115
‘‘(d) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in case of partner’s disregard
of requirements of this section, see part II of sub-
chapter A of chapter 68.
‘‘SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP AD-
JUSTMENTS INTO ACCOUNT.
‘‘(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS
FOR YEAR IN WHICH ADJUSTMENT TAKES EFFECT.—
‘‘(1) IN GENERAL.—If any partnership adjust-
ment with respect to any partnership item takes ef-
fect (within the meaning of subsection (d)(2)) during
any partnership taxable year and if an election
under paragraph (2) does not apply to such adjust-
ment, such adjustment shall be taken into account
in determining the amount of such item for the part-
nership taxable year in which such adjustment takes
effect. In applying this title to any person who is
(directly or indirectly) a partner in such partnership
during such partnership taxable year, such adjust-
ment shall be treated as an item actually arising
during such taxable year.
‘‘(2) 
PARTNERSHIP
LIABLE
IN
CERTAIN
CASES.—If—
‘‘(A) a partnership elects under this para-
graph to not take an adjustment into account
under paragraph (1),
116
‘‘(B) a partnership does not make such an
election but in filing its return for any partner-
ship taxable year fails to take fully into account
any partnership adjustment as required under
paragraph (1), or
‘‘(C) any partnership adjustment involves a
reduction in a credit which exceeds the
amount of such credit determined for the
partnership taxable year in which the adjust-
ment takes effect,
the partnership shall pay to the Secretary an
amount determined by applying the rules of sub-
section (b)(4) to the adjustments not so taken into
account and any excess referred to in subparagraph
(C).
‘‘(3) OFFSETTING ADJUSTMENTS TAKEN INTO
ACCOUNT.—If a partnership adjustment requires an-
other adjustment in a taxable year after the ad-
justed year and before the partnership taxable year
in which such partnership adjustment takes effect,
such other adjustment shall be taken into account
under this subsection for the partnership taxable
year in which such partnership adjustment takes ef-
fect.
117
‘‘(4) COORDINATION WITH PART II.—Amounts
taken into account under this subsection for any
partnership taxable year shall continue to be treated
as adjustments for the adjusted year for purposes of
determining whether such amounts may be read-
justed under part II.
‘‘(b) PARTNERSHIP LIABLE
FOR INTEREST
AND
PENALTIES.—
‘‘(1) IN
GENERAL.—If a partnership adjust-
ment takes effect during any partnership taxable
year and such adjustment results in an imputed
underpayment for the adjusted year, the partner-
ship—
‘‘(A) shall pay to the Secretary interest
computed under paragraph (2), and
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in
paragraph (3).
‘‘(2) DETERMINATION OF AMOUNT OF INTER-
EST.—The interest computed under this paragraph
with respect to any partnership adjustment is the in-
terest which would be determined under chapter
67—
118
‘‘(A) on the imputed underpayment deter-
mined under paragraph (4) with respect to such
adjustment,
‘‘(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the part-
nership taxable year in which such adjustment
takes effect (or, if earlier, in the case of any ad-
justment to which subsection (a)(2) applies, the
date on which the payment under subsection
(a)(2) is made).
Proper adjustments in the amount determined under
the preceding sentence shall be made for adjust-
ments required for partnership taxable years after
the adjusted year and before the year in which the
partnership adjustment takes effect by reason of
such partnership adjustment.
‘‘(3) PENALTIES.—A partnership shall be liable
for any penalty, addition to tax, or additional
amount for which it would have been liable if such
partnership had been an individual subject to tax
under chapter 1 for the adjusted year and the im-
puted underpayment determined under paragraph
(4) were an actual underpayment (or understate-
ment) for such year.
119
‘‘(4) IMPUTED UNDERPAYMENT.—For purposes
of this subsection, the imputed underpayment deter-
mined under this paragraph with respect to any
partnership adjustment is the underpayment (if any)
which would result—
‘‘(A) by netting all adjustments to items of
income, gain, loss, or deduction and by treating
any net increase in income as an underpayment
equal to the amount of such net increase multi-
plied by the highest rate of tax in effect under
section 1 or 11 for the adjusted year, and
‘‘(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net de-
crease in a loss shall be treated as an increase in in-
come and a similar rule shall apply to a net increase
in a loss.
‘‘(c) ADMINISTRATIVE PROVISIONS.—
‘‘(1) IN GENERAL.—Any payment required by
subsection (a)(2) or (b)(1)(A)—
‘‘(A) shall be assessed and collected in the
same manner as if it were a tax imposed by
subtitle C, and
120
‘‘(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
‘‘(2) INTEREST.—For purposes of determining
interest, any payment required by subsection (a)(2)
or (b)(1)(A) shall be treated as an underpayment
of tax.
‘‘(3) PENALTIES.—
‘‘(A) IN
GENERAL.—In the case of any
failure by any partnership to pay on the date
prescribed therefor any amount required by
subsection (a)(2) or (b)(1)(A), there is hereby
imposed on such partnership a penalty of 10
percent of the underpayment. For purposes of
the 
preceding 
sentence, 
the 
term
‘underpayment’ means the excess of any pay-
ment required under this section over the
amount (if any) paid on or before the date pre-
scribed therefor.
‘‘(B) ACCURACY-RELATED
AND
FRAUD
PENALTIES MADE APPLICABLE.—For purposes
of part II of subchapter A of chapter 68, any
payment required by subsection (a)(2) shall be
treated as an underpayment of tax.
121
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) PARTNERSHIP
ADJUSTMENT.—The term
‘partnership adjustment’ means any adjustment in
the amount of any partnership item of a large part-
nership.
‘‘(2) WHEN ADJUSTMENT TAKES EFFECT.—A
partnership adjustment takes effect—
‘‘(A) in the case of an adjustment pursu-
ant to the decision of a court in a proceeding
brought under part II, when such decision be-
comes final,
‘‘(B) in the case of an adjustment pursu-
ant to any administrative adjustment request
under section 6251, when such adjustment is
allowed by the Secretary, or
‘‘(C) in any other case, when such adjust-
ment is made.
‘‘(3) ADJUSTED
YEAR.—The term ‘adjusted
year’ means the partnership taxable year to which
the item being adjusted relates.
‘‘(4) RETURN
DUE
DATE.—The term ‘return
due date’ means, with respect to any taxable year,
the date prescribed for filing the partnership return
122
for such taxable year (determined without regard to
extensions).
‘‘(5) ADJUSTMENTS
INVOLVING
CHANGES
IN
CHARACTER.—Under regulations, appropriate ad-
justments in the application of this section shall be
made for purposes of taking into account partner-
ship adjustments which involve a change in the char-
acter of any item of income, gain, loss, or deduction.
‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction
shall be allowed under subtitle A for any payment required
to be made by a large partnership under this section.
‘‘PART II—PARTNERSHIP LEVEL ADJUSTMENTS
‘‘Subpart A. Adjustments by Secretary.
‘‘Subpart B. Claims for adjustments by partnership.
‘‘Subpart A—Adjustments by Secretary
‘‘Sec. 6245. Secretarial authority.
‘‘Sec. 6246. Restrictions on partnership adjustments.
‘‘Sec. 6247. Judicial review of partnership adjustment.
‘‘Sec. 6248. Period of limitations for making adjustments.
‘‘SEC. 6245. SECRETARIAL AUTHORITY.
‘‘(a) GENERAL RULE.—The Secretary is authorized
and directed to make adjustments at the partnership level
in any partnership item to the extent necessary to have
such item be treated in the manner required.
‘‘(b) NOTICE OF PARTNERSHIP ADJUSTMENT.—
‘‘(1) IN GENERAL.—If the Secretary determines
that a partnership adjustment is required, the Sec-
retary is authorized to send notice of such adjust-
123
ment to the partnership by certified mail or reg-
istered mail. Such notice shall be sufficient if mailed
to the partnership at its last known address even if
the partnership has terminated its existence.
‘‘(2) FURTHER NOTICES RESTRICTED.—If the
Secretary mails a notice of a partnership adjustment
to any partnership for any partnership taxable year
and the partnership files a petition under section
6247 with respect to such notice, in the absence of
a showing of fraud, malfeasance, or misrepresenta-
tion of a material fact, the Secretary shall not mail
another such notice to such partnership with respect
to such taxable year.
‘‘(3) AUTHORITY
TO
RESCIND
NOTICE
WITH
PARTNERSHIP CONSENT.—The Secretary may, with
the consent of the partnership, rescind any notice of
a partnership adjustment mailed to such partner-
ship. Any notice so rescinded shall not be treated as
a notice of a partnership adjustment, for purposes of
this section, section 6246, and section 6247, and the
taxpayer shall have no right to bring a proceeding
under section 6247 with respect to such notice.
Nothing in this subsection shall affect any suspen-
sion of the running of any period of limitations dur-
124
ing any period during which the rescinded notice
was outstanding.
‘‘SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this chapter, no adjustment to any partnership item
may be made (and no levy or proceeding in any court for
the collection of any amount resulting from such adjust-
ment may be made, begun or prosecuted) before—
‘‘(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was
mailed to the partnership, and
‘‘(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
‘‘(b) PREMATURE ACTION MAY BE ENJOINED.—
Notwithstanding section 7421(a), any action which vio-
lates subsection (a) may be enjoined in the proper court,
including the Tax Court. The Tax Court shall have no ju-
risdiction to enjoin any action under this subsection unless
a timely petition has been filed under section 6247 and
then only in respect of the adjustments that are the sub-
ject of such petition.
‘‘(c) EXCEPTIONS
TO RESTRICTIONS
ON ADJUST-
MENTS.—
125
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR
CLERICAL ERRORS.—
‘‘(A) IN GENERAL.—If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
quired, rules similar to the rules of paragraphs
(1) and (2) of section 6213(b) shall apply to
such adjustment.
‘‘(B) SPECIAL RULE.—If a large partner-
ship is a partner in another large partnership,
any adjustment on account of such partner-
ship’s failure to comply with the requirements
of section 6241(a) with respect to its interest in
such other partnership shall be treated as an
adjustment referred to in subparagraph (A), ex-
cept that paragraph (2) of section 6213(b) shall
not apply to such adjustment.
‘‘(2) 
PARTNERSHIP
MAY
WAIVE
RESTRIC-
TIONS.—The partnership shall at any time (whether
or not a notice of partnership adjustment has been
issued) have the right, by a signed notice in writing
filed with the Secretary, to waive the restrictions
provided in subsection (a) on the making of any
partnership adjustment.
126
‘‘(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no
proceeding under section 6247 is begun with respect to
any notice of a partnership adjustment during the 90-day
period described in subsection (a), the amount for which
the partnership is liable under section 6242 (and any in-
crease in any partner’s liability for tax under chapter 1
by reason of any adjustment under section 6242(a)) shall
not exceed the amount determined in accordance with such
notice.
‘‘SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT.
‘‘(a) GENERAL RULE.—Within 90 days after the date
on which a notice of a partnership adjustment is mailed
to the partnership with respect to any partnership taxable
year, the partnership may file a petition for a readjust-
ment of the partnership items for such taxable year with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the partnership’s principal place
of business is located, or
‘‘(3) the Claims Court.
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING
ACTION IN DISTRICT COURT OR CLAIMS COURT.—
‘‘(1) IN
GENERAL.—A readjustment petition
under this section may be filed in a district court of
127
the United States or the Claims Court only if the
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the
amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing
of the petition) if the partnership items were ad-
justed as provided by the notice of partnership ad-
justment. The court may by order provide that the
jurisdictional requirements of this paragraph are
satisfied where there has been a good faith attempt
to satisfy such requirement and any shortfall of the
amount required to be deposited is timely corrected.
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not
be treated as a payment of tax for purposes of this
title (other than chapter 67).
‘‘(c) SCOPE OF JUDICIAL REVIEW.—A court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items
of the partnership for the partnership taxable year to
which the notice of partnership adjustment relates and the
proper allocation of such items among the partners (and
the applicability of any penalty, addition to tax, or addi-
tional amount for which the partnership may be liable
under section 6242(b)).
128
‘‘(d) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this section shall have
the force and effect of a decision of the Tax Court or a
final judgment or decree of the district court or the Claims
Court, as the case may be, and shall be reviewable as such.
The date of any such determination shall be treated as
being the date of the court’s order entering the decision.
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If
an action brought under this section is dismissed other
than by reason of a rescission under section 6245(b)(3),
the decision of the court dismissing the action shall be con-
sidered as its decision that the notice of partnership ad-
justment is correct, and an appropriate order shall be en-
tered in the records of the court.
‘‘SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, no adjustment under this subpart to any
partnership item for any partnership taxable year may be
made after the date which is 3 years after the later of—
‘‘(1) the date on which the partnership return
for such taxable year was filed, or
‘‘(2) the last day for filing such return for such
year (determined without regard to extensions).
129
‘‘(b) EXTENSION BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period
under this subsection) may be extended by an agreement
entered into by the Secretary and the partnership before
the expiration of such period.
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.—
‘‘(1) FALSE RETURN.—In the case of a false or
fraudulent partnership return with intent to evade
tax, the adjustment may be made at any time.
‘‘(2) SUBSTANTIAL OMISSION OF INCOME.—If
any partnership omits from gross income an amount
properly includible therein which is in excess of 25
percent of the amount of gross income stated in its
return, subsection (a) shall be applied by substitut-
ing ‘6 years’ for ‘3 years’.
‘‘(3) NO RETURN.—In the case of a failure by
a partnership to file a return for any taxable year,
the adjustment may be made at any time.
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on be-
half of the partnership shall not be treated as a re-
turn of the partnership.
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE
OF ADJUSTMENT.—If notice of a partnership adjustment
130
with respect to any taxable year is mailed to the partner-
ship, the running of the period specified in subsection (a)
(as modified by the other provisions of this section) shall
be suspended—
‘‘(1) for the period during which an action may
be brought under section 6247 (and, if a petition is
filed under section 6247 with respect to such notice,
until the decision of the court becomes final), and
‘‘(2) for 1 year thereafter.
‘‘Subpart B—Claims for Adjustments by Partnership
‘‘Sec. 6251. Administrative adjustment requests.
‘‘Sec. 6252. Judicial review where administrative adjustment re-
quest is not allowed in full.
‘‘SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
‘‘(a) GENERAL RULE.—A partnership may file a re-
quest for an administrative adjustment of partnership
items for any partnership taxable year at any time which
is—
‘‘(1) within 3 years after the later of—
‘‘(A) the date on which the partnership re-
turn for such year is filed, or
‘‘(B) the last day for filing the partnership
return for such year (determined without re-
gard to extensions), and
‘‘(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to
such taxable year.
131
‘‘(b) SECRETARIAL ACTION.—If a partnership files
an administrative adjustment request under subsection
(a), the Secretary may allow any part of the requested
adjustments.
‘‘(c) SPECIAL RULE IN CASE OF EXTENSION UNDER
SECTION
6248.—If the period described in section
6248(a) is extended pursuant to an agreement under sec-
tion 6248(b), the period prescribed by subsection (a)(1)
shall not expire before the date 6 months after the expira-
tion of the extension under section 6248(b).
‘‘SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE
ADJUSTMENT REQUEST IS NOT ALLOWED IN
FULL.
‘‘(a) IN GENERAL.—If any part of an administrative
adjustment request filed under section 6251 is not allowed
by the Secretary, the partnership may file a petition for
an adjustment with respect to the partnership items to
which such part of the request relates with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
‘‘(3) the Claims Court.
132
‘‘(b) PERIOD FOR FILING PETITION.—A petition may
be filed under subsection (a) with respect to partnership
items for a partnership taxable year only—
‘‘(1) after the expiration of 6 months from the
date of filing of the request under section 6251, and
‘‘(2) before the date which is 2 years after the
date of such request.
The 2-year period set forth in paragraph (2) shall be ex-
tended for such period as may be agreed upon in writing
by the partnership and the Secretary.
‘‘(c) COORDINATION WITH SUBPART A.—
‘‘(1) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
BEFORE FILING OF PETITION.—No petition may be
filed under this section after the Secretary mails to
the partnership a notice of a partnership adjustment
for the partnership taxable year to which the request
under section 6251 relates.
‘‘(2) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
AFTER
FILING
BUT
BEFORE
HEARING
OF
PETI-
TION.—If the Secretary mails to the partnership a
notice of a partnership adjustment for the partner-
ship taxable year to which the request under section
6251 relates after the filing of a petition under this
subsection but before the hearing of such petition,
such petition shall be treated as an action brought
133
under section 6247 with respect to such notice, ex-
cept that subsection (b) of section 6247 shall not
apply.
‘‘(3) NOTICE MUST BE BEFORE EXPIRATION OF
STATUTE OF LIMITATIONS.—A notice of a partner-
ship adjustment for the partnership taxable year
shall be taken into account under paragraphs (1)
and (2) only if such notice is mailed before the expi-
ration of the period prescribed by section 6248 for
making adjustments to partnership items for such
taxable year.
‘‘(d) SCOPE OF JUDICIAL REVIEW.—Except in the
case described in paragraph (2) of subsection (c), a court
with which a petition is filed in accordance with this sec-
tion shall have jurisdiction to determine only those part-
nership items to which the part of the request under sec-
tion 6251 not allowed by the Secretary relates and those
items with respect to which the Secretary asserts adjust-
ments as offsets to the adjustments requested by the part-
nership.
‘‘(e) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this subsection shall
have the force and effect of a decision of the Tax Court
or a final judgment or decree of the district court or the
Claims Court, as the case may be, and shall be reviewable
134
as such. The date of any such determination shall be
treated as being the date of the court’s order entering the
decision.
‘‘PART III—DEFINITIONS AND SPECIAL RULES
‘‘Sec. 6255. Definitions and special rules.
‘‘SEC. 6255. DEFINITIONS AND SPECIAL RULES.
‘‘(a) DEFINITIONS.—For purposes of this sub-
chapter—
‘‘(1) LARGE
PARTNERSHIP.—The term ‘large
partnership’ has the meaning given to such term by
section 775 without regard to section 776(a).
‘‘(2) PARTNERSHIP ITEM.—The term ‘partner-
ship item’ has the meaning given to such term by
section 6231(a)(3).
‘‘(b) PARTNERS BOUND BY ACTIONS OF PARTNER-
SHIP, ETC.—
‘‘(1) DESIGNATION OF PARTNER.—Each large
partnership shall designate (in the manner pre-
scribed by the Secretary) a partner (or other person)
who shall have the sole authority to act on behalf of
such partnership under this subchapter. In any case
in which such a designation is not in effect, the Sec-
retary may select any partner as the partner with
such authority.
135
‘‘(2) BINDING
EFFECT.—A large partnership
and all partners of such partnership shall be
bound—
‘‘(A) by actions taken under this sub-
chapter by the partnership, and
‘‘(B) by any decision in a proceeding
brought under this subchapter.
‘‘(c) PARTNERSHIPS HAVING PRINCIPAL PLACE OF
BUSINESS OUTSIDE THE UNITED STATES.—For purposes
of sections 6247 and 6252, a principal place of business
located outside the United States shall be treated as lo-
cated in the District of Columbia.
‘‘(d) TREATMENT WHERE PARTNERSHIP CEASES TO
EXIST.—If a partnership ceases to exist before a partner-
ship adjustment under this subchapter takes effect, such
adjustment shall be taken into account by the former part-
ners of such partnership under regulations prescribed by
the Secretary.
‘‘(e) DATE DECISION BECOMES FINAL.—For pur-
poses of this subchapter, the principles of section 7481(a)
shall be applied in determining the date on which a deci-
sion of a district court or the Claims Court becomes final.
‘‘(f) PARTNERSHIPS IN CASES UNDER TITLE 11 OF
THE UNITED STATES CODE.—The running of any period
of limitations provided in this subchapter on making a
136
partnership adjustment (or provided by section 6501 or
6502 on the assessment or collection of any amount re-
quired to be paid under section 6242) shall, in a case
under title 11 of the United States Code, be suspended
during the period during which the Secretary is prohibited
by reason of such case from making the adjustment (or
assessment or collection) and—
‘‘(1) for adjustment or assessment, 60 days
thereafter, and
‘‘(2) for collection, 6 months thereafter.
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pro-
visions of this subchapter, including regulations—
‘‘(1) to prevent abuse through manipulation of
the provisions of this subchapter, and
‘‘(2) providing that this subchapter shall not
apply to any case described in section 6231(c)(1) (or
the regulations prescribed thereunder) where the ap-
plication of this subchapter to such a case would
interfere with the effective and efficient enforcement
of this title.
In any case to which this subchapter does not apply by
reason of paragraph (2), rules similar to the rules of sec-
tions 6229(f) and 6255(f) shall apply.’’
137
(b) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 63 is amended by adding at the end
thereof the following new item:
‘‘SUBCHAPTER D. Treatment of large partnerships.’’
SEC. 303. DUE DATE FOR FURNISHING INFORMATION TO
PARTNERS OF LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subsection (b) of section 6031
(relating to copies to partners) is amended by adding at
the end thereof the following new sentence: ‘‘In the case
of a large partnership (as defined in sections 775 and
776(a)), such information shall be furnished on or before
the first March 15 following the close of such taxable
year.’’
(b) TREATMENT AS INFORMATION RETURN.—Sec-
tion 6724 is amended by adding at the end thereof the
following new subsection:
‘‘(e) SPECIAL RULE FOR CERTAIN PARTNERSHIP RE-
TURNS.—If any partnership return under section 6031(a)
is required under section 6011(e) to be filed on magnetic
media or in other machine-readable form, for purposes of
this part, each schedule required to be included with such
return with respect to each partner shall be treated as a
separate information return.’’
138
SEC. 304. RETURNS MAY BE REQUIRED ON MAGNETIC
MEDIA.
Paragraph (2) of section 6011(e) (relating to returns
on magnetic media) is amended by adding at the end
thereof the following new sentence:
‘‘The preceding sentence shall not apply in the case
of the partnership return of a large partnership (as
defined in sections 775 and 776(a)) or any other
partnership with 250 or more partners.’’
SEC. 305. TREATMENT OF PARTNERSHIP ITEMS OF INDI-
VIDUAL RETIREMENT ACCOUNTS.
Subsection (b) of section 6012 is amended by adding
at the end thereof the following new paragraph:
‘‘(6) IRA SHARE OF PARTNERSHIP INCOME.—
In the case of a trust which is exempt from taxation
under section 408(e), for purposes of this section,
the trust’s distributive share of items of gross in-
come and gain of any partnership to which sub-
chapter C or D of chapter 63 applies shall be treat-
ed as equal to the trust’s distributive share of the
taxable income of such partnership.’’
SEC. 306. EFFECTIVE DATE.
(a) GENERAL RULE.—Except as otherwise provided
in this section, the amendments made by this subtitle shall
apply to partnership taxable years ending on or after De-
cember 31, 1994.
139
(b) SPECIAL RULE FOR SECTION 304.—In the case
of a partnership which is not a large partnership (as de-
fined in sections 775 and 776(a) of the Internal Revenue
Code of 1986, as added by this subtitle), the amendment
made by section 304 shall only apply to partnership tax-
able years ending on or after December 31, 1998.
(c) SPECIAL RULE FOR SECTION 305.—The amend-
ment made by section 305 shall apply to taxable years be-
ginning after December 31, 1993.
Subtitle B—Provisions Related to
TEFRA Partnership Proceedings
SEC. 311. TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY PROCEEDINGS.
(a) IN GENERAL.—Subchapter C of chapter 63 is
amended by adding at the end thereof the following new
section:
‘‘SEC. 
6234. DECLARATORY 
JUDGMENT 
RELATING 
TO
TREATMENT OF ITEMS OTHER THAN PART-
NERSHIP 
ITEMS 
WITH 
RESPECT 
TO 
AN
OVERSHELTERED RETURN.
‘‘(a) GENERAL RULE.—If—
‘‘(1) a taxpayer files an oversheltered return for
a taxable year,
‘‘(2) the Secretary makes a determination with
respect to the treatment of items (other than part-
140
nership items) of such taxpayer for such taxable
year, and
‘‘(3) the adjustments resulting from such deter-
mination do not give rise to a deficiency (as defined
in section 6211) but would give rise to a deficiency
if there were no net loss from partnership items,
the Secretary is authorized to send a notice of adjustment
reflecting such determination to the taxpayer by certified
or registered mail.
‘‘(b) OVERSHELTERED RETURN.—For purposes of
this section, the term ‘oversheltered return’ means an in-
come tax return which—
‘‘(1) shows no taxable income for the taxable
year, and
‘‘(2) shows a net loss from partnership items.
‘‘(c) JUDICIAL REVIEW IN THE TAX COURT.—Within
90 days, or 150 days if the notice is addressed to a person
outside the United States, after the day on which the no-
tice of adjustment authorized in subsection (a) is mailed
to the taxpayer, the taxpayer may file a petition with the
Tax Court for redetermination of the adjustments. Upon
the filing of such a petition, the Tax Court shall have ju-
risdiction to make a declaration with respect to all items
(other than partnership items and affected items which
require partner level determinations as described in sec-
141
tion 6230(a)(2)(A)(i)) for the taxable year to which the
notice of adjustment relates, in accordance with the prin-
ciples of section 6214(a). Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(d) FAILURE TO FILE PETITION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if the taxpayer does not file a petition
with the Tax Court within the time prescribed in
subsection (c), the determination of the Secretary
set forth in the notice of adjustment that was mailed
to the taxpayer shall be deemed to be correct.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply after the date that the taxpayer—
‘‘(A) files a petition with the Tax Court
within the time prescribed in subsection (c)
with respect to a subsequent notice of adjust-
ment relating to the same taxable year, or
‘‘(B) files a claim for refund of an overpay-
ment of tax under section 6511 for the taxable
year involved.
If a claim for refund is filed by the taxpayer, then
solely for purposes of determining (for the taxable
year involved) the amount of any computational ad-
justment in connection with a partnership proceed-
142
ing under this subchapter (other than under this
section) or the amount of any deficiency attributable
to affected items in a proceeding under section
6230(a)(2), the items that are the subject of the no-
tice of adjustment shall be presumed to have been
correctly reported on the taxpayer’s return during
the pendency of the refund claim (and, if within the
time prescribed by section 6532 the taxpayer com-
mences a civil action for refund under section 7422,
until the decision in the refund action becomes
final).
‘‘(e) LIMITATIONS PERIOD.—
‘‘(1) IN GENERAL.—Any notice to a taxpayer
under subsection (a) shall be mailed before the expi-
ration of the period prescribed by section 6501 (re-
lating to the period of limitations on assessment).
‘‘(2) SUSPENSION WHEN SECRETARY MAILS NO-
TICE OF ADJUSTMENT.—If the Secretary mails a no-
tice of adjustment to the taxpayer for a taxable year,
the period of limitations on the making of assess-
ments shall be suspended for the period during
which the Secretary is prohibited from making the
assessment (and, in any event, if a proceeding in re-
spect of the notice of adjustment is placed on the
docket of the Tax Court, until the decision of the
143
Tax Court becomes final), and for 60 days there-
after.
‘‘(3) RESTRICTIONS ON ASSESSMENT.—Except
as otherwise provided in section 6851, 6852, or
6861, no assessment of a deficiency with respect to
any tax imposed by subtitle A attributable to any
item (other than a partnership item or any item af-
fected by a partnership item) shall be made—
‘‘(A) until the expiration of the applicable
90-day or 150-day period set forth in sub-
section (c) for filing a petition with the Tax
Court, or
‘‘(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
‘‘(f) FURTHER
NOTICES
OF
ADJUSTMENT
RE-
STRICTED.—If the Secretary mails a notice of adjustment
to the taxpayer for a taxable year and the taxpayer files
a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such
notice to the taxpayer with respect to the same taxable
year in the absence of a showing of fraud, malfeasance,
or misrepresentation of a material fact.
‘‘(g) COORDINATION WITH OTHER PROCEEDINGS
UNDER THIS SUBCHAPTER.—
144
‘‘(1) IN GENERAL.—The treatment of any item
that has been determined pursuant to subsection (c)
or (d) shall be taken into account in determining the
amount of any computational adjustment that is
made in connection with a partnership proceeding
under this subchapter (other than under this sec-
tion), or the amount of any deficiency attributable to
affected items in a proceeding under section
6230(a)(2), for the taxable year involved. Notwith-
standing any other law or rule of law pertaining to
the period of limitations on the making of assess-
ments, for purposes of the preceding sentence, any
adjustment made in accordance with this section
shall be taken into account regardless of whether
any assessment has been made with respect to such
adjustment.
‘‘(2) SPECIAL
RULE
IN
CASE
OF
COMPUTA-
TIONAL ADJUSTMENT.—In the case of a computa-
tional adjustment that is made in connection with a
partnership proceeding under this subchapter (other
than under this section), the provisions of paragraph
(1) shall apply only if the computational adjustment
is made within the period prescribed by section 6229
for assessing any tax under subtitle A which is at-
145
tributable to any partnership item or affected item
for the taxable year involved.
‘‘(3) CONVERSION
TO
DEFICIENCY
PROCEED-
ING.—If—
‘‘(A) after the notice referred to in sub-
section (a) is mailed to a taxpayer for a taxable
year but before the expiration of the period for
filing a petition with the Tax Court under sub-
section (c) (or, if a petition is filed with the Tax
Court, before the Tax Court makes a declara-
tion for that taxable year), the treatment of any
partnership item for the taxable year is finally
determined, or any such item ceases to be a
partnership item pursuant to section 6231(b),
and
‘‘(B) as a result of that final determination
or cessation, a deficiency can be determined
with respect to the items that are the subject
of the notice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition
filed in respect of the notice shall be treated as an
action brought under section 6213.
146
‘‘(4) FINALLY DETERMINED.—For purposes of
this subsection, the treatment of partnership items
shall be treated as finally determined if—
‘‘(A) the Secretary enters into a settlement
agreement (within the meaning of section 6224)
with the taxpayer regarding such items,
‘‘(B) a notice of final partnership adminis-
trative adjustment has been issued and—
‘‘(i) no petition has been filed under
section 6226 and the time for doing so has
expired, or
‘‘(ii) a petition has been filed under
section 6226 and the decision of the court
has become final, or
‘‘(C) the period within which any tax at-
tributable to such items may be assessed
against the taxpayer has expired.
‘‘(h) SPECIAL RULES IF SECRETARY INCORRECTLY
DETERMINES APPLICABLE PROCEDURE.—
‘‘(1) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF ADJUSTMENT.—If the
Secretary erroneously determines that subchapter B
does not apply to a taxable year of a taxpayer and
consistent with that determination timely mails a no-
tice of adjustment to the taxpayer pursuant to sub-
147
section (a) of this section, the notice of adjustment
shall be treated as a notice of deficiency under sec-
tion 6212 and any petition that is filed in respect of
the notice shall be treated as an action brought
under section 6213.
‘‘(2) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY
MAILS
NOTICE
OF
DEFICIENCY.—If the
Secretary erroneously determines that subchapter B
applies to a taxable year of a taxpayer and consist-
ent with that determination timely mails a notice of
deficiency to the taxpayer pursuant to section 6212,
the notice of deficiency shall be treated as a notice
of adjustment under subsection (a) and any petition
that is filed in respect of the notice shall be treated
as an action brought under subsection (c).’’
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY
PROCEEDINGS.—Section 6211 (defining defi-
ciency) is amended by adding at the end thereof the follow-
ing new subsection:
‘‘(c) COORDINATION WITH SUBCHAPTER C.—In de-
termining the amount of any deficiency for purposes of
this subchapter, adjustments to partnership items shall be
made only as provided in subchapter C.’’
148
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter C of chapter 63 is amended by adding at
the end thereof the following new item:
‘‘Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an
oversheltered return.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 312. PARTNERSHIP RETURN TO BE DETERMINATIVE
OF AUDIT PROCEDURES TO BE FOLLOWED.
(a) IN GENERAL.—Section 6231 (relating to defini-
tions and special rules) is amended by adding at the end
thereof the following new subsection:
‘‘(g) PARTNERSHIP RETURN TO BE DETERMINATIVE
OF WHETHER SUBCHAPTER APPLIES.—
‘‘(1) DETERMINATION THAT SUBCHAPTER AP-
PLIES.—If, on the basis of a partnership return for
a taxable year, the Secretary reasonably determines
that this subchapter applies to such partnership for
such year but such determination is erroneous, then
the provisions of this subchapter are hereby ex-
tended to such partnership (and its items) for such
taxable year and to partners of such partnership.
‘‘(2) DETERMINATION THAT SUBCHAPTER DOES
NOT APPLY.—If, on the basis of a partnership re-
turn for a taxable year, the Secretary reasonably de-
149
termines that this subchapter does not apply to such
partnership for such year but such determination is
erroneous, then the provisions of this subchapter
shall not apply to such partnership (and its items)
for such taxable year or to partners of such partner-
ship.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 313. PROVISIONS RELATING TO STATUTE OF LIMITA-
TIONS.
(a) SUSPENSION OF STATUTE WHERE UNTIMELY
PETITION FILED.—Paragraph (1) of section 6229(d) (re-
lating to suspension where Secretary makes administrative
adjustment) is amended by striking all that follows ‘‘sec-
tion 6226’’ and inserting the following: ‘‘(and, if a petition
is filed under section 6226 with respect to such adminis-
trative adjustment, until the decision of the court becomes
final), and’’.
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY
PROCEEDING.—Section 6229 is amended by adding at the
end thereof the following new subsection:
‘‘(h) SUSPENSION DURING PENDENCY
OF BANK-
RUPTCY PROCEEDING.—If a petition is filed naming a
partner as a debtor in a bankruptcy proceeding under title
150
11 of the United States Code, the running of the period
of limitations provided in this section with respect to such
partner shall be suspended—
‘‘(1) for the period during which the Secretary
is prohibited by reason of such bankruptcy proceed-
ing from making an assessment, and
‘‘(2) for 60 days thereafter.’’
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Sec-
tion 6229(b) is amended by redesignating paragraph (2)
as paragraph (3) and by inserting after paragraph (1) the
following new paragraph:
‘‘(2) SPECIAL RULE WITH RESPECT TO DEBT-
ORS IN TITLE 11 CASES.—Notwithstanding any other
law or rule of law, if an agreement is entered into
under paragraph (1)(B) and the agreement is signed
by a person who would be the tax matters partner
but for the fact that, at the time that the agreement
is executed, the person is a debtor in a bankruptcy
proceeding under title 11 of the United States Code,
such agreement shall be binding on all partners in
the partnership unless the Secretary has been noti-
fied of the bankruptcy proceeding in accordance with
regulations prescribed by the Secretary.’’
(d) EFFECTIVE DATES.—
151
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall apply
to partnership taxable years with respect to which
the period under section 6229 of the Internal Reve-
nue Code of 1986 for assessing tax has not expired
on or before the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendment made
by subsection (c) shall apply to agreements entered
into after the date of the enactment of this Act.
SEC. 314. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
6231(a)(1)(B) (relating to exception for small partner-
ships) is amended to read as follows:
‘‘(i) IN
GENERAL.—The term ‘part-
nership’ shall not include any partnership
having 10 or fewer partners each of whom
is an individual (other than a nonresident
alien), a C corporation, or an estate of a
deceased partner. For purposes of the pre-
ceding sentence, a husband and wife (and
their estates) shall be treated as 1 part-
ner.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
152
SEC. 315. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1
YEAR LIMITATION ON ASSESSMENT.
(a) IN GENERAL.—Subsection (f) of section 6229 (re-
lating to items becoming nonpartnership items) is amend-
ed—
(1) 
by 
striking 
‘‘(f) 
ITEMS
BECOMING
NONPARTNERSHIP ITEMS.—If’’ and inserting the
following:
‘‘(f) SPECIAL RULES.—
‘‘(1) 
ITEMS
BECOMING
NONPARTNERSHIP
ITEMS.—If’’,
(2) by moving the text of such subsection 2 ems
to the right, and
(3) by adding at the end thereof the following
new paragraph:
‘‘(2) SPECIAL RULE FOR PARTIAL SETTLEMENT
AGREEMENTS.—If a partner enters into a settlement
agreement with the Secretary with respect to the
treatment of some of the partnership items in dis-
pute for a partnership taxable year but other part-
nership items for such year remain in dispute, the
period of limitations for assessing any tax attrib-
utable to the settled items shall be determined as if
such agreement had not been entered into.’’
153
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to settlements entered into after
the date of the enactment of this Act.
SEC. 316. EXTENSION OF TIME FOR FILING A REQUEST
FOR ADMINISTRATIVE ADJUSTMENT.
(a) IN GENERAL.—Section 6227 (relating to admin-
istrative adjustment requests) is amended by redesignat-
ing subsections (b) and (c) as subsections (c) and (d), re-
spectively, and by inserting after subsection (a) the follow-
ing new subsection:
‘‘(b) SPECIAL RULE IN CASE OF EXTENSION OF PE-
RIOD OF LIMITATIONS UNDER SECTION 6229.—The pe-
riod prescribed by subsection (a)(1) for filing of a request
for an administrative adjustment shall be extended—
‘‘(1) for the period within which an assessment
may be made pursuant to an agreement (or any ex-
tension thereof) under section 6229(b), and
‘‘(2) for 6 months thereafter.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
154
SEC. 317. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN
CONTEXT OF PARTNERSHIP PROCEEDINGS.
(a) IN GENERAL.—Subsection (a) of section 6230 is
amended by adding at the end thereof the following new
paragraph:
‘‘(3) SPECIAL RULE IN CASE OF ASSERTION BY
PARTNER’S
SPOUSE
OF
INNOCENT
SPOUSE
RE-
LIEF.—
‘‘(A) Notwithstanding section 6404(b), if
the spouse of a partner asserts that section
6013(e) applies with respect to a liability that
is attributable to any adjustment to a partner-
ship item, then such spouse may file with the
Secretary within 60 days after the notice of
computational adjustment is mailed to the
spouse a request for abatement of the assess-
ment specified in such notice. Upon receipt of
such request, the Secretary shall abate the as-
sessment. Any reassessment of the tax with re-
spect to which an abatement is made under this
subparagraph shall be subject to the deficiency
procedures prescribed by subchapter B. The pe-
riod for making any such reassessment shall
not expire before the expiration of 60 days after
the date of such abatement.
155
‘‘(B) If the spouse files a petition with the
Tax Court pursuant to section 6213 with re-
spect to the request for abatement described in
subparagraph (A), the Tax Court shall only
have jurisdiction pursuant to this section to de-
termine whether the requirements of section
6013(e) have been satisfied. For purposes of
such determination, the treatment of partner-
ship items under the settlement, the final part-
nership administrative adjustment, or the deci-
sion of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.
‘‘(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.’’
(b) CLAIMS FOR REFUND.—Subsection (c) of section
6230 is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(5) RULES FOR SEEKING INNOCENT SPOUSE
RELIEF.—
‘‘(A) IN GENERAL.—The spouse of a part-
ner may file a claim for refund on the ground
that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is at-
156
tributable to an adjustment to a partnership
item.
‘‘(B) TIME FOR FILING CLAIM.—Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the Secretary
mails to the spouse the notice of computational
adjustment referred to in subsection (a)(3)(A).
‘‘(C) SUIT IF CLAIM NOT ALLOWED.—If
the claim under subparagraph (B) is not al-
lowed, the spouse may bring suit with respect
to the claim within the period specified in para-
graph (3).
‘‘(D) PRIOR DETERMINATIONS ARE BIND-
ING.—For purposes of any claim or suit under
this paragraph, the treatment of partnership
items under the settlement, the final partner-
ship administrative adjustment, or the decision
of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.’’
(c) TECHNICAL AMENDMENTS.—
(1) Paragraph (1) of section 6230(a) is amend-
ed by striking ‘‘paragraph (2)’’ and inserting ‘‘para-
graph (2) or (3)’’.
157
(2) Subsection (a) of section 6503 is amended
by striking ‘‘section 6230(a)(2)(A)’’ and inserting
‘‘paragraph (2)(A) or (3) of section 6230(a)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 318. DETERMINATION OF PENALTIES AT PARTNER-
SHIP LEVEL.
(a) IN GENERAL.—Section 6221 (relating to tax
treatment determined at partnership level) is amended by
striking ‘‘item’’ and inserting ‘‘item (and the applicability
of any penalty, addition to tax, or additional amount which
relates to an adjustment to a partnership item)’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (f) of section 6226 is amended—
(A) by striking ‘‘relates and’’ and inserting
‘‘relates,’’, and
(B) by inserting before the period ‘‘, and
the applicability of any penalty, addition to tax,
or additional amount which relates to an ad-
justment to a partnership item’’.
(2) Clause (i) of section 6230(a)(2)(A) is
amended to read as follows:
158
‘‘(i) affected items which require part-
ner level determinations (other than pen-
alties, additions to tax, and additional
amounts that relate to adjustments to
partnership items), or’’.
(3)(A) Subparagraph (A) of section 6230(a)(3),
as added by section 317, is amended by inserting
‘‘(including any liability for any penalty, addition to
tax, or additional amount relating to such adjust-
ment)’’ after ‘‘partnership item’’.
(B) Subparagraph (B) of such section is
amended by inserting ‘‘(and the applicability of any
penalties, additions to tax, or additional amounts)’’
after ‘‘partnership items’’.
(C) Subparagraph (A) of section 6230(c)(5), as
added by section 317, is amended by inserting before
the period ‘‘(including any liability for any penalties,
additions to tax, or additional amounts relating to
such adjustment)’’.
(D) Subparagraph (D) of section 6230(c)(5), as
added by section 317, is amended by inserting ‘‘(and
the applicability of any penalties, additions to tax, or
additional amounts)’’ after ‘‘partnership items’’.
(4) Paragraph (1) of section 6230(c) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (A),
159
by striking the period at the end of subparagraph
(B) and inserting ‘‘, or’’, and by adding at the end
thereof the following new subparagraph:
‘‘(C) the Secretary erroneously imposed
any penalty, addition to tax, or additional
amount which relates to an adjustment to a
partnership item.’’
(5) So much of subparagraph (A) of section
6230(c)(2) as precedes ‘‘shall be filed’’ is amended
to read as follows:
‘‘(A) UNDER PARAGRAPH (1) (A) OR (C).—
Any claim under subparagraph (A) or (C) of
paragraph (1)’’.
(6) Paragraph (4) of section 6230(c) is amend-
ed by adding at the end thereof the following: ‘‘In
addition, the determination under the final partner-
ship administrative adjustment or under the decision
of the court (whichever is appropriate) concerning
the applicability of any penalty, addition to tax, or
additional amount which relates to an adjustment to
a partnership item shall also be conclusive. Notwith-
standing the preceding sentence, the partner shall be
allowed to assert any partner level defenses that may
apply or to challenge the amount of the computa-
tional adjustment.’’
160
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 319. PROVISIONS RELATING TO COURT JURISDIC-
TION, ETC.
(a) TAX COURT JURISDICTION TO ENJOIN PRE-
MATURE ASSESSMENTS OF DEFICIENCIES ATTRIBUTABLE
TO PARTNERSHIP ITEMS.—Subsection (b) of section 6225
is amended by striking ‘‘the proper court.’’ and inserting
‘‘the proper court, including the Tax Court. The Tax
Court shall have no jurisdiction to enjoin any action or
proceeding under this subsection unless a timely petition
for a readjustment of the partnership items for the taxable
year has been filed and then only in respect of the adjust-
ments that are the subject of such petition.’’
(b) JURISDICTION TO CONSIDER STATUTE OF LIMI-
TATIONS WITH RESPECT TO PARTNERS.—Paragraph (1)
of section 6226(d) is amended by adding at the end there-
of the following new sentence:
‘‘Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an action
shall be permitted to participate in such action (or
file a readjustment petition under subsection (b) or
paragraph (2) of this subsection) solely for the pur-
pose of asserting that the period of limitations for
161
assessing any tax attributable to partnership items
has expired with respect to such person, and the
court having jurisdiction of such action shall have
jurisdiction to consider such assertion.’’
(c) TAX
COURT
JURISDICTION
TO
DETERMINE
OVERPAYMENTS ATTRIBUTABLE TO AFFECTED ITEMS.—
(1) Paragraph (6) of section 6230(d) is amend-
ed by striking ‘‘(or an affected item)’’.
(2) Paragraph (3) of section 6512(b) is amend-
ed by adding at the end thereof the following new
sentence:
‘‘In the case of a credit or refund relating to an af-
fected 
item 
(within 
the 
meaning 
of 
section
6231(a)(5)), the preceding sentence shall be applied
by substituting the periods under sections 6229 and
6230(d) for the periods under section 6511(b)(2),
(c), and (d).’’
(d) VENUE ON APPEAL.—
(1) Paragraph (1) of section 7482(b) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (D),
by striking the period at the end of subparagraph
(E) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (E) the following new subparagraph:
‘‘(F) in the case of a petition under section
6234(c)—
162
‘‘(i) the legal residence of the peti-
tioner if the petitioner is not a corporation,
and
‘‘(ii) the place or office applicable
under subparagraph (B) if the petitioner is
a corporation.’’
(2) The last sentence of section 7482(b)(1) is
amended by striking ‘‘or 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(e) OTHER PROVISIONS.—
(1) Subsection (c) of section 7459 is amended
by striking ‘‘or section 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(2) Subsection (o) of section 6501 is amended
by adding at the end thereof the following new para-
graph:
‘‘(3) For declaratory judgment relating to treat-
ment of items other than partnership items with re-
spect to an oversheltered return, see section 6234.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
163
SEC. 320. TREATMENT OF PREMATURE PETITIONS FILED
BY 
NOTICE 
PARTNERS 
OR 
5-PERCENT
GROUPS.
(a) IN GENERAL.—Subsection (b) of section 6226
(relating to judicial review of final partnership administra-
tive adjustments) is amended by redesignating paragraph
(5) as paragraph (6) and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) 
TREATMENT
OF
PREMATURE
PETI-
TIONS.—If—
‘‘(A) a petition for a readjustment of part-
nership items for the taxable year involved is
filed by a notice partner (or a 5-percent group)
during the 90-day period described in sub-
section (a), and
‘‘(B) no action is brought under paragraph
(1) during the 60-day period described therein
with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of para-
graph (1) as filed on the last day of such 60-day
period.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to petitions filed after the date of
the enactment of this Act.
164
SEC. 321. BONDS IN CASE OF APPEALS FROM TEFRA PRO-
CEEDING.
(a) IN GENERAL.—Subsection (b) of section 7485
(relating to bonds to stay assessment of collection) is
amended—
(1) by inserting ‘‘penalties,’’ after ‘‘any inter-
est,’’, and
(2) by striking ‘‘aggregate of such deficiencies’’
and inserting ‘‘aggregate liability of the parties to
the action’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 322. SUSPENSION OF INTEREST WHERE DELAY IN
COMPUTATIONAL ADJUSTMENT RESULTING
FROM TEFRA SETTLEMENTS.
(a) IN GENERAL.—Subsection (c) of section 6601
(relating to interest on underpayment, nonpayment, or ex-
tension of time for payment, of tax) is amended by adding
at the end thereof the following new sentence: ‘‘In the case
of a settlement under section 6224(c) which results in the
conversion of partnership items to nonpartnership items
pursuant to section 6231(b)(1)(C), the preceding sentence
shall apply to a computational adjustment resulting from
such settlement in the same manner as if such adjustment
165
were a deficiency and such settlement were a waiver re-
ferred to in the preceding sentence.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to adjustments with respect to
partnership taxable years beginning after the date of the
enactment of this Act.
SEC. 323. SPECIAL RULES FOR ADMINISTRATIVE ADJUST-
MENT REQUESTS WITH RESPECT TO BAD
DEBTS OR WORTHLESS SECURITIES.
(a) GENERAL RULE.—Section 6227 (relating to ad-
ministrative adjustment requests) is amended by adding
at the end thereof the following new subsection:
‘‘(d) REQUESTS WITH RESPECT TO BAD DEBTS OR
WORTHLESS SECURITIES.—In the case of that portion of
any request for an administrative adjustment which re-
lates to the deductibility by the partnership under section
166 of a debt as a debt which became worthless, or under
section 165(g) of a loss from worthlessness of a security,
the period prescribed in subsection (a)(1) shall be 7 years
from the last day for filing the partnership return for the
year with respect to which such request is made (deter-
mined without regard to extensions).’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall take effect as if included in the
166
amendments made by section 402 of the Tax Equity
and Fiscal Responsibility Act of 1982.
(2) TREATMENT OF REQUESTS FILED BEFORE
DATE OF ENACTMENT.—In the case of that portion
of any request (filed before the date of the enact-
ment of this Act) for an administrative adjustment
which relates to the deductibility of a debt as a debt
which became worthless or the deductibility of a loss
from the worthlessness of a security—
(A) paragraph (2) of section 6227(a) of
the Internal Revenue Code of 1986 shall not
apply,
(B) the period for filing a petition under
section 6228 of the Internal Revenue Code of
1986 with respect to such request shall not ex-
pire before the date 6 months after the date of
the enactment of this Act, and
(C) such a petition may be filed without
regard to whether there was a notice of the be-
ginning of an administrative proceeding or a
final partnership administrative adjustment.
167
TITLE IV—FOREIGN PROVISIONS
Subtitle A—Simplification of Treat-
ment of Passive Foreign Cor-
porations
SEC. 401. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT
COMPANY RULES.
(a) GENERAL RULE.—The following provisions are
hereby repealed:
(1) Part III of subchapter G of chapter 1 (re-
lating to foreign personal holding companies).
(2) Section 1246 (relating to gain on foreign in-
vestment company stock).
(3) Section 1247 (relating to election by foreign
investment companies to distribute income cur-
rently).
(b) EXEMPTION OF FOREIGN CORPORATIONS FROM
ACCUMULATED EARNINGS TAX AND PERSONAL HOLDING
COMPANY RULES.—
(1) ACCUMULATED EARNINGS TAX.—Subsection
(b) of section 532 (relating to exceptions) is amend-
ed—
(A) by striking paragraph (2) and insert-
ing the following:
‘‘(2) a foreign corporation, or’’,
168
(B) by striking ‘‘, or’’ at the end of para-
graph (3) and inserting a period, and
(C) by striking paragraph (4).
(2) PERSONAL
HOLDING
COMPANY
RULES.—
Subsection (c) of section 542 (relating to exceptions)
is amended—
(A) by striking paragraph (5) and insert-
ing the following:
‘‘(5) a foreign corporation,’’,
(B) by striking paragraphs (7) and (10)
and by redesignating paragraphs (8) and (9) as
paragraphs (7) and (8), respectively,
(C) by inserting ‘‘and’’ at the end of para-
graph (7) (as so redesignated), and
(D) by striking ‘‘; and’’ at the end of para-
graph (8) (as so redesignated) and inserting a
period.
(c) TREATMENT OF CERTAIN SERVICE CONTRACTS
UNDER SUBPART F.—
(1) Paragraph (1) of section 954(c) (defining
foreign personal holding company income) is amend-
ed by adding at the end thereof the following new
subparagraph:
‘‘(F) PERSONAL SERVICE CONTRACTS.—
169
‘‘(i) Amounts received under a con-
tract under which the corporation is to fur-
nish personal services, if some person other
than the corporation has the right to des-
ignate (by name or by description) the in-
dividual who is to perform the services, or
if the individual who is to perform the
services is designated (by name or by de-
scription) in the contract.
‘‘(ii) Amounts received from the sale
or other disposition of such contract.
This subparagraph shall apply with respect to
amounts received for services under a particular
contract only if at some time during the taxable
year 25 percent or more in value of the out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who
has performed, is to perform, or may be des-
ignated (by name or by description) as the one
to perform, such services. For purposes of the
preceding sentence, the attribution rules of sec-
tion 544 shall apply, determined as if any ref-
erence to section 543(a)(7) were a reference to
this subparagraph.’’
170
(2) Clause (iii) of section 904(d)(2)(A) is
amended by striking ‘‘and’’ at the end of subclause
(II), by striking the period at the end of subclause
(III) and inserting ‘‘, and’’, and by adding at the
end thereof the following new subclause:
‘‘(IV) any income described in
section 954(c)(1)(F) (relating to per-
sonal service contracts).’’
SEC. 402. REPLACEMENT FOR PASSIVE FOREIGN INVEST-
MENT COMPANY RULES.
(a) GENERAL RULE.—Part VI of subchapter P of
chapter 1 (relating to treatment of certain passive foreign
investment companies) is amended to read as follows:
‘‘PART VI—TREATMENT OF PASSIVE FOREIGN
CORPORATIONS
‘‘Subpart A. Current taxation rules.
‘‘Subpart B. Interest on holdings to which subpart A does not
apply.
‘‘Subpart C. General provisions.
‘‘Subpart A—Current Taxation Rules
‘‘Sec. 1291. Stock in certain passive foreign corporations marked
to market.
‘‘Sec. 1292. Inclusion of income of certain passive foreign cor-
porations.
‘‘SEC. 1291. STOCK IN CERTAIN PASSIVE FOREIGN COR-
PORATIONS MARKED TO MARKET.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign corporation which is owned (or
171
treated under subsection (g) as owned) by a United States
person at the close of any taxable year 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
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 corporation—
‘‘(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-
172
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 corporation 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-
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 corporation, shall be
treated as ordinary income.
‘‘(B) LOSS.—Any—
173
‘‘(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 corporation to the extent that the
amount of such loss does not exceed the
unreversed inclusions with respect to such
stock,
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 corporation.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign corporation, 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
174
‘‘(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 1293.
‘‘(e) COORDINATION WITH SECTION 1292.—This
section shall not apply with respect to any stock in a pas-
sive foreign corporation—
‘‘(1) which is United States controlled,
‘‘(2) which is a qualified electing fund with re-
spect to the United States person for the taxable
year, or
‘‘(3) in which the United States person is a 25-
percent shareholder.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH
ARE SHAREHOLDERS
IN PASSIVE
FOREIGN CORPORATIONS.—In the case of a foreign cor-
poration which is a controlled foreign corporation (or is
treated as a controlled foreign corporation under section
1292) and which owns (or is treated under subsection (g)
as owning) stock in a passive foreign corporation—
‘‘(1) this section (other than subsection (c)(2)
thereof) shall apply to such foreign corporation in
175
the same manner as if such corporation were a
United States person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
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
176
treated as owning stock in a passive foreign corpora-
tion by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
shall be treated as a disposition by the United
States person of the stock in the passive foreign cor-
poration.
‘‘(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) TRANSITION RULES.—
‘‘(1) INDIVIDUALS
BECOMING
SUBJECT
TO
UNITED STATES TAX.—If any individual becomes a
United States person in a taxable year beginning
after December 31, 1993, solely for purposes of this
section, the adjusted basis (before adjustments
under subsection (b)) of any marketable stock in a
passive foreign corporation owned (or treated as
owned under subsection (g)) by such individual on
the first day of such taxable year shall be treated as
177
being the greater of its fair market value on such
first day or its adjusted basis on such first day.
‘‘(2) MARKETABLE STOCK HELD BEFORE EF-
FECTIVE DATE.—
‘‘(A) IN
GENERAL.—If any marketable
stock in a passive foreign corporation is owned
(or treated under subsection (g) as owned) by
a United States person on the first day of such
person’s first taxable year, beginning after De-
cember 31, 1993—
‘‘(i) paragraph (2) of section 1294(a)
shall apply to such stock as if it became
marketable during such first taxable year;
except that—
‘‘(I) section 1293 shall not apply
to the amount included in gross in-
come under subsection (a) to the ex-
tent such amount is attributable to in-
creases in fair market value during
such first taxable year, and
‘‘(II) the taxpayer’s holding pe-
riod shall be treated as having ended
on the last day of the preceding tax-
able year for purposes of allocating
178
amounts under section 1293(a)(1)(A),
and
‘‘(ii) such person may elect to extend
the time for the payment of the applicable
section 1293 deferred tax as provided in
subparagraph (B).
‘‘(B) ELECTION
TO
EXTEND
TIME
FOR
PAYMENT.—
‘‘(i) IN GENERAL.—At the election of
the taxpayer, the time for the payment of
the applicable section 1293 deferred tax
shall be extended to the extent and subject
to the limitations provided in this subpara-
graph.
‘‘(ii) TERMINATION OF EXTENSION.—
‘‘(I) 
DISTRIBUTIONS.—If 
any
distribution is received with respect to
any stock to which an extension under
clause (i) relates and such distribution
would be an excess distribution within
the meaning of section 1293 if such
section applied to such stock, then the
extension under clause (i) for the ap-
propriate 
portion 
(as 
determined
under regulations) of the applicable
179
section 1293 deferred tax shall expire
on the last day prescribed by law (de-
termined without regard to exten-
sions) for filing the return of tax for
the taxable year in which the distribu-
tion is received.
‘‘(II) 
REVERSAL
OF
INCLU-
SION.—If an amount is allowable as a
deduction under subsection (a)(2)
with respect to any stock to which an
extension under clause (i) relates and
the amount so allowable is allocable to
the amount which gave rise to the ap-
plicable section 1293 deferred tax,
then the extension under clause (i) for
the appropriate portion (as deter-
mined under regulations) of the appli-
cable section 1293 deferred tax shall
expire on the last day prescribed by
law (determined without regard to ex-
tensions) for filing the return of the
tax for the taxable year for which
such deduction is allowed.
‘‘(III) DISPOSITIONS, 
ETC.—If
stock in a passive foreign corporation
180
is disposed of during the taxable year,
all extensions under clause (i) for pay-
ment of the applicable section 1293
deferred tax attributable to such stock
which have not expired before the date
of such disposition shall expire on the
last date prescribed by law (deter-
mined without regard to extensions)
for filing the return of tax for the tax-
able year in which such disposition oc-
curs. To the extent provided in regu-
lations, the preceding sentence shall
not apply in the case of a disposition
in a transaction with respect to which
gain or loss is not recognized (in
whole or in part), and the person ac-
quiring such stock in such transaction
shall succeed to the treatment under
this section of the person making such
disposition.
‘‘(iii) OTHER RULES.—
‘‘(I) 
ELECTION.—The 
election
under clause (i) shall be made not
later than the time prescribed by law
(including extensions) for filing the
181
return of tax imposed by this chapter
for the first taxable year referred to
in subparagraph (A).
‘‘(II) TREATMENT OF LOANS TO
SHAREHOLDER.—For purposes of this
subparagraph, any loan by a passive
foreign corporation (directly or indi-
rectly) to a shareholder of such cor-
poration shall be treated as a distribu-
tion to such shareholder.
‘‘(C) CROSS REFERENCE.—
‘‘For provisions providing for interest for the pe-
riod of the extension under this paragraph, see sec-
tion 6601.
‘‘(D) APPLICABLE
SECTION
1293
DE-
FERRED TAX.—For purposes of this paragraph,
the term ‘applicable section 1293 deferred tax’
means the deferred tax amount determined
under section 1293 with respect to the amount
which, but for section 1293, would have been
included in gross income for the first taxable
year referred to in subparagraph (A). Such
term also includes the tax imposed by this
chapter for such first taxable year to the extent
attributable to the amounts allocated under sec-
tion 1293(a)(1)(A) to a period described in sec-
tion 1293(a)(1)(B)(ii).
182
‘‘(3) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN
GENERAL.—If any marketable
stock in a passive foreign corporation is owned
(or treated under subsection (g) as owned) by
a regulated investment company on the first
day of such company’s first taxable year begin-
ning after December 31, 1993—
‘‘(i) section 1293 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 company’s tax under this
chapter for such first taxable year shall be
increased by the aggregate amount of in-
terest which would have been determined
under section 1293(c)(3) if section 1293
were applied without regard to this sub-
paragraph.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
183
‘‘SEC. 1292. CURRENT INCLUSION OF INCOME OF CERTAIN
PASSIVE FOREIGN CORPORATIONS.
‘‘(a) PASSIVE FOREIGN CORPORATIONS WHICH ARE
UNITED STATES CONTROLLED.—
‘‘(1) TREATMENT UNDER SUBPART F.—
‘‘(A) IN GENERAL.—If a passive foreign
corporation is United States controlled, then for
purposes of subpart F of part III of subchapter
N—
‘‘(i) such corporation, if not otherwise
a controlled foreign corporation, shall be
treated as a controlled foreign corporation,
‘‘(ii) the term ‘United States share-
holder’ means, with respect to such cor-
poration, any United States person who
owns (within the meaning of section
958(a)) any stock in such corporation,
‘‘(iii) the entire gross income of such
corporation shall, after being reduced
under the principles of paragraph (5) of
section 954(b), be treated as foreign base
company income, and
‘‘(iv) sections 970 and 971 shall not
apply to such corporation.
184
Except as provided in regulations, the preceding
sentence shall also apply for purposes of section
904(d).
‘‘(B) SPECIAL RULES.—If any taxpayer is
treated as being a United States shareholder in
a controlled foreign corporation solely by reason
of this section—
‘‘(i) section 954(b)(4) (relating to ex-
ception for certain income subject to high
foreign taxes) shall not apply for purposes
of determining the amount included in the
gross income of such taxpayer under sec-
tion 951 by reason of being so treated with
respect to such corporation,
‘‘(ii) the amount so included in the
gross income of such taxpayer under sec-
tion 951 with respect to such corporation
shall be treated as long-term capital gain
to the extent attributable to the net capital
gain of such corporation, and
‘‘(iii) sections 956 and 956A shall not
apply to such taxpayer.
‘‘(2) UNITED STATES CONTROLLED.—For pur-
poses of this subpart, a passive foreign corporation
is United States controlled if—
185
‘‘(A) such corporation is a controlled for-
eign corporation determined without regard to
this subsection, or
‘‘(B) at any time during the taxable year
more than 50 percent of—
‘‘(i) the total combined voting power
of all classes of stock of such corporation
entitled to vote, or
‘‘(ii) the total value of the stock of
such corporation,
is owned directly or indirectly by 5 or fewer
United States persons.
‘‘(3) CONSTRUCTIVE
OWNERSHIP
RULES
FOR
PURPOSES OF PARAGRAPH (2)(B).—For purposes of
paragraph (2)(B), the attribution rules provided in
section 544 shall apply, determined as if any ref-
erence to a personal holding company were a ref-
erence to a corporation described in paragraph
(2)(B) (and any reference to the stock ownership re-
quirement provided in section 542(a)(2) were a ref-
erence to the requirement of paragraph (2)(B));
except that—
‘‘(A) subsection (a)(4) of such section shall
be applied by substituting ‘Paragraphs (1), (2),
and (3)’ for ‘Paragraphs (2) and (3)’,
186
‘‘(B) stock owned by a nonresident alien
individual shall not be considered by reason of
attribution through family membership as
owned by a citizen or resident alien individual
who is not the spouse of the nonresident alien
individual and who does not otherwise own
stock in the foreign corporation (determined
after the application of such attribution rules
other than attribution through family member-
ship), and
‘‘(C) stock of a corporation owned by any
foreign person shall not be considered by reason
of attribution through partners as owned by a
citizen or resident of the United States who
does not otherwise own stock in the foreign cor-
poration (determined after the application of
such attribution rules and subparagraph (A),
other than attribution through partners).
‘‘(b) TAXPAYERS ELECTING CURRENT INCLUSION
AND 25-PERCENT SHAREHOLDERS.—
‘‘(1) IN GENERAL.—If a passive foreign cor-
poration which is not United States controlled is a
qualified electing fund with respect to any taxpayer
or the taxpayer is a 25-percent shareholder in such
187
corporation, then for purposes of subpart F of part
III of subchapter N—
‘‘(A) such passive foreign corporation shall
be treated as a controlled foreign corporation
with respect to such taxpayer,
‘‘(B) such taxpayer shall be treated as a
United States shareholder in such corporation,
and
‘‘(C) the modifications of clauses (iii) and
(iv) of subsection (a)(1)(A) and of subpara-
graph (B) of subsection (a)(1) shall apply in
determining the amount included under such
subpart F in the gross income of such taxpayer
(and the character of the amount so included).
For purposes of section 904(d), any amount in-
cluded in the gross income of the taxpayer under the
preceding sentence shall be treated as a dividend
from a foreign corporation which is not a controlled
foreign corporation.
‘‘(2) QUALIFIED
ELECTING
FUND.—For pur-
poses of this subpart, the term ‘qualified electing
fund’ means any passive foreign corporation if—
‘‘(A) an election by the taxpayer under
paragraph (3) applies to such corporation for
the taxable year of the taxpayer, and
188
‘‘(B) such corporation complies with such
requirements as the Secretary may prescribe for
purposes of carrying out the purposes of this
subpart.
‘‘(3) ELECTION.—
‘‘(A) IN GENERAL.—A taxpayer may make
an election under this paragraph with respect to
any passive foreign corporation for any taxable
year of the taxpayer. Such an election, once
made with respect to any corporation, shall
apply to all subsequent taxable years of the tax-
payer with respect to such corporation unless
revoked by the taxpayer with the consent of the
Secretary.
‘‘(B) WHEN
MADE.—An election under
this subsection may be made for any taxable
year of the taxpayer at any time on or before
the due date (determined with regard to exten-
sions) for filing the return of the tax imposed
by this chapter for such taxable year. To the
extent provided in regulations, such an election
may be made later than as required in the pre-
ceding sentence where the taxpayer fails to
make a timely election because the taxpayer
189
reasonably believes that the corporation was not
a passive foreign corporation.
‘‘(4) 25-PERCENT
SHAREHOLDER.—For pur-
poses of this subpart, the term ‘25-percent share-
holder’ means, with respect to any passive foreign
corporation, any United States person who owns
(within the meaning of section 958(a)), or is consid-
ered as owning by applying the rules of section
958(b), 25 percent or more (by vote or value) of the
stock of such corporation.
‘‘Subpart B—Interest on Holdings To Which Subpart
A Does Not Apply
‘‘Sec. 1293. Interest on tax deferral.
‘‘Sec. 1294. Definitions and special rules.
‘‘SEC. 1293. INTEREST ON TAX DEFERRAL.
‘‘(a) TREATMENT OF DISTRIBUTIONS AND STOCK
DISPOSITIONS.—
‘‘(1) DISTRIBUTIONS.—If a United States per-
son receives an excess distribution in respect of
stock to which this section applies, then—
‘‘(A) the amount of the excess distribution
shall be allocated ratably to each day in the tax-
payer’s holding period for the stock,
‘‘(B) with respect to such excess distribu-
tion, the taxpayer’s gross income for the cur-
rent year shall include (as ordinary income)
190
only the amounts allocated under subparagraph
(A) to—
‘‘(i) the current year, or
‘‘(ii) any period in the taxpayer’s
holding period before the first day of the
first taxable year of the corporation which
begins after December 31, 1986, and for
which it was a passive foreign corporation,
and
‘‘(C) the tax imposed by this chapter for
the current year shall be increased by the de-
ferred tax amount (determined under sub-
section (c)).
‘‘(2) DISPOSITIONS.—If the taxpayer disposes
of stock to which this section applies, then the rules
of paragraph (1) shall apply to any gain recognized
on such disposition in the same manner as if such
gain were an excess distribution.
‘‘(3) DEFINITIONS.—For purposes of this sub-
part—
‘‘(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
191
period shall be treated as ending on the
date of such distribution, and
‘‘(ii) if section 1291 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 1291 so applied.
‘‘(B) CURRENT YEAR.—The term ‘current
year’ means the taxable year in which the ex-
cess distribution or disposition occurs.
‘‘(b) EXCESS DISTRIBUTION.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘excess distribution’ means any dis-
tribution in respect of stock received during any tax-
able year to the extent such distribution does not ex-
ceed its ratable portion of the total excess distribu-
tion (if any) for such taxable year.
‘‘(2) TOTAL EXCESS DISTRIBUTION.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—The term ‘total excess
distribution’ means the excess (if any) of—
192
‘‘(i) the amount of the distributions in
respect of the stock received by the tax-
payer during the taxable year, over
‘‘(ii) 125 percent of the average
amount of the distributions received in re-
spect of such stock by the taxpayer during
the 3 preceding taxable years (or, if short-
er, the portion of the taxpayer’s holding
period before the taxable year).
For purposes of clause (ii), any excess distribu-
tion received during such 3-year period shall be
taken into account only to the extent it was in-
cluded in gross income under subsection
(a)(1)(B).
‘‘(B) NO EXCESS FOR FIRST YEAR.—The
total excess distributions with respect to any
stock shall be zero for the taxable year in which
the taxpayer’s holding period in such stock be-
gins.
‘‘(3) ADJUSTMENTS.—Under regulations pre-
scribed by the Secretary—
‘‘(A) determinations under this subsection
shall be made on a share-by-share basis, except
that shares with the same holding period may
be aggregated,
193
‘‘(B) proper adjustments shall be made for
stock splits and stock dividends,
‘‘(C) if the taxpayer does not hold the
stock during the entire taxable year, distribu-
tions received during such year shall be
annualized,
‘‘(D) if the taxpayer’s holding period in-
cludes periods during which the stock was held
by another person, distributions received by
such other person shall be taken into account
as if received by the taxpayer,
‘‘(E) if the distributions are received in a
foreign currency, determinations under this
subsection shall be made in such currency and
the amount of any excess distribution deter-
mined in such currency shall be translated into
dollars,
‘‘(F) proper adjustment shall be made for
amounts not includible in gross income by rea-
son of section 959(a) or for which a deduction
is allowable under section 245(c), and
‘‘(G) if a charitable deduction was allow-
able under section 642(c) to a trust for any dis-
tribution of its income, proper adjustments
shall be made for the deduction so allowable to
194
the extent allocable to distributions or gain in
respect of stock in a passive foreign corpora-
tion.
For purposes of subparagraph (F), any amount not
includible in gross income by reason of section
551(d) (as in effect on January 1, 1993) or 1293(c)
(as so in effect) shall be treated as an amount not
includible in gross income by reason of section
959(a).
‘‘(c) DEFERRED TAX AMOUNT.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘deferred tax
amount’ means, with respect to any distribution or
disposition to which subsection (a) applies, an
amount equal to the sum of—
‘‘(A) the aggregate increases in taxes de-
scribed in paragraph (2), plus
‘‘(B) the aggregate amount of interest (de-
termined in the manner provided under para-
graph (3)) on such increases in tax.
Any increase in the tax imposed by this chapter for
the current year under subsection (a) to the extent
attributable to the amount referred to in subpara-
graph (B) shall be treated as interest paid under
section 6601 on the due date for the current year.
195
‘‘(2) AGGREGATE INCREASES IN TAXES.—For
purposes of paragraph (1)(A), the aggregate in-
creases in taxes shall be determined by multiplying
each amount allocated under subsection (a)(1)(A) to
any taxable year (other than any taxable year re-
ferred to in subsection (a)(1)(B)) by the highest rate
of tax in effect for such taxable year under section
1 or 11, whichever applies.
‘‘(3) COMPUTATION OF INTEREST.—
‘‘(A) IN GENERAL.—The amount of inter-
est referred to in paragraph (1)(B) on any in-
crease determined under paragraph (2) for any
taxable year shall be determined for the pe-
riod—
‘‘(i) beginning on the day after the
due date for such taxable year, and
‘‘(ii) ending on the due date for the
taxable year with or within which the dis-
tribution or disposition occurs,
by using the rates and method applicable under
section 6621 for underpayments of tax for such
period.
‘‘(B) DUE
DATE.—For purposes of this
subsection, the term ‘due date’ means the date
prescribed by law (determined without regard to
196
extensions) for filing the return of the tax im-
posed by this chapter for the taxable year.
‘‘(C) SPECIAL RULE.—For purposes of de-
termining the amount of interest referred to in
paragraph (1)(B), the amount of any increase
in tax determined under paragraph (2) shall be
determined without regard to any reduction
under section 1294(d) for a tax described in
paragraph (2)(A)(ii) thereof.
‘‘SEC. 1294. DEFINITIONS AND SPECIAL RULES.
‘‘(a) STOCK TO WHICH SECTION 1293 APPLIES.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, section 1293 shall apply to
any stock in a passive foreign corporation unless—
‘‘(A) such stock is marketable stock as of
the time of the distribution or disposition in-
volved, or
‘‘(B)(i) with respect to each of such cor-
poration’s taxable years for which such corpora-
tion was a passive foreign corporation and
which began after December 31, 1993, and in-
cluded any portion of the taxpayer’s holding pe-
riod in such stock—
197
‘‘(I) such corporation was United
States controlled (within the meaning of
section 1292(a)(2)), or
‘‘(II) such corporation was treated as
a controlled foreign corporation under sec-
tion 1292(b) with respect to the taxpayer,
and
‘‘(ii) with respect to each of such corpora-
tion’s taxable years for which such corporation
was a passive foreign corporation and which
begin after December 31, 1986, and before
January 1, 1994, and included any portion of
the taxpayer’s holding period in such stock,
such corporation was treated as a qualified
electing fund under this part (as in effect on
January 1, 1993) with respect to the taxpayer.
‘‘(2) TREATMENT
WHERE
STOCK
BECOMES
MARKETABLE.—If any stock in a passive foreign
corporation becomes marketable stock after the be-
ginning of the taxpayer’s holding period in such
stock, and if the requirements of paragraph (1)(B)
are not satisfied, section 1293 shall apply to—
‘‘(A) any distributions with respect to, or
disposition of, such stock in the taxable year of
198
the taxpayer in which it becomes so marketable,
and
‘‘(B) any amount which, but for section
1293, would have been included in gross income
under section 1291(a) with respect to such
stock for such taxable year in the same manner
as if such amount were gain on the disposition
of such stock.
‘‘(3) ELECTION
TO
RECOGNIZE
GAIN
WHERE
COMPANY BECOMES SUBJECT TO CURRENT INCLU-
SIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a passive foreign corporation first
meets the requirements of clause (i) of
paragraph (1)(B) with respect to the tax-
payer for a taxable year of such taxpayer
which begins after December 31, 1993,
‘‘(ii) the taxpayer holds stock in such
company on the first day of such taxable
year, and
‘‘(iii) the taxpayer establishes to the
satisfaction of the Secretary the fair mar-
ket value of such stock on such first day,
199
the taxpayer may elect to recognize gain as if
he sold such stock on such first day for such
fair market value.
‘‘(B) ADDITIONAL ELECTION FOR SHARE-
HOLDER OF CONTROLLED FOREIGN CORPORA-
TIONS.—
‘‘(i) IN GENERAL.—If—
‘‘(I) a passive foreign corporation
first 
meets 
the 
requirements 
of
subclause (I) of paragraph (1)(B)(i)
with respect to the taxpayer for a tax-
able year of such taxpayer which be-
gins after December 31, 1993,
‘‘(II) the taxpayer holds stock in
such corporation on the first day of
such taxable year, and
‘‘(III) such corporation is a con-
trolled foreign corporation without re-
gard to this part,
the taxpayer may elect to be treated as receiv-
ing a dividend on such first day in an amount
equal to the portion of the post-1986 earnings
and profits of such corporation attributable
(under regulations prescribed by the Secretary)
to the stock in such corporation held by the tax-
200
payer on such first day. The amount treated as
a dividend under the preceding sentence shall
be treated as an excess distribution and shall be
allocated under section 1293(a)(1)(A) only to
days during periods taken into account in deter-
mining the post-1986 earnings and profits so
attributable.
‘‘(ii) POST-1986 EARNINGS AND PROF-
ITS.—For purposes of clause (i), the term
‘post-1986 earnings and profits’ means
earnings and profits which were accumu-
lated in taxable years of the corporation
beginning after December 31, 1986, and
during the period or periods the stock was
held by the taxpayer while the corporation
was a passive foreign corporation.
‘‘(iii) COORDINATION
WITH
SECTION
959(e).—For purposes of section 959(e),
any amount treated as a dividend under
this subparagraph shall be treated as in-
cluded in gross income under section
1248(a).
‘‘(C) ADJUSTMENTS.—In the case of any
stock to which subparagraph (A) or (B) ap-
plies—
201
‘‘(i) the adjusted basis of such stock
shall be increased by the gain recognized
under subparagraph (A) or the amount
treated as a dividend under subparagraph
(B), as the case may be, and
‘‘(ii) the taxpayer’s holding period in
such stock shall be treated as beginning on
the first day referred to in such subpara-
graph.
‘‘(b) RULES RELATING TO STOCK ACQUIRED FROM
A DECEDENT.—
‘‘(1) BASIS.—In the case of stock of a passive
foreign corporation acquired by bequest, devise, or
inheritance (or by the decedent’s estate), notwith-
standing section 1014, the basis of such stock in the
hands of the person so acquiring it shall be the ad-
justed basis of such stock in the hands of the dece-
dent immediately before his death (or, if lesser, the
basis which would have been determined under sec-
tion 1014 without regard to this paragraph).
‘‘(2) DEDUCTION FOR ESTATE TAX.—If stock
in a passive foreign corporation is acquired from a
decedent, the taxpayer shall, under regulations pre-
scribed by the Secretary, be allowed (for the taxable
year of the sale or exchange) a deduction from gross
202
income equal to that portion of the decedent’s estate
tax deemed paid which is attributable to the excess
of (A) the value at which such stock was taken into
account for purposes of determining the value of the
decedent’s gross estate, over (B) the basis deter-
mined under paragraph (1).
‘‘(3) EXCEPTIONS.—This subsection shall not
apply to any stock in a passive foreign corporation
if—
‘‘(A) section 1293 would not have applied
to a disposition of such stock by the decedent
immediately before his death, or
‘‘(B) the decedent was a nonresident alien
at all times during his holding period in such
stock.
‘‘(c) RECOGNITION OF GAIN.—Except as otherwise
provided in regulations, in the case of any transfer of stock
in a passive foreign company to which section 1293 ap-
plies, where (but for this subsection) there is not full rec-
ognition of gain, the excess (if any) of—
‘‘(1) the fair market value of such stock, over
‘‘(2) its adjusted basis,
shall be treated as gain from the sale or exchange of such
stock and shall be recognized notwithstanding any provi-
sion of law. Proper adjustment shall be made to the basis
203
of property for gain recognized under the preceding sen-
tence.
‘‘(d) COORDINATION WITH FOREIGN TAX CREDIT
RULES.—
‘‘(1) IN GENERAL.—If there are creditable for-
eign taxes with respect to any distribution in respect
of stock in a passive foreign corporation—
‘‘(A) the amount of such distribution shall
be determined for purposes of section 1293 with
regard to section 78,
‘‘(B) the excess distribution taxes shall be
allocated ratably to each day in the taxpayer’s
holding period for the stock, and
‘‘(C) to the extent—
‘‘(i) that such excess distribution
taxes are allocated to a taxable year re-
ferred to in section 1293(a)(1)(B), such
taxes shall be taken into account under
section 901 for the current year, and
‘‘(ii) that such excess distribution
taxes are allocated to any other taxable
year, such taxes shall reduce (subject to
the principles of section 904 and not below
zero) the increase in tax determined under
section 1293(c)(2) for such taxable year by
204
reason of such distribution (but such taxes
shall not be taken into account under sec-
tion 901).
‘‘(2) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) CREDITABLE FOREIGN TAXES.—The
term ‘creditable foreign taxes’ means, with re-
spect to any distribution—
‘‘(i) any foreign taxes deemed paid
under section 902 with respect to such dis-
tribution, and
‘‘(ii) any withholding tax imposed with
respect to such distribution,
but only if the taxpayer chooses the benefits of
section 901 and such taxes are creditable under
section 901 (determined without regard to
paragraph (1)(C)(ii)).
‘‘(B) EXCESS DISTRIBUTION TAXES.—The
term ‘excess distribution taxes’ means, with re-
spect to any distribution, the portion of the
creditable foreign taxes with respect to such
distribution which is attributable (on a pro rata
basis) to the portion of such distribution which
is an excess distribution.
205
‘‘(C) SECTION
1248
GAIN.—The rules of
this subsection also shall apply in the case of
any gain which but for this section would be in-
cludible in gross income as a dividend under
section 1248.
‘‘(e) ATTRIBUTION OF OWNERSHIP.—For purposes
of this subpart—
‘‘(1) ATTRIBUTION
TO
UNITED
STATES
PER-
SONS.—This subsection—
‘‘(A) shall apply to the extent that the ef-
fect is to treat stock of a passive foreign cor-
poration as owned by a United States person,
and
‘‘(B) except as provided in paragraph (3)
or in regulations, shall not apply to treat stock
owned (or treated as owned under this sub-
section) by a United States person as owned by
any other person.
‘‘(2) CORPORATIONS.—
‘‘(A) IN GENERAL.—If 50 percent or more
in value of the stock of a corporation (other
than an S corporation) is owned, directly or in-
directly, by or for any person, such person shall
be considered as owning the stock owned di-
rectly or indirectly by or for such corporation in
206
that proportion which the value of the stock
which such person so owns bears to the value
of all stock in the corporation.
‘‘(B) 50-PERCENT
LIMITATION
NOT
TO
APPLY IN CERTAIN CASES.—For purposes of de-
termining whether a shareholder of a passive
foreign corporation (or whether a United States
shareholder of a controlled foreign corporation
which is not a passive foreign corporation) is
treated as owning stock owned directly or indi-
rectly by or for such corporation, subparagraph
(A) shall be applied without regard to the 50-
percent limitation contained therein.
‘‘(C) FAMILY AND PARTNER ATTRIBUTION
FOR 50-PERCENT LIMITATION.—For purposes of
determining whether the 50-percent limitation
of subparagraph (A) is met, the constructive
ownership rules of section 544(a)(2) shall apply
in addition to the other rules of this subsection.
‘‘(3) PARTNERSHIPS, ETC.—Except as provided
in regulations, stock owned, directly or indirectly, by
or for a partnership, S corporation, estate, or trust
shall be considered as being owned proportionately
by its partners, shareholders, or beneficiaries (as the
case may be).
207
‘‘(4) OPTIONS.—To the extent provided in regu-
lations, if any person has an option to acquire stock,
such stock shall be considered as owned by such per-
son. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to ac-
quire such stock.
‘‘(5) SUCCESSIVE APPLICATION.—Stock consid-
ered to be owned by a person by reason of the appli-
cation of paragraph (2), (3), or (4) shall, for pur-
poses of applying such paragraphs, be considered as
actually owned by such person.
‘‘(f) OTHER SPECIAL RULES.—For purposes of this
subpart—
‘‘(1) TIME FOR DETERMINATION.—Stock held
by a taxpayer shall be treated as stock in a passive
foreign corporation if, at any time during the hold-
ing period of the taxpayer with respect to such
stock, such corporation (or any predecessor) was a
passive foreign corporation. The preceding sentence
shall not apply if the taxpayer elects to recognize
gain (as of the last day of the last taxable year for
which the company was a passive foreign corpora-
tion) under rules similar to the rules of subsection
(a)(3)(A).
208
‘‘(2) APPLICATION OF SUBPART WHERE STOCK
HELD BY OTHER ENTITY.—Under regulations—
‘‘(A) IN GENERAL.—In any case in which
a United States person is treated as owning
stock in a passive foreign corporation by reason
of subsection (e)—
‘‘(i) any transaction which results in
the United States person being treated as
no longer owning such stock,
‘‘(ii) any disposition of such stock by
the person owning such stock, and
‘‘(iii) any distribution of property in
respect of such stock to the person holding
such stock,
shall be treated as a disposition by, or distribu-
tion to, the United States person with respect
to the stock in the passive foreign corporation.
‘‘(B) AMOUNT TREATED IN SAME MANNER
AS PREVIOUSLY TAXED INCOME.—Rules similar
to the rules of section 959(b) shall apply to any
amount described in subparagraph (A) in re-
spect of stock which the taxpayer is treated as
owning under subsection (e).
‘‘(C) COORDINATION WITH SECTION 951.—
If, but for this subparagraph, an amount would
209
be taken into account under section 1293 by
reason of subparagraph (A) and such amount
would also be included in the gross income of
the taxpayer under section 951, such amount
shall only be taken into account under section
1293.
‘‘(3) DISPOSITIONS.—Except as provided in
regulations, if a taxpayer uses any stock in a passive
foreign corporation as security for a loan, the tax-
payer shall be treated as having disposed of such
stock.
‘‘Subpart C—General Provisions
‘‘Sec. 1296. Passive foreign corporation.
‘‘Sec. 1297. Special rules.
‘‘SEC. 1296. PASSIVE FOREIGN CORPORATION.
‘‘(a) IN GENERAL.—For purposes of this part, except
as otherwise provided in this subpart, the term ‘passive
foreign corporation’ means any foreign corporation if—
‘‘(1) 60 percent or more of the gross income of
such corporation for the taxable year is passive in-
come,
‘‘(2) the average percentage of assets (by value)
held by such corporation during the taxable year
which produce passive income or which are held for
the production of passive income is at least 50 per-
cent, or
210
‘‘(3) such corporation is registered under the
Investment Company Act of 1940, as amended (15
U.S.C. 80a–1 to 80b–2), either as a management
company or as a unit investment trust.
In the case of a controlled foreign corporation (or any
other foreign corporation if such corporation so elects), the
determination under paragraph (2) shall be based on the
adjusted bases (as determined for purposes of computing
earnings and profits) of its assets in lieu of their value.
Such an election, once made, may be revoked only with
the consent of the Secretary.
‘‘(b) PASSIVE INCOME.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘passive income’
means any income which is of a kind which would
be foreign personal holding company income as de-
fined in section 954(c) without regard to paragraph
(3) thereof.
‘‘(2) EXCEPTIONS.—Except as provided in reg-
ulations, the term ‘passive income’ does not include
any income—
‘‘(A) derived in the active conduct of a
banking business by an institution licensed to
do business as a bank in the United States (or,
211
to the extent provided in regulations, by any
other corporation),
‘‘(B) derived in the active conduct of an in-
surance business by a corporation which is pre-
dominantly engaged in an insurance business
and which would be subject to tax under sub-
chapter L if it were a domestic corporation,
‘‘(C) which is interest, a dividend, or a
rent or royalty, which is received or accrued
from a related person (within the meaning of
section 954(d)(3)) to the extent such amount is
properly allocable (under regulations prescribed
by the Secretary) to income of such related per-
son which is not passive income, or
‘‘(D) any foreign trade income of a FSC.
For purposes of subparagraph (C), the term ‘related
person’ has the meaning given such term by section
954(d)(3) determined by substituting ‘foreign cor-
poration’ for ‘controlled foreign corporation’ each
place it appears in section 954(d)(3).
‘‘(3) TREATMENT OF INCOME FROM CERTAIN
ASSETS.—To the extent that any asset is properly
treated as not held for the production of passive in-
come for purposes of subsection (a)(2), all income
212
from such asset shall be treated as income which is
not passive income.
‘‘(4) TREATMENT OF CERTAIN DEALERS IN SE-
CURITIES.—
‘‘(A) IN GENERAL.—In the case of any for-
eign corporation which is a controlled foreign
corporation (as defined in section 957(a)), the
term ‘passive income’ does not include any in-
come derived in the active conduct of a securi-
ties business by such corporation if such cor-
poration is registered as a securities broker or
dealer under section 15(a) of the Securities Ex-
change Act of 1934 or is registered as a Gov-
ernment securities broker or dealer under sec-
tion 15C(a) of such Act. To the extent provided
in regulations, such term shall not include any
income derived in the active conduct of a securi-
ties business by a controlled foreign corporation
which is not so registered.
‘‘(B) APPLICATION
OF
LOOK-THROUGH
RULES.—For purposes of paragraph (2)(C),
rules similar to the rules of subparagraph (A)
of this paragraph shall apply in determining
whether any income of a related person (wheth-
er or not a corporation) is passive income.
213
‘‘(C) LIMITATION.—The preceding provi-
sions of this paragraph shall only apply in the
case of persons who are United States share-
holders (as defined in section 951(b)) in the
controlled foreign corporation.
‘‘(c) LOOK-THROUGH
IN
CASE
OF
25-PERCENT
OWNED CORPORATION.—If a foreign corporation owns
(directly or indirectly) at least 25 percent (by value) of
the stock of another corporation, for purposes of determin-
ing whether such foreign corporation is a passive foreign
corporation, such foreign corporation shall be treated as
if it—
‘‘(1) held its proportionate share of the assets
of such other corporation, and
‘‘(2) received directly its proportionate share of
the income of such other corporation.
‘‘SEC. 1297. SPECIAL RULES.
‘‘(a) UNITED STATES PERSON.—For purposes of this
part, the term ‘United States person’ has the meaning
given to such term by section 7701(a)(30).
‘‘(b) CONTROLLED FOREIGN CORPORATION.—For
purposes of this part, the term ‘controlled foreign corpora-
tion’ has the meaning given such term by section 957(a).
‘‘(c) MARKETABLE STOCK.—For purposes of this
part—
214
‘‘(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, and
‘‘(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.
‘‘(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
215
in a passive foreign corporation which it owns (or is
treated under section 1291(g) as owning) shall be
treated as marketable stock for purposes of this
part. Except as provided in regulations, a similar
rule shall apply in the case of any other regulated
investment company.
‘‘(d) OTHER SPECIAL RULES.—For purposes of this
part—
‘‘(1) CERTAIN CORPORATIONS NOT TREATED AS
PASSIVE.—A corporation shall not be treated as a
passive foreign corporation for the 1st taxable year
such corporation has gross income (hereinafter in
this paragraph referred to as the ‘start-up year’)
if—
‘‘(A) no predecessor of such corporation
was a passive foreign corporation,
‘‘(B) it is established to the satisfaction of
the Secretary that such corporation will not be
a passive foreign corporation for either of the
1st 2 taxable years following the start-up year,
and
‘‘(C) such corporation is not a passive for-
eign corporation for either of the 1st 2 taxable
years following the start-up year.
216
‘‘(2) CERTAIN CORPORATIONS CHANGING BUSI-
NESSES.—A corporation shall not be treated as a
passive foreign corporation for any taxable year if—
‘‘(A) neither such corporation (nor any
predecessor) was a passive foreign corporation
for any prior taxable year,
‘‘(B) it is established to the satisfaction of
the Secretary that—
‘‘(i) substantially all of the passive in-
come of the corporation for the taxable
year is attributable to proceeds from the
disposition of 1 or more active trades or
businesses, and
‘‘(ii) such corporation will not be a
passive foreign corporation for either of
the first 2 taxable years following the tax-
able year, and
‘‘(C) such corporation is not a passive for-
eign corporation for either of such 2 taxable
years.
For purposes of section 1296(c), any passive income
referred to in subparagraph (B)(i) shall be treated
as income which is not passive income and any as-
sets which produce income so described shall be
217
treated as assets producing income other than pas-
sive income.
‘‘(3) TREATMENT OF CERTAIN FOREIGN COR-
PORATIONS OWNING STOCK IN 25-PERCENT OWNED
DOMESTIC CORPORATION.—
‘‘(A) IN GENERAL.—If a foreign corpora-
tion owns at least 25 percent (by value) of the
stock of a domestic corporation, for purposes of
determining whether such foreign corporation is
a passive foreign corporation, any qualified
stock held by such domestic corporation shall be
treated as an asset which does not produce pas-
sive income (and is not held for the production
of passive income) and any amount included in
gross income with respect to such stock shall
not be treated as passive income.
‘‘(B) QUALIFIED STOCK.—For purposes of
subparagraph (A), the term ‘qualified stock’
means any stock in a C corporation which is a
domestic corporation and which is not a regu-
lated investment company or real estate invest-
ment trust.
‘‘(4) TREATMENT OF CORPORATION WHICH WAS
A PFIC.—A corporation shall be treated as a passive
foreign corporation for any taxable year beginning
218
before January 1, 1994, if and only if such corpora-
tion was a passive foreign investment company
under this part as in effect for such taxable year.
‘‘(5) SEPARATE INTERESTS TREATED AS SEPA-
RATE CORPORATIONS.—Under regulations prescribed
by the Secretary, where necessary to carry out the
purposes of this part, separate classes of stock (or
other interests) in a corporation shall be treated as
interests in separate corporations.
‘‘(6) TREATMENT OF CERTAIN SUBPART F IN-
CLUSIONS.—Any amount included in gross income
under subparagraph (B) or (C) of section 951(a)(1)
shall be treated as a distribution received with re-
spect to the stock.
‘‘(e) TREATMENT
OF
CERTAIN
LEASED
PROP-
ERTY.—For purposes of this part—
‘‘(1) IN
GENERAL.—Any tangible personal
property with respect to which a foreign corporation
is the lessee under a lease with a term of at least
12 months shall be treated as an asset actually held
by such corporation.
‘‘(2) AMOUNT TAKEN INTO ACCOUNT.—
‘‘(A) IN
GENERAL.—The amount taken
into account under section 1296(a)(2) with re-
spect to any asset to which paragraph (1) ap-
219
plies shall be the unamortized portion (as deter-
mined under regulations prescribed by the Sec-
retary) of the present value of the payments
under the lease for the use of such property.
‘‘(B) PRESENT VALUE.—For purposes of
subparagraph (A), the present value of pay-
ments described in subparagraph (A) shall be
determined in the manner provided in regula-
tions prescribed by the Secretary—
‘‘(i) as of the beginning of the lease
term, and
‘‘(ii) except as provided in such regu-
lations, by using a discount rate equal to
the applicable Federal rate determined
under section 1274(d)—
‘‘(I) by substituting the lease
term for the term of the debt instru-
ment, and
‘‘(II) without regard to para-
graph (2) or (3) thereof.
‘‘(3) EXCEPTIONS.—This subsection shall not
apply in any case where—
‘‘(A) the lessor is a related person (as de-
fined in section 954(d)(3)) with respect to the
foreign corporation, or
220
‘‘(B) a principal purpose of leasing the
property was to avoid the provisions of this part
or section 956A.
‘‘(f) SPECIAL RULES FOR CERTAIN INTANGIBLES.—
For purposes of this part—
‘‘(1) RESEARCH EXPENDITURES.—The adjusted
basis of the total assets of a controlled foreign cor-
poration shall be increased by the research or experi-
mental expenditures (within the meaning of section
174) paid or incurred by such foreign corporation
during the taxable year and the preceding 2 taxable
years. Any expenditure otherwise taken into account
under the preceding sentence shall be reduced by the
amount of any reimbursement received by the con-
trolled foreign corporation with respect to such ex-
penditure.
‘‘(2) CERTAIN LICENSED INTANGIBLES.—
‘‘(A) IN GENERAL.—In the case of any in-
tangible 
property 
(as 
defined 
in 
section
936(h)(3)(B)) with respect to which a con-
trolled foreign corporation is a licensee and
which is used by such foreign corporation in the
active conduct of a trade or business, the ad-
justed basis of the total assets of such foreign
corporation shall be increased by an amount
221
equal to 300 percent of the payments made
during the taxable year by such foreign cor-
poration for the use of such intangible property.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply to—
‘‘(i) any payments to a foreign person
if such foreign person is a related person
(as defined in section 954(d)(3)) with re-
spect to the controlled foreign corporation,
and
‘‘(ii) any payments under a license if
a principal purpose of entering into such
license was to avoid the provisions of this
part or section 956A.
‘‘(3) CONTROLLED
FOREIGN
CORPORATION.—
For purposes of this subsection, the term ‘controlled
foreign corporation’ has the meaning given such
term by section 957(a).
‘‘(g) ELECTION BY CERTAIN PASSIVE FOREIGN COR-
PORATIONS TO BE TREATED AS A DOMESTIC CORPORA-
TION.—
‘‘(1) IN GENERAL.—For purposes of this title,
if—
‘‘(A) a passive foreign corporation would
qualify as a regulated investment company
222
under part I of subchapter M if such passive
foreign corporation were a domestic corpora-
tion,
‘‘(B) such passive foreign corporation
meets such requirements as the Secretary shall
prescribe to ensure that the taxes imposed by
this title on such passive foreign corporation
are paid, and
‘‘(C) such passive foreign corporation
makes an election to have this paragraph apply
and waives all benefits which are granted by the
United States under any treaty and to which
such corporation would otherwise be entitled by
reason of being a resident of another country,
such corporation shall be treated as a domestic cor-
poration.
‘‘(2) CERTAIN
RULES
MADE
APPLICABLE.—
Rules similar to the rules of paragraphs (2), (3),
(4)(A), and (5) of section 953(d) shall apply with re-
spect to any corporation making an election under
paragraph (1).
‘‘(h) SPECIAL RULES FOR CERTAIN TAXPAYERS.—
‘‘(1) TAX-EXEMPT
ORGANIZATIONS.—In the
case of any organization exempt from tax under sec-
tion 501—
223
‘‘(A) this part shall apply to any stock in
a passive foreign corporation owned (or treated
as owned under section 1294(e)) by such orga-
nization only to the extent that a dividend on
such stock would be taken into account in de-
termining the unrelated business taxable income
of such organization, and
‘‘(B) to the extent that this part applies to
any such stock, this part shall be applied in the
same manner as if such organization were not
exempt from tax under section 501(a).
‘‘(2) TREATMENT OF STOCK HELD BY POOLED
INCOME FUND.—If stock in a passive foreign cor-
poration is owned (or treated as owned under section
1294(e)) by a pooled income fund (as defined in sec-
tion 642(c)(5)) and no portion of any gain from a
disposition of such stock may be allocated to income
under the terms of the governing instrument of such
fund—
‘‘(A) section 1293 shall not apply to any
gain on a disposition of such stock by such fund
if (without regard to section 1293) a deduction
would be allowable with respect to such gain
under section 642(c)(3),
224
‘‘(B) subpart A shall not apply with re-
spect to such stock, and
‘‘(C) in determining whether section 1293
applies to any distribution in respect of such
stock, such stock shall be treated as failing to
qualify 
for 
the 
exceptions 
under 
section
1294(a)(1).
‘‘(i) INFORMATION FROM SHAREHOLDERS.—Every
United States person who owns stock in any passive for-
eign corporation shall furnish with respect to such cor-
poration such information as the Secretary may prescribe.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this part, including regula-
tions—
‘‘(1) providing that gross income shall be deter-
mined without regard to section 1293 for such pur-
poses as may be specified in such regulations, and
‘‘(2) to prevent avoidance of the provisions of
this part through changes in citizenship or residence
status.’’
(b) INSTALLMENT SALES TREATMENT NOT AVAIL-
ABLE.—Paragraph (2) of section 453(k) is amended by
striking ‘‘or’’ at the end of subparagraph (A), by inserting
225
‘‘or’’ at the end of subparagraph (B), and by adding at
the end thereof the following new subparagraph:
‘‘(C) stock in a passive foreign corporation
(as defined in section 1296) if section 1293 ap-
plies to such sale,’’.
(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 1291.—For purposes of determining a regu-
lated investment company’s ordinary income—
‘‘(A) notwithstanding paragraph (1)(C),
section 1291 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
corporation during the portion of the calendar
year after October 31 shall be taken into ac-
count in determining such company’s ordinary
income for the following calendar year.
In the case of a company making an election under
paragraph (4), the preceding sentence shall be ap-
226
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
CORPORATIONS.—To
the extent provided in regulations, the taxable in-
come of a regulated investment company (other than
a company to which an election under section
4982(e)(4) applies) shall be computed without re-
gard to any net reduction in the value of any stock
of a passive foreign corporation to which section
1291 applies occurring after October 31 of the tax-
able year, and any such reduction shall be treated as
occurring 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 corporation
to which section 1291 applies occurring after Octo-
ber 31 of such year,’’.
(d) TREATMENT OF CERTAIN PREVIOUSLY TAXED
AMOUNTS.—Subsection (e) of section 959 is amended—
228
(4) Subsection (e) of section 443 is amended by
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4),
respectively.
(5) Clause (ii) of section 465(c)(7)(B) is
amended to read as follows:
‘‘(ii) a passive foreign corporation
with respect to which the stock ownership
requirements of section 1292(a)(2)(B) are
met, or’’.
(6) Subsection (b) of section 535 is amended by
striking paragraph (9).
(7) Subsection (d) of section 535 is hereby re-
pealed.
(8) Paragraph (1) of section 543(b) is amended
by inserting ‘‘and’’ at the end of subparagraph (A),
by striking ‘‘, and’’ at the end of subparagraph (B)
and inserting a period, and by striking subparagraph
(C).
(9) Section 545 is amended by striking sub-
sections (b)(7) and (c).
(10) Paragraph (1) of section 562(b) is amend-
ed by striking ‘‘or a foreign personal holding com-
pany described in section 552’’.
(11) Section 563 is amended—
229
(A) by striking subsection (c),
(B) by redesignating subsection (d) as sub-
section (c), and
(C) by striking ‘‘subsection (a), (b), or (c)’’
in subsection (c) (as so redesignated) and in-
serting ‘‘subsection (a) or (b)’’.
(12) Paragraph (2) of section 751(d) is amend-
ed by striking ‘‘subsection (a) of section 1246 (relat-
ing to gain on foreign investment company stock)’’
and inserting ‘‘section 1291 (relating to stock in
certain passive foreign corporations marked to
market)’’.
(13) Subsection (b) of section 851 is amended
by striking the sentence following paragraph (4)(B)
which contains a reference to section 1293(a).
(14) Clause (ii) of section 864(b)(2)(A) is
amended by striking ‘‘(other than’’ and all that fol-
lows down through ‘‘holding company)’’ and insert-
ing ‘‘(other than a corporation which would be a
personal holding company but for section 542(c)(5)
and which is not United States controlled (as de-
fined in section 1292(a)(2))’’.
(15) Subsection (d) of section 904 is amended
by striking paragraphs (2)(A)(ii), (2)(E)(iii), and
(3)(I).
230
(16)(A) Subparagraph (A) of section 904(g)(1)
is amended to read as follows:
‘‘(A) Any amount included in gross income
under section 951(a) (relating to amounts in-
cluded in gross income of United States share-
holders).’’
(B) The paragraph heading of paragraph (2) of
section 904(g) is amended by striking ‘‘AND FOR-
EIGN PERSONAL HOLDING OR PASSIVE FOREIGN IN-
VESTMENT COMPANY’’.
(17) Section 951 is amended by striking sub-
sections (c), (d), and (f), and by redesignating sub-
section (e) as subsection (c).
(18) Paragraph (3) of section 956A(c) is
amended—
(A) by striking ‘‘1297(d)’’ in subparagraph
(B) and inserting ‘‘1297(e)’’, and
(B) by striking ‘‘1297(e)’’ in subparagraph
(C) and inserting ‘‘1297(f)’’.
(19) Paragraph (1) of section 986(c) is amend-
ed by striking ‘‘or 1293(c)’’.
(20) Paragraph (3) of section 989(b) is amend-
ed by striking ‘‘, 551(a), or 1293(a)’’.
(21) Paragraph (5) of section 1014(b) is hereby
repealed.
231
(22) Subsection (a) of section 1016 is amended
by striking paragraph (13) and by redesignating the
following paragraphs accordingly.
(23) Paragraph (3) of section 1212(a) is
amended—
(A) by striking subparagraph (A),
(B) by redesignating subparagraphs (B)
and (C) as subparagraphs (A) and (B), respec-
tively, and
(C) by amending subparagraph (D) to read
as follows:
‘‘(C) for which it is a passive foreign cor-
poration.’’
(24) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly.
(25) Subsection (d) of section 1248 is amended
by striking paragraphs (5) and (7).
(26)(A) Subsection (a) of section 6035 is
amended by striking ‘‘foreign personal holding com-
pany (as defined in section 552)’’ and inserting
‘‘passive foreign corporation with respect to which
the 
stock 
ownership 
requirements 
of 
section
1292(a)(2)(B) are met’’.