288
‘‘(3) LIMITATION
ON
APPLICATION
OF
PARA-
GRAPH (2).—Paragraph (2) shall apply only if—
‘‘(A) capital is not a material income-pro-
ducing factor for the partnership, and
‘‘(B) the retiring or deceased partner was
a general partner in the partnership.’’
(b) LIMITATION ON DEFINITION OF UNREALIZED
RECEIVABLES.—
(1) IN
GENERAL.—Subsection (c) of section
751 (defining unrealized receivables) is amended—
(A) by striking ‘‘sections 731, 736, and
741’’ each place they appear and inserting ‘‘,
sections 731 and 741 (but not for purposes of
section 736)’’, and
(B) by striking ‘‘section 731, 736, or 741’’
each place it appears and inserting ‘‘section
731 or 741’’.
(2) TECHNICAL AMENDMENTS.—
(A) Subsection (e) of section 751 is
amended by striking ‘‘sections 731, 736, and
741’’ and inserting ‘‘sections 731 and 741’’.
(B) Section 736 is amended by striking
subsection (c).
(c) EFFECTIVE DATE.—
289
(1) IN GENERAL.—The amendments made by
this section shall apply in the case of partners retir-
ing or dying on or after January 5, 1993.
(2) 
BINDING
CONTRACT
EXCEPTION.—The
amendments made by this section shall not apply to
any partner retiring on or after January 5, 1993, if
a written contract to purchase such partner’s inter-
est in the partnership was binding on January 4,
1993, and at all times thereafter before such pur-
chase.
TITLE VI—OTHER INCOME TAX
PROVISIONS
Subtitle A—Provisions Relating to
Subchapter S Corporations
SEC. 601. AUTHORITY TO VALIDATE CERTAIN INVALID
ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
‘‘(f) INADVERTENT INVALID ELECTIONS OF TERMI-
NATIONS.—If—
‘‘(1) an election under subsection (a) by any
corporation—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
290
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to ob-
tain shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or ter-
mination were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were
taken—
‘‘(A) so that the corporation is a small
business corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with
the treatment of the corporation as an S corpora-
tion) as may be required by the Secretary with re-
spect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
291
treated as an S corporation during the period specified
by the Secretary.’’
(b) LATE ELECTIONS.—Subsection (b) of section
1362 is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS
AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to elections for taxable
years beginning after December 31, 1982.
SEC. 602. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
292
(1) Subparagraph (A) of section 1366(d)(1) is
amended by striking ‘‘paragraph (1)’’ and inserting
‘‘paragraphs (1) and (2)(A)’’.
(2) Subsection (d) of section 1368 is amended
by adding at the end thereof the following new sen-
tence:
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined
with regard to the adjustments provided in paragraph (1)
of section 1367(a) for the taxable year.’’
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end there-
of the following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net nega-
tive adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative
adjustment’ means, with respect to any taxable
year, the excess (if any) of—
293
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions in taxable years
beginning after December 31, 1992.
SEC. 603. OTHER MODIFICATIONS.
(a) TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.—Subsection (a) of section 1371 (relating to
application of subchapter C rules) is amended to read as
follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C
shall apply to an S corporation and its shareholders.’’
294
(b) S CORPORATIONS PERMITTED TO HOLD SUB-
SIDIARIES.—
(1) IN
GENERAL.—Paragraph (2) of section
1361(b) (defining ineligible corporation) is amended
by striking subparagraph (A) and by redesignating
subparagraphs (B), (C), (D), and (E) as subpara-
graphs (A), (B), (C), and (D), respectively.
(2) CONFORMING AMENDMENTS.—
(A) Subsection (c) of section 1361 is
amended by striking paragraph (6).
(B) Subsection (b) of section 1504 (defin-
ing includible corporation) is amended by add-
ing at the end thereof the following new para-
graph:
‘‘(8) An S corporation.’’
(c) ELIMINATION
OF PRE-1983 EARNINGS
AND
PROFITS.—
(1) IN GENERAL.—If—
(A) a corporation was an electing small
business corporation under subchapter S of
chapter 1 of the Internal Revenue Code of 1986
for any taxable year beginning before January
1, 1983, and
(B) such corporation is an S corporation
under subchapter S of chapter 1 of such Code
295
for its first taxable year beginning after Decem-
ber 31, 1992,
the amount of such corporation’s accumulated earn-
ings and profits (as of the beginning of such first
taxable year) shall be reduced by an amount equal
to the portion (if any) of such accumulated earnings
and profits which were accumulated in any taxable
year beginning before January 1, 1983, for which
such corporation was an electing small business cor-
poration under such subchapter S.
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (3) of section 1362(d) is
amended—
(i) by striking ‘‘subchapter C’’ in the
paragraph heading and inserting ‘‘accumu-
lated’’,
(ii) by striking ‘‘subchapter C’’ in
subparagraph (A)(i)(I) and inserting ‘‘ac-
cumulated’’, and
(iii) by striking subparagraph (B) and
redesignating the following subparagraphs
accordingly.
(B)(i) Subsection (a) of section 1375 is
amended by striking ‘‘subchapter C’’ in para-
graph (1) and inserting ‘‘accumulated’’.
296
(ii) Paragraph (3) of section 1375(b) is
amended to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross re-
ceipts’ have the same respective meanings as when
used in paragraph (3) of section 1362(d).’’
(iii) The section heading for section 1375
is amended by striking ‘‘SUBCHAPTER C’’
and inserting ‘‘ACCUMULATED’’.
(iv) The table of sections for part III of
subchapter S of chapter 1 is amended by strik-
ing ‘‘subchapter C’’ in the item relating to sec-
tion 1375 and inserting ‘‘accumulated’’.
(C) Clause (i) of section 1042(c)(4)(A) is
amended by striking ‘‘section 1362(d)(3)(D)’’
and inserting ‘‘section 1362(d)(3)(C)’’.
(d) ADJUSTMENTS TO BASIS OF INHERITED S STOCK
TO REFLECT CERTAIN ITEMS OF INCOME.—Subsection
(b) of section 1367 (relating to adjustments to basis of
stock of shareholders, etc.) is amended by adding at the
end thereof the following new paragraph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the
297
death of a decedent or by bequest, devise, or in-
heritance, section 691 shall be applied with re-
spect to any item of income of the S corpora-
tion in the same manner as if the decedent had
held directly his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the por-
tion of the value of the stock which is attrib-
utable to items constituting income in respect
of the decedent.’’
(e) EFFECTIVE DATES.—
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall take ef-
fect on the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendments made
by subsection (c) shall apply to taxable years begin-
ning after December 31, 1992.
(3) SUBSECTION (d).—The amendment made
by subsection (d) shall apply in the case of decedents
dying after the date of the enactment of this Act.
298
Subtitle B—Accounting Provisions
SEC. 611. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CER-
TAIN CASES.—Subsection (b) of section 460 (relating to
percentage of completion method) is amended by adding
at the end thereof the following new paragraph:
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER
COMPLETION
OF
CONTRACT.—Para-
graph (1)(B) shall not apply with respect to
any taxable year (beginning after the taxable
year in which the contract is completed) if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
such taxable year, is within
‘‘(ii) 10 percent of the cumulative
look-back taxable income (or loss) under
the contract as of the close of the most re-
cent taxable year to which paragraph
(1)(B) applied (or would have applied but
for subparagraph (B)).
299
‘‘(B) DE MINIMIS DISCREPANCIES.—Para-
graph (1)(B) shall not apply in any case to
which it would otherwise apply if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
each prior contract year, is within
‘‘(ii) 10 percent of the cumulative
look-back income (or loss) under the con-
tract as of the close of such prior contract
year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT
YEAR.—The term
‘contract year’ means any taxable year for
which income is taken into account under
the contract.
‘‘(ii) LOOK-BACK INCOME OR LOSS.—
The look-back income (or loss) is the
amount which would be the taxable income
(or loss) under the contract if the alloca-
tion method set forth in paragraph (2)(A)
were used in determining taxable income.
‘‘(iii) DISCOUNTING
NOT
APPLICA-
BLE.—The amounts taken into account
after the completion of the contract shall
300
be determined without regard to any dis-
counting under the 2nd sentence of para-
graph (2).
‘‘(D) CONTRACTS TO WHICH PARAGRAPH
APPLIES.—This paragraph shall only apply if
the taxpayer makes an election under this sub-
paragraph. Unless revoked with the consent of
the Secretary, such an election shall apply to all
long-term contracts completed during the tax-
able year for which election is made or during
any subsequent taxable year.’’
(b) MODIFICATION OF INTEREST RATE.—
(1) IN GENERAL.—Subparagraph (C) of section
460(b)(2) is amended by striking ‘‘the overpayment
rate established by section 6621’’ and inserting ‘‘the
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED
OVERPAYMENT
RATE.—Sub-
section (b) of section 460 is amended by adding at
the end thereof the following new paragraph:
‘‘(7) ADJUSTED OVERPAYMENT RATE.—
‘‘(A) IN GENERAL.—The adjusted overpay-
ment rate for any interest accrual period is the
overpayment rate in effect under section 6621
301
for the calendar quarter in which such interest
accrual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘inter-
est accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
‘‘(ii) ending on the return due date
for the following taxable year.
For purposes of the preceding sentence, the
term ‘return due date’ means the date pre-
scribed for filing the return of the tax imposed
by this chapter (determined without regard to
extensions).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to contracts completed in taxable
years ending after the date of the enactment of this Act.
SEC. 612. SIMPLIFIED METHOD FOR CAPITALIZING CER-
TAIN INDIRECT COSTS.
(a) GENERAL RULE.—Subsection (i) of section 263A
(relating to regulations) is amended by striking ‘‘and’’ at
the end of paragraph (1), by striking the period at the
end of paragraph (2) and inserting ‘‘, and’’, and by adding
at the end thereof the following:
302
‘‘(3) regulations providing that allocations of
costs of any administrative, service, or support func-
tion or department may be made on the basis of the
base period percentage of the current costs of such
function or department.
For purposes of paragraph (3), the term ‘base period per-
centage’ means, with respect to any function or depart-
ment, the percentage of the costs of such function or de-
partment during a base period specified in regulations
which were allocable to property to which this section ap-
plies.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
the date of the enactment of this Act.
Subtitle C—Provisions Relating To
Regulated Investment Companies
SEC. 621. REPEAL OF 30-PERCENT GROSS INCOME LIMITA-
TION.
(a) GENERAL RULE.—Subsection (b) of section 851
(relating to limitations) is amended by striking paragraph
(3), by adding ‘‘and’’ at the end of paragraph (2), and
by redesignating paragraph (4) as paragraph (3).
(b) TECHNICAL AMENDMENTS.—
303
(1) The material following paragraph (3) of sec-
tion 851 (as redesignated by subsection (a)) is
amended—
(A) by striking out ‘‘paragraphs (2) and
(3)’’ and inserting ‘‘paragraph (2)’’, and
(B) by striking out the last sentence there-
of.
(2) Subsection (c) of section 851 is amended by
striking ‘‘subsection (b)(4)’’ each place it appears
(including the heading) and inserting ‘‘subsection
(b)(3)’’.
(3) Subsection (d) of section 851 is amended by
striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
(4) Paragraph (1) of section 851(e) is amended
by striking ‘‘subsection (b)(4)’’ and inserting ‘‘sub-
section (b)(3)’’.
(5) Paragraph (4) of section 851(e) is amended
by striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
(6) Section 851 is amended by striking sub-
section (g) and redesignating subsection (h) as sub-
section (g).
305
open-end regulated investment company, such return
shall include for each such disposition—
‘‘(A) the basis of the stock disposed of (de-
termined by reference to the average basis of all
of the stock in the account from which the dis-
position was made immediately before the dis-
position), and
‘‘(B) the portion of such gross proceeds at-
tributable to stock held for more than 1 year
and the portion not so attributable.
Determinations under subparagraph (B) shall be
made on a first-in, first-out, basis and determina-
tions of basis and holding period shall be made in
such manner as the Secretary may prescribe.
‘‘(2) OPEN-END REGULATED INVESTMENT COM-
PANY.—For purposes of this subsection, the term
‘open-end regulated investment company’ means any
regulated investment company which is offering for
sale or has outstanding any redeemable security (as
defined in section 2(a)(32) of the Investment Com-
pany Act of 1940) of which it is the issuer.
‘‘(3) INFORMATION TRANSFERS.—To the extent
provided in regulations, there shall be such ex-
changes of information between brokers as such reg-
306
ulations may require for purposes of enabling bro-
kers to meet the requirements of this subsection.
‘‘(4) APPLICATION OF SUBSECTION.—This sub-
section shall not apply with respect to stock in any
account—
‘‘(A) which was established before January
1, 1995, or
‘‘(B) which includes any stock not acquired
by purchase.’’
(b) BASIS FOR INCOME TAX PURPOSES.—Section
1012 of such Code is amended—
(1) by striking ‘‘The basis’’ and inserting ‘‘(a)
GENERAL RULE.—The basis’’, and
(2) by adding at the end thereof the following
new subsection:
‘‘(b) SPECIAL RULES FOR STOCK IN OPEN-END REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—In the case of any disposi-
tion of stock from a covered account—
‘‘(A) the basis of such stock shall be deter-
mined by reference to the average basis of all
of the stock in such account immediately before
such disposition, and
307
‘‘(B) the determination of which stock in
such account is so disposed of shall be made on
a first-in, first-out, basis.
‘‘(2) COVERED ACCOUNT.—For purposes of this
subsection—
‘‘(A) IN GENERAL.—The term ‘covered ac-
count’ means any account of stock in an open-
end regulated investment company if section
6045(f) applies to such account.
‘‘(B) ELECTION OUT.—The term ‘covered
account’ shall not include any account if, on the
taxpayer’s return for his first taxable year in
which a disposition from such account occurs,
the taxpayer elects to have this subsection not
apply to such account.’’
(c) COORDINATION WITH WASH SALE RULES.—Sec-
tion 1091 is amended by adding at the end thereof the
following new subsection:
‘‘(f) SPECIAL RULES FOR CERTAIN ACCOUNTS IN
OPEN-END REGULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—In applying this section to
a disposition during December of any calendar year
of stock from a covered account, any acquisition of
stock after January 15 of the following calendar
year shall be disregarded if such acquisition is a re-
308
sult of a dividend reinvestment pursuant to a divi-
dend reinvestment program established at the time
such account was opened or, if later, at least 6
months before the date of such disposition.
‘‘(2) COVERED ACCOUNT.—For purposes of this
subsection, the term ‘covered account’ means any ac-
count of stock in an open-end regulated investment
company if section 6045(f) applies to such account.’’
(d) MODIFICATION OF LOAD BASIS DEFERRAL RULE
FOR CERTAIN ACQUISITIONS OCCURRING AFTER JANU-
ARY 15.—
(1) Paragraph (1) of section 852(f) is amended
by striking ‘‘subparagraph (C)) shall not’’ and all
that follows and inserting ‘‘subparagraph (C)) shall
be recaptured as provided in paragraph (2). To the
extent such charge is recaptured under paragraph
(2), such charge shall be treated as incurred in con-
nection with the acquisition referred to in subpara-
graph (C) (including for purposes of reapplying this
paragraph).’’
(2) Subsection (f) of section 852 is amended by
redesignating paragraph (2) as paragraph (3) and
by inserting after paragraph (1) the following new
paragraph:
‘‘(2) RECAPTURE.—
309
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), any load charge required by
paragraph (1) to be recaptured shall not be
taken into account in determining the amount
of gain or loss on the disposition referred to in
paragraph (1)(B).
‘‘(B) SUBSEQUENT ACQUISITIONS OCCUR-
RING AFTER JANUARY 15.—If—
‘‘(i) the acquisition referred to in
paragraph (1)(A) occurs in a calendar
year, and
‘‘(ii) the subsequent acquisition re-
ferred to in paragraph (1)(C) occurs after
January 15 of the following calendar year,
subparagraph (A) shall not apply and the
amount of the load charge required by para-
graph (1) to be recaptured shall be included in
gross income as short-term capital gain for the
taxable year in which the subsequent acquisi-
tion referred to in paragraph (1)(C) occurs.’’
(e) TECHNICAL AMENDMENT.—Section 6724 of such
Code is amended by adding at the end thereof the follow-
ing new subsection:
‘‘(e) SPECIAL RULE FOR CERTAIN REPORTS WITH
RESPECT TO STOCK IN OPEN END REGULATED INVEST-
310
MENT
COMPANIES.—For 
purposes 
of 
sections
6721(e)(2)(B) and 6722(c)(1)(B), the amount required to
be reported under section 6045 shall be determined with-
out regard to subsection (f) thereof.’’
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to returns and statements required for
calendar year 1995 and subsequent calendar years.
(2) SUBSECTION (b).—The amendments made
by subsection (b) shall apply to dispositions after
December 31, 1994.
SEC. 623. NONRECOGNITION TREATMENT FOR CERTAIN
TRANSFERS BY COMMON TRUST FUNDS TO
REGULATED INVESTMENT COMPANIES.
(a) GENERAL RULE.—Section 584 (relating to com-
mon trust funds) is amended by redesignating subsection
(h) as subsection (i) and by inserting after subsection (g)
the following new subsection:
‘‘(h) NONRECOGNITION TREATMENT FOR CERTAIN
TRANSFERS TO REGULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a common trust fund transfers sub-
stantially all of its assets to a regulated invest-