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(c) DEFINITION
OF
TERMINATION
OF
UNITED
STATES CITIZENSHIP.—Section 7701(a) is amended by
adding at the end the following new paragraph:
‘‘(47) TERMINATION OF UNITED STATES CITI-
ZENSHIP.—An individual shall not cease to be treat-
ed as a United States citizen before the date on
which the individual’s citizenship is treated as relin-
quished under section 877A(e)(3).’’.
(d) CONFORMING AMENDMENTS.—
(1) Section 877 is amended by adding at the
end the following new subsection:
‘‘(f) APPLICATION.—This section shall not apply to
any individual who relinquishes (within the meaning of
section 877A(e)(3)) United States citizenship on or after
February 6, 1995.’’.
(2) Section 2107(c) is amended by adding at
the end the following new paragraph:
‘‘(3) CROSS
REFERENCE.—For credit against
the tax imposed by subsection (a) for expatriation
tax, see section 877A(i).’’.
(3) Section 2501(a)(3) is amended by adding at
the end the following new flush sentence:
‘‘For credit against the tax imposed under this sec-
tion by reason of this paragraph, see section
877A(i).’’.
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(4) Paragraph (10) of section 7701(b) is
amended by adding at the end the following new
sentence: ‘‘This paragraph shall not apply to any
long-term resident of the United States who is an
expatriate (as defined in section 877A(e)(1)).’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part II of subchapter N of chapter 1
is amended by inserting after the item relating to section
877 the following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in this
subsection, the amendments made by this section
shall apply to expatriates (within the meaning of
section 877A(e) of the Internal Revenue Code of
1986, as added by this section) whose expatriation
date (as so defined) occurs on or after February 6,
1995.
(2) GIFTS AND BEQUESTS.—Section 102(d) of
the Internal Revenue Code of 1986 (as added by
subsection (b)) shall apply to amounts received from
expatriates (as so defined) whose expatriation date
(as so defined) occurs on and after February 6,
1995.
(3) SPECIAL
RULES
RELATING
TO
CERTAIN
ACTS OCCURRING BEFORE FEBRUARY 6, 1995.—In
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the case of an individual who took an act of expa-
triation specified in paragraph (1), (2), (3), or (4)
of section 349(a) of the Immigration and Nationality
Act (8 U.S.C. 1481(a) (1)–(4)) before February 6,
1995, but whose expatriation date (as so defined)
occurs after February 6, 1995—
(A) the amendment made by subsection (c)
shall not apply,
(B) the amendment made by subsection
(d)(1) shall not apply for any period prior to
the expatriation date, and
(C) the other amendments made by this
section shall apply as of the expatriation date.
(4) DUE DATE FOR TENTATIVE TAX.—The due
date under section 877A(h)(2) of such Code shall in
no event occur before the 90th day after the date of
the enactment of this Act.
SEC. ll102. INFORMATION ON INDIVIDUALS EXPATRIAT-
ING.
(a) IN GENERAL.—Subpart A of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6039E the following new section:
‘‘SEC. 6039F. INFORMATION ON INDIVIDUALS EXPATRIAT-
ING.
‘‘(a) REQUIREMENT.—
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‘‘(1) IN GENERAL.—Notwithstanding any other
provision of law, any expatriate (within the meaning
of section 877A(e)(1)) shall provide a statement
which includes the information described in sub-
section (b).
‘‘(2) TIMING.—
‘‘(A) CITIZENS.—In the case of an expatri-
ate described in section 877(e)(1)(A), such
statement shall be—
‘‘(i) provided not later than the expa-
triation date (within the meaning of sec-
tion 877A(e)(2)), and
‘‘(ii) provided to the person or court
referred to in section 877A(e)(3).
‘‘(B) NONCITIZENS.—In the case of an ex-
patriate described in section 877A(e)(1)(B),
such statement shall be provided to the Sec-
retary with the return of tax imposed by chap-
ter 1 for the taxable year during which the
event described in such section occurs.
‘‘(b) INFORMATION TO BE PROVIDED.—Information
required under subsection (a) shall include—
‘‘(1) the taxpayer’s TIN,
‘‘(2) the mailing address of such individual’s
principal foreign residence,
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‘‘(3) the foreign country in which such individ-
ual is residing,
‘‘(4) the foreign country of which such individ-
ual is a citizen,
‘‘(5) in the case of an individual having a net
worth of at least the dollar amount applicable under
section 877A(c)(1)(B), information detailing the as-
sets and liabilities of such individual, and
‘‘(6) such other information as the Secretary
may prescribe.
‘‘(c) PENALTY.—Any individual failing to provide a
statement required under subsection (a) shall be subject
to a penalty for each year during any portion of which
such failure continues in an amount equal to the greater
of—
‘‘(1) 5 percent of the additional tax required to
be paid under section 877A for such year, or
‘‘(2) $1,000,
unless it is shown that such failure is due to reasonable
cause and not to willful neglect.
‘‘(d) INFORMATION TO BE PROVIDED
TO SEC-
RETARY.—Notwithstanding any other provision of law—
‘‘(1) any Federal agency or court which collects
(or is required to collect) the statement under sub-
section (a) shall provide to the Secretary—
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1059(e)(1) of the Internal Revenue Code of 1986
(as amended by this Act), paragraphs (1) and (2)
shall be applied by substituting ‘‘September 13,
1995’’ for ‘‘May 3, 1995’’.
SEC. 
ll202. 
REGISTRATION 
OF 
CONFIDENTIAL 
COR-
PORATE 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.
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‘‘(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
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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.
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‘‘(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 any
promoter 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
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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) 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’’.
(d) EFFECTIVE DATE.—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 offered
to potential participants after the Secretary of the Treas-
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ury prescribes guidance with respect to meeting require-
ments added by such amendments.
SEC. ll203. DENIAL OF DEDUCTION FOR INTEREST ON
LOANS WITH RESPECT TO COMPANY-OWNED
INSURANCE.
(a) IN GENERAL.—Paragraph (4) of section 264(a)
is amended—
(1) by inserting ‘‘, or any endowment or annu-
ity contracts owned by the taxpayer covering any in-
dividual,’’ after ‘‘the life of any individual’’, and
(2) by striking all that follows ‘‘carried on by
the taxpayer’’ and inserting a period.
(b) EXCEPTION FOR CONTRACTS RELATING TO KEY
PERSONS; PERMISSIBLE INTEREST RATES.—Section 264
is amended—
(1) by striking ‘‘Any’’ in subsection (a)(4) and
inserting ‘‘Except as provided in subsection (d),
any’’, and
(2) by adding at the end the following new sub-
section:
‘‘(d) SPECIAL RULES FOR APPLICATION OF SUB-
SECTION (a)(4).—
‘‘(1) EXCEPTION
FOR
KEY
PERSONS.—Sub-
section (a)(4) shall not apply to any interest paid or
accrued on any indebtedness with respect to policies
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or contracts covering an individual who is a key per-
son to the extent that the aggregate amount of such
indebtedness with respect to policies and contracts
covering such individual does not exceed $50,000.
‘‘(2) INTEREST
RATE
CAP
ON
KEY
PERSONS
AND PRE-1986 CONTRACTS.—
‘‘(A) IN GENERAL.—No deduction shall be
allowed by reason of paragraph (1) or the last
sentence of subsection (a) with respect to inter-
est paid or accrued for any month to the extent
the amount of such interest exceeds the amount
which would have been determined if the appli-
cable rate of interest were used for such month.
‘‘(B) APPLICABLE RATE OF INTEREST.—
For purposes of subparagraph (A)—
‘‘(i) IN
GENERAL.—The applicable
rate of interest for any month is the rate
of interest described as Moody’s Corporate
Bond 
Yield 
Average-Monthly 
Average
Corporates as published by Moody’s Inves-
tors Service, Inc., or any successor thereto,
for such month.
‘‘(ii) PRE-1986
CONTRACT.—In the
case of indebtedness on a contract to which
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the last sentence of subsection (a) ap-
plies—
‘‘(I) which is a contract providing
a fixed rate of interest, the applicable
rate of interest for any month shall be
the Moody’s rate described in clause
(i) for the month in which the con-
tract was purchased, or
‘‘(II) which is a contract provid-
ing a variable rate of interest, the ap-
plicable rate of interest for any month
in an applicable period shall be such
Moody’s rate for the second month
preceding the first month in such pe-
riod.
For purposes of subclause (II), the tax-
payer shall elect an applicable period for
such contract on its return of tax imposed
by this chapter for its first taxable year
ending on or after October 13, 1995. Such
applicable period shall be for any number
of months (not greater than 12) specified
in the election and may not be changed by
the taxpayer without the consent of the
Secretary.
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‘‘(3) KEY PERSON.—For purposes of paragraph
(1), the term ‘key person’ means an officer or 20-
percent owner, except that the number of individuals
who may be treated as key persons with respect to
any taxpayer shall not exceed the greater of—
‘‘(A) 5 individuals, or
‘‘(B) the lesser of 5 percent of the total of-
ficers and employees of the taxpayer or 10 indi-
viduals.
‘‘(4) 20-PERCENT
OWNER.—For purposes of
this 
subsection, 
the 
term 
‘20-percent 
owner’
means—
‘‘(A) if the taxpayer is a corporation, any
person who owns directly 20 percent or more of
the outstanding stock of the corporation or
stock possessing 20 percent or more of the total
combined voting power of all stock of the cor-
poration, or
‘‘(B) if the taxpayer is not a corporation,
any person who owns 20 percent or more of the
capital or profits interest in the employer.
‘‘(5) AGGREGATION RULES.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (4)(A) and applying the $50,000 limita-
tion in paragraph (1)—
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‘‘(i) all members of a controlled group
shall be treated as 1 taxpayer, and
‘‘(ii) such limitation shall be allocated
among the members of such group in such
manner as the Secretary may prescribe.
‘‘(B) CONTROLLED GROUP.—For purposes
of this paragraph, all persons treated as a sin-
gle employer under subsection (a) or (b) of sec-
tion 52 or subsection (m) or (o) of section 414
shall be treated as members of a controlled
group.’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to interest paid or accrued
after October 13, 1995.
(2) TRANSITION RULE FOR EXISTING INDEBT-
EDNESS.—
(A) IN GENERAL.—In the case of—
(i) indebtedness incurred before Janu-
ary 1, 1996, or
(ii) indebtedness incurred before Jan-
uary 1, 1997, with respect to any contract
or policy entered into in 1994 or 1995,
the amendments made by this section shall not
apply to qualified interest paid or accrued on
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such indebtedness after October 13, 1995, and
before January 1, 1999.
(B) QUALIFIED INTEREST.—For purposes
of subparagraph (A), the qualified interest with
respect to any indebtedness for any month is
the applicable percentage of the amount of in-
terest (otherwise deductible) which would be
paid or accrued for such month on such indebt-
edness if—
(i) in the case of any interest paid or
accrued after December 31, 1995, indebt-
edness with respect to no more than
20,000 insured individuals were taken into
account, and
(ii) the lesser of the following rates of
interest were used for such month:
(I) The rate of interest specified
under the terms of the indebtedness
as in effect on October 13, 1995 (and
without regard to modification of such
terms after such date).
(II) The rate of interest de-
scribed as Moody’s Corporate Bond
Yield 
Average-Monthly 
Average
Corporates as published by Moody’s
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Investors Service, Inc., or any succes-
sor thereto, for such month.
For purposes of clause (i), all persons treated
as a single employer under subsection (a) or (b)
of section 52 of the Internal Revenue Code of
1986 or subsection (m) or (o) of section 414 of
such Code shall be treated as one person.
(C) APPLICABLE PERCENTAGE.—For pur-
poses of subparagraph (B), the applicable per-
centage is as follows:
For calendar year:
The percentage is:
1995 ..........................................................................
100 percent
1996 ..........................................................................
90 percent
1997 ..........................................................................
80 percent
1998 ..........................................................................
70 percent.
(3) SPECIAL RULE FOR GRANDFATHERED CON-
TRACTS.—This section shall not apply to any con-
tract purchased on or before June 20, 1986, except
that section 264(d)(2) of the Internal Revenue Code
of 1986 shall apply to interest paid or accrued after
October 13, 1995.
(d) SPREAD OF INCOME INCLUSION ON SURRENDER,
ETC. OF CONTRACTS.—
(1) IN GENERAL.—If any amount is received
under any life insurance policy or endowment or an-
nuity contract described in paragraph (4) of section
264(a) of the Internal Revenue Code of 1986—
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(A) on the complete surrender, redemption,
or maturity of such policy or contract during
calendar year 1996, 1997, or 1998, or
(B) in full discharge during any such cal-
endar year of the obligation under the policy or
contract which is in the nature of a refund of
the consideration paid for the policy or con-
tract,
then (in lieu of any other inclusion in gross income)
such amount shall be includible in gross income rat-
ably over the 4-taxable year period beginning with
the taxable year such amount would (but for this
paragraph) be includible. The preceding sentence
shall only apply to the extent the amount is includ-
ible in gross income for the taxable year in which
the event described in subparagraph (A) or (B) oc-
curs.
(2) SPECIAL
RULES
FOR
APPLYING
SECTION
264.—A contract shall not be treated as—
(A) failing to meet the requirement of sec-
tion 264(c)(1) of the Internal Revenue Code of
1986, or
(B) a single premium contract under sec-
tion 264(b)(1) of such Code,
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solely by reason of an occurrence described in sub-
paragraph (A) or (B) of paragraph (1) of this sub-
section or solely by reason of no additional pre-
miums being received under the contract by reason
of a lapse occurring after October 13, 1995.
(3) SPECIAL
RULE
FOR
DEFERRED
ACQUISI-
TION COSTS.—In the case of the occurrence of any
event described in subparagraph (A) or (B) of para-
graph (1) of this subsection with respect to any pol-
icy or contract—
(A) section 848 of the Internal Revenue
Code 
of 
1986 
shall 
not 
apply 
to 
the
unamortized balance (if any) of the specified
policy acquisition expenses attributable to such
policy or contract immediately before the insur-
ance company’s taxable year in which such
event occurs, and
(B) there shall be allowed as a deduction
to such company for such taxable year under
chapter 1 of such Code an amount equal to
such unamortized balance.
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SEC. ll204. 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 September 13, 1995.
‘‘(B) 20-YEAR
PHASEOUT
OF
EXISTING
SUSPENSE ACCOUNTS.—Each suspense account
under this subsection shall be reduced (but not
below zero) for each of the first 20 taxable
years beginning after September 13, 1995, by
an amount equal to the applicable portion of
such account. Any reduction in a suspense ac-
count under this paragraph shall be included in
gross income for the taxable year of the reduc-
tion. The amount of the reduction required
under this paragraph for any taxable year shall
be reduced (but not below zero) by the amount
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of any reduction required for such taxable year
under any other provision of this subsection.
‘‘(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.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years ending after Sep-
tember 13, 1995.
SEC. ll205. MODIFICATIONS OF PUERTO RICO AND POS-
SESSIONS TAX CREDIT.
(a) PHASEOUT OF REDUCED CREDIT.—The table
contained in clause (ii) of section 936(a)(4)(B) (relating
to election to take reduced credit) is amended to read as
follows:
‘‘In the case of taxable
years beginning in:
The percentage is:
1996 .........................................................................................
1997 .........................................................................................
1998 .........................................................................................
1999 .........................................................................................
2000 .........................................................................................
2001 and thereafter .................................................................
0.’’
(b) CARRYOVER
OF EXCESS ECONOMIC ACTIVITY
CREDIT.—
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(1) IN GENERAL.—Section 936(a)(4) is amend-
ed by redesignating subparagraph (C) as subpara-
graph (D) and by inserting after subparagraph (B)
the following new subparagraph:
‘‘(C) CARRYOVER
OF
EXCESS
ECONOMIC
ACTIVITY CREDIT.—
‘‘(i) IN GENERAL.—If the amount de-
termined under subparagraph (A) for any
taxable year exceeds the amount of the
credit determined under paragraph (1) for
such taxable year with respect to income
referred to in paragraph (1)(A), the
amount determined under subparagraph
(A) for the following taxable year shall be
increased by the amount of such excess.
‘‘(ii) LIMITATION.—Any excess de-
scribed in clause (i) may not be carried to
any taxable year after the 5th taxable year
following the taxable year in which it
arises.
‘‘(iii) ORDERING
RULE.—For pur-
poses of applying subparagraph (A), the
limitation under subparagraph (A) shall be
treated as used on a first-in, first-out
basis.’’
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(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. ll206. 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:
‘‘(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.
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‘‘(B) PREDOMINANT USE.—Except as pro-
vided in subparagraph (C), the predominant use
of any property shall be determined 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) 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 December
6, 1995, 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
December 6, 1995, and at all times thereafter before
the disposition or acquisition of property. A contract
shall not fail to meet the requirements of the preced-
ing sentence solely because—
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(A) it provides for a sale in lieu of an ex-
change, or
(B) the property to be disposed of as relin-
quished property, or the property to be acquired
as replacement property, whichever is applica-
ble, was not identified under such contract be-
fore December 7, 1995.
SEC. ll207. REPEAL OF FINANCIAL INSTITUTION TRANSI-
TION 
RULE 
TO 
INTEREST 
ALLOCATION
RULES.
(a) IN GENERAL.—Paragraph (5) of section 1215(c)
of the Tax Reform Act of 1986 (Public Law 99–514, 100
Stat. 2548) is hereby repealed.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. ll208. CONVERSION OF LARGE CORPORATIONS INTO
S CORPORATIONS TREATED AS COMPLETE
LIQUIDATION.
(a) IN GENERAL.—Section 1374 (relating to tax im-
posed on certain built-in gains) is amended by redesignat-
ing subsection (e) as subsection (f) and by inserting after
subsection (d) the following new subsection:
‘‘(e) SECTION NOT TO APPLY TO CONVERSIONS OF
LARGE C CORPORATIONS.—
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‘‘(1) IN GENERAL.—If an S corporation was a
large C corporation for the last taxable year before
the first taxable year for which the election under
section 1362(a) was effective—
‘‘(A) the preceding provisions of this sec-
tion shall not apply to the S corporation, but
‘‘(B) for purposes of this title—
‘‘(i) the C corporation shall be treated
as having distributed, as of the last day of
such last taxable year, all its property to
its shareholders in complete liquidation,
and
‘‘(ii) the shareholders shall be treated
as having immediately contributed such
property to the S corporation in exchange
for its stock.
‘‘(2) SPECIAL
RULE
FOR
ASSET
ACQUISI-
TIONS.—Rules similar to the rules of paragraph (1)
shall apply to any transaction described in sub-
section (d)(8) in which an S corporation acquires as-
sets from a large C corporation.
‘‘(3) LARGE C CORPORATION.—For purposes of
this subsection, the term ‘large C corporation’ means
a C corporation the fair market value of all of the
stock of which, as of the close of the last taxable
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year described in paragraph (1), is greater than
$5,000,000.
(b) REGULATORY AUTHORITY TO PREVENT AVOID-
ANCE.—Section 1374(f), as redesignated by subsection
(a), is amended by inserting ‘‘and regulations preventing
avoidance of the application of subsection (e)’’ before the
period at the end.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to elections under section
1361(a) of the Internal Revenue Code of 1986 which
are made after December 6, 1995.
(2) ACQUISITIONS.—The provisions of section
1374(e)(2) of such Code (as added by the amend-
ments made by this section) shall apply to acquisi-
tions after December 6, 1995, except that such pro-
visions shall not apply to any acquisition after such
date pursuant to a binding contract in effect on such
date and at all times thereafter before such acquisi-
tion.
SEC. ll209. 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—
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(1) by striking ‘‘3’’ in clause (i) and inserting
‘‘1’’, and
(2) by striking ‘‘15’’ in clause (ii) and inserting
‘‘20’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to net operating losses for taxable
years beginning after December 31, 1995.
SEC. ll210. CONSTRUCTIVE SALES TREATMENT FOR AP-
PRECIATED FINANCIAL POSITIONS.
(a) IN GENERAL.—Part IV of subchapter P of chap-
ter 1 is amended by adding at the end the following new
section:
‘‘SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR AP-
PRECIATED FINANCIAL POSITIONS.
‘‘(a) IN GENERAL.—If there is a constructive sale of
an appreciated financial position—
‘‘(1) such position shall be treated as sold for
its fair market value on the date of such construc-
tive sale (and any gain shall be taken into account
for the taxable year which includes such date), and
‘‘(2) for purposes of applying this title for peri-
ods after the constructive sale—
‘‘(A) proper adjustment shall be made in
the amount of any gain or loss subsequently re-
alized with respect to such position for any gain
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taken into account by reason of paragraph (1),
and
‘‘(B) the holding period of such position
shall be determined as if such position were
originally acquired on the date of such con-
structive sale.
‘‘(b) APPRECIATED FINANCIAL POSITION.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—The term ‘appreciated fi-
nancial position’ means any position with respect to
any stock, debt instrument, or partnership interest
if there would be gain were such position sold.
‘‘(2) POSITION.—The term ‘position’ means an
interest, including a futures or forward contract,
short sale, or option.
‘‘(c) CONSTRUCTIVE SALE.—For purposes of this
section—
‘‘(1) IN GENERAL.—A taxpayer shall be treated
as having made a constructive sale of an appreciated
financial position if the taxpayer or a related per-
son—
‘‘(A) enters into 1 or more positions with
respect to the same or substantially identical
property which, for some period, substantially
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HR 2903 IH
eliminate both risk of loss and opportunity for
gain on the appreciated financial position, or
‘‘(B) enters into any other transaction
which is marketed or sold as being economically
equivalent to any transaction described in sub-
paragraph (A).
The transactions described in subparagraph (A)
shall include making a short sale with respect to
substantially identical property, and the granting of
a call option, or the acquisition of a put option, with
respect to the same or substantially identical prop-
erty but only if there is a substantial certainty that
such call or put option will be exercised.
‘‘(2) EXCEPTION FOR TRANSACTIONS MARKED
TO MARKET.—The term ‘constructive sale’ shall not
include any transaction if the appreciated financial
position which is part of such transaction is marked
to market under section 475 or 1256.
‘‘(3) EXCEPTION FOR SALES OF NONPUBLICLY
TRADED
PROPERTY.—The term ‘constructive sale’
shall not include any contract for sale of any stock,
debt instrument, or partnership interest which is not
a marketable security (as defined in section 453(f))
if the sale occurs within 1 year after the date such
contract is entered into.
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‘‘(4) RELATED PERSON.—A person is related to
another person with respect to a transaction if—
‘‘(A) the relationship between such persons
would result in a disallowance of losses under
section 267 or 707(b), and
‘‘(B) such transaction is entered into with
a view toward avoiding the purposes of this sec-
tion.
‘‘(d) SPECIAL RULES.—
‘‘(1) TRANSACTIONS COVERING LESS THAN ALL
OF APPRECIATED FINANCIAL POSITIONS.—If there is
a constructive sale of less than all of the appreciated
financial positions held by the taxpayer, subsection
(a) shall apply to such positions in the order in
which acquired or entered into.
‘‘(2) TREATMENT
OF
SUBSEQUENT
SALE
OF
POSITION WHICH WAS DEEMED SOLD.—If—
‘‘(A) there is a constructive sale of any ap-
preciated financial position,
‘‘(B) such position is subsequently sold or
otherwise disposed of, and
‘‘(C) at the time of such sale or disposi-
tion, the transaction resulting in the construc-
tive sale of such position is open,
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solely for purposes of determining whether the tax-
payer has entered into a constructive sale of any
other appreciated financial position held by the tax-
payer, the taxpayer shall be treated as entering into
such transaction immediately after such sale or
other disposition.
‘‘(3) CERTAIN TRUST INSTRUMENTS TREATED
AS STOCK.—For purposes of this section, an interest
in a trust which is actively traded (within the mean-
ing of section 1092(d)(1)) shall be treated as stock.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for such part IV is amended by adding at the end the
following new item:
‘‘Sec. 1259. Constructive sales treatment for appreciated financial positions.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to—
(A) constructive sales after the date of the
enactment of this Act, and
(B) constructive sales after January 4,
1996, and before the date of the enactment of
this Act but only if the transaction is not closed
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HR 2903 IH
before the date which is 30 days after the date
of the enactment of this Act.
In a case to which subparagraph (B) applies, section
1259 of the Internal Revenue Code of 1986 (as
added by this section) shall be applied as if the con-
structive sale occurred on the date which is 30 days
after the date of the enactment of this Act.
(2) SPECIAL RULE.—In the case of a decedent
dying after the date of the enactment of this Act,
if—
(A) there was a constructive sale on or be-
fore such date of enactment of any appreciated
financial position, and
(B) on the day before the date of the dece-
dent’s death, the transaction resulting in the
constructive sale of such position is open,
for purposes of the Internal Revenue Code of 1986,
such position (and any property related thereto, as
determined 
under 
the 
principles 
of 
section
1259(d)(1) of such Code (as so added)) shall be
treated as property constituting rights to receive an
item of income in respect of a decedent under sec-
tion 691 of such Code.
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SEC. ll211. MODIFICATION OF RULES FOR ALLOCATING
INTEREST EXPENSE TO TAX-EXEMPT INTER-
EST.
(a) PRO RATA ALLOCATION RULES APPLICABLE TO
CORPORATIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
265(b) is amended by striking ‘‘In the case of a fi-
nancial institution’’ and inserting ‘‘In the case of a
corporation’’.
(2) ONLY OBLIGATIONS ACQUIRED AFTER DE-
CEMBER 6, 1995 TAKEN INTO ACCOUNT.—Subpara-
graph (A) of section 265(b)(2) is amended by strik-
ing ‘‘August 7, 1986’’ and inserting ‘‘December 6,
1995 (August 7, 1986, in the case of a financial in-
stitution)’’.
(3) 
SMALL
ISSUER
EXCEPTION
NOT
TO
APPLY.—Subparagraph (A) of section 265(b)(3) is
amended by striking ‘‘Any qualified’’ and inserting
‘‘In the case of a financial institution, any quali-
fied’’.
(4) EXCEPTION FOR CERTAIN BONDS ACQUIRED
ON SALE OF GOODS OR SERVICES.—Subparagraph
(B) of section 265(b)(4) is amended by adding at
the end the following new sentence: ‘‘In the case of
a taxpayer other than a financial institution, such
term shall not include a nonsaleable obligation ac-
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HR 2903 IH
quired by such taxpayer in the ordinary course of
business as payment for goods or services provided
by such taxpayer to any State or local government.’’
(5) LOOK-THRU RULES FOR PARTNERSHIPS.—
Paragraph (6) of section 265(b) is amended by add-
ing at the end the following new subparagraph:
‘‘(C) LOOK-THRU
RULES
FOR
PARTNER-
SHIPS.—In the case of a corporation which is a
partner in a partnership, such corporation shall
be treated for purposes of this subsection as
holding directly its allocable share of the assets
of the partnership.’’
(6) APPLICATION OF PRO RATA DISALLOWANCE
ON
AFFILIATED
GROUP
BASIS.—Subsection (b) of
section 265 is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) APPLICATION OF DISALLOWANCE ON AF-
FILIATED GROUP BASIS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, all members of an affiliated group
filing a consolidated return under section 1501
shall be treated as 1 taxpayer.
‘‘(B) TREATMENT OF INSURANCE COMPA-
NIES.—This subsection shall not apply to an in-
surance company, and subparagraph (A) shall
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be applied without regard to any member of an
affiliated group which is an insurance com-
pany.’’
(7) CLERICAL
AMENDMENT.—The subsection
heading for section 265(b) is amended by striking
‘‘FINANCIAL INSTITUTIONS’’ and inserting ‘‘COR-
PORATIONS’’.
(b) APPLICATION OF SECTION 265(a)(2) WITH RE-
SPECT TO CONTROLLED GROUPS.—Paragraph (2) of sec-
tion 265(a) is amended after ‘‘obligations’’ by inserting
‘‘held by the taxpayer (or any corporation which is a mem-
ber of a controlled group (as defined in section 267(f)(1))
which includes the taxpayer)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. ll212. REDUCTION OF 70 PERCENT DIVIDENDS RE-
CEIVED DEDUCTION TO 50 PERCENT.
(a) IN GENERAL.—Paragraph (1) of section 243(a)
(relating to dividends received by corporations) is amended
by striking ‘‘70 percent’’ and inserting ‘‘50 percent’’.
(b) CONFORMING CHANGES.—Each of the following
provisions is amended by striking ‘‘70 percent’’ and insert-
ing ‘‘50 percent’’:
(1) Section 243(c)(1).
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(2) Subsections (a)(3) and (b)(2) of section
244.
(3) Section 245(c)(1)(B).
(4) Section 246(b)(3)(B).
(5) Section 246A(a)(1).
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dividends received or accrued
after January 31, 1996.
SEC. ll213. MODIFICATION OF HOLDING PERIOD APPLI-
CABLE TO DIVIDENDS RECEIVED DEDUC-
TION.
(a) IN GENERAL.—Subparagraph (A) of section
246(c)(1) is amended to read as follows:
‘‘(A) which is held by the taxpayer for 45
days or less during the 90-day period beginning
on the date which is 45 days before the date on
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-
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HR 2903 IH
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 January 31, 1996.
SEC. ll214. 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.
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‘‘(2) NONQUALIFIED PREFERRED STOCK.—For
purposes of paragraph (1), the term ‘nonqualified
preferred stock’ means preferred stock if—
‘‘(A) the holder of such stock has the right
to require the issuer or a related person to re-
deem or purchase the stock,
‘‘(B) the issuer or a related person is re-
quired to redeem or purchase such stock,
‘‘(C) the issuer or a related person has the
right to redeem or purchase the stock and, as
of the issue date, it is more likely than not that
such right will be exercised, or
‘‘(D) the dividend rate on such stock varies
in whole or in part (directly or indirectly) with
reference to interest rates, commodity prices, or
other similar indices.
Subparagraphs (A), (B), and (C) shall apply only if
the right or obligation referred to therein may be ex-
ercised within the 20-year period beginning on the
issue date of such stock and if such right or obliga-
tion is not pursuant to a contingency the likelihood
of which is remote.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
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HR 2903 IH
‘‘(A) PREFERRED STOCK.—The term ‘pre-
ferred stock’ means stock which is limited and
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 exchanges of stock and securities in certain reor-
ganizations) is amended by adding at the end the following
new subparagraph:
‘‘(C) 
NONQUALIFIED
PREFERRED
STOCK.—
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HR 2903 IH
‘‘(i) IN GENERAL.—Nonqualified pre-
ferred 
stock 
(as 
defined 
in 
section
351(g)(2)) received in exchange for stock
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,
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 that such family mem-
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HR 2903 IH
ber’s holding period would be reduced
under the rules of section 246(c)(4).
(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
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HR 2903 IH
355, such preferred stock would be permitted to be
received without the recognition of gain.’’
(e) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 354(a)(2) is
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) is
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 TREATED
AS NOT STOCK.—For purposes of this section, non-
qualified preferred stock (as defined in section 351(g)(2))
shall be treated as not stock.’’
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transactions after Decem-
ber 7, 1995.
(2) TRANSITIONAL
RULE.—The amendments
made by this section shall not apply to—
(A) any stock issued pursuant to a written
agreement which was (subject to customary
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HR 2903 IH
conditions) binding on December 7, 1995, and
at all times thereafter before the stock was is-
sued,
(B) any stock issued pursuant to an ex-
change offer which was outstanding on such
date, and
(C) any stock which was priced for pur-
poses of issuance on or before such date.
SEC. ll215. DENIAL OF INTEREST DEDUCTIONS ON CER-
TAIN DEBT INSTRUMENTS.
(a) IN GENERAL.—Section 163 (relating to deduction
for interest) is amended by redesignating subsection (k)
as subsection (l) and by inserting after subsection (j) the
following new subsection:
‘‘(k) DISALLOWANCE OF DEDUCTION ON CERTAIN
DEBT INSTRUMENTS OF CORPORATIONS.—
‘‘(1) IN GENERAL.—No deduction shall be al-
lowed under this chapter for any interest paid or ac-
crued on a disqualified debt instrument.
‘‘(2) DISQUALIFIED DEBT INSTRUMENT.—For
purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘disqualified
debt instrument’ means any indebtedness of a
corporation—
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HR 2903 IH
‘‘(i) which has a weighted average ma-
turity of more than 40 years, or
‘‘(ii) any principal or interest on
which is payable in equity of the issuer or
a related party.
‘‘(B) EXCEPTIONS.—Such term shall not
include—
‘‘(i) a demand loan,
‘‘(ii) indebtedness in connection with a
lease described in section 1055(c)(1) (re-
lating to redeemable ground rents), or
‘‘(iii) any other indebtedness specified
by the Secretary.
‘‘(3) WEIGHTED
AVERAGE
MATURITY.—For
purposes of paragraph (2)(A)(i), the weighted aver-
age maturity of any indebtedness shall be deter-
mined in the same manner as under section 1273,
and in making such determination—
‘‘(A) any option or other right to extend,
renew, or relend the amount of any indebted-
ness shall be treated as if exercised,
‘‘(B) the holding of a put, call, or other
right to accelerate payment shall be dis-
regarded, and
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HR 2903 IH
‘‘(C) 2 or more loans which are part of the
same transaction or series of transactions shall
be treated as 1 loan.
‘‘(4) SPECIAL RULES FOR AMOUNTS PAYABLE
IN EQUITY.—For purposes of paragraph (2)(A)(ii),
principal or interest on indebtedness shall be treated
as payable in equity of the issuer or a related party
only if—
‘‘(A) the principal or interest is required to
be paid or converted, or at the option of the is-
suer or a related party is payable or convertible,
into such equity,
‘‘(B) the amount of principal or interest is
required to be determined, or at the option of
the issuer or a related party is determined, by
reference to the value of such equity at the time
of payment of such principal or interest, or
‘‘(C) the indebtedness is part of an ar-
rangement which is reasonably expected to re-
sult in a transaction described in subparagraph
(A) or (B).
The requirements of the preceding sentence shall be
treated as met with respect to any principal or inter-
est on indebtedness only if such requirement is met
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HR 2903 IH
with respect to a substantial amount of such prin-
cipal or interest.
‘‘(5) RELATED PARTY.—For purposes of this
subsection, a person is a related party with respect
to another person if such person bears a relationship
to such other person described in section 267(b) or
707(b).
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations preventing avoidance
of this subsection through the use of an issuer other
than a corporation.’’
(b) CLASSIFICATION OF CERTAIN INSTRUMENTS AS
DEBT OR EQUITY.—Section 385(c) (relating to effect of
classification by issuer) is amended by redesignating para-
graph (3) as paragraph (4) and by inserting after para-
graph (2) the following new paragraph:
‘‘(3) DEEMED CLASSIFICATION OF INTEREST AS
STOCK.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in regulations, for purposes of this
subsection, an applicable corporation shall be
treated as having characterized an interest in
the corporation as stock if—
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HR 2903 IH
‘‘(i) it has a term of more than 20
years (determined under the principles of
subparagraphs (A), (B), and (C) of section
163(k)(3)), and
‘‘(ii) it is not shown as indebtedness
on an applicable balance sheet of the is-
suer.
This paragraph shall not apply to an interest
described in section 163(k)(2)(B).
‘‘(B) EFFECT
OF
CHARACTERIZATION.—
Any characterization of an interest as stock
under subparagraph (A)—
‘‘(i) may not be changed, and
‘‘(ii) except to the extent provided in
regulations, shall be treated as having been
made as of the time of issuance.
‘‘(C) APPLICABLE
CORPORATION, ETC.—
For purposes of this paragraph—
‘‘(i) APPLICABLE CORPORATION.—The
term ‘applicable corporation’ means, with
respect to any interest, a corporation
which, at any time during the 1-year pe-
riod beginning on the date of issuance of
the interest, is—
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HR 2903 IH
‘‘(I) required to file annual finan-
cial statements with the Securities
and Exchange Commission, or
‘‘(II) required to be included in
such financial statements.
‘‘(ii) APPLICABLE BALANCE SHEET.—
The term ‘applicable balance sheet’ means
any balance sheet which is required to be
filed with the Securities and Exchange
Commission by the issuer of an interest or
which is required to include data with re-
spect to such issuer.
‘‘(D) INTERESTS
ISSUED
TO
RELATED
PARTIES.—For 
purposes 
of 
subparagraph
(A)(ii), if—
‘‘(i) an interest in a corporation to
which subparagraph (A) applies is issued
to a person (other than a corporation)
which is related to the issuer, and
‘‘(ii) such interest is not shown on an
applicable balance sheet of the issuer solely
because the related person is consolidated
with such person on such balance sheet,
such interest shall be treated as having been
characterized as stock if such related person is-
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HR 2903 IH
sues a related instrument not shown as indebt-
edness on such balance sheet. For purposes of
the preceding sentence, a person is a related
person with respect to an issuer if such person
bears a relationship to the issuer described in
section 267(b) or 707(b).
‘‘(E) EXCEPTION FOR CERTAIN LEASE RE-
CEIVABLES.—This subsection shall not apply to
a nonrecourse interest if the issuer’s investment
in a related lease receivable as shown on the ap-
plicable balance sheet is reduced by the amount
of such interest.’’
(c) REGULATIONS.—Paragraph (4) of section 385(c),
as redesignated by subsection (b), is amended to read as
follows:
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including such requirements for the provid-
ing of information to the Secretary or such other
persons as the Secretary determines appropriate.’’
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to interests in a corporation
issued on or after December 7, 1995.
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(2) TRANSITIONAL
RULE.—The amendments
made by this section shall not apply to—
(A) any interest issued pursuant to a com-
mitment which was binding on December 6,
1995, and at all times thereafter before the in-
terest was issued,
(B) any interest issued pursuant to an ex-
change offer which was outstanding on such
date,
(C) any interest which was priced for pur-
poses of issuance on or before such date,
(D) interests issued pursuant to a registra-
tion statement filed with the Securities and Ex-
change Commission on or before December 7,
1995 (other than a registration statement
which, under 17 CFR 230.415, contemplated a
delayed or continuous offering of such inter-
ests), but only to the extent that such interests
are described in, and the amount of such inter-
ests does not exceed in the aggregate the
amount stated in, such registration statement
as of such date,
(E) interests issued pursuant to a registra-
tion statement which is filed with the Securities
and Exchange Commission on or before Decem-
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ber 7, 1995, and which, under 17 CFR
230.415, contemplated a delayed or continuous
offering of such interests if a prospectus supple-
ment (including a preliminary prospectus sup-
plement) to such registration statement was
filed under 17 CFR 230.424 on or before De-
cember 7, 1995, but only to the extent that
such interests are described in, and the amount
of such interests does not exceed in the aggre-
gate the amount stated in, such prospectus sup-
plement as of such date (or, to the extent a pre-
liminary prospectus supplement as of such date
does not state a maximum amount to be issued,
the amount expected to be offered may be es-
tablished by other contemporaneous, written
evidence), and
(F) interests issued pursuant to a private
placement that contemplates resales of the in-
terests pursuant to 17 CFR 230.144A, but only
if, on or before December 7, 1995—
(i) the issuer had made a public an-
nouncement of its intention to issue the in-
terests, and
(ii) an offering circular or memoran-
dum (including a preliminary offering cir-
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cular or memorandum) with respect to the
interests had been distributed to prospec-
tive investors, but only to the extent that
such interests are described in, and the
amount of such interests does not exceed
in the aggregate the amount stated in,
such offering circular or memorandum as
of such date.
An interest shall be treated as meeting the require-
ments of subparagraph (A) if such interest is issued,
before the 30th day after the date of the enactment
of this Act, as part of an issue substantially identical
(other than yield) to an issue which was publicly an-
nounced as having been sold on December 7, 1995,
but which was terminated on such date.
SEC. ll216. DEFERRAL OF DEDUCTION FOR INTEREST ON
CONVERTIBLE DEBT UNTIL PAYMENT.
(a) IN GENERAL.—Section 163, as amended by sec-
tion ll, is amended by redesignating subsection (l) as
subsection (m) and by inserting after subsection (k) the
following new subsection:
‘‘(l) DEFERRAL OF INTEREST DEDUCTION ON CON-
VERTIBLE INDEBTEDNESS.—
‘‘(1) IN GENERAL.—Interest on convertible in-
debtedness of a corporation shall be deductible under
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this chapter only in the taxable year in which paid.
For purposes of the preceding sentence, the prin-
ciples of section 163(i)(3)(B) shall apply.
‘‘(2) EQUITY
PAYMENTS
DISREGARDED.—Ex-
cept to the extent provided in regulations, payments
(including through an arrangement described in
paragraph (3)(C)) shall be disregarded for purposes
of paragraph (1) if such payments are in the form
of—
‘‘(A) equity of the issuer or a related
party, or
‘‘(B) cash or other property the amount of
which is determined by reference to the value of
such equity.
‘‘(3) CONVERTIBLE INDEBTEDNESS.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—The term ‘convertible
indebtedness’ means any indebtedness if—
‘‘(i) the indebtedness is convertible
into equity of the issuer or a related party,
‘‘(ii) the amount principal or interest
on such indebtedness is determined by ref-
erence to the value of such equity, or
‘‘(iii) the indebtedness is issued with
warrants or similar instruments as part of
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an investment unit in which the indebted-
ness may be used to satisfy the exercise
price of such warrants or similar instru-
ments.
‘‘(B) EXCEPTIONS.—Such term shall not
include—
‘‘(i) any indebtedness which would
(but for this subparagraph) be convertible
indebtedness solely because a fixed pay-
ment of principal or interest is, at the elec-
tion of the holder, payable in equity of the
issuer or a related party having a value
equal to the amount of such principal or
interest, or
‘‘(ii) any other indebtedness specified
by the Secretary.
‘‘(4) RELATED PARTY.—For purposes of this
subsection, persons are related if they bear a rela-
tionship specified in section 267(b) or section
707(b).
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations preventing avoidance
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market value of the transferred property.
For purposes of the preceding sentence,
consideration other than cash shall be
taken into account at its fair market value
and the rules of section 679(a)(3) shall
apply.
‘‘(ii) 
PENSION
AND
CHARITABLE
TRUSTS.—Subparagraph 
(A) 
shall 
not
apply with respect to a trust which is—
‘‘(I) 
described 
in 
section
404(a)(4) or 404A, or
‘‘(II) determined by the Sec-
retary to be described in section
501(c)(3).
‘‘(4) RESPONSIBLE
PARTY.—For purposes of
this 
subsection, 
the 
term 
‘responsible 
party’
means—
‘‘(A) the grantor in the case of the cre-
ation of an inter vivos trust,
‘‘(B) the transferor in the case of a report-
able event described in paragraph (3)(A)(ii)
other than a transfer by reason of death, and
‘‘(C) the executor of the decedent’s estate
in any other case.
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‘‘(b) UNITED
STATES
GRANTOR
OF
FOREIGN
TRUST.—
‘‘(1) IN GENERAL.—If, at any time during any
taxable year of a United States person, such person
is treated as the owner of any portion of a foreign
trust under the rules of subpart E of part I of sub-
chapter J of chapter 1, such person shall be respon-
sible to ensure that—
‘‘(A) such trust makes a return for such
year which sets forth a full and complete ac-
counting of all trust activities and operations
for the year, the name of the United States
agent for such trust, and such other informa-
tion as the Secretary may prescribe, and
‘‘(B) such trust furnishes such information
as the Secretary may prescribe to each United
States person (i) who is treated as the owner of
any portion of such trust or (ii) who receives
(directly or indirectly) any distribution from the
trust.
‘‘(2) TRUSTS
NOT
HAVING
UNITED
STATES
AGENT.—
‘‘(A) IN
GENERAL.—If the rules of this
subsection apply to any foreign trust, the deter-
mination of amounts required to be taken into
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account with respect to such trust by a United
States person under the rules of subpart E of
part I of subchapter J of chapter 1 shall be de-
termined by the Secretary in the Secretary’s
sole discretion from the Secretary’s own knowl-
edge or from such information as the Secretary
may obtain through testimony or otherwise.
‘‘(B) UNITED STATES AGENT REQUIRED.—
The rules of this subsection shall apply to any
foreign trust to which paragraph (1) applies un-
less such trust agrees (in such manner, subject
to such conditions, and at such time as the Sec-
retary shall prescribe) to authorize a United
States person to act as such trust’s limited
agent solely for purposes of applying sections
7602, 7603, and 7604 with respect to—
‘‘(i) any request by the Secretary to
examine records or produce testimony re-
lated to the proper treatment of amounts
required to be taken into account under
the rules referred to in subparagraph (A),
or
‘‘(ii) any summons by the Secretary
for such records or testimony.