350
which such share becomes ex-dividend with re-
spect to such dividend, or’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 246(c) is amended
to read as follows:
‘‘(2) 90-DAY RULE IN THE CASE OF CERTAIN
PREFERENCE DIVIDENDS.—In the case of stock hav-
ing preference in dividends, if the taxpayer receives
dividends with respect to such stock which are at-
tributable to a period or periods aggregating in ex-
cess of 366 days, paragraph (1)(A) shall be ap-
plied—
‘‘(A) by substituting ‘90 days’ for ‘45
days’ each place it appears, and
‘‘(B) by substituting ‘180-day period’ for
‘90-day period’.’’.
(2) Paragraph (3) of section 246(c) is amended
by adding ‘‘and’’ at the end of subparagraph (A), by
striking subparagraph (B), and by redesignating
subparagraph (C) as subparagraph (B).
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dividends received or accrued
after the 30th day after the date of the enactment of this
Act.
351
Subtitle C—Other Corporate
Provisions
SEC. 1021. REGISTRATION AND OTHER PROVISIONS RELAT-
ING 
TO 
CONFIDENTIAL 
CORPORATE 
TAX
SHELTERS.
(a) IN GENERAL.—Section 6111 (relating to registra-
tion of tax shelters) is amended by redesignating sub-
sections (d) and (e) as subsections (e) and (f), respectively,
and by inserting after subsection (c) the following new
subsection:
‘‘(d) 
CERTAIN
CONFIDENTIAL
ARRANGEMENTS
TREATED AS TAX SHELTERS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘tax shelter’ includes any entity, plan,
arrangement, or transaction—
‘‘(A) a significant purpose of the structure
of which is the avoidance or evasion of Federal
income tax for a direct or indirect participant
which is a corporation,
‘‘(B) which is offered to any potential par-
ticipant under conditions of confidentiality, and
‘‘(C) for which the tax shelter promoters
may receive fees in excess of $100,000 in the
aggregate.
352
‘‘(2) CONDITIONS OF CONFIDENTIALITY.—For
purposes of paragraph (1)(B), an offer is under con-
ditions of confidentiality if—
‘‘(A) the potential participant to whom the
offer is made (or any other person acting on be-
half of such participant) has an understanding
or agreement with or for the benefit of any pro-
moter of the tax shelter that such participant
(or such other person) will limit disclosure of
the tax shelter or any significant tax features of
the tax shelter, or
‘‘(B) any promoter of the tax shelter—
‘‘(i) claims, knows, or has reason to
know,
‘‘(ii) knows or has reason to know
that any other person (other than the po-
tential participant) claims, or
‘‘(iii) causes another person to claim,
that the tax shelter (or any aspect thereof) is
proprietary to any person other than the poten-
tial participant or is otherwise protected from
disclosure to or use by others.
For purposes of this subsection, the term ‘promoter’
means any person or any related person (within the
meaning of section 267 or 707) who participates in
353
the organization, management, or sale of the tax
shelter.
‘‘(3) PERSONS
OTHER
THAN
PROMOTER
RE-
QUIRED TO REGISTER IN CERTAIN CASES.—
‘‘(A) IN GENERAL.—If—
‘‘(i) the requirements of subsection (a)
are not met with respect to any tax shelter
(as defined in paragraph (1)) by any tax
shelter promoter, and
‘‘(ii) no tax shelter promoter is a
United States person,
then each United States person who discussed
participation in such shelter shall register such
shelter under subsection (a).
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to a United States person who
discussed participation in a tax shelter if—
‘‘(i) such person notified the promoter
in writing (not later than the close of the
90th day after the day on which such dis-
cussions began) that such person would
not participate in such shelter, and
‘‘(ii) such person does not participate
in such shelter.
354
‘‘(4) OFFER
TO
PARTICIPATE
TREATED
AS
OFFER FOR SALE.—For purposes of subsections (a)
and (b), an offer to participate in a tax shelter (as
defined in paragraph (1)) shall be treated as an
offer for sale.’’.
(b) PENALTY.—Subsection (a) of section 6707 (relat-
ing to failure to furnish information regarding tax shel-
ters) is amended by adding at the end the following new
paragraph:
‘‘(3) CONFIDENTIAL ARRANGEMENTS.—
‘‘(A) IN GENERAL.—In the case of a tax
shelter (as defined in section 6111(d)), the pen-
alty imposed under paragraph (1) shall be an
amount equal to the greater of—
‘‘(i) 50 percent of the fees paid to all
promoters of the tax shelter with respect to
offerings made before the date such shelter
is registered under section 6111, or
‘‘(ii) $10,000.
Clause (i) shall be applied by substituting ‘75
percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in paragraph (1).
‘‘(B) SPECIAL
RULE
FOR
PARTICIPANTS
REQUIRED
TO
REGISTER
SHELTER.—In the
355
case of a person required to register such a tax
shelter by reason of section 6111(d)(3)—
‘‘(i) such person shall be required to
pay the penalty under paragraph (1) only
if such person actually participated in such
shelter,
‘‘(ii) the amount of such penalty shall
be determined by taking into account
under subparagraph (A)(i) only the fees
paid by such person, and
‘‘(iii) such penalty shall be in addition
to the penalty imposed on any other person
for failing to register such shelter.’’.
(c) MODIFICATIONS TO SUBSTANTIAL UNDERSTATE-
MENT PENALTY.—
(1) RESTRICTION ON REASONABLE BASIS FOR
CORPORATE UNDERSTATEMENT OF INCOME TAX.—
Subparagraph (B) of section 6662(d)(2) is amended
by adding at the end the following new flush sen-
tence:
‘‘For purposes of clause (ii)(II), in no event
shall a corporation be treated as having a rea-
sonable basis for its tax treatment of an item
attributable to a multiple-party financing trans-
356
action if such treatment does not clearly reflect
the income of the corporation.’’.
(2) MODIFICATION
TO
DEFINITION
OF
TAX
SHELTER.—Clause (iii) of section 6662(d)(2)(C) is
amended by striking ‘‘the principal purpose’’ and in-
serting ‘‘a significant purpose’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 6707(a) is amend-
ed by striking ‘‘The penalty’’ and inserting ‘‘Except
as provided in paragraph (3), the penalty’’.
(2) Subparagraph (A) of section 6707(a)(1) is
amended by striking ‘‘paragraph (2)’’ and inserting
‘‘paragraph (2) or (3), as the case may be’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to any tax shelter (as defined in section
6111(d) of the Internal Revenue Code of 1986, as
amended by this section) interests in which are of-
fered to potential participants after the Secretary of
the Treasury prescribes guidance with respect to
meeting requirements added by such amendments.
(2) MODIFICATIONS TO SUBSTANTIAL UNDER-
STATEMENT PENALTY.—The amendments made by
subsection (c) shall apply to items with respect to
357
transactions entered into after the date of the enact-
ment of this Act.
SEC. 1022. CERTAIN PREFERRED STOCK TREATED AS BOOT.
(a) SECTION 351.—Section 351 (relating to transfer
to corporation controlled by transferor) is amended by re-
designating subsection (g) as subsection (h) and by insert-
ing after subsection (f) the following new subsection:
‘‘(g) NONQUALIFIED
PREFERRED
STOCK
NOT
TREATED AS STOCK.—
‘‘(1) IN
GENERAL.—For purposes of sub-
sections (a) and (b), the term ‘stock’ shall not in-
clude nonqualified preferred stock.
‘‘(2) NONQUALIFIED PREFERRED STOCK.—For
purposes of paragraph (1)—
‘‘(A) 
IN
GENERAL.—The 
term 
‘non-
qualified preferred stock’ means preferred stock
if—
‘‘(i) the holder of such stock has the
right to require the issuer or a related per-
son to redeem or purchase the stock,
‘‘(ii) the issuer or a related person is
required to redeem or purchase such stock,
‘‘(iii) the issuer or a related person
has the right to redeem or purchase the
stock and, as of the issue date, it is more
358
likely than not that such right will be exer-
cised, or
‘‘(iv) the dividend rate on such stock
varies in whole or in part (directly or indi-
rectly) with reference to interest rates,
commodity prices, or other similar indices.
‘‘(B) LIMITATIONS.—Clauses (i), (ii), and
(iii) of subparagraph (A) shall apply only if the
right or obligation referred to therein may be
exercised within the 20-year period beginning
on the issue date of such stock and such right
or obligation is not subject to a contingency
which, as of the issue date, makes remote the
likelihood of the redemption or purchase.
‘‘(C) EXCEPTIONS
FOR
CERTAIN
RIGHTS
OR OBLIGATIONS.—
‘‘(i) IN GENERAL.—A right or obliga-
tion shall not be treated as described in
clause (i), (ii), or (iii) of subparagraph (A)
if—
‘‘(I) it may be exercised only
upon the death, disability, or mental
incompetency of the holder, or
‘‘(II) in the case of a right or ob-
ligation to redeem or purchase stock
359
transferred in connection with the
performance of services for the issuer
or a related person (and which rep-
resents reasonable compensation), it
may be exercised only upon the hold-
er’s separation from service from the
issuer or a related person.
‘‘(ii) EXCEPTION.—Clause (i)(I) shall
not apply if the stock relinquished in the
exchange, or the stock acquired in the ex-
change is in—
‘‘(I) a corporation if any class of
stock in such corporation or a related
party is readily tradable on an estab-
lished securities market or otherwise,
or
‘‘(II) any other corporation if
such exchange is part of a transaction
or series of transactions in which such
corporation is to become a corporation
described in subclause (I).
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) PREFERRED STOCK.—The term ‘pre-
ferred stock’ means stock which is limited and
360
preferred as to dividends and does not partici-
pate (including through a conversion privilege)
in corporate growth to any significant extent.
‘‘(B) RELATED PERSON.—A person shall
be treated as related to another person if they
bear a relationship to such other person de-
scribed in section 267(b) or 707(b).
‘‘(4) REGULATIONS.—The Secretary may pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section and sections 354(a)(2)(C), 355(a)(3)(D),
and 356(e). The Secretary may also prescribe regu-
lations, consistent with the treatment under this
subsection and such sections, for the treatment of
nonqualified preferred stock under other provisions
of this title.’’.
(b) SECTION 354.—Paragraph (2) of section 354(a)
(relating to exchanges of stock and securities in certain
reorganizations) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(C) 
NONQUALIFIED
PREFERRED
STOCK.—
‘‘(i) IN GENERAL.—Nonqualified pre-
ferred 
stock 
(as 
defined 
in 
section
351(g)(2)) received in exchange for stock
361
other than nonqualified preferred stock (as
so defined) shall not be treated as stock or
securities.
‘‘(ii) RECAPITALIZATIONS OF FAMILY-
OWNED CORPORATIONS.—
‘‘(I) IN
GENERAL.—Clause (i)
shall not apply in the case of a recapi-
talization under section 368(a)(1)(E)
of a family-owned corporation.
‘‘(II) FAMILY-OWNED
CORPORA-
TION.—For purposes of this clause,
except as provided in regulations, the
term 
‘family-owned 
corporation’
means any corporation which is de-
scribed in clause (i) of section
447(d)(2)(C) throughout the 8-year
period beginning on the date which is
5 years before the date of the recapi-
talization. For purposes of the preced-
ing sentence, stock shall not be treat-
ed as owned by a family member dur-
ing any period described in section
355(d)(6)(B).’’.
362
(c) SECTION 355.—Paragraph (3) of section 355(a)
is amended by adding at the end the following new sub-
paragraph:
‘‘(D) 
NONQUALIFIED
PREFERRED
STOCK.—Nonqualified preferred stock (as de-
fined in section 351(g)(2)) received in a dis-
tribution with respect to stock other than non-
qualified preferred stock (as so defined) shall
not be treated as stock or securities.’’.
(d) SECTION 356.—Section 356 is amended by redes-
ignating subsections (e) and (f) as subsections (f) and (g),
respectively, and by inserting after subsection (d) the fol-
lowing new subsection:
‘‘(e) NONQUALIFIED PREFERRED STOCK TREATED
AS OTHER PROPERTY.—For purposes of this section—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘other property’ includes non-
qualified preferred stock (as defined in section
351(g)(2)).
‘‘(2) EXCEPTION.—The term ‘other property’
does not include nonqualified preferred stock (as so
defined) to the extent that, under section 354 or
355, such preferred stock would be permitted to be
received without the recognition of gain.’’.
(e) CONFORMING AMENDMENTS.—
363
(1) Subparagraph (B) of section 354(a)(2) and
subparagraph (C) of section 355(a)(3)(C) are each
amended by inserting ‘‘(including nonqualified pre-
ferred stock, as defined in section 351(g)(2))’’ after
‘‘stock’’.
(2) Subparagraph (A) of section 354(a)(3) and
subparagraph (A) of section 355(a)(4) are each
amended by inserting ‘‘nonqualified preferred stock
and’’ after ‘‘including’’.
(3) Section 1036 is amended by redesignating
subsection (b) as subsection (c) and by inserting
after subsection (a) the following new subsection:
‘‘(b) NONQUALIFIED
PREFERRED
STOCK
NOT
TREATED AS STOCK.—For purposes of this section, non-
qualified preferred stock (as defined in section 351(g)(2))
shall be treated as property other than stock.’’.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transactions after June 8,
1997.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any trans-
action after June 8, 1997, if such transaction is—
364
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
Subtitle D—Administrative
Provisions
SEC. 1031. REPORTING OF CERTAIN PAYMENTS MADE TO
ATTORNEYS.
(a) IN GENERAL.—Section 6045 (relating to returns
of brokers) is amended by adding at the end the following
new subsection:
‘‘(f) RETURN REQUIRED IN THE CASE OF PAYMENTS
TO ATTORNEYS.—
‘‘(1) IN GENERAL.—Any person engaged in a
trade or business and making a payment (in the
course of such trade or business) to which this sub-
section applies shall file a return under subsection
(a) and a statement under subsection (b) with re-
spect to such payment.
365
‘‘(2) APPLICATION OF SUBSECTION.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any payment to an attorney in connec-
tion with legal services (whether or not such
services are performed for the payor).
‘‘(B) EXCEPTION.—This subsection shall
not apply to the portion of any payment which
is required to be reported under section 6041(a)
(or would be so required but for the dollar limi-
tation contained therein) or section 6051.’’.
(b) REPORTING OF ATTORNEYS’ FEES PAYABLE TO
CORPORATIONS.—The regulations providing an exception
under section 6041 of the Internal Revenue Code of 1986
for payments made to corporations shall not apply to pay-
ments of attorneys’ fees.
(c) EFFECTIVE DATE.—The amendment made by
this section shall apply to payments made after December
31, 1997.
SEC. 1032. DECREASE OF THRESHOLD FOR REPORTING
PAYMENTS TO CORPORATIONS PERFORMING
SERVICES FOR FEDERAL AGENCIES.
(a) IN GENERAL.—Subsection (d) of section 6041A
(relating to returns regarding payments of remuneration
for services and direct sales) is amended by adding at the
end the following new paragraph:
366
‘‘(3) PAYMENTS
TO
CORPORATIONS
BY
FED-
ERAL EXECUTIVE AGENCIES.—
‘‘(A) IN GENERAL.—Notwithstanding any
regulation prescribed by the Secretary before
the date of the enactment of this paragraph,
subsection (a) shall apply to remuneration paid
to a corporation by any Federal executive agen-
cy (as defined in section 6050M(b)).
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to—
‘‘(i) services under contracts described
in section 6050M(e)(3) with respect to
which 
the 
requirements 
of 
section
6050M(e)(2) are met, and
‘‘(ii) such other services as the Sec-
retary may specify in regulations pre-
scribed after the date of the enactment of
this paragraph.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to returns the due date for which
(determined without regard to any extension) is more than
90 days after the date of the enactment of this Act.
367
SEC. 1033. DISCLOSURE OF RETURN INFORMATION FOR AD-
MINISTRATION OF CERTAIN VETERANS PRO-
GRAMS.
(a) GENERAL RULE.—Subparagraph (D) of section
6103(l)(7) (relating to disclosure of return information to
Federal, State, and local agencies administering certain
programs) is amended by striking ‘‘Clause (viii) shall not
apply after September 30, 1998.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
SEC. 1034. CONTINUOUS LEVY ON CERTAIN PAYMENTS.
(a) IN GENERAL.—Section 6331 (relating to levy and
distraint) is amended—
(1) by redesignating subsection (h) as sub-
section (i), and
(2) by inserting after subsection (g) the follow-
ing new subsection:
‘‘(h) CONTINUING LEVY ON CERTAIN PAYMENTS.—
‘‘(1) IN
GENERAL.—The effect of a levy on
specified payments to or received by a taxpayer shall
be continuous from the date such levy is first made
until such levy is released. Notwithstanding section
6334, such continuous levy shall attach to up to 15
percent of any specified payment due to the tax-
payer.
368
‘‘(2) SPECIFIED PAYMENT.—For the purposes
of paragraph (1), the term ‘specified payment’
means—
‘‘(A) any Federal payment other than a
payment for which eligibility is based on the in-
come or assets (or both) of a payee,
‘‘(B) any payment described in paragraph
(4), (7), (9), or (11) of section 6334(a), and
‘‘(C) any annuity or pension payment
under the Railroad Retirement Act or benefit
under the Railroad Unemployment Insurance
Act described in subsection (a)(6) of this sec-
tion.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to levies issued after the date
of the enactment of this Act.
SEC. 1035. MODIFICATION OF LEVY EXEMPTION.
(a) IN GENERAL.—Section 6334 (relating to property
exempt from levy) is amended by redesignating subsection
(f) as subsection (g) and by inserting after subsection (e)
the following new subsection:
‘‘(f) LEVY ALLOWED ON CERTAIN SPECIFIED PAY-
MENTS.—Any payment described in subparagraph (B) or
(C) of section 6331(h)(2) shall not be exempt from levy
369
if the Secretary approves the levy thereon under section
6331(h).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to levies issued after the date
of the enactment of this Act.
SEC. 1036. CONFIDENTIALITY AND DISCLOSURE OF RE-
TURNS AND RETURN INFORMATION.
(a) IN GENERAL.—Subsection (k) of section 6103 is
amended by adding at the end the following new para-
graph:
‘‘(8) LEVIES ON CERTAIN GOVERNMENT PAY-
MENTS.—
‘‘(A) DISCLOSURE OF RETURN INFORMA-
TION IN LEVIES ON FINANCIAL MANAGEMENT
SERVICE.—In serving a notice of levy, or release
of such levy, with respect to any applicable gov-
ernment payment, the Secretary may disclose to
officers and employees of the Financial Man-
agement Service—
‘‘(i) return information, including tax-
payer identity information,
‘‘(ii) the amount of any unpaid liabil-
ity under this title (including penalties and
interest), and
370
‘‘(iii) the type of tax and tax period to
which such unpaid liability relates.
‘‘(B) RESTRICTION ON USE OF DISCLOSED
INFORMATION.—Return information disclosed
under subparagraph (A) may be used by offi-
cers and employees of the Financial Manage-
ment Service only for the purpose of, and to the
extent necessary in, transferring levied funds in
satisfaction of the levy, maintaining appropriate
agency records in regard to such levy or the re-
lease thereof, notifying the taxpayer and the
agency certifying such payment that the levy
has been honored, or in the defense of any liti-
gation ensuing from the honor of such levy.
‘‘(C) 
APPLICABLE
GOVERNMENT
PAY-
MENT.—For purposes of this paragraph, the
term ‘applicable government payment’ means—
‘‘(i) any Federal payment (other than
a payment for which eligibility is based on
the income or assets (or both) of a payee)
certified to the Financial Management
Service for disbursement, and
‘‘(ii) any other payment which is cer-
tified to the Financial Management Service
371
for disbursement and which the Secretary
designates by published notice.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 6301(p) is amended—
(A) in paragraph (3)(A), by striking ‘‘(2),
or (6)’’ and inserting ‘‘(2), (6), or (8), and
(B) 
in 
paragraph 
(4), 
by 
inserting
‘‘(k)(8),’’ after ‘‘(j) (1) or (2),’’ each place it
appears.
(2) Section 552a(a)(8)(B) of title 5, United
States Code, is amended by striking ‘‘or’’ at the end
of clause (v), by adding ‘‘or’’ at the end of clause
(vi), and by adding at the end the following new
clause:
‘‘(vii) matches performed incident to a
levy described in section 6103(k)(8) of the
Internal Revenue Code of 1986;’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to levies issued after the date of
the enactment of this Act.
372
SEC. 1037. RETURNS OF BENEFICIARIES OF ESTATES AND
TRUSTS REQUIRED TO FILE RETURNS CON-
SISTENT WITH ESTATE OR TRUST RETURN
OR TO NOTIFY SECRETARY OF INCONSIST-
ENCY.
(a) DOMESTIC
ESTATES
AND
TRUSTS.—Section
6034A (relating to information to beneficiaries of estates
and trusts) is amended by adding at the end the following
new subsection:
‘‘(c) BENEFICIARY’S RETURN MUST BE CONSISTENT
WITH ESTATE OR TRUST RETURN OR SECRETARY NOTI-
FIED OF INCONSISTENCY.—
‘‘(1) IN GENERAL.—A beneficiary of any estate
or trust to which subsection (a) applies shall, on
such beneficiary’s return, treat any reported item in
a manner which is consistent with the treatment of
such item on the applicable entity’s return.
‘‘(2) NOTIFICATION OF INCONSISTENT TREAT-
MENT.—
‘‘(A) IN GENERAL.—In the case of any re-
ported item, if—
‘‘(i)(I) the applicable entity has filed a
return but the beneficiary’s treatment on
such beneficiary’s return is (or may be) in-
consistent with the treatment of the item
on the applicable entity’s return, or
373
‘‘(II) the applicable entity has not
filed a return, and
‘‘(ii) the beneficiary files with the Sec-
retary a statement identifying the incon-
sistency,
paragraph (1) shall not apply to such item.
‘‘(B) BENEFICIARY RECEIVING INCORRECT
INFORMATION.—A beneficiary shall be treated
as having complied with clause (ii) of subpara-
graph (A) with respect to a reported item if the
beneficiary—
‘‘(i) demonstrates to the satisfaction
of the Secretary that the treatment of the
reported item on the beneficiary’s return is
consistent with the treatment of the item
on the statement furnished under sub-
section (a) to the beneficiary by the appli-
cable entity, 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
374
‘‘(B) in which the beneficiary does not
comply with subparagraph (A)(ii) of paragraph
(2),
any adjustment required to make the treatment of
the items by such beneficiary consistent with the
treatment of the items on the applicable entity’s re-
turn 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 pre-
ceding sentence.
‘‘(4) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) REPORTED
ITEM.—The term ‘re-
ported item’ means any item for which informa-
tion is required to be furnished under sub-
section (a).
‘‘(B) APPLICABLE ENTITY.—The term ‘ap-
plicable entity’ means the estate or trust of
which the taxpayer is the beneficiary.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COM-
PLY WITH SECTION.—For addition to tax in the case
of a beneficiary’s negligence in connection with, or
disregard of, the requirements of this section, see
part II of subchapter A of chapter 68.’’.
375
(b) FOREIGN TRUSTS.—Subsection (d) of section
6048 (relating to information with respect to certain for-
eign trusts) is amended by adding at the end the following
new paragraph:
‘‘(5) UNITED STATES PERSON’S RETURN MUST
BE
CONSISTENT
WITH
TRUST
RETURN
OR
SEC-
RETARY NOTIFIED OF INCONSISTENCY.—Rules simi-
lar to the rules of section 6034A(c) shall apply to
items reported by a trust under subsection (b)(1)(B)
and to United States persons referred to in such
subsection.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to returns of beneficiaries and own-
ers filed after the date of the enactment of this Act.
Subtitle E—Excise Tax Provisions
SEC. 1041. EXTENSION AND MODIFICATION OF AIRPORT
AND AIRWAY TRUST FUND TAXES.
(a) FUEL TAXES.—
(1) AVIATION
FUEL.—Clause (ii) of section
4091(b)(3)(A) is amended by striking ‘‘September
30, 1997’’ and inserting ‘‘September 30, 2007’’.
(2) AVIATION GASOLINE.—Subparagraph (B) of
section 4081(d)(2) is amended by striking ‘‘Septem-
ber 30, 1997’’ and inserting ‘‘September 30, 2007’’.
376
(3) 
NONCOMMERCIAL
AVIATION.—Subpara-
graph (B) of section 4041(c)(3) is amended by strik-
ing ‘‘September 30, 1997’’ and inserting ‘‘September
30, 2007’’.
(b) TICKET TAXES.—
(1) 
PERSONS.—Clause 
(ii) 
of 
section
4261(g)(1)(A) is amended by striking ‘‘September
30, 1997’’ and inserting ‘‘September 30, 2007’’.
(2) 
PROPERTY.—Clause 
(ii) 
of 
section
4271(d)(1)(A) is amended by striking ‘‘September
30, 1997’’ and inserting ‘‘September 30, 2007’’.
(c) MODIFICATIONS TO TAX ON TRANSPORTATION OF
PERSONS BY AIR.—
(1) IN
GENERAL.—Section 4261 (relating to
imposition of tax) is amended by striking sub-
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-
377
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
‘‘(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
378
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-
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.—
379
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.
‘‘(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-
380
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).
‘‘(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.’’.
381
(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
‘‘(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).
382
(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.
(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
383
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
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.—Notwithstanding section 6302 of the Inter-
nal Revenue Code of 1986, in the case of deposits of taxes
384
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—
(1) after August 14, 1997, and before October
1, 1997, shall be October 10, 1997, or
(2) after June 30, 1998, and before October 1,
1998, shall be October 13, 1998.
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’’.
(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-
385
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
(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,
386
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—
‘‘(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
387
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’’.
(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.
388
(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’’.
(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).—’’
389
(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.’’.
(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’’.
390
(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.
(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—
391
(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.—
(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-
392
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
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.
393
(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.
SEC. 1043. 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
394
the Taxpayer Relief Act of 1997 and before October 1,
2002’’.
SEC. 1044. 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
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.
395
(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
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:
396
‘‘(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
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
397
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.
‘‘(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—
398
‘‘(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
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.—
399
(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.
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:
400
‘‘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
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:
401
‘‘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.—
‘‘(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
402
‘‘(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
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.
403
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
(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.
404
(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.—
‘‘(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-
405
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.
‘‘(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
406
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-
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—
407
(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,
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:
408
‘‘(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-
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
409
‘‘(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
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.—
410
‘‘(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.—
‘‘(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
411
taken into account by reason of clause
(ii) shall not exceed the benefit to
which the trade or business is entitled
under the policy or contract.
‘‘(iv) 
REPORTING.—The 
Secretary
shall require such reporting from policy-
holders and issuers as is necessary to carry
out clause (ii). Any report required under
the preceding sentence shall be treated as
a 
statement 
referred 
to 
in 
section
6724(d)(1).
‘‘(B) TREATMENT OF PARTNERSHIPS AND
S CORPORATIONS.—In the case of a partnership
or S corporation, this subsection shall be 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
412
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
(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.—
413
(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
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
414
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
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’’.
415
(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
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
416
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
‘‘(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—
417
‘‘(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.
‘‘(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.
418
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—
‘‘(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).’’.
419
(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.
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.—
420
‘‘(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—
‘‘(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
421
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:
‘‘(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-
422
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.
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)).’’.
423
(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
‘‘, 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
424
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
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),
425
‘‘(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-
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
426
forth under the contract, and that at the
end of each payment period the customer
may either continue to use the consumer
property by making the payment for the
next payment period or return such prop-
erty to the rent-to-own dealer in good
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
427
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
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:
428
‘‘(i) REPLACEMENT PROPERTY MUST BE ACQUIRED
FROM UNRELATED PERSON IN CERTAIN CASES.—
‘‘(1) IN GENERAL.—If the property which is in-
voluntarily converted is held by a taxpayer to which
this subsection applies, subsection (a) shall not apply
if the replacement property or stock is acquired from
a related person. The preceding sentence shall not
apply to the extent that the related person acquired
the replacement property or stock from an unrelated
person during the period applicable under subsection
(a)(2)(B).
‘‘(2) TAXPAYERS TO WHICH SUBSECTION AP-
PLIES.—This subsection shall apply to—
‘‘(A) a C corporation,
‘‘(B) a partnership in which 1 or more C
corporations own, directly or indirectly (deter-
mined in accordance with section 707(b)(3)),
more than 50 percent of the capital interest, or
profits interest, in such partnership at the time
of the involuntary conversion, and
‘‘(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.
429
In the case of a partnership, subparagraph (C) shall
apply with respect to the partnership and with re-
spect to each partner. A similar rule shall apply in
the case of an S corporation and its shareholders.
‘‘(3) RELATED PERSON.—For purposes of this
subsection, a person is related to another person if
the person bears a relationship to the other person
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—
430
(A) such changes shall be treated as initi-
ated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the net amount of the adjustments re-
quired to be taken into account under section
481(a) of the Internal Revenue Code of 1986
shall be taken into account ratably over the 4
taxable year period beginning with the first tax-
able year beginning after the date of the enact-
ment of this Act.
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
431
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—
(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-
432
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
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.
433
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
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
434
without the United States consists of qualified
passive income,
‘‘(B) the amount of the creditable foreign
taxes paid or accrued by the individual during
the taxable year does not exceed $300 ($600 in
the case of a joint return), and
‘‘(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.
435
‘‘(C) 
PAYEE
STATEMENT.—The 
term
‘payee statement’ has the meaning given to
such term by section 6724(d)(2).
‘‘(D) ESTATES
AND
TRUSTS
NOT
ELIGI-
BLE.—This subsection shall not apply to any
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
436
the average exchange rate for the taxable year
to which such taxes relate.
‘‘(B) EXCEPTION FOR CERTAIN TAXES.—
Subparagraph (A) shall not apply to any 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
437
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
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—
438
‘‘(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,
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
439
taxes relate (and translated as provided in sec-
tion 986(a)(2)(A)).
‘‘(3) ADJUSTMENTS.—The amount of tax (if
any) due on any redetermination under paragraph
(1) shall be paid by the taxpayer on notice and de-
mand by the Secretary, and the amount of tax over-
paid (if any) shall be credited or refunded to the
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
440
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.—
(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.’’.
441
(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 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:
442
‘‘(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
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, 1997, and for which
443
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 amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1106. TREATMENT OF PERSONAL TRANSACTIONS BY
INDIVIDUALS UNDER FOREIGN CURRENCY
RULES.
(a) GENERAL RULE.—Subsection (e) of section 988
(relating to application to individuals) is amended to read
as follows:
‘‘(e) APPLICATION TO INDIVIDUALS.—
‘‘(1) IN GENERAL.—The preceding provisions of
this section shall not apply to any section 988 trans-
action entered into by an individual which is a per-
sonal transaction.
‘‘(2) EXCLUSION
FOR
CERTAIN
PERSONAL
TRANSACTIONS.—If—
444
‘‘(A) nonfunctional currency is disposed of
by an individual in any transaction, and
‘‘(B) such transaction is a personal trans-
action,
no gain shall be recognized for purposes of this sub-
title by reason of changes in exchange rates after
such currency was acquired by such individual and
before such disposition. The preceding sentence shall
not apply if the gain which would otherwise be rec-
ognized on the transaction exceeds $200.
‘‘(3) PERSONAL TRANSACTIONS.—For purposes
of this subsection, the term ‘personal transaction’
means any transaction entered into by an individual,
except that such term shall not include any trans-
action to the extent that expenses properly allocable
to such transaction meet the requirements of section
162 or 212 (other than that part of section 212
dealing with expenses incurred in connection with
taxes).’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
445
SEC. 1107. ALL NONCONTROLLED SECTION 902 CORPORA-
TIONS WHICH ARE NOT PASSIVE FOREIGN IN-
VESTMENT COMPANIES IN ONE FOREIGN TAX
LIMITATION BASKET.
(a) IN GENERAL.—Subparagraph (E) of section
904(d)(2) (relating to noncontrolled section 902 corpora-
tions) is amended by adding at the end the following new
clause:
‘‘(iv) ALL
NON-PFIC’S
TREATED
AS
ONE.—All noncontrolled section 902 cor-
porations which are not passive foreign in-
vestment companies (as defined in section
1297) shall be treated as one noncontrolled
section 902 corporation for purposes of
paragraph (1). The Secretary may pre-
scribe regulations regarding the treatment
of distributions out of earnings and profits
for periods prior to the taxpayer’s acquisi-
tion of such stock.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 2001.
446
Subtitle B—Treatment of
Controlled Foreign Corporations
SEC. 1111. 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
thereof 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-
tion shall be made without regard to the preceding
sentence.
447
‘‘(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.
448
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-
449
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, 1997.
(c) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end thereof the fol-
lowing new sentence: ‘‘For purposes of this sub-
section, any exemption (or reduction) with respect to
the tax imposed by section 884 shall not be taken
into account.’’.
450
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
SEC. 1113. 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.
451
‘‘(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—
‘‘(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
452
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
(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.
453
(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
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
454
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—
455
‘‘(A) which is after December 31, 1997,
and
‘‘(B) during which the shareholder is a
United States shareholder (as defined in section
951(b)) of the corporation and the corporation
is a controlled foreign corporation.
‘‘(3) NEW HOLDING PERIOD IF QUALIFIED POR-
TION ENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), if the qualified portion of a
shareholder’s holding period with respect to any
stock ends after December 31, 1997, solely for
purposes of this part, the shareholder’s holding
period with respect to such stock shall be treat-
ed as beginning as of the first day following
such period.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if such stock was, with respect
to such shareholder, stock in a passive foreign
investment company at any time before the
qualified portion of the shareholder’s holding
period with respect to such stock and no elec-
tion under section 1298(b)(1) is made.’’.
456
SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK IN PASSIVE FOREIGN INVEST-
MENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chap-
ter 1 is amended by redesignating subpart C as subpart
D, by redesignating sections 1296 and 1297 as sections
1297 and 1298, respectively, and by inserting after sub-
part B the following new subpart:
‘‘Subpart C—Election of Mark to Market For
Marketable Stock
‘‘Sec. 1296. Election of mark to market for marketable stock.
‘‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign investment company which is
owned (or treated under subsection (g) as owned) by a
United States person at the close of any taxable year of
such person, at the election of such person—
‘‘(1) If the fair market value of such stock as
of the close of such taxable year exceeds its adjusted
basis, such United States person shall include in
gross income for such taxable year an amount equal
to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close
of such taxable year, such United States person
457
shall be allowed a deduction for such taxable year
equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect
to such stock.
‘‘(b) BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The adjusted basis of stock
in a passive foreign investment company—
‘‘(A) shall be increased by the amount in-
cluded in the gross income of the United States
person under subsection (a)(1) with respect to
such stock, and
‘‘(B) shall be decreased by the amount al-
lowed as a deduction to the United States per-
son under subsection (a)(2) with respect to
such stock.
‘‘(2) SPECIAL
RULE
FOR
STOCK
CONSTRUC-
TIVELY OWNED.—In the case of stock in a passive
foreign investment company which the United States
person is treated as owning under subsection (g)—
‘‘(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent treat-
458
ment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross
income under subsection (a)(1), and any gain
on the sale or other disposition of marketable
stock in a passive foreign investment company
(with respect to which an election under this
section is in effect), shall be treated as ordinary
income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction
under subsection (a)(2), and
‘‘(ii) loss on the sale or other disposi-
tion of marketable stock in a passive for-
eign investment company (with respect to
which an election under this section is in
effect) to the extent that the amount of
such loss does not exceed the unreversed
inclusions with respect to such stock,
459
shall be treated as an ordinary loss. The
amount so treated shall be treated as a deduc-
tion allowable in computing adjusted gross in-
come.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or
allowed as a deduction under subsection (a)(2)) shall
be determined in the same manner as if such
amount were gain or loss (as the case may be) from
the sale of stock in the passive foreign investment
company.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign investment com-
pany, the excess (if any) of—
‘‘(1) the amount included in gross income of
the taxpayer under subsection (a)(1) with respect to
such stock for prior taxable years, over
‘‘(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income
under subsection (a)(1) with respect to such stock for any
prior taxable year but for section 1291.
460
‘‘(e) MARKETABLE STOCK.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘marketable
stock’ means—
‘‘(A) any stock which is regularly traded
on—
‘‘(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).
461
‘‘(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
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—
462
‘‘(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-
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
463
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
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.—
464
‘‘(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
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
465
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.
‘‘(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
466
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
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, 1997, solely for purposes of this sec-
tion, the adjusted basis (before adjustments under sub-
467
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
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
468
‘‘(ii) if section 1296 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
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) TREATMENT OF MARK-TO-MARKET GAIN UNDER
SECTION 4982.—
(1) Subsection (e) of section 4982 is amended
by adding at the end thereof the following new para-
graph:
‘‘(6) TREATMENT OF GAIN RECOGNIZED UNDER
SECTION 1296.—For purposes of determining a regu-
lated investment company’s ordinary income—
‘‘(A) notwithstanding paragraph (1)(C),
section 1296 shall be applied as if such compa-
ny’s taxable year ended on October 31, and
‘‘(B) any ordinary gain or loss from an ac-
tual disposition of stock in a passive foreign in-
vestment company during the portion of the
calendar year after October 31 shall be taken
into account in determining such regulated in-
vestment company’s ordinary income for the
following calendar year.
469
In the case of a company making an election under
paragraph (4), the preceding sentence shall be ap-
plied by substituting the last day of the company’s
taxable year for October 31.’’.
(2) Subsection (b) of section 852 is amended by
adding at the end thereof the following new para-
graph:
‘‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON
STOCK
IN
PASSIVE
FOREIGN
INVESTMENT
COM-
PANY.—To the extent provided in regulations, the
taxable income of a regulated investment company
(other than a company to which an election under
section 4982(e)(4) applies) shall be computed with-
out regard to any net reduction in the value of any
stock of a passive foreign investment company with
respect to which an election under section 1296(k)
is in effect occurring after October 31 of the taxable
year, and any such reduction shall be treated as oc-
curring on the first day of the following taxable
year.’’.
(3) Subsection (c) of section 852 is amended by
inserting after ‘‘October 31 of such year’’ the follow-
ing: ‘‘, without regard to any net reduction in the
value of any stock of a passive foreign investment
company with respect to which an election under
471
regard to the preceding sentence)’’ after ‘‘investment com-
pany’’.
SEC. 1123. EFFECTIVE DATE.
The amendments made by this subtitle shall apply
to—
(1) taxable years of United States persons be-
ginning after December 31, 1997, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
Subtitle D—Repeal of Excise Tax
on Transfers to Foreign Entities
SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOR-
EIGN ENTITIES; RECOGNITION OF GAIN ON
CERTAIN TRANSFERS TO FOREIGN TRUSTS
AND ESTATES.
(a) REPEAL OF EXCISE TAX.—Chapter 5 (relating
to transfers to avoid income tax) is hereby repealed.
(b) RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO FOREIGN TRUSTS AND ESTATES.—Subpart F of part
I of subchapter J of chapter 1 is amended by adding at
the end the following new section:
472
‘‘SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO CERTAIN FOREIGN TRUSTS AND ESTATES.
‘‘(a) IN GENERAL.—In the case of any transfer of
property by a United States person to a foreign estate or
trust, for purposes of this subtitle, 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) EXCEPTION.—Subsection (a) shall not apply to
a transfer to a trust by a United States person if such
person is treated as the owner of such trust under section
671.’’.
(b) OTHER ANTI-AVOIDANCE PROVISIONS REPLAC-
ING REPEALED EXCISE TAX.—
(1) GAIN
RECOGNITION
ON
EXCHANGES
IN-
VOLVING
FOREIGN
PERSONS.—Section 1035 is
amended by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b) the
following new subsection:
‘‘(c) EXCHANGES INVOLVING FOREIGN PERSONS.—
To the extent provided in regulations, subsection (a) shall
473
not apply to any exchange having the effect of transferring
property to any person other than a United States per-
son.’’.
(2) TRANSFERS TO FOREIGN CORPORATIONS.—
Section 367 is amended by adding at the end the
following new subsection:
‘‘(f) OTHER TRANSFERS.—To the extent provided in
regulations, if a United States person transfers property
to a foreign corporation as paid-in surplus or as a con-
tribution to capital (in a transaction not otherwise de-
scribed in this section), such foreign corporation shall not,
for purposes of determining the extent to which gain shall
be recognized on such transfer, be considered to be a cor-
poration.’’.
(3) CERTAIN TRANSFERS TO PARTNERSHIPS.—
Section 721 is amended by adding at the end the
following new subsection:
‘‘(c) REGULATIONS RELATING TO TRANSFERS TO
FOREIGN PERSONS.—The Secretary may provide by regu-
lations that subsection (a) shall not apply to gain realized
on the transfer of property to a partnership if such gain,
when recognized, will be includible in the gross income of
a person other than a United States person.’’.
474
(4) REPEAL OF U.S. SOURCE TREATMENT OF
DEEMED ROYALTIES.—Subparagraph (C) of section
367(d)(2) is amended to read as follows:
‘‘(C) AMOUNTS RECEIVED TREATED AS OR-
DINARY INCOME.—For purposes of this chapter,
any amount included in gross income by reason
of this subsection shall be treated as ordinary
income.’’.
(5) TRANSFERS OF INTANGIBLES TO PARTNER-
SHIPS.—
(A) Subsection (d) of section 367 is
amended by adding at the end the following
new paragraph:
‘‘(3) REGULATIONS RELATING TO TRANSFERS
OF
INTANGIBLES
TO
PARTNERSHIPS.—The Sec-
retary may provide by regulations that the rules of
paragraph (2) also apply to the transfer of intangi-
ble property by a United States person to a partner-
ship in circumstances consistent with the purposes
of this subsection.’’.
(B) Section 721 is amended by adding at
the end the following new subsection:
‘‘(d) TRANSFERS OF INTANGIBLES.—
‘‘For regulatory authority to treat intangibles
transferred to a partnership as sold, see section
367(d)(3).’’.
(c) TECHNICAL AND CONFORMING AMENDMENTS.—
475
(1) Subsection (h) of section 814 is amended by
striking ‘‘or 1491’’.
(2) Section 1057 (relating to election to treat
transfer to foreign trust, etc., as taxable exchange)
is hereby repealed.
(3) Section 6422 is amended by striking para-
graph (5) and by redesignating paragraphs (6)
through (13) as paragraphs (5) through (12), re-
spectively.
(4) The table of chapters for subtitle A is
amended by striking the item relating to chapter 5.
(5) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(6) The table of sections for subpart F of part
I of subchapter J of chapter 1 is amended by adding
at the end the following new item:
‘‘Sec. 684. Recognition of gain on certain transfers to certain for-
eign trusts and estates.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
476
Subtitle E—Information Reporting
SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN
REQUIREMENT TO FOREIGN PARTNERSHIPS.
(a) IN GENERAL.—Section 6031 (relating to return
of partnership income) is amended by adding at the end
the following new subsection:
‘‘(e) FOREIGN PARTNERSHIPS.—
‘‘(1) EXCEPTION
FOR
FOREIGN
PARTNER-
SHIP.—Except as provided in paragraph (2), the
preceding provisions of this section shall not apply
to a foreign partnership.
‘‘(2) CERTAIN
FOREIGN
PARTNERSHIPS
RE-
QUIRED TO FILE RETURN.—Except as provided in
regulations prescribed by the Secretary, this section
shall apply to a foreign partnership for any taxable
year if for such year, such partnership has—
‘‘(A) gross income derived from sources
within the United States, or
‘‘(B) gross income which is effectively con-
nected with the conduct of a trade or business
within the United States.
The Secretary may provide simplified filing proce-
dures for foreign partnerships to which this section
applies.’’.
477
(b) SANCTION FOR FAILURE BY FOREIGN PARTNER-
SHIP TO COMPLY WITH SECTION 6031 TO INCLUDE DE-
NIAL OF DEDUCTIONS.—Subsection (f) of section 6231 is
amended—
(1) by striking ‘‘LOSSES AND’’ in the heading
and inserting ‘‘DEDUCTIONS, LOSSES, AND’’, and
(2) by striking ‘‘loss or’’ each place it appears
and inserting ‘‘deduction, loss, or’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUB-
JECT TO INFORMATION REPORTING COM-
PARABLE TO INFORMATION REPORTING FOR
CONTROLLED FOREIGN CORPORATIONS.
(a) IN GENERAL.—So much of section 6038 (relating
to information with respect to certain foreign corpora-
tions) as precedes paragraph (2) of subsection (a) is
amended to read as follows:
‘‘SEC. 6038. INFORMATION REPORTING WITH RESPECT TO
CERTAIN 
FOREIGN 
CORPORATIONS 
AND
PARTNERSHIPS.
‘‘(a) REQUIREMENT.—
‘‘(1) IN GENERAL.—Every United States person
shall furnish, with respect to any foreign business
478
entity which such person controls, such information
as the Secretary may prescribe relating to—
‘‘(A) the name, the principal place of busi-
ness, and the nature of business of such entity,
and the country under whose laws such entity
is incorporated (or organized in the case of a
partnership);
‘‘(B) in the case of a foreign corporation,
its post-1986 undistributed earnings (as defined
in section 902(c));
‘‘(C) a balance sheet for such entity listing
assets, liabilities, and capital;
‘‘(D) transactions between such entity
and—
‘‘(i) such person,
‘‘(ii) any corporation or partnership
which such person controls, and
‘‘(iii) any United States person own-
ing, at the time the transaction takes
place—
‘‘(I) in the case of a foreign cor-
poration, 10 percent or more of the
value of any class of stock outstand-
ing of such corporation, and
479
‘‘(II) in the case of a foreign
partnership, at least a 10-percent in-
terest in such partnership; and
‘‘(E)(i) in the case of a foreign corpora-
tion, a description of the various classes of
stock outstanding, and a list showing the name
and address of, and number of shares held by,
each United States person who is a shareholder
of record owning at any time during the annual
accounting period 5 percent or more in value of
any class of stock outstanding of such foreign
corporation, and
‘‘(ii) information comparable to the infor-
mation described in clause (i) in the case of a
foreign partnership.
The Secretary may also require the furnishing of
any other information which is similar or related in
nature to that specified in the preceding sentence or
which the Secretary determines to be appropriate to
carry out the provisions of this title.’’.
(b) DEFINITIONS.—
(1) IN
GENERAL.—Subsection (e) of section
6038 (relating to definitions) is amended—
(A) by redesignating paragraphs (1) and
(2) as paragraphs (2) and (4), respectively,
480
(B) by inserting before paragraph (2) (as
so redesignated) the following new paragraph:
‘‘(1) FOREIGN
BUSINESS
ENTITY.—The term
‘foreign business entity’ means a foreign corporation
and a foreign partnership.’’, and
(C) by inserting after paragraph (2) (as so
redesignated) the following new paragraph:
‘‘(3) PARTNERSHIP-RELATED DEFINITIONS.—
‘‘(A) CONTROL.—A person is in control of
a partnership if such person owns directly or in-
directly more than a 50 percent interest in such
partnership.
‘‘(B) 50-PERCENT
INTEREST.—For pur-
poses of subparagraph (A), a 50-percent inter-
est in a partnership is—
‘‘(i) an interest equal to 50 percent of
the capital interest, or 50 percent of the
profits interest, in such partnership, or
‘‘(ii) to the extent provided in regula-
tions, an interest to which 50 percent of
the deductions or losses of such partner-
ship are allocated.
For purposes of the preceding sentence, rules
similar to the rules of section 267(c) (other
than paragraph (3)) shall apply, except so as to
481
consider a United States person as owning such
an interest which is owned by a person which
is not a United States person.
‘‘(C) 10-PERCENT
INTEREST.—A 10-per-
cent interest in a partnership is an interest
which would be described in subparagraph (B)
if ‘10 percent’ were substituted for ‘50 percent’
each place it appears.’’.
(2) CLERICAL
AMENDMENT.—The paragraph
heading for paragraph (2) of section 6038(e) (as so
redesignated) is amended by inserting ‘‘OF
COR-
PORATION’’ after ‘‘CONTROL’’.
(c) MODIFICATION OF SANCTIONS ON PARTNERSHIPS
AND CORPORATIONS FOR FAILURE TO FURNISH INFOR-
MATION.—
(1) IN
GENERAL.—Subsection (b) of section
6038 is amended—
(A) by striking ‘‘$1,000’’ each place it ap-
pears and inserting ‘‘$10,000’’, and
(B) by striking ‘‘$24,000’’ in paragraph
(2) and inserting ‘‘$50,000’’.
(d) REPORTING BY 10-PERCENT PARTNERS.—Sub-
section (a) of section 6038 is amended by adding at the
end the following new paragraph:
482
‘‘(5) INFORMATION
REQUIRED
FROM
10-PER-
CENT
PARTNER
OF
CONTROLLED
FOREIGN
PART-
NERSHIP.—In the case of a foreign partnership
which is controlled by United States persons holding
at least 10-percent interests (but not by any one
United States person), the Secretary may require
each United States person who holds a 10-percent
interest in such partnership to furnish information
relating to such partnership, including information
relating to such partner’s ownership interests in the
partnership and allocations to such partner of part-
nership items.’’.
(e) TECHNICAL AMENDMENTS.—
(1) The following provisions of section 6038 are
each amended by striking ‘‘foreign corporation’’ each
place it appears and inserting ‘‘foreign business en-
tity’’:
(A) Paragraphs (2) and (3) of subsection
(a).
(B) Subsection (b).
(C) Subsection (c) other than paragraph
(1)(B) thereof.
(D) Subsection (d).
(E) Subsection (e)(4) (as redesignated by
subsection (b)).
483
(2) Subparagraph (B) of section 6038(c)(1) is
amended by inserting ‘‘in the case of a foreign busi-
ness entity which is a foreign corporation,’’ after
‘‘(B)’’.
(3) Paragraph (8) of section 318(b) is amended
by 
striking 
‘‘6038(d)(1)’’ 
and 
inserting
‘‘6038(d)(2)’’.
(4) Paragraph (4) of section 901(k) is amended
by striking ‘‘foreign corporation’’ and inserting ‘‘for-
eign corporation or partnership’’.
(5) The table of sections for subpart A of part
III of subchapter A of chapter 61 is amended by
striking the item relating to section 6038 and insert-
ing the following new item:
‘‘Sec. 6038. Information reporting with respect to certain foreign
corporations and partnerships.’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to annual accounting periods of
foreign partnerships beginning after the date of the enact-
ment of this Act.
SEC. 1143. MODIFICATIONS RELATING TO RETURNS RE-
QUIRED 
TO 
BE 
FILED 
BY 
REASON 
OF
CHANGES IN OWNERSHIP INTERESTS IN FOR-
EIGN PARTNERSHIP.
(a) NO RETURN REQUIRED UNLESS CHANGES IN-
VOLVE 10-PERCENT INTEREST IN PARTNERSHIP.—
484
(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.—
485
‘‘(1) IN GENERAL.—In addition to any criminal
penalty provided by law, any person required to file
a return under section 6035, 6046, or 6046A who
fails to file such return at the time provided in such
section, or who files a return which does not show
the information required pursuant to such section,
shall pay a penalty of $10,000, unless it is shown
that such failure is due to reasonable cause.
‘‘(2) INCREASE IN PENALTY WHERE FAILURE
CONTINUES
AFTER
NOTIFICATION.—If any failure
described in paragraph (1) continues for more than
90 days after the day on which the Secretary mails
notice of such failure to the United States person,
such person shall pay a penalty (in addition to the
amount required under paragraph (1)) of $10,000
for each 30-day period (or fraction thereof) during
which such failure continues after the expiration of
such 90-day period. The increase in any penalty
under this paragraph shall not exceed $50,000.
‘‘(3) REDUCED PENALTY FOR RETURNS RELAT-
ING TO FOREIGN PERSONAL HOLDING COMPANIES.—
In the case of a return required under section 6035,
paragraph (1) shall be applied by substituting
‘$1,000’ for ‘$10,000’, and paragraph (2) shall not
apply.’’.
486
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers and changes after the
date of the enactment of this Act.
SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PART-
NERSHIPS SUBJECT TO INFORMATION RE-
PORTING COMPARABLE TO INFORMATION
REPORTING FOR SUCH TRANSFERS TO FOR-
EIGN CORPORATIONS.
(a) 
IN
GENERAL.—Paragraph 
(1) 
of 
section
6038B(a) (relating to notice of certain transfers to foreign
corporations) is amended to read as follows:
‘‘(1) transfers property to—
‘‘(A) a foreign corporation in an exchange
described in section 332, 351, 354, 355, 356, or
361, or
‘‘(B) a foreign partnership in a contribu-
tion described in section 721 or in any other
contribution described in regulations prescribed
by the Secretary,’’.
(b) EXCEPTIONS.—Section 6038B is amended by re-
designating subsection (b) as subsection (c) and by insert-
ing after subsection (a) the following new subsection:
‘‘(b) EXCEPTIONS
FOR CERTAIN TRANSFERS
TO
FOREIGN PARTNERSHIPS; SPECIAL RULE.—
487
‘‘(1) EXCEPTIONS.—Subsection (a)(1)(B) shall
apply to a transfer by a United States person to a
foreign partnership only if—
‘‘(A) the United States person holds (im-
mediately after the transfer) directly or indi-
rectly at least a 10-percent interest (as defined
in section 6046A(d)) in the partnership, or
‘‘(B) the value of the property transferred
(when added to the value of the property trans-
ferred by such person or any related person to
such partnership or a related partnership dur-
ing the 12-month period ending on the date of
the transfer) exceeds $100,000.
For purposes of the preceding sentence, the value of
any transferred property is its fair market value at
the time of its transfer.
‘‘(2) SPECIAL RULE.—If by reason of an ad-
justment under section 482 or otherwise, a contribu-
tion described in subsection (a)(1) is deemed to have
been made, such contribution shall be treated for
purposes of this section as having been made not
earlier than the date specified by the Secretary.’’.
(c) MODIFICATION
OF PENALTY APPLICABLE
TO
FOREIGN CORPORATIONS
AND PARTNERSHIPS.—Para-
graph (1) of section 6038B(b) is amended by striking
488
‘‘equal to’’ and all that follows and inserting ‘‘equal to
10 percent of the fair market value of the property at the
time of the exchange (and, in the case of a contribution
described in subsection (a)(1)(B), such person shall recog-
nize gain as if the contributed property had been sold for
such value at the time of such contribution).’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transfers made after the
date of the enactment of this Act.
(2) ELECTION OF RETROACTIVE EFFECT.—Sec-
tion 1494(c) of the Internal Revenue Code of 1986
shall not apply to any transfer after August 20,
1996, if the person otherwise required to file a re-
turn with respect to such transfer elects to apply the
amendments made by this section to transfers after
August 20, 1996. The Secretary of the Treasury or
his delegate may prescribe simplified reporting
under the preceding sentence.
SEC. 1145. EXTENSION OF STATUTE OF LIMITATION FOR
FOREIGN TRANSFERS.
(a) IN GENERAL.—Paragraph (8) of section 6501(c)
(relating to failure to notify Secretary under section
6038B) is amended to read as follows:
489
‘‘(8) FAILURE TO NOTIFY SECRETARY OF CER-
TAIN FOREIGN TRANSFERS.—In the case of any in-
formation which is required to be reported to the
Secretary under section 6038, 6038A, 6038B, 6046,
6046A, or 6048, the time for assessment of any tax
imposed by this title with respect to any event or pe-
riod to which such information relates shall not ex-
pire before the date which is 3 years after the date
on which the Secretary is furnished the information
required to be reported under such section.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to information the due date for
the reporting of which is after the date of the enactment
of this Act.
SEC. 1146. 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.—
490
‘‘(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
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
491
‘‘(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
‘‘(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, 1998.
492
Subtitle F—Determination of For-
eign or Domestic Status of Part-
nerships
SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC
STATUS OF PARTNERSHIPS.
(a) IN GENERAL.—Paragraph (4) of section 7701(a)
is amended by inserting before the period ‘‘unless, in the
case of a partnership, the partnership is more properly
treated as a foreign partnership under regulations pre-
scribed by the Secretary’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
the date of the enactment of this Act.
Subtitle G—Other Simplification
Provisions
SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.
(a) IN GENERAL.—Paragraph (3) of section 1907(a)
of the Small Business Job Protection Act of 1996 is
amended by adding at the end the following flush sen-
tence:
‘‘To the extent prescribed in regulations by the Sec-
retary of the Treasury or his delegate, a trust which
was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under subpart
E of part I of subchapter J of chapter 1 of the In-
493
ternal Revenue Code of 1986), and which was treat-
ed as a United States person on the day before the
date of the enactment of this Act may elect to con-
tinue to be treated as a United States person not-
withstanding section 7701(a)(30)(E) of such Code.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect as if included in the
amendments made by section 1907(a) of the Small Busi-
ness Job Protection Act of 1996.
SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HAR-
BOR REQUIREMENT THAT PRINCIPAL OFFICE
BE OUTSIDE THE UNITED STATES.
(a) IN GENERAL.—The last sentence of clause (ii) of
section 864(b)(2)(A) (relating to stock or securities) is
amended by striking ‘‘, or in the case of a corporation’’
and all that follows and inserting a period.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
Subtitle H—Other Provisions
SEC. 1171. DEFINITION OF FOREIGN PERSONAL HOLDING
COMPANY INCOME.
(a) INCOME
FROM
NOTIONAL
PRINCIPAL
CON-
TRACTS AND PAYMENTS IN LIEU OF DIVIDENDS.—
494
(1) IN
GENERAL.—Paragraph (1) of section
954(c) (defining foreign personal holding company
income) is amended by adding at the end the follow-
ing new subparagraphs:
‘‘(F) INCOME FROM NOTIONAL PRINCIPAL
CONTRACTS.—Net income from notional prin-
cipal contracts. Any item of income, gain, de-
duction, or loss from a notional principal con-
tract entered into for purposes of hedging any
item described in any preceding subparagraph
shall not be taken into account for purposes of
this subparagraph but shall be taken into ac-
count under such other subparagraph.
‘‘(G) PAYMENTS IN LIEU OF DIVIDENDS.—
Payments in lieu of dividends which are made
pursuant to an agreement to which section
1058 applies.’’.
(2) CONFORMING AMENDMENT.—Subparagraph
(B) of section 954(c)(1) is amended—
(A) by striking the second sentence, and
(B) by striking ‘‘also’’ in the last sentence.
(b) EXCEPTION FOR DEALERS.—Paragraph (2) of
section 954(c) is amended by adding at the end the follow-
ing new subparagraph:
495
‘‘(C) EXCEPTION FOR DEALERS.—Except
as provided in subparagraph (A), (E), or (G) of
paragraph (1) or by regulations, in the case of
a regular dealer in property (within the mean-
ing of paragraph (1)(B)), forward contracts,
option contracts, or similar financial instru-
ments (including notional principal contracts
and all instruments referenced to commodities),
there shall not be taken into account in comput-
ing foreign personal holding income any item of
income, gain, deduction, or loss from any trans-
action (including hedging transactions) entered
into in the ordinary course of such dealer’s
trade or business as such a dealer.’’.
(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. 1172. PERSONAL PROPERTY USED PREDOMINANTLY
IN THE UNITED STATES TREATED AS NOT
PROPERTY OF A LIKE KIND WITH RESPECT
TO PROPERTY USED PREDOMINANTLY OUT-
SIDE THE UNITED STATES.
(a) IN GENERAL.—Subsection (h) of section 1031
(relating to exchange of property held for productive use
or investment) is amended to read as follows:
496
‘‘(h) SPECIAL RULES FOR FOREIGN REAL AND PER-
SONAL PROPERTY.—For purposes of this section—
‘‘(1) REAL PROPERTY.—Real property located
in the United States and real property located out-
side the United States are not property of a like
kind.
‘‘(2) PERSONAL PROPERTY.—
‘‘(A) IN
GENERAL.—Personal property
used predominantly within the United States
and personal property used predominantly out-
side the United States are not property of a like
kind.
‘‘(B) PREDOMINANT USE.—Except as pro-
vided in subparagraph (C) and (D), the pre-
dominant use of any property shall be deter-
mined based on—
‘‘(i) in the case of the property relin-
quished in the exchange, the 2-year period
ending on the date of such relinquishment,
and
‘‘(ii) in the case of the property ac-
quired in the exchange, the 2-year period
beginning on the date of such acquisition.
‘‘(C) PROPERTY HELD FOR LESS THAN 2
YEARS.—Except in the case of an exchange
497
which is part of a transaction (or series of
transactions) structured to avoid the purposes
of this subsection—
‘‘(i) only the periods the property was
held by the person relinquishing the prop-
erty (or any related person) shall be taken
into account under subparagraph (B)(i),
and
‘‘(ii) only the periods the property was
held by the person acquiring the property
(or any related person) shall be taken into
account under subparagraph (B)(ii).
‘‘(D) SPECIAL RULE FOR CERTAIN PROP-
ERTY.—Property described in any subpara-
graph of section 168(g)(4) shall be treated as
used predominantly in the United States.’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to transfers after June 8,
1997, in taxable years ending after such date.
(2) BINDING
CONTRACTS.—The amendment
made by this section shall not apply to any transfer
pursuant to a written binding contract in effect on
June 8, 1997, and at all times thereafter before the
disposition of property. A contract shall not fail to
498
meet the requirements of the preceding sentence
solely because—
(A) it provides for a sale in lieu of an ex-
change, or
(B) the property to be acquired as replace-
ment property was not identified under such
contract before June 9, 1997.
SEC. 1173. HOLDING PERIOD REQUIREMENT FOR CERTAIN
FOREIGN TAXES.
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
‘‘(k) MINIMUM HOLDING PERIOD
FOR CERTAIN
TAXES.—
‘‘(1) WITHHOLDING TAXES.—
‘‘(A) IN GENERAL.—In no event shall a
credit be allowed under subsection (a) for any
withholding tax on a dividend with respect to
stock in a corporation if—
‘‘(i) such stock is held by the recipient
of the dividend for 15 days or less during
the 30-day period beginning on the date
which is 15 days before the date on which
such share becomes ex-dividend with re-
spect to such dividend, or
499
‘‘(ii) to the extent that the recipient of
the dividend is under an obligation (wheth-
er pursuant to a short sale or otherwise) to
make related payments with respect to po-
sitions in substantially similar or related
property.
‘‘(B) WITHHOLDING
TAX.—For purposes
of this paragraph, the term ‘withholding tax’ in-
cludes any tax determined on a gross basis; but
does not include any tax which is in the nature
of a prepayment of a tax imposed on a net
basis.
‘‘(2) DEEMED PAID TAXES.—In the case of in-
come, war profits, or excess profits taxes deemed
paid under section 853, 902, or 960 through a chain
of ownership of stock in 1 or more corporations, no
credit shall be allowed under subsection (a) for such
taxes if—
‘‘(A) any stock of any corporation in such
chain (the ownership of which is required to ob-
tain credit under subsection (a) for such taxes)
is held for less than the period described in
paragraph (1)(A)(i), or
500
‘‘(B) the corporation holding the stock is
under an obligation referred to in paragraph
(1)(A)(ii).
‘‘(3) 45-DAY RULE IN THE CASE OF CERTAIN
PREFERENCE DIVIDENDS.—In the case of stock hav-
ing preference in dividends and dividends with re-
spect to such stock which are attributable to a pe-
riod or periods aggregating in excess of 366 days,
paragraph (1)(A)(i) shall be applied—
‘‘(A) by substituting ‘45 days’ for ‘15
days’ each place it appears, and
‘‘(B) by substituting ‘90-day period’ for
‘30-day period’.
‘‘(4) EXCEPTION FOR CERTAIN TAXES PAID BY
SECURITIES DEALERS.—
‘‘(A) IN
GENERAL.—Paragraphs (1) and
(2) shall not apply to any qualified tax with re-
spect to any security held in the active conduct
in a foreign country of a securities business of
any person—
‘‘(i) who is registered as a securities
broker or dealer under section 15(a) of the
Securities Exchange Act of 1934,
501
‘‘(ii) who is registered as a Govern-
ment securities broker or dealer under sec-
tion 15C(a) of such Act, or
‘‘(iii) who is licensed or authorized in
such foreign country to conduct securities
activities in such country and is subject to
bona fide regulation by a securities regu-
lating authority of such country.
‘‘(B) QUALIFIED
TAX.—For purposes of
subparagraph (A), the term ‘qualified tax’
means a tax paid to a foreign country (other
than the foreign country referred to in subpara-
graph (A)) if—
‘‘(i) the dividend to which such tax is
attributable is subject to taxation on a net
basis by the country referred to in sub-
paragraph (A), and
‘‘(ii) such country allows a credit
against its net basis tax for the full
amount of the tax paid to such other for-
eign country.
‘‘(C) REGULATIONS.—The Secretary may
prescribe such regulations as may be appro-
priate to prevent the abuse of the exception
provided by this paragraph.
502
‘‘(5) CERTAIN RULES TO APPLY.—For purposes
of this subsection, the rules of paragraphs (3) and
(4) of section 246(c) shall apply.
‘‘(6) TREATMENT OF BONA FIDE SALES.—If a
person’s holding period is reduced by reason of the
application of the rules of section 246(c)(4) to any
contract for the bona fide sale of stock, the deter-
mination of whether such person’s holding period
meets the requirements of paragraph (2) shall be
made as of the date such contract is entered into.
‘‘(7) TAXES ALLOWED AS DEDUCTION, ETC.—
Sections 275 and 78 shall not apply to any tax
which is not allowable as a credit under subsection
(a) by reason of this subsection.’’.
(b) NOTICE OF WITHHOLDING TAXES PAID BY REG-
ULATED INVESTMENT COMPANY.—Subsection (c) of sec-
tion 853 (relating to foreign tax credit allowed to share-
holders) is amended by adding at the end the following
new sentence: ‘‘Such notice shall also include the amount
of such taxes which (without regard to the election under
this section) would not be allowable as a credit under sec-
tion 901(a) to the regulated investment company by rea-
son of section 901(k).’’.
503
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dividends paid or accrued more
than 30 days after the date of the enactment of this Act.
SEC. 1174. PENALTIES FOR FAILURE TO DISCLOSE POSI-
TION THAT CERTAIN INTERNATIONAL TRANS-
PORTATION INCOME IS NOT INCLUDIBLE IN
GROSS INCOME.
(a) IN GENERAL.—Section 883 is amended by adding
at the end the following new subsection:
‘‘(d) PENALTIES FOR FAILURE TO DISCLOSE POSI-
TION THAT CERTAIN INTERNATIONAL TRANSPORTATION
INCOME IS NOT INCLUDIBLE IN GROSS INCOME.—
‘‘(1) IN GENERAL.—A taxpayer who, with re-
spect to any tax imposed by this title, takes the posi-
tion that any of its gross income derived from the
international operation of 1 or more ships or aircraft
is not includible in gross income by reason of para-
graph (1) or (2) of subsection (a) or paragraph (1)
or (2) of section 872(b) (or by reason of any appli-
cable treaty) shall be entitled to such treatment only
if such position is disclosed (in such manner as the
Secretary may prescribe) on the return of tax for
such tax (or any statement attached to such return).
‘‘(2) ADDITIONAL PENALTIES FOR FAILING TO
DISCLOSE POSITION.—If a taxpayer fails to meet the
504
requirement of paragraph (1) for any taxable year
with respect to the international operation of 1 or
more ships or 1 or more aircraft—
‘‘(A) the amount of the income from the
international operation to which such failure re-
lates—
‘‘(i) which is from sources without the
United States, and
‘‘(ii) which is attributable to a fixed
place of business in the United States,
shall be treated for purposes of this title as ef-
fectively connected with the conduct of a trade
or business within the United States, and
‘‘(B) no deductions or credits shall be al-
lowed which are attributable to income from the
international operation to which the failure re-
lates.
‘‘(3) REASONABLE
CAUSE
EXCEPTION.—This
subsection shall not apply to a failure to disclose a
position if it is shown that such failure is due to rea-
sonable cause and not due to willful neglect.’’.
(b) CONFORMING AMENDMENTS.—Paragraphs (1)
and (2) of section 872(b), and paragraphs (1) and (2) of
section 883(a), are each amended by striking ‘‘Gross in-
505
come’’ each place it appears and inserting ‘‘Except as pro-
vided in section 883(d), gross income’’.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1997.
(2) 
COORDINATION
WITH
TREATIES.—The
amendments made by this section shall not apply in
any case where their application would be contrary
to any treaty obligation of the United States.
(d) INFORMATION TO BE PROVIDED BY CUSTOMS
SERVICE.—The United States Custom Service shall pro-
vide the Secretary of the Treasury or his delegate with
such information as may be specified by such Secretary
in order to enable such Secretary to determine whether
ships which are not registered in the United States are
engaged in transportation to or from the United States.
SEC. 1175. DENIAL OF TREATY BENEFITS FOR CERTAIN
PAYMENTS THROUGH HYBRID ENTITIES.
A foreign person shall be entitled under any income
tax treaty of the United States with a foreign country to
any reduced rate of any withholding tax imposed by the
Internal Revenue Code of 1986 on an item of income de-
rived through any partnership or other pass-thru entity
only to the extent that such item is treated for purposes
506
of the taxation laws of such foreign country as an item
of income of such person. The preceding sentence shall
not apply if—
(1) the treaty contains a provision addressing
the applicability of the treaty in the case of an item
of income derived through a partnership, or
(2) the foreign country imposes tax on a dis-
tribution of such item of income from such partner-
ship to such person.
SEC. 1176. INTEREST ON UNDERPAYMENTS NOT REDUCED
BY FOREIGN TAX CREDIT CARRYBACKS.
(a) IN GENERAL.—Subsection (d) of section 6601 is
amended by redesignating paragraphs (2) and (3) as para-
graphs (3) and (4), respectively, and by inserting after
paragraph (1) the following new paragraph:
‘‘(2) FOREIGN
TAX
CREDIT
CARRYBACKS.—If
any credit allowed for any taxable year is increased
by reason of a carryback of tax paid or accrued to
foreign countries or possessions of the United
States, such increase shall not affect the computa-
tion of interest under this section for the period end-
ing with the filing date for the taxable year in which
such taxes were in fact paid or accrued, or, with re-
spect to any portion of such credit carryback from
a taxable year attributable to a net operating loss
507
carryback or a capital loss carryback from a subse-
quent taxable year, such increase shall not affect the
computation of interest under this section for the
period ending with the filing date for such subse-
quent taxable year.’’.
(b) CONFORMING AMENDMENT
TO REFUNDS AT-
TRIBUTABLE TO FOREIGN TAX CREDIT CARRYBACKS.—
(1) IN
GENERAL.—Subsection (f) of section
6611 is amended by redesignating paragraphs (2)
and (3) as paragraphs (3) and (4), respectively, and
by inserting after paragraph (1) the following new
paragraph:
‘‘(2) FOREIGN TAX CREDIT CARRYBACKS.—For
purposes of subsection (a), if any overpayment of
tax imposed by subtitle A results from a carryback
of tax paid or accrued to foreign countries or posses-
sions of the United States, such overpayment shall
be deemed not to have been made before the filing
date for the taxable year in which such taxes were
in fact paid or accrued, or, with respect to any por-
tion of such credit carryback from a taxable year at-
tributable to a net operating loss carryback or a cap-
ital loss carryback from a subsequent taxable year,
such overpayment shall be deemed not to have been
508
made before the filing date for such subsequent tax-
able year.’’.
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (4) of section 6611(f) (as
so redesignated) is amended—
(i) by striking ‘‘PARAGRAPHS (1) AND
(2)’’ and inserting ‘‘PARAGRAPHS (1), (2),
AND (3)’’, and
(ii) by striking ‘‘paragraph (1) or (2)’’
each place it appears and inserting ‘‘para-
graph (1), (2), or (3)’’.
(B) Clause (ii) of section 6611(f)(4)(B) (as
so redesignated) is amended by striking ‘‘and’’
at the end of subclause (I), by redesignating
subclause (II) as subclause (III), and by insert-
ing after subclause (I) the following new sub-
clause:
‘‘(II) in the case of a carryback
of taxes paid or accrued to foreign
countries or possessions of the United
States, the taxable year in which such
taxes were in fact paid or accrued (or,
with respect to any portion of such
carryback from a taxable year attrib-
utable 
to 
a 
net 
operating 
loss
509
carryback or a capital loss carryback
from a subsequent taxable year, such
subsequent taxable year), and’’.
(C) 
Subclause 
(III) 
of 
section
6611(f)(4)(B)(ii) (as so redesignated) is amend-
ed by inserting ‘‘(as defined in paragraph
(3)(B))’’ after ‘‘credit carryback’’ the first place
it appears.
(D) Section 6611 is amended by striking
subsection (g) and by redesignating subsections
(h) and (i) as subsections (g) and (h), respec-
tively.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to carrybacks arising in taxable
years beginning after the date of the enactment of this
Act.
SEC. 1177. CLARIFICATION OF PERIOD OF LIMITATIONS ON
CLAIM FOR CREDIT OR REFUND ATTRIB-
UTABLE 
TO 
FOREIGN 
TAX 
CREDIT
CARRYFORWARD.
(a) IN GENERAL.—Subparagraph (A) of section
6511(d)(3) is amended by striking ‘‘for the year with re-
spect to which the claim is made’’ and inserting ‘‘for the
year in which such taxes were actually paid or accrued’’.
510
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxes paid or accrued in tax-
able years beginning after the date of the enactment of
this Act.
SEC. 1178. MISCELLANEOUS CLARIFICATIONS.
(a) ATTRIBUTION OF DEEMED PAID FOREIGN TAXES
TO PRIOR DISTRIBUTIONS.—Subparagraph (B) of section
902(c)(2) is amended by striking ‘‘deemed paid with re-
spect to’’ and inserting ‘‘attributable to’’.
(b) FINANCIAL
SERVICES
INCOME
DETERMINED
WITHOUT REGARD TO HIGH-TAXED INCOME.—Subclause
(II) of section 904(d)(2)(C)(i) is amended by striking
‘‘subclause (I)’’ and inserting ‘‘subclauses (I) and (III)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
TITLE 
XII—SIMPLIFICATION
PROVISIONS RELATING TO IN-
DIVIDUALS AND BUSINESSES
Subtitle A—Provisions Relating to
Individuals
SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM
TAX EXEMPTION AMOUNT FOR CERTAIN DE-
PENDENTS.
(a) BASIC STANDARD DEDUCTION.—
511
(1) IN
GENERAL.—Paragraph (5) of section
63(c) (relating to limitation on basic standard de-
duction in the case of certain dependents) is amend-
ed by striking ‘‘shall not exceed’’ and all that follows
and inserting ‘‘shall not exceed the greater of—
‘‘(A) $500, or
‘‘(B) the sum of $250 and such individ-
ual’s earned income.’’.
(2) CONFORMING AMENDMENT.—Paragraph (4)
of section 63(c) is amended—
(A) by striking ‘‘(5)(A)’’ in the material
preceding subparagraph (A) and inserting
‘‘(5)’’, and
(B) by striking ‘‘by substituting’’ and all
that follows in subparagraph (B) and inserting
‘‘by substituting for ‘calendar year 1992’ in
subparagraph (B) thereof—
‘‘(i) ‘calendar year 1987’ in the case
of the dollar amounts contained in para-
graph (2) or (5)(A) or subsection (f), and
‘‘(ii) ‘calendar year 1997’ in the case
of the dollar amount contained in para-
graph (5)(B).’’.
(b) MINIMUM
TAX
EXEMPTION
AMOUNT.—Sub-
section (j) of section 59 is amended to read as follows:
512
‘‘(j) TREATMENT OF UNEARNED INCOME OF MINOR
CHILDREN.—
‘‘(1) IN GENERAL.—In the case of a child to
whom section 1(g) applies, the exemption amount
for purposes of section 55 shall not exceed the sum
of—
‘‘(A) such child’s earned income (as de-
fined in section 911(d)(2)) for the taxable year,
plus
‘‘(B) $5,000.
‘‘(2) INFLATION ADJUSTMENT.—In the case of
any taxable year beginning in a calendar year after
1998, the dollar amount in paragraph (1)(B) shall
be increased by an amount equal to the product of—
‘‘(A) such dollar amount, and
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘1997’ for ‘1992’ in sub-
paragraph (B) thereof.
If any increase determined under the preceding sen-
tence is not a multiple of $50, such increase shall
be rounded to the nearest multiple of $50.’’.
513
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM
ESTIMATED TAX REQUIREMENTS.
(a) IN GENERAL.—Paragraph (1) of section 6654(e)
(relating to exception where tax is small amount) is
amended by striking ‘‘$500’’ and inserting ‘‘$1,000’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1203. OPTIONAL METHODS FOR COMPUTING SECA TAX
COMBINED.
(a) INTERNAL REVENUE CODE.—
(1) IN
GENERAL.—Subsection (h) of section
1402 is amended to read as follows:
‘‘(h) OPTIONAL METHOD FOR COMPUTING SELF-EM-
PLOYMENT INCOME.—
‘‘(1) INDIVIDUALS.—In the case of any trade or
business which is carried on by an individual—
‘‘(A) if the gross income derived by him
from such trade or business is not more than
the upper limit for the taxable year, the net
earnings from self-employment derived by him
from such trade or business may, at his option,
514
be deemed to be 662⁄3 percent of such gross in-
come, or
‘‘(B) if the gross income derived by him
from such trade or business is more than the
upper limit for the taxable year and the net
earnings from self-employment derived by him
from such trade or business (computed under
subsection (a) without regard to this sentence)
are less than the lower limit for the taxable
year, the net earnings from self-employment de-
rived by him from such trade or business may,
at his option, be deemed to be the lower limit
for the taxable year.
‘‘(2) MEMBER OF A PARTNERSHIP.—In the case
of a member of a partnership carrying on any trade
or business—
‘‘(A) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) applies) is not more than
the upper limit for the taxable year, his dis-
tributive share of income described in section
702(a)(8) derived from such trade or business
may, at his option, be deemed to be an amount
515
equal to 662⁄3 percent of his distributive share
of such gross income (after such gross income
has been so reduced), or
‘‘(B) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) applies) is more than the
upper limit for the taxable year and his dis-
tributive share (whether or not distributed) of
income described in section 702(a)(8) derived
from such trade or business (computed under
this subsection without regard to this sentence)
is less than the lower limit for the taxable year,
his distributive share of income described in
section 702(a)(8) derived from such trade or
business may, at his option, be deemed to be
the lower limit for the taxable year.
‘‘(3) UPPER
AND
LOWER
LIMITS.—For pur-
poses of this subsection—
‘‘(A) LOWER LIMIT.—The lower limit for
any taxable year is the sum of the amounts ap-
plicable under section 213(d) of the Social Se-
curity Act for calendar quarters ending with or
within such taxable year.
516
‘‘(B) UPPER LIMIT.—The upper limit for
any taxable year is the amount equal to 150
percent of the lower limit for such taxable year.
‘‘(4) DETERMINATION OF GROSS INCOME.—For
purposes of this subsection, the term ‘gross income’
means—
‘‘(A) in the case of any such trade or busi-
ness in which the income is computed under a
cash receipts and disbursements method, the
gross receipts from such trade or business re-
duced by the cost or other basis of property
which was purchased and sold in carrying on
such trade or business, adjusted (after such re-
duction) in accordance with the provisions of
paragraphs (1) through (7) and paragraph (9)
of subsection (a), and
‘‘(B) in the case of any such trade or busi-
ness in which the income is computed under an
accrual method, the gross income from such
trade or business, adjusted in accordance with
the provisions of paragraphs (1) through (7)
and paragraph (9) of subsection (a).
‘‘(5) INCOME
DERIVED
FROM
MORE
THAN
TRADE
OR
BUSINESS.—For purposes of this sub-
section, if an individual (including a member of a
517
partnership) derives gross income from more than 1
such trade or business, such gross income (including
his distributive share of the gross income of any
partnership derived from any such trade or busi-
ness) shall be deemed to have been derived from one
trade or business.
‘‘(6) ELECTION.—The option under
this subsection shall be allowed for any
taxable year only if elected on the first re-
turn filed for such taxable year.’’.
(2) CONFORMING AMENDMENT.—Subsection (a)
of section 1402 is amended by striking all that fol-
lows the first sentence following paragraph (15) and
inserting ‘‘For optional method of determining net
earnings from self-employment, see subsection (h).’’.
(b) SOCIAL SECURITY ACT.—Subsection (g) of sec-
tion 211 of the Social Security Act is amended to read
as follows:
‘‘(g) OPTIONAL METHOD FOR COMPUTING SELF-EM-
PLOYMENT INCOME.—
‘‘(1) INDIVIDUALS.—In the case of any trade or
business which is carried on by an individual—
‘‘(A) if the gross income derived by him
from such trade or business is not more than
the upper limit for the taxable year, the net
518
earnings from self-employment derived by him
from such trade or business may, at his option,
be deemed to be 662⁄3 percent of such gross in-
come, or
‘‘(B) if the gross income derived by him
from such trade or business is more than the
upper limit for the taxable year and the net
earnings from self-employment derived by him
from such trade or business (computed under
subsection (a) without regard to this sentence)
are less than the lower limit for the taxable
year, the net earnings from self-employment de-
rived by him from such trade or business may,
at his option, be deemed to be the lower limit
for the taxable year.
‘‘(2) MEMBER OF A PARTNERSHIP.—In the case
of a member of a partnership carrying on any trade
or business—
‘‘(A) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) of the Internal Revenue
Code of 1986 applies) is not more than the
upper limit for the taxable year, his distributive
519
share of income described in section 702(a)(8)
of such Code derived from such trade or busi-
ness may, at his option, be deemed to be an
amount equal to 662⁄3 percent of his distributive
share of such gross income (after such gross in-
come has been so reduced), or
‘‘(B) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) of such Code applies) is
more than the upper limit for the taxable year
and his distributive share (whether or not dis-
tributed) 
of 
income 
described 
in 
section
702(a)(8) of such Code derived from such trade
or business (computed under this subsection
without regard to this sentence) is less than the
lower limit for the taxable year, his distributive
share of income described in section 702(a)(8)
of such Code derived from such trade or busi-
ness may, at his option, be deemed to be the
lower limit for the taxable year.
‘‘(3) UPPER
AND
LOWER
LIMITS.—For pur-
poses of this subsection—
520
‘‘(A) LOWER LIMIT.—The lower limit for
any taxable year is the sum of the amounts ap-
plicable under section 213(d) for calendar quar-
ters ending with or within such taxable year.
‘‘(B) UPPER LIMIT.—The upper limit for
any taxable year is the amount equal to 150
percent of the lower limit for such taxable year.
‘‘(4) DETERMINATION OF GROSS INCOME.—For
purposes of this subsection, the term ‘gross income’
means—
‘‘(A) in the case of any such trade or busi-
ness in which the income is computed under a
cash receipts and disbursements method, the
gross receipts from such trade or business re-
duced by the cost or other basis of property
which was purchased and sold in carrying on
such trade or business, adjusted (after such re-
duction) in accordance with the provisions of
paragraphs (1) through (6) and paragraph (8)
of subsection (a), and
‘‘(B) in the case of any such trade or busi-
ness in which the income is computed under an
accrual method, the gross income from such
trade or business, adjusted in accordance with
521
the provisions of paragraphs (1) through (6)
and paragraph (8) of subsection (a).
‘‘(5) INCOME
DERIVED
FROM
MORE
THAN
TRADE
OR
BUSINESS.—For purposes of this sub-
section, if an individual (including a member of a
partnership) derives gross income from more than 1
such trade or business, such gross income (including
his distributive share of the gross income of any
partnership derived from any such trade or busi-
ness) shall be deemed to have been derived from one
trade or business.
‘‘(6) ELECTION.—The option under this sub-
section shall be allowed for any taxable year only if
elected on the first return filed for such taxable
year.’’.
(2) CONFORMING AMENDMENT.—Subsection (a)
of section 211 of the Social Security Act is amended
by striking all that follows the first sentence follow-
ing paragraph (15) and inserting ‘‘For optional
method of determining net earnings from self-em-
ployment, see subsection (g).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
522
SEC. 1204. TREATMENT OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.
(a) IN GENERAL.—Section 162 (relating to trade or
business expenses) is amended by redesignating subsection
(o) as subsection (p) and by inserting after subsection (n)
the following new subsection:
‘‘(o) TREATMENT
OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.—
‘‘(1) GENERAL RULE.—In the case of any em-
ployee of the United States Postal Service who per-
forms services involving the collection and delivery of
mail on a rural route and who receives qualified re-
imbursements for the expenses incurred by such em-
ployee for the use of a vehicle in performing such
services—
‘‘(A) the amount allowable as a deduction
under this chapter for the use of a vehicle in
performing such services shall be equal to the
amount of such qualified reimbursements; and
‘‘(B) such qualified reimbursements shall
be treated as paid under a reimbursement or
other expense allowance arrangement for pur-
poses of section 62(a)(2)(A) (and section 62(c)
shall not apply to such qualified reimburse-
ments).
523
‘‘(2) DEFINITION OF QUALIFIED REIMBURSE-
MENTS.—For purposes of this subsection, the term
‘qualified reimbursements’ means the amounts paid
by the United States Postal Service to employees as
an equipment maintenance allowance under the
1991 collective bargaining agreement between the
United States Postal Service and the National Rural
Letter Carriers’ Association. Amounts paid as an
equipment maintenance allowance by such Postal
Service under later collective bargaining agreements
that supersede the 1991 agreement shall be consid-
ered qualified reimbursements if such amounts do
not exceed the amounts that would have been paid
under the 1991 agreement, adjusted for changes in
the Consumer Price Index (as defined in section
1(f)(5)) since 1991.’’.
(b) TECHNICAL AMENDMENT.—Section 6008 of the
Technical and Miscellaneous Revenue Act of 1988 is here-
by repealed.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
524
SEC. 1205. TREATMENT OF TRAVELING EXPENSES OF CER-
TAIN FEDERAL EMPLOYEES ENGAGED IN
CRIMINAL INVESTIGATIONS.
(a) IN GENERAL.—Subsection (a) of section 162 is
amended by adding at the end the following new sentence:
‘‘The preceding sentence shall not apply to any Federal
employee during any period for which such employee is
certified by the Attorney General (or the designee thereof)
as traveling on behalf of the United States in temporary
duty status to investigate, or provide support services for
the investigation of, a Federal crime.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts paid or incurred
with respect to taxable years ending after the date of the
enactment of this Act.
SEC. 1206. PAYMENT OF TAX BY COMMERCIALLY ACCEPT-
ABLE MEANS.
(a) GENERAL RULE.—Section 6311 is amended to
read as follows:
‘‘SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPT-
ABLE MEANS.
‘‘(a) AUTHORITY TO RECEIVE.—It shall be lawful for
the Secretary to receive for internal revenue taxes (or in
payment for internal revenue stamps) any commercially
acceptable means that the Secretary deems appropriate to
525
the extent and under the conditions provided in regula-
tions prescribed by the Secretary.
‘‘(b) ULTIMATE
LIABILITY.—If a check, money
order, or other method of payment, including payment by
credit card, debit card, or charge card so received is not
duly paid, or is paid and subsequently charged back to
the Secretary, the person by whom such check, or money
order, or other method of payment has been tendered shall
remain liable for the payment of the tax or for the stamps,
and for all legal penalties and additions, to the same ex-
tent as if such check, money order, or other method of
payment had not been tendered.
‘‘(c) LIABILITY OF BANKS AND OTHERS.—If any cer-
tified, treasurer’s, or cashier’s check (or other guaranteed
draft), or any money order, or any other means of pay-
ment that has been guaranteed by a financial institution
(such as a credit card, debit card, or charge card trans-
action which has been guaranteed expressly by a financial
institution) so received is not duly paid, the United States
shall, in addition to its right to exact payment from the
party originally indebted therefor, have a lien for—
‘‘(1) the amount of such check (or draft) upon
all assets of the financial institution on which
drawn,
526
‘‘(2) the amount of such money order upon all
the assets of the issuer thereof, or
‘‘(3) the guaranteed amount of any other trans-
action upon all the assets of the institution making
such guarantee,
and such amount shall be paid out of such assets in pref-
erence to any other claims whatsoever against such finan-
cial institution, issuer, or guaranteeing institution, except
the necessary costs and expenses of administration and
the reimbursement of the United States for the amount
expended in the redemption of the circulating notes of
such financial institution.
‘‘(d) PAYMENT BY OTHER MEANS.—
‘‘(1) AUTHORITY
TO
PRESCRIBE
REGULA-
TIONS.—The Secretary shall prescribe such regula-
tions as the Secretary deems necessary to receive
payment by commercially acceptable means, includ-
ing regulations that—
‘‘(A) specify which methods of payment by
commercially acceptable means will be accept-
able,
‘‘(B) specify when payment by such means
will be considered received,
‘‘(C) identify types of nontax matters re-
lated to payment by such means that are to be
527
resolved by persons ultimately liable for pay-
ment and financial intermediaries, without the
involvement of the Secretary, and
‘‘(D) ensure that tax matters will be re-
solved by the Secretary, without the involve-
ment of financial intermediaries.
‘‘(2) 
AUTHORITY
TO
ENTER
INTO
CON-
TRACTS.—Notwithstanding section 3718(f) of title
31, United States Code, the Secretary is authorized
to enter into contracts to obtain services related to
receiving payment by other means where cost bene-
ficial to the Government.
‘‘(3) SPECIAL PROVISIONS FOR USE OF CREDIT
CARDS.—If use of credit cards is accepted as a
method of payment of taxes pursuant to subsection
(a)—
‘‘(A) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by
a person by use of a credit card shall not be
subject to section 161 of the Truth-in-Lending
Act (15 U.S.C. 1666), or to any similar provi-
sions of State law, if the error alleged by the
person is an error relating to the underlying tax
liability, rather than an error relating to the
credit card account such as a computational
528
error or numerical transposition in the credit
card transaction or an issue as to whether the
person authorized payment by use of the credit
card,
‘‘(B) a payment of internal revenue taxes
(or a payment for internal revenue stamps)
shall not be subject to section 170 of the Truth-
in-Lending Act (15 U.S.C. 1666i), or to any
similar provisions of State law,
‘‘(C) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by
a person by use of a debit card shall not be
subject to section 908 of the Electronic Fund
Transfer Act (15 U.S.C. 1693f), or to any simi-
lar provisions of State law, if the error alleged
by the person is an error relating to the under-
lying tax liability, rather than an error relating
to the debit card account such as a computa-
tional error or numerical transposition in the
debit card transaction or an issue as to whether
the person authorized payment by use of the
debit card,
‘‘(D) the term ‘creditor’ under section
103(f) of the Truth-in-Lending Act (15 U.S.C.
1602(f)) shall not include the Secretary with re-
529
spect to credit card transactions in payment of
internal revenue taxes (or payment for internal
revenue stamps), and
‘‘(E) notwithstanding any other provision
of law to the contrary, in the case of payment
made by credit card or debit card transaction of
an amount owed to a person as the result of the
correction of an error under section 161 of the
Truth-in-Lending Act (15 U.S.C. 1666) or sec-
tion 908 of the Electronic Fund Transfer Act
(15 U.S.C. 1693f), the Secretary is authorized
to provide such amount to such person as a
credit to that person’s credit card or debit card
account through the applicable credit card or
debit card system.
‘‘(e) CONFIDENTIALITY OF INFORMATION.—
‘‘(1) IN
GENERAL.—Except as otherwise au-
thorized by this subsection, no person may use or
disclose any information relating to credit or debit
card transactions obtained pursuant to section
6103(k)(8) other than for purposes directly related
to the processing of such transactions, or the billing
or collection of amounts charged or debited pursuant
thereto.
‘‘(2) EXCEPTIONS.—
530
‘‘(A) Debit or credit card issuers or others
acting on behalf of such issuers may also use
and disclose such information for purposes di-
rectly related to servicing an issuer’s accounts.
‘‘(B) Debit or credit card issuers or others
directly involved in the processing of credit or
debit card transactions or the billing or collec-
tion of amounts charged or debited thereto may
also use and disclose such information for pur-
poses directly related to—
‘‘(i) statistical risk and profitability
assessment;
‘‘(ii) 
transferring 
receivables, 
ac-
counts, or interest therein;
‘‘(iii) auditing the account informa-
tion;
‘‘(iv) complying with Federal, State,
or local law; and
‘‘(v) properly authorized civil, crimi-
nal, or regulatory investigation by Federal,
State, or local authorities.
‘‘(3) PROCEDURES.—Use and disclosure of in-
formation under this paragraph shall be made only
to the extent authorized by written procedures pro-
mulgated by the Secretary.
531
‘‘(4) CROSS REFERENCE.—
‘‘For provision providing for civil damages for vio-
lation of paragraph (1), see section 7431.’’.
(b) SEPARATE APPROPRIATION REQUIRED FOR PAY-
MENT OF CREDIT CARD FEES.—No amount may be paid
by the United States to a credit card issuer for the right
to receive payments of internal revenue taxes by credit
card without a separate appropriation therefor.
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter B of chapter 64 is amended by striking
the item relating to section 6311 and inserting the follow-
ing:
‘‘Sec. 6311. Payment of tax by commercially acceptable means.’’.
(d) AMENDMENTS
TO SECTIONS 6103 AND 7431
WITH RESPECT TO DISCLOSURE AUTHORIZATION.—
(1) Subsection (k) of section 6103 (relating to
confidentiality and disclosure of returns and return
information) is amended by adding at the end the
following new paragraph:
‘‘(8) DISCLOSURE OF INFORMATION TO ADMIN-
ISTER SECTION 6311.—The Secretary may disclose
returns or return information to financial institu-
tions and others to the extent the Secretary deems
necessary for the administration of section 6311.
Disclosures of information for purposes other than
to accept payments by checks or money orders shall
532
be made only to the extent authorized by written
procedures promulgated by the Secretary.’’.
(2) Section 7431 (relating to civil damages for
unauthorized disclosure of returns and return infor-
mation) is amended by adding at the end the follow-
ing new subsection:
‘‘(g) SPECIAL RULE FOR INFORMATION OBTAINED
UNDER SECTION 6103(k)(8).—For purposes of this sec-
tion, any reference to section 6103 shall be treated as in-
cluding a reference to section 6311(e).’’.
(3) Section 6103(p)(3)(A) is amended by strik-
ing ‘‘or (6)’’ and inserting ‘‘(6), or (8)’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the day 9 months after
the date of the enactment of this Act.
Subtitle B—Provisions Relating to
Businesses Generally
SEC. 1211. 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:
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
533
‘‘(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-
tract as of the close of such prior contract
year.
534
‘‘(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
long-term contracts completed during the tax-
535
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
‘‘(ii) ending on the return due date
for the following taxable year.
536
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.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to contracts completed in taxable years
ending after the date of the enactment of this Act.
(2) SUBSECTION (b).—The amendments made
by subsection (b) shall apply for purposes of section
167(g) of the Internal Revenue Code of 1986 to
property placed in service after September 13, 1995.
SEC. 1212. 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
clause shall not apply to any amount not described in sec-
tion 834(b).’’.
537
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Simplification Relating
to Electing Large Partnerships
PART I—GENERAL PROVISIONS
SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING
LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subchapter K (relating to
partners and partnerships) is amended by adding at the
end the following new part:
‘‘PART IV—SPECIAL RULES FOR ELECTING
LARGE PARTNERSHIPS
‘‘Sec. 771. Application of subchapter to electing large partner-
ships.
‘‘Sec. 772. Simplified flow-through.
‘‘Sec. 773. Computations at partnership level.
‘‘Sec. 774. Other modifications.
‘‘Sec. 775. Electing large partnership defined.
‘‘Sec. 776. Special rules for partnerships holding oil and gas prop-
erties.
‘‘Sec. 777. Regulations.
‘‘SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING
LARGE PARTNERSHIPS.
‘‘The preceding provisions of this subchapter to the
extent inconsistent with the provisions of this part shall
not apply to an electing large partnership and its partners.
‘‘SEC. 772. SIMPLIFIED FLOW-THROUGH.
‘‘(a) GENERAL RULE.—In determining the income
tax of a partner of an electing large partnership, such
538
partner shall take into account separately such partner’s
distributive share of the partnership’s—
‘‘(1) taxable income or loss from passive loss
limitation activities,
‘‘(2) taxable income or loss from other activi-
ties,
‘‘(3) net capital gain (or net capital loss)—
‘‘(A) to the extent allocable to passive loss
limitation activities, and
‘‘(B) to the extent allocable to other activi-
ties,
‘‘(4) tax-exempt interest,
‘‘(5) applicable net AMT adjustment separately
computed for—
‘‘(A) passive loss limitation activities, and
‘‘(B) other activities,
‘‘(6) general credits,
‘‘(7) low-income housing credit determined
under section 42,
‘‘(8) rehabilitation credit determined under sec-
tion 47,
‘‘(9) foreign income taxes,
‘‘(10) the credit allowable under section 29, and
539
‘‘(11) other items to the extent that the Sec-
retary determines that the separate treatment of
such items is appropriate.
‘‘(b) SEPARATE COMPUTATIONS.—In determining
the amounts required under subsection (a) to be sepa-
rately taken into account by any partner, this section and
section 773 shall be applied separately with respect to
such partner by taking into account such partner’s dis-
tributive share of the items of income, gain, loss, deduc-
tion, or credit of the partnership.
‘‘(c) TREATMENT AT PARTNER LEVEL.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, rules similar to the rules of section
702(b) shall apply to any partner’s distributive share
of the amounts referred to in subsection (a).
‘‘(2) INCOME OR LOSS FROM PASSIVE LOSS LIM-
ITATION ACTIVITIES.—For purposes of this chapter,
any partner’s distributive share of any income or
loss described in subsection (a)(1) shall be treated as
an item of income or loss (as the case may be) from
the conduct of a trade or business which is a single
passive activity (as defined in section 469). A similar
rule shall apply to a partner’s distributive share of
amounts referred to in paragraphs (3)(A) and
(5)(A) of subsection (a).
540
‘‘(3) INCOME OR LOSS FROM OTHER ACTIVI-
TIES.—
‘‘(A) IN GENERAL.—For purposes of this
chapter, any partner’s distributive share of any
income or loss described in subsection (a)(2)
shall be treated as an item of income or expense
(as the case may be) with respect to property
held for investment.
‘‘(B) DEDUCTIONS
FOR
LOSS
NOT
SUB-
JECT
TO
SECTION
67.—The deduction under
section 212 for any loss described in subpara-
graph (A) shall not be treated as a miscellane-
ous itemized deduction for purposes of section
67.
‘‘(4) TREATMENT
OF
NET
CAPITAL
GAIN
OR
LOSS.—For purposes of this chapter, any partner’s
distributive share of any gain or loss described in
subsection (a)(3) shall be treated as a long-term
capital gain or loss, as the case may be.
‘‘(5) MINIMUM TAX TREATMENT.—In determin-
ing the alternative minimum taxable income of any
partner, such partner’s distributive share of any ap-
plicable net AMT adjustment shall be taken into ac-
count in lieu of making the separate adjustments
provided in sections 56, 57, and 58 with respect to
541
the items of the partnership. Except as provided in
regulations, the applicable net AMT adjustment
shall be treated, for purposes of section 53, as an
adjustment or item of tax preference not specified in
section 53(d)(1)(B)(ii).
‘‘(6) GENERAL CREDITS.—A partner’s distribu-
tive share of the amount referred to in paragraph
(6) of subsection (a) shall be taken into account as
a current year business credit.
‘‘(d) OPERATING RULES.—For purposes of this sec-
tion—
‘‘(1) PASSIVE
LOSS
LIMITATION
ACTIVITY.—
The term ‘passive loss limitation activity’ means—
‘‘(A) any activity which involves the con-
duct of a trade or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term
‘trade or business’ includes any activity treated as a
trade or business under paragraph (5) or (6) of sec-
tion 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-
exempt interest’ means interest excludable from
gross income under section 103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
542
‘‘(A) IN
GENERAL.—The applicable net
AMT adjustment is—
‘‘(i) with respect to taxpayers other
than corporations, the net adjustment de-
termined by using the adjustments applica-
ble to individuals, and
‘‘(ii) with respect to corporations, the
net adjustment determined by using the
adjustments applicable to corporations.
‘‘(B) NET ADJUSTMENT.—The term ‘net
adjustment’ means the net adjustment in the
items attributable to passive loss activities or
other activities (as the case may be) which
would result if such items were determined with
the adjustments of sections 56, 57, and 58.
‘‘(4) TREATMENT
OF
CERTAIN
SEPARATELY
STATED ITEMS.—
‘‘(A) EXCLUSION
FOR
CERTAIN
PUR-
POSES.—In determining the amounts referred
to in paragraphs (1) and (2) of subsection (a),
any net capital gain or net capital loss (as the
case may be), and any item referred to in sub-
section (a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net cap-
ital gain shall be treated—
543
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
gain does not exceed the net capital gain
determined by only taking into account
gains and losses from sales and exchanges
of property used in connection with such
activities, and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount
allocated under clause (i).
A similar rule shall apply for purposes of allo-
cating any net capital loss.
‘‘(C) NET CAPITAL LOSS.—The term ‘net
capital loss’ means the excess of the losses from
sales or exchanges of capital assets over the
gains from sales or exchange of capital assets.
‘‘(5) GENERAL
CREDITS.—The term ‘general
credits’ means any credit other than the low-income
housing credit, the rehabilitation credit, the foreign
tax credit, and the credit allowable under section 29.
‘‘(6) FOREIGN INCOME TAXES.—The term ‘for-
eign income taxes’ means taxes described in section
901 which are paid or accrued to foreign countries
and to possessions of the United States.
544
‘‘(e) SPECIAL RULE
FOR UNRELATED BUSINESS
TAX.—In the case of a partner which is an organization
subject to tax under section 511, such partner’s distribu-
tive share of any items shall be taken into account sepa-
rately to the extent necessary to comply with the provi-
sions of section 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in an elect-
ing large partnership other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
‘‘(2) such partner’s distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
an electing large partnership shall be computed in
the same manner as in the case of an individual ex-
cept that—
545
‘‘(A) the items described in section 772(a)
shall be separately stated, and
‘‘(B) the modifications of subsection (b)
shall apply.
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of an electing
large partnership or the computation of any credit
of an electing large partnership shall be made by the
partnership; except that the election under section
901, and any election under section 108, shall be
made by each partner separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), all limitations and other pro-
visions affecting the computation of the taxable
income of an electing large partnership or the
computation of any credit of an electing large
partnership shall be applied at the partnership
level (and not at the partner level).
‘‘(B) CERTAIN LIMITATIONS APPLIED AT
PARTNER
LEVEL.—The following provisions
shall be applied at the partner level (and not at
the partnership level):
‘‘(i) Section 68 (relating to overall
limitation on itemized deductions).