
through (13) as paragraphs (5) through (12), respec-
tively.
(4) The table of chapters for subtitle A is amend-
ed by striking the item relating to chapter 5.
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(5) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(6) The table of sections for subpart F of part I
of subchapter J of chapter 1 is amended by adding
at the end the following new item:
‘‘Sec. 684. Recognition of gain on certain transfers to certain for-
eign trusts and estates.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall take effect on the date of the enactment of this
Act.
Subtitle D—Information Reporting
SEC. 931. CLARIFICATION OF APPLICATION OF RETURN RE-
QUIREMENT TO FOREIGN PARTNERSHIPS.
(a) IN GENERAL.—Section 6031 (relating to return of
partnership income) is amended by adding at the end the
following new subsection:
‘‘(e) FOREIGN PARTNERSHIPS.—
‘‘(1) EXCEPTION FOR FOREIGN PARTNERSHIP.—
Except as provided in paragraph (2), the preceding
provisions of this section shall not apply to a foreign
partnership.
‘‘(2) CERTAIN
FOREIGN
PARTNERSHIPS
RE-
QUIRED TO FILE RETURN.—Except as provided in
regulations prescribed by the Secretary, this section
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shall apply to a foreign partnership for any taxable
year if for such year, such partnership has—
‘‘(A) gross income derived from sources
within the United States, or
‘‘(B) gross income which is effectively con-
nected with the conduct of a trade or business
within the United States.
The Secretary may provide simplified filing proce-
dures for foreign partnerships to which this section
applies.’’.
(b) SANCTION FOR FAILURE BY FOREIGN PARTNER-
SHIP TO COMPLY WITH SECTION 6031 TO INCLUDE DE-
NIAL OF DEDUCTIONS.—Subsection (f) of section 6231 is
amended—
(1) by striking ‘‘LOSSES AND’’ in the heading
and inserting ‘‘DEDUCTIONS, LOSSES, AND’’, and
(2) by striking ‘‘loss or’’ each place it appears
and inserting ‘‘deduction, loss, or’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
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SEC. 932. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT
TO INFORMATION REPORTING COMPARABLE
TO 
INFORMATION 
REPORTING 
FOR 
CON-
TROLLED FOREIGN CORPORATIONS.
(a) IN GENERAL.—So much of section 6038 (relating
to information with respect to certain foreign corporations)
as precedes paragraph (2) of subsection (a) is amended to
read as follows:
‘‘SEC. 6038. INFORMATION REPORTING WITH RESPECT TO
CERTAIN 
FOREIGN 
CORPORATIONS 
AND
PARTNERSHIPS.
‘‘(a) REQUIREMENT.—
‘‘(1) IN GENERAL.—Every United States person
shall furnish, with respect to any foreign business en-
tity which such person controls, such information as
the Secretary may prescribe relating to—
‘‘(A) the name, the principal place of busi-
ness, and the nature of business of such entity,
and the country under whose laws such entity is
incorporated (or organized in the case of a part-
nership);
‘‘(B) in the case of a foreign corporation, its
post-1986 undistributed earnings (as defined in
section 902(c));
‘‘(C) a balance sheet for such entity listing
assets, liabilities, and capital;
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‘‘(D) transactions between such entity
and—
‘‘(i) such person,
‘‘(ii) any corporation or partnership
which such person controls, and
‘‘(iii) any United States person own-
ing, at the time the transaction takes
place—
‘‘(I) in the case of a foreign cor-
poration, 10 percent or more of the
value of any class of stock outstanding
of such corporation, and
‘‘(II) in the case of a foreign part-
nership, at least a 10-percent interest
in such partnership; and
‘‘(E)(i) in the case of a foreign corporation,
a description of the various classes of stock out-
standing, and a list showing the name and ad-
dress of, and number of shares held by, each
United States person who is a shareholder of
record owning at any time during the annual
accounting period 5 percent or more in value of
any class of stock outstanding of such foreign
corporation, and
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‘‘(ii) information comparable to the infor-
mation described in clause (i) in the case of a
foreign partnership.
The Secretary may also require the furnishing of any
other information which is similar or related in na-
ture to that specified in the preceding sentence or
which the Secretary determines to be appropriate to
carry out the provisions of this title.’’.
(b) DEFINITIONS.—
(1) IN GENERAL.—Subsection (e) of section 6038
(relating to definitions) is amended—
(A) by redesignating paragraphs (1) and
(2) as paragraphs (2) and (4), respectively,
(B) by inserting before paragraph (2) (as so
redesignated) the following new paragraph:
‘‘(1) FOREIGN BUSINESS ENTITY.—The term ‘for-
eign business entity’ means a foreign corporation and
a foreign partnership.’’, and
(C) by inserting after paragraph (2) (as so
redesignated) the following new paragraph:
‘‘(3) PARTNERSHIP-RELATED DEFINITIONS.—
‘‘(A) CONTROL.—A person is in control of a
partnership if such person owns directly or indi-
rectly more than a 50 percent interest in such
partnership.
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‘‘(B) 50-PERCENT INTEREST.—For purposes
of subparagraph (A), a 50-percent interest in a
partnership is—
‘‘(i) an interest equal to 50 percent of
the capital interest, or 50 percent of the
profits interest, in such partnership, or
‘‘(ii) to the extent provided in regula-
tions, an interest to which 50 percent of the
deductions or losses of such partnership are
allocated.
For purposes of the preceding sentence, rules
similar to the rules of section 267(c) (other than
paragraph (3)) shall apply, except so as to con-
sider a United States person as owning such an
interest which is owned by a person which is not
a United States person.
‘‘(C) 10-PERCENT INTEREST.—A 10-percent
interest in a partnership is an interest which
would be described in subparagraph (B) if ‘10
percent’ were substituted for ‘50 percent’ each
place it appears.’’.
(2) CLERICAL
AMENDMENT.—The paragraph
heading for paragraph (2) of section 6038(e) (as so
redesignated) is amended by inserting ‘‘OF CORPORA-
TION’’ after ‘‘CONTROL’’.
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(c) MODIFICATION OF SANCTIONS ON PARTNERSHIPS
AND CORPORATIONS FOR FAILURE TO FURNISH INFORMA-
TION.—
(1) IN GENERAL.—Subsection (b) of section 6038
is amended—
(A) by striking ‘‘$1,000’’ each place it ap-
pears and inserting ‘‘$10,000’’, and
(B) by striking ‘‘$24,000’’ in paragraph (2)
and inserting ‘‘$50,000’’.
(d) REPORTING
BY 10-PERCENT PARTNERS.—Sub-
section (a) of section 6038 is amended by adding at the
end the following new paragraph:
‘‘(5) INFORMATION REQUIRED FROM 10-PERCENT
PARTNER OF CONTROLLED FOREIGN PARTNERSHIP.—
In the case of a foreign partnership which is con-
trolled by United States persons holding at least 10-
percent interests (but not by any one United States
person), the Secretary may require each United States
person who holds a 10-percent interest in such part-
nership to furnish information relating to such part-
nership, including information relating to such part-
ner’s ownership interests in the partnership and allo-
cations to such partner of partnership items.’’.
(e) TECHNICAL AMENDMENTS.—
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(1) The following provisions of section 6038 are
each amended by striking ‘‘foreign corporation’’ each
place it appears and inserting ‘‘foreign business en-
tity’’:
(A) Paragraphs (2) and (3) of subsection
(a).
(B) Subsection (b).
(C) Subsection (c) other than paragraph
(1)(B) thereof.
(D) Subsection (d).
(E) Subsection (e)(4) (as redesignated by
subsection (b)).
(2) Subparagraph (B) of section 6038(c)(1) is
amended by inserting ‘‘in the case of a foreign busi-
ness entity which is a foreign corporation,’’ after
‘‘(B)’’.
(3) Paragraph (8) of section 318(b) is amended
by striking ‘‘6038(d)(1)’’ and inserting ‘‘6038(d)(2)’’.
(4) Paragraph (4) of section 901(k) is amended
by striking ‘‘foreign corporation’’ and inserting ‘‘for-
eign corporation or partnership’’.
(5) The table of sections for subpart A of part III
of subchapter A of chapter 61 is amended by striking
the item relating to section 6038 and inserting the
following new item:
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‘‘Sec. 6038. Information reporting with respect to certain foreign
corporations and partnerships.’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to annual accounting periods of foreign
partnerships beginning after the date of the enactment of
this Act.
SEC. 933. MODIFICATIONS RELATING TO RETURNS RE-
QUIRED 
TO 
BE 
FILED 
BY 
REASON 
OF
CHANGES IN OWNERSHIP INTERESTS IN FOR-
EIGN PARTNERSHIP.
(a) NO RETURN REQUIRED UNLESS CHANGES IN-
VOLVE 10-PERCENT INTEREST IN PARTNERSHIP.—
(1) IN
GENERAL.—Subsection (a) of section
6046A (relating to returns as to interests in foreign
partnerships) is amended by adding at the end the
following new sentence: ‘‘Paragraphs (1) and (2) shall
apply to any acquisition or disposition only if the
United States person directly or indirectly holds at
least a 10-percent interest in such partnership either
before or after such acquisition or disposition, and
paragraph (3) shall apply to any change only if the
change is equivalent to at least a 10-percent interest
in such partnership.’’.
(2) 10-PERCENT
INTEREST.—Section 6046A is
amended by redesignating subsection (d) as subsection
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(e) and by inserting after subsection (c) the following
new subsection:
‘‘(d) 10-PERCENT INTEREST.—For purposes of sub-
section (a), a 10-percent interest in a partnership is an
interest described in section 6038(e)(3)(C).’’.
(b) MODIFICATION OF PENALTY ON FAILURE TO RE-
PORT CHANGES IN OWNERSHIP INTERESTS IN FOREIGN
CORPORATIONS
AND PARTNERSHIPS.—Subsection (a) of
section 6679 (relating to failure to file returns, etc., with
respect to foreign corporations or foreign partnerships) is
amended to read as follows:
‘‘(a) CIVIL PENALTY.—
‘‘(1) IN GENERAL.—In addition to any criminal
penalty provided by law, any person required to file
a return under section 6035, 6046, or 6046A who
fails to file such return at the time provided in such
section, or who files a return which does not show the
information required pursuant to such section, shall
pay a penalty of $10,000, unless it is shown that such
failure is due to reasonable cause.
‘‘(2) INCREASE
IN
PENALTY
WHERE
FAILURE
CONTINUES AFTER NOTIFICATION.—If any failure de-
scribed in paragraph (1) continues for more than 90
days after the day on which the Secretary mails no-
tice of such failure to the United States person, such
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person shall pay a penalty (in addition to the
amount required under paragraph (1)) of $10,000 for
each 30-day period (or fraction thereof) during which
such failure continues after the expiration of such 90-
day period. The increase in any penalty under this
paragraph shall not exceed $50,000.
‘‘(3) REDUCED PENALTY FOR RETURNS RELAT-
ING TO FOREIGN PERSONAL HOLDING COMPANIES.—
In the case of a return required under section 6035,
paragraph (1) shall be applied by substituting
‘$1,000’ for ‘$10,000’, and paragraph (2) shall not
apply.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to transfers and changes after the date
of the enactment of this Act.
SEC. 934. TRANSFERS OF PROPERTY TO FOREIGN PARTNER-
SHIPS SUBJECT TO INFORMATION REPORT-
ING COMPARABLE TO INFORMATION REPORT-
ING FOR SUCH TRANSFERS TO FOREIGN COR-
PORATIONS.
(a) IN GENERAL.—Paragraph (1) of section 6038B(a)
(relating to notice of certain transfers to foreign corpora-
tions) is amended to read as follows:
‘‘(1) transfers property to—
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‘‘(A) a foreign corporation in an exchange
described in section 332, 351, 354, 355, 356, or
361, or
‘‘(B) a foreign partnership in a contribu-
tion described in section 721 or in any other
contribution described in regulations prescribed
by the Secretary,’’.
(b) EXCEPTIONS.—Section 6038B is amended by re-
designating subsection (b) as subsection (c) and by inserting
after subsection (a) the following new subsection:
‘‘(b) EXCEPTIONS FOR CERTAIN TRANSFERS TO FOR-
EIGN PARTNERSHIPS; SPECIAL RULE.—
‘‘(1) EXCEPTIONS.—Subsection (a)(1)(B) shall
apply to a transfer by a United States person to a
foreign partnership only if—
‘‘(A) the United States person holds (imme-
diately after the transfer) directly or indirectly
at least a 10-percent interest (as defined in sec-
tion 6046A(d)) in the partnership, or
‘‘(B) the value of the property transferred
(when added to the value of the property trans-
ferred by such person or any related person to
such partnership or a related partnership during
the 12-month period ending on the date of the
transfer) exceeds $100,000.
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For purposes of the preceding sentence, the value of
any transferred property is its fair market value at
the time of its transfer.
‘‘(2) SPECIAL RULE.—If by reason of an adjust-
ment under section 482 or otherwise, a contribution
described in subsection (a)(1) is deemed to have been
made, such contribution shall be treated for purposes
of this section as having been made not earlier than
the date specified by the Secretary.’’.
(c) MODIFICATION OF PENALTY APPLICABLE TO FOR-
EIGN CORPORATIONS AND PARTNERSHIPS.—
(1) IN
GENERAL.—Paragraph (1) of section
6038B(b) is amended by striking ‘‘equal to’’ and all
that follows and inserting ‘‘equal to 10 percent of the
fair market value of the property at the time of the
exchange (and, in the case of a contribution described
in subsection (a)(1)(B), such person shall recognize
gain as if the contributed property had been sold for
such value at the time of such contribution).’’.
(2) LIMIT
ON
PENALTY.—Section 6038B(b) is
amended by adding at the end the following new
paragraph:
‘‘(3) LIMIT
ON
PENALTY.—The penalty under
paragraph (1) with respect to any exchange shall not
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exceed $100,000 unless the failure with respect to such
exchange was due to intentional disregard.’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to transfers made after the
date of the enactment of this Act.
(2) ELECTION OF RETROACTIVE EFFECT.—Sec-
tion 1494(c) of the Internal Revenue Code of 1986
shall not apply to any transfer after August 20, 1996,
if all applicable reporting requirements under section
6038B of such Code (as amended by this section) are
satisfied. The Secretary of the Treasury or his dele-
gate may prescribe simplified reporting under the
preceding sentence.
SEC. 935. EXTENSION OF STATUTE OF LIMITATION FOR
FOREIGN TRANSFERS.
(a) IN GENERAL.—Paragraph (8) of section 6501(c)
(relating to failure to notify Secretary under section 6038B)
is amended to read as follows:
‘‘(8) FAILURE TO NOTIFY SECRETARY OF CER-
TAIN FOREIGN TRANSFERS.—In the case of any infor-
mation which is required to be reported to the Sec-
retary under section 6038, 6038A, 6038B, 6046,
6046A, or 6048, the time for assessment of any tax
imposed by this title with respect to any event or pe-
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riod to which such information relates shall not ex-
pire before the date which is 3 years after the date on
which the Secretary is furnished the information re-
quired to be reported under such section.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to information the due date for the
reporting of which is after the date of the enactment of this
Act.
SEC. 936. INCREASE IN FILING THRESHOLDS FOR RETURNS
AS TO ORGANIZATION OF FOREIGN CORPORA-
TIONS AND ACQUISITIONS OF STOCK IN SUCH
CORPORATIONS.
(a) IN GENERAL.—Subsection (a) of section 6046 (re-
lating to returns as to organization or reorganization of
foreign corporations and as to acquisitions of their stock)
is amended to read as follows:
‘‘(a) REQUIREMENT OF RETURN.—
‘‘(1) IN GENERAL.—A return complying with the
requirements of subsection (b) shall be made by—
‘‘(A) each United States citizen or resident
who becomes an officer or director of a foreign
corporation if a United States person (as defined
in section 7701(a)(30)) meets the stock ownership
requirements of paragraph (2) with respect to
such corporation,
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‘‘(B) each United States person—
‘‘(i) who acquires stock which, when
added to any stock owned on the date of
such acquisition, meets the stock ownership
requirements of paragraph (2) with respect
to a foreign corporation, or
‘‘(ii) who acquires stock which, without
regard to stock owned on the date of such
acquisition, meets the stock ownership re-
quirements of paragraph (2) with respect to
a foreign corporation,
‘‘(C) each person (not described in subpara-
graph (B)) who is treated as a United States
shareholder under section 953(c) with respect to
a foreign corporation, and
‘‘(D) each person who becomes a United
States person while meeting the stock ownership
requirements of paragraph (2) with respect to
stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States share-
holder under section 953(c), subparagraph (A) shall
be treated as including a reference to each United
States person who is an officer or director of such cor-
poration.
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‘‘(2) STOCK
OWNERSHIP
REQUIREMENTS.—A
person meets the stock ownership requirements of this
paragraph with respect to any corporation if such
person owns 10 percent or more of—
‘‘(A) the total combined voting power of all
classes of stock of such corporation entitled to
vote, or
‘‘(B) the total value of the stock of such cor-
poration.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect on January 1, 1998.
Subtitle E—Determination of For-
eign or Domestic Status of Part-
nerships
SEC. 941. DETERMINATION OF FOREIGN OR DOMESTIC STA-
TUS OF PARTNERSHIPS.
(a) IN GENERAL.—Paragraph (4) of section 7701(a)
is amended by inserting before the period ‘‘unless, in the
case of a partnership, the Secretary provides otherwise by
regulations’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after the
date of the enactment of this Act.
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Subtitle F—Other Simplification
Provisions
SEC. 951. TRANSITION RULE FOR CERTAIN TRUSTS.
(a) IN GENERAL.—Paragraph (3) of section 1907(a)
of the Small Business Job Protection Act of 1996 is amend-
ed by adding at the end the following flush sentence:
‘‘To the extent prescribed in regulations by the Sec-
retary of the Treasury or his delegate, a trust which
was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under subpart
E of part I of subchapter J of chapter 1 of the Inter-
nal Revenue Code of 1986), and which was treated as
a United States person on the day before the date of
the enactment of this Act may elect to continue to be
treated as a United States person notwithstanding
section 7701(a)(30)(E) of such Code.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall take effect as if included in the amendments
made by section 1907(a) of the Small Business Job Protec-
tion Act of 1996.
SEC. 952. REPEAL OF STOCK AND SECURITIES SAFE HAR-
BOR REQUIREMENT THAT PRINCIPAL OFFICE
BE OUTSIDE THE UNITED STATES.
(a) IN GENERAL.—The last sentence of clause (ii) of
section 864(b)(2)(A) (relating to stock or securities) is
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amended by striking ‘‘, or in the case of a corporation’’
and all that follows and inserting a period.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 1997.
SEC. 953. MISCELLANEOUS CLARIFICATIONS.
(a) ATTRIBUTION OF DEEMED PAID FOREIGN TAXES
TO PRIOR DISTRIBUTIONS.—Subparagraph (B) of section
902(c)(2) is amended by striking ‘‘deemed paid with respect
to’’ and inserting ‘‘attributable to’’.
(b) FINANCIAL SERVICES INCOME DETERMINED WITH-
OUT REGARD TO HIGH-TAXED INCOME.—Subclause (II) of
section 904(d)(2)(C)(i) is amended by striking ‘‘subclause
(I)’’ and inserting ‘‘subclauses (I) and (III)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect on the date of the enactment of this
Act.
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TITLE X—SIMPLIFICATION PRO-
VISIONS RELATING TO INDI-
VIDUALS AND BUSINESSES
Subtitle A—Provisions Relating to
Individuals
SEC. 1001. BASIC STANDARD DEDUCTION AND MINIMUM
TAX EXEMPTION AMOUNT FOR CERTAIN DE-
PENDENTS.
(a) BASIC STANDARD DEDUCTION.—
(1) IN GENERAL.—Paragraph (5) of section 63(c)
(relating to limitation on basic standard deduction in
the case of certain dependents) is amended by striking
‘‘shall not exceed’’ and all that follows and inserting
‘‘shall not exceed the greater of—
‘‘(A) $500, or
‘‘(B) the sum of $250 and such individual’s
earned income.’’.
(2) CONFORMING AMENDMENT.—Paragraph (4)
of section 63(c) is amended—
(A) by striking ‘‘(5)(A)’’ in the material
preceding subparagraph (A) and inserting ‘‘(5)’’,
and
(B) by striking ‘‘by substituting’’ and all
that follows in subparagraph (B) and inserting
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‘‘by substituting for ‘calendar year 1992’ in sub-
paragraph (B) thereof—
‘‘(i) ‘calendar year 1987’ in the case of
the dollar amounts contained in paragraph
(2) or (5)(A) or subsection (f), and
‘‘(ii) ‘calendar year 1997’ in the case
of the dollar amount contained in para-
graph (5)(B).’’.
(b) MINIMUM TAX EXEMPTION AMOUNT.—Subsection
(j) of section 59 is amended to read as follows:
‘‘(j) TREATMENT OF UNEARNED INCOME OF MINOR
CHILDREN.—
‘‘(1) IN GENERAL.—In the case of a child to
whom section 1(g) applies, the exemption amount for
purposes of section 55 shall not exceed the sum of—
‘‘(A) such child’s earned income (as defined
in section 911(d)(2)) for the taxable year, plus
‘‘(B) $5,000.
‘‘(2) INFLATION
ADJUSTMENT.—In the case of
any taxable year beginning in a calendar year after
1998, the dollar amount in paragraph (1)(B) shall be
increased by an amount equal to the product of—
‘‘(A) such dollar amount, and
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar year
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in which the taxable year begins, determined by
substituting ‘1997’ for ‘1992’ in subparagraph
(B) thereof.
If any increase determined under the preceding sen-
tence is not a multiple of $50, such increase shall be
rounded to the nearest multiple of $50.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 1002. INCREASE IN AMOUNT OF TAX EXEMPT FROM ES-
TIMATED TAX REQUIREMENTS.
(a) IN GENERAL.—Paragraph (1) of section 6654(e)
(relating to exception where tax is small amount) is amend-
ed by striking ‘‘$500’’ and inserting ‘‘$1,000’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 1003. TREATMENT OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.
(a) IN GENERAL.—Section 162 (relating to trade or
business expenses), as amended by title VII, is amended by
redesignating subsection (p) as subsection (q) and by insert-
ing after subsection (o) the following new subsection:
‘‘(p) TREATMENT
OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.—
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‘‘(1) GENERAL RULE.—In the case of any em-
ployee of the United States Postal Service who per-
forms services involving the collection and delivery of
mail on a rural route and who receives qualified re-
imbursements for the expenses incurred by such em-
ployee for the use of a vehicle in performing such
services—
‘‘(A) the amount allowable as a deduction
under this chapter for the use of a vehicle in per-
forming such services shall be equal to the
amount of such qualified reimbursements; and
‘‘(B) such qualified reimbursements shall be
treated as paid under a reimbursement or other
expense allowance arrangement for purposes of
section 62(a)(2)(A) (and section 62(c) shall not
apply to such qualified reimbursements).
‘‘(2) DEFINITION
OF
QUALIFIED
REIMBURSE-
MENTS.—For purposes of this subsection, the term
‘qualified reimbursements’ means the amounts paid
by the United States Postal Service to employees as
an equipment maintenance allowance under the 1991
collective bargaining agreement between the United
States Postal Service and the National Rural Letter
Carriers’ Association. Amounts paid as an equipment
maintenance allowance by such Postal Service under
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later collective bargaining agreements that supersede
the 1991 agreement shall be considered qualified reim-
bursements if such amounts do not exceed the
amounts that would have been paid under the 1991
agreement, adjusted for changes in the Consumer
Price Index (as defined in section 1(f)(5)) since
1991.’’.
(b) TECHNICAL AMENDMENT.—Section 6008 of the
Technical and Miscellaneous Revenue Act of 1988 is hereby
repealed.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 1004. TREATMENT OF TRAVELING EXPENSES OF CER-
TAIN FEDERAL EMPLOYEES ENGAGED IN
CRIMINAL INVESTIGATIONS.
(a) IN GENERAL.—Subsection (o) of section 162, as
added by title VII, is amended by adding at the end the
following new paragraph:
‘‘(3) TRAVELING
EXPENSES
OF
CERTAIN
FED-
ERAL EMPLOYEES ENGAGED IN CRIMINAL INVESTIGA-
TIONS.—Paragraph (1) shall not apply to any Fed-
eral employee during any period for which such em-
ployee is certified by the Attorney General (or the des-
ignee thereof) as traveling on behalf of the United
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States in temporary duty status to investigate, or
provide support services for the investigation of, a
Federal crime.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to amounts paid or incurred with
respect to taxable years ending after the date of the enact-
ment of this Act.
Subtitle B—Provisions Relating to
Businesses Generally
SEC. 1011. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CERTAIN
CASES.—Subsection (b) of section 460 (relating to percent-
age of completion method) is amended by adding at the end
the following new paragraph:
‘‘(6) ELECTION
TO
HAVE
LOOK-BACK
METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) 
AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER COMPLETION OF CONTRACT.—Paragraph
(1)(B) shall not apply with respect to any tax-
able year (beginning after the taxable year in
which the contract is completed) if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
such taxable year, is within
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‘‘(ii) 10 percent of the cumulative look-
back taxable income (or loss) under the con-
tract as of the close of the most recent tax-
able year to which paragraph (1)(B) ap-
plied (or would have applied but for sub-
paragraph (B)).
‘‘(B) DE MINIMIS DISCREPANCIES.—Para-
graph (1)(B) shall not apply in any case to
which it would otherwise apply if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
each prior contract year, is within
‘‘(ii) 10 percent of the cumulative look-
back income (or loss) under the contract as
of the close of such prior contract year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT YEAR.—The term ‘con-
tract year’ means any taxable year for
which income is taken into account under
the contract.
‘‘(ii) LOOK-BACK INCOME OR LOSS.—
The look-back income (or loss) is the
amount which would be the taxable income
(or loss) under the contract if the allocation
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method set forth in paragraph (2)(A) were
used in determining taxable income.
‘‘(iii) 
DISCOUNTING
NOT
APPLICA-
BLE.—The amounts taken into account
after the completion of the contract shall be
determined without regard to any discount-
ing under the 2nd sentence of paragraph
(2).
‘‘(D) CONTRACTS
TO
WHICH
PARAGRAPH
APPLIES.—This paragraph shall only apply if
the taxpayer makes an election under this sub-
paragraph. Unless revoked with the consent of
the Secretary, such an election shall apply to all
long-term contracts completed during the taxable
year for which election is made or during any
subsequent taxable year.’’.
(b) MODIFICATION OF INTEREST RATE.—
(1) IN GENERAL.—Subparagraph (C) of section
460(b)(2) is amended by striking ‘‘the overpayment
rate established by section 6621’’ and inserting ‘‘the
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED OVERPAYMENT RATE.—Subsection
(b) of section 460 is amended by adding at the end
the following new paragraph:
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‘‘(7) ADJUSTED OVERPAYMENT RATE.—
‘‘(A) IN GENERAL.—The adjusted overpay-
ment rate for any interest accrual period is the
overpayment rate in effect under section 6621 for
the calendar quarter in which such interest ac-
crual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘interest
accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
‘‘(ii) ending on the return due date for
the following taxable year.
For purposes of the preceding sentence, the term
‘return due date’ means the date prescribed for
filing the return of the tax imposed by this chap-
ter (determined without regard to extensions).’’.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to contracts completed in taxable years ending
after the date of the enactment of this Act.
(2) SUBSECTION (b).—The amendments made by
subsection (b) shall apply for purposes of section
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167(g) of the Internal Revenue Code of 1986 to prop-
erty placed in service after September 13, 1995.
SEC. 1012. MINIMUM TAX TREATMENT OF CERTAIN PROP-
ERTY AND CASUALTY INSURANCE COMPA-
NIES.
(a) IN GENERAL.—Clause (i) of section 56(g)(4)(B)
(relating to inclusion of items included for purposes of com-
puting earnings and profits) is amended by adding at the
end the following new sentence: ‘‘In the case of any insur-
ance company taxable under section 831(b), this clause
shall not apply to any amount not described in section
834(b).’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 1997.
SEC. 1013. USE OF ESTIMATES OF SHRINKAGE FOR INVEN-
TORY ACCOUNTING.
(a) IN GENERAL.—Section 471 (relating to general
rule for inventories) is amended by redesignating subsection
(b) as subsection (c) and by inserting after subsection (a)
the following new subsection:
‘‘(b) ESTIMATES
OF INVENTORY SHRINKAGE PER-
MITTED.—A method of determining inventories shall not be
deemed not to clearly reflect income solely because it utilizes
estimates of inventory shrinkage that are confirmed by a
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physical count only after the last day of the taxable year
if—
‘‘(1) the taxpayer normally does a physical count
of inventories at each location on a regular and con-
sistent basis, and
‘‘(2) the taxpayer makes proper adjustments to
such inventories and to its estimating methods to the
extent such estimates are greater than or less than the
actual shrinkage.’’.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendment made by this
section shall apply to taxable years ending after the
date of the enactment of this Act.
(2) COORDINATION WITH SECTION 481.—In the
case of any taxpayer permitted by this section to
change its method of accounting to a permissible
method for any taxable year—
(A) such changes shall be treated as initi-
ated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the period for taking into account the
adjustments under section 481 by reason of such
change shall be 4 years.
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SEC. 1014. QUALIFIED LESSEE CONSTRUCTION ALLOW-
ANCES FOR SHORT-TERM LEASES.
(a) IN GENERAL.—Part III of subchapter B of chapter
1 is amended by inserting after section 109 the following
new section:
‘‘SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOW-
ANCES FOR SHORT-TERM LEASES.
‘‘(a) IN GENERAL.—Gross income of a lessee does not
include any amount received in cash (or treated as a rent
reduction) by a lessee from a lessor—
‘‘(1) under a short-term lease of retail space, and
‘‘(2) for the purpose of such lessee’s constructing
or improving qualified long-term real property for use
in such lessee’s trade or business at such retail space,
but only to the extent that such amount does not exceed
the amount expended by the lessee for such construction or
improvement.
‘‘(b) CONSISTENT TREATMENT BY LESSOR.—Qualified
long-term real property constructed or improved in connec-
tion with any amount excluded from a lessee’s income by
reason of subsection (a) shall be treated as nonresidential
real property by the lessor.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED LONG-TERM REAL PROPERTY.—
The term ‘qualified long-term real property’ means
nonresidential real property which is part of, or oth-
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erwise present at, the retail space referred to in sub-
section (a) and which reverts to the lessor at the ter-
mination of the lease.
‘‘(2) SHORT-TERM LEASE.—The term ‘short-term
lease’ means a lease (or other agreement for occu-
pancy or use) of retail space for 15 years or less (as
determined under the rules of section 168(i)(3)).
‘‘(3) RETAIL
SPACE.—The term ‘retail space’
means real property leased, occupied, or otherwise
used by a lessee in its trade or business of selling tan-
gible personal property or services to the general pub-
lic.
‘‘(d) INFORMATION REQUIRED TO BE FURNISHED TO
SECRETARY.—Under regulations, the lessee and lessor de-
scribed in subsection (a) shall, at such times and in such
manner as may be provided in such regulations, furnish
to the Secretary—
‘‘(1) information concerning the amounts re-
ceived (or treated as a rent reduction) and expended
as described in subsection (a), and
‘‘(2) any other information which the Secretary
deems necessary to carry out the provisions of this
section.’’.
(b) TREATMENT
AS INFORMATION RETURN.—Sub-
paragraph (A) of section 6724(d)(1)(A) is amended by
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striking ‘‘or’’ at the end of clause (vii), by adding ‘‘or’’ at
the end of clause (viii), and by adding at the end the follow-
ing new clause:
‘‘(ix) section 110(d) (relating to quali-
fied lessee construction allowances for short-
term leases),’’.
(c) CROSS REFERENCE.—Paragraph (8) of section
168(i) (relating to treatment of leasehold improvements) is
amended by adding at the end the following new subpara-
graph:
‘‘(C) CROSS REFERENCE.—
‘‘For treatment of qualified long-term real property
constructed or improved in connection with cash or
rent reduction from lessor to lessee, see section
110(b).’’.
(d) CLERICAL AMENDMENT.—The table of sections for
part III of subchapter B of chapter 1 is amended by insert-
ing after the item relating to section 109 the following new
item:
‘‘Sec. 110. Qualified lessee construction allowances for short-term
leases.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to leases entered into after the date of
the enactment of this Act.
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Subtitle C—Simplification Relating
to Electing Large Partnerships
PART I—GENERAL PROVISIONS
SEC. 1021. SIMPLIFIED FLOW-THROUGH FOR ELECTING
LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subchapter K (relating to part-
ners and partnerships) is amended by adding at the end
the following new part:
‘‘PART IV—SPECIAL RULES FOR ELECTING LARGE
PARTNERSHIPS
‘‘Sec. 771. Application of subchapter to electing large partnerships.
‘‘Sec. 772. Simplified flow-through.
‘‘Sec. 773. Computations at partnership level.
‘‘Sec. 774. Other modifications.
‘‘Sec. 775. Electing large partnership defined.
‘‘Sec. 776. Special rules for partnerships holding oil and gas prop-
erties.
‘‘Sec. 777. Regulations.
‘‘SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING
LARGE PARTNERSHIPS.
‘‘The preceding provisions of this subchapter to the ex-
tent inconsistent with the provisions of this part shall not
apply to an electing large partnership and its partners.
‘‘SEC. 772. SIMPLIFIED FLOW-THROUGH.
‘‘(a) GENERAL RULE.—In determining the income tax
of a partner of an electing large partnership, such partner
shall take into account separately such partner’s distribu-
tive share of the partnership’s—
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‘‘(1) taxable income or loss from passive loss lim-
itation activities,
‘‘(2) taxable income or loss from other activities,
‘‘(3) net capital gain (or net capital loss)—
‘‘(A) to the extent allocable to passive loss
limitation activities, and
‘‘(B) to the extent allocable to other activi-
ties,
‘‘(4) tax-exempt interest,
‘‘(5) applicable net AMT adjustment separately
computed for—
‘‘(A) passive loss limitation activities, and
‘‘(B) other activities,
‘‘(6) general credits,
‘‘(7) low-income housing credit determined under
section 42,
‘‘(8) rehabilitation credit determined under sec-
tion 47,
‘‘(9) foreign income taxes,
‘‘(10) the credit allowable under section 29, and
‘‘(11) other items to the extent that the Secretary
determines that the separate treatment of such items
is appropriate.
‘‘(b) SEPARATE COMPUTATIONS.—In determining the
amounts required under subsection (a) to be separately
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taken into account by any partner, this section and section
773 shall be applied separately with respect to such partner
by taking into account such partner’s distributive share of
the items of income, gain, loss, deduction, or credit of the
partnership.
‘‘(c) TREATMENT AT PARTNER LEVEL.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, rules similar to the rules of section 702(b)
shall apply to any partner’s distributive share of the
amounts referred to in subsection (a).
‘‘(2) INCOME OR LOSS FROM PASSIVE LOSS LIMI-
TATION
ACTIVITIES.—For purposes of this chapter,
any partner’s distributive share of any income or loss
described in subsection (a)(1) shall be treated as an
item of income or loss (as the case may be) from the
conduct of a trade or business which is a single pas-
sive activity (as defined in section 469). A similar
rule shall apply to a partner’s distributive share of
amounts referred to in paragraphs (3)(A) and (5)(A)
of subsection (a).
‘‘(3) INCOME
OR
LOSS
FROM
OTHER
ACTIVI-
TIES.—
‘‘(A) IN
GENERAL.—For purposes of this
chapter, any partner’s distributive share of any
income or loss described in subsection (a)(2)
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shall be treated as an item of income or expense
(as the case may be) with respect to property
held for investment.
‘‘(B) DEDUCTIONS FOR LOSS NOT SUBJECT
TO
SECTION
67.—The deduction under section
212 for any loss described in subparagraph (A)
shall not be treated as a miscellaneous itemized
deduction for purposes of section 67.
‘‘(4) TREATMENT
OF
NET
CAPITAL
GAIN
OR
LOSS.—For purposes of this chapter, any partner’s
distributive share of any gain or loss described in
subsection (a)(3) shall be treated as a long-term cap-
ital gain or loss, as the case may be.
‘‘(5) MINIMUM TAX TREATMENT.—In determin-
ing the alternative minimum taxable income of any
partner, such partner’s distributive share of any ap-
plicable net AMT adjustment shall be taken into ac-
count in lieu of making the separate adjustments pro-
vided in sections 56, 57, and 58 with respect to the
items of the partnership. Except as provided in regu-
lations, the applicable net AMT adjustment shall be
treated, for purposes of section 53, as an adjustment
or item of tax preference not specified in section
53(d)(1)(B)(ii).
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‘‘(6) GENERAL CREDITS.—A partner’s distribu-
tive share of the amount referred to in paragraph (6)
of subsection (a) shall be taken into account as a cur-
rent year business credit.
‘‘(d) OPERATING RULES.—For purposes of this sec-
tion—
‘‘(1) PASSIVE LOSS LIMITATION ACTIVITY.—The
term ‘passive loss limitation activity’ means—
‘‘(A) any activity which involves the con-
duct of a trade or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term
‘trade or business’ includes any activity treated as a
trade or business under paragraph (5) or (6) of sec-
tion 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-ex-
empt interest’ means interest excludable from gross
income under section 103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
‘‘(A) IN
GENERAL.—The applicable net
AMT adjustment is—
‘‘(i) with respect to taxpayers other
than corporations, the net adjustment deter-
mined by using the adjustments applicable
to individuals, and
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‘‘(ii) with respect to corporations, the
net adjustment determined by using the ad-
justments applicable to corporations.
‘‘(B) NET ADJUSTMENT.—The term ‘net ad-
justment’ means the net adjustment in the items
attributable to passive loss activities or other ac-
tivities (as the case may be) which would result
if such items were determined with the adjust-
ments of sections 56, 57, and 58.
‘‘(4) TREATMENT
OF
CERTAIN
SEPARATELY
STATED ITEMS.—
‘‘(A) 
EXCLUSION
FOR
CERTAIN
PUR-
POSES.—In determining the amounts referred to
in paragraphs (1) and (2) of subsection (a), any
net capital gain or net capital loss (as the case
may be), and any item referred to in subsection
(a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net capital
gain shall be treated—
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
gain does not exceed the net capital gain de-
termined by only taking into account gains
and losses from sales and exchanges of prop-
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erty used in connection with such activities,
and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount al-
located under clause (i).
A similar rule shall apply for purposes of allo-
cating any net capital loss.
‘‘(C) NET
CAPITAL
LOSS.—The term ‘net
capital loss’ means the excess of the losses from
sales or exchanges of capital assets over the gains
from sales or exchange of capital assets.
‘‘(5) GENERAL
CREDITS.—The term ‘general
credits’ means any credit other than the low-income
housing credit, the rehabilitation credit, the foreign
tax credit, and the credit allowable under section 29.
‘‘(6) FOREIGN INCOME TAXES.—The term ‘for-
eign income taxes’ means taxes described in section
901 which are paid or accrued to foreign countries
and to possessions of the United States.
‘‘(e) SPECIAL
RULE
FOR
UNRELATED
BUSINESS
TAX.—In the case of a partner which is an organization
subject to tax under section 511, such partner’s distributive
share of any items shall be taken into account separately
to the extent necessary to comply with the provisions of sec-
tion 512(c)(1).
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‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in an elect-
ing large partnership other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
‘‘(2) such partner’s distributive share of the part-
nership items allocable to passive loss limitation ac-
tivities shall be taken into account separately to the
extent necessary to comply with the provisions of sec-
tion 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
an electing large partnership shall be computed in the
same manner as in the case of an individual except
that—
‘‘(A) the items described in section 772(a)
shall be separately stated, and
‘‘(B) the modifications of subsection (b)
shall apply.
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of an electing large
partnership or the computation of any credit of an
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electing large partnership shall be made by the part-
nership; except that the election under section 901,
and any election under section 108, shall be made by
each partner separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), all limitations and other pro-
visions affecting the computation of the taxable
income of an electing large partnership or the
computation of any credit of an electing large
partnership shall be applied at the partnership
level (and not at the partner level).
‘‘(B) CERTAIN
LIMITATIONS
APPLIED
AT
PARTNER LEVEL.—The following provisions shall
be applied at the partner level (and not at the
partnership level):
‘‘(i) Section 68 (relating to overall lim-
itation on itemized deductions).
‘‘(ii) Sections 49 and 465 (relating to
at risk limitations).
‘‘(iii) Section 469 (relating to limita-
tion on passive activity losses and credits).
‘‘(iv) Any other provision specified in
regulations.
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‘‘(4) COORDINATION WITH OTHER PROVISIONS.—
Paragraphs (2) and (3) shall apply notwithstanding
any other provision of this chapter other than this
part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAXABLE
INCOME.—In determining the taxable income of an electing
large partnership—
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.—The
following deductions shall not be allowed:
‘‘(A) The deduction for personal exemptions
provided in section 151.
‘‘(B) The net operating loss deduction pro-
vided in section 172.
‘‘(C) The additional itemized deductions for
individuals provided in part VII of subchapter B
(other than section 212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determining
the amount allowable under section 170, the limita-
tion of section 170(b)(2) shall apply.
‘‘(3) COORDINATION WITH SECTION 67.—In lieu
of applying section 67, 70 percent of the amount of
the miscellaneous itemized deductions shall be dis-
allowed.
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‘‘(c) SPECIAL RULES FOR INCOME FROM DISCHARGE
OF INDEBTEDNESS.—If an electing large partnership has
income from the discharge of any indebtedness—
‘‘(1) such income shall be excluded in determin-
ing the amounts referred to in section 772(a), and
‘‘(2) in determining the income tax of any part-
ner of such partnership—
‘‘(A) such income shall be treated as an
item required to be separately taken into account
under section 772(a), and
‘‘(B) the provisions of section 108 shall be
applied without regard to this part.
‘‘SEC. 774. OTHER MODIFICATIONS.
‘‘(a) TREATMENT
OF CERTAIN OPTIONAL ADJUST-
MENTS, ETC.—In the case of an electing large partner-
ship—
‘‘(1) computations under section 773 shall be
made without regard to any adjustment under section
743(b) or 108(b), but
‘‘(2) a partner’s distributive share of any
amount referred to in section 772(a) shall be appro-
priately adjusted to take into account any adjustment
under section 743(b) or 108(b) with respect to such
partner.
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‘‘(b) CREDIT RECAPTURE DETERMINED AT PARTNER-
SHIP LEVEL.—
‘‘(1) IN GENERAL.—In the case of an electing
large partnership—
‘‘(A) any credit recapture shall be taken
into account by the partnership, and
‘‘(B) the amount of such recapture shall be
determined as if the credit with respect to which
the recapture is made had been fully utilized to
reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO AC-
COUNT.—An electing large partnership shall take into
account a credit recapture by reducing the amount of
the appropriate current year credit to the extent
thereof, and if such recapture exceeds the amount of
such current year credit, the partnership shall be lia-
ble to pay such excess.
‘‘(3) DISPOSITIONS
NOT
TO
TRIGGER
RECAP-
TURE.—No credit recapture shall be required by rea-
son of any transfer of an interest in an electing large
partnership.
‘‘(4) CREDIT RECAPTURE.—For purposes of this
subsection, the term ‘credit recapture’ means any in-
crease in tax under section 42(j) or 50(a).
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‘‘(c) PARTNERSHIP NOT TERMINATED BY REASON OF
CHANGE IN OWNERSHIP.—Subparagraph (B) of section
708(b)(1) shall not apply to an electing large partnership.
‘‘(d) PARTNERSHIP ENTITLED
TO CERTAIN CRED-
ITS.—The following shall be allowed to an electing large
partnership and shall not be taken into account by the part-
ners of such partnership:
‘‘(1) The credit provided by section 34.
‘‘(2) Any credit or refund under section
852(b)(3)(D).
‘‘(e) TREATMENT OF REMIC RESIDUALS.—For pur-
poses of applying section 860E(e)(6) to any electing large
partnership—
‘‘(1) all interests in such partnership shall be
treated as held by disqualified organizations,
‘‘(2) in lieu of applying subparagraph (C) of sec-
tion 860E(e)(6), the amount subject to tax under sec-
tion 860E(e)(6) shall be excluded from the gross in-
come of such partnership, and
‘‘(3) subparagraph (D) of section 860E(e)(6)
shall not apply.
‘‘(f) SPECIAL RULES
FOR APPLYING CERTAIN IN-
STALLMENT SALE RULES.—In the case of an electing large
partnership—
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‘‘(1) the provisions of sections 453(l)(3) and
453A shall be applied at the partnership level, and
‘‘(2) in determining the amount of interest pay-
able under such sections, such partnership shall be
treated as subject to tax under this chapter at the
highest rate of tax in effect under section 1 or 11.
‘‘SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN
GENERAL.—The term ‘electing large
partnership’ means, with respect to any partnership
taxable year, any partnership if—
‘‘(A) the number of persons who were part-
ners in such partnership in the preceding part-
nership taxable year equaled or exceeded 100,
and
‘‘(B) such partnership elects the application
of this part.
To the extent provided in regulations, a partnership
shall cease to be treated as an electing large partner-
ship for any partnership taxable year if in such tax-
able year fewer than 100 persons were partners in
such partnership.
‘‘(2) ELECTION.—The election under this sub-
section shall apply to the taxable year for which made
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and all subsequent taxable years unless revoked with
the consent of the Secretary.
‘‘(b) SPECIAL RULES FOR CERTAIN SERVICE PART-
NERSHIPS.—
‘‘(1) CERTAIN
PARTNERS
NOT
COUNTED.—For
purposes of this section, the term ‘partner’ does not
include any individual performing substantial serv-
ices in connection with the activities of the partner-
ship and holding an interest in such partnership, or
an individual who formerly performed substantial
services in connection with such activities and who
held an interest in such partnership at the time the
individual performed such services.
‘‘(2) EXCLUSION.—For purposes of this part, an
election under subsection (a) shall not be effective
with respect to any partnership if substantially all
the partners of such partnership—
‘‘(A) are individuals performing substantial
services in connection with the activities of such
partnership or are personal service corporations
(as defined in section 269A(b)) the owner-em-
ployees (as defined in section 269A(b)) of which
perform such substantial services,
‘‘(B) are retired partners who had per-
formed such substantial services, or
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‘‘(C) are spouses of partners who are per-
forming (or had previously performed) such sub-
stantial services.
‘‘(3) SPECIAL RULE FOR LOWER TIER PARTNER-
SHIPS.—For purposes of this subsection, the activities
of a partnership shall include the activities of any
other partnership in which the partnership owns di-
rectly an interest in the capital and profits of at least
80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For pur-
poses of this part, an election under subsection (a) shall
not be effective with respect to any partnership the prin-
cipal activity of which is the buying and selling of commod-
ities (not described in section 1221(1)), or options, futures,
or forwards with respect to such commodities.
‘‘(d) SECRETARY MAY RELY ON TREATMENT ON RE-
TURN.—If, on the partnership return of any partnership,
such partnership is treated as an electing large partnership,
such treatment shall be binding on such partnership and
all partners of such partnership but not on the Secretary.
‘‘SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING
OIL AND GAS PROPERTIES.
‘‘(a) COMPUTATION OF PERCENTAGE DEPLETION.—In
the case of an electing large partnership, except as provided
in subsection (b)—
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‘‘(1) the allowance for depletion under section
611 with respect to any partnership oil or gas prop-
erty shall be computed at the partnership level with-
out regard to any provision of section 613A requiring
such allowance to be computed separately by each
partner,
‘‘(2) such allowance shall be determined without
regard to the provisions of section 613A(c) limiting
the amount of production for which percentage deple-
tion is allowable and without regard to paragraph (1)
of section 613A(d), and
‘‘(3) paragraph (3) of section 705(a) shall not
apply.
‘‘(b) TREATMENT OF CERTAIN PARTNERS.—
‘‘(1) IN GENERAL.—In the case of a disqualified
person, the treatment under this chapter of such per-
son’s distributive share of any item of income, gain,
loss, deduction, or credit attributable to any partner-
ship oil or gas property shall be determined without
regard to this part. Such person’s distributive share
of any such items shall be excluded for purposes of
making determinations under sections 772 and 773.
‘‘(2) DISQUALIFIED
PERSON.—For purposes of
paragraph (1), the term ‘disqualified person’ means,
with respect to any partnership taxable year—
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‘‘(A) any person referred to in paragraph
(2) or (4) of section 613A(d) for such person’s
taxable year in which such partnership taxable
year ends, and
‘‘(B) any other person if such person’s aver-
age daily production of domestic crude oil and
natural gas for such person’s taxable year in
which such partnership taxable year ends exceeds
500 barrels.
‘‘(3) AVERAGE
DAILY
PRODUCTION.—For pur-
poses of paragraph (2), a person’s average daily pro-
duction of domestic crude oil and natural gas for any
taxable year shall be computed as provided in section
613A(c)(2)—
‘‘(A) by taking into account all production
of domestic crude oil and natural gas (including
such person’s proportionate share of any produc-
tion of a partnership),
‘‘(B) by treating 6,000 cubic feet of natural
gas as a barrel of crude oil, and
‘‘(C) by treating as 1 person all persons
treated as 1 taxpayer under section 613A(c)(8)
or among whom allocations are required under
such section.
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‘‘SEC. 777. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as may
be appropriate to carry out the purposes of this part.’’.
(b) CLERICAL AMENDMENT.—The table of parts for
subchapter K of chapter 1 is amended by adding at the end
the following new item:
‘‘Part IV. Special rules for electing large partnerships.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to partnership taxable years beginning
after December 31, 1997.
SEC. 1022. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING
LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Chapter 63 is amended by add-
ing at the end thereof the following new subchapter:
‘‘Subchapter D—Treatment of electing large
partnerships
‘‘Part I. Treatment of partnership items and adjustments.
‘‘Part II. Partnership level adjustments.
‘‘Part III. Definitions and special rules.
‘‘PART I—TREATMENT OF PARTNERSHIP ITEMS
AND ADJUSTMENTS
‘‘Sec. 6240. Application of subchapter.
‘‘Sec. 6241. Partner’s return must be consistent with partnership
return.
‘‘Sec. 6242. Procedures for taking partnership adjustments into ac-
count.
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‘‘SEC. 6240. APPLICATION OF SUBCHAPTER.
‘‘(a) GENERAL RULE.—This subchapter shall only
apply to electing large partnerships and partners in such
partnerships.
‘‘(b) COORDINATION
WITH
OTHER
PARTNERSHIP
AUDIT PROCEDURES.—
‘‘(1) IN GENERAL.—Subchapter C of this chapter
shall not apply to any electing large partnership
other than in its capacity as a partner in another
partnership which is not an electing large partner-
ship.
‘‘(2) TREATMENT
WHERE
PARTNER
IN
OTHER
PARTNERSHIP.—If an electing large partnership is a
partner in another partnership which is not an elect-
ing large partnership—
‘‘(A) subchapter C of this chapter shall
apply to items of such electing large partnership
which are partnership items with respect to such
other partnership, but
‘‘(B) any adjustment under such subchapter
C shall be taken into account in the manner pro-
vided by section 6242.
‘‘SEC. 6241. PARTNER’S RETURN MUST BE CONSISTENT
WITH PARTNERSHIP RETURN.
‘‘(a) GENERAL RULE.—A partner of any electing large
partnership shall, on the partner’s return, treat each part-
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nership item attributable to such partnership in a manner
which is consistent with the treatment of such partnership
item on the partnership return.
‘‘(b) UNDERPAYMENT DUE TO INCONSISTENT TREAT-
MENT ASSESSED AS MATH ERROR.—Any underpayment of
tax by a partner by reason of failing to comply with the
requirements of subsection (a) shall be assessed and collected
in the same manner as if such underpayment were on ac-
count of a mathematical or clerical error appearing on the
partner’s return. Paragraph (2) of section 6213(b) shall not
apply to any assessment of an underpayment referred to
in the preceding sentence.
‘‘(c) ADJUSTMENTS NOT TO AFFECT PRIOR YEAR OF
PARTNERS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a) and (b) shall apply without
regard to any adjustment to the partnership item
under part II.
‘‘(2) CERTAIN CHANGES IN DISTRIBUTIVE SHARE
TAKEN INTO ACCOUNT BY PARTNER.—
‘‘(A) IN GENERAL.—To the extent that any
adjustment under part II involves a change
under section 704 in a partner’s distributive
share of the amount of any partnership item
shown on the partnership return, such adjust-
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ment shall be taken into account in applying
this title to such partner for the partner’s taxable
year for which such item was required to be
taken into account.
‘‘(B) COORDINATION WITH DEFICIENCY PRO-
CEDURES.—
‘‘(i) IN GENERAL.—Subchapter B shall
not apply to the assessment or collection of
any underpayment of tax attributable to an
adjustment referred to in subparagraph (A).
‘‘(ii) ADJUSTMENT NOT PRECLUDED.—
Notwithstanding any other law or rule of
law, nothing in subchapter B (or in any
proceeding under subchapter B) shall pre-
clude the assessment or collection of any
underpayment of tax (or the allowance of
any credit or refund of any overpayment of
tax) attributable to an adjustment referred
to in subparagraph (A) and such assessment
or collection or allowance (or any notice
thereof) shall not preclude any notice, pro-
ceeding, or determination under subchapter
B.
‘‘(C) PERIOD OF LIMITATIONS.—The period
for—
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‘‘(i) assessing any underpayment of
tax, or
‘‘(ii) filing a claim for credit or refund
of any overpayment of tax,
attributable to an adjustment referred to in sub-
paragraph (A) shall not expire before the close of
the period prescribed by section 6248 for making
adjustments with respect to the partnership tax-
able year involved.
‘‘(D) TIERED STRUCTURES.—If the partner
referred to in subparagraph (A) is another part-
nership or an S corporation, the rules of this
paragraph shall also apply to persons holding
interests in such partnership or S corporation
(as the case may be); except that, if such partner
is an electing large partnership, the adjustment
referred to in subparagraph (A) shall be taken
into account in the manner provided by section
6242.
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‘‘(d) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in case of partner’s disregard
of requirements of this section, see part II of sub-
chapter A of chapter 68.
‘‘SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP AD-
JUSTMENTS INTO ACCOUNT.
‘‘(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS
FOR YEAR IN WHICH ADJUSTMENT TAKES EFFECT.—
‘‘(1) IN GENERAL.—If any partnership adjust-
ment with respect to any partnership item takes effect
(within the meaning of subsection (d)(2)) during any
partnership taxable year and if an election under
paragraph (2) does not apply to such adjustment,
such adjustment shall be taken into account in deter-
mining the amount of such item for the partnership
taxable year in which such adjustment takes effect. In
applying this title to any person who is (directly or
indirectly) a partner in such partnership during such
partnership taxable year, such adjustment shall be
treated as an item actually arising during such tax-
able year.
‘‘(2) PARTNERSHIP LIABLE IN CERTAIN CASES.—
If—
‘‘(A) a partnership elects under this para-
graph to not take an adjustment into account
under paragraph (1),
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‘‘(B) a partnership does not make such an
election but in filing its return for any partner-
ship taxable year fails to take fully into account
any partnership adjustment as required under
paragraph (1), or
‘‘(C) any partnership adjustment involves a
reduction in 
a 
credit 
which 
exceeds 
the
amount of such credit determined for the part-
nership taxable year in which the adjustment
takes effect,
the partnership shall pay to the Secretary an amount
determined by applying the rules of subsection (b)(4)
to the adjustments not so taken into account and any
excess referred to in subparagraph (C).
‘‘(3) OFFSETTING ADJUSTMENTS TAKEN INTO AC-
COUNT.—If a partnership adjustment requires an-
other adjustment in a taxable year after the adjusted
year and before the partnership taxable year in which
such partnership adjustment takes effect, such other
adjustment shall be taken into account under this
subsection for the partnership taxable year in which
such partnership adjustment takes effect.
‘‘(4) COORDINATION
WITH
PART
II.—Amounts
taken into account under this subsection for any part-
nership taxable year shall continue to be treated as
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adjustments for the adjusted year for purposes of de-
termining whether such amounts may be readjusted
under part II.
‘‘(b) PARTNERSHIP LIABLE FOR INTEREST AND PEN-
ALTIES.—
‘‘(1) IN GENERAL.—If a partnership adjustment
takes effect during any partnership taxable year and
such adjustment results in an imputed underpayment
for the adjusted year, the partnership—
‘‘(A) shall pay to the Secretary interest
computed under paragraph (2), and
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in
paragraph (3).
‘‘(2) DETERMINATION
OF
AMOUNT
OF
INTER-
EST.—The interest computed under this paragraph
with respect to any partnership adjustment is the in-
terest which would be determined under chapter 67—
‘‘(A) on the imputed underpayment deter-
mined under paragraph (4) with respect to such
adjustment,
‘‘(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the part-
nership taxable year in which such adjustment
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takes effect (or, if earlier, in the case of any ad-
justment to which subsection (a)(2) applies, the
date on which the payment under subsection
(a)(2) is made).
Proper adjustments in the amount determined under
the preceding sentence shall be made for adjustments
required for partnership taxable years after the ad-
justed year and before the year in which the partner-
ship adjustment takes effect by reason of such part-
nership adjustment.
‘‘(3) PENALTIES.—A partnership shall be liable
for any penalty, addition to tax, or additional
amount for which it would have been liable if such
partnership had been an individual subject to tax
under chapter 1 for the adjusted year and the im-
puted underpayment determined under paragraph (4)
were an actual underpayment (or understatement) for
such year.
‘‘(4) IMPUTED UNDERPAYMENT.—For purposes of
this subsection, the imputed underpayment deter-
mined under this paragraph with respect to any part-
nership adjustment is the underpayment (if any)
which would result—
‘‘(A) by netting all adjustments to items of
income, gain, loss, or deduction and by treating
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any net increase in income as an underpayment
equal to the amount of such net increase multi-
plied by the highest rate of tax in effect under
section 1 or 11 for the adjusted year, and
‘‘(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net de-
crease in a loss shall be treated as an increase in in-
come and a similar rule shall apply to a net increase
in a loss.
‘‘(c) ADMINISTRATIVE PROVISIONS.—
‘‘(1) IN GENERAL.—Any payment required by
subsection (a)(2) or (b)(1)(A)—
‘‘(A) shall be assessed and collected in the
same manner as if it were a tax imposed by sub-
title C, and
‘‘(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
‘‘(2) INTEREST.—For purposes of determining
interest, any payment required by subsection (a)(2)
or (b)(1)(A) shall be treated as an underpayment of
tax.
‘‘(3) PENALTIES.—
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‘‘(A) IN GENERAL.—In the case of any fail-
ure by any partnership to pay on the date pre-
scribed therefor any amount required by sub-
section (a)(2) or (b)(1)(A), there is hereby im-
posed on such partnership a penalty of 10 per-
cent of the underpayment. For purposes of the
preceding sentence, the term ‘underpayment’
means the excess of any payment required under
this section over the amount (if any) paid on or
before the date prescribed therefor.
‘‘(B) ACCURACY-RELATED AND FRAUD PEN-
ALTIES
MADE
APPLICABLE.—For purposes of
part II of subchapter A of chapter 68, any pay-
ment required by subsection (a)(2) shall be treat-
ed as an underpayment of tax.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) PARTNERSHIP
ADJUSTMENT.—The term
‘partnership adjustment’ means any adjustment in
the amount of any partnership item of an electing
large partnership.
‘‘(2) WHEN
ADJUSTMENT
TAKES
EFFECT.—A
partnership adjustment takes effect—
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‘‘(A) in the case of an adjustment pursuant
to the decision of a court in a proceeding brought
under part II, when such decision becomes final,
‘‘(B) in the case of an adjustment pursuant
to any administrative adjustment request under
section 6251, when such adjustment is allowed
by the Secretary, or
‘‘(C) in any other case, when such adjust-
ment is made.
‘‘(3) ADJUSTED YEAR.—The term ‘adjusted year’
means the partnership taxable year to which the item
being adjusted relates.
‘‘(4) RETURN DUE DATE.—The term ‘return due
date’ means, with respect to any taxable year, the
date prescribed for filing the partnership return for
such taxable year (determined without regard to ex-
tensions).
‘‘(5) ADJUSTMENTS
INVOLVING
CHANGES
IN
CHARACTER.—Under regulations, appropriate adjust-
ments in the application of this section shall be made
for purposes of taking into account partnership ad-
justments which involve a change in the character of
any item of income, gain, loss, or deduction.
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‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction shall
be allowed under subtitle A for any payment required to
be made by an electing large partnership under this section.
‘‘PART II—PARTNERSHIP LEVEL ADJUSTMENTS
‘‘Subpart A. Adjustments by Secretary.
‘‘Subpart B. Claims for adjustments by partnership.
‘‘Subpart A—Adjustments by Secretary
‘‘Sec. 6245. Secretarial authority.
‘‘Sec. 6246. Restrictions on partnership adjustments.
‘‘Sec. 6247. Judicial review of partnership adjustment.
‘‘Sec. 6248. Period of limitations for making adjustments.
‘‘SEC. 6245. SECRETARIAL AUTHORITY.
‘‘(a) GENERAL RULE.—The Secretary is authorized
and directed to make adjustments at the partnership level
in any partnership item to the extent necessary to have such
item be treated in the manner required.
‘‘(b) NOTICE OF PARTNERSHIP ADJUSTMENT.—
‘‘(1) IN GENERAL.—If the Secretary determines
that a partnership adjustment is required, the Sec-
retary is authorized to send notice of such adjustment
to the partnership by certified mail or registered
mail. Such notice shall be sufficient if mailed to the
partnership at its last known address even if the
partnership has terminated its existence.
‘‘(2) FURTHER
NOTICES
RESTRICTED.—If the
Secretary mails a notice of a partnership adjustment
to any partnership for any partnership taxable year
and the partnership files a petition under section
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6247 with respect to such notice, in the absence of a
showing of fraud, malfeasance, or misrepresentation
of a material fact, the Secretary shall not mail an-
other such notice to such partnership with respect to
such taxable year.
‘‘(3) AUTHORITY
TO
RESCIND
NOTICE
WITH
PARTNERSHIP CONSENT.—The Secretary may, with
the consent of the partnership, rescind any notice of
a partnership adjustment mailed to such partnership.
Any notice so rescinded shall not be treated as a no-
tice of a partnership adjustment, for purposes of this
section, section 6246, and section 6247, and the tax-
payer shall have no right to bring a proceeding under
section 6247 with respect to such notice. Nothing in
this subsection shall affect any suspension of the run-
ning of any period of limitations during any period
during which the rescinded notice was outstanding.
‘‘SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this chapter, no adjustment to any partnership item may
be made (and no levy or proceeding in any court for the
collection of any amount resulting from such adjustment
may be made, begun or prosecuted) before—
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‘‘(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was
mailed to the partnership, and
‘‘(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
‘‘(b) PREMATURE ACTION MAY BE ENJOINED.—Not-
withstanding section 7421(a), any action which violates
subsection (a) may be enjoined in the proper court, includ-
ing the Tax Court. The Tax Court shall have no jurisdiction
to enjoin any action under this subsection unless a timely
petition has been filed under section 6247 and then only
in respect of the adjustments that are the subject of such
petition.
‘‘(c) EXCEPTIONS
TO RESTRICTIONS
ON ADJUST-
MENTS.—
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR
CLERICAL ERRORS.—
‘‘(A) IN GENERAL.—If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
quired, rules similar to the rules of paragraphs
(1) and (2) of section 6213(b) shall apply to such
adjustment.
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‘‘(B) SPECIAL RULE.—If an electing large
partnership is a partner in another electing
large partnership, any adjustment on account of
such partnership’s failure to comply with the re-
quirements of section 6241(a) with respect to its
interest in such other partnership shall be treat-
ed as an adjustment referred to in subparagraph
(A), except that paragraph (2) of section 6213(b)
shall not apply to such adjustment.
‘‘(2) PARTNERSHIP MAY WAIVE RESTRICTIONS.—
The partnership shall at any time (whether or not a
notice of partnership adjustment has been issued)
have the right, by a signed notice in writing filed
with the Secretary, to waive the restrictions provided
in subsection (a) on the making of any partnership
adjustment.
‘‘(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no
proceeding under section 6247 is begun with respect to any
notice of a partnership adjustment during the 90-day pe-
riod described in subsection (a), the amount for which the
partnership is liable under section 6242 (and any increase
in any partner’s liability for tax under chapter 1 by reason
of any adjustment under section 6242(a)) shall not exceed
the amount determined in accordance with such notice.
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‘‘SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT.
‘‘(a) GENERAL RULE.—Within 90 days after the date
on which a notice of a partnership adjustment is mailed
to the partnership with respect to any partnership taxable
year, the partnership may file a petition for a readjustment
of the partnership items for such taxable year with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the partnership’s principal place
of business is located, or
‘‘(3) the Claims Court.
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING
ACTION IN DISTRICT COURT OR CLAIMS COURT.—
‘‘(1) IN
GENERAL.—A readjustment petition
under this section may be filed in a district court of
the United States or the Claims Court only if the
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the
amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing of
the petition) if the partnership items were adjusted as
provided by the notice of partnership adjustment. The
court may by order provide that the jurisdictional re-
quirements of this paragraph are satisfied where there
has been a good faith attempt to satisfy such require-
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ment and any shortfall of the amount required to be
deposited is timely corrected.
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not
be treated as a payment of tax for purposes of this
title (other than chapter 67).
‘‘(c) SCOPE
OF JUDICIAL REVIEW.—A court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items
of the partnership for the partnership taxable year to which
the notice of partnership adjustment relates and the proper
allocation of such items among the partners (and the appli-
cability of any penalty, addition to tax, or additional
amount for which the partnership may be liable under sec-
tion 6242(b)).
‘‘(d) DETERMINATION OF COURT REVIEWABLE.—Any
determination by a court under this section shall have the
force and effect of a decision of the Tax Court or a final
judgment or decree of the district court or the Claims Court,
as the case may be, and shall be reviewable as such. The
date of any such determination shall be treated as being
the date of the court’s order entering the decision.
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If
an action brought under this section is dismissed other than
by reason of a rescission under section 6245(b)(3), the deci-
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sion of the court dismissing the action shall be considered
as its decision that the notice of partnership adjustment is
correct, and an appropriate order shall be entered in the
records of the court.
‘‘SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, no adjustment under this subpart to any
partnership item for any partnership taxable year may be
made after the date which is 3 years after the later of—
‘‘(1) the date on which the partnership return for
such taxable year was filed, or
‘‘(2) the last day for filing such return for such
year (determined without regard to extensions).
‘‘(b) EXTENSION
BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period
under this subsection) may be extended by an agreement
entered into by the Secretary and the partnership before
the expiration of such period.
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.—
‘‘(1) FALSE RETURN.—In the case of a false or
fraudulent partnership return with intent to evade
tax, the adjustment may be made at any time.
‘‘(2) SUBSTANTIAL
OMISSION
OF
INCOME.—If
any partnership omits from gross income an amount
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properly includible therein which is in excess of 25
percent of the amount of gross income stated in its re-
turn, subsection (a) shall be applied by substituting
‘6 years’ for ‘3 years’.
‘‘(3) NO RETURN.—In the case of a failure by a
partnership to file a return for any taxable year, the
adjustment may be made at any time.
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on behalf
of the partnership shall not be treated as a return of
the partnership.
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE
OF ADJUSTMENT.—If notice of a partnership adjustment
with respect to any taxable year is mailed to the partner-
ship, the running of the period specified in subsection (a)
(as modified by the other provisions of this section) shall
be suspended—
‘‘(1) for the period during which an action may
be brought under section 6247 (and, if a petition is
filed under section 6247 with respect to such notice,
until the decision of the court becomes final), and
‘‘(2) for 1 year thereafter.
‘‘Subpart B—Claims for Adjustments by Partnership
‘‘Sec. 6251. Administrative adjustment requests.
‘‘Sec. 6252. Judicial review where administrative adjustment re-
quest is not allowed in full.
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‘‘SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
‘‘(a) GENERAL RULE.—A partnership may file a re-
quest for an administrative adjustment of partnership
items for any partnership taxable year at any time which
is—
‘‘(1) within 3 years after the later of—
‘‘(A) the date on which the partnership re-
turn for such year is filed, or
‘‘(B) the last day for filing the partnership
return for such year (determined without regard
to extensions), and
‘‘(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to
such taxable year.
‘‘(b) SECRETARIAL ACTION.—If a partnership files an
administrative adjustment request under subsection (a), the
Secretary may allow any part of the requested adjustments.
‘‘(c) SPECIAL RULE IN CASE OF EXTENSION UNDER
SECTION 6248.—If the period described in section 6248(a)
is extended pursuant to an agreement under section
6248(b), the period prescribed by subsection (a)(1) shall not
expire before the date 6 months after the expiration of the
extension under section 6248(b).
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‘‘SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE
ADJUSTMENT REQUEST IS NOT ALLOWED IN
FULL.
‘‘(a) IN GENERAL.—If any part of an administrative
adjustment request filed under section 6251 is not allowed
by the Secretary, the partnership may file a petition for
an adjustment with respect to the partnership items to
which such part of the request relates with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
‘‘(3) the Claims Court.
‘‘(b) PERIOD FOR FILING PETITION.—A petition may
be filed under subsection (a) with respect to partnership
items for a partnership taxable year only—
‘‘(1) after the expiration of 6 months from the
date of filing of the request under section 6251, and
‘‘(2) before the date which is 2 years after the
date of such request.
The 2-year period set forth in paragraph (2) shall be ex-
tended for such period as may be agreed upon in writing
by the partnership and the Secretary.
‘‘(c) COORDINATION WITH SUBPART A.—
‘‘(1) NOTICE OF PARTNERSHIP ADJUSTMENT BE-
FORE FILING OF PETITION.—No petition may be filed
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under this section after the Secretary mails to the
partnership a notice of a partnership adjustment for
the partnership taxable year to which the request
under section 6251 relates.
‘‘(2) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
AFTER FILING BUT BEFORE HEARING OF PETITION.—
If the Secretary mails to the partnership a notice of
a partnership adjustment for the partnership taxable
year to which the request under section 6251 relates
after the filing of a petition under this subsection but
before the hearing of such petition, such petition shall
be treated as an action brought under section 6247
with respect to such notice, except that subsection (b)
of section 6247 shall not apply.
‘‘(3) NOTICE MUST BE BEFORE EXPIRATION OF
STATUTE OF LIMITATIONS.—A notice of a partnership
adjustment for the partnership taxable year shall be
taken into account under paragraphs (1) and (2) only
if such notice is mailed before the expiration of the
period prescribed by section 6248 for making adjust-
ments to partnership items for such taxable year.
‘‘(d) SCOPE OF JUDICIAL REVIEW.—Except in the case
described in paragraph (2) of subsection (c), a court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine only those partnership
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items to which the part of the request under section 6251
not allowed by the Secretary relates and those items with
respect to which the Secretary asserts adjustments as offsets
to the adjustments requested by the partnership.
‘‘(e) DETERMINATION OF COURT REVIEWABLE.—Any
determination by a court under this subsection shall have
the force and effect of a decision of the Tax Court or a final
judgment or decree of the district court or the Claims Court,
as the case may be, and shall be reviewable as such. The
date of any such determination shall be treated as being
the date of the court’s order entering the decision.
‘‘PART III—DEFINITIONS AND SPECIAL RULES
‘‘Sec. 6255. Definitions and special rules.
‘‘SEC. 6255. DEFINITIONS AND SPECIAL RULES.
‘‘(a) DEFINITIONS.—For purposes of this subchapter—
‘‘(1) ELECTING LARGE PARTNERSHIP.—The term
‘electing large partnership’ has the meaning given to
such term by section 775.
‘‘(2) PARTNERSHIP ITEM.—The term ‘partner-
ship item’ has the meaning given to such term by sec-
tion 6231(a)(3).
‘‘(b) PARTNERS BOUND BY ACTIONS OF PARTNERSHIP,
ETC.—
‘‘(1) DESIGNATION OF PARTNER.—Each electing
large partnership shall designate (in the manner pre-
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scribed by the Secretary) a partner (or other person)
who shall have the sole authority to act on behalf of
such partnership under this subchapter. In any case
in which such a designation is not in effect, the Sec-
retary may select any partner as the partner with
such authority.
‘‘(2) BINDING EFFECT.—An electing large part-
nership and all partners of such partnership shall be
bound—
‘‘(A) by actions taken under this subchapter
by the partnership, and
‘‘(B) by any decision in a proceeding
brought under this subchapter.
‘‘(c) PARTNERSHIPS HAVING PRINCIPAL PLACE OF
BUSINESS OUTSIDE THE UNITED STATES.—For purposes
of sections 6247 and 6252, a principal place of business
located outside the United States shall be treated as located
in the District of Columbia.
‘‘(d) TREATMENT WHERE PARTNERSHIP CEASES TO
EXIST.—If a partnership ceases to exist before a partner-
ship adjustment under this subchapter takes effect, such ad-
justment shall be taken into account by the former partners
of such partnership under regulations prescribed by the Sec-
retary.
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‘‘(e) DATE DECISION BECOMES FINAL.—For purposes
of this subchapter, the principles of section 7481(a) shall
be applied in determining the date on which a decision of
a district court or the Claims Court becomes final.
‘‘(f) PARTNERSHIPS IN CASES UNDER TITLE 11 OF
THE UNITED STATES CODE.—The running of any period
of limitations provided in this subchapter on making a
partnership adjustment (or provided by section 6501 or
6502 on the assessment or collection of any amount required
to be paid under section 6242) shall, in a case under title
11 of the United States Code, be suspended during the pe-
riod during which the Secretary is prohibited by reason of
such case from making the adjustment (or assessment or
collection) and—
‘‘(1) for adjustment or assessment, 60 days there-
after, and
‘‘(2) for collection, 6 months thereafter.
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the provi-
sions of this subchapter, including regulations—
‘‘(1) to prevent abuse through manipulation of
the provisions of this subchapter, and
‘‘(2) providing that this subchapter shall not
apply to any case described in section 6231(c)(1) (or
the regulations prescribed thereunder) where the ap-
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plication of this subchapter to such a case would
interfere with the effective and efficient enforcement of
this title.
In any case to which this subchapter does not apply by rea-
son of paragraph (2), rules similar to the rules of sections
6229(f) and 6255(f) shall apply.’’.
(b) CLERICAL AMENDMENT.—The table of subchapters
for chapter 63 is amended by adding at the end thereof the
following new item:
‘‘SUBCHAPTER D. Treatment of electing large partnerships.’’.
SEC. 1023. DUE DATE FOR FURNISHING INFORMATION TO
PARTNERS OF ELECTING LARGE PARTNER-
SHIPS.
(a) GENERAL RULE.—Subsection (b) of section 6031
(relating to copies to partners) is amended by adding at
the end the following new sentence: ‘‘In the case of an elect-
ing large partnership (as defined in section 775), such in-
formation shall be furnished on or before the first March
15 following the close of such taxable year.’’.
(b) TREATMENT AS INFORMATION RETURN.—Section
6724 is amended by adding at the end the following new
subsection:
‘‘(e) SPECIAL RULE FOR CERTAIN PARTNERSHIP RE-
TURNS.—If any partnership return under section 6031(a)
is required under section 6011(e) to be filed on magnetic
media or in other machine-readable form, for purposes of
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this part, each schedule required to be included with such
return with respect to each partner shall be treated as a
separate information return.’’.
SEC. 1024. RETURNS MAY BE REQUIRED ON MAGNETIC
MEDIA.
Paragraph (2) of section 6011(e) (relating to returns
on magnetic media) is amended by adding at the end there-
of the following new sentence:
‘‘Notwithstanding the preceding sentence, the Sec-
retary shall require partnerships having more than
100 partners to file returns on magnetic media.’’.
SEC. 1025. TREATMENT OF PARTNERSHIP ITEMS OF INDI-
VIDUAL RETIREMENT ACCOUNTS.
Subsection (b) of section 6012 is amended by adding
at the end thereof the following new paragraph:
‘‘(6) IRA SHARE OF PARTNERSHIP INCOME.—In
the case of a trust which is exempt from taxation
under section 408(e), for purposes of this section, the
trust’s distributive share of items of gross income and
gain of any partnership to which subchapter C or D
of chapter 63 applies shall be treated as equal to the
trust’s distributive share of the taxable income of such
partnership.’’.
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SEC. 1026. EFFECTIVE DATE.
The amendments made by this part shall apply to
partnership taxable years ending on or after December 31,
1997.
PART II—PROVISIONS RELATED TO TEFRA
PARTNERSHIP PROCEEDINGS
SEC. 1031. TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY PROCEEDINGS.
(a) IN GENERAL.—Subchapter C of chapter 63 is
amended by adding at the end the following new section:
‘‘SEC. 
6234. 
DECLARATORY 
JUDGMENT 
RELATING 
TO
TREATMENT OF ITEMS OTHER THAN PART-
NERSHIP ITEMS WITH RESPECT TO AN OVER-
SHELTERED RETURN.
‘‘(a) GENERAL RULE.—If—
‘‘(1) a taxpayer files an oversheltered return for
a taxable year,
‘‘(2) the Secretary makes a determination with
respect to the treatment of items (other than partner-
ship items) of such taxpayer for such taxable year,
and
‘‘(3) the adjustments resulting from such deter-
mination do not give rise to a deficiency (as defined
in section 6211) but would give rise to a deficiency
if there were no net loss from partnership items,
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the Secretary is authorized to send a notice of adjustment
reflecting such determination to the taxpayer by certified
or registered mail.
‘‘(b) OVERSHELTERED RETURN.—For purposes of this
section, the term ‘oversheltered return’ means an income tax
return which—
‘‘(1) shows no taxable income for the taxable
year, and
‘‘(2) shows a net loss from partnership items.
‘‘(c) JUDICIAL REVIEW IN THE TAX COURT.—Within
90 days, or 150 days if the notice is addressed to a person
outside the United States, after the day on which the notice
of adjustment authorized in subsection (a) is mailed to the
taxpayer, the taxpayer may file a petition with the Tax
Court for redetermination of the adjustments. Upon the fil-
ing of such a petition, the Tax Court shall have jurisdiction
to make a declaration with respect to all items (other than
partnership items and affected items which require partner
level 
determinations 
as 
described 
in 
section
6230(a)(2)(A)(i)) for the taxable year to which the notice
of adjustment relates, in accordance with the principles of
section 6214(a). Any such declaration shall have the force
and effect of a decision of the Tax Court and shall be
reviewable as such.
‘‘(d) FAILURE TO FILE PETITION.—
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‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if the taxpayer does not file a petition with
the Tax Court within the time prescribed in sub-
section (c), the determination of the Secretary set
forth in the notice of adjustment that was mailed to
the taxpayer shall be deemed to be correct.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply after the date that the taxpayer—
‘‘(A) files a petition with the Tax Court
within the time prescribed in subsection (c) with
respect to a subsequent notice of adjustment re-
lating to the same taxable year, or
‘‘(B) files a claim for refund of an overpay-
ment of tax under section 6511 for the taxable
year involved.
If a claim for refund is filed by the taxpayer, then
solely for purposes of determining (for the taxable
year involved) the amount of any computational ad-
justment in connection with a partnership proceeding
under this subchapter (other than under this section)
or the amount of any deficiency attributable to af-
fected items in a proceeding under section 6230(a)(2),
the items that are the subject of the notice of adjust-
ment shall be presumed to have been correctly re-
ported on the taxpayer’s return during the pendency
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of the refund claim (and, if within the time pre-
scribed by section 6532 the taxpayer commences a
civil action for refund under section 7422, until the
decision in the refund action becomes final).
‘‘(e) LIMITATIONS PERIOD.—
‘‘(1) IN GENERAL.—Any notice to a taxpayer
under subsection (a) shall be mailed before the expira-
tion of the period prescribed by section 6501 (relating
to the period of limitations on assessment).
‘‘(2) SUSPENSION WHEN SECRETARY MAILS NO-
TICE OF ADJUSTMENT.—If the Secretary mails a no-
tice of adjustment to the taxpayer for a taxable year,
the period of limitations on the making of assessments
shall be suspended for the period during which the
Secretary is prohibited from making the assessment
(and, in any event, if a proceeding in respect of the
notice of adjustment is placed on the docket of the Tax
Court, until the decision of the Tax Court becomes
final), and for 60 days thereafter.
‘‘(3) RESTRICTIONS ON ASSESSMENT.—Except as
otherwise provided in section 6851, 6852, or 6861, no
assessment of a deficiency with respect to any tax im-
posed by subtitle A attributable to any item (other
than a partnership item or any item affected by a
partnership item) shall be made—
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‘‘(A) until the expiration of the applicable
90-day or 150-day period set forth in subsection
(c) for filing a petition with the Tax Court, or
‘‘(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
‘‘(f) FURTHER
NOTICES
OF
ADJUSTMENT
RE-
STRICTED.—If the Secretary mails a notice of adjustment
to the taxpayer for a taxable year and the taxpayer files
a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such
notice to the taxpayer with respect to the same taxable year
in the absence of a showing of fraud, malfeasance, or mis-
representation of a material fact.
‘‘(g) COORDINATION
WITH
OTHER
PROCEEDINGS
UNDER THIS SUBCHAPTER.—
‘‘(1) IN GENERAL.—The treatment of any item
that has been determined pursuant to subsection (c)
or (d) shall be taken into account in determining the
amount of any computational adjustment that is
made in connection with a partnership proceeding
under this subchapter (other than under this section),
or the amount of any deficiency attributable to af-
fected items in a proceeding under section 6230(a)(2),
for the taxable year involved. Notwithstanding any
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other law or rule of law pertaining to the period of
limitations on the making of assessments, for pur-
poses of the preceding sentence, any adjustment made
in accordance with this section shall be taken into ac-
count regardless of whether any assessment has been
made with respect to such adjustment.
‘‘(2) SPECIAL RULE IN CASE OF COMPUTATIONAL
ADJUSTMENT.—In the case of a computational adjust-
ment that is made in connection with a partnership
proceeding under this subchapter (other than under
this section), the provisions of paragraph (1) shall
apply only if the computational adjustment is made
within the period prescribed by section 6229 for as-
sessing any tax under subtitle A which is attributable
to any partnership item or affected item for the tax-
able year involved.
‘‘(3) CONVERSION
TO
DEFICIENCY
PROCEED-
ING.—If—
‘‘(A) after the notice referred to in sub-
section (a) is mailed to a taxpayer for a taxable
year but before the expiration of the period for
filing a petition with the Tax Court under sub-
section (c) (or, if a petition is filed with the Tax
Court, before the Tax Court makes a declaration
for that taxable year), the treatment of any part-
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nership item for the taxable year is finally deter-
mined, or any such item ceases to be a partner-
ship item pursuant to section 6231(b), and
‘‘(B) as a result of that final determination
or cessation, a deficiency can be determined with
respect to the items that are the subject of the no-
tice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition
filed in respect of the notice shall be treated as an ac-
tion brought under section 6213.
‘‘(4) FINALLY
DETERMINED.—For purposes of
this subsection, the treatment of partnership items
shall be treated as finally determined if—
‘‘(A) the Secretary enters into a settlement
agreement (within the meaning of section 6224)
with the taxpayer regarding such items,
‘‘(B) a notice of final partnership adminis-
trative adjustment has been issued and—
‘‘(i) no petition has been filed under
section 6226 and the time for doing so has
expired, or
‘‘(ii) a petition has been filed under
section 6226 and the decision of the court
has become final, or
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‘‘(C) the period within which any tax at-
tributable to such items may be assessed against
the taxpayer has expired.
‘‘(h) SPECIAL RULES IF SECRETARY INCORRECTLY
DETERMINES APPLICABLE PROCEDURE.—
‘‘(1) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF ADJUSTMENT.—If the Sec-
retary erroneously determines that subchapter B does
not apply to a taxable year of a taxpayer and con-
sistent with that determination timely mails a notice
of adjustment to the taxpayer pursuant to subsection
(a) of this section, the notice of adjustment shall be
treated as a notice of deficiency under section 6212
and any petition that is filed in respect of the notice
shall be treated as an action brought under section
6213.
‘‘(2) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF DEFICIENCY.—If the Sec-
retary erroneously determines that subchapter B ap-
plies to a taxable year of a taxpayer and consistent
with that determination timely mails a notice of defi-
ciency to the taxpayer pursuant to section 6212, the
notice of deficiency shall be treated as a notice of ad-
justment under subsection (a) and any petition that
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is filed in respect of the notice shall be treated as an
action brought under subsection (c).’’.
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY PROCEEDINGS.—Section 6211 (defining deficiency)
is amended by adding at the end the following new sub-
section:
‘‘(c) COORDINATION WITH SUBCHAPTER C.—In deter-
mining the amount of any deficiency for purposes of this
subchapter, adjustments to partnership items shall be made
only as provided in subchapter C.’’.
(c) CLERICAL AMENDMENT.—The table of sections for
subchapter C of chapter 63 is amended by adding at the
end the following new item:
‘‘Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an over-
sheltered return.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1032. PARTNERSHIP RETURN TO BE DETERMINATIVE
OF AUDIT PROCEDURES TO BE FOLLOWED.
(a) IN GENERAL.—Section 6231 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
‘‘(g) PARTNERSHIP RETURN TO BE DETERMINATIVE
OF WHETHER SUBCHAPTER APPLIES.—
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‘‘(1) DETERMINATION
THAT
SUBCHAPTER
AP-
PLIES.—If, on the basis of a partnership return for
a taxable year, the Secretary reasonably determines
that this subchapter applies to such partnership for
such year but such determination is erroneous, then
the provisions of this subchapter are hereby extended
to such partnership (and its items) for such taxable
year and to partners of such partnership.
‘‘(2) DETERMINATION THAT SUBCHAPTER DOES
NOT APPLY.—If, on the basis of a partnership return
for a taxable year, the Secretary reasonably deter-
mines that this subchapter does not apply to such
partnership for such year but such determination is
erroneous, then the provisions of this subchapter shall
not apply to such partnership (and its items) for such
taxable year or to partners of such partnership.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1033. PROVISIONS RELATING TO STATUTE OF LIMITA-
TIONS.
(a) SUSPENSION OF STATUTE WHERE UNTIMELY PE-
TITION FILED.—Paragraph (1) of section 6229(d) (relating
to suspension where Secretary makes administrative adjust-
ment) is amended by striking all that follows ‘‘section
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6226’’ and inserting the following: ‘‘(and, if a petition is
filed under section 6226 with respect to such administrative
adjustment, until the decision of the court becomes final),
and’’.
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY
PROCEEDING.—Section 6229 is amended by adding at the
end the following new subsection:
‘‘(h) SUSPENSION DURING PENDENCY OF BANKRUPTCY
PROCEEDING.—If a petition is filed naming a partner as
a debtor in a bankruptcy proceeding under title 11 of the
United States Code, the running of the period of limitations
provided in this section with respect to such partner shall
be suspended—
‘‘(1) for the period during which the Secretary is
prohibited by reason of such bankruptcy proceeding
from making an assessment, and
‘‘(2) for 60 days thereafter.’’.
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Sec-
tion 6229(b) is amended by redesignating paragraph (2)
as paragraph (3) and by inserting after paragraph (1) the
following new paragraph:
‘‘(2) SPECIAL RULE WITH RESPECT TO DEBTORS
IN TITLE 11 CASES.—Notwithstanding any other law
or rule of law, if an agreement is entered into under
paragraph (1)(B) and the agreement is signed by a