1151
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
ket system established pursuant to section
11A of the Securities and Exchange Act of
1934, or
‘‘(ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of this
part,
‘‘(B) to the extent provided in regulations,
stock in any foreign corporation which is com-
parable to a regulated investment company and
which offers for sale or has outstanding any
stock of which it is the issuer and which is re-
deemable at its net asset value, and
‘‘(C) to the extent provided in regulations,
any option on stock described in subparagraph
(A) or (B).
‘‘(2) SPECIAL RULE FOR REGULATED INVEST-
MENT COMPANIES.—In the case of any regulated in-
vestment company which is offering for sale or has
outstanding any stock of which it is the issuer and
which is redeemable at its net asset value, all stock
in a passive foreign investment company which it
1152
owns directly or indirectly shall be treated as mar-
ketable stock for purposes of this section. Except as
provided in regulations, similar treatment as mar-
ketable stock shall apply in the case of any other
regulated investment company which publishes net
asset valuations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH
ARE SHAREHOLDERS
IN PASSIVE
FOREIGN INVESTMENT COMPANIES.—In the case of a for-
eign corporation which is a controlled foreign corporation
and which owns (or is treated under subsection (g) as own-
ing) stock in a passive foreign investment company—
‘‘(1) this section (other than subsection (c)(2))
shall apply to such foreign corporation in the same
manner as if such corporation were a United States
person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
1153
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN
ENTITIES.—Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately
by its partners or beneficiaries. Stock considered to
be owned by a person by reason of the application
of the preceding sentence shall, for purposes of ap-
plying such sentence, be treated as actually owned
by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—
In any case in which a United States person is
treated as owning stock in a passive foreign invest-
ment company by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
1154
shall be treated as a disposition by the United
States person of the stock in the passive foreign in-
vestment company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For
purposes of paragraphs (2) and (3) of section 851(b), any
amount included in gross income under subsection (a)
shall be treated as a dividend.
‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the
case of stock of a passive foreign investment company
which is acquired by bequest, devise, or inheritance (or
by the decedent’s estate) and with respect to which an
election under this section was in effect as of the date of
the decedent’s death, notwithstanding section 1014, the
basis of such stock in the hands of the person so acquiring
it shall be the adjusted basis of such stock in the hands
of the decedent immediately before his death (or, if lesser,
the basis which would have been determined under section
1014 without regard to this subsection).
‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST
YEAR OF ELECTION.—
‘‘(1) TAXPAYERS OTHER THAN REGULATED IN-
VESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—If the taxpayer elects
the application of this section with respect to
any marketable stock in a corporation after the
1155
beginning of the taxpayer’s holding period in
such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall
apply to—
‘‘(i) any distributions with respect to,
or disposition of, such stock in the first
taxable year of the taxpayer for which such
election is made, and
‘‘(ii) any amount which, but for sec-
tion 1291, would have been included in
gross income under subsection (a) with re-
spect to such stock for such taxable year in
the same manner as if such amount were
gain on the disposition of such stock.
‘‘(B) REQUIREMENTS.—The requirements
of this subparagraph are met if, with respect to
each of such corporation’s taxable years for
which such corporation was a passive foreign
investment company and which begin after De-
cember 31, 1986, and included any portion of
the taxpayer’s holding period in such stock,
such corporation was treated as a qualified
electing fund under this part with respect to the
taxpayer.
1156
‘‘(2) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN GENERAL.—If a regulated invest-
ment company elects the application of this sec-
tion with respect to any marketable stock in a
corporation after the beginning of the tax-
payer’s holding period in such stock, then, with
respect to such company’s first taxable year for
which such company elects the application of
this section with respect to such stock—
‘‘(i) section 1291 shall not apply to
such stock with respect to any distribution
or disposition during, or amount included
in gross income under this section for,
such first taxable year, but
‘‘(ii) such regulated investment com-
pany’s tax under this chapter for such first
taxable year shall be increased by the ag-
gregate amount of interest which would
have 
been 
determined 
under 
section
1291(c)(3) if section 1291 were applied
without regard to this subparagraph.
Clause (ii) shall not apply if for the preceding
taxable year the company elected to mark to
1157
market the stock held by such company as of
the last day of such preceding taxable year.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
‘‘(k) ELECTION.—This section shall apply to market-
able stock in a passive foreign investment company which
is held by a United States person only if such person elects
to apply this section with respect to such stock. Such an
election shall apply to the taxable year for which made
and all subsequent taxable years unless—
‘‘(1) such stock ceases to be marketable stock,
or
‘‘(2) the Secretary consents to the revocation of
such election.
‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING
SUBJECT TO UNITED STATES TAX.—If any individual be-
comes a United States person in a taxable year beginning
after December 31, 1995, solely for purposes of this sec-
tion, the adjusted basis (before adjustments under sub-
section (b)) of any marketable stock in a passive foreign
investment company owned by such individual on the first
day of such taxable year shall be treated as being the
1158
greater of its fair market value on such first day or its
adjusted basis on such first day.’’
(b) COORDINATION
WITH
INTEREST
CHARGE,
ETC.—
(1) Paragraph (1) of section 1291(d) is amend-
ed by adding at the end the following new flush sen-
tence:
‘‘Except as provided in section 1296(j), this section
also shall not apply if an election under section
1296(k) is in effect for the taxpayer’s taxable year.’’
(2) The subsection heading for subsection (d) of
section 1291 is amended by striking ‘‘SUBPART B’’
and inserting ‘‘SUBPARTS B AND C’’.
(3) Subparagraph (A) of section 1291(a)(3) is
amended to read as follows:
‘‘(A) HOLDING
PERIOD.—The taxpayer’s
holding period shall be determined under sec-
tion 1223; except that—
‘‘(i) for purposes of applying this sec-
tion to an excess distribution, such holding
period shall be treated as ending on the
date of such distribution, and
‘‘(ii) if section 1296 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
1159
shall be treated as beginning on the first
day of the first taxable year beginning
after the last taxable year for which sec-
tion 1296 so applied.’’
(c) CONFORMING AMENDMENTS.—
(1) Sections 532(b)(4) and 542(c)(10) are each
amended by striking ‘‘section 1296’’ and inserting
‘‘section 1297’’.
(2) Subsection (f) of section 551 is amended by
striking ‘‘section 1297(b)(5)’’ and inserting ‘‘section
1298(b)(5)’’
(3) Subsections (a)(1) and (d) of section 1293
are each amended by striking ‘‘section 1297(a)’’ and
inserting ‘‘section 1298(a)’’.
(4) Paragraph (3) of section 1297(b), as redes-
ignated by subsection (a), is hereby repealed.
(5) The table of sections for subpart D of part
VI of subchapter P of chapter 1, as redesignated by
subsection (a), is amended to read as follows:
‘‘Sec. 1297. Passive foreign investment company.
‘‘Sec. 1298. Special rules.’’
(6) The table of subparts for part VI of sub-
chapter P of chapter 1 is amended by striking the
last item and inserting the following new items:
‘‘Subpart C. Election of mark to market for marketable stock.
‘‘Subpart D. General provisions.’’
1160
(d) CLARIFICATION OF GAIN RECOGNITION ELEC-
TION.—The last sentence of section 1298(b)(1), as so re-
designated, is amended by inserting ‘‘(determined without
regard to the preceding sentence)’’ after ‘‘investment com-
pany’’.
SEC. 14403. MODIFICATIONS TO DEFINITION OF PASSIVE
INCOME.
(a) EXCEPTION FOR SAME COUNTRY INCOME NOT
TO APPLY.—Paragraph (1) of section 1297(b) (defining
passive income), as redesignated by section 14402, is
amended by inserting before the period ‘‘without regard
to paragraph (3) thereof’’.
(b) PASSIVE INCOME NOT TO INCLUDE FSC IN-
COME.—Paragraph (2) of section 1297(b), as so redesig-
nated, is amended by striking ‘‘or’’ at the end of subpara-
graph (B), by striking the period at the end of subpara-
graph (C) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (C) the following new subparagraph:
‘‘(D) any foreign trade income of a FSC.’’
SEC. 14404. EFFECTIVE DATE.
The amendments made by this part shall apply to—
(1) taxable years of United States persons be-
ginning after December 31, 1995, and
1161
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
PART II—TREATMENT OF CONTROLLED FOREIGN
CORPORATIONS
SEC. 14411. GAIN ON CERTAIN STOCK SALES BY CON-
TROLLED FOREIGN CORPORATIONS TREAT-
ED AS DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
the following new subsection:
‘‘(e) GAIN
ON CERTAIN STOCK SALES
BY CON-
TROLLED FOREIGN CORPORATIONS TREATED AS DIVI-
DENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other for-
eign corporation, gain recognized on such sale or ex-
change shall be included in the gross income of such
controlled foreign corporation as a dividend to the
same extent that it would have been so included
under section 1248(a) if such controlled foreign cor-
poration were a United States person. For purposes
of determining the amount which would have been so
includible, the determination of whether such other
foreign corporation was a controlled foreign corpora-
1162
tion shall be made without regard to the preceding
sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA-
BLE.—Clause (i) of section 954(c)(3)(A) shall not
apply to any amount treated as a dividend by reason
of paragraph (1).
‘‘(3) CLARIFICATION OF DEEMED SALES.—For
purposes of this subsection, a controlled foreign cor-
poration shall be treated as having sold or ex-
changed any stock if, under any provision of this
subtitle, such controlled foreign corporation is treat-
ed as having gain from the sale or exchange of such
stock.’’
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of
section 904(d)(2)(E) is amended by striking ‘‘and except
as provided in regulations, the taxpayer was a United
States shareholder in such corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a)
shall apply to gain recognized on transactions occur-
ring after the date of the enactment of this Act.
(2) The amendment made by subsection (b)
shall apply to distributions after the date of the en-
actment of this Act.
1163
SEC. 
14412. 
MISCELLANEOUS 
MODIFICATIONS 
TO
SUBPART F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN
DETERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F in-
come) is amended by adding at the end the following
new sentence: ‘‘For purposes of subparagraph (B),
any gain included in the gross income of any person
as a dividend under section 1248 shall be treated as
a distribution received by such person with respect
to the stock involved.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
1164
other controlled foreign corporation, adjustments similar
to the adjustments provided by subsections (a) and (b)
shall be made to the basis of such stock in the hands of
such other controlled foreign corporation, but only for the
purposes of determining the amount included under sec-
tion 951 in the gross income of such United States share-
holder (or any other United States shareholder who ac-
quires from any person any portion of the interest of such
United States shareholder by reason of which such share-
holder was treated as owning such stock, but only to the
extent of such portion, and subject to such proof of iden-
tity of such interest as the Secretary may prescribe by reg-
ulations).’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply for purposes of deter-
mining inclusions for taxable years of United States
shareholders beginning after December 31, 1995.
(c) DETERMINATION
OF PREVIOUSLY TAXED IN-
COME IN SECTION 304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings and profits) is amended by adding at the end
the following new subsection:
‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—
If by reason of—
1165
‘‘(1) a transaction to which section 304 applies,
‘‘(2) the structure of a United States sharehold-
er’s holdings in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income
(or an inclusion or exclusion without an appropriate basis
adjustment) by reason of this subpart, the Secretary may
prescribe regulations providing such modifications in the
application of this subpart as may be necessary to elimi-
nate such multiple inclusion or provide such basis adjust-
ment, as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of the
enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end the following
new sentence: ‘‘For purposes of this subsection, any
exemption (or reduction) with respect to the tax im-
posed by section 884 shall not be taken into ac-
count.’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
1166
SEC. 14413. INDIRECT FOREIGN TAX CREDIT ALLOWED
FOR CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN
GENERAL.—Subsection (b) of section
902 (relating to deemed taxes increased in case of
certain 2nd and 3rd tier foreign corporations) is
amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER-
TAIN LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have
paid the same proportion of such other member’s
post-1986 foreign income taxes as would be deter-
mined under subsection (a) if such foreign corpora-
tion were a domestic corporation.
‘‘(2) QUALIFIED
GROUP.—For purposes of
paragraph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
1167
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other 
foreign 
corporation 
indirectly
through a chain of foreign corporations
connected through stock ownership of at
least 10 percent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corpora-
tion in such chain, and
‘‘(iii) such other corporation is not
below the sixth tier in such chain.
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corpora-
tion is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a Unit-
ed States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall
apply to those taxes paid by a member of the quali-
fied group below the third tier only with respect to
periods during which it was a controlled foreign cor-
poration.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
1168
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corpora-
tion’’ and inserting ‘‘sixth tier foreign corpora-
tion’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC
CORPORATION
ACQUIRES
PERCENT
OF
FOREIGN
CORPORATION’’ and inserting
‘‘WHERE FOREIGN CORPORATION FIRST QUALI-
FIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits)
is amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under
section 951(a) in the gross income of a domestic cor-
poration any amount attributable to earnings and
1169
profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b))
with respect to the domestic corporation, then, ex-
cept to the extent provided in regulations, section
902 shall be applied as if the amount so included
were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accord-
ance with section 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxes of foreign corpora-
tions for taxable years of such corporations begin-
ning after the date of enactment of this Act.
(2) SPECIAL RULE.—In the case of any chain
of foreign corporations described in clauses (i) and
(ii) of section 902(b)(2)(B) of the Internal Revenue
Code of 1986 (as amended by this section), no liq-
uidation, reorganization, or similar transaction in a
taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting
taxes to be taken into account under section 902 of
the Internal Revenue Code of 1986 which could not
have been taken into account under such section but
for such transaction.
1170
SEC. 14414. REPEAL OF INCLUSION OF CERTAIN EARNINGS
INVESTED IN EXCESS PASSIVE ASSETS.
(a) IN GENERAL.—
(1) REPEAL OF INCLUSION.—Paragraph (1) of
section 951(a) (relating to amounts included in
gross income of United States shareholders) is
amended by striking subparagraph (C), by striking
‘‘; and’’ at the end of subparagraph (B) and insert-
ing a period, and by adding ‘‘and’’ at the end of
subparagraph (A).
(2) REPEAL OF INCLUSION AMOUNT.—Section
956A (relating to earnings invested in excess passive
assets) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (G) of section 904(d)(3) is
amended by striking ‘‘subparagraph (B) or (C) of
section 
951(a)(1)’’ 
and 
inserting 
‘‘section
951(a)(1)(B)’’.
(2) Paragraph (1) of section 956(b) is amended
to read as follows:
‘‘(1) APPLICABLE EARNINGS.—For purposes of
this section, the term ‘applicable earnings’ means,
with respect to any controlled foreign corporation,
the sum of—
‘‘(A) the amount (not including a deficit)
referred to in section 316(a)(1), and
1171
‘‘(B) the amount referred to in section
316(a)(2),
but reduced by distributions made during the tax-
able year.’’
(3) Paragraph (3) of section 956(b) is amended
to read as follows:
‘‘(3) SPECIAL
RULE
WHERE
CORPORATION
CEASES
TO
BE
CONTROLLED
FOREIGN
CORPORA-
TION.—If any foreign corporation ceases to be a
controlled foreign corporation during any taxable
year—
‘‘(A) the determination of any United
States shareholder’s pro rata share shall be
made on the basis of stock owned (within the
meaning of section 958(a)) by such shareholder
on the last day during the taxable year on
which the foreign corporation is a controlled
foreign corporation,
‘‘(B) the average referred to in subsection
(a)(1)(A) for such taxable year shall be deter-
mined by only taking into account quarters end-
ing on or before such last day, and
‘‘(C) in determining applicable earnings,
the amount taken into account by reason of
being described in paragraph (2) of section
1172
316(a) shall be the portion of the amount so
described which is allocable (on a pro rata
basis) to the part of such year during which the
corporation is a controlled foreign corporation.’’
(4) Subsection (a) of section 959 (relating to
exclusion from gross income of previously taxed
earnings and profits) is amended by adding ‘‘or’’ at
the end of paragraph (1), by striking ‘‘or’’ at the
end of paragraph (2), and by striking paragraph (3).
(5) Subsection (a) of section 959 is amended by
striking ‘‘paragraphs (2) and (3)’’ in the last sen-
tence and inserting ‘‘paragraph (2)’’.
(6) Subsection (c) of section 959 is amended by
adding at the end the following flush sentence:
‘‘References in this subsection to section 951(a)(1)(C) and
subsection (a)(3) shall be treated as references to such
provisions as in effect on the day before the date of the
enactment of the Tax Simplification Act of 1995.’’
(7) Paragraph (1) of section 959(f) is amended
to read as follows:
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, amounts that would be included under subpara-
graph (B) of section 951(a)(1) (determined without
regard to this section) shall be treated as attrib-
utable first to earnings described in subsection
1173
(c)(2), and then to earnings described in subsection
(c)(3).’’
(8) Paragraph (2) of section 959(f) is amended
by striking ‘‘subparagraphs (B) and (C) of section
951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.
(9) Subsection (b) of section 989 is amended by
striking ‘‘subparagraph (B) or (C) of section
951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.
(10) Paragraph (9) of section 1298(b), as re-
designated by section 14402, is amended by striking
‘‘subparagraph (B) or (C) of section 951(a)(1)’’ and
inserting ‘‘section 951(a)(1)(B)’’.
(11) Subsections (d)(3)(B) and (e)(2)(B)(ii) of
section 1298, as redesignated by section 14402, are
each amended by striking ‘‘or section 956A’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart F of part III of subchapter N of chapter 1
is amended by striking the item relating to section 956A.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years of foreign corpora-
tions beginning after September 30, 1995, and to taxable
years of United States shareholders within which or with
which such taxable years of foreign corporations end.
1174
PART III—OTHER PROVISIONS
SEC. 14421. EXCHANGE RATE USED IN TRANSLATING FOR-
EIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVER-
AGE RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to translation of foreign taxes) is
amended to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of
any foreign income taxes (and any adjustment
thereto) shall be translated into dollars by using
the average exchange rate for the taxable year
to which such taxes relate.
‘‘(B) EXCEPTION
FOR
TAXES
NOT
PAID
WITHIN FOLLOWING 2 YEARS.—
‘‘(i) Subparagraph (A) shall not apply
to any foreign income taxes paid after the
date 2 years after the close of the taxable
year to which such taxes relate.
1175
‘‘(ii) Subparagraph (A) shall not
apply to taxes paid before the beginning of
the taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—Subparagraph (A) shall not apply to
any foreign income taxes the liability for which
is denominated in any currency determined to
be an inflationary currency under regulations
prescribed by the Secretary.
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of de-
termining the amount of the foreign tax credit, in
the case of any foreign income taxes to which sub-
paragraph (A) of paragraph (1) does not apply—
‘‘(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
‘‘(B) any adjustment to the amount of
such taxes shall be translated into dollars
using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
1176
adjustment is paid to the foreign country
or possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes
of this subsection, the term ‘foreign income taxes’
means any income, war profits, or excess profits
taxes paid or accrued to any foreign country or to
any possession of the United States.’’
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2
YEARS AFTER YEAR TO WHICH TAXES RELATE.—
Subsection (c) of section 905 is amended to read as
follows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year
to which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
1177
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—In making the redetermination
under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in
subparagraph (B) of paragraph (1). Any such taxes
if subsequently paid shall be taken into account for
the taxable year in which paid and no redetermina-
tion under this section shall be made on account of
such payment.
‘‘(3) ADJUSTMENTS.—The amount of tax due
on any redetermination under paragraph (1) (if any)
shall be paid by the taxpayer on notice and demand
by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in
accordance with subchapter B of chapter 66 (section
6511 et seq.).
‘‘(4) BOND
REQUIREMENTS.—In the case of
any tax accrued but not paid, the Secretary, as a
condition precedent to the allowance of the credit
provided in this subpart, may require the taxpayer
to give a bond, with sureties satisfactory to and ap-
proved by the Secretary, in such sum as the Sec-
1178
retary may require, conditioned on the payment by
the taxpayer of any amount of tax found due on any
such redetermination. Any such bond shall contain
such further conditions as the Secretary may re-
quire.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of
the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of
the taxes refunded for which credit has been allowed
under this section shall be reduced by the amount of
any tax described in section 901 imposed by the for-
eign country or possession of the United States with
respect to such refund; but no credit under this sub-
part, or deduction under section 164, shall be al-
lowed for any taxable year with respect to any such
tax imposed on the refund. No interest shall be as-
sessed or collected on any amount of tax due on any
redetermination by the Secretary, resulting from a
refund to the taxpayer, for any period before the re-
ceipt of such refund, except to the extent interest
was paid by the foreign country or possession of the
United States on such refund for such period.’’
(b) AUTHORITY TO USE AVERAGE RATES.—
1179
(1) IN
GENERAL.—Subsection (a) of section
986 (as amended by subsection (a)) is amended by
redesignating paragraph (3) as paragraph (4) and
inserting after paragraph (2) the following new
paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in
such regulations) during which the taxes or adjust-
ment is paid may be used instead of the exchange
rate as of the time of such payment.’’
(2) DETERMINATION
OF
AVERAGE
RATES.—
Subsection (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting
‘‘, and’’, and by adding at the end the following new
paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘weight-
ed’’ each place it appears.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
1180
or accrued in taxable years beginning after Decem-
ber 31, 1995.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1995.
SEC. 14422. ELECTION TO USE SIMPLIFIED SECTION 904
LIMITATION FOR ALTERNATIVE MINIMUM
TAX.
(a) GENERAL RULE.—Subsection (a) of section 59
(relating to alternative minimum tax foreign tax credit)
is amended by adding at the end the following new para-
graph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
‘‘(ii) the limitation of section 904
shall be based on the proportion which—
‘‘(I) the taxpayer’s taxable in-
come (as determined for purposes of
the regular tax) from sources without
1181
the United States (but not in excess
of the taxpayer’s entire alternative
minimum taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
after December 31, 1995, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
‘‘(ii) ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with
the consent of the Secretary.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
1182
SEC. 14423. MODIFICATION OF SECTION 1491.
(a) GENERAL RULE.—So much of chapter 5 (relating
to tax on transfers to avoid income tax) as precedes sec-
tion 1492 is amended to read as follows:
‘‘CHAPTER 5—TREATMENT OF TRANSFERS
TO AVOID INCOME TAX
‘‘Sec. 1491. Recognition of gain.
‘‘Sec. 1492. Exceptions.
‘‘SEC. 1491. RECOGNITION OF GAIN.
‘‘In the case of any transfer of property by a United
States person to a foreign corporation as paid-in surplus
or as a contribution to capital, to a foreign estate or trust,
or to a foreign partnership, for purposes of this subtitle
(other than for purposes of section 679), such transfer
shall be treated as a sale or exchange for an amount equal
to the fair market value of the property transferred, and
the transferor shall recognize as gain the excess of—
‘‘(1) the fair market value of the property so
transferred, over
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the
transferor.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1057 is hereby repealed.
(2) Section 1492 is amended to read as follows:
1183
‘‘SEC. 1492. EXCEPTIONS.
‘‘The provisions of section 1491 shall not apply—
‘‘(1) If the transferee is an organization exempt
from income tax under part I of subchapter F of
chapter 1 (other than an organization described in
section 401(a)),
‘‘(2) To a transfer described in section 367, or
‘‘(3) To any other transfer, to the extent pro-
vided in regulations in accordance with principles
similar to the principles of section 367 or otherwise
consistent with the purpose of section 1491.’’
(3) Section 1494 is hereby repealed.
(4) Paragraph (8) of section 6501(c) is amend-
ed by inserting ‘‘or on any transfer by reason of sec-
tion 1491’’ after ‘‘section 367’’.
(5) Subsection (a) of section 6038B is amended
by striking ‘‘or’’ at the end of paragraph (1), by
adding ‘‘or’’ at the end of paragraph (2), and by in-
serting after paragraph (2) the following new para-
graph:
‘‘(3) makes any transfer described in section
1491,’’.
(6) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
1184
(7) The table of chapters for subtitle A is
amended by striking ‘‘Tax on’’ in the item relating
to chapter 5 and inserting ‘‘Treatment of’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after December 31,
1995.
SEC. 14424. MODIFICATION OF SECTION 367(b).
(a) GENERAL RULE.—Paragraph (1) of section
367(b) is amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any trans-
action described in section 332, 351, 354, 355, 356,
or 361 in which the status of a foreign corporation
as a corporation is a general condition for non-
recognition by 1 or more of the parties to the trans-
action, income shall be required to be recognized to
the extent provided in regulations prescribed by the
Secretary which are necessary or appropriate to pre-
vent the avoidance of Federal income taxes. This
subsection shall not apply to a transaction in which
the foreign corporation is not treated as a corpora-
tion under subsection (a)(1).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after December 31,
1995.
1185
SEC. 14425. INCREASE IN FILING THRESHOLDS FOR RE-
TURNS AS TO ORGANIZATION OF FOREIGN
CORPORATIONS 
AND 
ACQUISITIONS 
OF
STOCK IN SUCH CORPORATIONS.
(a) IN GENERAL.—Subsection (a) of section 6046
(relating to returns as to organization or reorganization
of foreign corporations and as to acquisitions of their
stock) is amended to read as follows:
‘‘(a) REQUIREMENT OF RETURN.—
‘‘(1) IN GENERAL.—A return complying with
the requirements of subsection (b) shall be made
by—
‘‘(A) each United States citizen or resident
who becomes an officer or director of a foreign
corporation if a United States person (as de-
fined in section 7701(a)(30)) meets the stock
ownership requirements of paragraph (2) with
respect to such corporation,
‘‘(B) each United States person—
‘‘(i) who acquires stock which, when
added to any stock owned on the date of
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation, or
‘‘(ii) who acquires stock which, with-
out regard to stock owned on the date of
1186
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation,
‘‘(C) each person (not described in sub-
paragraph (B)) who is treated as a United
States shareholder under section 953(c) with
respect to a foreign corporation, and
‘‘(D) each person who becomes a United
States person while meeting the stock owner-
ship requirements of paragraph (2) with respect
to stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States
shareholder under section 953(c), subparagraph (A)
shall be treated as including a reference to each
United States person who is an officer or director of
such corporation.
‘‘(2) STOCK
OWNERSHIP
REQUIREMENTS.—A
person meets the stock ownership requirements of
this paragraph with respect to any corporation if
such person owns 10 percent or more of—
‘‘(A) the total combined voting power of all
classes of stock of such corporation entitled to
vote, or
1187
‘‘(B) the total value of the stock of such
corporation.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on January 1, 1996.
SEC. 14426. APPLICATION OF UNIFORM CAPITALIZATION
RULES TO FOREIGN PERSONS.
(a) IN GENERAL.—Section 263A(c) (relating to ex-
ceptions) is amended by adding at the end the following
new paragraph:
‘‘(7) FOREIGN
PERSONS.—This section shall
apply to any taxpayer who is not a United States
person only for purposes of—
‘‘(A) tax liability with respect to income
which is effectively connected with the conduct
of a trade or business in the United States, and
‘‘(B) tax liability of a United States share-
holder (as defined in section 951(b)) with re-
spect to amounts includible in gross income
under section 951(a).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1995. Section 481 of the Internal Revenue
Code of 1986 shall not apply to any change in a method
of accounting by reason of such amendment.
1188
SEC. 14427. CERTAIN PRIZES AND AWARDS.
(a) IN GENERAL.—Section 863 (relating to special
rules for determining source) is amended by adding at the
end the following new subsection:
‘‘(f) CERTAIN PRIZES
AND AWARDS ASSOCIATED
WITH AMATEUR SPORTS COMPETITIONS.—
‘‘(1) IN GENERAL.—A prize or award received
by a nonresident alien by reason of participating in
an amateur sports competition in the United States
shall not be treated as derived from sources within
the United States if such alien performs no services
for such prize or award.
‘‘(2) AMATEUR
SPORTS
COMPETITION.—For
purposes of paragraph (1), the term ‘amateur sports
competition’ means any competition in which the
only prizes awarded by the sponsors of the competi-
tion are of nominal value.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to prizes and awards granted
after the date of the enactment of this Act.
SEC. 14428. TREATMENT FOR ESTATE TAX PURPOSES OF
SHORT-TERM OBLIGATIONS HELD BY NON-
RESIDENT ALIENS.
(a) IN GENERAL.—Subsection (b) of section 2105 is
amended by striking ‘‘and’’ at the end of paragraph (2),
by striking the period at the end of paragraph (3) and
1189
inserting ‘‘, and’’, and by inserting after paragraph (3)
the following new paragraph:
‘‘(4) obligations which would be original issue
discount obligations as defined in section 871(g)(1)
but for subparagraph (B)(i) thereof, if any interest
thereon (were such interest received by the decedent
at the time of his death) would not be effectively
connected with the conduct of a trade or business
within the United States.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
Subtitle E—Other Income Tax
Provisions
PART I—PROVISIONS RELATING TO S
CORPORATIONS
SEC. 14501. S CORPORATIONS PERMITTED TO HAVE 75
SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining
small business corporation) is amended by striking ‘‘35
shareholders’’ and inserting ‘‘75 shareholders’’.
SEC. 14502. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
1190
holders) is amended by inserting after clause (iv) the fol-
lowing new clause:
‘‘(v) An electing small business trust.’’
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—Subparagraph (B) of section 1361(c)(2) is
amended by adding at the end the following new clause:
‘‘(v) In the case of a trust described
in clause (v) of subparagraph (A), each po-
tential current beneficiary of such trust
shall be treated as a shareholder; except
that, if for any period there is no potential
current beneficiary of such trust, such
trust shall be treated as the shareholder
during such period.’’
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—
Section 1361 (defining S corporation) is amended by add-
ing at the end the following new subsection:
‘‘(e) ELECTING
SMALL
BUSINESS
TRUST
DE-
FINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small
business trust’ means any trust if—
1191
‘‘(i) such trust does not have as a
beneficiary any person other than (I) an
individual, (II) an estate, or (III) an orga-
nization described in paragraph (2), (3),
(4), or (5) of section 170(c) which holds a
contingent interest and is not a potential
current beneficiary,
‘‘(ii) no interest in such trust was ac-
quired by purchase, and
‘‘(iii) an election under this subsection
applies to such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—
The term ‘electing small business trust’ shall
not include—
‘‘(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an elec-
tion under subsection (d)(2) applies to any
corporation the stock of which is held by
such trust, and
‘‘(ii) any trust exempt from tax under
this subtitle.
‘‘(C) PURCHASE.—For purposes of sub-
paragraph (A), the term ‘purchase’ means any
acquisition if the basis of the property acquired
is determined under section 1012.
1192
‘‘(2) POTENTIAL CURRENT BENEFICIARY.—For
purposes of this section, the term ‘potential current
beneficiary’ means, with respect to any period, any
person who at any time during such period is enti-
tled to, or at the discretion of any person may re-
ceive, a distribution from the principal or income of
the trust. If a trust disposes of all of the stock which
it holds in an S corporation, then, with respect to
such corporation, the term ‘potential current bene-
ficiary’ does not include any person who first met
the requirements of the preceding sentence during
the 60-day period ending on the date of such dis-
position.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such elec-
tion shall apply to the taxable year of the trust for
which made and all subsequent taxable years of such
trust unless revoked with the consent of the Sec-
retary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
1193
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
S corporations shall be treated as a separate
trust, and
‘‘(B) the amount of the tax imposed by
this chapter on such separate trust shall be de-
termined with the modifications of paragraph
(2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (1), the modifications of this paragraph are
the following:
‘‘(A) Except as provided in section 1(h),
the amount of the tax imposed by section 1(e)
shall be determined by using the highest rate of
tax set forth in section 1(e).
‘‘(B) The exemption amount under section
55(d) shall be zero.
‘‘(C) The only items of income, loss, deduc-
tion, or credit to be taken into account are the
following:
1194
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the dis-
position of stock in an S corporation.
‘‘(iii) To the extent provided in regu-
lations, State or local income taxes or ad-
ministrative expenses to the extent alloca-
ble to items described in clauses (i) and
(ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be appor-
tioned to any beneficiary.
‘‘(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
‘‘(3) TREATMENT
OF
REMAINDER
OF
TRUST
AND
DISTRIBUTIONS.—For purposes of determin-
ing—
‘‘(A) the amount of the tax imposed by
this chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the
entire trust,
1195
the items referred to in paragraph (2)(C) shall be
excluded. Except as provided in the preceding sen-
tence, this subsection shall not affect the taxation of
any distribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE TERMINATION OF SEPARATE TRUST.—If a
portion of an electing small business trust ceases to
be treated as a separate trust under paragraph (1),
any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be
taken into account by the entire trust.
‘‘(5) ELECTING SMALL BUSINESS TRUST.—For
purposes of this subsection, the term ‘electing small
business trust’ has the meaning given such term by
section 1361(e)(1).’’
(e) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 1366(a) is amended by inserting ‘‘, or of a trust or
estate which terminates,’’ after ‘‘who dies’’.
SEC. 14503. EXPANSION OF POST-DEATH QUALIFICATION
FOR CERTAIN TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to
certain trusts permitted as shareholders) is amended—
(1) by striking ‘‘60-day period’’ each place it
appears in clauses (ii) and (iii) and inserting ‘‘2-year
period’’, and
1196
(2) by striking the last sentence in clause (ii).
SEC. 14504. FINANCIAL INSTITUTIONS PERMITTED TO
HOLD SAFE HARBOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining
straight debt) is amended by striking ‘‘or a trust described
in paragraph (2)’’ and inserting ‘‘a trust described in
paragraph (2), or a person which is actively and regularly
engaged in the business of lending money.’’
SEC. 14505. RULES RELATING TO INADVERTENT TERMI-
NATIONS AND INVALID ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.—If—
‘‘(1) an election under subsection (a) by any
corporation—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to ob-
tain shareholder consents, or
‘‘(B) was terminated under paragraph (2)
of subsection (d),
1197
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or ter-
mination were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were
taken—
‘‘(A) so that the corporation is a small
business corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with
the treatment of the corporation as an S corpora-
tion) as may be required by the Secretary with re-
spect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified
by the Secretary.’’
(b) LATE ELECTIONS.—Subsection (b) of section
1362 is amended by adding at the end the following new
paragraph:
1198
‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS
AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’
(c) EFFECTIVE DATE.—The amendments made by
subsection (a) and (b) shall apply with respect to elections
for taxable years beginning after December 31, 1982.
SEC. 14506. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro
rata share) is amended to read as follows:
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN
GENERAL.—Under regulations
prescribed by the Secretary, if any shareholder
terminates the shareholder’s interest in the cor-
poration during the taxable year and all af-
fected shareholders and the corporation agree
1199
to the application of this paragraph, paragraph
(1) shall be applied to the affected shareholders
as if the taxable year consisted of 2 taxable
years the first of which ends on the date of the
termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘af-
fected shareholders’ means the shareholder
whose interest is terminated and all sharehold-
ers to whom such shareholder has transferred
shares during the taxable year. If such share-
holder has transferred shares to the corpora-
tion, the term ‘affected shareholders’ shall in-
clude all persons who are shareholders during
the taxable year.’’
SEC. 14507. EXPANSION OF POST-TERMINATION TRANSI-
TION PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b)
(relating to post-termination transition period) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by re-
designating subparagraph (B) as subparagraph (C), and
by inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(B) the 120-day period beginning on the
date of any determination pursuant to an audit
1200
of the taxpayer which follows the termination of
the corporation’s election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of
section 1377(b) is amended by striking subparagraphs (A)
and (B), by redesignating subparagraph (C) as subpara-
graph (B), and by inserting before subparagraph (B) (as
so redesignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR
SUBCHAPTER S ITEMS.—
(1) GENERAL RULE.—Subchapter D of chapter
63 (relating to tax treatment of subchapter S items)
is hereby repealed.
(2) CONSISTENT TREATMENT REQUIRED.—Sec-
tion 6037 (relating to return of S corporation) is
amended by adding at the end the following new
subsection:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSIST-
ENT WITH CORPORATE RETURN OR SECRETARY NOTI-
FIED OF INCONSISTENCY.—
1201
‘‘(1) IN GENERAL.—A shareholder of an S cor-
poration shall, on such shareholder’s return, treat a
subchapter S item in a manner which is consistent
with the treatment of such item on the corporate re-
turn.
‘‘(2) NOTIFICATION OF INCONSISTENT TREAT-
MENT.—
‘‘(A) IN
GENERAL.—In the case of any
subchapter S item, if—
‘‘(i)(I) the corporation has filed a re-
turn but the shareholder’s treatment on
his return is (or may be) inconsistent with
the treatment of the item on the corporate
return, or
‘‘(II) the corporation has not filed a
return, and
‘‘(ii) the shareholder files with the
Secretary a statement identifying the in-
consistency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER
RECEIVING
INCOR-
RECT
INFORMATION.—A shareholder shall be
treated as having complied with clause (ii) of
subparagraph (A) with respect to a subchapter
S item if the shareholder—
1202
‘‘(i) demonstrates to the satisfaction
of the Secretary that the treatment of the
subchapter S item on the shareholder’s re-
turn is consistent with the treatment of the
item on the schedule furnished to the
shareholder by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I)
of paragraph (2), and
‘‘(B) in which the shareholder does not
comply with subparagraph (A)(ii) of paragraph
(2),
any adjustment required to make the treatment of
the items by such shareholder consistent with the
treatment of the items on the corporate return shall
be treated as arising out of mathematical or clerical
errors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sen-
tence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of
this subsection, the term ‘subchapter S item’ means
1203
any item of an S corporation to the extent that reg-
ulations prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appro-
priately determined at the corporation level than at
the shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COM-
PLY WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of sub-
chapter A of chapter 68.’’
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking
subsection (g).
(B) Subsection (b) of section 6233 is
amended to read as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a part-
nership return is filed for any taxable year but it is deter-
mined that there is no entity for such taxable year, to the
extent provided in regulations, rules similar to the rules
of subsection (a) shall apply.’’
(C) The table of subchapters for chapter
63 is amended by striking the item relating to
subchapter D.
1204
SEC. 14508. S CORPORATIONS PERMITTED TO HOLD SUB-
SIDIARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b)
(defining ineligible corporation) is amended by striking
subparagraph (A) and by redesignating subparagraphs
(B), (C), (D), and (E) as subparagraphs (A), (B), (C),
and (D), respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S
CORPORATION SUBSIDIARIES.—Section 1361(b) (defining
small business corporation) is amended by adding at the
end the following new paragraph:
‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED
SUBSIDIARIES.—
‘‘(A) IN GENERAL.—For purposes of this
title—
‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treat-
ed as a separate corporation, and
‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
1205
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
STA-
TUS.—For purposes of this title, if any corpora-
tion which was a qualified subchapter S subsidi-
ary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as
a new corporation acquiring all of its assets
(and assuming all of its liabilities) immediately
before such cessation from the S corporation in
exchange for its stock.’’
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE
INVESTMENT INCOME.—Paragraph (3) of section 1362(d)
is amended by adding at the end the following new sub-
paragraph:
‘‘(F) TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a
C corporation meeting the requirements of sec-
1206
tion 1504(a)(2), the term ‘passive investment
income’ shall not include dividends from such C
corporation to the extent such dividends are at-
tributable to the earnings and profits of such C
corporation derived from the active conduct of
a trade or business.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended
by striking paragraph (6).
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’
SEC. 14509. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1)
(relating to losses and deductions cannot exceed
shareholder’s basis in stock and debt) is amended by
striking ‘‘paragraph (1)’’ and inserting ‘‘paragraphs
(1) and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to
certain adjustments taken into account) is amended
by adding at the end the following new sentence:
1207
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined
with regard to the adjustments provided in paragraph (1)
of section 1367(a) for the taxable year.’’
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end the
following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net nega-
tive adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative
adjustment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’
1208
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
SEC. 14510. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to applica-
tion of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C
shall apply to an S corporation and its shareholders.’’
SEC. 14511. ELIMINATION OF CERTAIN EARNINGS AND
PROFITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business
corporation under subchapter S of chapter 1 of the
Internal Revenue Code of 1986 for any taxable year
beginning before January 1, 1983, and
(2) such corporation is an S corporation under
subchapter S of chapter 1 of such Code for its first
taxable year beginning after December 31, 1995,
1209
the amount of such corporation’s accumulated earnings
and profits (as of the beginning of such first taxable year)
shall be reduced by an amount equal to the portion (if
any) of such accumulated earnings and profits which were
accumulated in any taxable year beginning before January
1, 1983, for which such corporation was an electing small
business corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1362(d) is amend-
ed—
(A) by striking ‘‘SUBCHAPTER C’’ in the
paragraph heading and inserting ‘‘ACCUMU-
LATED’’,
(B) by striking ‘‘subchapter C’’ in sub-
paragraph (A)(i)(I) and inserting ‘‘accumu-
lated’’, and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amend-
ed by striking ‘‘subchapter C’’ in paragraph (1) and
inserting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amend-
ed to read as follows:
1210
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross re-
ceipts’ have the same respective meanings as when
used in paragraph (3) of section 1362(d).’’
(C) The section heading for section 1375 is
amended by striking ‘‘SUBCHAPTER C’’ and insert-
ing ‘‘ACCUMULATED’’.
(D) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking ‘‘sub-
chapter C’’ in the item relating to section 1375 and
inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is
amended by striking ‘‘section 1362(d)(3)(D)’’ and
inserting ‘‘section 1362(d)(3)(C)’’.
SEC. 14512. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carry-
over of disallowed losses and deductions to post-termi-
nation transition period) is amended by adding at the end
the following new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the ex-
tent that any increase in adjusted basis de-
scribed in subparagraph (B) would have in-
creased the shareholder’s amount at risk under
section 465 if such increase had occurred on
1211
the day preceding the commencement of the
post-termination transition period, rules similar
to the rules described in subparagraphs (A)
through (C) shall apply to any losses disallowed
by reason of section 465(a).’’
SEC. 14513. ADJUSTMENTS TO BASIS OF INHERITED S
STOCK TO REFLECT CERTAIN ITEMS OF IN-
COME.
(a) IN GENERAL.—Subsection (b) of section 1367
(relating to adjustments to basis of stock of shareholders,
etc.) is amended by adding at the end the following new
paragraph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the
death of a decedent or by bequest, devise, or in-
heritance, section 691 shall be applied with re-
spect to any item of income of the S corpora-
tion in the same manner as if the decedent had
held directly his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the por-
tion of the value of the stock which is attrib-
1212
utable to items constituting income in respect
of the decedent.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply in the case of decedents dying
after the date of the enactment of this Act.
SEC. 14514. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237
(relating to real property subdivided for sale) is amended
by striking ‘‘other than a corporation’’ in the material pre-
ceding paragraph (1) and inserting ‘‘other than a C cor-
poration’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A)
of section 1237(a)(2) is amended by inserting ‘‘an S cor-
poration which included the taxpayer as a shareholder,’’
after ‘‘controlled by the taxpayer,’’.
SEC. 14515. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this part, the amendments made by this part shall apply
to taxable years beginning after December 31, 1995.
(b) TREATMENT OF CERTAIN ELECTIONS UNDER
PRIOR LAW.—For purposes of section 1362(g) of the In-
ternal Revenue Code of 1986 (relating to election after
termination), any termination under section 1362(d) of
1213
such Code in a taxable year beginning before January 1,
1996, shall not be taken into account.
PART II—PROVISIONS RELATING TO REGULATED
INVESTMENT COMPANIES
SEC. 14521. REPEAL OF 30-PERCENT GROSS INCOME LIMI-
TATION.
(a) GENERAL RULE.—Subsection (b) of section 851
(relating to limitations) is amended by striking paragraph
(3), by adding ‘‘and’’ at the end of paragraph (2), and
by redesignating paragraph (4) as paragraph (3).
(b) TECHNICAL AMENDMENTS.—
(1) The material following paragraph (3) of sec-
tion 851(b) (as redesignated by subsection (a)) is
amended—
(A) by striking out ‘‘paragraphs (2) and
(3)’’ and inserting ‘‘paragraph (2)’’, and
(B) by striking out the last sentence there-
of.
(2) Subsection (c) of section 851 is amended by
striking ‘‘subsection (b)(4)’’ each place it appears
(including the heading) and inserting ‘‘subsection
(b)(3)’’.
(3) Subsection (d) of section 851 is amended by
striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
1214
(4) Paragraph (1) of section 851(e) is amended
by striking ‘‘subsection (b)(4)’’ and inserting ‘‘sub-
section (b)(3)’’.
(5) Paragraph (4) of section 851(e) is amended
by striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
(6) Section 851 is amended by striking sub-
section (g) and redesignating subsection (h) as sub-
section (g).
(7) Subsection (g) of section 851 (as redesig-
nated by paragraph (6)) is amended by striking
paragraph (3).
(8) Section 817(h)(2) is amended—
(A) by striking ‘‘851(b)(4)’’ in subpara-
graph (A) and inserting ‘‘851(b)(3)’’, and
(B) by striking ‘‘851(b)(4)(A)(i)’’ in sub-
paragraph (B) and inserting ‘‘851(b)(3)(A)(i)’’.
(9) Section 1092(f)(2) is amended by striking
‘‘Except for purposes of section 851(b)(3), the’’ and
inserting ‘‘The’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after the
date of the enactment of this Act.
1215
PART III—PROVISIONS RELATING TO REAL
ESTATE INVESTMENT TRUSTS
SEC. 14531. CLARIFICATION OF LIMITATION ON MAXIMUM
NUMBER OF SHAREHOLDERS.
(a) RULES RELATING TO DETERMINATION OF OWN-
ERSHIP.—
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND
LETTER NOT TO DISQUALIFY REIT.—Section 857(a)
(relating to requirements applicable to real estate in-
vestment trusts) is amended by striking paragraph
(2) and by redesignating paragraph (3) as para-
graph (2).
(2) SHAREHOLDER DEMAND LETTER REQUIRE-
MENT; PENALTY.—Section 857 (relating to taxation
of real estate investment trusts and their bene-
ficiaries) is amended by redesignating subsection (f)
as subsection (g) and by inserting after subsection
(e) the following new subsection:
‘‘(f) REAL ESTATE INVESTMENT TRUSTS TO ASCER-
TAIN OWNERSHIP.—
‘‘(1) IN
GENERAL.—Each real estate invest-
ment trust shall each taxable year comply with regu-
lations prescribed by the Secretary for the purposes
of ascertaining the actual ownership of the outstand-
ing shares, or certificates of beneficial interest, of
such trust.
1216
‘‘(2) FAILURE TO COMPLY.—
‘‘(A) IN GENERAL.—If a real estate invest-
ment trust fails to comply with the require-
ments of paragraph (1) for a taxable year, such
trust shall pay (on notice and demand by the
Secretary and in the same manner as tax) a
penalty of $25,000.
‘‘(B) INTENTIONAL
DISREGARD.—If any
failure under paragraph (1) is due to inten-
tional disregard of the requirement under para-
graph (1), the penalty under subparagraph (A)
shall be $50,000.
‘‘(C) FAILURE
TO
COMPLY
AFTER
NO-
TICE.—The Secretary may require a real estate
investment trust to take such actions as the
Secretary determines appropriate to ascertain
actual ownership if the trust fails to meet the
requirements of paragraph (1). If the trust fails
to take such actions, the trust shall pay (on no-
tice and demand by the Secretary and in the
same manner as tax) an additional penalty
equal to the penalty determined under subpara-
graph (A) or (B), whichever is applicable.
‘‘(D) REASONABLE
CAUSE.—No penalty
shall be imposed under this paragraph with re-
1217
spect to any failure if it is shown that such fail-
ure is due to reasonable cause and not to willful
neglect.’’
(b) COMPLIANCE WITH CLOSELY HELD PROHIBI-
TION.—
(1) IN GENERAL.—Section 856 (defining real
estate investment trust) is amended by adding at the
end the following new subsection:
‘‘(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY
HELD TREATED AS MET IN CERTAIN CASES.—A corpora-
tion, trust, or association—
‘‘(1) which for a taxable year meets the require-
ments of section 857(f)(1), and
‘‘(2) which does not know, or exercising reason-
able diligence would not have known, whether the
entity failed to meet the requirement of subsection
(a)(6),
shall be treated as having met the requirement of sub-
section (a)(6) for the taxable year.’’
(2) CONFORMING AMENDMENT.—Paragraph (6)
of section 856(a) is amended by inserting ‘‘subject
to the provisions of subsection (k),’’ before ‘‘which
is not’’.
1218
SEC. 14532. DE MINIMIS RULE FOR TENANT SERVICES IN-
COME.
(a) IN GENERAL.—Paragraph (2) of section 856(d)
(defining rents from real property) is amended by striking
subparagraph (C) and the last sentence and inserting:
‘‘(C) any impermissible tenant service in-
come (as defined in paragraph (7)).’’
(b) IMPERMISSIBLE TENANT SERVICE INCOME.—
Section 856(d) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) IMPERMISSIBLE
TENANT
SERVICE
IN-
COME.—For purposes of paragraph (2)(C)—
‘‘(A) IN GENERAL.—The term ‘impermis-
sible tenant service income’ means, with respect
to any real or personal property, any amount
received or accrued directly or indirectly by the
real estate investment trust for—
‘‘(i) services furnished or rendered by
the trust to the tenants of such property,
or
‘‘(ii) managing or operating such
property.
‘‘(B) DISQUALIFICATION OF ALL AMOUNTS
WHERE MORE THAN DE MINIMIS AMOUNT.—If
the amount described in subparagraph (A) with
respect to a property for any taxable year ex-
1219
ceeds 1 percent of all amounts received or ac-
crued during such taxable year directly or indi-
rectly by the real estate investment trust with
respect to such property, the impermissible ten-
ant service income of the trust with respect to
the property shall include all such amounts.
‘‘(C) EXCEPTIONS.—For purposes of sub-
paragraph (A)—
‘‘(i) services furnished or rendered, or
management 
or 
operation 
provided,
through an independent contractor from
whom the trust itself does not derive or re-
ceive any income shall not be treated as
furnished, rendered, or provided by the
trust, and
‘‘(ii) there shall not be taken into ac-
count any amount which would be excluded
from unrelated business taxable income
under section 512(b)(3) if received by an
organization 
described 
in 
section
511(a)(2).
‘‘(D) AMOUNT ATTRIBUTABLE TO IMPER-
MISSIBLE SERVICES.—For purposes of subpara-
graph (A), the amount treated as received for
any service (or management or operation) shall
1220
not be less than 150 percent of the direct cost
of the trust in furnishing or rendering the serv-
ice (or providing the management or operation).
‘‘(E) 
COORDINATION
WITH
LIMITA-
TIONS.—For purposes of paragraphs (2) and
(3) of subsection (c), amounts described in sub-
paragraph (A) shall be included in the gross in-
come of the corporation, trust, or association.’’
SEC. 14533. ATTRIBUTION RULES APPLICABLE TO TENANT
OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership
of stock) is amended by adding at the end the following:
‘‘For purposes of paragraph (2)(B), section 318(a)(3)(A)
shall be applied under the preceding sentence in the case
of a partnership by taking into account only partners who
own (directly or indirectly) 25 percent or more of the cap-
ital interest, or the profits interest, in the partnership.’’
SEC. 14534. CREDIT FOR TAX PAID BY REIT ON RETAINED
CAPITAL GAINS.
(a) GENERAL RULE.—Paragraph (3) of section
857(b) (relating to capital gains) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph:
1221
‘‘(D) TREATMENT BY SHAREHOLDERS OF
UNDISTRIBUTED CAPITAL GAINS.—
‘‘(i) Every shareholder of a real estate
investment trust at the close of the trust’s
taxable year shall include, in computing his
long-term capital gains in his return for
his taxable year in which the last day of
the trust’s taxable year falls, such amount
as the trust shall designate in respect of
such shares in a written notice mailed to
its shareholders at any time prior to the
expiration of 60 days after the close of its
taxable year (or mailed to its shareholders
or holders of beneficial interests with its
annual report for the taxable year), but the
amount so includible by any shareholder
shall not exceed that part of the amount
subjected to tax in subparagraph (A)(ii)
which he would have received if all of such
amount had been distributed as capital
gain dividends by the trust to the holders
of such shares at the close of its taxable
year.
‘‘(ii) For purposes of this title, every
such shareholder shall be deemed to have
1222
paid, for his taxable year under clause (i),
the tax imposed by subparagraph (A)(ii)
on the amounts required by this subpara-
graph to be included in respect of such
shares in computing his long-term capital
gains for that year; and such shareholders
shall be allowed credit or refund as the
case may be, for the tax so deemed to have
been paid by him.
‘‘(iii) The adjusted basis of such
shares in the hands of the holder shall be
increased with respect to the amounts re-
quired by this subparagraph to be included
in computing his long-term capital gains,
by the difference between the amount of
such includible gains and the tax deemed
paid by such shareholder in respect of such
shares under clause (ii).
‘‘(iv) In the event of such designation,
the tax imposed by subparagraph (A)(ii)
shall be paid by the real estate investment
trust within 30 days after the close of its
taxable year.
‘‘(v) The earnings and profits of such
real estate investment trust, and the earn-
1223
ings and profits of any such shareholder
which is a corporation, shall be appro-
priately adjusted in accordance with regu-
lations prescribed by the Secretary.
‘‘(vi) As used in this subparagraph,
the terms ‘shares’ and ‘shareholders’ shall
include beneficial interests and holders of
beneficial interests, respectively.’’
(b) CONFORMING AMENDMENTS.—
(1) Clause (i) of section 857(b)(7)(A) is amend-
ed by striking ‘‘subparagraph (B)’’ and inserting
‘‘subparagraph (B) or (D)’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘by 65 percent’’ and all that
follows and inserting ‘‘by the difference between the
amount of such includible gains and the tax deemed
paid by such shareholder in respect of such shares
under clause (ii).’’
SEC. 14535. REPEAL OF 30-PERCENT GROSS INCOME RE-
QUIREMENT.
(a) GENERAL RULE.—Subsection (c) of section 856
(relating to limitations) is amended—
(1) by adding ‘‘and’’ at the end of paragraph
(3),
(2) by striking paragraphs (4) and (8), and
1224
(3) by redesignating paragraphs (5), (6), and
(7) as paragraphs (4), (5), and (6), respectively.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (G) of section 856(c)(5), as
redesignated by subsection (a), is amended by strik-
ing ‘‘and such agreement shall be treated as a secu-
rity for purposes of paragraph (4)(A)’’.
(2) Paragraph (5) of section 857(b) is amended
by striking ‘‘section 856(c)(7)’’ and inserting ‘‘sec-
tion 856(c)(6)’’.
(3) Subparagraph (C) of section 857(b)(6) is
amended by striking ‘‘section 856(c)(6)(B)’’ and in-
serting ‘‘section 856(c)(5)(B)’’.
SEC. 14536. MODIFICATION OF EARNINGS AND PROFITS
RULES FOR DETERMINING WHETHER REIT
HAS EARNINGS AND PROFITS FROM NON-
REIT YEAR.
Subsection (d) of section 857 is amended by adding
at the end the following new paragraph:
‘‘(3) DISTRIBUTIONS TO MEET REQUIREMENTS
OF SUBSECTION (a)(2)(B).—Any distribution which
is made in order to comply with the requirements of
subsection (a)(2)(B)—
‘‘(A) shall be treated for purposes of this
subsection and subsection (a)(2)(B) as made
1225
from the earliest accumulated earnings and
profits (other than earnings and profits to
which subsection (a)(2)(A) applies) rather than
the most recently accumulated earnings and
profits, and
‘‘(B) to the extent treated under subpara-
graph (A) as made from accumulated earnings
and profits, shall not be treated as a distribu-
tion for purposes of subsection (b)(2)(B).’’
SEC. 14537. TREATMENT OF FORECLOSURE PROPERTY.
(a) GRACE PERIODS.—
(1) INITIAL PERIOD.—Paragraph (2) of section
856(e) (relating to special rules for foreclosure prop-
erty) is amended by striking ‘‘on the date which is
2 years after the date the trust acquired such prop-
erty’’ and inserting ‘‘as of the close of the 3d taxable
year following the taxable year in which the trust ac-
quired such property’’.
(2) EXTENSION.—Paragraph (3) of section
856(e) is amended—
(A) by striking ‘‘or more extensions’’ and
inserting ‘‘extension’’, and
(B) by striking the last sentence and in-
serting: ‘‘Any such extension shall not extend
the grace period beyond the close of the 3d tax-
1226
able year following the last taxable year in the
period under paragraph (2).’’
(b) REVOCATION OF ELECTION.—Paragraph (5) of
section 856(e) is amended by striking the last sentence
and inserting: ‘‘A real estate investment trust may revoke
any such election for a taxable year by filing the revocation
(in the manner provided by the Secretary) on or before
the due date (including any extension of time) for filing
its return of tax under this chapter for the taxable year.
If a trust revokes an election for any property, no election
may be made by the trust under this paragraph with re-
spect to the property for any subsequent taxable year.’’
(c) CERTAIN ACTIVITIES NOT TO DISQUALIFY PROP-
ERTY.—Paragraph (4) of section 856(e) is amended by
adding at the end the following new flush sentence:
‘‘For purposes of subparagraph (C), property shall
not be treated as used in a trade or business by rea-
son of any activities of the real estate investment
trust with respect to such property to the extent
that such activities would not result in amounts re-
ceived or accrued, directly or indirectly, with respect
to such property being treated as other than rents
from real property.’’
1227
SEC. 14538. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(5)(G) (relating to treatment of certain
interest rate agreements), as redesignated by section
14535, is amended to read as follows:
‘‘(G) TREATMENT OF CERTAIN HEDGING
INSTRUMENTS.—Except to the extent provided
by regulations, any—
‘‘(i) payment to a real estate invest-
ment trust under an interest rate swap or
cap agreement, option, futures contract,
forward rate agreement, or any similar fi-
nancial instrument, entered into by the
trust in a transaction to reduce the inter-
est rate risks with respect to any indebted-
ness incurred or to be incurred by the
trust to acquire or carry real estate assets,
and
‘‘(ii) gain from the sale or other dis-
position of any such investment,
shall be treated as income qualifying under
paragraph (2).’’
SEC. 14539. EXCESS NONCASH INCOME.
Section 857(e)(2) (relating to determination of
amount of excess noncash income) is amended—
(1) by striking subparagraph (B),
1228
(2) by striking the period at the end of sub-
paragraph (C) and inserting a comma,
(3) by redesignating subparagraph (C) (as
amended by paragraph (2)) as subparagraph (B),
and
(4) by adding at the end the following new sub-
paragraphs:
‘‘(C) the amount (if any) by which—
‘‘(i) the amounts includible in gross
income with respect to instruments to
which section 860E(a) or 1272 applies, ex-
ceed
‘‘(ii) the amount of money and the
fair market value of other property re-
ceived during the taxable year under such
instruments, and
‘‘(D) amounts includible in income by rea-
son of cancellation of indebtedness.’’
SEC. 14540. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to cer-
tain sales not to constitute prohibited transactions) is
amended by striking ‘‘(other than foreclosure property)’’
in subclauses (I) and (II) and inserting ‘‘(other than sales
of foreclosure property or sales to which section 1033 ap-
plies)’’.
1229
SEC. 14541. SHARED APPRECIATION MORTGAGES.
(a) BANKRUPTCY SAFE HARBOR.—Section 856(j)
(relating to treatment of shared appreciation mortgages)
is amended by redesignating paragraph (4) as paragraph
(5) and by inserting after paragraph (3) the following new
paragraph:
‘‘(4) COORDINATION WITH 4-YEAR HOLDING PE-
RIOD.—
‘‘(A) IN GENERAL.—For purposes of sec-
tion 857(b)(6)(C), if a real estate investment
trust is treated as having sold secured property
under paragraph (3)(A), the trust shall be
treated as having held such property for at
least 4 years if—
‘‘(i) the secured property is sold or
otherwise disposed of pursuant to a case
under title 11 of the United States Code,
‘‘(ii) the seller is under the jurisdic-
tion of the court in such case, and
‘‘(iii) the disposition is required by the
court or is pursuant to a plan approved by
the court.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if—
1230
‘‘(i) the secured property was acquired
by the trust with the intent to evict or
foreclose, or
‘‘(ii) the trust knew or had reason to
know that default on the obligation de-
scribed in paragraph (5)(A) would occur.’’
(b) CLARIFICATION OF DEFINITION OF SHARED AP-
PRECIATION
PROVISION.—Clause 
(ii) 
of 
section
856(j)(5)(A) is amended by inserting before the period ‘‘or
appreciation in value as of any specified date’’.
SEC. 14542. WHOLLY OWNED SUBSIDIARIES.
Section 856(i)(2) (defining qualified REIT subsidi-
ary) is amended by striking ‘‘at all times during the period
such corporation was in existence’’.
SEC. 14543. EFFECTIVE DATE.
The amendments made by this part shall apply to
taxable years beginning after the date of the enactment
of this Act.
PART IV—ACCOUNTING PROVISIONS
SEC. 14551. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CER-
TAIN CASES.—Subsection (b) of section 460 (relating to
percentage of completion method) is amended by adding
at the end the following new paragraph:
1231
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER
COMPLETION
OF
CONTRACT.—Para-
graph (1)(B) shall not apply with respect to
any taxable year (beginning after the taxable
year in which the contract is completed) if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
such taxable year, is within
‘‘(ii) 10 percent of the cumulative
look-back taxable income (or loss) under
the contract as of the close of the most re-
cent taxable year to which paragraph
(1)(B) applied (or would have applied but
for subparagraph (B)).
‘‘(B) DE MINIMIS DISCREPANCIES.—Para-
graph (1)(B) shall not apply in any case to
which it would otherwise apply if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
each prior contract year, is within
‘‘(ii) 10 percent of the cumulative
look-back income (or loss) under the con-
1232
tract as of the close of such prior contract
year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT
YEAR.—The term
‘contract year’ means any taxable year for
which income is taken into account under
the contract.
‘‘(ii) LOOK-BACK INCOME OR LOSS.—
The look-back income (or loss) is the
amount which would be the taxable income
(or loss) under the contract if the alloca-
tion method set forth in paragraph (2)(A)
were used in determining taxable income.
‘‘(iii) DISCOUNTING
NOT
APPLICA-
BLE.—The amounts taken into account
after the completion of the contract shall
be determined without regard to any dis-
counting under the 2nd sentence of para-
graph (2).
‘‘(D) CONTRACTS TO WHICH PARAGRAPH
APPLIES.—This paragraph shall only apply if
the taxpayer makes an election under this sub-
paragraph. Unless revoked with the consent of
the Secretary, such an election shall apply to all
1233
long-term contracts completed during the tax-
able year for which election is made or during
any subsequent taxable year.’’
(b) MODIFICATION OF INTEREST RATE.—
(1) IN GENERAL.—Subparagraph (C) of section
460(b)(2) is amended by striking ‘‘the overpayment
rate established by section 6621’’ and inserting ‘‘the
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED
OVERPAYMENT
RATE.—Sub-
section (b) of section 460 is amended by adding at
the end the following new paragraph:
‘‘(7) ADJUSTED OVERPAYMENT RATE.—
‘‘(A) IN GENERAL.—The adjusted overpay-
ment rate for any interest accrual period is the
overpayment rate in effect under section 6621
for the calendar quarter in which such interest
accrual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘inter-
est accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
1234
‘‘(ii) ending on the return due date
for the following taxable year.
For purposes of the preceding sentence, the
term ‘return due date’ means the date pre-
scribed for filing the return of the tax imposed
by this chapter (determined without regard to
extensions).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to contracts completed in taxable
years ending after the date of the enactment of this Act.
SEC. 14552. APPLICATION OF MARK TO MARKET ACCOUNT-
ING METHOD TO TRADERS IN SECURITIES.
(a) IN GENERAL.—Section 475 (relating to mark to
market accounting method for dealers in securities) is
amended by redesignating subsection (e) as subsection (f)
and by inserting after subsection (d) the following new
subsection:
‘‘(e) AUTHORITY TO EXTEND METHOD TO TRADERS
IN SECURITIES.—
‘‘(1) IN GENERAL.—A trader in securities may
elect to have the provisions of this section (other
than subsection (d)(3)) apply to securities held by
the trader. Such election may be made only with the
consent of the Secretary.
1235
‘‘(2) TRADER IN SECURITIES.—For purposes of
this subsection, the term ‘trader in securities’ means
a taxpayer who is regularly engaged in trading secu-
rities.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending on and
after December 31, 1995.
SEC. 14553. MODIFICATION OF RULING AMOUNTS FOR NU-
CLEAR DECOMMISSIONING COSTS.
(a) IN GENERAL.—Section 468A(d) (relating to rul-
ing amount) is amended by adding at the end the following
new paragraph:
‘‘(4) NONSUBSTANTIAL MODIFICATIONS.—
A taxpayer may modify a schedule of ruling
amounts under paragraph (1) without a review
under paragraph (3) if such modification does
not substantially modify the ruling amount. The
taxpayer shall notify the Secretary of any such
modification.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to modifications after the date of
the enactment of this Act.
1236
SEC. 14554. ELECTION OF ALTERNATIVE TAXABLE YEARS
BY PARTNERSHIPS AND S CORPORATIONS.
(a) REPEAL OF LIMITATION ON WHAT TAXABLE
YEAR MAY BE ELECTED.—
(1) IN GENERAL.—Section 444(b) (relating to
limitations on taxable years which may be elected) is
amended by adding at the end the following new
paragraph:
‘‘(5) LIMITATIONS NOT TO APPLY TO CERTAIN
PARTNERSHIPS AND S CORPORATIONS.—
‘‘(A) IN GENERAL.—In the case of a part-
nership or an S corporation, this subsection
shall not apply to an election under subsection
(a) for a taxable year beginning after December
31, 1996.
‘‘(B) SPECIAL RULE FOR EXISTING ELEC-
TIONS.—
‘‘(i) IN GENERAL.—If a partnership
or S corporation has an election in effect
for its last taxable year beginning before
January 1, 1997, the partnership or S cor-
poration may elect to have this paragraph
apply beginning with any taxable year be-
ginning after December 31, 1996. Such an
election may be made without the consent
of the Secretary and shall not be treated
1237
as a termination of an election for pur-
poses of subsection (d).
‘‘(ii) TREATMENT OF REQUIRED PAY-
MENTS.—A partnership or S corporation
making an election under clause (i) may
elect to have its net required payment bal-
ance (within the meaning of section
7519(e)(4))—
‘‘(I) credited against its first esti-
mated tax payment under section
6654A for its first full taxable year
for which such section applies, or
‘‘(II) refunded to it at the time
provided in section 7519(c)(3).’’
(2) EFFECT OF ELECTION.—Paragraph (1) of
section 444(c) (relating to effect of election) is
amended to read as follows:
‘‘(1) in the case of a partnership or S corpora-
tion, such entity shall—
‘‘(A) make the payments required by sec-
tion 7519, or
‘‘(B) if subsection (b)(5) applies to the
election, make the estimated tax payments de-
scribed in section 6654A, and’’.
1238
(b) ESTIMATED TAX
FOR PARTNERSHIPS
AND S
CORPORATIONS MAKING TAXABLE YEAR ELECTIONS.—
Part I of subchapter A of chapter 68 (relating to additions
to tax and additional amounts) is amended by inserting
after section 6654 the following new section:
‘‘SEC. 6654A. FAILURE BY ELECTING PARTNERSHIP OR S
CORPORATION TO PAY ESTIMATED TAX.
‘‘(a) PENALTY.—Except as otherwise provided in this
section, in the case of a partnership or S corporation with
respect to which an election to which section 444(b)(5)
applies is in effect (hereafter referred to as ‘the entity’),
there is hereby imposed a penalty for each quarter for
which there is an underpayment in an amount determined
by applying—
‘‘(1) the underpayment rate established under
section 6621,
‘‘(2) to the amount of the underpayment,
‘‘(3) for the period of the underpayment.
‘‘(b) AMOUNT
OF
UNDERPAYMENT; PERIOD
OF
UNDERPAYMENT.—For purposes of subsection (a)—
‘‘(1) 
AMOUNT.—The 
amount 
of 
the
underpayment shall be the excess of—
‘‘(A) the required installment, over
1239
‘‘(B) the amount (if any) of the install-
ment paid on or before the due date for the in-
stallment.
‘‘(2) PERIOD OF UNDERPAYMENT.—The period
of the underpayment shall run from the due date for
the installment to the earlier of—
‘‘(A) the first April 15 more than 3
months after the close of the taxable year, or
‘‘(B) with respect to any portion of the
underpayment, the date on which such portion
is paid.
‘‘(3) ORDER
OF
CREDITING
PAYMENTS.—For
purposes of paragraph (2)(B), a payment of esti-
mated tax shall be credited against unpaid required
installments in the order in which the installments
are required to be paid.
‘‘(c) REQUIRED INSTALLMENTS.—For purposes of
this section—
‘‘(1) NUMBER
AND
DATES.—An entity shall
make 4 required installments which shall be due on
the 15th day of the 3d, 5th, 8th, and 12th months
of the taxable year.
‘‘(2) NO REQUIRED PAYMENTS WHERE ENTI-
TY’S
LIABILITY
IS
LESS
THAN
$5,000.—An entity
shall not be required to make estimated payments
1240
under this section for any taxable year for which
(but for this paragraph) its aggregate liability under
this section would be less than $5,000.
‘‘(3) AMOUNT.—The amount of each required
installment shall be 25 percent of the product of—
‘‘(A) the entity’s applicable income deter-
mined under its applicable method for the quar-
ter for which the installment is being made, and
‘‘(B) the applicable rate.
‘‘(4) APPLICABLE RATE.—
‘‘(A) IN GENERAL.—The term ‘applicable
rate’ means 34 percent (39.6 percent in the
case of an entity described in subparagraph
(B)).
‘‘(B) HIGH AVERAGE INCOME ENTITY.—
‘‘(i) IN GENERAL.—An entity is de-
scribed in this subparagraph if—
‘‘(I) the average applicable in-
come of 2-percent owners of the entity
for its base year is $250,000 or more,
or
‘‘(II) in the case of a partner-
ship, its applicable income for the
base year is $10,000,000 or more.
1241
An entity shall not be treated as so de-
scribed if it has no base year.
‘‘(ii) 2-PERCENT OWNER.—The term
‘2-percent owner’ means—
‘‘(I) in the case of a partnership,
any person who owns (or is considered
as owning within the meaning of sec-
tion 318) on any day during the base
year more than 2 percent of the cap-
ital interests of the partnerships, and
‘‘(II) in the case of an S corpora-
tion, a 2-percent shareholder (as de-
fined in section 1372(b)).
‘‘(5) ADJUSTMENTS
UNDER
ANNUALIZED
IN-
COME METHOD.—An entity using the annualized in-
come method shall adjust its required installment for
any quarter to reflect any change in its required in-
stallment for any prior quarter in the taxable year
which would have been required if the annualized
applicable income for the current quarter had been
used for the prior quarter.
‘‘(d) APPLICABLE METHOD.—For purposes of this
section—
1242
‘‘(1) IN GENERAL.—An entity shall determine
its applicable income on the basis of the 100-percent
method.
‘‘(2) EXCEPTIONS.—
‘‘(A) ELECTIONS.—An entity may deter-
mine its applicable income—
‘‘(i) for all quarters in a taxable year
on the basis of the 110-percent method if
it elects such method on or before the due
date for the first quarterly installment, or
‘‘(ii) for any quarter in a taxable year
on the basis of the annualized income
method if it elects such method on or be-
fore the due date for the quarterly install-
ment for such quarter.
An election under clause (ii) shall apply for the
quarter for which made and all subsequent
quarters during the taxable year.
‘‘(B) LARGE INCREASE IN INCOME.—If an
entity’s applicable income for the taxable year
exceeds its applicable income for the base year
by more than $750,000, the entity may not use
the 110-percent method for the taxable year.
‘‘(3) METHODS.—
1243
‘‘(A) 100-PERCENT METHOD.—Under the
100-percent method, an entity’s applicable in-
come shall be its applicable income for the tax-
able year.
‘‘(B) 110-PERCENT METHOD.—Under the
110-percent method, an entity’s applicable in-
come shall be 110 percent of its applicable in-
come for the base year.
‘‘(C) ANNUALIZED
INCOME
METHOD.—
Under the annualized income method, the enti-
ty’s applicable income for purposes of determin-
ing the required installment for any quarter
shall be an amount equal to the product of—
‘‘(i) its applicable income for the pe-
riod consisting of the months in the tax-
able year ending before the due date for
the quarter, and
‘‘(ii) a percentage equal to 12 divided
by the number of such months.
‘‘(e) APPLICABLE INCOME.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the applicable income for any taxable year shall
be the net amount (not less than zero) determined—
‘‘(A) by taking into account the entity’s
items in the manner and with the exceptions
1244
provided in section 703(a) or 1363(b), as the
case may be, and
‘‘(B) by making the further adjustments
provided in paragraphs (2), (3), (4), and (5) of
this subsection.
‘‘(2) CERTAIN DEDUCTIONS ALLOWED.—In de-
termining applicable income, the following amounts
shall be allowed as deductions:
‘‘(A) The deduction allowable under section
170 for charitable contributions of the entity.
‘‘(B) The deduction allowable under sec-
tion 901 for taxes described in section 901(c)
paid or accrued to foreign countries or posses-
sions of the United States.
‘‘(3) CERTAIN
LIMITATIONS
DISREGARDED.—
For purposes of paragraphs (1) and (2), any limita-
tion on the amount of any item which may be taken
into account for purposes of computing the taxable
income of a partner or shareholder shall be dis-
regarded.
‘‘(4) GUARANTEED
PAYMENTS
TO
PARTNERS
NOT DEDUCTED.—In determining applicable income,
a guaranteed payment to a partner shall not be
treated as an item of deduction.
1245
‘‘(5) DISPROPORTIONATE
APPLICABLE
PAY-
MENTS DURING DEFERRAL PERIOD.—
‘‘(A) DEDUCTION NOT ALLOWED.—In de-
termining applicable income, no deduction shall
be allowed for disproportionate deferral period
applicable payments.
‘‘(B) DISPROPORTIONATE
DEFERRAL
PE-
RIOD APPLICABLE PAYMENTS.—For purposes of
subparagraph (A), the term ‘disproportionate
deferral period applicable payments’ means the
excess (if any) of—
‘‘(i) the product of the deferral ratio
and the aggregate applicable payments
made to owners during the entity’s entire
taxable year, over
‘‘(ii) the aggregate applicable pay-
ments made to owners during the deferral
period.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) the term ‘applicable payments’
has the meaning given to such term by sec-
tion 7519(d)(3), except that in the case of
an S corporation only payments to 2-per-
1246
cent shareholders (as defined in section
1372(b)) shall be taken into account,
‘‘(ii) the term ‘deferral period’ means
the months in the period beginning with
the first day of the entity’s taxable year
and ending on December 31, and
‘‘(iii) the term ‘deferral ratio’ means
the ratio which the number of months in
the deferral period bears to the total num-
ber of months in the taxable year.
‘‘(6) SPECIAL
RULE
WHERE
C
CORPORATION
FOR
BASE
YEAR.—In applying the 110-percent
method, if an S corporation was a C corporation for
the base year, the S corporation’s applicable income
shall be the taxable income of the C corporation for
the base year.
‘‘(f) COORDINATION BETWEEN ENTITY AND OWN-
ERS.—
‘‘(1) TREATMENT OF PAYMENTS OF REQUIRED
INSTALLMENTS.—
‘‘(A) IN GENERAL.—For purposes of this
title, an owner in an entity shall be treated as
having paid, for the owner’s first taxable year
ending with or after the close of the entity’s
taxable year, an amount of tax imposed by sec-
1247
tion 1 equal to the owner’s allocable share of
the entity’s payments of required installments
under this section (determined without regard
to excess payments described in subparagraph
(C)(ii)(II) or amounts the entity is treated as
paying under paragraph (2)).
‘‘(B) COORDINATION WITH OWNER’S ESTI-
MATED TAX.—For purposes of section 6654, an
individual shall be treated as having paid on the
due date for the estimated tax installment for
each quarter of the individual’s taxable year de-
scribed in subparagraph (A)—
‘‘(i) except as provided in clause (ii),
25 percent of the tax deemed paid under
subparagraph (A), or
‘‘(ii) if the annualized income method
was used by the entity for any quarter of
the entity’s taxable year described in sub-
paragraph (A), an amount for the cor-
responding quarter in the individuals’s tax-
able year equal to the portion of such tax
attributable to the individual’s allocable
share of the entity’s applicable income for
the entity’s quarter.
1248
In no event shall the aggregate estimated tax
payments treated as paid under this subpara-
graph exceed the amount of tax determined
under subparagraph (A).
‘‘(C) AMOUNTS DETERMINED ON BASIS OF
RETURN.—
‘‘(i) IN GENERAL.—The determination
of the amount of tax payments under sub-
paragraph (A) shall be made on the basis
of amounts shown on the entity’s return
for the taxable year.
‘‘(ii) 
RECONCILIATION
OF
DIF-
FERENCES.—If, as of the first April 15
more than 3 months after the close of the
entity’s 
taxable 
year, 
the 
aggregate
amounts paid as required installments
under this section are less or more than
the aggregate amounts described in clause
(i) shown on the entity’s return of tax for
the taxable year, then—
‘‘(I) subject to paragraph (2),
there is hereby imposed on the entity
under chapter 1 an additional tax
equal to the amount of the shortfall,
1249
the due date for which is such April
15, or
‘‘(II) the entity shall be treated
as having made a payment of tax
under chapter 1 on such April 15 in
an amount equal to the excess.
‘‘(2) TREATMENT OF PAYMENTS BY OWNERS.—
For purposes of subsection (b)(2)(B) and paragraph
(1)(C), an entity shall be treated as paying any por-
tion of an underpayment attributable to an owner’s
allocable share of applicable income at the time the
tax imposed by chapter 1 on the owner with respect
to such income is paid.
‘‘(3) ALLOCABLE SHARE.—For purposes of this
subsection—
‘‘(A) IN GENERAL.—An owner’s allocable
share of an item for a taxable year shall be an
amount which bears the same ratio to the
amount of such item as the owner’s applicable
income for the taxable year bears to the sum of
the applicable incomes of all owners. For pur-
poses of this subparagraph, applicable income
of an owner shall be determined in the same
manner as subsection (e).
1250
‘‘(B) APPLICATION OTHER THAN ON TAX-
ABLE YEAR BASIS.—If—
‘‘(i) the entity elects the annualized
income method for any quarter, subpara-
graph (A) shall be applied on a quarter-by-
quarter basis, or
‘‘(ii) there is an interim closing of the
books of an entity under this title, sub-
paragraph (A) shall be applied separately
for the periods before and after the clos-
ing.
‘‘(g) SPECIAL RULES FOR SHORT YEAR CREATED BY
ELECTION.—
‘‘(1) ADDITIONAL REQUIRED INSTALLMENT.—
If, by reason of an election under this section, an en-
tity has a taxable year of less than 12 months, the
entity shall make a required installment under this
section for such taxable year—
‘‘(A) which shall be in an amount equal to
the applicable rate multiplied by the lesser of—
‘‘(i) the entity’s applicable income for
such taxable year as determined under
subsection (e), or
‘‘(ii) 110 percent of the entity’s appli-
cable income for the base year (as so de-
1251
termined but ratably reduced to reflect the
period of such taxable year), and
‘‘(B) the due date for which shall be the
last day for which an election under this section
could be made for the taxable year.
‘‘(2) TREATMENT OF LOSSES.—Any net operat-
ing loss arising in the taxable year described in
paragraph (1) shall be treated as arising one-third
in such taxable year and each of the 2 following tax-
able years. This paragraph shall not apply to an en-
tity not in existence before such taxable year unless
more than one-half of the equity interests in the en-
tity are held by persons who owned another entity
carrying on the same business before such taxable
year.
‘‘(h) OTHER DEFINITIONS AND SPECIAL RULES.—
For purpose of this section—
‘‘(1) BASE YEAR.—The term ‘base year’ means
the most recent preceding taxable year containing 12
months.
‘‘(2) EQUITY INTEREST.—The term ‘equity in-
terest’ means—
‘‘(A) in the case of a partnership, the cap-
ital interests, and
1252
‘‘(B) in the case of an S corporation, the
shares of stock in the corporation (whether vot-
ing or nonvoting).
‘‘(3) OWNER.—The term ‘owner’ means a part-
ner in a partnership or a shareholder in an S cor-
poration, whichever is applicable.
‘‘(4) COMMON CONTROL.—
‘‘(A) IN GENERAL.—For purposes of sub-
sections (c)(2), (c)(4)(B), and (d)(2)(B), enti-
ties under common control shall be treated as
1 entity.
‘‘(B) COMMON
CONTROL.—Entities shall
be treated as under common control under sub-
paragraph (A) if they are treated as a single
employee under subsection (a) or (b) of section
52.
‘‘(5) WAIVER.—No penalty shall be imposed
under 
subsection 
(a) 
with 
respect 
to 
any
underpayment to the extent the Secretary deter-
mines that by reason of casualty, disaster, or other
unusual circumstances the imposition of the penalty
would be against equity and good conscience.’’
(c) MODIFICATION OF ELECTIONS.—
(1) TIME FOR MAKING.—Paragraph (1) of sec-
tion 444(d) is amended by adding at the end the fol-
1253
lowing new sentence: ‘‘Such election may be made at
any time on or before the 15th day of the 3d month
of the first taxable year of 12 months under the
election.’’
(2) TERMINATIONS.—Paragraph (2) of section
444(d) is amended by striking subparagraph (B)
and inserting:
‘‘(B) TERMINATIONS.—
‘‘(i) REVOCATION.—An election under
subsection (a) may be terminated by rev-
ocation but only if owners of more than
one-half of the equity interests in the en-
tity on the date of the revocation consent
to it.
‘‘(ii) ENTITY TERMINATIONS.—In the
case of a partnership or S corporation, an
election under subsection (a) terminates
when the partnership terminates under
section 708(b)(1) or the corporation ceases
to be an S corporation.
‘‘(C) SUBSEQUENT
ELECTIONS.—If an
election under subsection (a) has been termi-
nated, no such election may be made with re-
spect to such entity or any successor entity for
any taxable year before its 5th taxable year be-
1254
ginning after the 1st taxable year for which the
termination was effective, unless the Secretary
consents to the election.’’
(d) CONFORMING AMENDMENTS.—
(1) Section 6665(b) is amended—
(A) by inserting ‘‘6654A,’’ after ‘‘6654,’’,
and
(B) by striking ‘‘6654 or’’ and inserting
‘‘6654, 6654A, or’’.
(2) The table of sections for part I of sub-
chapter A of chapter 68 is amended by inserting
after the item relating to section 6654 the following
new item:
‘‘Sec. 6654A. Failure by electing partnership or S corporation to
pay estimated tax.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
SEC. 14555. SPECIAL RULE FOR CROP INSURANCE PRO-
CEEDS AND DISASTER PAYMENTS.
(a) IN GENERAL.—Section 451(d) of the Internal
Revenue Code of 1986 (relating to special rule for crop
insurance proceeds and disaster payments) is amended to
read as follows:
‘‘(d) SPECIAL RULE FOR CROP INSURANCE PRO-
CEEDS AND DISASTER PAYMENTS.—
1255
‘‘(1) GENERAL RULE.—In the case of any pay-
ment described in paragraph (2), a taxpayer report-
ing on the cash receipts and disbursements method
of accounting—
‘‘(A) may elect to treat any such payment
received in the taxable year of destruction or
damage of crops as having been received in the
following taxable year if the taxpayer estab-
lishes that, under the taxpayer’s practice, in-
come from such crops involved would have been
reported in a following taxable year, or
‘‘(B) may elect to treat any such payment
received in a taxable year following the taxable
year of the destruction or damage of crops as
having been received in the taxable year of de-
struction or damage, if the taxpayer establishes
that, under the taxpayer’s practice, income
from such crops involved would have been re-
ported in the taxable year of destruction or
damage.
‘‘(2) PAYMENTS DESCRIBED.—For purposes of
this subsection, a payment is described in this para-
graph if such payment—
‘‘(A) is insurance proceeds received on ac-
count of destruction or damage to crops, or
1256
‘‘(B) is disaster assistance received under
any Federal law as a result of—
‘‘(i) destruction or damage to crops
caused by drought, flood, or other natural
disaster, or
‘‘(ii) inability to plant crops because
of such a disaster.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) applies to payments received after Decem-
ber 31, 1995, as a result of destruction or damage occur-
ring after such date.
PART V—TAX-EXEMPT BOND PROVISIONS
SEC. 14561. REPEAL OF $100,000 LIMITATION ON UNSPENT
PROCEEDS UNDER 1-YEAR EXCEPTION FROM
REBATE.
Subclause (I) of section 148(f)(4)(B)(ii) (relating to
additional period for certain bonds) is amended by striking
‘‘the lesser of 5 percent of the proceeds of the issue or
$100,000’’ and inserting ‘‘5 percent of the proceeds of the
issue’’.
SEC. 14562. EXCEPTION FROM REBATE FOR EARNINGS ON
BONA FIDE DEBT SERVICE FUND UNDER
CONSTRUCTION BOND RULES.
Subparagraph (C) of section 148(f)(4) is amended by
adding at the end the following new clause:
1257
‘‘(xvii) TREATMENT
OF
BONA
FIDE
DEBT
SERVICE
FUNDS.—If the spending
requirements of clause (ii) are met with re-
spect to the available construction proceeds
of a construction issue, then paragraph (2)
shall not apply to earnings on a bona fide
debt service fund for such issue.’’
SEC. 14563. REPEAL OF DEBT SERVICE-BASED LIMITATION
ON INVESTMENT IN CERTAIN NONPURPOSE
INVESTMENTS.
Subsection (d) of section 148 (relating to special
rules for reasonably required reserve or replacement fund)
is amended by striking paragraph (3).
SEC. 14564. REPEAL OF EXPIRED PROVISIONS.
(a) Paragraph (2) of section 148(c) is amended by
striking subparagraph (B) and by redesignating subpara-
graphs (C), (D), and (E) as subparagraphs (B), (C), and
(D), respectively.
(b) Paragraph (4) of section 148(f) is amended by
striking subparagraph (E).
SEC. 14565. EFFECTIVE DATES.
The amendments made by this part shall apply to
bonds issued after the date of the enactment of this Act.
1258
PART VI—INSURANCE PROVISIONS
SEC. 14571. TREATMENT OF CERTAIN INSURANCE CON-
TRACTS ON RETIRED LIVES.
(a) GENERAL RULE.—
(1) Paragraph (2) of section 817(d) (defining
variable contract) is amended by striking ‘‘or’’ at the
end of subparagraph (A), by striking ‘‘and’’ at the
end of subparagraph (B) and inserting ‘‘or’’, and by
inserting after subparagraph (B) the following new
subparagraph:
‘‘(C) provides for funding of insurance on
retired lives as described in section 807(c)(6),
and’’.
(2) Paragraph (3) of section 817(d) is amended
by striking ‘‘or’’ at the end of subparagraph (A), by
striking the period at the end of subparagraph (B)
and inserting ‘‘, or’’, and by inserting after subpara-
graph (B) the following new subparagraph:
‘‘(C) in the case of funds held under a con-
tract described in paragraph (2)(C), the
amounts paid in, or the amounts paid out, re-
flect the investment return and the market
value of the segregated asset account.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
1259
SEC. 14572. TREATMENT OF MODIFIED GUARANTEED CON-
TRACTS.
(a) GENERAL RULE.—Subpart E of part I of sub-
chapter L of chapter 1 (relating to definitions and special
rules) is amended by inserting after section 817 the follow-
ing new section:
‘‘SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED
CONTRACTS.
‘‘(a) COMPUTATION OF RESERVES.—In the case of
a modified guaranteed contract, clause (ii) of section
807(e)(1)(A) shall not apply.
‘‘(b) SEGREGATED ASSETS UNDER MODIFIED GUAR-
ANTEED CONTRACTS MARKED TO MARKET.—
‘‘(1) IN GENERAL.—In the case of any life in-
surance company, for purposes of this subtitle—
‘‘(A) Any gain or loss with respect to a
segregated asset shall be treated as ordinary in-
come or loss, as the case may be.
‘‘(B) If any segregated asset is held by
such company as of the close of any taxable
year—
‘‘(i) such company shall recognize
gain or loss as if such asset were sold for
its fair market value on the last business
day of such taxable year, and
1260
‘‘(ii) any such gain or loss shall be
taken into account for such taxable year.
Proper adjustment shall be made in the amount
of any gain or loss subsequently realized for
gain or loss taken into account under the pre-
ceding sentence. The Secretary may provide by
regulations for the application of this subpara-
graph at times other than the times provided in
this subparagraph.
‘‘(2) SEGREGATED
ASSET.—For purposes of
paragraph (1), the term ‘segregated asset’ means
any asset held as part of a segregated account re-
ferred to in subsection (d)(1) under a modified guar-
anteed contract.
‘‘(c) SPECIAL RULE IN COMPUTING LIFE INSURANCE
RESERVES.—For 
purposes 
of 
applying 
section
816(b)(1)(A) to any modified guaranteed contract, an as-
sumed rate of interest shall include a rate of interest de-
termined, from time to time, with reference to a market
rate of interest.
‘‘(d) MODIFIED
GUARANTEED
CONTRACT
DE-
FINED.—For purposes of this section, the term ‘modified
guaranteed contract’ means a contract not described in
section 817—
1261
‘‘(1) all or part of the amounts received under
which are allocated to an account which, pursuant to
State law or regulation, is segregated from the gen-
eral asset accounts of the company and is valued
from time to time with reference to market values,
‘‘(2) which—
‘‘(A) provides for the payment of annuities,
‘‘(B) is a life insurance contract, or
‘‘(C) is a pension plan contract which is
not a life, accident, or health, property, cas-
ualty, or liability contract,
‘‘(3) for which reserves are valued at market for
annual statement purposes, and
‘‘(4) which provides for a net surrender value or
a policyholder’s fund (as defined in section
807(e)(1)).
If only a portion of a contract is not described in section
817, such portion shall be treated for purposes of this sec-
tion as a separate contract.
‘‘(e) REGULATIONS.—The Secretary may prescribe
regulations—
‘‘(1) to provide for the treatment of market
value adjustments under sections 72, 7702, 7702A,
and 807(e)(1)(B),
1262
‘‘(2) to determine the interest rates applicable
under sections 807(c)(3), 807(d)(2)(B), and 812
with respect to a modified guaranteed contract an-
nually, in a manner appropriate for modified guar-
anteed contracts and, to the extent appropriate for
such a contract, to modify or waive the applicability
of section 811(d),
‘‘(3) to provide rules to limit ordinary gain or
loss treatment to assets constituting reserves for
modified guaranteed contracts (and not other assets)
of the company,
‘‘(4) to provide appropriate treatment of trans-
fers of assets to and from the segregated account,
and
‘‘(5) as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for subpart E of part I of subchapter L of chapter 1 is
amended by inserting after the item relating to section
817 the following new item:
‘‘Sec. 817A. Special rules for modified guaranteed contracts.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1995.
1263
(2) TREATMENT
OF
NET
ADJUSTMENTS.—In
the case of any taxpayer required by the amend-
ments made by this section to change its calculation
of reserves to take into account market value adjust-
ments and to mark segregated assets to market for
any taxable year—
(A) such changes shall be treated as a
change in method of accounting initiated by the
taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the adjustments required by reason of
section 481 of the Internal Revenue Code of
1986 shall be taken into account as ordinary in-
come or loss by the taxpayer for the taxpayer’s
first taxable year beginning after December 31,
1995.
SEC. 14573. 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
computing earnings and profits) is amended by adding at
the end the following new sentence: ‘‘In the case of any
insurance company taxable under section 831(b), this
1264
clause shall not apply to any amount not described in sec-
tion 834(b).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1995.
PART VII—OTHER PROVISIONS
SEC. 14581. CLOSING OF PARTNERSHIP TAXABLE YEAR
WITH RESPECT TO DECEASED PARTNER, ETC.
(a) GENERAL RULE.—Subparagraph (A) of section
706(c)(2) (relating to disposition of entire interest) is
amended to read as follows:
‘‘(A) DISPOSITION
OF
ENTIRE
INTER-
EST.—The taxable year of a partnership shall
close with respect to a partner whose entire in-
terest in the partnership terminates (whether
by reason of death, liquidation, or otherwise).’’
(b) CLERICAL AMENDMENT.—The paragraph head-
ing for paragraph (2) of section 706(c) is amended to read
as follows:
‘‘(2) TREATMENT OF DISPOSITIONS.—’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years begin-
ning after December 31, 1995.
1265
SEC. 14582. CREDIT FOR SOCIAL SECURITY TAXES PAID
WITH RESPECT TO EMPLOYEE CASH TIPS.
(a) REPORTING REQUIREMENT NOT CONSIDERED.—
Subparagraph (A) of section 45B(b)(1) (relating to excess
employer social security tax) is amended by inserting
‘‘(without regard to whether such tips are reported under
section 6053)’’ after ‘‘section 3121(q)’’.
(b) TAXES PAID.—Subsection (d) of section 13443
of the Revenue Reconciliation Act of 1993 is amended by
inserting ‘‘, with respect to services performed before, on,
or after such date’’ after ‘‘1993’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by, and the provisions of, section 13443 of
the Revenue Reconciliation Act of 1993.
SEC. 14583. DUE DATE FOR FIRST QUARTER ESTIMATED
TAX PAYMENTS BY PRIVATE FOUNDATIONS.
(a) IN GENERAL.—Paragraph (3) of section 6655(g)
is amended by inserting after subparagraph (C) the follow-
ing new subparagraph:
‘‘(D) In the case of any private foundation,
subsection (c)(2) shall be applied by substitut-
ing ‘May 15’ for ‘April 15 ’ ’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1995.
1266
SEC. 14584. TREATMENT OF DUES PAID TO AGRICULTURAL
OR HORTICULTURAL ORGANIZATIONS.
(a) GENERAL RULE.—Section 512 (defining unre-
lated business taxable income) is amended by adding at
the end thereof the following new subsection:
‘‘(d) TREATMENT OF DUES OF AGRICULTURAL OR
HORTICULTURAL ORGANIZATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) an agricultural or horticultural orga-
nization described in section 501(c)(5) requires
annual dues to be paid in order to be a member
of such organization, and
‘‘(B) the amount of such required annual
dues does not exceed $100,
in no event shall any portion of such dues be treated
as derived by such organization from an unrelated
trade or business by reason of any benefits or privi-
leges to which members of such organization are en-
titled.
‘‘(2) INDEXATION
OF
$100
AMOUNT.—In the
case of any taxable year beginning in a calendar
year after 1995, the $100 amount in paragraph (1)
shall be increased by an amount equal to—
‘‘(A) $100, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
1267
year in which the taxable year begins, by sub-
stituting ‘calendar year 1994’ for ‘calendar year
1992’ in subparagraph (B) thereof.
‘‘(3) DUES.—For purposes of this subsection,
the term ‘dues’ includes any payment required to be
made in order to be recognized by the organization
as a member of the organization.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1994.
Subtitle F—Estates and Trusts
PART I—INCOME TAX PROVISIONS
SEC. 14601. CERTAIN REVOCABLE TRUSTS TREATED AS
PART OF ESTATE.
(a) IN GENERAL.—Subpart A of part I of subchapter
J (relating to estates, trusts, beneficiaries, and decedents)
is amended by adding at the end the following new section:
‘‘SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS
PART OF ESTATE.
‘‘(a) GENERAL RULE.—For purposes of this subtitle,
if both the executor of an estate and the trustee of a quali-
fied revocable trust elect the treatment provided in this
section, such trust shall be treated and taxed as part of
such estate (and not as a separate trust) for all taxable
1268
years of the estate ending after the date of the decedent’s
death and before the applicable date.
‘‘(b) DEFINITIONS.—For purposes of subsection
(a)—
‘‘(1) 
QUALIFIED
REVOCABLE
TRUST.—The
term ‘qualified revocable trust’ means any trust all
of which was treated under section 676 as owned by
the decedent of the estate referred to in subsection
(a).
‘‘(2) APPLICABLE DATE.—The term ‘applicable
date’ means—
‘‘(A) if no return of tax imposed by chap-
ter 11 is required to be filed, the date which is
2 years after the date of the decedent’s death,
and
‘‘(B) if such a return is required to be
filed, the date which is 6 months after the date
of the final determination of the liability for tax
imposed by chapter 11.
‘‘(c) ELECTION.—The election under subsection (a)
shall be made not later than the time prescribed for filing
the return of tax imposed by this chapter for the first tax-
able year of the estate (determined with regard to exten-
sions) and, once made, shall be irrevocable.’’
1269
(b) COMPARABLE TREATMENT UNDER GENERATION-
SKIPPING TAX.—Paragraph (1) of section 2652(b) is
amended by adding at the end the following new sentence:
‘‘Such term shall not include any trust during any period
the trust is treated as part of an estate under section
646.’’
(c) CLERICAL AMENDMENT.—The table of sections
for such subpart A is amended by adding at the end the
following new item:
‘‘Sec. 646. Certain revocable trusts treated as part of estate.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to estates of decedents
dying after the date of the enactment of this Act.
SEC. 14602. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAX-
ABLE YEAR OF ESTATE.
(a) IN GENERAL.—Subsection (b) of section 663 (re-
lating to distributions in first 65 days of taxable year) is
amended by inserting ‘‘an estate or’’ before ‘‘a trust’’ each
place it appears.
(b) CONFORMING AMENDMENT.—Paragraph (2) of
section 663(b) is amended by striking ‘‘the fiduciary of
such trust’’ and inserting ‘‘the executor of such estate or
the fiduciary of such trust (as the case may be)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
1270
SEC. 14603. SEPARATE SHARE RULES AVAILABLE TO
ESTATES.
(a) IN GENERAL.—Subsection (c) of section 663 (re-
lating to separate shares treated as separate trusts) is
amended—
(1) by inserting before the last sentence the fol-
lowing new sentence: ‘‘Rules similar to the rules of
the preceding provisions of this subsection shall
apply to treat substantially separate and independ-
ent shares of different beneficiaries in an estate hav-
ing more than 1 beneficiary as separate estates.’’,
and
(2) by inserting ‘‘or estates’’ after ‘‘trusts’’ in
the last sentence.
(b) CONFORMING
AMENDMENT.—The subsection
heading of section 663(c) is amended by inserting ‘‘ES-
TATES OR’’ before ‘‘TRUSTS’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
SEC. 14604. EXECUTOR OF ESTATE AND BENEFICIARIES
TREATED AS RELATED PERSONS FOR DIS-
ALLOWANCE OF LOSSES, ETC.
(a) DISALLOWANCE OF LOSSES.—Subsection (b) of
section 267 (relating to losses, expenses, and interest with
respect to transactions between related taxpayers) is
1271
amended by striking ‘‘or’’ at the end of paragraph (11),
by striking the period at the end of paragraph (12) and
inserting ‘‘; or’’, and by adding at the end the following
new paragraph:
‘‘(13) Except in the case of a sale or exchange
in satisfaction of a pecuniary bequest, an executor of
an estate and a beneficiary of such estate.’’
(b) ORDINARY INCOME FROM GAIN FROM SALE OF
DEPRECIABLE PROPERTY.—Subsection (b) of section
1239 is amended by striking the period at the end of para-
graph (2) and inserting ‘‘, and’’ and by adding at the end
the following new paragraph:
‘‘(3) except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of
an estate and a beneficiary of such estate.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 14605. LIMITATION ON TAXABLE YEAR OF ESTATES.
(a) IN GENERAL.—Section 645 (relating to taxable
year of trusts) is amended to read as follows:
‘‘SEC. 645. TAXABLE YEAR OF ESTATES AND TRUSTS.
‘‘(a) ESTATES.—For purposes of this subtitle, the
taxable year of an estate shall be a year ending on October
31, November 30, or December 31.
1272
‘‘(b) TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this sub-
title, the taxable year of any trust shall be the cal-
endar year.
‘‘(2) EXCEPTION FOR TRUSTS EXEMPT FROM
TAX
AND
CHARITABLE
TRUSTS.—Paragraph (1)
shall not apply to a trust exempt from taxation
under section 501(a) or to a trust described in sec-
tion 4947(a)(1).’’
(b) CLERICAL AMENDMENT.—The table of sections
for subpart A of part I of subchapter J of chapter 1 is
amended by striking the item relating to section 645 and
inserting the following new item:
‘‘Sec. 645. Taxable year of estates and trusts.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
SEC. 14606. REPEAL OF CERTAIN THROWBACK RULES AP-
PLICABLE TO DOMESTIC TRUSTS.
(a) ACCUMULATION DISTRIBUTIONS.—
(1) IN GENERAL.—Section 665 is amended by
adding at the end the following new subsection:
‘‘(f) ACCUMULATION DISTRIBUTIONS AFTER 1995.—
For purposes of this subpart, in the case of a trust other
than a foreign trust, any distribution in any taxable year
1273
beginning after December 31, 1995, shall be computed
without regard to any undistributed net income.’’
(2) CONFORMING AMENDMENT.—Subsection (b)
of section 665 is amended by inserting ‘‘except as
provided in subsection (f),’’ after ‘‘subpart,’’
(b) PROPERTY TRANSFERRED
TO TRUSTS.—Sub-
section (e) of section 644 is amended by striking ‘‘or’’ at
the end of paragraph (3), by striking the period at the
end of paragraph (4) and inserting ‘‘, or ’’, and by adding
at the end the following new paragraph:
‘‘(5) in the case of a trust other than a foreign
trust, any sale or exchange of property after Decem-
ber 31, 1995.’’
(c) EFFECTIVE DATES.—
(1) 
ACCUMULATION
DISTRIBUTION.—The
amendments made by subsection (a) shall apply to
distributions in taxable years beginning after De-
cember 31, 1995.
(2) TRANSFERRED
PROPERTY.—The amend-
ments made by subsection (b) shall apply to sales or
exchanges after December 31, 1995.
SEC. 14607. TREATMENT OF FUNERAL TRUSTS.
(a) IN GENERAL.—Subpart F of part I of subchapter
J of chapter 1 is amended by adding at the end the follow-
ing new section:
1274
‘‘SEC. 684. TREATMENT OF FUNERAL TRUSTS.
‘‘(a) IN GENERAL.—In the case of a qualified funeral
trust—
‘‘(1) subparts B, C, D, and E shall not apply,
and
‘‘(2) no deduction shall be allowed by section
642(b).
‘‘(b) QUALIFIED FUNERAL TRUST.—For purposes of
this subsection, the term ‘qualified funeral trust’ means
any trust (other than a foreign trust) if—
‘‘(1) the trust arises as a result of a contract
with a person engaged in the trade or business of
providing funeral or burial services or property nec-
essary to provide such services,
‘‘(2) the sole purpose of the trust is to hold, in-
vest, and reinvest funds in the trust and to use such
funds solely to make payments for such services or
property for the benefit of the beneficiaries of the
trust,
‘‘(3) the only beneficiaries of such trust are in-
dividuals who have entered into contracts described
in paragraph (1) to have such services or property
provided at their death,
‘‘(4) the only contributions to the trust are con-
tributions by or for the benefit of such beneficiaries,
1275
‘‘(5) the trustee elects the application of this
subsection, and
‘‘(6) the trust would (but for the election de-
scribed in paragraph (5)) be treated as owned by the
beneficiaries under subpart E.
‘‘(c) DOLLAR LIMITATION ON CONTRIBUTIONS.—
‘‘(1) IN GENERAL.—The term ‘qualified funeral
trust’ shall not include any trust which accepts con-
tributions by or for the benefit of an individual in
excess of $5,000.
‘‘(2) RELATED TRUSTS.—For purposes of para-
graph (1), all trusts having trustees which are relat-
ed persons shall be treated as 1 trust. For purposes
of the preceding sentence, persons are related if—
‘‘(A) the relationship between such persons
would result in the disallowance of losses under
section 267 or 707(b),
‘‘(B) such persons are treated as a single
employer under subsection (a) or (b) of section
52, or
‘‘(C) the Secretary determines that treat-
ing such persons as related is necessary to pre-
vent avoidance of the purposes of this section.
‘‘(3) INFLATION ADJUSTMENT.—In the case of
any contract referred to in subsection (b)(1) which
1276
is entered into during any calendar year after 1996,
the dollar amount referred to paragraph (1) shall be
increased by an amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year, by substituting ‘calendar year 1995’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any dollar amount after being increased under the
preceding sentence is not a multiple of $100, such
dollar amount shall be rounded to the nearest mul-
tiple of $100.
‘‘(d) APPLICATION
OF RATE SCHEDULE.—Section
1(e) shall be applied to each qualified funeral trust by
treating each beneficiary’s interest in each such trust as
a separate trust.
‘‘(e) TREATMENT OF AMOUNTS REFUNDED TO BEN-
EFICIARY ON CANCELLATION.—No gain or loss shall be
recognized to a beneficiary described in subsection (b)(3)
of any qualified funeral trust by reason of any payment
from such trust to such beneficiary by reason of cancella-
tion of a contract referred to in subsection (b)(1). If any
payment referred to in the preceding sentence consists of
property other than money, the basis of such property in
1277
the hands of such beneficiary shall be the same as the
trust’s basis in such property immediately before the pay-
ment.
‘‘(f) SIMPLIFIED REPORTING.—The Secretary may
prescribe rules for simplified reporting of all trusts having
a single trustee.’’
(b) CLERICAL AMENDMENT.—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. Treatment of funeral trusts.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
PART II—ESTATE AND GIFT TAX PROVISIONS
SEC. 14611. CLARIFICATION OF WAIVER OF CERTAIN
RIGHTS OF RECOVERY.
(a) AMENDMENT TO SECTION 2207A.—Paragraph
(2) of section 2207A(a) (relating to right of recovery in
the case of certain marital deduction property) is amended
to read as follows:
‘‘(2) DECEDENT
MAY
OTHERWISE
DIRECT.—
Paragraph (1) shall not apply with respect to any
property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent
to waive any right of recovery under this subchapter
with respect to such property.’’
1278
(b) AMENDMENT TO SECTION 2207B.—Paragraph
(2) of section 2207B(a) (relating to right of recovery
where decedent retained interest) is amended to read as
follows:
‘‘(2) DECEDENT
MAY
OTHERWISE
DIRECT.—
Paragraph (1) shall not apply with respect to any
property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent
to waive any right of recovery under this subchapter
with respect to such property.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to the estates of dece-
dents dying after the date of the enactment of this Act.
SEC. 14612. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF
DECEDENT’S DEATH.
(a) GENERAL RULE.—Section 2035 is amended to
read as follows:
‘‘SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE
WITHIN 3 YEARS OF DECEDENT’S DEATH.
‘‘(a) INCLUSION OF CERTAIN PROPERTY IN GROSS
ESTATE.—If—
‘‘(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or relin-
quished a power with respect to any property, during
1279
the 3-year period ending on the date of the dece-
dent’s death, and
‘‘(2) the value of such property (or an interest
therein) would have been included in the decedent’s
gross estate under section 2036, 2037, 2038, or
2042 if such transferred interest or relinquished
power had been retained by the decedent on the date
of his death,
the value of the gross estate shall include the value of any
property (or interest therein) which would have been so
included.
‘‘(b) INCLUSION OF GIFT TAX ON GIFTS MADE DUR-
ING
3 YEARS
BEFORE
DECEDENT’S
DEATH.—The
amount of the gross estate (determined without regard to
this subsection) shall be increased by the amount of any
tax paid under chapter 12 by the decedent or his estate
on any gift made by the decedent or his spouse during
the 3-year period ending on the date of the decedent’s
death.
‘‘(c) OTHER
RULES
RELATING
TO
TRANSFERS
WITHIN 3 YEARS OF DEATH.—
‘‘(1) IN GENERAL.—For purposes of—
‘‘(A) section 303(b) (relating to distribu-
tions in redemption of stock to pay death
taxes),
1280
‘‘(B) section 2032A (relating to special
valuation of certain farms, etc., real property),
and
‘‘(C) subchapter C of chapter 64 (relating
to lien for taxes),
the value of the gross estate shall include the value
of all property to the extent of any interest therein
of which the decedent has at any time made a trans-
fer, by trust or otherwise, during the 3-year period
ending on the date of the decedent’s death.
‘‘(2) COORDINATION WITH SECTION 6166.—An
estate shall be treated as meeting the 35 percent of
adjusted 
gross 
estate 
requirement 
of 
section
6166(a)(1) only if the estate meets such requirement
both with and without the application of paragraph
(1).
‘‘(3) MARITAL AND SMALL TRANSFERS.—Para-
graph (1) shall not apply to any transfer (other than
a transfer with respect to a life insurance policy)
made during a calendar year to any donee if the de-
cedent was not required by section 6019 (other than
by reason of section 6019(2)) to file any gift tax re-
turn for such year with respect to transfers to such
donee.
1281
‘‘(d) EXCEPTION.—Subsection (a) shall not apply to
any bona fide sale for an adequate and full consideration
in money or money’s worth.
‘‘(e) TREATMENT OF CERTAIN TRANSFERS FROM
REVOCABLE TRUSTS.—For purposes of this section and
section 2038, any transfer from any portion of a trust dur-
ing any period that such portion was treated under section
676 as owned by the decedent shall be treated as a trans-
fer made directly by the decedent.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter A of chapter 11 is amended
by striking ‘‘gifts’’ in the item relating to section 2035
and inserting ‘‘certain gifts’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to the estates of decedents dying
after the date of the enactment of this Act.
SEC. 14613. CLARIFICATION OF QUALIFIED TERMINABLE
INTEREST RULES.
(a) GENERAL RULE.—
(1) ESTATE TAX.—Subparagraph (B) of section
2056(b)(7) (defining qualified terminable interest
property) is amended by adding at the end the fol-
lowing new clause:
‘‘(vi) TREATMENT
OF
CERTAIN
IN-
COME DISTRIBUTIONS.—An income inter-
1282
est shall not fail to qualify as a qualified
income interest for life solely because in-
come for the period after the last distribu-
tion date and on or before the date of the
surviving spouse’s death is not required to
be distributed to the surviving spouse or to
the estate of the surviving spouse.’’
(2) GIFT
TAX.—Paragraph (3) of section
2523(f) is amended by striking ‘‘and (iv)’’ and in-
serting ‘‘(iv), and (vi)’’.
(b) CLARIFICATION OF SUBSEQUENT INCLUSIONS.—
Section 2044 is amended by adding at the end the follow-
ing new subsection:
‘‘(d) CLARIFICATION OF INCLUSION OF CERTAIN IN-
COME.—The amount included in the gross estate under
subsection (a) shall include the amount of any income
from the property to which this section applies for the pe-
riod after the last distribution date and on or before the
date of the decedent’s death if such income is not other-
wise included in the decedent’s gross estate.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply with respect to the estates of
decedents dying, and gifts made, after the date of
the enactment of this Act.
1283
(2) APPLICATION OF SECTION 2044 TO TRANS-
FERS BEFORE DATE OF ENACTMENT.—In the case
of the estate of any decedent dying after the date of
the enactment of this Act, if there was a transfer of
property on or before such date—
(A) such property shall not be included in
the gross estate of the decedent under section
2044 of the Internal Revenue Code of 1986 if
no prior marital deduction was allowed with re-
spect to such a transfer of such property to the
decedent, but
(B) such property shall be so included if
such a deduction was allowed.
SEC. 14614. TRANSITIONAL RULE UNDER SECTION 2056A.
(a) GENERAL RULE.—In the case of any trust cre-
ated under an instrument executed before the date of the
enactment of the Revenue Reconciliation Act of 1990,
such trust shall be treated as meeting the requirements
of paragraph (1) of section 2056A(a) of the Internal Reve-
nue Code of 1986 if the trust instrument requires that
all trustees of the trust be individual citizens of the United
States or domestic corporations.
(b) EFFECTIVE DATE.—The provisions of subsection
(a) shall take effect as if included in the provisions of sec-
tion 11702(g) of the Revenue Reconciliation Act of 1990.
1284
SEC. 14615. OPPORTUNITY TO CORRECT CERTAIN FAIL-
URES UNDER SECTION 2032A.
(a) GENERAL RULE.—Paragraph (3) of section
2032A(d) (relating to modification of election and agree-
ment to be permitted) is amended to read as follows:
‘‘(3) MODIFICATION OF ELECTION AND AGREE-
MENT TO BE PERMITTED.—The Secretary shall pre-
scribe procedures which provide that in any case in
which the executor makes an election under para-
graph (1) (and submits the agreement referred to in
paragraph (2)) within the time prescribed therefor,
but—
‘‘(A) the notice of election, as filed, does
not contain all required information, or
‘‘(B) signatures of 1 or more persons re-
quired to enter into the agreement described in
paragraph (2) are not included on the agree-
ment as filed, or the agreement does not con-
tain all required information,
the executor will have a reasonable period of time
(not exceeding 90 days) after notification of such
failures to provide such information or signatures.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to the estates of decedents dying
after the date of the enactment of this Act.
1285
SEC. 14616. UNIFIED CREDIT OF DECEDENT INCREASED BY
UNIFIED CREDIT OF SPOUSE USED ON SPLIT
GIFT 
INCLUDED 
IN 
DECEDENT’S 
GROSS
ESTATE.
(a) IN GENERAL.—Section 2010 (relating to unified
credit against estate tax) is amended by adding at the end
the following new subsection:
‘‘(d) TREATMENT OF UNIFIED CREDIT USED BY
SPOUSE
ON
SPLIT-GIFT
INCLUDED
IN
DECEDENT’S
GROSS ESTATE.—If—
‘‘(1) the decedent was the donor of any gift
one-half of which was considered under section 2513
as made by the decedent’s spouse, and
‘‘(2) the amount of such gift is includible in the
gross estate of the decedent by reason of section
2035, 2036, 2037, or 2038,
the amount of the credit allowable by subsection (a) to
the estate of the decedent shall be increased by the amount
of the unified credit allowed against the tax imposed by
section 2501 on the amount of such gift considered under
section 2513 as made by such spouse.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to gifts made after the date of
the enactment of this Act.
1286
SEC. 14617. REFORMATION OF DEFECTIVE BEQUESTS, ETC.,
TO SPOUSE OF DECEDENT.
(a) IN GENERAL.—Subsection (b) of section 2056
(relating to bequests, etc., to surviving spouse) is amended
by adding at the end the following new paragraph:
‘‘(11) REFORMATIONS PERMITTED.—
‘‘(A) IN GENERAL.—In the case of any in-
terest in property with respect to which a de-
duction would be allowable under subsection (a)
but for a provision of this subsection, if—
‘‘(i) the surviving spouse is entitled to
all of the income from the property for life,
‘‘(ii) no person other than such spouse
is entitled to any distribution of such prop-
erty during such spouse’s life, and
‘‘(iii) there is a change of a governing
instrument (by reformation, amendment,
construction, or otherwise) as of the appli-
cable date which results in the satisfaction
of the requirements of such provision as of
the date of the decedent’s death,
the determination of whether such deduction is
allowable shall be made as of the applicable
date.
‘‘(B) SPECIAL RULE WHERE TIMELY COM-
MENCEMENT
OF
REFORMATION.—Clauses (i)
1287
and (ii) of subparagraph (A) shall not apply to
any interest if, not later than the date described
in subparagraph (C)(i), a judicial proceeding is
commenced to change such interest into an in-
terest which satisfies the requirements of the
provision by reason of which (but for this para-
graph) a deduction would not be allowable
under subsection (a) for such interest.
‘‘(C) APPLICABLE DATE.—For purposes of
subparagraph (A), the term ‘applicable date’
means—
‘‘(i) the last date (including exten-
sions) for filing the return of tax imposed
by this chapter, or
‘‘(ii) if a judicial proceeding is com-
menced to comply with such provision, the
time when the changes pursuant to such
proceeding are made.
‘‘(D) SPECIAL RULE.—If the change re-
ferred to in subparagraph (A)(iii) is to qualify
the passage of the interest under paragraph
(7), subparagraph (A) shall apply only if the
election under subparagraph (B) thereof is
made.
1288
‘‘(E) STATUTE OF LIMITATIONS.—If a ju-
dicial proceeding described in subparagraph
(C)(ii) is commenced with respect to any inter-
est, the period for assessing any deficiency of
tax attributable to such interest shall not expire
before the date 1 year after the date on which
the Secretary is notified that such provision has
been complied with or that such proceeding has
been terminated.’’
(b) COMPARABLE RULE FOR GIFT TAX.—Section
2523 (relating to gift to spouse) is amended by adding
at the end the following new subsection:
‘‘(j) REFORMATIONS PERMITTED.—Rules similar to
the rules of section 2056(b)(11) shall apply for purposes
of this section.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying, and
gifts made, after the date of the enactment of this Act.
SEC. 14618. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX
PURPOSES AFTER EXPIRATION OF STATUTE
OF LIMITATIONS.
(a) IN GENERAL.—Section 2001 (relating to imposi-
tion and rate of estate tax) is amended by adding at the
end the following new subsection:
‘‘(f) VALUATION OF GIFTS.—If—
1289
‘‘(1) the time has expired within which a tax
may be assessed under chapter 12 (or under cor-
responding provisions of prior laws) on the transfer
of property by gift made during a preceding cal-
endar period (as defined in section 2502(b)), and
‘‘(2) the value of such gift is shown on the re-
turn for such preceding calendar period or is dis-
closed in such return, or in a statement attached to
the return, in a manner adequate to apprise the Sec-
retary of the nature of such gift,
the value of such gift shall, for purposes of computing the
tax under this chapter, be the value of such gift as finally
determined for purposes of chapter 12.’’
(b) MODIFICATION OF APPLICATION OF STATUTE OF
LIMITATIONS.—Paragraph (9) of section 6501(c) is
amended to read as follows:
‘‘(9) GIFT TAX ON CERTAIN GIFTS NOT SHOWN
ON RETURN.—If any gift of property the value of
which (or any increase in taxable gifts required
under section 2701(d)) is required to be shown on
a return of tax imposed by chapter 12 (without re-
gard to section 2503(b)), and is not shown on such
return, any tax imposed by chapter 12 on such gift
may be assessed, or a proceeding in court for the
collection of such tax may be begun without assess-
1290
ment, at any time. The preceding sentence shall not
apply to any item which is disclosed in such return,
or in a statement attached to the return, in a man-
ner adequate to apprise the Secretary of the nature
of such item. The value of any item which is so dis-
closed may not be redetermined by the Secretary
after the expiration of the period under subsection
(a).’’
(c) DECLARATORY JUDGMENT PROCEDURE FOR DE-
TERMINING VALUE OF GIFT.—
(1) IN GENERAL.—Part IV of subchapter C of
chapter 76 is amended by inserting after section
7476 the following new section:
‘‘SEC. 7477. DECLARATORY JUDGMENTS RELATING TO
VALUE OF CERTAIN GIFTS.
‘‘(a) CREATION OF REMEDY.—In a case of an actual
controversy involving a determination by the Secretary of
the value of any gift shown on the return of tax imposed
by chapter 12 or disclosed on such return or in any state-
ment attached to such return, upon the filing of an appro-
priate pleading, the Tax Court may make a declaration
of the value of such gift. Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(b) LIMITATIONS.—
1291
‘‘(1) PETITIONER.—A pleading may be filed
under this section only by the donor.
‘‘(2) EXHAUSTION
OF
ADMINISTRATIVE
REM-
EDIES.—The court shall not issue a declaratory
judgment or decree under this section in any pro-
ceeding unless it determines that the petitioner has
exhausted all available administrative remedies with-
in the Internal Revenue Service.
‘‘(3) TIME FOR BRINGING ACTION.—If the Sec-
retary sends by certified or registered mail notice of
his determination as described in subsection (a) to
the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the
91st day after the date of such mailing.’’
(2) CLERICAL AMENDMENT.—The table of sec-
tions for such part IV is amended by inserting after
the item relating to section 7476 the following new
item:
‘‘Sec. 7477. Declaratory judgments relating to value of certain
gifts.’’
(d) CONFORMING AMENDMENT.—Subsection (c) of
section 2504 is amended by striking ‘‘, and if a tax under
this chapter or under corresponding provisions of prior
laws has been assessed or paid for such preceding calendar
period’’.
(e) EFFECTIVE DATES.—
1292
(1) IN GENERAL.—The amendments made by
subsections (a) and (c) shall apply to gifts made
after the date of the enactment of this Act.
(2) SUBSECTION (b).—The amendment made by
subsection (b) shall apply to gifts made in calendar
years ending after the date of the enactment of this
Act.
SEC. 14619. CLARIFICATIONS RELATING TO DISCLAIMERS.
(a) PARTIAL TRANSFER-TYPE DISCLAIMERS PER-
MITTED.—Paragraph (3) of section 2518(c) (relating to
certain transfers treated as disclaimers) is amended by in-
serting ‘‘(or an undivided portion of such interest)’’ after
‘‘entire interest in the property’’.
(b) RETENTION
OF
INTEREST
BY
DECEDENT’S
SPOUSE
PERMITTED
IN
TRANSFER-TYPE
DISCLAIM-
ERS.—Paragraph (3) of section 2518(c) is amended by
adding at the end the following new flush sentence:
‘‘For purposes of the preceding sentence, a written
transfer by the spouse of the decedent of property
to a trust shall not fail to be treated as a transfer
of such spouse’s interest in such property by reason
of such spouse having an interest in such trust.’’
(c) DISCLAIMERS ARE EFFECTIVE FOR INCOME TAX
PURPOSES.—Subsection (a) of section 2518 is amended
1293
by inserting ‘‘and subtitle A’’ after ‘‘this subtitle’’ each
place it appears.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers creating an interest
in the person disclaiming, and disclaimers, made after the
date of the enactment of this Act.
SEC. 14620. CLARIFICATION OF TREATMENT OF SURVIVOR
ANNUITIES UNDER QUALIFIED TERMINABLE
INTEREST RULES.
(a) IN GENERAL.—Subparagraph (C) of section
2056(b)(7) is amended by inserting ‘‘(or, in the case of
an interest in an annuity arising under the community
property laws of a State, included in the gross estate of
the decedent under section 2033)’’ after ‘‘section 2039’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
SEC. 14621. TREATMENT UNDER QUALIFIED DOMESTIC
TRUST RULES OF FORMS OF OWNERSHIP
WHICH ARE NOT TRUSTS.
(a) IN GENERAL.—Subsection (c) of section 2056A
(defining qualified domestic trust) is amended by adding
at the end the following new paragraph:
‘‘(3) TRUST.—To the extent provided in regula-
tions prescribed by the Secretary, the term ‘trust’
1294
includes other arrangements which have substan-
tially the same effect as a trust.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
SEC. 14622. AUTHORITY TO WAIVE REQUIREMENT OF UNIT-
ED STATES TRUSTEE FOR QUALIFIED DOMES-
TIC TRUSTS.
(a) IN GENERAL.—Subparagraph (A) of section
2056A(a)(1) is amended by inserting ‘‘except as provided
in regulations prescribed by the Secretary,’’ before ‘‘re-
quires’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.
PART III—GENERATION-SKIPPING TAX
PROVISIONS
SEC. 14631. SEVERING OF TRUSTS HOLDING PROPERTY
HAVING AN INCLUSION RATIO OF GREATER
THAN ZERO.
(a) IN GENERAL.—Subsection (a) of section 2642
(relating to inclusion ratio) is amended by adding at the
end the following new paragraph:
1295
‘‘(3) SEVERING OF TRUSTS HOLDING PROPERTY
HAVING AN INCLUSION RATIO OF GREATER THAN
ZERO.—
‘‘(A) IN
GENERAL.—If a trust holding
property having an inclusion ratio of greater
than zero is severed in a qualified severance, at
the election of the trustee of such trust, the
trusts resulting from such severance shall be
treated as separate trusts for purposes of this
chapter.
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A), the term ‘qualified
severance’ means the creation of 2 trusts from
a single trust if each property held by the single
trust was divided between the 2 created trusts
such that one trust received an interest in each
such property equal to the applicable fraction of
the single trust. Such term includes any other
severance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) ELECTION.—The election under this
paragraph shall be made at the time prescribed
by the Secretary. Such an election, once made,
shall be irrevocable.’’
1296
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to severances after the date of
the enactment of this Act.
SEC. 14632. CLARIFICATION OF WHO IS TRANSFEROR
WHERE SUBSEQUENT GIFT BY REASON OF
POWER OF APPOINTMENT.
(a) IN GENERAL.—Paragraph (1) of section 2652(a)
(defining transferor) is amended by adding at the end the
following new sentence: ‘‘A transferor described in sub-
paragraph (A) shall not be treated as the transferor of
any property if another individual is treated as the trans-
feror of such property under subparagraph (B) by reason
of the exercise, release, or lapse of a general power of ap-
pointment with respect to such property.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to the exercise, release, or lapse
of a general power of appointment after the date of the
enactment of this Act.
SEC. 14633. TAXABLE TERMINATION NOT TO INCLUDE DI-
RECT SKIPS.
(a) IN GENERAL.—Paragraph (1) of section 2612(a)
(defining taxable termination) is amended by adding at
the end the following new flush sentence:
‘‘Such term shall not include a direct skip.’’
1297
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to generation-skipping transfers
(as defined in section 2611 of the Internal Revenue Code
of 1986) after the date of the enactment of this Act.
SEC. 14634. EXPANSION OF EXCEPTION FROM GENERA-
TION-SKIPPING TRANSFER TAX FOR TRANS-
FERS TO INDIVIDUALS WITH DECEASED PAR-
ENTS.
(a) IN GENERAL.—Section 2651 (relating to genera-
tion assignment) is amended by redesignating subsection
(e) as subsection (f), and by inserting after subsection (d)
the following new subsection:
‘‘(e) SPECIAL RULE
FOR PERSONS WITH
A DE-
CEASED PARENT.—
‘‘(1) IN GENERAL.—For purposes of determin-
ing whether any transfer is a generation-skipping
transfer, if—
‘‘(A) an individual is a descendant of a
parent of the transferor (or the transferor’s
spouse or former spouse), and
‘‘(B) such individual’s parent who is a lin-
eal descendant of the parent of the transferor
(or the transferor’s spouse or former spouse) is
dead at the time the transfer (from which an
interest of such individual is established or de-
1298
rived) is subject to a tax imposed by chapter 11
or 12 upon the transferor (and if there shall be
more than 1 such time, then at the earliest
such time),
such individual shall be treated as if such individual
were a member of the generation which is 1 genera-
tion below the lower of the transferor’s generation or
the generation assignment of the youngest living an-
cestor of such individual who is also a descendant of
the parent of the transferor (or the transferor’s
spouse or former spouse), and the generation assign-
ment of any descendant of such individual shall be
adjusted accordingly.
‘‘(2) LIMITED APPLICATION OF SUBSECTION TO
COLLATERAL
HEIRS.—This subsection shall not
apply with respect to a transfer to any individual
who is not a lineal descendant of the transferor (or
the transferor’s spouse or former spouse) if, at the
time of the transfer, such transferor has any living
lineal descendant.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 2612(c) (defining direct skip) is
amended by striking paragraph (2) and by redesig-
nating paragraph (3) as paragraph (2).
1299
(2) Section 2612(c)(2) (as so redesignated) is
amended by striking ‘‘section 2651(e)(2)’’ and in-
serting ‘‘section 2651(f)(2)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to terminations, distributions, and
transfers occurring after the date of the enactment of this
Act.
Subtitle G—Excise Tax
Simplification
PART I—PROVISIONS RELATED TO DISTILLED
SPIRITS, WINES, AND BEER
SEC. 14701. CREDIT OR REFUND FOR IMPORTED BOTTLED
DISTILLED 
SPIRITS 
RETURNED 
TO 
DIS-
TILLED SPIRITS PLANT.
(a) IN GENERAL.—Paragraph (1) of section 5008(c)
(relating to distilled spirits returned to bonded premises)
is amended by striking ‘‘withdrawn from bonded premises
on payment or determination of tax’’ and inserting ‘‘on
which tax has been determined or paid’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
1300
SEC. 14702. AUTHORITY TO CANCEL OR CREDIT EXPORT
BONDS WITHOUT SUBMISSION OF RECORDS.
(a) IN GENERAL.—Subsection (c) of section 5175
(relating to export bonds) is amended by striking ‘‘on the
submission of’’ and all that follows and inserting ‘‘if there
is such proof of exportation as the Secretary may by regu-
lations require.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 14703. REPEAL OF REQUIRED MAINTENANCE OF
RECORDS ON PREMISES OF DISTILLED SPIR-
ITS PLANT.
(a) IN GENERAL.—Subsection (c) of section 5207
(relating to records and reports) is amended by striking
‘‘shall be kept on the premises where the operations cov-
ered by the record are carried on and’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
1301
SEC. 14704. FERMENTED MATERIAL FROM ANY BREWERY
MAY BE RECEIVED AT A DISTILLED SPIRITS
PLANT.
(a) IN GENERAL.—Paragraph (2) of section 5222(b)
(relating to production, receipt, removal, and use of distill-
ing materials) is amended to read as follows:
‘‘(2) beer conveyed without payment of tax
from brewery premises, beer which has been lawfully
removed from brewery premises upon determination
of tax, or’’.
(b) CLARIFICATION OF AUTHORITY TO PERMIT RE-
MOVAL OF BEER WITHOUT PAYMENT OF TAX FOR USE
AS DISTILLING MATERIAL.—Section 5053 (relating to ex-
emptions) is amended by redesignating subsection (f) as
subsection (i) and by inserting after subsection (e) the fol-
lowing new subsection:
‘‘(f) REMOVAL
FOR USE
AS DISTILLING MATE-
RIAL.—Subject to such regulations as the Secretary may
prescribe, beer may be removed from a brewery without
payment of tax to any distilled spirits plant for use as
distilling material.’’
(c) CLARIFICATION
OF REFUND
AND CREDIT
OF
TAX.—Section 5056 (relating to refund and credit of tax,
or relief from liability) is amended—
1302
(1) by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b) the
following new subsection:
‘‘(c) BEER RECEIVED
AT
A DISTILLED SPIRITS
PLANT.—Any tax paid by any brewer on beer produced
in the United States may be refunded or credited to the
brewer, without interest, or if the tax has not been paid,
the brewer may be relieved of liability therefor, under reg-
ulations as the Secretary may prescribe, if such beer is
received on the bonded premises of a distilled spirits plant
pursuant to the provisions of section 5222(b)(2), for use
in the production of distilled spirits.’’, and
(2) by striking ‘‘or rendering unmerchantable’’
in subsection (d) (as so redesignated) and inserting
‘‘rendering unmerchantable, or receipt on the bond-
ed premises of a distilled spirits plant’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 14705. REPEAL OF REQUIREMENT FOR WHOLESALE
DEALERS IN LIQUORS TO POST SIGN.
(a) IN GENERAL.—Section 5115 (relating to sign re-
quired on premises) is hereby repealed.
(b) CONFORMING AMENDMENTS.—
1303
(1) Subsection (a) of section 5681 is amended
by striking ‘‘, and every wholesale dealer in liquors,’’
and by striking ‘‘section 5115(a) or’’.
(2) Subsection (c) of section 5681 is amend-
ed—
(A) by striking ‘‘or wholesale liquor estab-
lishment, on which no sign required by section
5115(a) or’’ and inserting ‘‘on which no sign
required by’’, and
(B) by striking ‘‘or wholesale liquor estab-
lishment, or who’’ and inserting ‘‘or who’’.
(3) The table of sections for subpart D of part
II of subchapter A of chapter 51 is amended by
striking the item relating to section 5115.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 14706. REFUND OF TAX ON WINE RETURNED TO BOND
NOT LIMITED TO UNMERCHANTABLE WINE.
(a) IN GENERAL.—Subsection (a) of section 5044
(relating to refund of tax on unmerchantable wine) is
amended by striking ‘‘as unmerchantable’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 5361 is amended by striking
‘‘unmerchantable’’.
1304
(2) The section heading for section 5044 is
amended by striking ‘‘UNMERCHANTABLE’’.
(3) The item relating to section 5044 in the
table of sections for subpart C of part I of sub-
chapter A of chapter 51 is amended by striking
‘‘unmerchantable’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 14707. USE OF ADDITIONAL AMELIORATING MATERIAL
IN CERTAIN WINES.
(a) IN GENERAL.—Subparagraph (D) of section
5384(b)(2) (relating to ameliorated fruit and berry wines)
is amended by striking ‘‘loganberries, currants, or goose-
berries,’’ and inserting ‘‘any fruit or berry with a natural
fixed acid of 20 parts per thousand or more (before any
correction of such fruit or berry)’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
1305
SEC. 14708. DOMESTICALLY PRODUCED BEER MAY BE
WITHDRAWN FREE OF TAX FOR USE OF FOR-
EIGN EMBASSIES, LEGATIONS, ETC.
(a) IN GENERAL.—Section 5053 (relating to exemp-
tions) is amended by inserting after subsection (f) the fol-
lowing new subsection:
‘‘(g) REMOVALS FOR USE OF FOREIGN EMBASSIES,
LEGATIONS, ETC.—
‘‘(1) IN GENERAL.—Subject to such regulations
as the Secretary may prescribe—
‘‘(A) beer may be withdrawn from the
brewery without payment of tax for transfer to
any customs bonded warehouse for entry pend-
ing withdrawal therefrom as provided in sub-
paragraph (B), and
‘‘(B) beer entered into any customs bonded
warehouse under subparagraph (A) may be
withdrawn for consumption in the United
States by, and for the official and family use of,
such foreign governments, organizations, and
individuals as are entitled to withdraw imported
beer from such warehouses free of tax.
Beer transferred to any customs bonded warehouse
under subparagraph (A) shall be entered, stored,
and accounted for in such warehouse under such
regulations and bonds as the Secretary may pre-
1306
scribe, and may be withdrawn therefrom by such
governments, organizations, and individuals free of
tax under the same conditions and procedures as im-
ported beer.
‘‘(2) OTHER RULES TO APPLY.—Rules similar
to the rules of paragraphs (2) and (3) of section
5362(e) of such section shall apply for purposes of
this subsection.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 14709. BEER MAY BE WITHDRAWN FREE OF TAX FOR
DESTRUCTION.
(a) IN GENERAL.—Section 5053 is amended by in-
serting after subsection (g) the following new subsection:
‘‘(h) REMOVALS
FOR DESTRUCTION.—Subject to
such regulations as the Secretary may prescribe, beer may
be removed from the brewery without payment of tax for
destruction.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
1307
SEC. 14710. AUTHORITY TO ALLOW DRAWBACK ON EX-
PORTED BEER WITHOUT SUBMISSION OF
RECORDS.
(a) IN GENERAL.—The first sentence of section 5055
(relating to drawback of tax on beer) is amended by strik-
ing ‘‘found to have been paid’’ and all that follows and
inserting ‘‘paid on such beer if there is such proof of ex-
portation as the Secretary may by regulations require.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 14711. TRANSFER TO BREWERY OF BEER IMPORTED
IN BULK WITHOUT PAYMENT OF TAX.
(a) IN GENERAL.—Part II of subchapter G of chap-
ter 51 is amended by adding at the end the following new
section:
‘‘SEC. 5418. BEER IMPORTED IN BULK.
‘‘Beer imported or brought into the United States in
bulk containers may, under such regulations as the Sec-
retary may prescribe, be withdrawn from customs custody
and transferred in such bulk containers to the premises
of a brewery without payment of the internal revenue tax
imposed on such beer. The proprietor of a brewery to
which such beer is transferred shall become liable for the
tax on the beer withdrawn from customs custody under
1308
this section upon release of the beer from customs custody,
and the importer, or the person bringing such beer into
the United States, shall thereupon be relieved of the liabil-
ity for such tax.’’
(b) CLERICAL AMENDMENT.—The table of sections
for such part II is amended by adding at the end the fol-
lowing new item:
‘‘Sec. 5418. Beer imported in bulk.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
PART II—CONSOLIDATION OF TAXES ON
AVIATION GASOLINE
SEC. 14721. CONSOLIDATION OF TAXES ON AVIATION GASO-
LINE.
(a) IN GENERAL.—Subparagraph (A) of section
4081(a)(2) (relating to imposition of tax on gasoline and
diesel fuel) is amended by redesignating clause (ii) as
clause (iii) and by striking clause (i) and inserting the fol-
lowing:
‘‘(i) in the case of gasoline other than
aviation gasoline, 18.3 cents per gallon,
‘‘(ii) in the case of aviation gasoline,
19.3 cents per gallon, and’’.
1309
(b) TERMINATION.—Subsection (d) of section 4081
is amended by redesignating paragraph (2) as paragraph
(3) and by inserting after paragraph (1) the following new
paragraph:
‘‘(2) AVIATION GASOLINE.—On and after Janu-
ary 1, 1996, the rate specified in subsection
(a)(2)(A)(ii) shall be 4.3 cents per gallon.’’
(c) REPEAL OF RETAIL LEVEL TAX.—
(1) Subsection (c) of section 4041 is amended
by striking paragraphs (2) and (3) and by redesig-
nating paragraphs (4) and (5) as paragraphs (2)
and (3), respectively.
(2) Paragraph (3) of section 4041(c), as redes-
ignated by paragraph (1), is amended by striking
‘‘paragraphs (1) and (2)’’ and inserting ‘‘paragraph
(1)’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 4041(k) is amend-
ed by adding ‘‘and’’ at the end of subparagraph (A),
by striking ‘‘, and’’ at the end of subparagraph (B)
and inserting a period, and by striking subparagraph
(C).
(2) Paragraph (1) of section 4081(d) is amend-
ed by striking ‘‘each rate of tax specified in sub-
section (a)(2)(A)’’ and inserting ‘‘the rates of tax
1310
specified in clauses (i) and (iii) of subsection
(a)(2)(A)’’.
(3) Sections 6421(f)(2)(A) and 9502(f)(1)(A)
are each amended by striking ‘‘section 4041(c)(4)’’
and inserting ‘‘section 4041(c)(2)’’.
(4) Paragraph (2) of section 9502(b) is amend-
ed by striking ‘‘14 cents’’ and inserting ‘‘15 cents’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1996.
(f) FLOOR STOCKS TAX.—
(1) IMPOSITION OF TAX.—In the case of avia-
tion gasoline on which tax was imposed under sec-
tion 4081 of the Internal Revenue Code of 1986 be-
fore January 1, 1996, and which is held on such
date by any person, there is hereby imposed a floor
stocks tax of 1 cent per gallon of such gasoline.
(2) LIABILITY FOR TAX AND METHOD OF PAY-
MENT.—
(A) LIABILITY FOR TAX.—A person hold-
ing aviation gasoline on January 1, 1996, to
which the tax imposed by paragraph (1) applies
shall be liable for such tax.
(B) METHOD OF PAYMENT.—The tax im-
posed by paragraph (1) shall be paid in such
manner as the Secretary shall prescribe.
1311
(C) TIME
FOR
PAYMENT.—The tax im-
posed by paragraph (1) shall be paid on or be-
fore June 30, 1996.
(3) DEFINITIONS.—For purposes of this sub-
section:
(A) HELD BY A PERSON.—Gasoline shall
be considered as ‘‘held by a person’’ if title
thereto has passed to such person (whether or
not delivery to the person has been made).
(B) SECRETARY.—The term ‘‘Secretary’’
means the Secretary of the Treasury or his del-
egate.
(4) EXCEPTION FOR EXEMPT USES.—The tax
imposed by paragraph (1) shall not apply to gasoline
held by any person exclusively for any use to the ex-
tent a credit or refund of the tax imposed by section
4081 of such Code is allowable for such use.
(5) EXCEPTION FOR FUEL HELD IN AIRCRAFT
TANK.—No tax shall be imposed by paragraph (1)
on aviation gasoline held in the tank of an aircraft.
(6) EXCEPTION
FOR
CERTAIN
AMOUNTS
OF
FUEL.—
(A) IN
GENERAL.—No tax shall be im-
posed by paragraph (1) on aviation gasoline
held on January 1, 1996, by any person if the
1312
aggregate amount of aviation gasoline held by
such person on such date does not exceed 6,000
gallons. The preceding sentence shall apply only
if such person submits to the Secretary (at the
time and in the manner required by the Sec-
retary) such information as the Secretary shall
require for purposes of this paragraph.
(B) EXEMPT FUEL.—For purposes of sub-
paragraph (A), there shall not be taken into ac-
count fuel held by any person which is exempt
from the tax imposed by paragraph (1) by rea-
son of paragraph (4) or (5).
(C) CONTROLLED GROUPS.—
(i) CORPORATIONS.—In the case of a
controlled group, the 6,000 gallon amount
in subparagraph (A) shall be apportioned
among the component members of such
group in such manner as the Secretary
shall by regulations prescribe. For pur-
poses of the preceding sentence, the term
‘‘controlled group’’ has the meaning given
to such term by subsection (a) of section
1563 of such Code; except that for such
purposes the phrase ‘‘more than 50 per-
cent’’ shall be substituted for the phrase
1313
‘‘at least 80 percent’’ each place it appears
in such subsection.
(ii) 
NONINCORPORATED
PERSONS
UNDER COMMON CONTROL.—Under regula-
tions prescribed by the Secretary, prin-
ciples similar to the principles of clause (i)
shall apply to a group under common con-
trol where 1 or more of the members is not
a corporation.
(7) OTHER LAWS APPLICABLE.—All provisions
of law, including penalties, applicable with respect to
the taxes imposed by section 4081 of such Code
shall, insofar as applicable and not inconsistent with
the provisions of this subsection, apply with respect
to the floor stock taxes imposed by paragraph (1) to
the same extent as if such taxes were imposed by
such section 4081.
PART III—OTHER EXCISE TAX PROVISIONS
SEC. 14731. AUTHORITY TO GRANT EXEMPTIONS FROM
REGISTRATION REQUIREMENTS.
(a) IN GENERAL.—The first sentence of section 4222
(relating to registration) is amended to read as follows:
‘‘Except as provided in subsection (b), section 4221 shall
not apply with respect to the sale of any article by or to
1314
any person who is required by the Secretary to be reg-
istered under this section and who is not so registered.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to sales after the 180th day
after the date of the enactment of this Act.
SEC. 14732. CERTAIN COMBINATIONS NOT TREATED AS
MANUFACTURE UNDER RETAIL SALES TAX
ON HEAVY TRUCKS.
(a) IN GENERAL.—Paragraph (2) of section 4052(c)
(relating to certain combinations not treated as manufac-
ture) is amended by striking ‘‘or wood or metal floor’’ and
inserting ‘‘wood or metal floor, or a power take-off and
dump body’’.
(b) REMOVAL OF FIFTH WHEEL.—Paragraph (1) of
section 4052(c) is amended by inserting before the period
‘‘or the removal of any coupling device (including any fifth
wheel)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 14733. EXEMPTION FROM DIESEL FUEL DYEING RE-
QUIREMENTS WITH RESPECT TO CERTAIN
STATES.
(a) IN GENERAL.—Section 4082 (relating to exemp-
tions for diesel fuel) is amended by redesignating sub-
1315
sections (c) and (d) as subsections (d) and (e), respec-
tively, and by inserting after subsection (b) the following
new subsection:
‘‘(c) EXCEPTION
TO
DYEING
REQUIREMENTS.—
Paragraph (2) of subsection (a) shall not apply with re-
spect to any diesel fuel—
‘‘(1) removed, entered, or sold in a State for ul-
timate sale or use in an area of such State which
is exempted from the fuel dyeing requirements under
subsection (i) of section 211 of the Clean Air Act (as
in effect on the date of the enactment of this sub-
section) by the Administrator of the Environmental
Protection Agency under paragraph (4) of such sub-
section, and
‘‘(2) the use of which is certified pursuant to
regulations issued by the Secretary.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the first day of the first
calendar quarter beginning after the date of the enactment
of this Act.
SEC. 14734. REPEAL OF EXPIRED PROVISIONS.
(a) PIGGY-BACK TRAILERS.—Section 4051 is amend-
ed by striking subsection (d) and by redesignating sub-
section (e) as subsection (d).
(b) DEEP SEABED MINING.—
1316
(1) Subchapter F of chapter 36 (relating to tax
on removal of hard mineral resources from deep sea-
bed) is hereby repealed.
(2) The table of subchapters for chapter 36 is
amended by striking the item relating to subchapter
F.
Subtitle H—Administrative
Provisions
PART I—GENERAL PROVISIONS
SEC. 14801. REPEAL OF AUTHORITY TO DISCLOSE WHETH-
ER PROSPECTIVE JUROR HAS BEEN AU-
DITED.
(a) IN GENERAL.—Subsection (h) of section 6103
(relating to disclosure to certain Federal officers and em-
ployees for purposes of tax administration, etc.) is amend-
ed by striking paragraph (5) and by redesignating para-
graph (6) as paragraph (5).
(b) CONFORMING AMENDMENT.—Paragraph (4) of
section 6103(p) is amended by striking ‘‘(h)(6)’’ each
place it appears and inserting ‘‘(h)(5)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to judicial proceedings pending on,
or commenced after, the date of the enactment of this Act.
1317
SEC. 14802. CLARIFICATION OF STATUTE OF LIMITATIONS.
(a) IN GENERAL.—Subsection (a) of section 6501
(relating to limitations on assessment and collection) is
amended by adding at the end the following new sentence:
‘‘For purposes of this chapter, the term ‘return’ means
the return required to be filed by the taxpayer (and does
not include a return of any person from whom the tax-
payer has received an item of income, gain, loss, deduc-
tion, or credit).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 14803. CERTAIN NOTICES DISREGARDED UNDER PRO-
VISION 
INCREASING 
INTEREST 
RATE 
ON
LARGE CORPORATE UNDERPAYMENTS.
(a) GENERAL RULE.—Subparagraph (B) of section
6621(c)(2) (defining applicable date) is amended by add-
ing at the end the following new clause:
‘‘(iii) EXCEPTION
FOR
LETTERS
OR
NOTICES
INVOLVING
SMALL
AMOUNTS.—
For purposes of this paragraph, any letter
or notice shall be disregarded if the
amount of the deficiency or proposed defi-
ciency (or the assessment or proposed as-
sessment) set forth in such letter or notice
is not greater than $100,000 (determined
1318
by not taking into account any interest,
penalties, or additions to tax).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply for purposes of determining in-
terest for periods after December 31, 1995.
SEC. 14804. CLARIFICATION OF AUTHORITY TO WITHHOLD
PUERTO RICO INCOME TAXES FROM SALA-
RIES OF FEDERAL EMPLOYEES.
(a) IN GENERAL.—Subsection (c) of section 5517 of
title 5, United States Code, is amended by striking ‘‘or
territory or possession’’ and inserting ‘‘, territory, posses-
sion, or commonwealth’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
PART II—TAX COURT PROCEDURES
SEC. 14811. OVERPAYMENT DETERMINATIONS OF TAX
COURT.
(a) APPEAL OF ORDER.—Paragraph (2) of section
6512(b) (relating to jurisdiction to enforce) is amended
by adding at the end the following new sentence: ‘‘An
order of the Tax Court disposing of a motion under this
paragraph shall be reviewable in the same manner as a
decision of the Tax Court, but only with respect to the
matters determined in such order.’’
1319
(b) DENIAL OF JURISDICTION REGARDING CERTAIN
CREDITS AND REDUCTIONS.—Subsection (b) of section
6512 (relating to overpayment determined by Tax Court)
is amended by adding at the end the following new
paragraph:
‘‘(4) DENIAL
OF
JURISDICTION
REGARDING
CERTAIN
CREDITS
AND
REDUCTIONS.—The Tax
Court shall have no jurisdiction under this sub-
section to restrain or review any credit or reduction
made by the Secretary under section 6402.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 14812. AWARDING OF ADMINISTRATIVE COSTS.
(a) RIGHT TO APPEAL TAX COURT DECISION.—Sub-
section (f) of section 7430 (relating to right of appeal)
is amended by adding at the end the following new
paragraph:
‘‘(3) APPEAL
OF
TAX
COURT
DECISION.—An
order of the Tax Court disposing of a petition under
paragraph (2) shall be reviewable in the same man-
ner as a decision of the Tax Court, but only with re-
spect to the matters determined in such order.’’
(b) PERIOD FOR APPLYING TO IRS FOR COSTS.—
Subsection (b) of section 7430 (relating to limitations) is
1320
amended by adding at the end the following new
paragraph:
‘‘(5) PERIOD FOR APPLYING TO IRS FOR AD-
MINISTRATIVE
COSTS.—An award may be made
under subsection (a) by the Internal Revenue Serv-
ice for reasonable administrative costs only if the
prevailing party files an application with the Inter-
nal Revenue Service for such costs before the 91st
day after the date on which the final decision of the
Internal Revenue Service as to the determination of
the tax, interest, or penalty is mailed to such party.’’
(c) PERIOD FOR PETITIONING OF TAX COURT FOR
REVIEW OF DENIAL OF COSTS.—Paragraph (2) of section
7430(f) (relating to right of appeal) is amended—
(1) by striking ‘‘appeal to’’ and inserting ‘‘the
filing of a petition for review with’’, and
(2) by adding at the end the following new sen-
tence: ‘‘If the Secretary sends by certified or reg-
istered mail a notice of such decision to the peti-
tioner, no proceeding in the Tax Court may be initi-
ated under this paragraph unless such petition is
filed before the 91st day after the date of such
mailing.’’
1321
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to civil actions or proceedings com-
menced after the date of the enactment of this Act.
SEC. 14813. REDETERMINATION OF INTEREST PURSUANT
TO MOTION.
(a) IN GENERAL.—Paragraph (3) of section 7481(c)
(relating to jurisdiction over interest determinations) is
amended by striking ‘‘petition’’ and inserting ‘‘motion’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 14814. APPLICATION OF NET WORTH REQUIREMENT
FOR AWARDS OF LITIGATION COSTS.
(a) IN GENERAL.—Paragraph (4) of section 7430(c)
(defining prevailing party) is amended by adding at the
end the following new subparagraph:
‘‘(C) SPECIAL RULES FOR APPLYING NET
WORTH
REQUIREMENT.—In applying the re-
quirements of section 2412(d)(2)(B) of title 28,
United States Code, for purposes of subpara-
graph (A)(iii) of this paragraph—
‘‘(i) the net worth limitation in clause
(i) of such section shall apply to—
1322
‘‘(I) an estate but shall be deter-
mined as of the date of the decedent’s
death, and
‘‘(II) a trust but shall be deter-
mined as of the last day of the taxable
year involved in the proceeding, and
‘‘(ii) individuals filing a joint return
shall be treated as 1 individual for pur-
poses of clause (i) of such section, except
in the case of a spouse relieved of liability
under section 6013(e).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to proceedings commenced after
the date of the enactment of this Act.
PART III—AUTHORITY FOR CERTAIN
COOPERATIVE AGREEMENTS
SEC. 14821. COOPERATIVE AGREEMENTS WITH STATE TAX
AUTHORITIES.
(a) GENERAL RULE.—Chapter 77 (relating to mis-
cellaneous provisions) is amended by adding at the end
the following new section:
‘‘SEC. 7524. COOPERATIVE AGREEMENTS WITH STATE TAX
AUTHORITIES.
‘‘(a) AUTHORIZATION OF AGREEMENTS.—The Sec-
retary is hereby authorized to enter into cooperative agree-
1323
ments with State tax authorities for purposes of enhancing
joint tax administration. Such agreements may provide
for—
‘‘(1) joint filing of Federal and State income
tax returns,
‘‘(2) single processing of such returns,
‘‘(3) joint collection of taxes (other than Fed-
eral income taxes), and
‘‘(4) such other provisions as may enhance joint
tax administration.
‘‘(b) SERVICES
ON REIMBURSABLE BASIS.—Any
agreement under subsection (a) may require reimburse-
ment for services provided by either party to the agree-
ment.
‘‘(c) AVAILABILITY OF FUNDS.—Any funds appro-
priated for purposes of the administration of this title
shall be available for purposes of carrying out the Sec-
retary’s responsibility under an agreement entered into
under subsection (a). Any reimbursement received pursu-
ant to such an agreement shall be credited to the amount
so appropriated.
‘‘(d) STATE TAX AUTHORITY.—For purposes of this
section, the term ‘State tax authority’ means agency,
body, or commission referred to in section 6103(d)(1).’’
1324
(b) CLERICAL AMENDMENT.—The table of sections
for chapter 77 is amended by adding at the end the follow-
ing new item:
‘‘Sec. 7524. Cooperative agreements with State tax authorities.’’
TITLE 
XV—PRESERVING, 
PRO-
TECTING, AND STRENGTHEN-
ING MEDICARE
H.R. 2425 as passed the House of Representatives
is hereby enacted into law.
TITLE XVI—TRANSFORMATION
OF THE MEDICAID PROGRAM
SEC. 16000. SHORT TITLE.
This title may be cited as the ‘‘Medicaid Trans-
formation Act of 1995’’.
SEC. 16001. TRANSFORMATION OF MEDICAID PROGRAM.
The Social Security Act is amended by adding at the
end the following new title:
‘‘TITLE XXI—MEDIGRANT PROGRAM FOR LOW-
INCOME INDIVIDUALS AND FAMILIES
‘‘TABLE OF CONTENTS OF TITLE
‘‘Sec. 2100. Purpose; State MediGrant plans.
‘‘PART A—OBJECTIVES, GOALS, AND PERFORMANCE UNDER STATE PLANS
‘‘Sec. 2101. Description of strategic objectives and performance goals.
‘‘Sec. 2102. Annual reports.
‘‘Sec. 2103. Periodic, independent evaluations.
‘‘Sec. 2104. Description of process for MediGrant plan development.
‘‘Sec. 2105. Consultation in MediGrant plan development.
‘‘Sec. 2106. MediGrant Task Force.
‘‘PART B—ELIGIBILITY, BENEFITS, AND SET-ASIDES
1325
‘‘Sec. 2111. General description of eligibility and benefits.
‘‘Sec. 2112. Set-asides of funds for population groups.
‘‘Sec. 2113. Premiums and cost-sharing.
‘‘Sec. 2114. Description of process for developing capitation payment rates.
‘‘Sec. 2115. Preventing spousal impoverishment.
‘‘Sec. 2116. Construction.
‘‘Sec. 2117. Limitations on causes of action.
‘‘PART C—PAYMENTS TO STATES
‘‘Sec. 2121. Allotment of funds among States.
‘‘Sec. 2122. Payments to States.
‘‘Sec. 2123. Limitation on use of funds; disallowance.
‘‘PART D—PROGRAM INTEGRITY AND QUALITY
‘‘Sec. 2131. Use of audits to achieve fiscal integrity.
‘‘Sec. 2132. Fraud prevention program.
‘‘Sec. 2133. Information concerning sanctions taken by State licensing authori-
ties against health care practitioners and providers.
‘‘Sec. 2134. State MediGrant fraud control units.
‘‘Sec. 2135. Recoveries from third parties and others.
‘‘Sec. 2136. Assignment of rights of payment.
‘‘Sec. 2137. Quality assurance standards for nursing facilities.
‘‘Sec. 2138. Other provisions promoting program integrity.
‘‘PART E—ESTABLISHMENT AND AMENDMENT OF STATE MEDIGRANT PLANS
‘‘Sec. 2151. Submittal and approval of MediGrant plans.
‘‘Sec. 2152. Submittal and approval of plan amendments.
‘‘Sec. 2153. Process for State withdrawal from program.
‘‘Sec. 2154. Sanctions for substantial noncompliance.
‘‘Sec. 2155. Secretarial authority.
‘‘PART F—GENERAL PROVISIONS
‘‘Sec. 2171. Definitions.
‘‘Sec. 2172. Treatment of territories.
‘‘Sec. 2173. Description of treatment of Indian Health Service facilities.
‘‘Sec. 2174. Application of certain general provisions.
‘‘Sec. 2175. MediGrant master drug rebate agreements.
‘‘SEC. 2100. PURPOSE; STATE MEDIGRANT PLANS.
‘‘(a) PURPOSE.—The purpose of this title is to pro-
vide block grants to States to enable them to provide medi-
cal assistance to low-income individuals and families in a
more effective, efficient, and responsive manner.
‘‘(b) STATE PLAN REQUIRED.—A State is not eligible
for payment under section 2122 of this title unless the
1326
State has submitted to the Secretary under part E a plan
(in this title referred to as a ‘MediGrant plan’) that—
‘‘(1) sets forth how the State intends to use the
funds provided under this title to provide medical as-
sistance to needy individuals and families consistent
with the provisions of this title, and
‘‘(2) is approved under such part.
‘‘(c) 
CONTINUED
APPROVAL.—An 
approved
MediGrant plan shall continue in effect unless and until—
‘‘(1) the State amends the plan under section
2152,
‘‘(2) the State terminates participation under
this title under section 2153, or
‘‘(3) the Secretary finds substantial noncompli-
ance of the plan with the requirements of this title
under section 2154.
‘‘(d) STATE ENTITLEMENT.—This title constitutes
budget authority in advance of appropriations Acts, and
represents the obligation of the Federal Government to
provide for the payment to States of amounts provided
under part C.
1327
‘‘PART A—OBJECTIVES, GOALS, AND PERFORMANCE
UNDER STATE PLANS
‘‘SEC. 2101. DESCRIPTION OF STRATEGIC OBJECTIVES AND
PERFORMANCE GOALS.
‘‘(a) DESCRIPTION.—A MediGrant plan shall include
a description of the strategic objectives and performance
goals the State has established for providing health care
services to low-income populations under this title, includ-
ing a general description of the manner in which the plan
is designed to meet these objectives and goals.
‘‘(b) 
CERTAIN
OBJECTIVES
AND
GOALS
RE-
QUIRED.—A MediGrant plan shall include strategic objec-
tives and performance goals relating to rates of childhood
immunizations and reductions in infant mortality and
morbidity.
‘‘(c) CONSIDERATIONS.—In specifying these objec-
tives and goals the State may consider factors such as the
following:
‘‘(1) The State’s priorities with respect to such
areas as providing assistance to low-income popu-
lations.
‘‘(2) The State’s priorities with respect to the
general public health and the health status of indi-
viduals eligible for assistance under the MediGrant
plan.
1328
‘‘(3) The State’s financial resources, the par-
ticular economic conditions in the State, and relative
adequacy of the health care infrastructure in dif-
ferent regions of the State.
‘‘(d) PERFORMANCE
MEASURES.—To the extent
practicable—
‘‘(1) one or more performance goals shall be es-
tablished by the State for each strategic objective
identified in the MediGrant plan; and
‘‘(2) the MediGrant plan shall describe, how
program performance will be—
‘‘(A) measured through objective, inde-
pendently verifiable means, and
‘‘(B) compared against performance goals,
in order to determine the State’s performance
under this title.
‘‘(e) PERIOD COVERED.—
‘‘(1) STRATEGIC
OBJECTIVES.—The strategic
objectives shall cover a period of not less than 5
years and shall be updated and revised at least every
3 years.
‘‘(2) PERFORMANCE GOALS.—The performance
goals shall be established for dates that are not more
than 3 years apart.
1329
‘‘SEC. 2102. ANNUAL REPORTS.
‘‘(a) IN GENERAL.—In the case of a State with a
MediGrant plan that is in effect for part or all of a fiscal
year, no later than March 31 following such fiscal year
(or March 31, 1998, in the case of fiscal year 1996) the
State shall prepare and submit to the Secretary and the
Congress a report on program activities and performance
under this title for such fiscal year.
‘‘(b) CONTENTS.—Each annual report under this sec-
tion for a fiscal year shall include the following:
‘‘(1) EXPENDITURE
AND
BENEFICIARY
SUM-
MARY.—
‘‘(A) INITIAL SUMMARY.—For the report
for fiscal year 1997 (and, if applicable, fiscal
year 1996), a summary of all expenditures
under the MediGrant plan during the fiscal
year (and during any portions of fiscal year
1996 during which the MediGrant plan was in
effect under this title) as follows:
‘‘(i) Aggregate medical assistance ex-
penditures, disaggregated to the extent re-
quired to determine compliance with the
set-aside requirements of subsections (a)
through (c) section 2112 and to compute
the 
case 
mix 
index 
under 
section
2121(d)(3).
1330
‘‘(ii) For each general category of eli-
gible individuals (specified in subsection
(c)(1), aggregate medical assistance ex-
penditures and the total and average num-
ber of eligible individuals under the
MediGrant plan.
‘‘(iii) By each general category of eli-
gible individuals, total expenditures for
each of the categories of health care items
and services (specified in subsection (c)(2))
which are covered under the MediGrant
plan and provided on a fee-for-service
basis.
‘‘(iv) By each general category of eli-
gible individuals, total expenditures for
payments to capitated health care organi-
zations (as defined in section 2114(c)(1)).
‘‘(v) Total administrative expendi-
tures.
‘‘(B) SUBSEQUENT SUMMARIES.—For re-
ports for each succeeding fiscal year, a sum-
mary of—
‘‘(i) 
all 
expenditures 
under 
the
MediGrant plan consistent with the report-
1331
ing format specified by the MediGrant
Task Force under section 2106(d)(1), and
‘‘(ii) the total and average number of
eligible individuals under the MediGrant
plan for each general category of eligible
individuals.
‘‘(2) UTILIZATION SUMMARY.—
‘‘(A) INITIAL SUMMARY.—For the report
for fiscal year 1997 (and, if applicable, fiscal
year 1996), summary statistics on the utiliza-
tion 
of 
health 
care 
services 
under 
the
MediGrant plan during the year (and during
any portions of fiscal year 1996 during which
the MediGrant plan was in effect under this
title) as follows:
‘‘(i) For each general category of eli-
gible individuals and for each of the cat-
egories of health care items and services
which are covered under the MediGrant
plan and provided on a fee-for-service
basis, the number and percentage of per-
sons who received such a type of service or
item during the period covered by the re-
port.
1332
‘‘(ii) Summary of health care utiliza-
tion data reported to the State by
capitated health care organizations.
‘‘(B) SUBSEQUENT SUMMARIES.—For re-
ports for each succeeding fiscal year, summary
statistics on the utilization of health care serv-
ices under the MediGrant plan consistent with
the 
reporting 
format 
specified 
by 
the
MediGrant 
Task 
Force 
under 
section
2106(d)(1).
‘‘(3) 
ACHIEVEMENT
OF
PERFORMANCE
GOALS.—With respect to each performance goal es-
tablished under section 2101 and applicable to the
year involved—
‘‘(A) a brief description of the goal;
‘‘(B) data on the actual performance with
respect to the goal;
‘‘(C) a review of the extent to which the
goal was achieved, based on such data; and
‘‘(D) where a performance goal has not
been met—
‘‘(i) why the goal was not met, and
‘‘(ii) actions to be taken in response
to such performance (including adjust-
1333
ments in performance goals or program ac-
tivities for subsequent years).
‘‘(4) PROGRAM EVALUATIONS.—A summary of
the findings of evaluations under section 2103 com-
pleted during the fiscal year covered by the report.
‘‘(5) FRAUD AND ABUSE AND QUALITY CON-
TROL
ACTIVITIES.—A general description of the
State’s activities under part D to detect and deter
fraud and abuse and to assure quality of services
provided under the program.
‘‘(6) PLAN ADMINISTRATION.—
‘‘(A) A description of the administrative
roles and responsibilities of entities in the State
responsible for administration of this title.
‘‘(B) Organizational charts for each entity
in the State primarily responsible for activities
under this title.
‘‘(C) A brief description of each interstate
compact (if any) the State has entered into
with other States with respect to activities
under this title.
‘‘(D) General citations to the State stat-
utes and administrative rules governing the
State’s activities under this title.
1334
‘‘(7) INPATIENT
HOSPITAL
PAYMENTS.—With
respect to inpatient hospital services provided under
the MediGrant plan on a fee-for-service basis, a de-
scription of the average amount paid per discharge
in the fiscal year compared either to the average
charge for such services or to the State’s estimate
of the average amount paid per discharge by com-
mercial health insurers in the State.
‘‘(c) DEFINITIONS.—In this section:
‘‘(1) Each of the following is a general category
of eligible individuals:
‘‘(A) Children.
‘‘(B) Blind or disabled adults under 65
years of age.
‘‘(C) Persons 65 years of age or older.
‘‘(D) Other adults.
‘‘(2) The health care items and services de-
scribed in each subparagraph of section 2171(a)(1)
shall be considered a separate category of health
care items and services.
‘‘SEC. 2103. PERIODIC, INDEPENDENT EVALUATIONS.
‘‘(a) IN GENERAL.—During fiscal year 1998 and
every third fiscal year thereafter, each State shall provide
for an evaluation of the operation of its MediGrant plan
under this title.
1335
‘‘(b) INDEPENDENT.—Each such evaluation with re-
spect to an activity under the MediGrant plan shall be con-
ducted by an entity that is neither responsible under State
law for the submission of the State plan (or part thereof)
nor responsible for administering (or supervising the ad-
ministration of) the activity. If consistent with the pre-
vious sentence, such an entity may be a college or univer-
sity, a State agency, a legislative branch agency in a State,
or an independent contractor.
‘‘(c) RESEARCH
DESIGN.—Each such evaluation
shall be conducted in accordance with a research design
that is based on generally accepted models of survey de-
sign and sampling and statistical analysis.
‘‘SEC. 2104. DESCRIPTION OF PROCESS FOR MEDIGRANT
PLAN DEVELOPMENT.
‘‘Each MediGrant plan shall include a description of
the process under which the plan shall be developed and
implemented in the State (consistent with section 2105).
‘‘SEC. 2105. CONSULTATION IN MEDIGRANT PLAN DEVELOP-
MENT.
‘‘(a) PUBLIC NOTICE PROCESS.—
‘‘(1) 
IN
GENERAL.—Before 
submitting 
a
MediGrant plan or a plan amendment described in
paragraph (3) to the Secretary under part E, a
State shall provide—
1336
‘‘(A) public notice respecting the submittal
of the proposed plan or amendment, including
a general description of the plan or amendment;
‘‘(B) a means for the public to inspect or
obtain a copy (at reasonable charge) of the pro-
posed plan or amendment; and
‘‘(C) an opportunity for submittal and con-
sideration of public comments on the proposed
plan or amendment.
The previous sentence shall not apply to a revision
of a MediGrant plan (or revision of an amendment
to a plan) made by a State under section 2154(c)(1)
or to a plan amendment withdrawal described in sec-
tion 2152(c)(4).
‘‘(2) CONTENTS OF NOTICE.—A notice under
paragraph (1)(A) for a proposed plan or amendment
shall include a description of—
‘‘(A) the general purpose of the proposed
plan or amendment (including applicable effec-
tive dates),
‘‘(B) where the public may inspect the pro-
posed plan or amendment,
‘‘(C) how the public may obtain a copy of
the proposed plan or amendment and the appli-
cable charge (if any) for the copy, and
1337
‘‘(D) how the public may submit comments
on the proposed plan or amendment, including
any deadlines applicable to consideration of
such comments.
‘‘(3) AMENDMENTS
DESCRIBED.—An amend-
ment to a MediGrant plan described in this para-
graph is an amendment which makes a material and
substantial change in eligibility under the MediGrant
plan or the benefits provided under the plan.
‘‘(4) PUBLICATION.—Notices under this sub-
section may be published (as selected by the State)
in one or more daily newspapers of general circula-
tion in the State or in any publication used by the
State to publish State statutes or rules.
‘‘(5) COMPARABLE PROCESS.—A separate no-
tice, or notices, shall not be required under this sub-
section for a State if notice of the MediGrant plan
or an amendment to the plan will be provided under
a process specified in State law that is substantially
equivalent to the notice process specified in this sub-
section.
‘‘(b) ADVISORY COMMITTEE.—
‘‘(1) 
IN
GENERAL.—Each 
State 
with 
a
MediGrant plan shall establish and maintain an ad-
visory committee.
1338
‘‘(2) CONSULTATION.—The State shall periodi-
cally consult with the advisory committee in the de-
velopment, revision, and monitoring the performance
of the MediGrant plan, including—
‘‘(A) the development of strategic objec-
tives and performance goals under section
2101,
‘‘(B) the annual report under section
2102, and
‘‘(C) the research design under section
2103(c).
‘‘(3) GEOGRAPHIC
DIVERSITY.—The composi-
tion of the advisory committee shall be chosen in a
manner that assures some representation on the ad-
visory committee of the different general geographic
regions of the State. Nothing in the previous sen-
tence shall be construed as requiring proportional
representation of geographic areas in a State.
‘‘(4) CONSTRUCTION.—Nothing in this title
shall be construed as preventing a State from estab-
lishing more than one advisory committee, including
specialized advisory committees that represent the
interests of specific population groups, provider
groups, or geographic areas.
1339
‘‘SEC. 2106. MEDIGRANT TASK FORCE.
‘‘(a) IN GENERAL.—The Secretary shall provide for
the establishment of a MediGrant Task Force (in this sec-
tion referred to as the ‘Task Force’).
‘‘(b) COMPOSITION.—The Task Force shall consist of
6 members appointed by the chair of the National Gov-
ernors Association and 6 members appointed by the vice
chair of the National Governors Association.
‘‘(c) ADVISORY GROUP FOR TASK FORCE.—The Sec-
retary shall provide for the establishment of an advisory
group to assist the Task Force in carrying out its duties
under this section, consisting of one representative ap-
pointed by each of the following associations:
‘‘(1) National Committee for Quality Assur-
ance.
‘‘(2) Joint Commission for the Accreditation of
Healthcare Organizations.
‘‘(3) Group Health Association of America.
‘‘(4) American Managed Care and Review Asso-
ciation.
‘‘(5) Association of State and Territorial Health
Officers.
‘‘(6) American Medical Association.
‘‘(7) American Hospital Association.
‘‘(8) American Dental Association.
‘‘(9) American College of Gerontology.
1340
‘‘(10) American Health Care Association.
‘‘(11) An association identified by the Secretary
as representing the interests of disabled individuals.
‘‘(12) An association identified by the Secretary
as representing the interests of children.
‘‘(13) An association identified by the Secretary
as representing the interests of the elderly.
‘‘(14) An association identified by the Secretary
as representing the interests of mentally ill individ-
uals.
Any reference in this subsection to a particular group shall
be deemed a reference to any successor to such group.
‘‘(d) DUTIES.—
‘‘(1) FORMAT FOR EXPENDITURE AND UTILIZA-
TION SUMMARIES.—The Task Force shall specify, by
not later than December 31, 1996, the format of ex-
penditure summaries and utilization summaries re-
quired under section 2102. Such format may provide
for the reporting of different information from that
required under section 2102(a), but shall include the
reporting of at least the information described in
section 2102(b)(1)(A)(i).
‘‘(2) MODELS AND SUGGESTIONS.—The Task
Force shall study and report to Congress and the
1341
States, by not later than April 1, 1997, rec-
ommendations on the following:
‘‘(A) Recommended models for strategic
objectives and performance goals for consider-
ation by States in the development of such ob-
jectives and goals under section 2102, including
alternative models for each of the objectives and
goals described in section 2101(b).
‘‘(B) For each suggested model for a stra-
tegic objective or performance goal suggested
methodologies for States to consider in measur-
ing and verifying the objective or goal.
‘‘(C) An assessment of the potential useful-
ness to States of quality assurance safeguards,
utilization data sets, and accreditation pro-
grams that are used or under development in
the private sector.
‘‘(D) Recommended designs and evaluation
methodologies for consideration by States in
providing for independent evaluations under
section 2103.
‘‘(3) CONSTRUCTION.—Nothing in this sub-
section shall be construed as requiring a State to
adopt any of the strategic objectives or performance
goals suggested under paragraph (2).