370
sections (a), (b), and (c) and inserting the following
new subsections:
‘‘(a) IN GENERAL.—There is hereby imposed on the
amount paid for taxable transportation of any person a
tax equal to 7.5 percent of the amount so paid.
‘‘(b) DOMESTIC SEGMENTS OF TAXABLE TRANSPOR-
TATION.—
‘‘(1) IN GENERAL.—There is hereby imposed on
the amount paid for each domestic segment of tax-
able transportation by air a tax in the amount deter-
mined in accordance with the following table for the
calendar year in which the segment begins:
In the case of segments
beginning during:
The tax is:
1997 or 1998 .........................................................
$2.00
1999 .......................................................................
$2.25
2000 .......................................................................
$2.50
2001 .......................................................................
$2.75
2002 or thereafter .................................................
$3.00.
‘‘(2) DOMESTIC
SEGMENT.—For purposes of
this section, the term ‘domestic segment’ means any
segment which is taxable transportation described in
section 4262(a)(1).
‘‘(3) CHANGES IN SEGMENTS BY REASON OF
REROUTING.—If—
‘‘(A) a ticket is purchased for transpor-
tation between 2 locations on specified flights,
and
371
‘‘(B) at the initiation of the air carrier
after such purchase, there is a change in the
route taken which changes the number of do-
mestic segments, but there is no change in the
amount charged for such transportation,
the tax imposed by paragraph (1) shall be deter-
mined without regard to such change in route.
‘‘(c) USE OF INTERNATIONAL TRAVEL FACILITIES.—
‘‘(1) IN GENERAL.—There is hereby imposed a
tax of $15.50 on any amount paid (whether within
or without the United States) for any transportation
of any person by air, if such transportation begins
or ends in the United States.
‘‘(2) EXCEPTION
FOR
TRANSPORTATION
EN-
TIRELY
TAXABLE
UNDER
SUBSECTION
(a).—This
subsection shall not apply to any transportation all
of which is taxable under subsection (a) (determined
without regard to sections 4281 and 4282).
‘‘(3) SPECIAL
RULE
FOR
ALASKA
AND
HA-
WAII.—In any case in which the tax imposed by
paragraph (1) applies to a domestic segment, such
tax shall apply only on departure.’’
(2) SPECIAL RULES.—Section 4261 is amended
by redesignating subsections (e), (f), and (g), as sub-
sections (f), (g), and (h), respectively, and by insert-
372
ing after subsection (d) the following new sub-
section:
‘‘(e) SPECIAL RULES.—
‘‘(1) AMOUNTS
PAID
OUTSIDE
THE
UNITED
STATES.—In the case of amounts paid outside the
United States for taxable transportation, the taxes
imposed by subsections (a) and (b) shall apply only
to segments of such transportation which begin and
end in the United States.
‘‘(2) AMOUNTS
PAID
FOR
RIGHT
TO
AWARD
FREE OR REDUCED RATE AIR TRANSPORTATION.—
Any amount paid (and the value of any other benefit
provided) to an air carrier (or any related person)
for the right to provide mileage awards for (or other
reductions in the cost of) any transportation of per-
sons by air shall be treated for purposes of sub-
section (a) as an amount paid for taxable transpor-
tation, and such amount shall be taxable under sub-
section (a) without regard to any other provision of
this subchapter. The Secretary shall prescribe rules
which reallocate items of income, deduction, credit,
exclusion, or other allowance to the extent necessary
to prevent the avoidance of tax imposed by reason
of this paragraph.
373
‘‘(3) INFLATION
ADJUSTMENT
OF
DOLLAR
RATES OF TAX.—
‘‘(A) IN GENERAL.—In the case of taxable
events in a calendar year after the last non-
indexed year, the dollar amount contained in
subsection (b) and the dollar amount contained
in subsection (c) shall each be increased by an
amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such
calendar year by substituting the year be-
fore the last nonindexed year for ‘calendar
year 1992’ in subparagraph (B) thereof.
If any increase determined under the preceding
sentence is not a multiple of 10 cents, such in-
crease shall be rounded to the nearest multiple
of 10 cents.
‘‘(B) LAST NONINDEXED YEAR.—For pur-
poses of subparagraph (A), the last nonindexed
year is—
‘‘(i) 2002 in the case of a dollar
amount contained in subsection (b), and
‘‘(ii) 1998 in the case of a dollar
amount contained in subsection (c).
374
‘‘(C) TAXABLE EVENT.—For purposes of
subparagraph (A), in the case of the tax im-
posed subsection (b), the beginning of the do-
mestic segment shall be treated as the taxable
event.’’
(3) SECONDARY
LIABILITY
OF
CARRIER
FOR
UNPAID
TAX.—Subsection (c) of section 4263 is
amended by striking ‘‘subchapter—’’ and all that
follows and inserting ‘‘, such tax shall be paid by the
carrier providing the initial segment of such trans-
portation which begins or ends in the United
States.’’
(d) MODIFICATION OF RULES ON AIRLINE FARE AD-
VERTISING.—Subsection (b) of section 7275 (relating to
advertising) is amended by striking ‘‘shall—’’ and all that
follows and inserting ‘‘shall—
‘‘(1) separately state—
‘‘(A) the amount to be paid for such trans-
portation, and
‘‘(B) the amount of the taxes imposed by
subsections (a), (b), and (c) of section 4261 at
a location proximate to (and in a type size not
less than half the type size of) the statement of
the amount described in subparagraph (A), and
375
‘‘(2) describe such taxes substantially as: ‘user
taxes to pay for airport construction and airway
safety and operations’.’’
(e) INCREASED AIRPORT AND AIRWAY TRUST FUND
DEPOSITS.—
(1) Paragraph (1) of section 9502(b) is amend-
ed—
(A) by striking ‘‘(to the extent that the
rate of the tax on such gasoline exceeds 4.3
cents per gallon)’’ in subparagraph (C), and
(B) by striking ‘‘to the extent attributable
to the Airport and Airway Trust Fund financ-
ing rate’’ in subparagraph (C).
(2) Section 9502 is amended by striking sub-
section (f).
(f) EFFECTIVE DATES.—
(1) FUEL TAXES.—The amendments made by
subsection (a) shall apply take effect on October 1,
1997.
(2) TICKET TAXES.—
(A) IN
GENERAL.—Except as otherwise
provided in this paragraph, the amendments
made by subsections (b) and (c) shall apply to
transportation beginning on or after October 1,
1997.
376
(B) TREATMENT OF AMOUNTS PAID FOR
TICKETS PURCHASED BEFORE DATE OF ENACT-
MENT.—The amendments made by subsection
(c) shall not apply to amounts paid for a ticket
purchased before the date of the enactment of
this Act for a specified flight beginning on or
after October 1, 1997.
(C) AMOUNTS PAID FOR RIGHT TO AWARD
MILEAGE AWARDS.—
(i) IN
GENERAL.—Paragraph (2) of
section 4261(e) of the Internal Revenue
Code of 1986 (as added by the amendment
made by subsection (c)) shall apply to
amounts paid after September 30, 1997.
(ii) PAYMENTS WITHIN CONTROLLED
GROUP.—For purposes of clause (i), any
amount paid after June 11, 1997, and be-
fore October 1, 1997, by 1 member of a
controlled group for a right which is de-
scribed in such section 4261(e)(2) and is
furnished by another member of such
group after September 30, 1997, shall be
treated as paid after September 30, 1997.
For purposes of the preceding sentence, all
persons treated as a single employer under
377
subsection (a) or (b) of section 52 of such
Code shall be treated as members of a con-
trolled group.
(3) ADVERTISING.—The amendment made by
subsection (d) shall take effect on October 1, 1997.
(4) INCREASED DEPOSITS INTO AIRPORT AND
AIRWAY TRUST FUND.—The amendments made by
subsection (e) shall apply with respect to taxes re-
ceived in the Treasury on and after October 1, 1997.
(g) DELAYED DEPOSITS OF AIRLINE TICKET TAX
REVENUES.—In the case of deposits of taxes imposed by
section 4261 of the Internal Revenue Code of 1986, the
due date for any such deposit which would (but for this
subsection) be required to be made after August 14, 1997,
and before October 1, 1997, shall be October 10, 1997.
SEC. 1042. KEROSENE TAXED AS DIESEL FUEL.
(a) IN GENERAL.—Subsection (a) of section 4083
(defining taxable fuel) is amended by striking ‘‘and’’ at
the end of subparagraph (A), by striking the period at
the end of subparagraph (B) and inserting ‘‘, and’’, and
by adding at the end the following new subparagraph:
‘‘(C) kerosene.’’
(b) 
RATE
OF
TAX.—Clause 
(iii) 
of 
section
4081(a)(2)(A) is amended by inserting ‘‘or kerosene’’
after ‘‘diesel fuel’’.
378
(c) EXEMPTIONS FROM TAX; REFUNDS
TO VEN-
DORS.—
(1) IN GENERAL.—Section 4082 (relating to ex-
emptions for diesel fuel) is amended by striking
‘‘diesel fuel’’ each place it appears in subsections (a)
and (c) and inserting ‘‘diesel fuel and kerosene’’.
(2) CERTAIN KEROSENE EXEMPT FROM DYEING
REQUIREMENT.—Section 4082 is amended by redes-
ignating subsections (c) and (d) as subsections (d)
and (e), respectively, and by inserting after sub-
section (b) the following new subsection:
‘‘(c) EXCEPTIONS TO DYEING REQUIREMENTS.—
‘‘(1) AVIATION-GRADE KEROSENE.—Subsection
(a)(2) shall not apply to a removal, entry, or sale of
aviation-grade kerosene (as determined under regu-
lations prescribed by the Secretary) if the person re-
ceiving the kerosene is registered under section 4101
with respect to the tax imposed by section 4091.
‘‘(2) USE
FOR
NON-FUEL
FEEDSTOCK
PUR-
POSES.—Subsection (a)(2) shall not apply to ker-
osene—
‘‘(A) received by pipeline or barge for use
by the person receiving the kerosene in the
manufacture or production of any substance
379
(other than gasoline, diesel fuel, or special fuels
referred to in section 4041), or
‘‘(B) to the extent provided in regulations,
removed or entered—
‘‘(i) for such a use by the person re-
moving or entering the kerosene, or
‘‘(ii) for resale by such person for
such a use by the purchaser,
but only if the person receiving, removing, or enter-
ing the kerosene and such purchaser (if any) are
registered under section 4101 with respect to the tax
imposed by section 4081.’’
(3) REFUNDS.—
(A) Subsection (l) of section 6427 is
amended by inserting ‘‘or kerosene’’ after ‘‘die-
sel fuel’’ each place it appears in paragraphs
(1), (2), and (5) (including the heading for
paragraph (5)).
(B) Paragraph (5) of section 6427(l) is
amended by redesignating subparagraph (B) as
subparagraph (C) and by inserting after sub-
paragraph (A) the following new subparagraph:
‘‘(B) SALES OF KEROSENE NOT FOR USE
IN MOTOR FUEL.—Paragraph (1)(A) shall not
apply to kerosene sold by a vendor—
380
‘‘(i) for any use if such sale is from
a pump which (as determined under regu-
lations prescribed by the Secretary) is not
suitable for use in fueling any diesel-pow-
ered highway vehicle or train, or
‘‘(ii) to the extent provided by the
Secretary, for blending with heating oil to
be used during periods of extreme or un-
seasonable cold.’’
(C) 
Subparagraph 
(C) 
of 
section
6427(l)(5), as redesignated by subparagraph
(B) of this paragraph, is amended by striking
‘‘subparagraph (A)’’ and inserting ‘‘subpara-
graph (A) or (B)’’.
(D) The heading for subsection (l) of sec-
tion 6427 is amended by inserting ‘‘, KER-
OSENE,’’ after ‘‘DIESEL FUEL’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 4041(a) is amend-
ed by striking ‘‘kerosene, gas oil, or fuel oil’’ and in-
serting ‘‘gas oil, fuel oil’’.
(2) Paragraph (1) of section 4041(c) is amend-
ed by striking ‘‘any liquid’’ and inserting ‘‘kerosene
and any other liquid’’.
381
(3)(A) The heading for section 4082 is amend-
ed by inserting ‘‘AND KEROSENE’’ after ‘‘DIESEL
FUEL’’.
(B) The table of sections for subpart A of part
III of subchapter A of chapter 32 is amended by in-
serting ‘‘and kerosene’’ after ‘‘diesel fuel’’ in the
item relating to section 4082.
(4) Subsection (b) of section 4083 is amended
by striking ‘‘gasoline, diesel fuel,’’ and inserting
‘‘taxable fuels’’.
(5) Subsection (a) of section 4093 is amended
by striking ‘‘any liquid’’ and inserting ‘‘kerosene and
any other liquid’’.
(6) The material following subparagraph (F) of
section 6416(b)(2) is amended by inserting ‘‘or ker-
osene’’ after ‘‘diesel fuel’’.
(7) Paragraphs (1) and (3) of section 6427(f),
and the heading for section 6427(f), are each
amended by inserting ‘‘kerosene,’’ after ‘‘diesel
fuel,’’.
(8) Paragraph (2) of section 6427(f) is amend-
ed by striking ‘‘or diesel fuel’’ each place it appears
and inserting ‘‘, diesel fuel, or kerosene’’.
382
(9) Subparagraph (A) of section 6427(i)(3) is
amended by striking ‘‘or diesel fuel’’ and inserting
‘‘, diesel fuel, or kerosene’’.
(10) The heading for paragraph (4) of section
6427(i) is amended to read as follows:
‘‘(4) SPECIAL RULE FOR REFUNDS UNDER SUB-
SECTION (l).—’’
(11) Paragraph (1) of section 6715(c) is
amended by inserting ‘‘or kerosene’’ after ‘‘diesel
fuel’’.
(12)(A) The text of section 7232 is amended by
striking ‘‘gasoline, lubricating oil, diesel fuel’’ and
inserting ‘‘any taxable fuel (as defined in section
4083)’’.
(B) The section heading for section 7232 is
amended to read as follows:
‘‘SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101,
FALSE REPRESENTATIONS OF REGISTRATION
STATUS, ETC.’’
(C) The table of sections for part II of sub-
chapter A of chapter 75 is amended by striking the
item relating to section 7232 and inserting the fol-
lowing:
‘‘Sec. 7232. Failure to register under section 4101, false represen-
tations of registration status, etc.’’
383
(13) Sections 9503(b)(1)(E) and 9508(b)(2)
are each amended by striking ‘‘and diesel fuel’’ and
inserting ‘‘, diesel fuel, and kerosene’’.
(14) Subparagraph (B) of section 9503(b)(5) is
amended by striking ‘‘or diesel fuel’’ and inserting
‘‘, diesel fuel, or kerosene’’.
(15) Paragraphs (1)(B) and (2) of section
9503(f) are each amended by inserting ‘‘or ker-
osene’’ after ‘‘diesel fuel’’ each place it appears.
(e) EFFECTIVE DATE.—The amendments made by
this section shall take effect on July 1, 1998.
(f) FLOOR STOCK TAXES.—
(1) IMPOSITION OF TAX.—In the case of ker-
osene which is held on July 1, 1998, by any person,
there is hereby imposed a floor stocks tax of 24.3
cents per gallon.
(2) LIABILITY FOR TAX AND METHOD OF PAY-
MENT.—
(A) LIABILITY FOR TAX.—A person hold-
ing kerosene on July 1, 1998, 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.
384
(C) TIME
FOR
PAYMENT.—The tax im-
posed by paragraph (1) shall be paid on or be-
fore August 31, 1998.
(3) DEFINITIONS.—For purposes of this sub-
section—
(A) HELD BY A PERSON.—Kerosene 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 ker-
osene held by any person exclusively for any use to
the extent a credit or refund of the tax imposed by
section 4081 of the Internal Revenue Code of 1986
is allowable for such use.
(5) EXCEPTION FOR FUEL HELD IN VEHICLE
TANK.—No tax shall be imposed by paragraph (1)
on kerosene held in the tank of a motor vehicle or
motorboat.
(6) EXCEPTION
FOR
CERTAIN
AMOUNTS
OF
FUEL.—
385
(A) IN
GENERAL.—No tax shall be im-
posed by paragraph (1) on kerosene held on
July 1, 1998, by any person if the aggregate
amount of kerosene held by such person on
such date does not exceed 2,000 gallons. The
preceding sentence shall apply only if such per-
son submits to the Secretary (at the time and
in the manner required by the Secretary) 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.—For purposes
of this paragraph—
(i) CORPORATIONS.—
(I) IN
GENERAL.—All persons
treated as a controlled group shall be
treated as 1 person.
(II) CONTROLLED
GROUP.—The
term ‘‘controlled group’’ has the
meaning given to such term by sub-
section (a) of section 1563 of such
386
Code; except that for such purposes
the phrase ‘‘more than 50 percent’’
shall be substituted for the phrase ‘‘at
least 80 percent’’ each place it ap-
pears 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 of persons under
common control where 1 or more of such
persons is not a corporation.
(7) COORDINATION
WITH
SECTION
4081.—No
tax shall be imposed by paragraph (1) on kerosene
to the extent that tax has been (or will be) imposed
on such kerosene under section 4081 or 4091 of
such Code.
(8) 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.
387
SEC. 1043. REDUCTION OF INCENTIVES FOR ALCOHOL
FUELS.
(a) DENIAL OF CREDIT FOR ALCOHOL USED TO
PRODUCE
ETHER.—Subsection (b) of section 40 is
amended by adding at the end the following new para-
graph:
‘‘(6) DENIAL OF CREDIT FOR ALCOHOL USED
TO PRODUCE ETHER.—No credit shall be allowed
under this section for alcohol used to produce any
ether.’’
(b) LIMITATION ON ALCOHOL ELIGIBLE FOR CREDIT
FOR ALCOHOL USED AS FUEL—
(1) IN GENERAL.—Subparagraph (A) of section
40(d)(1) (defining alcohol) is amended by striking
‘‘or’’ at the end of clause (i), by striking the period
at the end of clause (ii) and inserting ‘‘, or’’, and
by adding at the end the following new clause:
‘‘(iii) alcohol produced by a still (or
other distilling apparatus) placed in service
after June 8, 1997.’’
(2) FUTURE CREDIT LIMITED TO AVERAGE HIS-
TORICAL PRODUCTION.—Section 40 is amended by
adding at the end the following new subsection:
‘‘(i) EXPANDED
PRODUCTION
INELIGIBLE
FOR
CREDIT.—
388
‘‘(1) IN GENERAL.—Subsection (a) shall apply
to alcohol produced after December 31, 1997, only
if the alcohol is designated under this subsection by
a producer who is registered under section 4101.
‘‘(2) DESIGNATION BASED ON HISTORICAL PRO-
DUCTION.—
‘‘(A) IN GENERAL.—The amount of alcohol
produced by a producer during any calendar
year which may be designated under this sub-
section by any producer other than an eligible
small ethanol producer is the amount equal to
the average annual amount of alcohol (as de-
fined in subsection (d)(1)(A) without regard to
clause (iii))—
‘‘(i) which was produced by such pro-
ducer (other than casual off-farm produc-
tion) during each of the base period years,
and
‘‘(ii) which was sold or used by such
producer for any purpose described in
clause (i) of subsection (b)(4)(B).
For purposes of the preceding sentence, a rule
similar to the rule of subsection (b)(4)(D) shall
apply.
389
‘‘(B) BASE PERIOD YEAR.—For purposes
of subparagraph (A), the term ‘base period
year’ means each of 3 years which are among
the 5-year period ending on May 31, 1997, de-
termined by disregarding—
‘‘(i) one year for which the production
described in subparagraph (A)(i) was the
largest, and
‘‘(ii) one year for which the produc-
tion described in subparagraph (A)(i) was
the smallest.
‘‘(3) PRODUCTION
FOR
LESS
THAN
ENTIRE
BASE PERIOD.—If alcohol is produced by a producer
for less than 3 base period years, the average re-
ferred to in paragraph (2) shall be treated as being
not less than 50 percent of the annual productive ca-
pacity of such producer as of June 8, 1997.
‘‘(4) ACQUISITIONS AND DISPOSITIONS.—Rules
similar to the rules of subparagraphs (A) and (B) of
section 41(f)(3) shall apply for purposes of this sub-
section.’’
(3) CONFORMING AMENDMENT.—Paragraph (1)
of section 40(g) is amended by striking ‘‘clauses (i)
and (ii)’’ and inserting ‘‘clauses (i), (ii), and (iii)’’.
390
(c) REDUCTION OF CREDIT FOR ETHANOL BY REA-
SON OF CARBON DIOXIDE BYPRODUCT BENEFIT.—
(1) Subsection (h) of section 40 is amended—
(A) by striking ‘‘54 cents’’ each place it
appears and inserting ‘‘51 cents’’, and
(B) by striking ‘‘40 cents’’ each place it
appears and inserting ‘‘38.25 cents’’.
(2) Subparagraph (A) of section 4041(b)(2) is
amended by striking ‘‘5.4 cents’’ and inserting ‘‘5.1
cents’’.
(3) Paragraphs (4)(A) and (5) of section
4081(c) are each amended by striking ‘‘5.4 cents’’
each place it appears and inserting ‘‘5.1 cents’’.
(4) Paragraph (1) of section 4091(c) is amend-
ed by striking ‘‘13.4 cents’’ and inserting ‘‘13.1
cents’’.
(d) EXCISE TAX ON EXCESS PRODUCTION OF FUEL
ALCOHOL.—
(1) IN GENERAL.—Chapter 36 (relating to cer-
tain other excise taxes) is amended by inserting
after subchapter B the following new subchapter:
‘‘Subchapter C—Excess Production of Fuel
Alcohol
‘‘Sec. 4476. Imposition of tax.
391
‘‘SEC. 4476. IMPOSITION OF TAX.
‘‘(a) GENERAL RULE.—There is hereby imposed a
tax of 51 cents for each gallon of excess fuel alcohol pro-
duced, imported, or brought into the United States.
‘‘(b) LIABILITY FOR TAX.—The tax imposed by sub-
section (a) shall be paid by the person who would be liable
for the tax imposed by section 5001 on the alcohol but
for paragraph (1)(C) or (12) of section 5214(a).
‘‘(c) EXCESS FUEL ALCOHOL.—For purposes of this
section—
‘‘(1) DOMESTIC PRODUCTION.—In the case of
alcohol produced in the United States, the term ‘ex-
cess fuel alcohol’ means any alcohol—
‘‘(A) which is withdrawn free of tax under
paragraph (1)(C) or (12) of section 5214(a)
during any calendar year, and
‘‘(B) which is not designated under section
40(i).
‘‘(2) OTHER PRODUCTION.—In the case of alco-
hol imported or brought into the United States—
‘‘(A) IN GENERAL.—The term ‘excess fuel
alcohol’ means, with respect to the person im-
porting or bringing such alcohol into the United
States, the excess of—
392
‘‘(i) the amount of alcohol so imported
or brought into the United States by such
person during any year, over
‘‘(ii) such person’s historical average
determined under rules similar to the rules
of section 40(i)(2).
‘‘(B) EXCEPTION.—Such term shall not in-
clude any alcohol which the person importing or
bringing such alcohol into the United States es-
tablishes to the satisfaction of the Secretary
that such alcohol is not to be used as a fuel or
in a mixture to be used as a fuel.
‘‘(3) ALCOHOL.—The term ‘alcohol’ includes
methanol and ethanol but does not include alcohol
produced from petroleum, natural gas, or coal (in-
cluding lignite).
‘‘(d) SPECIAL RULES.—
‘‘(1) EXCEPTION FOR CASUAL OFF-FARM PRO-
DUCTION.—The tax imposed by this section shall not
apply to casual off-farm production (within the
meaning of section 40).
‘‘(2) ALCOHOL
MUST
BE
WITHDRAWN
FOR
FUEL USE.—Alcohol withdrawn free of tax under
section 5214(a)(1)(C) shall be taken into account
under this section only if withdrawn for fuel use.
393
‘‘(3) CERTAIN RULES TO APPLY.—The tax im-
posed by this section shall attach, and be determined
and paid, as if it were tax imposed by section 5001.
‘‘(e) APPLICATION OF TAX DEPENDENT ON AVAIL-
ABILITY OF OTHER FUEL ALCOHOL SUBSIDIES.—
‘‘(1) APPLICATION
IF
FUEL
ALCOHOL
SUB-
SIDIES
CONTINUE.—Paragraphs 
(1)(B) 
and
(2)(A)(ii) of subsection (c) shall not apply after De-
cember 31, 2000, if this section is in effect after
such date.
‘‘(2) APPLICATION
IF
FUEL
ALCOHOL
SUB-
SIDIES
TERMINATE.—This section shall not apply
after December 31, 2000, if none of the fuel alcohol
subsidies apply to any sale or use after such date.
For purposes of the preceding sentence, the fuel al-
cohol subsidies are sections 40, 4041(b)(2), 4081(c),
4091(c), 6427(f), and 6427(q).’’
(2) TAX TO BE NONDEDUCTIBLE.—Subsection
(a) of section 275 is amended by adding at the end
the following new paragraph:
‘‘(7) Taxes imposed by section 4476 (relating to
excess production of fuel alcohol).’’
(3) TAX
TO
BE
DEPOSITED
INTO
HIGHWAY
TRUST FUND.—Paragraph (1) of section 9503(b) is
amended by striking ‘‘and’’ at the end of subpara-
394
graph (E), by redesignating subparagraph (F) as
subparagraph (G), and by inserting after subpara-
graph (E) the following new subparagraph:
‘‘(F) section 4476 (relating to excess pro-
duction of fuel alcohol), and’’.
(4) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 36 is amended by inserting
after the item relating to subchapter B the following
new item:
‘‘Subchapter C. Excess production of fuel alcohol.’’
(e) INCREASE IN SMALL ETHANOL PRODUCER CRED-
IT.—Subparagraph (A) of section 40(b)(4) is amended by
striking ‘‘10 cents’’ and inserting ‘‘13 cents’’.
(f) EFFECTIVE DATE.—
(1) AMENDMENTS RELATING TO CREDIT.—The
amendments made by subsections (a), (b), (c)(1),
and (e) shall apply to alcohol produced after Decem-
ber 31, 1997, in taxable years ending after such
date.
(2) 
AMENDMENTS
RELATING
TO
EXCISE
TAXES.—The amendments made by subsections
(c)(2) and (d) shall take effect on January 1, 1998.
(3) STILLS PLACED IN SERVICE PURSUANT TO
BINDING CONTRACTS.—For purposes of subsections
(d)(1)(A)(iii) and (i)(3) of section 40 of the Internal
Revenue Code of 1986, as amended by this section,
395
a still (or other distilling apparatus) shall be treated
as placed in service before June 9, 1997, if such still
(or other apparatus) is constructed or acquired by
the taxpayer pursuant to a written contract which
was binding on June 8, 1997, and at all times there-
after before such construction or acquisition.
SEC. 1044. RESTORATION OF LEAKING UNDERGROUND
STORAGE TANK TRUST FUND TAXES.
Paragraph (3) of section 4081(d) is amended by
striking ‘‘shall not apply after December 31, 1995’’ and
inserting ‘‘shall apply after the date of the enactment of
the Revenue Reconciliation Act of 1997 and before Octo-
ber 1, 2002’’.
SEC. 1045. APPLICATION OF COMMUNICATIONS TAX TO
LONG-DISTANCE 
PREPAID 
TELEPHONE
CARDS.
(a) IN GENERAL.—Subsection (b) of section 4251 is
amended—
(1) by adding at the end the following new
paragraph:
‘‘(3) LONG-DISTANCE
PREPAID
TELEPHONE
CARDS AND SIMILAR ARRANGEMENTS.—Any amount
paid (and the value of any other benefit provided) to
a provider of communications services (or any relat-
ed person) for the right to award, sell, or otherwise
396
make available telephone service (or reductions in
the cost of such service) other than local telephone
service through prepaid telephone cards or any simi-
lar arrangement shall be treated as an amount paid
for communications services. The Secretary shall
prescribe rules which reallocate items of income, de-
duction, credit, exclusion, or other allowance to the
extent necessary to prevent the avoidance of tax im-
posed by reason of this paragraph.’’, and
(2) by inserting ‘‘AND SPECIAL RULE’’ after
‘‘DEFINITIONS’’ in the heading.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to amounts paid on or after
the date of the enactment of this Act.
(2) PAYMENTS WITHIN CONTROLLED GROUP.—
For purposes of paragraph (1), any amount paid
after June 11, 1997, and before the date of the en-
actment of this Act by 1 member of a controlled
group for a right which is described in section
4251(b)(3) of the Internal Revenue Code of 1986
(as added by this section) and is furnished by an-
other member of such group shall be treated as paid
on the date of the enactment of this Act. For pur-
poses of the preceding sentence, all persons treated
397
as a single employer under subsection (a) or (b) of
section 52 of such Code shall be treated as members
of a controlled group.
Subtitle F—Provisions Relating to
Tax-Exempt Entities
SEC. 1051. EXPANSION OF LOOK-THRU RULE FOR INTER-
EST, ANNUITIES, ROYALTIES, AND RENTS DE-
RIVED BY SUBSIDIARIES OF TAX-EXEMPT OR-
GANIZATIONS.
(a) IN GENERAL.—Paragraph (13) of section 512(b)
is amended to read as follows:
‘‘(13) SPECIAL RULES FOR CERTAIN AMOUNTS
RECEIVED FROM CONTROLLED ENTITIES.—
‘‘(A) IN GENERAL.—If an organization (in
this paragraph referred to as the ‘controlling
organization’) receives (directly or indirectly) a
specified payment from another entity which it
controls (in this paragraph referred to as the
‘controlled entity’), notwithstanding paragraphs
(1), (2), and (3), the controlling organization
shall include such payment as an item of gross
income derived from an unrelated trade or busi-
ness to the extent such payment reduces the net
unrelated income of the controlled entity (or in-
creases any net unrelated loss of the controlled
398
entity). There shall be allowed all deductions of
the controlling organization directly connected
with amounts treated as derived from an unre-
lated trade or business under the preceding sen-
tence.
‘‘(B) 
NET
UNRELATED
INCOME
OR
LOSS.—For purposes of this paragraph—
‘‘(i) NET UNRELATED INCOME.—The
term ‘net unrelated income’ means—
‘‘(I) in the case of a controlled
entity which is not exempt from tax
under section 501(a), the portion of
such entity’s taxable income which
would be unrelated business taxable
income if such entity were exempt
from tax under section 501(a) and
had the same exempt purposes (as de-
fined in section 513A(a)(5)(A)) as the
controlling organization, or
‘‘(II) in the case of a controlled
entity which is exempt from tax under
section 501(a), the amount of the un-
related business taxable income of the
controlled entity.
399
‘‘(ii) NET
UNRELATED
LOSS.—the
term ‘net unrelated loss’ means the net op-
erating loss adjusted under rules similar to
the rules of clause (i).
‘‘(C) SPECIFIED PAYMENT.—For purposes
of this paragraph, the term ‘specified payment’
means any interest, annuity, royalty, or rent.
‘‘(D) DEFINITION OF CONTROL.—For pur-
poses of this paragraph—
‘‘(i) CONTROL.—The term ‘control’
means—
‘‘(I) in the case of a corporation,
ownership (by vote or value) of more
than 50 percent of the stock in such
corporation,
‘‘(II) in the case of a partner-
ship, ownership of more than 50 per-
cent of the profits interests or capital
interests in such partnership, or
‘‘(III) in any other case, owner-
ship of more than 50 percent of the
beneficial interests in the entity.
‘‘(ii) CONSTRUCTIVE
OWNERSHIP.—
Section 318 (relating to constructive own-
ership of stock) shall apply for purposes of
400
determining ownership of stock in a cor-
poration. Similar principles shall apply for
purposes of determining ownership of in-
terests in any other entity.
‘‘(E) RELATED PERSONS.—The Secretary
shall prescribe such rules as may be necessary
or appropriate to prevent avoidance of the pur-
poses of this paragraph through the use of re-
lated persons.’’
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after the date
of the enactment of this Act.
(2) CONTROL
TEST.—In the case of taxable
years beginning before January 1, 1999, an organi-
zation shall be treated as controlling another organi-
zation for purposes of section 512(b)(13) of the In-
ternal Revenue Code of 1986 (as amended by this
section) only if it controls such organization within
the meaning of such section, determined by sub-
stituting ‘‘80 percent’’ for ‘‘50 percent’’ each place
it appears in subparagraph (D) thereof.
401
SEC. 1052. LIMITATION ON INCREASE IN BASIS OF PROP-
ERTY RESULTING FROM SALE BY TAX-EX-
EMPT ENTITY TO A RELATED PERSON.
(a) IN GENERAL.—Part IV of subchapter O of chap-
ter 1 (relating to special rules for gain or loss on disposi-
tion of property) is amended by redesignating section
1061 as section 1062 and by inserting after section 1060
the following new section:
‘‘SEC. 1061. BASIS LIMITATION FOR SALE OR EXCHANGE OF
PROPERTY BY TAX-EXEMPT ENTITY TO RE-
LATED PERSON.
‘‘(a) GENERAL RULE.—In the case of a sale or ex-
change of property directly or indirectly between a tax-
exempt entity and a related person, the basis of the related
person in the property acquired shall not exceed the ad-
justed basis of such property (immediately before the ex-
change) in the hands of the tax-exempt entity, increased
by the amount of gain recognized to the tax-exempt entity
on the transfer which is subject to tax under section 511.
‘‘(b) DEFINITIONS.—For purposes of this section—
‘‘(1) TAX-EXEMPT ENTITY.—The term ‘tax-ex-
empt entity’ means any entity which is exempt from
the tax imposed by this chapter.
‘‘(2) RELATED
PERSON.—The term ‘related
person’ means any person bearing a relationship to
the tax-exempt entity which is described in section
402
267(b) or 707(b)(1). For purposes of applying sec-
tion 267(b)(2) under the preceding sentence, such
an entity shall be treated as if it were an individ-
ual.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part IV of subchapter O of chapter 1 is amended by
striking the last item and inserting the following:
‘‘Sec. 1061. Basis limitation for sale or exchange of property by
tax-exempt entity to related person.
‘‘Sec. 1062. Cross references.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to sales and exchanges after
June 8, 1997.
(2) BINDING
CONTRACTS.—The amendments
made by this section shall not apply to any sale or
exchange pursuant to a written contract which was
binding on June 8, 1997, and at all times thereafter
before the sale or exchange.
SEC. 1053. MODIFICATIONS TO EXCEPTION FROM REPORT-
ING, ETC. OF LOBBYING ACTIVITIES.
(a) IN GENERAL.—Paragraph (3) of section 6033(e)
(relating to exception where dues generally nondeductible)
is amended to read as follows:
‘‘(3) EXCEPTION
WHERE
DUES
GENERALLY
NONDEDUCTIBLE.—
403
‘‘(A) IN
GENERAL.—Paragraph (1)(A)
shall not apply to an organization if more than
90 percent of the amount of the aggregate an-
nual dues (or similar payments) paid to such
organization are paid—
‘‘(i) by individuals or families whose
annual dues (or similar amounts) are less
than $100, or
‘‘(ii) by organizations which are ex-
empt from tax.
For purposes of the preceding sentence, all or-
ganizations sharing a name, charter, historic af-
filiation, or similar characteristics and coordi-
nating their lobbying activities shall be treated
a 1 organization.
‘‘(B) INFLATION
ADJUSTMENT.—In the
case of dues for annual periods beginning in
any calendar year after 1998, the dollar amount
contained in subparagraph (A)(i) shall be in-
creased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such
calendar year by substituting ‘calendar
404
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
If any increase determined under the preceding
sentence is not a multiple of $5, such increase
shall be rounded to the nearest multiple of $5.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
SEC. 1054. TERMINATION OF CERTAIN EXCEPTIONS FROM
RULES RELATING TO EXEMPT ORGANIZA-
TIONS WHICH PROVIDE COMMERCIAL-TYPE
INSURANCE.
(a) IN GENERAL.—Subparagraphs (A) and (B) of
section 1012(c)(4) of the Tax Reform Act of 1986 shall
not apply to any taxable year beginning after December
31, 1997.
(b) SPECIAL RULES.—In the case of an organization
to which section 501(m) of the Internal Revenue Code of
1986 applies solely by reason of the amendment made by
subsection (a)—
(1) no adjustment shall be made under section
481 (or any other provision) of such Code on ac-
count of a change in its method of accounting for its
first taxable year beginning after December 31,
1997, and
405
(2) for purposes of determining gain or loss, the
adjusted basis of any asset held on the 1st day of
such taxable year shall be treated as equal to its fair
market value as of such day.
(c) RESERVE WEAKENING AFTER JUNE 8, 1997.—
Any reserve weakening after June 8, 1997, by an organi-
zation described in subsection (b) shall be treated as oc-
curring in such organizations 1st taxable year beginning
after December 31, 1997.
(d) REGULATIONS.—The Secretary of the Treasury
or his delegate may prescribe rules for providing proper
adjustments for organizations described in subsection (b)
with respect to short taxable years which begin during
1998 by reason of section 843 of the Internal Revenue
Code of 1986.
Subtitle G—Other Revenue
Provisions
SEC. 1061. TERMINATION OF SUSPENSE ACCOUNTS FOR
FAMILY CORPORATIONS REQUIRED TO USE
ACCRUAL METHOD OF ACCOUNTING.
(a) IN GENERAL.—Subsection (i) of section 447 (re-
lating to method of accounting for corporations engaged
in farming) is amended by adding at the end the following
new paragraph:
‘‘(7) TERMINATION.—
406
‘‘(A) IN GENERAL.—No suspense account
may be established under this subsection by any
corporation required by this section to change
its method of accounting for any taxable year
ending after June 8, 1997.
‘‘(B) PHASEOUT OF EXISTING SUSPENSE
ACCOUNTS.—
‘‘(i) IN GENERAL.—Each suspense ac-
count under this subsection shall be re-
duced (but not below zero) for each taxable
year beginning after June 8, 1997, by an
amount equal to the lesser of—
‘‘(I) the applicable portion of
such account, or
‘‘(II) 50 percent of the taxable
income of the corporation for the tax-
able year, or, if the corporation has no
taxable income for such year, the
amount of any net operating loss (as
defined in section 172(c)) for such
taxable year.
For purposes of the preceding sentence,
the amount of taxable income and net op-
erating loss shall be determined without re-
gard to this paragraph.
407
‘‘(ii) COORDINATION WITH OTHER RE-
DUCTIONS.—The amount of the applicable
portion for any taxable year shall be re-
duced (but not below zero) by the amount
of any reduction required for such taxable
year under any other provision of this sub-
section.
‘‘(iv) INCLUSION IN INCOME.—Any re-
duction in a suspense account under this
paragraph shall be included in gross in-
come for the taxable year of the reduction.
‘‘(C) APPLICABLE
PORTION.—For pur-
poses of subparagraph (B), the term ‘applicable
portion’ means, for any taxable year, the
amount which would ratably reduce the amount
in the account (after taking into account prior
reductions) to zero over the period consisting of
such taxable year and the remaining taxable
years in such first 20 taxable years.
‘‘(D) AMOUNTS AFTER 20TH YEAR.—Any
amount in the account as of the close of the
20th year referred to in subparagraph (C) shall
be treated as the applicable portion for each
succeeding year thereafter to the extent not re-
408
duced under this paragraph for any prior tax-
able year after such 20th year.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after June
8, 1997.
SEC. 1062. MODIFICATION OF TAXABLE YEARS TO WHICH
NET OPERATING LOSSES MAY BE CARRIED.
(a) IN GENERAL.—Subparagraph (A) of section
172(b)(1) (relating to years to which loss may be carried)
is amended—
(1) by striking ‘‘3’’ in clause (i) and inserting
‘‘2’’, and
(2) by striking ‘‘15’’ in clause (ii) and inserting
‘‘20’’.
(b) RETENTION OF 3-YEAR CARRYBACK FOR CAS-
UALTY LOSSES OF INDIVIDUALS.—Paragraph (1) of sec-
tion 172(b) is amended by adding at the end the following
new subparagraph:
‘‘(F) CASUALTY
LOSSES
OF
INDIVID-
UALS.—Subparagraph (A)(i) shall be applied by
substituting ‘3 years’ for ‘2 years’ with respect
to the portion of the net operating loss of an in-
dividual for the taxable year which is attrib-
utable to losses of property arising from fire,
409
storm, shipwreck, or other casualty, or from
theft.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to net operating losses for taxable
years beginning after the date of the enactment of this
Act.
SEC. 1063. EXPANSION OF DENIAL OF DEDUCTION FOR
CERTAIN AMOUNTS PAID IN CONNECTION
WITH INSURANCE.
(a) DENIAL OF DEDUCTION FOR PREMIUMS.—Para-
graph (1) of section 264(a) is amended to read as follows:
‘‘(1) Premiums on any life insurance policy, or
endowment or annuity contract, if the taxpayer is di-
rectly or indirectly a beneficiary under the policy or
contract.’’
(b) INTEREST ON POLICY LOANS.—Paragraph (4) of
section 264(a) is amended by striking ‘‘individual, who’’
and all that follows and inserting ‘‘individual.’’
(c) PRO RATA ALLOCATION OF INTEREST EXPENSE
TO POLICY CASH VALUES.—Section 264 is amended by
adding at the end the following new subsection:
‘‘(e) PRO RATA ALLOCATION OF INTEREST EXPENSE
TO POLICY CASH VALUES.—
‘‘(1) IN GENERAL.—No deduction shall be al-
lowed for that portion of the taxpayer’s interest ex-
410
pense which is allocable to unborrowed policy cash
values.
‘‘(2) ALLOCATION.—For purposes of paragraph
(1), the portion of the taxpayer’s interest expense
which is allocable to unborrowed policy cash values
is an amount which bears the same ratio to such in-
terest expense as—
‘‘(A) the taxpayer’s average unborrowed
policy cash values of life insurance policies, and
annuity and endowment contracts, issued after
June 8, 1997, bears to
‘‘(B) the average adjusted bases (within
the meaning of section 1016) for all assets of
the taxpayer.
‘‘(3) UNBORROWED
POLICY
CASH
VALUES.—
The term ‘unborrowed policy cash value’ means,
with respect to any life insurance policy or annuity
or endowment contract, the excess of—
‘‘(A) the cash surrender value of such pol-
icy or contract determined without regard to
any surrender charge, over
‘‘(B) the amount of any loan in respect of
such policy or contract.
‘‘(4) EXCEPTION FOR CERTAIN POLICIES AND
CONTRACTS COVERING OFFICERS, DIRECTORS, AND
411
EMPLOYEES.—Paragraph (1) shall not apply to any
policy or contract owned by an entity engaged in a
trade or business which covers any individual who is
an officer, director, or employee of such trade or
business at the time first covered by the policy or
contract, and such policies and contracts shall not be
taken into account under paragraph (2).
‘‘(5) EXCEPTION
FOR
POLICIES
AND
CON-
TRACTS HELD BY NATURAL PERSONS; TREATMENT
OF PARTNERSHIPS AND S CORPORATIONS.—
‘‘(A) POLICIES AND CONTRACTS HELD BY
NATURAL PERSONS.—
‘‘(i) IN
GENERAL.—This subsection
shall not apply to any policy or contract
held by a natural person.
‘‘(ii) EXCEPTION WHERE BUSINESS IS
BENEFICIARY.—If a trade or business is
directly or indirectly the beneficiary under
any policy or contract, to the extent of the
unborrowed cash value of such policy or
contract, such policy or contract shall be
treated as held by such trade or business
and not by a natural person.
‘‘(iii) SPECIAL RULES.—
412
‘‘(I) CERTAIN TRADES OR BUSI-
NESSES NOT TAKEN INTO ACCOUNT.—
Clause (ii) shall not apply to any
trade or business carried on as a sole
proprietorship and to any trade or
business performing services as an
employee.
‘‘(II) 
LIMITATION
ON
UNBORROWED
CASH
VALUE.—The
amount of the unborrowed cash value
of any policy or contract which is
taken into account by reason of clause
(ii) shall not exceed the benefit to
which the trade or business is entitled
under the policy or contract.
‘‘(iv) 
REPORTING.—The 
Secretary
shall require such reporting from policy-
holders and issuers as is necessary to carry
out clause (ii). Any report required under
the preceding sentence shall be treated as
a 
statement 
referred 
to 
in 
section
6724(d)(1).
‘‘(B) TREATMENT OF PARTNERSHIPS AND
S CORPORATIONS.—In the case of a partnership
413
or S corporation, this subsection shall be ap-
plied at the partnership and corporate levels.
‘‘(6) SPECIAL RULES.—
‘‘(A) COORDINATION WITH SUBSECTION (a)
AND SECTION 265.—If interest on any indebted-
ness is disallowed under subsection (a) or sec-
tion 265—
‘‘(i) such disallowed interest shall not
be taken into account for purposes of ap-
plying this subsection, and
‘‘(ii) for purposes of applying para-
graph (2)(B), the adjusted bases otherwise
taken into account shall be reduced (but
not below zero) by the amount of such in-
debtedness.
‘‘(B) 
COORDINATION
WITH
SECTION
263A.—This subsection shall be applied before
the application of section 263A (relating to cap-
italization of certain expenses where taxpayer
produces property).’’
‘‘(7) INTEREST EXPENSE.—The term ‘interest
expense’ means the aggregate amount allowable to
the taxpayer as a deduction for interest (within the
meaning of section 265(b)(4)) for the taxable year
414
(determined without regard to this subsection, sec-
tion 265(b), and section 291).
‘‘(8) AGGREGATION RULES.—
‘‘(A) IN GENERAL.—All members of a con-
trolled group (within the meaning of subsection
(d)(5)(B)) shall be treated as 1 taxpayer for
purposes of this subsection.
‘‘(B) TREATMENT OF INSURANCE COMPA-
NIES.—This subsection shall not apply to an in-
surance company, and subparagraph (A) shall
be applied without regard to any insurance
company.’’
(b) TREATMENT OF INSURANCE COMPANIES.—
(1) Clause (ii) of section 805(a)(4)(C) is
amended by inserting ‘‘, or out of the increase for
the taxable year in policy cash values (within the
meaning of section 264(e)(3)(A)) of life insurance
policies and annuity and endowment contracts to
which section 264(e) applies’’ after ‘‘tax-exempt in-
terest’’.
(2) Clause (iii) of section 805(a)(4)(D) is
amended by striking ‘‘and’’ and inserting ‘‘, the in-
crease for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life
415
insurance policies and annuity and endowment con-
tracts to which section 264(e) applies, and’’.
(3) Subparagraph (B) of section 807(a)(2) is
amended by striking ‘‘interest,’’ and inserting ‘‘in-
terest and the amount of the policyholder’s share of
the increase for the taxable year in policy cash val-
ues (within the meaning of section 264(e)(3)(A)) of
life insurance policies and annuity and endowment
contracts to which section 264(e) applies,’’.
(4) Subparagraph (B) of section 807(b)(1) is
amended by striking ‘‘interest,’’ and inserting ‘‘in-
terest and the amount of the policyholder’s share of
the increase for the taxable year in policy cash val-
ues (within the meaning of section 264(e)(3)(A)) of
life insurance policies and annuity and endowment
contracts to which section 264(e) applies,’’.
(5) Paragraph (1) of section 812(d) is amended
by striking ‘‘and’’ at the end of subparagraph (B),
by striking the period at the end of subparagraph
(C) and inserting ‘‘, and’’, and by adding at the end
the following new subparagraph:
‘‘(D) the increase for any taxable year in
the policy cash values (within the meaning of
section 264(e)(3)(A)) of life insurance policies
416
and annuity and endowment contracts to which
section 264(e) applies.’’
(6) Subparagraph (B) of section 832(b)(5) is
amended by striking ‘‘and’’ at the end of clause (i),
by striking the period at the end of clause (ii) and
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new clause:
‘‘(iii) the increase for the taxable year
in policy cash values (within the meaning
of section 264(e)(3)(A)) of life insurance
policies and annuity and endowment con-
tracts to which section 264(e) applies.’’
(c) CONFORMING AMENDMENT.—Subparagraph (A)
of section 265(b)(4) is amended by inserting ‘‘, section
264,’’ before ‘‘and section 291’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to contracts issued after June 8,
1997, in taxable years ending after such date. For pur-
poses of the preceding sentence, any material increase in
the death benefit or other material change in the contract
shall be treated as a new contract but the addition of cov-
ered lives shall be treated as a new contract only with re-
spect to such additional covered lives. For purposes of this
subsection, an increase in the death benefit under a policy
or contract issued in connection with a lapse described in
417
section 501(d)(2) of the Health Insurance Portability and
Accountability Act of 1996 shall not be treated as a new
contract.
SEC. 1064. ALLOCATION OF BASIS AMONG PROPERTIES DIS-
TRIBUTED BY PARTNERSHIP.
(a) IN GENERAL.—Subsection (c) of section 732 is
amended to read as follows:
‘‘(c) ALLOCATION OF BASIS.—
‘‘(1) IN
GENERAL.—The basis of distributed
properties to which subsection (a)(2) or (b) is appli-
cable shall be allocated—
‘‘(A)(i) first to any unrealized receivables
(as defined in section 751(c)) and inventory
items (as defined in section 751(d)(2)) in an
amount equal to the adjusted basis of each such
property to the partnership, and
‘‘(ii) if the basis to be allocated is less than
the sum of the adjusted bases of such prop-
erties to the partnership, then, to the extent
any decrease is required in order to have the
adjusted bases of such properties equal the
basis to be allocated, in the manner provided in
paragraph (3), and
418
‘‘(B) to the extent of any basis not allo-
cated under subparagraph (A), to other distrib-
uted properties—
‘‘(i) first by assigning to each such
other property such other property’s ad-
justed basis to the partnership, and
‘‘(ii) then, to the extent any increase
or decrease in basis is required in order to
have the adjusted bases of such other dis-
tributed properties equal such remaining
basis, in the manner provided in paragraph
(2) or (3), whichever is appropriate.
‘‘(2) METHOD
OF
ALLOCATING
INCREASE.—
Any increase required under paragraph (1)(B) shall
be allocated among the properties—
‘‘(A) first to properties with unrealized ap-
preciation in proportion to their respective
amounts of unrealized appreciation before such
increase (but only to the extent of each prop-
erty’s unrealized appreciation), and
‘‘(B) then, to the extent such increase is
not allocated under subparagraph (A), in pro-
portion to their respective fair market values.
419
‘‘(3) METHOD
OF
ALLOCATING
DECREASE.—
Any decrease required under paragraph (1)(A) or
(1)(B) shall be allocated—
‘‘(A) first to properties with unrealized de-
preciation in proportion to their respective
amounts of unrealized depreciation before such
decrease (but only to the extent of each prop-
erty’s unrealized depreciation), and
‘‘(B) then, to the extent such decrease is
not allocated under subparagraph (A), in pro-
portion to their respective adjusted bases (as
adjusted under subparagraph (A)).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to distributions after the date
of the enactment of this Act.
SEC. 1065. REPEAL OF REQUIREMENT THAT INVENTORY BE
SUBSTANTIALLY APPRECIATED.
(a) IN GENERAL.—Paragraph (2) of section 751(a)
is amended to read as follows:
‘‘(2) inventory items of the partnership,’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 751 is amended to
read as follows:
‘‘(d) INVENTORY ITEMS.—For purposes of this sub-
chapter, the term ‘inventory items’ means—
420
‘‘(1) property of the partnership of the kind de-
scribed in section 1221(1),
‘‘(2) any other property of the partnership
which, on sale or exchange by the partnership, would
be considered property other than a capital asset
and other than property described in section 1231,
‘‘(3) any other property of the partnership
which, if sold or exchanged by the partnership,
would result in a gain taxable under subsection (a)
of section 1246 (relating to gain on foreign invest-
ment company stock), and
‘‘(4) any other property held by the partnership
which, if held by the selling or distributee partner,
would be considered property of the type described
in paragraph (1), (2), or (3).’’
(2) 
Sections 
724(d)(2), 
731(a)(2)(B),
731(c)(6), 732(c)(1)(A) (as amended by the preced-
ing section), 735(a)(2), and 735(c)(1) are each
amended by striking ‘‘section 751(d)(2)’’ and insert-
ing ‘‘section 751(d)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales, exchanges, and distribu-
tions after the date of the enactment of this Act.
421
SEC. 
1066. 
EXTENSION 
OF 
TIME 
FOR 
TAXING
PRECONTRIBUTION GAIN.
(a) 
IN
GENERAL.—Sections 
704(c)(1)(B) 
and
737(b)(1) are each amended by striking ‘‘5 years’’ and
inserting ‘‘10 years’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to property contributed to a
partnership after June 8, 1997.
SEC. 1067. RESTRICTIONS ON AVAILABILITY OF EARNED IN-
COME CREDIT FOR TAXPAYERS WHO IM-
PROPERLY CLAIMED CREDIT IN PRIOR YEAR.
(a) IN GENERAL.—Section 32 is amended by redesig-
nating subsections (k) and (l) as subsections (l) and (m),
respectively, and by inserting after subsection (j) the fol-
lowing new subsection:
‘‘(k) RESTRICTIONS ON TAXPAYERS WHO IMPROP-
ERLY CLAIMED CREDIT IN PRIOR YEAR.—
‘‘(1) TAXPAYERS MAKING PRIOR FRAUDULENT
OR RECKLESS CLAIMS.—
‘‘(A) IN GENERAL.—No credit shall be al-
lowed under this section for any taxable year in
the disallowance period.
‘‘(B) DISALLOWANCE
PERIOD.—For pur-
poses of paragraph (1), the disallowance period
is—
422
‘‘(i) the period of 10 taxable years
after the most recent taxable year for
which there was a final determination that
the taxpayer’s claim of credit under this
section was due to fraud, and
‘‘(ii) the period of 2 taxable years
after the most recent taxable year for
which there was a final determination that
the taxpayer’s claim of credit under this
section was due to reckless or intentional
disregard of rules and regulations (but not
due to fraud).
‘‘(2) TAXPAYERS
MAKING
IMPROPER
PRIOR
CLAIMS.—In the case of a taxpayer who is denied
credit under this section for any taxable year as a
result of the deficiency procedures under subchapter
B of chapter 63, no credit shall be allowed under
this section for any subsequent taxable year unless
the taxpayer provides such information as the Sec-
retary may require to demonstrate eligibility for
such credit.’’
(b) DUE DILIGENCE REQUIREMENT ON INCOME TAX
RETURN PREPARERS.—Section 6695 is amended by add-
ing at the end the following new subsection:
423
‘‘(g) FAILURE TO BE DILIGENT IN DETERMINING
ELIGIBILITY FOR EARNED INCOME CREDIT.—Any person
who is an income tax preparer with respect to any return
or claim for refund who fails to comply with due diligence
requirements imposed by the Secretary by regulations with
respect to determining eligibility for, or the amount of,
the credit allowable by section 32 shall pay a penalty of
$100 for each such failure.’’
(c) EXTENSION
PROCEDURES
APPLICABLE
TO
MATHEMATICAL OR CLERICAL ERRORS.—Paragraph (2)
of section 6213(g) (relating to the definition of mathe-
matical or clerical errors) is amended by striking ‘‘and’’
at the end of subparagraph (H), by striking the period
at the end of subparagraph (I) and inserting ‘‘, and’’, and
by inserting after subparagraph (I) the following new sub-
paragraph:
‘‘(J) an omission of information required
by section 32(k)(2) (relating to taxpayers mak-
ing improper prior claims of earned income
credit).’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
424
SEC. 1068. LIMITATION ON PROPERTY FOR WHICH INCOME
FORECAST METHOD MAY BE USED.
(a) LIMITATION.—Subsection (g) of section 167 is
amended by adding at the end the following new para-
graph:
‘‘(6) LIMITATION ON PROPERTY FOR WHICH IN-
COME FORECAST METHOD MAY BE USED.—The de-
preciation deduction allowable under this section
may be determined under the income forecast meth-
od or any similar method only with respect to—
‘‘(A) property described in paragraph (3)
or (4) of section 168(f),
‘‘(B) copyrights,
‘‘(C) books,
‘‘(D) patents, and
‘‘(E) other property specified in regula-
tions.
Such methods may not be used with respect to any
amortizable section 197 intangible (as defined in
section 197(c)).’’
(b) DEPRECIATION
PERIOD
FOR
RENT-TO-OWN
PROPERTY.—
(1) IN GENERAL.—Subparagraph (A) of section
168(e)(3) (relating to 3-year property) is amended
by striking ‘‘and’’ at the end of clause (i), by strik-
ing the period at the end of clause (ii) and inserting
425
‘‘, and’’, and by adding at the end the following new
clause:
‘‘(iii) any qualified rent-to-own prop-
erty.’’
(2) 4-YEAR CLASS LIFE.—The table contained
in section 168(g)(3)(B) is amended by inserting be-
fore the first item the following new item:
‘‘(A)(iii) .................................................................................
4 ’’
(3) DEFINITION OF QUALIFIED RENT-TO-OWN
PROPERTY.—Subsection (i) of section 168 is amend-
ed by adding at the end the following new para-
graph:
‘‘(14) QUALIFIED RENT-TO-OWN PROPERTY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
rent-to-own property’ means property held by a
rent-to-own dealer for purposes of being subject
to a rent-to-own contract.
‘‘(B) RENT-TO-OWN
DEALER.—The term
‘rent-to-own dealer’ means a person that, in the
ordinary course of business, regularly enters
into rent-to-own contracts with customers for
the use of consumer property, if a substantial
portion of those contracts terminate and the
property is returned to such person before the
receipt of all payments required to transfer
426
ownership of the property from such person to
the customer.
‘‘(C) CONSUMER
PROPERTY.—The term
‘consumer property’ means tangible personal
property of a type generally used within the
home. Such term shall not include cellular tele-
phones and any computer or peripheral equip-
ment (as defined in section 168(i)).
‘‘(D) 
RENT-TO-OWN
CONTRACT.—The
term ‘rent-to-own contract’ means any lease for
the use of consumer property between a rent-to-
own dealer and a customer who is an individual
which— –
‘‘(i) is titled ‘Rent-to-Own Agreement’
or ‘Lease Agreement with Ownership Op-
tion,’ or uses other similar language,
‘‘(ii) provides for level, regular peri-
odic payments (for a payment period which
is a week or month),
‘‘(iii) provides that legal title to such
property remains with the rent-to-own
dealer until the customer makes all the
payments described in clause (ii) or early
purchase payments required under the con-
427
tract to acquire legal title to the item of
property,
‘‘(iv) provides a beginning date and a
maximum period of time for which the con-
tract may be in effect that does not exceed
156 weeks or 36 months from such begin-
ning date (including renewals or options to
extend),
‘‘(v) provides for level payments with-
in the 156-week or 36-month period that,
in the aggregate, generally exceed the nor-
mal retail price of the consumer property
plus interest,
‘‘(vi) provides for payments under the
contract that, in the aggregate, do not ex-
ceed $10,000 per item of consumer prop-
erty,
‘‘(vii) provides that the customer does
not have any legal obligation to make all
the payments referred to in clause (ii) set
forth under the contract, and that at the
end of each payment period the customer
may either continue to use the consumer
property by making the payment for the
next payment period or return such prop-
428
erty to the rent-to-own dealer in good
working order, in which case the customer
does not incur any further obligations
under the contract and is not entitled to a
return of any payments previously made
under the contract, and
‘‘(viii) provides that the customer has
no right to sell, sublease, mortgage, pawn,
pledge, encumber, or otherwise dispose of
the consumer property until all the pay-
ments stated in the contract have been
made.’’
(c) EFFECTIVE DATE.—The amendment made by
this section shall apply to property placed in service after
the date of the enactment of this Act.
SEC. 1069. REPEAL OF SPECIAL RULE FOR RENTAL USE OF
VACATION HOMES, ETC., FOR LESS THAN 15
DAYS.
(a) IN GENERAL.—Section 280A (relating to dis-
allowance of certain expenses in connection with business
use of home, rental of vacation homes, etc.) is amended
by striking subsection (g).
(b) NO BASIS REDUCTION UNLESS DEPRECIATION
CLAIMED.—Section 1016 is amended by redesignating
429
subsection (e) as subsection (f) and by inserting after sub-
section (d) the following new subsection:
‘‘(e) SPECIAL RULE WHERE RENTAL USE OF VACA-
TION HOME, ETC., FOR LESS THAN 15 DAYS.—If a dwell-
ing unit is used during the taxable year by the taxpayer
as a residence and such dwelling unit is actually rented
for less than 15 days during the taxable year, the reduc-
tion under subsection (a)(2) by reason of such rental use
in any taxable year beginning after December 31, 1997,
shall not exceed the depreciation deduction allowed for
such rental use.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1070. EXPANSION OF REQUIREMENT THAT INVOLUN-
TARILY 
CONVERTED 
PROPERTY 
BE 
RE-
PLACED WITH PROPERTY ACQUIRED FROM
AN UNRELATED PERSON.
(a) IN GENERAL.—Subsection (i) of section 1033 is
amended to read as follows:
‘‘(i) REPLACEMENT PROPERTY MUST BE ACQUIRED
FROM UNRELATED PERSON IN CERTAIN CASES.—
‘‘(1) IN GENERAL.—If the property which is in-
voluntarily converted is held by a taxpayer to which
this subsection applies, subsection (a) shall not apply
430
if the replacement property or stock is acquired from
a related person. The preceding sentence shall not
apply to the extent that the related person acquired
the replacement property or stock from an unrelated
person during the period applicable under subsection
(a)(2)(B).
‘‘(2) TAXPAYERS TO WHICH SUBSECTION AP-
PLIES.—This subsection shall apply to—
‘‘(A) a C corporation,
‘‘(B) a partnership in which 1 or more C
corporations own, directly or indirectly (deter-
mined in accordance with section 707(b)(3)),
more than 50 percent of the capital interest, or
profits interest, in such partnership at the time
of the involuntary conversion, and
‘‘(C) any other taxpayer if, with respect to
property which is involuntarily converted during
the taxable year, the aggregate of the amount
of realized gain on such property on which
there is realized gain exceeds $100,000.
In the case of a partnership, subparagraph (C) shall
apply with respect to the partnership and with re-
spect to each partner. A similar rule shall apply in
the case of an S corporation and its shareholders.
431
‘‘(3) RELATED PERSON.—For purposes of this
subsection, a person is related to another person if
the person bears a relationship to the other person
described in section 267(b) or 707(b)(1).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to involuntary conversions occur-
ring after June 8, 1997.
SEC. 1071. TREATMENT OF EXCEPTION FROM INSTALL-
MENT SALES RULES FOR SALES OF PROP-
ERTY BY A MANUFACTURER TO A DEALER.
(a) IN GENERAL.—Paragraph (2) of section 811(c)
of the Tax Reform Act of 1986 is hereby repealed.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to taxable years beginning
after the date of the enactment of this Act.
(2) COORDINATION WITH SECTION 481.—In the
case of any taxpayer required by this section to
change its method of accounting for any taxable
year—
(A) such changes shall be treated as initi-
ated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
432
(C) the net amount of the adjustments re-
quired to be taken into account under section
481(a) of the Internal Revenue Code of 1986
shall be taken into account ratably over the 4
taxable year period beginning with the first tax-
able year beginning after the date of the enact-
ment of this Act.
TITLE XI—SIMPLIFICATION AND
OTHER 
FOREIGN-RELATED
PROVISIONS
Subtitle A—General Provisions
SEC. 1101. TREATMENT OF COMPUTER SOFTWARE AS FSC
EXPORT PROPERTY.
(a) IN GENERAL.—Subparagraph (B) of section
927(a)(2) (relating to property excluded from eligibility as
FSC export property) is amended by inserting ‘‘, and
other than computer software (whether or not patented)’’
before ‘‘, for commercial or home use’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to gross receipts attributable to
periods after December 31, 1997, in taxable years ending
after such date.
(c) PHASEIN OF TREATMENT.—For purposes of the
Internal Revenue Code of 1986—
433
(1) 1998.—In the case of gross receipts attrib-
utable to calendar year 1998, the amendment made
by subsection (a) shall apply to only 1⁄3 of such gross
receipts.
(2) 1999.—In the case of gross receipts attrib-
utable to calendar year 1999, the amendment made
by subsection (a) shall apply to only 2⁄3 of such gross
receipts.
SEC. 1102. ADJUSTMENT OF DOLLAR LIMITATION ON SEC-
TION 911 EXCLUSION.
(a) GENERAL RULE.—Paragraph (2) of section
911(b) is amended by—
(1) by striking ‘‘of $70,000’’ in subparagraph
(A) and inserting ‘‘equal to the exclusion amount for
the calendar year in which such taxable year be-
gins’’, and
(2) by adding at the end the following new sub-
paragraph:
‘‘(D) EXCLUSION AMOUNT.—
‘‘(i) IN
GENERAL.—The exclusion
amount for any calendar year is the exclu-
sion amount determined in accordance with
the following table (as adjusted by clause
(ii)):
‘‘For calendar year—
The exclusion amount is—
1998 .........................................................................................
$72,000
1999 .........................................................................................
74,000
434
‘‘For calendar year—
The exclusion amount is—
2000 .........................................................................................
76,000
2001 .........................................................................................
78,000
2002 and thereafter .................................................................
80,000.
‘‘(ii) INFLATION
ADJUSTMENT.—In
the case of any taxable year beginning in
a calendar year after 2007, the $80,000
amount in clause (i) shall be increased by
an amount equal to the product of—
‘‘(I) such dollar amount, and
‘‘(II) the cost-of-living adjust-
ment determined under section 1(f)(3)
for the calendar year in which the tax-
able year begins, determined by sub-
stituting ‘2006’ for ‘1992’ in subpara-
graph (B) thereof.
If any increase determined under the pre-
ceding sentence is not a multiple of $100,
such increase shall be rounded to the next
lowest multiple of $100.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1103. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN
TAX CREDIT LIMITATION.
(a) GENERAL RULE.—Section 904 (relating to limi-
tations on foreign tax credit) is amended by redesignating
435
subsection (j) as subsection (k) and by inserting after sub-
section (i) the following new subsection:
‘‘(j) CERTAIN INDIVIDUALS EXEMPT.—
‘‘(1) IN GENERAL.—In the case of an individual
to whom this subsection applies for any taxable
year—
‘‘(A) the limitation of subsection (a) shall
not apply,
‘‘(B) no taxes paid or accrued by the indi-
vidual during such taxable year may be deemed
paid or accrued under subsection (c) in any
other taxable year, and
‘‘(C) no taxes paid or accrued by the indi-
vidual during any other taxable year may be
deemed paid or accrued under subsection (c) in
such taxable year.
‘‘(2) INDIVIDUALS TO WHOM SUBSECTION AP-
PLIES.—This subsection shall apply to an individual
for any taxable year if—
‘‘(A) the entire amount of such individual’s
gross income for the taxable year from sources
without the United States consists of qualified
passive income,
‘‘(B) the amount of the creditable foreign
taxes paid or accrued by the individual during
436
the taxable year does not exceed $300 ($600 in
the case of a joint return), and
‘‘(C) such individual elects to have this
subsection apply for the taxable year.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) QUALIFIED
PASSIVE
INCOME.—The
term ‘qualified passive income’ means any item
of gross income if—
‘‘(i) such item of income is passive in-
come (as defined in subsection (d)(2)(A)
without regard to clause (iii) thereof), and
‘‘(ii) such item of income is shown on
a payee statement furnished to the individ-
ual.
‘‘(B) CREDITABLE FOREIGN TAXES.—The
term ‘creditable foreign taxes’ means any taxes
for which a credit is allowable under section
901; except that such term shall not include
any tax unless such tax is shown on a payee
statement furnished to such individual.
‘‘(C) 
PAYEE
STATEMENT.—The 
term
‘payee statement’ has the meaning given to
such term by section 6724(d)(2).
437
‘‘(D) ESTATES
AND
TRUSTS
NOT
ELIGI-
BLE.—This subsection shall not apply to any
estate or trust.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
SEC. 1104. 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.
438
‘‘(B) EXCEPTION FOR CERTAIN TAXES.—
Subparagraph (A) shall not apply to any for-
eign income taxes—
‘‘(i) paid after the date 2 years after
the close of the taxable year to which such
taxes relate, or
‘‘(ii) paid before the beginning of the
taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—Subparagraph (A) shall not apply to
any foreign income taxes the liability for which
is denominated in any inflationary currency (as
determined under regulations).
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of 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
439
‘‘(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
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,
440
‘‘(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,
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected. The Secretary may prescribe adjust-
ments to tax pools under sections 902 and 960 in
lieu of the redetermination under the preceding sen-
tence.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), in making the redetermina-
tion under paragraph (1), no credit shall be al-
lowed for accrued taxes not paid before the date
referred to in subparagraph (B) of paragraph
(1).
‘‘(B) TAXES
SUBSEQUENTLY
PAID.—Any
such taxes if subsequently paid shall be taken
into account for the taxable year to which such
taxes relate (and translated as provided in sec-
tion 986(a)(2)(A)).
441
‘‘(3) ADJUSTMENTS.—The amount of tax (if
any) due on any redetermination under paragraph
(1) shall be paid by the taxpayer on notice and de-
mand by the Secretary, and the amount of tax over-
paid (if any) shall be credited or refunded to the
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-
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-
442
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.—
(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
443
‘‘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 thereof the following
new paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘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
or accrued in taxable years beginning after Decem-
ber 31, 1997.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1997.
SEC. 1105. ELECTION TO USE SIMPLIFIED SECTION 904 LIM-
ITATION 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 thereof the following new
paragraph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
450
SEC. 1112. 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 thereof the
following new sentence: ‘‘For purposes of subpara-
graph (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 thereof the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
456
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.
Subtitle C—Treatment of Passive
Foreign Investment Companies
SEC. 1121. UNITED STATES SHAREHOLDERS OF CON-
TROLLED 
FOREIGN 
CORPORATIONS 
NOT
SUBJECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the
following new subsection:
‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLD-
ERS OF CONTROLLED FOREIGN CORPORATIONS.—
‘‘(1) IN GENERAL.—For purposes of this part,
a corporation shall not be treated with respect to a
shareholder as a passive foreign investment company
during the qualified portion of such shareholder’s
holding period with respect to stock in such corpora-
tion.
‘‘(2) QUALIFIED
PORTION.—For purposes of
this subsection, the term ‘qualified portion’ means
the portion of the shareholder’s holding period—
486
(1) IN
GENERAL.—Subsection (a) of section
6046A (relating to returns as to interests in foreign
partnerships) is amended by adding at the end the
following new sentence: ‘‘Paragraphs (1) and (2)
shall apply to any acquisition or disposition only if
the United States person directly or indirectly holds
at least a 10-percent interest in such partnership ei-
ther before or after such acquisition or disposition,
and paragraph (3) shall apply to any change only if
the change is equivalent to at least a 10-interest in
such partnership.’’
(2) 10-PERCENT INTEREST.—Section 6046A is
amended by redesignating subsection (d) as sub-
section (e) and by inserting after subsection (c) the
following new subsection:
‘‘(d) 10-PERCENT INTEREST.—For purposes of sub-
section (a), a 10-percent interest in a partnership is an
interest described in section 6038(e)(3)(C).’’
(b) MODIFICATION OF PENALTY ON FAILURE TO RE-
PORT CHANGES IN OWNERSHIP INTERESTS IN FOREIGN
CORPORATIONS AND PARTNERSHIPS.—Subsection (a) of
section 6679 (relating to failure to file returns, etc., with
respect to foreign corporations or foreign partnerships) is
amended to read as follows:
‘‘(a) CIVIL PENALTY.—
562
be taken into account in the manner provided
by section 6242.
‘‘(d) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in case of partner’s disregard
of requirements of this section, see part II of sub-
chapter A of chapter 68.
‘‘SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP AD-
JUSTMENTS INTO ACCOUNT.
‘‘(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS
FOR YEAR IN WHICH ADJUSTMENT TAKES EFFECT.—
‘‘(1) IN GENERAL.—If any partnership adjust-
ment with respect to any partnership item takes ef-
fect (within the meaning of subsection (d)(2)) during
any partnership taxable year and if an election
under paragraph (2) does not apply to such adjust-
ment, such adjustment shall be taken into account
in determining the amount of such item for the part-
nership taxable year in which such adjustment takes
effect. In applying this title to any person who is
(directly or indirectly) a partner in such partnership
during such partnership taxable year, such adjust-
ment shall be treated as an item actually arising
during such taxable year.
‘‘(2) 
PARTNERSHIP
LIABLE
IN
CERTAIN
CASES.—If—