155
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 6601(j) (relating to 4-percent rate on certain
portion of estate tax extended under section 6166),
as amended by section 501(e), are amended to read
as follows:
‘‘(1) IN GENERAL.—If the time for payment of
an amount of tax imposed by chapter 11 is extended
as provided in section 6166, then in lieu of the an-
nual rate provided by subsection (a)—
‘‘(A) no interest shall be paid on the no-
interest portion of such amount, and
‘‘(B) interest on so much of such amount
as exceeds such no-interest portion shall be paid
at a rate equal to 45 percent of the annual rate
provided by subsection (a).
For purposes of this subsection, the amount of any
deficiency which is prorated to installments payable
under section 6166 shall be treated as an amount of
tax payable in installments under such section.
‘‘(2) NO-INTEREST PORTION.—For purposes of
this section, the term ‘no-interest portion’ means the
lesser of—
‘‘(A)(i) the amount of the tentative tax
which would be determined under the rate
schedule set forth in section 2001(c) if the
156
amount with respect to which such tentative tax
is to be computed were the sum of $1,000,000
and the applicable exclusion amount in effect
under section 2010(c), reduced by
‘‘(ii) the applicable credit amount in effect
under section 2010(c), or
‘‘(B) the amount of the tax imposed by
chapter 11 which is extended as provided in
section 6166.’’.
(2) CONFORMING AMENDMENTS.—
(A) Section 6601(j), as amended by section
501, is amended—
(i) by striking ‘‘4-percent’’ each place
it appears in paragraph (3) and inserting
‘‘no-interest’’, and
(ii) by striking ‘‘4-PERCENT RATE ON
CERTAIN PORTION OF’’ in the heading and
inserting ‘‘RATE ON’’.
(B) Section 6166(b)(7)(A)(iii) is amended
to read as follows:
‘‘(iii) for purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’.
157
(C) Section 6166(b)(8)(A)(iii) is amended
to read as follows:
‘‘(iii) NO-INTEREST PORTION NOT TO
APPLY.—For purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’.
(b) DISALLOWANCE OF INTEREST DEDUCTION.—
(1) ESTATE
TAX.—Paragraph (1) of section
2053(c) is amended by adding at the end the follow-
ing new subparagraph:
‘‘(D) SECTION 6166 INTEREST.—No deduc-
tion shall be allowed under this section for any
interest payable under section 6601 on any un-
paid portion of the tax imposed by section 2001
for the period during which an extension of
time for payment of such tax is in effect under
section 6166.’’.
(2) INCOME TAX.—Subparagraph (E) of section
163(h)(2) is amended by striking ‘‘or 6166’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
December 31, 1997.
158
SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS
UNDER SECTION 2032A TO LINEAL DESCEND-
ANTS.
(a) GENERAL RULE.—Paragraph (7) of section
2032A(c) (relating to special rules for tax treatment of
dispositions and failures to use for qualified use) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) CERTAIN RENTS TREATED AS QUALI-
FIED USE.—For purposes of this subsection, a
surviving spouse or lineal descendant of the de-
cedent shall not be treated as failing to use
qualified real property in a qualified use solely
because such spouse or descendant rents such
property to a member of the family of such
spouse or descendant on a net cash basis. For
purposes of the preceding sentence, a legally
adopted child of an individual shall be treated
as the child of such individual by blood.’’.
(b) 
CONFORMING
AMENDMENT.—Section
2032A(b)(5)(A) is amended by striking the last sentence.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to leases entered into
after December 31, 1976.
159
SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGI-
BILITY FOR EXTENSION OF TIME FOR PAY-
MENT OF ESTATE TAX.
(a) IN GENERAL.—Part IV of subchapter C of chap-
ter 76 of the Internal Revenue Code of 1986 (relating to
declaratory judgments) is amended by adding at the end
the following new section:
‘‘SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELI-
GIBILITY OF ESTATE WITH RESPECT TO IN-
STALLMENT 
PAYMENTS 
UNDER 
SECTION
6166.
‘‘(a) CREATION OF REMEDY.—In a case of actual
controversy involving a determination by the Secretary of
(or a failure by the Secretary to make a determination
with respect to)—
‘‘(1) whether an election may be made under
section 6166 (relating to extension of time for pay-
ment of estate tax where estate consists largely of
interest in closely held business) with respect to an
estate, or
‘‘(2) whether the extension of time for payment
of tax provided in section 6166(a) has ceased to
apply with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court
may make a declaration with respect to whether such elec-
tion may be made, whether such extension has ceased to
160
apply, or the amount of such installment payments. Any
such declaration shall have the force and effect of a deci-
sion of the Tax Court and shall be reviewable as such.
‘‘(b) LIMITATIONS.—
‘‘(1) PETITIONER.—A pleading may be filed
under this section, with respect to any estate, only—
‘‘(A) by the executor of such estate, or
‘‘(B) by any person who has assumed an
obligation to make payments under section
6166 with respect to such estate (but only if
each other such person is joined as a party).
‘‘(2) EXHAUSTION
OF
ADMINISTRATIVE
REM-
EDIES.—The court shall not issue a declaratory
judgment or decree under this section in any pro-
ceeding unless it determines that the petitioner has
exhausted all available administrative remedies with-
in the Internal Revenue Service. A petitioner shall
be deemed to have exhausted its administrative rem-
edies with respect to a failure of the Secretary to
make a determination at the expiration of 180 days
after the date on which the request for such deter-
mination was made if the petitioner has taken, in a
timely manner, all reasonable steps to secure such
determination.
161
‘‘(3) TIME FOR BRINGING ACTION.—If the Sec-
retary sends by certified or registered mail notice of
his determination as described in subsection (a) to
the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the
91st day after the date of such mailing.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for part IV of subchapter C of chapter 76 of such Code
is amended by adding at the end the following new item:
‘‘Sec. 7479. Declaratory judgments relating to eligibility of estate
with respect to installment payments under section
6166.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to the estates of decedents dying
after the date of the enactment of this Act.
SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX
PURPOSES AFTER EXPIRATION OF STATUTE
OF LIMITATIONS.
(a) IN GENERAL.—Section 2001 (relating to imposi-
tion and rate of estate tax) is amended by adding at the
end the following new subsection:
‘‘(f) VALUATION OF GIFTS.—If—
‘‘(1) the time has expired within which a tax
may be assessed under chapter 12 (or under cor-
responding provisions of prior laws) on the transfer
of property by gift made during a preceding cal-
endar period (as defined in section 2502(b)), and
162
‘‘(2) the value of such gift is shown on the re-
turn for such preceding calendar period or is dis-
closed in such return, or in a statement attached to
the return, in a manner adequate to apprise the Sec-
retary of the nature of such gift,
the value of such gift shall, for purposes of computing the
tax under this chapter, be the value of such gift as finally
determined for purposes of chapter 12.’’.
(b) MODIFICATION OF APPLICATION OF STATUTE OF
LIMITATIONS.—Paragraph (9) of section 6501(c) is
amended to read as follows:
‘‘(9) GIFT TAX ON CERTAIN GIFTS NOT SHOWN
ON RETURN.—If any gift of property the value of
which (or any increase in taxable gifts required
under section 2701(d) which) is required to be
shown on a return of tax imposed by chapter 12
(without regard to section 2503(b)), and is not
shown on such return, any tax imposed by chapter
12 on such gift may be assessed, or a proceeding in
court for the collection of such tax may be begun
without assessment, at any time. The preceding sen-
tence shall not apply to any item which is disclosed
in such return, or in a statement attached to the re-
turn, in a manner adequate to apprise the Secretary
of the nature of such item. The value of any item
163
which is so disclosed may not be redetermined by the
Secretary after the expiration of the period under
subsection (a).’’.
(c) DECLARATORY JUDGMENT PROCEDURE FOR DE-
TERMINING VALUE OF GIFT.—
(1) IN GENERAL.—Part IV of subchapter C of
chapter 76 is amended by inserting after section
7476 the following new section:
‘‘SEC. 7477. DECLARATORY JUDGMENTS RELATING TO
VALUE OF CERTAIN GIFTS.
‘‘(a) CREATION OF REMEDY.—In a case of an actual
controversy involving a determination by the Secretary of
the value of any gift shown on the return of tax imposed
by chapter 12 or disclosed on such return or in any state-
ment attached to such return, upon the filing of an appro-
priate pleading, the Tax Court may make a declaration
of the value of such gift. Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(b) LIMITATIONS.—
‘‘(1) PETITIONER.—A pleading may be filed
under this section only by the donor.
‘‘(2) EXHAUSTION
OF
ADMINISTRATIVE
REM-
EDIES.—The court shall not issue a declaratory
judgment or decree under this section in any pro-
164
ceeding unless it determines that the petitioner has
exhausted all available administrative remedies with-
in the Internal Revenue Service.
‘‘(3) TIME FOR BRINGING ACTION.—If the Sec-
retary sends by certified or registered mail notice of
his determination as described in subsection (a) to
the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the
91st day after the date of such mailing.’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for such part IV is amended by inserting after
the item relating to section 7476 the following new
item:
‘‘Sec. 7477. Declaratory judgments relating to value of certain
gifts.’’.
(d) CONFORMING AMENDMENT.—Subsection (c) of
section 2504 is amended by striking ‘‘, and if a tax under
this chapter or under corresponding provisions of prior
laws has been assessed or paid for such preceding calendar
period’’.
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a) and (c) shall apply to gifts made
after the date of the enactment of this Act.
(2) SUBSECTION (b)—The amendment made by
subsection (b) shall apply to gifts made in calendar
165
years ending after the date of the enactment of this
Act.
SEC. 507. TERMINATION OF THROWBACK RULES FOR DO-
MESTIC TRUSTS.
(a) ACCUMULATION DISTRIBUTIONS.—
(1) IN GENERAL.—Section 665 is amended by
adding at the end the following new subsection:
‘‘(f) SPECIAL RULE FOR UNITED STATES TRUSTS.—
For purposes of this subpart, in the case of a trust other
than a foreign trust, any distribution in any taxable year
beginning after the date of the enactment of this sub-
section shall be computed without regard to any undistrib-
uted net income.’’.
(2) CONFORMING AMENDMENT.—Subsection (b)
of section 665 is amended by inserting ‘‘except as
provided in subsection (f),’’ after ‘‘subpart,’’.
(b) PROPERTY TRANSFERRED
TO TRUSTS.—Sub-
section (e) of section 644 is amended by striking ‘‘or’’ at
the end of paragraph (3), by striking the period at the
end of paragraph (4) and inserting ‘‘, or ’’, and by adding
at the end the following new paragraph:
‘‘(5) in the case of a trust other than a foreign
trust, any sale or exchange of property after the
date of the enactment of this paragraph.’’.
(c) EFFECTIVE DATES.—
166
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to distributions in taxable years begin-
ning after the date of the enactment of this Act.
(2) TRANSFERRED
PROPERTY.—The amend-
ments made by subsection (b) shall apply to sales or
exchanges after the date of the enactment of this
Act.
SEC. 508. UNIFIED CREDIT OF DECEDENT INCREASED BY
UNIFIED CREDIT OF SPOUSE USED ON SPLIT
GIFT INCLUDED IN DECEDENT’S GROSS ES-
TATE.
(a) IN GENERAL.—Section 2010 (relating to unified
credit against estate tax) is amended by adding at the end
the following new subsection:
‘‘(d) TREATMENT OF UNIFIED CREDIT USED BY
SPOUSE
ON
SPLIT-GIFT
INCLUDED
IN
DECEDENT’S
GROSS ESTATE.—If—
‘‘(1) the decedent was the donor of any gift
one-half of which was considered under section 2513
as made by the decedent’s spouse, and
‘‘(2) the amount of such gift is includible in the
gross estate of the decedent by reason of section
2035, 2036, 2037, or 2038,
168
construction, or otherwise) as of the appli-
cable date which results in the satisfaction
of the requirements of such provision as of
the date of the decedent’s death,
the determination of whether such deduction is
allowable shall be made as of the applicable
date.
‘‘(B) SPECIAL RULE WHERE TIMELY COM-
MENCEMENT
OF
REFORMATION.—Clauses (i)
and (ii) of subparagraph (A) shall not apply to
any interest if, not later than the date described
in subparagraph (C)(i), a judicial proceeding is
commenced to change such interest into an in-
terest which satisfies the requirements of the
provision by reason of which (but for this para-
graph) a deduction would not be allowable
under subsection (a) for such interest.
‘‘(C) APPLICABLE DATE.—For purposes of
subparagraph (A), the term ‘applicable date’
means—
‘‘(i) the last date (including exten-
sions) for filing the return of tax imposed
by this chapter, or
‘‘(ii) if a judicial proceeding is com-
menced to comply with such provision, the
169
time when the changes pursuant to such
proceeding are made.
‘‘(D) SPECIAL RULE.—If the change re-
ferred to in subparagraph (A)(iii) is to qualify
the passage of the interest under paragraph
(7), subparagraph (A) shall apply only if the
election under paragraph (7)(B) is made.
‘‘(E) STATUTE OF LIMITATIONS.—If a ju-
dicial proceeding described in subparagraph
(C)(ii) is commenced with respect to any inter-
est, the period for assessing any deficiency of
tax attributable to such interest shall not expire
before the date 1 year after the date on which
the Secretary is notified that such provision has
been complied with or that such proceeding has
been terminated.’’.
(b) COMPARABLE RULE FOR GIFT TAX.—Section
2523 (relating to gift to spouse) is amended by adding
at the end the following new subsection:
‘‘(j) REFORMATIONS PERMITTED.—Rules similar to
the rules of section 2056(b)(11) shall apply for purposes
of this section.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying, and
gifts made, after the date of the enactment of this Act.
170
Subtitle B—Generation-Skipping
Tax Provisions
SEC. 511. SEVERING OF TRUSTS HOLDING PROPERTY HAV-
ING AN INCLUSION RATIO OF GREATER THAN
ZERO.
(a) IN GENERAL.—Subsection (a) of section 2642
(relating to inclusion ratio) is amended by adding at the
end the following new paragraph:
‘‘(3) SEVERING OF TRUSTS HOLDING PROPERTY
HAVING AN INCLUSION RATIO OF GREATER THAN
ZERO.—
‘‘(A) IN
GENERAL.—If a trust holding
property having an inclusion ratio of greater
than zero is severed in a qualified severance, at
the election of the trustee of such trust, the
trusts resulting from such severance shall be
treated as separate trusts for purposes of this
chapter and 1 such trust shall have an inclusion
ratio of 1 and the other such trust shall have
an inclusion ratio of zero.
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A), the term ‘qualified
severance’ means the creation of 2 trusts from
a single trust if each property held by the single
trust was divided between the 2 created trusts
171
such that one trust received an interest in each
such property equal to the applicable fraction of
the single trust. Such term includes any other
severance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) ELECTION.—The election under this
paragraph shall be made at the time prescribed
by the Secretary. Such an election, once made,
shall be irrevocable.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to severances after the date of
the enactment of this Act.
SEC. 512. EXPANSION OF EXCEPTION FROM GENERATION-
SKIPPING TRANSFER TAX FOR TRANSFERS
TO INDIVIDUALS WITH DECEASED PARENTS.
(a) IN GENERAL.—Section 2651 (relating to genera-
tion assignment) is amended by redesignating subsection
(e) as subsection (f), and by inserting after subsection (d)
the following new subsection:
‘‘(e) SPECIAL RULE
FOR PERSONS WITH
A DE-
CEASED PARENT.—
‘‘(1) IN GENERAL.—For purposes of determin-
ing whether any transfer is a generation-skipping
transfer, if—
172
‘‘(A) an individual is a descendant of a
parent of the transferor (or the transferor’s
spouse or former spouse), and
‘‘(B) such individual’s parent who is a lin-
eal descendant of the parent of the transferor
(or the transferor’s spouse or former spouse) is
dead at the time the transfer (from which an
interest of such individual is established or de-
rived) is subject to a tax imposed by chapter 11
or 12 upon the transferor (and if there shall be
more than 1 such time, then at the earliest
such time),
such individual shall be treated as if such individual
were a member of the generation which is 1 genera-
tion below the lower of the transferor’s generation or
the generation assignment of the youngest living an-
cestor of such individual who is also a descendant of
the parent of the transferor (or the transferor’s
spouse or former spouse), and the generation assign-
ment of any descendant of such individual shall be
adjusted accordingly.
‘‘(2) LIMITED APPLICATION OF SUBSECTION TO
COLLATERAL
HEIRS.—This subsection shall not
apply with respect to a transfer to any individual
who is not a lineal descendant of the transferor (or
173
the transferor’s spouse or former spouse) if, at the
time of the transfer, such transferor has any living
lineal descendant.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 2612(c) (defining direct skip) is
amended by striking paragraph (2) and by redesig-
nating paragraph (3) as paragraph (2).
(2) Section 2612(c)(2) (as so redesignated) is
amended by striking ‘‘section 2651(e)(2)’’ and in-
serting ‘‘section 2651(f)(2)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to terminations, distributions, and
transfers occurring after December 31, 1997.
TITLE VI—EXTENSIONS
SEC. 601. RESEARCH TAX CREDIT.
(a) IN GENERAL.—Paragraph (1) of section 41(h)
(relating to termination) is amended—
(1) by striking ‘‘May 31, 1997’’ and inserting
‘‘December 31, 1998’’, and
(2) by striking in the last sentence ‘‘during the
first 11 months of such taxable year.’’ and inserting
‘‘during the 30-month period beginning with the
first month of such year. The 30 months referred to
in the preceding sentence shall be reduced by the
number of full months after June 1996 (and before
174
the first month of such first taxable year) during
which the taxpayer paid or incurred any amount
which is taken into account in determining the credit
under this section.’’.
(b) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 41(c)(4) is
amended to read as follows:
‘‘(B) ELECTION.—An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the Sec-
retary.’’.
(2) Paragraph (1) of section 45C(b) is amended
by striking ‘‘May 31, 1997’’ and inserting ‘‘Decem-
ber 31, 1998’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts paid or incurred after
May 31, 1997.
SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDA-
TIONS.
(a) 
IN
GENERAL.—Clause 
(ii) 
of 
section
170(e)(5)(D) (relating to termination) is amended by
striking ‘‘May 31, 1997’’ and inserting ‘‘December 31,
1998’’.
175
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to contributions made after May
31, 1997.
SEC. 603. WORK OPPORTUNITY TAX CREDIT.
(a) EXTENSION.—
(1) IN GENERAL.—Subparagraph (B) of section
51(c)(4) (relating to termination) is amended by
striking ‘‘September 30, 1997’’ and inserting ‘‘Sep-
tember 30, 1998’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to individuals who
begin work for the employer after September 30,
1997.
(b) 
WORK
OPPORTUNITY
CREDIT
ALLOWED
AGAINST MINIMUM TAX.—
(1) IN GENERAL.—Subsection (c) of section 38
(relating to limitation based on amount of tax) is
amended by redesignating paragraph (3) as para-
graph (4) and by inserting after paragraph (2) the
following new paragraph:
‘‘(3) SPECIAL RULES FOR WORK OPPORTUNITY
CREDIT.—
‘‘(A) IN
GENERAL.—In the case of the
work opportunity credit—
176
‘‘(i) this section and section 39 shall
be applied separately with respect to the
credit, and
‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) subparagraph (A) shall not
apply, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the
taxable year (other than the work op-
portunity credit).
‘‘(B) WORK
OPPORTUNITY
CREDIT.—For
purposes of this subsection, the term ‘work op-
portunity credit’ means the credit allowable
under subsection (a) by reason of section
51(a).’’.
(2) CONFORMING AMENDMENT.—Subclause (II)
of section 38(c)(2)(A)(ii) is amended by inserting
‘‘or the work opportunity credit’’ after ‘‘employment
credit’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to taxable years begin-
ning after December 31, 1997.
177
(c) PERCENTAGE OF WAGES ALLOWED AS CRED-
IT.—
(1) IN GENERAL.—Subsection (a) of section 51
(relating to determination of amount) is amended by
striking ‘‘35 percent’’ and inserting ‘‘40 percent’’.
(2) APPLICATION OF CREDIT FOR INDIVIDUALS
PERFORMING
FEWER
THAN
400
HOURS
OF
SERV-
ICES.—Paragraph (3) of section 51(i) is amended to
read as follows:
‘‘(3) INDIVIDUALS NOT MEETING MINIMUM EM-
PLOYMENT PERIODS.—
‘‘(A) REDUCTION OF CREDIT FOR INDIVID-
UALS PERFORMING FEWER THAN 400 HOURS OF
SERVICES.—In the case of an individual who
has completed at least 120 hours, but less than
400 hours, of services performed for the em-
ployer, subsection (a) shall be applied by sub-
stituting ‘25 percent’ for ‘40 percent’.
‘‘(B) DENIAL OF CREDIT FOR INDIVIDUALS
PERFORMING
FEWER
THAN
120
HOURS
OF
SERVICES.—No wages shall be taken into ac-
count under subsection (a) with respect to any
individual unless such individual has completed
at least 120 hours of services performed for the
employer.’’.
178
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
begin work for the employer after September 30,
1997.
(d) MODIFICATION OF ELIGIBILITY REQUIREMENT
BASED ON PERIOD ON WELFARE.—
(1) IN GENERAL.—Subparagraph (A) of section
51(d)(2) (defining qualified IV–A recipient) is
amended by striking all that follows ‘‘a IV–A pro-
gram’’ and inserting ‘‘for any 9 months during the
18-month period ending on the hiring date.’’.
(2) CONFORMING AMENDMENT.—Subparagraph
(A) of section 51(d)(3) is amended to read as fol-
lows:
‘‘(A) IN
GENERAL.—The term ‘qualified
veteran’ means any veteran who is certified by
the designated local agency as being a member
of a family receiving assistance under a food
stamp program under the Food Stamp Act of
1977 for at least a 3-month period ending dur-
ing the 12-month period ending on the hiring
date.’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
179
begin work for the employer after September 30,
1997.
SEC. 604. ORPHAN DRUG TAX CREDIT.
(a) IN GENERAL.—Section 45C (relating to clinical
testing expenses for certain drugs for rare diseases or con-
ditions) is amended by striking subsection (e).
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts paid or incurred
after May 31, 1997.
SEC. 605. BUDGETARY TREATMENT OF EXPIRING PREF-
ERENTIAL EXCISE TAX RATES WHICH ARE
DEDICATED TO TRUST FUNDS.
(a) IN GENERAL.—Subparagraph (C) of section
257(b)(2) of the Balanced Budget and Emergency Deficit
Control Act of 1985 (relating to the baseline) is amended
by inserting before the period ‘‘; except that any expiring
preferential rate (and any credit or refund related thereto)
shall be assumed not to be extended’’.
(b) ESTIMATE OF REVENUE GAIN FROM CORRECT-
ING BASELINE.—For purposes of estimating revenues
under budget reconciliation, the impact of the amendment
made by subsection (a) on the calculation of the baseline
shall be determined in the same manner as if such amend-
ment were an amendment to the Internal Revenue Code
of 1986.
180
(c) BUDGET ACT POINT OF ORDER.—For purposes
of section 311(a) of the Congressional Budget Act of
1974, the appropriate level of revenues shall be deter-
mined on the assumption that any expiring preferential
rate (and any credit or refund related thereto) of any ex-
cise tax dedicated to a trust fund shall expire according
to current law.
(d) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to budget years beginning after
the date of the enactment of this Act.
TITLE VII—INCENTIVES FOR RE-
VITALIZATION OF THE DIS-
TRICT OF COLUMBIA
SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE
DISTRICT OF COLUMBIA.
(a) IN GENERAL.—Chapter 1 is amended by adding
at the end the following new subchapter:
‘‘Subchapter W—District of Columbia
Enterprise Zone
‘‘Sec. 1400.
Establishment of DC Zone.
‘‘Sec. 1400A. Tax-exempt economic development bonds.
‘‘Sec. 1400B. Credit for equity investments in and loans to Dis-
trict of Columbia businesses.
‘‘Sec. 1400C. Zero percent capital gains rate.
‘‘Sec. 1400D. Credit to provide equivalent of 10 percent rate
bracket in lieu of 15 percent bracket.
‘‘SEC. 1400. ESTABLISHMENT OF DC ZONE.
‘‘(a) IN GENERAL.—The applicable DC area is here-
by designated as the District of Columbia Enterprise
181
Zone. For purposes of this title (except as otherwise pro-
vided in this subchapter), the District of Columbia Enter-
prise Zone shall be treated as an empowerment zone des-
ignated under subchapter U.
‘‘(b) APPLICABLE DC AREA.—For purposes of sub-
section (a), the term ‘applicable DC area’ means the area
consisting of—
‘‘(1) the census tracts located in the District of
Columbia which are part of an enterprise community
designated under subchapter U before the date of
the enactment of this subchapter, and
‘‘(2) all other census tracts—
‘‘(A) which are located in the District of
Columbia, and
‘‘(B) for which the poverty rate is not less
than 35 percent.
‘‘(c) DISTRICT OF COLUMBIA ENTERPRISE ZONE.—
For purposes of this subchapter, the terms ‘District of Co-
lumbia Enterprise Zone’ and ‘DC Zone’ mean the District
of Columbia Enterprise Zone designated by subsection (a).
‘‘(d) SPECIAL RULE FOR APPLICATION OF EMPLOY-
MENT CREDIT.—In the case of the DC Zone, section 1396
(relating to empowerment zone employment credit) shall
be applied by substituting ‘‘20’’ for ‘‘15’’ in the table con-
tained in section 1396(b). The preceding sentence shall
182
apply only with respect to qualified zone employees, as de-
fined in section 1396(d), determined by treating no area
other than the DC Zone as an empowerment zone or en-
terprise community.
‘‘(e) TIME FOR WHICH DESIGNATION APPLICA-
BLE.—
‘‘(1) IN GENERAL.—The designation made by
subsection (a) shall apply for the period beginning
on January 1, 1998, and ending on December 31,
2002.
‘‘(2) COORDINATION
WITH
DC
ENTERPRISE
COMMUNITY DESIGNATED UNDER SUBCHAPTER U.—
The designation as an enterprise community, under
subchapter U, of the census tracts referred to in
subsection (b)(1) shall terminate on December 31,
2002.
‘‘SEC. 
1400A. 
TAX-EXEMPT 
ECONOMIC 
DEVELOPMENT
BONDS.
‘‘(a) IN GENERAL.—In the case of the District of Co-
lumbia Enterprise Zone—
‘‘(1) subsection (a) of section 1394 (relating to
tax-exempt facility bonds for empowerment zones
and enterprise communities) applies only with re-
spect to bonds issued by the Economic Development
Corporation, and
183
‘‘(2) subparagraph (A) of section 1394(c)(1)
(relating to limitation on amount of bonds) shall be
applied 
by 
substituting 
‘$15,000,000’ 
for
‘$3,000,000’.
‘‘(b) ECONOMIC DEVELOPMENT CORPORATION.—For
purposes of this section, the term ‘Economic Development
Corporation’ means an entity which is created by Federal
law in 1997 as part of the District of Columbia govern-
ment.
‘‘(c) PERIOD OF APPLICABILITY.—This section shall
apply to bonds issued during the period beginning on Jan-
uary 1, 1998, and ending on December 31, 2002.
‘‘SEC. 1400B. CREDIT FOR EQUITY INVESTMENTS IN AND
LOANS TO DISTRICT OF COLUMBIA BUSI-
NESSES.
‘‘(a) GENERAL RULE.—For purposes of section 38,
the DC Zone investment credit determined under this sec-
tion for any taxable year is—
‘‘(1) the qualified lender credit for such year,
and
‘‘(2) the qualified equity investment credit for
such year.
‘‘(b) QUALIFIED LENDER CREDIT.—For purposes of
this section—
184
‘‘(1) IN GENERAL.—The qualified lender credit
for any taxable year is the amount of credit specified
for such year by the Economic Development Cor-
poration with respect to qualified District loans
made by the taxpayer.
‘‘(2) LIMITATION.—In no event may the quali-
fied lender credit with respect to any loan exceed 25
percent of the cost of the property purchased with
the proceeds of the loan.
‘‘(3) QUALIFIED
DISTRICT
LOAN.—For pur-
poses of paragraph (1), the term ‘qualified district
loan’ means any loan for the purchase (as defined in
section 179(d)(2)) of property to which section 168
applies (or would apply but for section 179) (or land
which is functionally related and subordinate to such
property) and substantially all of the use of which
is in the District of Columbia and is in the active
conduct of a trade or business in the District of Co-
lumbia. A rule similar to the rule of section
1397C(a)(2) shall apply for purposes of the preced-
ing sentence.
‘‘(c) QUALIFIED EQUITY INVESTMENT CREDIT.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the qualified equity investment credit deter-
mined under this section for any taxable year is an
185
amount equal to the percentage specified by the
Economic Development Corporation (but not greater
than 25 percent) of the aggregate amount paid in
cash by the taxpayer during the taxable year for the
purchase of District business investments.
‘‘(2) DISTRICT
BUSINESS
INVESTMENT.—For
purposes of this subsection, the term ‘District busi-
ness investment’ means—
‘‘(A) any District business stock, and
‘‘(B) any District partnership interest.
‘‘(3) DISTRICT
BUSINESS
STOCK.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘District business
stock’ means any stock in a domestic corpora-
tion if—
‘‘(i) such stock is acquired by the tax-
payer at its original issue (directly or
through an underwriter) solely in exchange
for cash, and
‘‘(ii) as of the time such stock was is-
sued, such corporation was engaged in a
trade or business in the District of Colum-
bia (or, in the case of a new corporation,
such corporation was being organized for
186
purposes of engaging in such a trade or
business).
‘‘(B) REDEMPTIONS.—A rule similar to
the rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
‘‘(4) QUALIFIED
DISTRICT
PARTNERSHIP
IN-
TEREST.—For purposes of this subsection, the term
‘qualified District partnership interest’ means any
interest in a partnership if—
‘‘(A) such interest is acquired by the tax-
payer from the partnership solely in exchange
for cash, and
‘‘(B) as of the time such interest was ac-
quired, such partnership was engaging in a
trade or business in the District of Columbia
(or, in the case of a new partnership, such part-
nership was being organized for purposes of en-
gaging in such a trade or business).
A rule similar to the rule of paragraph (3)(B) shall
apply for purposes of this paragraph.
‘‘(5) RECAPTURE
OF
CREDIT
UPON
CERTAIN
DISPOSITIONS
OF
DISTRICT
BUSINESS
INVEST-
MENTS.—
‘‘(A) IN GENERAL.—If a taxpayer disposes
of any District business investment (or any
187
other property the basis of which is determined
in whole or in part by reference to the adjusted
basis of such investment) before the end of the
5-year period beginning on the date such invest-
ment was acquired by the taxpayer, the tax-
payer’s tax imposed by this chapter for the tax-
able year in which such distribution occurs shall
be increased by the aggregate decrease in the
credits allowed under section 38 for all prior
taxable years which would have resulted solely
from reducing to zero any credit determined
under this section with respect to such invest-
ment.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply to any gift, transfer, or trans-
action described in paragraph (1), (2), or (3) of
section 1245(b).
‘‘(C) SPECIAL RULE.—Any increase in tax
under subparagraph (A) shall not be treated as
a tax imposed by this chapter for purposes of—
‘‘(i) determining the amount of any
credit allowable under this chapter, and
‘‘(ii) determining the amount of the
tax imposed by section 55.
188
‘‘(6) BASIS REDUCTION.—For purposes of this
title, the basis of any District business investment
shall be reduced by the amount of the credit deter-
mined under this section with respect to such invest-
ment.
‘‘(d) LIMITATION ON AMOUNT OF CREDIT.—
‘‘(1) IN
GENERAL.—The amount of the DC
Zone investment credit determined under this sec-
tion with respect to any taxpayer for any taxable
year shall not exceed the credit amount allocated to
such taxpayer for such taxable year by the Economic
Development Corporation.
‘‘(2) OVERALL
LIMITATION.—The aggregate
credit amount which may be allocated by the Eco-
nomic Development Corporation under this section
shall not exceed $75,000,000.
‘‘(3) 
CRITERIA
FOR
ALLOCATING
CREDIT
AMOUNTS.—The allocation of credit amounts under
this section shall be made in accordance with criteria
established by the Economic Development Corpora-
tion. In establishing such criteria, such Corporation
shall take into account—
‘‘(A) the degree to which the business re-
ceiving the loan or investment will provide job
189
opportunities for low and moderate income resi-
dents of the DC Zone, and
‘‘(B) whether such business is within the
DC Zone.
‘‘(e) ECONOMIC DEVELOPMENT CORPORATION.—For
purposes of this section, the term ‘Economic Development
Corporation’ has the meaning given such term by section
1400A(b).
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out this
section.
‘‘(g) APPLICATION OF SECTION.—This section shall
apply to any credit amount allocated for taxable years be-
ginning after December 31, 1997, and before January 1,
2003.
‘‘SEC. 1400C. ZERO PERCENT CAPITAL GAINS RATE.
‘‘(a) EXCLUSION.—Gross income shall not include
qualified capital gain from the sale or exchange of any
DC Zone asset held for more than 5 years.
‘‘(b) DC ZONE ASSET.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The term ‘DC Zone asset’
means—
‘‘(A) any DC Zone business stock,
190
‘‘(B) any DC Zone partnership interest,
and
‘‘(C) any DC Zone business property.
‘‘(2) DC ZONE BUSINESS STOCK.—
‘‘(A) IN GENERAL.—The term ‘DC Zone
business stock’ means any stock in a domestic
corporation which is originally issued after De-
cember 31, 1997, if—
‘‘(i) such stock is acquired by the tax-
payer, before January 1, 2003, at its origi-
nal issue (directly or through an under-
writer) solely in exchange for cash,
‘‘(ii) as of the time such stock was is-
sued, such corporation was a DC Zone
business (or, in the case of a new corpora-
tion, such corporation was being organized
for purposes of being a DC Zone business),
and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such stock,
such corporation qualified as a DC Zone
business.
‘‘(B) REDEMPTIONS.—A rule similar to
the rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
191
‘‘(3) DC ZONE PARTNERSHIP INTEREST.—The
term ‘DC Zone partnership interest’ means any cap-
ital or profits interest in a domestic partnership
which is originally issued after December 31, 1997,
if—
‘‘(A) such interest is acquired by the tax-
payer, before January 1, 2003, from the part-
nership solely in exchange for cash,
‘‘(B) as of the time such interest was ac-
quired, such partnership was a DC Zone busi-
ness (or, in the case of a new partnership, such
partnership was being organized for purposes of
being a DC Zone business), and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as a DC Zone business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
‘‘(4) DC ZONE BUSINESS PROPERTY.—
‘‘(A) IN GENERAL.—The term ‘DC Zone
business property’ means tangible property if—
‘‘(i) such property was acquired by
the taxpayer by purchase (as defined in
section 179(d)(2)) after December 31,
1997, and before January 1, 2003,
192
‘‘(ii) the original use of such property
in the DC Zone commences with the tax-
payer, and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such prop-
erty, substantially all of the use of such
property was in a DC Zone business of the
taxpayer.
‘‘(B) SPECIAL
RULE
FOR
BUILDINGS
WHICH ARE SUBSTANTIALLY IMPROVED.—
‘‘(i) IN GENERAL.—The requirements
of clauses (i) and (ii) of subparagraph (A)
shall be treated as met with respect to—
‘‘(I) property which is substan-
tially improved by the taxpayer before
January 1, 2003, and
‘‘(II) any land on which such
property is located.
‘‘(ii) SUBSTANTIAL IMPROVEMENT.—
For purposes of clause (i), property shall
be treated as substantially improved by the
taxpayer only if, during any 24-month pe-
riod beginning after December 31, 1997,
additions to basis with respect to such
193
property in the hands of the taxpayer ex-
ceed the greater of—
‘‘(I) an amount equal to the ad-
justed basis of such property at the
beginning of such 24-month period in
the hands of the taxpayer, or
‘‘(II) $5,000.
‘‘(6) 
TREATMENT
OF
SUBSEQUENT
PUR-
CHASERS, ETC.—The term ‘DC Zone asset’ includes
any property which would be a DC Zone asset but
for paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) in the
hands of the taxpayer if such property was a DC
Zone asset in the hands of a prior holder.
‘‘(7) 5-YEAR SAFE HARBOR.—If any property
ceases to be a DC Zone asset by reason of para-
graph (2)(A)(iii), (3)(C), or (4)(A)(iii) after the 5-
year period beginning on the date the taxpayer ac-
quired such property, such property shall continue to
be treated as meeting the requirements of such
paragraph; except that the amount of gain to which
subsection (a) applies on any sale or exchange of
such property shall not exceed the amount which
would be qualified capital gain had such property
been sold on the date of such cessation.
194
‘‘(c) DC ZONE BUSINESS.—For purposes of this sec-
tion, the term ‘DC Zone business’ means any entity which
is an enterprise zone business (as defined in section
1397B), determined by treating no area other than the
DC Zone as an empowerment zone or enterprise commu-
nity.
‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) QUALIFIED
CAPITAL
GAIN.—Except as
otherwise provided in this subsection, the term
‘qualified capital gain’ means any gain recognized on
the sale or exchange of—
‘‘(A) a capital asset, or
‘‘(B) property used in the trade or busi-
ness (as defined in section 1231(b)).
‘‘(2) GAIN BEFORE 1998 OR AFTER 2007 NOT
QUALIFIED.—The term ‘qualified capital gain’ shall
not include any gain attributable to periods before
January 1, 1998, or after December 31, 2007.
‘‘(3) CERTAIN GAIN ON REAL PROPERTY NOT
QUALIFIED.—The term ‘qualified capital gain’ shall
not include any gain which would be treated as ordi-
nary income under section 1250 if section 1250 ap-
plied to all depreciation rather than the additional
depreciation.
195
‘‘(4) INTANGIBLES AND LAND NOT INTEGRAL
PART OF DC ZONE BUSINESS.—The term ‘qualified
capital gain’ shall not include any gain which is at-
tributable to real property, or an intangible asset,
which is not an integral part of a DC Zone business.
‘‘(5) RELATED
PARTY
TRANSACTIONS.—The
term ‘qualified capital gain’ shall not include any
gain attributable, directly or indirectly, in whole or
in part, to a transaction with a related person. For
purposes of this paragraph, persons are related to
each other if such persons are described in section
267(b) or 707(b)(1).
‘‘(e) CERTAIN OTHER RULES TO APPLY.—Rules
similar to the rules of subsections (g), (h), (i)(2), and (j)
of section 1202 shall apply for purposes of this section.
‘‘(f) SALES
AND EXCHANGES
OF INTERESTS
IN
PARTNERSHIPS AND S CORPORATIONS WHICH ARE DC
ZONE BUSINESSES.—In the case of the sale or exchange
of an interest in a partnership, or of stock in an S corpora-
tion, which was a DC Zone business during substantially
all of the period the taxpayer held such interest or stock,
the amount of qualified capital gain shall be determined
without regard to—
196
‘‘(1) any gain which is attributable to real prop-
erty, or an intangible asset, which is not an integral
part of a DC Zone business, and
‘‘(2) any gain attributable to periods before
January 1, 1998, or after December 31, 2007.
‘‘SEC. 1400D. CREDIT TO PROVIDE EQUIVALENT OF 10 PER-
CENT RATE BRACKET IN LIEU OF 15 PER-
CENT BRACKET.
‘‘(a) IN GENERAL.—In the case of a DC Zone indi-
vidual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year an amount
equal to 5 percent of so much of the taxpayer’s taxable
income for the year as does not exceed the highest amount
of such income which is subject to the 15 percent rate
under section 1.
‘‘(b) DC ZONE INDIVIDUAL.—For purposes of this
section, the term ‘DC Zone individual’ means an individ-
ual who has a principal place of abode in the District of
Columbia Enterprise Zone for not less than 183 days of
the taxable year.
‘‘(c) CREDIT
NOT
TO
APPLY
TO
ESTATE
OR
TRUST.—This section shall not apply to an estate or trust.
‘‘(d) COORDINATION WITH OTHER CREDITS.—For
purposes of this chapter, the credit under this section shall
197
be treated as a credit under subpart A of part IV of sub-
chapter A.
‘‘(e) TERMINATION.—This section shall not apply to
any taxable year beginning after December 31, 2007.’’.
(b) CREDITS MADE PART OF GENERAL BUSINESS
CREDIT.—
(1) Subsection (b) of section 38 is amended by
striking ‘‘plus’’ at the end of paragraph (11), by
striking the period at the end of paragraph (12) and
inserting ‘‘, plus’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(13) the DC Zone investment credit deter-
mined under section 1400B(a).’’.
(2) Subsection (d) of section 39 is amended by
adding at the end the following new paragraph:
‘‘(8) NO CARRYBACK OF DC ZONE CREDITS BE-
FORE EFFECTIVE DATE.—No portion of the unused
business credit for any taxable year which is attrib-
utable to the credit under section 1400B, or to the
credits under subchapter U by reason of section
1400, may be carried back to a taxable year ending
before the date of the enactment of sections 1400B
and 1400.’’.
(3) Subsection (c) of section 196 is amended by
striking ‘‘and’’ at the end of paragraph (6), by strik-
198
ing the period at the end of paragraph (7) and in-
serting ‘‘, and’’, and by adding at the end the follow-
ing new paragraph:
‘‘(8) the DC Zone investment credit determined
under section 1400B(a).’’.
(c) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 1 is amended by adding at the end
the following new item:
‘‘Subchapter W. District of Columbia Enterprise Zone.’’.
(d) EFFECTIVE DATE.—This section shall take effect
on the date of the enactment of this Act.
SEC. 702. INCENTIVES CONDITIONED ON OTHER DC RE-
FORM.
The amendments made by section 701 shall not take
effect unless an entity known as the Economic Develop-
ment Corporation is created by Federal law in 1997 as
part of the District of Columbia government.
TITLE VIII—WELFARE-TO-WORK
INCENTIVES
SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAM-
ILY ASSISTANCE RECIPIENTS.
(a) IN GENERAL.—Subpart F of part IV of sub-
chapter A of chapter 1 is amended by inserting after sec-
tion 51 the following new section:
199
‘‘SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING
LONG-TERM 
FAMILY 
ASSISTANCE 
RECIPI-
ENTS.
‘‘(a) DETERMINATION OF AMOUNT.—For purposes of
section 38, the amount of the welfare-to-work credit deter-
mined under this section for the taxable year shall be
equal to—
‘‘(1) 35 percent of the qualified first-year wages
for such year, and
‘‘(2) 50 percent of the qualified second-year
wages for such year.
‘‘(b) QUALIFIED WAGES DEFINED.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘qualified wages’
means the wages paid or incurred by the employer
during the taxable year to individuals who are long-
term family assistance recipients.
‘‘(2) QUALIFIED
FIRST-YEAR
WAGES.—The
term ‘qualified first-year wages’ means, with respect
to any individual, qualified wages attributable to
service rendered during the 1-year period beginning
with the day the individual begins work for the em-
ployer.
‘‘(3) QUALIFIED
SECOND-YEAR
WAGES.—The
term ‘qualified second-year wages’ means, with re-
spect to any individual, qualified wages attributable
200
to service rendered during the 1-year period begin-
ning on the day after the last day of the 1-year pe-
riod with respect to such individual determined
under paragraph (2).
‘‘(4) ONLY FIRST $10,000 OF WAGES PER YEAR
TAKEN INTO ACCOUNT.—The amount of the quali-
fied first-year wages, and the amount of qualified
second-year wages, which may be taken into account
with respect to any individual shall not exceed
$10,000 per year.
‘‘(5) WAGES.—
‘‘(A) IN GENERAL.—The term ‘wages’ has
the meaning given such term by section 51(c),
without regard to paragraph (4) thereof.
‘‘(B) CERTAIN
AMOUNTS
TREATED
AS
WAGES.—The term ‘wages’ includes amounts
paid or incurred by the employer which are ex-
cludable from such recipient’s gross income
under—
‘‘(i) section 105 (relating to amounts
received under accident and health plans),
‘‘(ii) section 106 (relating to contribu-
tions by employer to accident and health
plans),
201
‘‘(iii) section 127 (relating to edu-
cational assistance programs) or would be
so excludable but for section 127(d), but
only to the extent paid or incurred to a
person not related to the employer, or
‘‘(iv) section 129 (relating to depend-
ent care assistance programs).
The amount treated as wages by clause (i) or
(ii) for any period shall be based on the reason-
able cost of coverage for the period, but shall
not exceed the applicable premium for the pe-
riod under section 4980B(f)(4).
‘‘(C) SPECIAL RULES FOR AGRICULTURAL
AND RAILWAY LABOR.—If such recipient is an
employee to whom subparagraph (A) or (B) of
section 51(h)(1) applies, rules similar to the
rules of such subparagraphs shall apply except
that—
‘‘(i) such subparagraph (A) shall be
applied by substituting ‘$10,000’ for
‘$6,000’, and
‘‘(ii) such subparagraph (B) shall be
applied by substituting ‘$833.33’ for
‘$500’.
202
‘‘(c) LONG-TERM
FAMILY
ASSISTANCE
RECIPI-
ENTS.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘long-term family
assistance recipient’ means any individual who is
certified by the designated local agency (as defined
in section 51(d)(10))—
‘‘(A) as being a member of a family receiv-
ing assistance under a IV-A program (as de-
fined in section 51(d)(2)(B)) for at least the
18-month period ending on the hiring date.
‘‘(B)(i) as being a member of a family re-
ceiving such assistance for 18 months beginning
after the date of the enactment of this section,
and
‘‘(ii) as having a hiring date which is not
more than 2 years after the end of the earliest
such 18-month period, or
‘‘(C)(i) as being a member of a family
which ceased to be eligible after the date of the
enactment of this section for such assistance by
reason of any limitation imposed by Federal or
State law on the maximum period such assist-
ance is payable to a family, and
203
‘‘(ii) as having a hiring date which is not
more than 2 years after the date of such ces-
sation.
‘‘(2) HIRING DATE.—The term ‘hiring date’ has
the meaning given such term by section 51(d).
‘‘(d) CERTAIN RULES TO APPLY.—
‘‘(1) IN GENERAL.—Rules similar to the rules
of section 52, and subsections (d)(11), (f), (g), (i)
(as in effect on the day before the date of the enact-
ment of the Taxpayer Reief Act of 1997), (j), and
(k) of section 51, shall apply for purposes of this
section.
‘‘(2) CREDIT TO BE PART OF GENERAL BUSI-
NESS CREDIT, ETC.—References to section 51 in sec-
tion 38(b), 280C(a), and 1396(c)(3) shall be treated
as including references to this section.
‘‘(e) COORDINATION WITH WORK OPPORTUNITY
CREDIT.—If a credit is allowed under this section to an
employer with respect to an individual for any taxable
year, then for purposes of applying section 51 to such em-
ployer, such individual shall not be treated as a member
of a targeted group for such taxable year.
‘‘(f) TERMINATION.—This section shall not apply to
individuals who begin work for the employer after April
30, 1999.’’.
204
(b) CLERICAL AMENDMENT.—The table of sections
for subpart F of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
51 the following new item:
‘‘Sec. 51A. Temporary incentives for employing long-term family
assistance recipients.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to individuals who begin work for
the employer after December 31, 1997.
TITLE IX—MISCELLANEOUS
PROVISIONS
Subtitle A—Provisions Relating to
Excise Taxes
SEC. 901. REPEAL OF TAX ON DIESEL FUEL USED IN REC-
REATIONAL BOATS.
(a) IN GENERAL.—Subparagraph (B) of section
6421(e)(2) (defining off-highway business use) is amended
by striking clauses (iii) and (iv).
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 4041(a)(1) is
amended—
(A) by striking ‘‘, a diesel-powered train,
or a diesel-powered boat’’ each place it appears
and inserting ‘‘or a diesel-powered train’’, and
(B) by striking ‘‘vehicle, train, or boat’’
and inserting ‘‘vehicle or train’’.
205
(2) Paragraph (1) of section 4041(a) is amend-
ed by striking subparagraph (D).
(3) Paragraph (2) of section 9503(f) is amend-
ed by striking subparagraph (C) and by redesignat-
ing subparagraphs (D) and (E) as subparagraphs
(C) and (D), respectively.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1998.
SEC. 902. CONTINUED APPLICATION OF TAX ON IMPORTED
RECYCLED HALON-1211.
(a) IN GENERAL.—Paragraph (1) of section 4682(d)
is amended by striking ‘‘recycled halon’’ and inserting ‘‘re-
cycled Halon-1301 or recycled Halon-2402’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
SEC. 903. UNIFORM RATE OF TAX ON VACCINES.
(a) IN GENERAL.—Subsection (b) of section 4131 is
amended to read as follows:
‘‘(b) AMOUNT OF TAX.—
‘‘(1) IN GENERAL.—The amount of the tax im-
posed by subsection (a) shall be 84 cents per dose
of any taxable vaccine.
‘‘(2) COMBINATIONS OF VACCINES.—If any tax-
able vaccine is described in more than 1 subpara-
206
graph of section 4132(a)(1), the amount of the tax
imposed by subsection (a) on such vaccine shall be
the sum of the amounts for the vaccines which are
so included.’’.
(b) TAXABLE VACCINES.—Paragraph (1) of section
4132(a) is amended to read as follows:
‘‘(1) TAXABLE
VACCINE.—The term ‘taxable
vaccine’ means any of the following vaccines which
are manufactured or produced in the United States
or entered into the United States for consumption,
use, or warehousing:
‘‘(A) Any vaccine containing diphtheria
toxoid.
‘‘(B) Any vaccine containing tetanus tox-
oid.
‘‘(C) Any vaccine containing pertussis bac-
teria, extracted or partial cell bacteria, or spe-
cific pertussis antigens.
‘‘(D) Any vaccine against measles.
‘‘(E) Any vaccine against mumps.
‘‘(F) Any vaccine against rubella.
‘‘(G) Any vaccine containing polio virus.
‘‘(H) Any HIB vaccine.
‘‘(I) Any vaccine against hepatitis B.
‘‘(J) Any vaccine against chicken pox.’’.
207
(c) CONFORMING AMENDMENT.—Subsection (a) of
section 4132 is amended by striking paragraphs (2), (3),
and (4) and by redesignating paragraphs (5) through (8)
as paragraphs (2) through (5), respectively.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect on October 1, 1997.
SEC. 904. OPERATORS OF MULTIPLE GASOLINE RETAIL
OUTLETS 
TREATED 
AS 
WHOLESALE 
DIS-
TRIBUTOR FOR REFUND PURPOSES.
(a) IN GENERAL.—Subparagraph (B) of section
6416(a)(4) (defining whole distributor) is amended by
adding at the end the following new sentence: ‘‘Such term
includes any person who makes retail sales of gasoline at
10 or more retail motor fuel outlets.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
SEC. 905. EXEMPTION OF ELECTRIC AND OTHER CLEAN-
FUEL 
MOTOR 
VEHICLES 
FROM 
LUXURY
AUTOMOBILE CLASSIFICATION.
(a) IN GENERAL.—Subsection (a) of section 4001
(relating to imposition of tax) is amended to read as fol-
lows:
‘‘(a) IMPOSITION OF TAX.—
208
‘‘(1) IN GENERAL.—There is hereby imposed on
the 1st retail sale of any passenger vehicle a tax
equal to 10 percent of the price for which so sold to
the extent such price exceeds the applicable amount.
‘‘(2) APPLICABLE AMOUNT.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraphs (B) and (C), the applicable
amount is $30,000.
‘‘(B) QUALIFIED
CLEAN-FUEL
VEHICLE
PROPERTY.—In the case of a passenger vehicle
which is propelled by a fuel which is not a
clean-burning fuel to which is installed qualified
clean-fuel vehicle property (as defined in section
179A(c)(1)(A)) for purposes of permitting such
vehicle to be propelled by a clean-burning fuel,
the applicable amount is equal to the sum of—
‘‘(i) $30,000, plus
‘‘(ii) the increase in the price for
which the passenger vehicle was sold (with-
in the meaning of section 4002) due to the
installation of such property.
‘‘(C) PURPOSE
BUILT
PASSENGER
VEHI-
CLE.—
‘‘(i) IN GENERAL.—In the case of a
purpose built passenger vehicle, the appli-
209
cable amount is equal to 150 percent of
$30,000.
‘‘(ii) PURPOSE BUILT PASSENGER VE-
HICLE.—For purposes of clause (i), the
term ‘purpose built passenger vehicle’
means a passenger vehicle produced by an
original equipment manufacturer and de-
signed so that the vehicle may be propelled
primarily by electricity.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (e) of section 4001 (relating to
inflation adjustment) is amended to read as follows:
‘‘(e) INFLATION ADJUSTMENT.—
‘‘(1) IN
GENERAL.—The $30,000 amount in
subparagraphs (A), (B)(i), and (C)(i) of subsection
(a)(2) shall be increased by an amount equal to—
‘‘(A) $30,000, multiplied by
‘‘(B) the cost-of-living adjustment under
section 1(f)(3) for the calendar year in which
the vehicle is sold, determined by substituting
‘calendar year 1990’ for ‘calendar year 1992’ in
subparagraph (B) thereof.
‘‘(2) ROUNDING.—If any amount as adjusted
under paragraph (1) is not a multiple of $2,000,
210
such amount shall be rounded to the next lowest
multiple of $2,000.’’.
(2) Subsection (f) of section 4001 (relating to
phasedown) is amended by striking ‘‘subsection (a)’’
and inserting ‘‘subsection (a)(1)’’.
(3) Subparagraph (B) of section 4003(a)(2) is
amended to read as follows:
‘‘(B) the appropriate applicable amount as
determined under section 4001(a)(2).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales and installations occurring
on or after the date of the enactment of this Act.
Subtitle B—Provisions Relating to
Pensions and Fringe Benefits
SEC. 911. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION
AND DRAINAGE ENTITIES.
(a) IN GENERAL.—Subparagraph (B) of section
401(k)(7) (relating to rural cooperative plan) is amend-
ed—
(1) by striking ‘‘and’’ at the end of clause (iii),
by redesignating clause (iv) as clause (v), and by in-
serting after clause (iii) the following new clause:
‘‘(iv) any organization which—
‘‘(I) is a mutual irrigation or
ditch company described in section
211
501(c)(12) (without regard to the 85
percent requirement thereof), or
‘‘(II) is a district organized
under the laws of a State as a munici-
pal corporation for the purpose of irri-
gation, water conservation, or drain-
age, and’’, and
(2) in clause (v), as so redesignated, by striking
‘‘or (iii)’’ and inserting ‘‘, (iii), or (iv)’’.
(b) EFFECTIVE DATE.—The amendments made by
subsection (a) shall apply to years beginning after Decem-
ber 31, 1997.
SEC. 912. EXTENSION OF MORATORIUM ON APPLICATION
OF CERTAIN NONDISCRIMINATION RULES TO
STATE AND LOCAL GOVERNMENTS.
(a) GENERAL NONDISCRIMINATION AND PARTICIPA-
TION RULES.—
(1) 
NONDISCRIMINATION
REQUIREMENTS.—
Section 401(a)(5) (relating to qualified pension,
profit-sharing, and stock bonus plans) is amended by
adding at the end the following:
‘‘(G) 
GOVERNMENTAL
PLANS.—Para-
graphs (3) and (4) shall not apply to a govern-
mental plan (within the meaning of section
414(d)).’’.
212
(2) 
ADDITIONAL
PARTICIPATION
REQUIRE-
MENTS.—Section 401(a)(26)(H) (relating to addi-
tional participation requirements) is amended to
read as follows:
‘‘(H) EXCEPTION
FOR
GOVERNMENTAL
PLANS.—This paragraph shall not apply to a
governmental plan (within the meaning of sec-
tion 414(d)).’’.
(3) MINIMUM
PARTICIPATION
STANDARDS.—
Section 410(c)(2) (relating to application of partici-
pation standards to certain plans) is amended to
read as follows:
‘‘(2) A plan described in paragraph (1) shall be
treated as meeting the requirements of this section
for purposes of section 401(a), except that in the
case of a plan described in subparagraph (B), (C),
or (D) of paragraph (1), this paragraph shall only
apply if such plan meets the requirements of section
401(a)(3) (as in effect on September 1, 1974).’’.
(b) PARTICIPATION STANDARDS
FOR QUALIFIED
CASH
OR
DEFERRED
ARRANGEMENTS.—Section
401(k)(3) (relating to application of participation and dis-
crimination standards) is amended by adding at the end
the following:
213
‘‘(G)(i) The requirements of subparagraph
(A)(i) and (C) shall not apply to a govern-
mental plan (within the meaning of section
414(d)).
‘‘(ii) 
The 
requirements 
of 
subsection
(m)(2) (without regard to subsection (a)(4))
shall apply to any matching contribution of a
governmental plan (as so defined).’’.
(c) NONDISCRIMINATION
RULES
FOR
SECTION
403(b) PLANS.—Section 403(b)(12) (relating to non-
discrimination requirements) is amended by adding at the
end the following:
‘‘(C) GOVERNMENTAL
PLANS.—For pur-
poses of paragraph (1)(D), the requirements of
subparagraph (A)(i) shall not apply to a gov-
ernmental plan (within the meaning of section
414(d)).’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section apply to taxable years beginning on or
after the date of enactment of this Act.
(2) TREATMENT
FOR
YEARS
BEGINNING
BE-
FORE DATE OF ENACTMENT.—A governmental plan
(within the meaning of section 414(d) of the Inter-
nal Revenue Code of 1986) shall be treated as satis-
214
fying the requirements of sections 401(a)(3),
401(a)(4), 
401(a)(26), 
401(k), 
401(m), 
403
(b)(1)(D) and (b)(12), and 410 of such Code for all
taxable years beginning before the date of enactment
of this Act.
SEC. 913. TREATMENT OF CERTAIN DISABILITY BENEFITS
RECEIVED BY FORMER POLICE OFFICERS OR
FIREFIGHTERS.
(a) GENERAL RULE.—For purposes of determining
whether any amount to which this section applies is ex-
cludable from gross income under section 104(a)(1) of the
Internal Revenue Code of 1986, the following conditions
shall be treated as personal injuries or sickness in the
course of employment:
(1) Heart disease.
(2) Hypertension.
(b) AMOUNTS TO WHICH SECTION APPLIES.—This
section shall apply to any amount—
(1) which is payable—
(A) to an individual (or to the survivors of
an individual) who was a full-time employee of
any police department or fire department which
is organized and operated by a State, by any
political subdivision thereof, or by any agency
215
or instrumentality of a State or political sub-
division thereof, and
(B) under a State law (as amended on
May 19, 1992) which irrebuttably presumed
that heart disease and hypertension are work-
related illnesses but only for employees separat-
ing from service before July 1, 1992; and
(2) which was received in calendar year 1989,
1990, or 1991.
(c) WAIVER OF STATUTE OF LIMITATIONS.—If, on
the date of the enactment of this Act (or at any time with-
in the 1-year period beginning on such date of enactment)
credit or refund of any overpayment of tax resulting from
the provisions of this section is barred by any law or rule
of law, credit or refund of such overpayment shall, never-
theless, be allowed or made if claim therefore is filed be-
fore the date 1 year after such date of enactment.
SEC. 914. PORTABILITY OF PERMISSIVE SERVICE CREDIT
UNDER GOVERNMENTAL PENSION PLANS.
(a) IN GENERAL.—Section 415(b)(2) (relating to the
limitation for defined benefit plans) is amended by adding
at the end the following new subparagraph:
‘‘(J) PURCHASE OF PERMISSIVE SERVICE
CREDIT.—
216
‘‘(i) BENEFITS TREATED AS DERIVED
FROM
EMPLOYER
CONTRIBUTIONS.—For
purposes of this section, the term ‘annual
benefit’ shall include the accrued benefit
derived from contributions to a govern-
mental plan (within the meaning of section
414(d)) to purchase permissive service
credit.
‘‘(ii) 
DEFINITION
OF
PERMISSIVE
SERVICE
CREDIT.—For purposes of this
subparagraph, the term ‘permissive service
credit’ means credit—
‘‘(I) for a period of service recog-
nized by a governmental plan for pur-
poses of calculating an employee’s ac-
crued benefit under such plan,
‘‘(II) which such employee has
not received (or has forfeited), and
‘‘(III) which such employee may
receive only by making a contribution,
as determined under the governmental
plan, which does not exceed the
amount (actuarially determined under
the terms of such governmental plan)
217
necessary to fund the accrued benefit
attributable to such period of service.
‘‘(iii) NO
EFFECT
ON
EMPLOYER
‘PICK-UP’ 
CONTRIBUTIONS.—Nothing in
this subparagraph shall be construed as
preventing 
the 
application 
of 
section
414(h) to contributions to purchase per-
missive service credit.’’.
(b) CONFORMING AMENDMENT.—Section 415(c)(2)
is amended by adding at the end the following new sen-
tence: ‘‘The term ‘annual addition’ shall not include con-
tributions to purchase permissive service credit (within the
meaning of subsection (b)(2)(J)).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to years beginning after December
31, 1997.
SEC. 915. GRATUITOUS TRANSFERS FOR THE BENEFIT OF
EMPLOYEES.
(a) IN GENERAL.—Subparagraph (C) of section
664(d)(1) and subparagraph (C) of section 664(d)(2) are
each amended by striking the period at the end thereof
and inserting ‘‘or, to the extent the remainder interest is
in qualified employer securities (as defined in paragraph
(3)(C)), is to be transferred to an employee stock owner-
218
ship plan (as defined in section 4975(e)(7)) in a qualified
gratuitous transfer (as defined by subsection (g)).’’.
(b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—
Section 664 is amended by adding at the end the following
new subsection:
‘‘(g) QUALIFIED GRATUITOUS TRANSFER OF QUALI-
FIED EMPLOYER SECURITIES.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified gratuitous transfer’ means
a transfer of qualified employer securities to an em-
ployee stock ownership plan (as defined in section
4975(e)(7)) but only to the extent that—
‘‘(A) the securities transferred previously
passed from a decedent dying before January 1,
1999, to a trust described in paragraph (1) or
(2) of subsection (d),
‘‘(B) no deduction under section 404 is al-
lowable with respect to such transfer,
‘‘(C) such plan contains the provisions re-
quired by paragraph (3),
‘‘(D) such plan treats such securities as
being attributable to employer contributions but
without regard to the limitations otherwise ap-
plicable to such contributions under section
404, and
219
‘‘(E) the employer whose employees are
covered by the plan described in this paragraph
files with the Secretary a verified written state-
ment consenting to the application of sections
4978 and 4979A with respect to such employer.
‘‘(2) EXCEPTION.—The term ‘qualified gratu-
itous transfer’ shall not include a transfer of quali-
fied employer securities to an employee stock owner-
ship plan unless—
‘‘(A) such plan was in existence on August
1, 1996,
‘‘(B) at the time of the transfer, the dece-
dent and members of the decedent’s family
(within the meaning of section 267(c)(4)) own
(directly or through the application of section
318(a)) no more than 10 percent of the value
of the stock of the corporation referred to in
paragraph (4), and
‘‘(C) immediately after the transfer, such
plan owns (after the application of section
318(a)(4)) at least 60 percent of the value of
the outstanding stock of the corporation.
‘‘(3) PLAN REQUIREMENTS.—A plan contains
the provisions required by this paragraph if such
plan provides that—
220
‘‘(A) the qualified employer securities so
transferred are allocated to plan participants in
a manner consistent with section 401(a)(4),
‘‘(B) plan participants are entitled to di-
rect the plan as to the manner in which such
securities which are entitled to vote and are al-
located to the account of such participant are to
be voted,
‘‘(C) an independent trustee votes the se-
curities so transferred which are not allocated
to plan participants,
‘‘(D) each participant who is entitled to a
distribution from the plan has the rights de-
scribed in subparagraphs (A) and (B) of section
409(h)(1),
‘‘(E) such securities are held in a suspense
account under the plan to be allocated each
year, up to the limitations under section 415(c),
after first allocating all other annual additions
for the limitation year, up to the limitations
under sections 415 (c) and (e), and
‘‘(F) on termination of the plan, all securi-
ties so transferred which are not allocated to
plan participants as of such termination are to
221
be transferred to, or for the use of, an organi-
zation described in section 170(c).
For purposes of the preceding sentence, the term
‘independent trustee’ means any trustee who is not
a member of the family (within the meaning of sec-
tion 267(c)(4)) of the decedent or a 5-percent share-
holder. A plan shall not fail to be treated as meeting
the requirements of section 401(a) by reason of
meeting the requirements of this subsection.
‘‘(4) QUALIFIED EMPLOYER SECURITIES.—For
purposes of this section, the term ‘qualified employer
securities’ means employer securities (as defined in
section 409(l)) which are issued by a domestic cor-
poration—
‘‘(A) which has no outstanding stock which
is readily tradable on an established securities
market, and
‘‘(B) which has only 1 class of stock.
‘‘(5) TREATMENT OF SECURITIES ALLOCATED
BY
EMPLOYEE
STOCK
OWNERSHIP
PLAN
TO
PER-
SONS
RELATED
TO
DECEDENT
OR
5-PERCENT
SHAREHOLDERS.—
‘‘(A) IN GENERAL.—If any portion of the
assets of the plan attributable to securities ac-
222
quired by the plan in a qualified gratuitous
transfer are allocated to the account of—
‘‘(i) any person who is related to the
decedent (within the meaning of section
267(b)), or
‘‘(ii) any person who, at the time of
such allocation or at any time during the
1-year period ending on the date of the ac-
quisition of qualified employer securities by
the plan, is a 5-percent shareholder of the
employer maintaining the plan,
the plan shall be treated as having distributed
(at the time of such allocation) to such person
or shareholder the amount so allocated.
‘‘(B) 
5-PERCENT
SHAREHOLDER.—For
purposes of subparagraph (A), the term ‘5-per-
cent shareholder’ means any person who owns
(directly or through the application of section
318(a)) more than 5 percent of the outstanding
stock of the corporation which issued such
qualified employer securities or of any corpora-
tion which is a member of the same controlled
group of corporations (within the meaning of
section 409(l)(4)) as such corporation. For pur-
poses of the preceding sentence, section 318(a)
223
shall be applied without regard to the exception
in paragraph (2)(B)(i) thereof.
‘‘(C) CROSS REFERENCE.—
‘‘For excise tax on allocations described in sub-
paragraph (A), see section 4979A.
‘‘(6) 
TAX
ON
FAILURE
TO
TRANSFER
UNALLOCATED SECURITIES TO CHARITY ON TERMI-
NATION OF PLAN.—If the requirements of paragraph
(3)(F) are not met with respect to any securities,
there is hereby imposed a tax on the employer main-
taining the plan in an amount equal to the sum of—
‘‘(A) the amount of the increase in the tax
which would be imposed by chapter 11 if such
securities were not transferred as described in
paragraph (1), and
‘‘(B) interest on such amount at the
underpayment rate under section 6621 (and
compounded daily) from the due date for filing
the return of the tax imposed by chapter 11.’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 401(a)(1) is amended by inserting
‘‘or by a charitable remainder trust pursuant to a
qualified gratuitous transfer (as defined in section
664(g)(1)),’’ after ‘‘stock bonus plans),’’.
224
(2) Section 404(a)(9) is amended by inserting
after subparagraph (B) the following new subpara-
graph:
‘‘(C) A qualified gratuitous transfer (as de-
fined in section 664(g)(1)) shall have no effect
on the amount or amounts otherwise deductible
under paragraph (3) or (7) or under this para-
graph.’’.
(3) Section 415(c)(6) is amended by adding at
the end thereof the following new sentence:
‘‘The amount of any qualified gratuitous transfer
(as defined in section 664(g)(1)) allocated to a par-
ticipant for any limitation year shall not exceed the
limitations imposed by this section, but such amount
shall not be taken into account in determining
whether any other amount exceeds the limitations
imposed by this section.’’.
(4) Section 415(e) is amended—
(A) by redesignating paragraph (6) as
paragraph (7), and
(B) by inserting after paragraph (5) the
following new paragraph:
‘‘(6) SPECIAL
RULE
FOR
QUALIFIED
GRATU-
ITOUS TRANSFERS.—Any qualified gratuitous trans-
fer of qualified employer securities (as defined by
225
section 664(g)) shall not be taken into account in
calculating, and shall not be subject to, the limita-
tions provided in this subsection.’’.
(5) Subparagraph (B) of section 664(d)(1) and
subparagraph (B) of section 664(d)(2) are each
amended by inserting ‘‘and other than qualified gra-
tuitous transfers described in subparagraph (C)’’
after ‘‘subparagraph (A)’’.
(6) Paragraph (4) of section 674(b) is amended
by inserting before the period ‘‘or to an employee
stock ownership plan (as defined in section
4975(e)(7)) in a qualified gratuitous transfer (as de-
fined in section 664(g)(1))’’.
(7) Section 2055(a) is amended—
(i) by striking ‘‘or’’ at the end of para-
graph (3),
(ii) by striking the period at the end of
paragraph (4) and inserting ‘‘; or’’, and
(iii) by inserting after paragraph (4) the
following new paragraph:
‘‘(5) to an employee stock ownership plan if
such transfer qualifies as a qualified gratuitous
transfer of qualified employer securities within the
meaning of section 664(g).’’.
226
(8) Paragraph (8) of section 2056(b) is amend-
ed to read as follows:
‘‘(8) SPECIAL RULE FOR CHARITABLE REMAIN-
DER TRUSTS.—
‘‘(A) 
IN
GENERAL.—If 
the 
surviving
spouse of the decedent is the only beneficiary of
a qualified charitable remainder trust who is
not a charitable beneficiary nor an ESOP bene-
ficiary, paragraph (1) shall not apply to any in-
terest in such trust which passes or has passed
from the decedent to such surviving spouse.
‘‘(B) DEFINITIONS.—For purposes of sub-
paragraph (A)—
‘‘(i) CHARITABLE BENEFICIARY.—The
term ‘charitable beneficiary’ means any
beneficiary which is an organization de-
scribed in section 170(c).
‘‘(ii) ESOP BENEFICIARY.—The term
‘ESOP beneficiary’ means any beneficiary
which is an employee stock ownership plan
(as defined in section 4975(e)(7)) that
holds a remainder interest in qualified em-
ployer securities (as defined in section
664(g)(4)) to be transferred to such plan
227
in a qualified gratuitous transfer (as de-
fined in section 664(g)(1)).
‘‘(iii) QUALIFIED
CHARITABLE
RE-
MAINDER
TRUST.—The term ‘qualified
charitable remainder trust’ means a chari-
table remainder annuity trust or a chari-
table remainder unitrust (described in sec-
tion 664).’’.
(9) Section 4947(b) is amended by inserting
after paragraph (3) the following new paragraph:
‘‘(4) SECTION 507.—The provisions of section
507(a) shall not apply to a trust which is described
in subsection (a)(2) by reason of a distribution of
qualified employer securities (as defined in section
664(g)(4)) to an employee stock ownership plan (as
defined in section 4975(e)(7)) in a qualified gratu-
itous transfer (as defined by section 664(g)).’’.
(10) The last sentence of section 4975(e)(7) is
amended by inserting ‘‘and section 664(g)’’ after
‘‘section 409(n)’’
(11) Subsection (a) of section 4978 is amend-
ed—
(A) by inserting ‘‘or acquired any qualified
employer securities in a qualified gratuitous
228
transfer to which section 664(g) applied’’ after
‘‘section 1042 applied’’, and
(B) by inserting before the period at the
end of subparagraph (B) ‘‘60 percent of the
total value of all employer securities as of such
disposition in the case of any qualified employer
securities in a qualified gratuitous transfer to
which section 664(g) applied)’’.
(12) Paragraph (2) of section 4978(b) is
amended—
(A) by inserting ‘‘or acquired in the quali-
fied gratuitous transfer to which section 664(g)
applied’’ after ‘‘section 1042 applied’’, and
(B) by inserting ‘‘or to which section
664(g) applied’’ after ‘‘section 1042 applied’’ in
subparagraph (C) thereof.
(13) Subsection (c) of section 4978 is amended
by striking ‘‘written statement’’ and all that follows
and inserting ‘‘written statement described in sec-
tion 664(g)(1)(E) or in section 1042(b)(3) (as the
case may be).’’.
(14) Paragraph (2) of section 4978(e) is
amended by striking the period and inserting ‘‘; ex-
cept that such section shall be applied without re-
gard to subparagraph (B) thereof for purposes of
229
applying this section and section 4979A with respect
to securities acquired in a qualified gratuitous trans-
fer (as defined in section 664(g)(1)).’’.
(15) Subsection (a) of section 4979A is amend-
ed to read as follows:
‘‘(a) IMPOSITION OF TAX.—If—
‘‘(1) there is a prohibited allocation of qualified
securities by any employee stock ownership plan or
eligible worker-owned cooperative, or
‘‘(2) there is an allocation described in section
664(g)(5)(A),
there is hereby imposed a tax on such allocation equal to
50 percent of the amount involved.’’.
(16) Subsection (c) of section 4979A is amend-
ed to read as follows:
‘‘(c) LIABILITY FOR TAX.—The tax imposed by this
section shall be paid by—
‘‘(1) the employer sponsoring such plan, or
‘‘(2) the eligible worker-owned cooperative,
which made the written statement described in section
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may
be).’’.
(17) Section 4979A is amended by redesignat-
ing subsection (d) as subsection (e) and by inserting
after subsection (c) the following new subsection:
230
‘‘(d) SPECIAL STATUTE OF LIMITATIONS FOR TAX
ATTRIBUTABLE TO CERTAIN ALLOCATIONS.—The statu-
tory period for the assessment of any tax imposed by this
section on an allocation described in subsection (a)(2) of
qualified employer securities shall not expire before the
date which is 3 years from the later of—
‘‘(1) the 1st allocation of such securities in con-
nection with a qualified gratuitous transfer (as de-
fined in section 664(g)(1)), or
‘‘(2) the date on which the Secretary is notified
of the allocation described in subsection (a)(2).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers made by trusts to, or
for the use of, an employee stock ownership plan after the
date of the enactment of this Act.
SEC. 916. TREATMENT OF CERTAIN TRANSPORTATION ON
NON-COMMERCIALLY OPERATED AIRCRAFT
AS A FRINGE BENEFIT EXCLUDABLE FROM
GROSS INCOME.
(a) IN GENERAL.—Subsection (b) of section 132 (re-
lating to no-additional-cost service defined) is amended to
read as follows:
‘‘(b) NO-ADDITIONAL-COST SERVICE DEFINED.—
For purposes of this section, the term ‘no-additional-cost
231
service’ means any service provided by an employer to an
employee for use by such employee if—
‘‘(1) such service—
‘‘(A) is offered for sale to customers in the
ordinary course of the line of business of the
employer in which the employee is performing
services, or
‘‘(B) consists of transportation on an air-
craft, if—
‘‘(i) transportation on such aircraft is
not offered for sale to customers,
‘‘(ii) such transportation for use by
such employee is provided on a flight made
in the ordinary course of the trade or busi-
ness of an employer which owns or leases
such aircraft for use in such trade or busi-
ness, and
‘‘(iii) the flight on which the transpor-
tation is provided would have been made
whether or not such employee was trans-
ported on the flight, and
‘‘(2) the employer incurs no substantial addi-
tional cost (including forgone revenue) in providing
such service to the employee (determined without re-
232
gard to any amount paid by the employee for such
service).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to services provided after De-
cember 31, 1997.
SEC. 917. MINIMUM PENSION ACCRUED BENEFIT DISTRIB-
UTABLE WITHOUT CONSENT INCREASED TO
$5,000.
(a) IN GENERAL.—Subparagraph (A) of section
411(a)(11) (relating to restrictions on certain mandatory
distributions) is amended by striking ‘‘$3,500’’ and insert-
ing ‘‘the applicable limit’’.
(b) APPLICABLE LIMIT.—Paragraph (11) of section
411(a) is amended by adding at the end the following new
subparagraph:
‘‘(D) APPLICABLE LIMIT.—
‘‘(i) IN
GENERAL.—For purposes of
subparagraph (A), the applicable limit is
$5,000.
‘‘(ii) INFLATION
ADJUSTMENT.—In
the case of plan years beginning in a cal-
endar year after 1998, the dollar amount
contained in clause (i) shall be increased
by an amount equal to—
233
‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjust-
ment determined under section 1(f)(3)
for such calendar year by substituting
‘calendar year 1997’ for ‘calendar
year 1992’ in subparagraph (B) there-
of.
If any amount as adjusted under the pre-
ceding sentence is not a multiple of $50,
such amount shall be rounded to the next
lowest multiple of $50.’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 411(a)(7)(B), paragraphs (1) and
(2) of section 417(e), and section 457(e)(9) are each
amended by striking ‘‘$3,500’’ each place in appears
(other than the headings) and inserting ‘‘the appli-
cable limit under section 411(a)(11)(D)’’.
(2) The headings for paragraphs (1) and (2) of
section 417(e) and subparagraph (A) of section
457(e)(9) are each amended by striking ‘‘$3,500’’
and inserting ‘‘APPLICABLE LIMIT’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to plan years beginning after the
date of the enactment of this Act.
234
SEC. 918. CLARIFICATION OF CERTAIN RULES RELATING
TO EMPLOYEE STOCK OWNERSHIP PLANS OF
S CORPORATIONS.
(a) CERTAIN CASH DISTRIBUTIONS PERMITTED.—
(1) Paragraph (2) of section 409(h) is amended
by adding at the end the following new subpara-
graph:
‘‘(B) PLAN MAINTAINED BY S CORPORA-
TION.—In the case of a plan established and
maintained by an S corporation which otherwise
meets the requirements of this subsection or
section 4975(e)(7), such plan shall not be treat-
ed as failing to meet the requirements of this
subsection or section 401(a) merely because it
does not permit a participant to exercise the
right described in paragraph (1)(A) if such plan
provides that the participant entitled to a dis-
tribution has a right to receive the distribution
in cash.’’.
(2) Paragraph (2) of section 409(h) is amend-
ed—
(A) by striking ‘‘a plan which’’ in the first
sentence and inserting the following:
‘‘(A) IN GENERAL.—A plan which’’, and
(B) by moving the text before subpara-
graph (B) 2 ems to the right.
235
(b) SHAREHOLDER-EMPLOYEES NOT TREATED AS
OWNER-EMPLOYEES
UNDER
TAX
ON
PROHIBITED
TRANSACTIONS.—The last sentence of section 4975(d) is
amended by striking all that follows ‘‘preceding sentence,’’
through ‘‘Revision Act of 1982,’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Revisions Relating to
Disasters
SEC. 921. AUTHORITY TO POSTPONE CERTAIN TAX-RELAT-
ED 
DEADLINES 
BY 
REASON 
OF 
PRESI-
DENTIALLY DECLARED DISASTER.
(a) IN GENERAL.—Chapter 77 is amended by insert-
ing after section 7508 the following new section:
‘‘SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RE-
LATED DEADLINES BY REASON OF PRESI-
DENTIALLY DECLARED DISASTER.
‘‘(a) IN GENERAL.—In the case of a taxpayer deter-
mined by the Secretary to be affected by a Presidentially
declared disaster (as defined by section 1033(h)(3)), the
Secretary may prescribe regulations under which a period
of up to 90 days may be disregarded in determining, under
the internal revenue laws, in respect of any tax liability
236
(including any penalty, additional amount, or addition to
the tax) of such taxpayer—
‘‘(1) whether any of the acts by the taxpayer
described in paragraph (1) of section 7508(a) were
performed within the time prescribed therefor, and
‘‘(2) the amount of any credit or refund.
‘‘(b) INTEREST ON OVERPAYMENTS AND UNDERPAY-
MENTS.—Subsection (a) shall not apply for the purpose
of determining interest on any overpayment or underpay-
ment.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for chapter 77 is amended by inserting after the item re-
lating to section 7508 the following new item:
‘‘Sec. 7508A. Authority to postpone certain tax-related deadlines
by reason of presidentially declared disaster.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to any period for per-
forming an act that has not expired before the date of
the enactment of this Act.
SEC. 922. USE OF CERTAIN APPRAISALS TO ESTABLISH
AMOUNT OF DISASTER LOSS.
(a) IN GENERAL.—Subsection (i) of section 165 is
amended by adding at the end the following new para-
graph:
‘‘(4) USE OF DISASTER LOAN APPRAISALS TO
ESTABLISH AMOUNT OF LOSS.—Nothing in this title
237
shall be construed to prohibit the Secretary from
prescribing regulations or other guidance under
which an appraisal for the purpose of obtaining a
loan of Federal funds or a loan guarantee from the
Federal Government as a result of a Presidentially
declared disaster (as defined by section 1033(h)(3))
may be used to establish the amount of any loss de-
scribed in paragraph (1) or (2).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
SEC. 923. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT
OF WEATHER-RELATED CONDITIONS.
(a) DEFERRAL OF INCOME INCLUSION.—Subsection
(e) of section 451 (relating to special rules for proceeds
from livestock sold on account of drought) is amended—
(1) by striking ‘‘drought conditions, and that
these drought conditions’’ in paragraph (1) and in-
serting ‘‘drought, flood, or other weather-related
conditions, and that such conditions’’; and
(2) by inserting ‘‘, FLOOD, OR OTHER WEATH-
ER-RELATED CONDITIONS’’ after ‘‘DROUGHT’’ in the
subsection heading.
238
(b) INVOLUNTARY CONVERSIONS.—Subsection (e) of
section 1033 (relating to livestock sold on account of
drought) is amended—
(1) by inserting ‘‘, flood, or other weather-relat-
ed conditions’’ before the period at the end thereof;
and
(2) by inserting ‘‘, FLOOD, OR OTHER WEATH-
ER-RELATED CONDITIONS’’ after ‘‘DROUGHT’’ in the
subsection heading.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales and exchanges after De-
cember 31, 1996.
SEC. 924. MORTGAGE FINANCING FOR RESIDENCES LO-
CATED IN DISASTER AREAS.
Subsection (k) of section 143 (relating to mortgage
revenue bonds; qualified mortgage bond and qualified vet-
eran’s mortgage bond) is amended by adding at the end
the following new paragraph:
‘‘(11) SPECIAL
RULES
FOR
RESIDENCES
LO-
CATED IN DISASTER AREAS.—In the case of a resi-
dence located in an area determined by the Presi-
dent to warrant assistance from the Federal Govern-
ment under the Disaster Relief and Emergency As-
sistance Act (as in effect on the date of the enact-
ment of the Taxpayer Relief Act of 1997), this sec-
239
tion shall be applied with the following modifications
to financing provided with respect to such residence
within 1 year after the date of the disaster declara-
tion:
‘‘(A) Subsection (d) (relating to 3-year re-
quirement) shall not apply.
‘‘(B) Subsections (e) and (f) (relating to
purchase price requirement and income require-
ment) shall be applied as if such residence were
a targeted area residence.
The preceding sentence shall apply only with respect
to bonds issued after December 31, 1996, and before
January 1, 2000.’’.
Subtitle D—Provisions Relating to
Employment Taxes
SEC. 931. CLARIFICATION OF EMPLOYMENT TAX STATUS OF
INDIVIDUALS DISTRIBUTING BAKERY PROD-
UCTS.
(a) INTERNAL REVENUE CODE.—Subparagraph (A)
of section 3121(d)(3) is amended by striking ‘‘bakery
products,’’.
(b) SOCIAL SECURITY ACT.—Subparagraph (A) of
section 210(j)(3) of the Social Security Act is amended
by striking ‘‘bakery products,’’.
240
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to services performed after Decem-
ber 31, 1997.
SEC. 932. CLARIFICATION OF STANDARD TO BE USED IN
DETERMINING EMPLOYMENT TAX STATUS OF
SECURITIES BROKERS.
(a) IN GENERAL.—In determining for purposes of
the Internal Revenue Code of 1986 whether a registered
representative of a securities broker-dealer is an employee
(as defined in section 3121(d) of the Internal Revenue
Code of 1986), no weight shall be given to instructions
from the service recipient which are imposed only in com-
pliance with investor protection standards imposed by the
Federal Government, any State government, or a govern-
ing body pursuant to a delegation by a Federal or State
agency.
(b) EFFECTIVE DATE.—Subsection (a) shall apply to
services performed after December 31, 1997.
SEC. 933. CLARIFICATION OF EXEMPTION FROM SELF-EM-
PLOYMENT TAX FOR CERTAIN TERMINATION
PAYMENTS RECEIVED BY FORMER INSUR-
ANCE SALESMEN.
(a) INTERNAL REVENUE CODE.—Section 1402 (re-
lating to definitions) is amended by adding at the end the
following new subsection:
241
‘‘(k) CODIFICATION
OF TREATMENT
OF CERTAIN
TERMINATION PAYMENTS RECEIVED BY FORMER INSUR-
ANCE SALESMEN.—Nothing in subsection (a) shall be con-
strued as including in the net earnings from self-employ-
ment of an individual any amount received during the tax-
able year from an insurance company on account of serv-
ices performed by such individual as an insurance sales-
man for such company if—
‘‘(1) such amount is received after termination
of such individual’s agreement to perform such serv-
ices for such company,
‘‘(2) such individual performs no services for
such company after such termination and before the
close of such taxable year,
‘‘(3) such individual enters into a covenant not
to compete against such company which applies to at
least the 1-year period beginning on the date of such
termination, and
‘‘(4) the amount of such payment—
‘‘(A) depends solely on policies sold by
such individual during the last year of such
agreement and the extent to which such policies
remain in force for some period after such ter-
mination, and
242
‘‘(B) does not depend to any extent on
length of service or overall earnings from serv-
ices performed for such company.’’.
(b) SOCIAL SECURITY ACT.—Section 211 of the So-
cial Security Act is amended by adding at the end the fol-
lowing new subsection:
‘‘Codification of Treatment of Certain Termination
Payments Received by Former Insurance Salesmen
‘‘(j) Nothing in subsection (a) shall be construed as
including in the net earnings from self-employment of an
individual any amount received during the taxable year
from an insurance company on account of services per-
formed by such individual as an insurance salesman for
such company if—
‘‘(1) such amount is received after termination
of such individual’s agreement to perform such serv-
ices for such company,
‘‘(2) such individual performs no services for
such company after such termination and before the
close of such taxable year,
‘‘(3) such individual enters into a covenant not
to compete against such company which applies to at
least the 1-year period beginning on the date of such
termination, and
‘‘(4) the amount of such payment—
243
‘‘(A) depends solely on policies sold by
such individual during the last year of such
agreement and the extent to which such policies
remain in force for some period after such ter-
mination, and
‘‘(B) does not depend to any extent on
length of service or overall earnings from serv-
ices performed for such company.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments after December 31,
1997.
SEC. 934. STANDARDS FOR DETERMINING WHETHER INDI-
VIDUALS ARE NOT EMPLOYEES.
(a) IN GENERAL.—Chapter 25 (general provisions re-
lating to employment taxes) is amended by adding after
section 3510 the following new section:
‘‘SEC. 3511. STANDARDS FOR DETERMINING WHETHER IN-
DIVIDUALS ARE NOT EMPLOYEES.
‘‘(a) GENERAL RULE.—For purposes of this title,
and notwithstanding any provision of this title to the con-
trary, if the requirements of subsections (b), (c), and (d)
are met with respect to any service performed by any indi-
vidual, then with respect to such service—
‘‘(1) the service provider shall not be treated as
an employee,
244
‘‘(2) the service recipient shall not be treated as
an employer, and
‘‘(3) the payor shall not be treated as an em-
ployer.
‘‘(b) SERVICE PROVIDER REQUIREMENTS WITH RE-
GARD TO SERVICE RECIPIENT.—For the purposes of sub-
section (a), the requirements of this subsection are met
if the service provider, in connection with performing the
service—
‘‘(1) has a significant investment in assets and/
or training,
‘‘(2) incurs significant unreimbursed expenses,
‘‘(3) agrees to perform the service for a particu-
lar amount of time or to complete a specific result
and is liable for damages for early termination with-
out cause,
‘‘(4) is paid primarily on a commissioned basis,
or
‘‘(5) purchases products for resale.
‘‘(c) ADDITIONAL SERVICE PROVIDER REQUIRE-
MENTS WITH REGARD TO OTHERS.—For the purposes of
subsection (a), the requirements of this subsection are met
if—
‘‘(1) the service provider—
‘‘(A) has a principal place of business,
245
‘‘(B) does not primarily provide the service
in the service recipient’s place of business, or
‘‘(C) pays a fair market rent for use of the
service recipient’s place of business; or
‘‘(2) the service provider—
‘‘(A) is not required to perform service ex-
clusively for the service recipient, and
‘‘(B) in the year involved, or in the preced-
ing or subsequent year—
‘‘(i) has performed a significant
amount of service for other persons,
‘‘(ii) has offered to perform service for
other persons through—
‘‘(I) advertising,
‘‘(II) individual written or oral
solicitations,
‘‘(III) 
listing 
with 
registries,
agencies, brokers, and other persons
in the business of providing referrals
to other service recipients, or
‘‘(IV) other similar activities, or
‘‘(iii) provides service under a busi-
ness name which is registered with (or for
which a license has been obtained from) a
State, a political subdivision of a State, or
246
any agency or instrumentality of 1 or more
States or political subdivisions.
‘‘(d) WRITTEN DOCUMENT REQUIREMENTS.—For
purposes of subsection (a), the requirements of this sub-
section are met if the services performed by the individual
are performed pursuant to a written contract between
such individual and the person for whom the services are
performed, or the payor, and such contract provides that
the individual will not be treated as an employee with re-
spect to such services for purposes of this subtitle or sub-
title A.
‘‘(e) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) If for any taxable year any service recipi-
ent or payor fails to meet the applicable reporting
requirements of sections 6041(a), 6041A(a), or 6051
with respect to a service provider, then, unless such
failure is due to reasonable cause and not willful ne-
glect, this section shall not apply in determining
whether such service provider shall not be treated as
an employee of such service recipient or payor for
such year.
‘‘(2) If the service provider is performing serv-
ices through an entity owned in whole or in part by
such service provider, then the references to ‘service
247
provider’ in subsections (b) through (d) may include
such entity, provided that the written contract re-
ferred to in paragraph (1) of subsection (d) may be
with either the service provider or such entity and
need not be with both.
‘‘(f) DEFINITIONS.—For the purposes of this sec-
tion—
‘‘(1) SERVICE
PROVIDER.—The term ‘service
provider’ means any individual who performs service
for another person.
‘‘(2) SERVICE RECIPIENT.—Except as provided
in paragraph (5), the term ‘service recipient’ means
the person for whom the service provider performs
such service.
‘‘(3) PAYOR.—Except as provided in paragraph
(5), the term ‘payor’ means the person who pays the
service provider for the performance of such service
in the event that the service recipients do not pay
the service provider.
‘‘(4) IN CONNECTION WITH PERFORMING THE
SERVICE.—The term ‘in connection with performing
the service’ means in connection or related to—
‘‘(A) the actual service performed by the
service provider for the service recipients or for
248
other persons for whom the service provider has
performed similar service, or
‘‘(B) the operation of the service provider’s
trade or business.
‘‘(5) EXCEPTIONS.—The terms ‘service recipi-
ent’ and ‘payor’ do not include any entity which is
owned in whole or in part by the service provider.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for chapter 25 is amended by adding at the end the follow-
ing new item:
‘‘Sec. 3511. Standards for determining whether individuals are
not employees.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to services performed after Decem-
ber 31, 1997.
Subtitle E—Provisions Relating to
Small Businesses
SEC. 941. WAIVER OF PENALTY THROUGH 1998 ON SMALL
BUSINESSES FAILING TO MAKE ELECTRONIC
FUND TRANSFERS OF TAXES.
No penalty shall be imposed under the Internal Reve-
nue Code of 1986 solely by reason of a failure by a person
to use the electronic fund transfer system established
under section 6302(h) of such Code if—
249
(1) such person is a member of a class of tax-
payers first required to use such system on or after
July 1, 1997, and
(2) such failure occurs before January 1, 1999.
SEC. 942. CLARIFICATION OF TREATMENT OF HOME OF-
FICE USE FOR ADMINISTRATIVE AND MAN-
AGEMENT ACTIVITIES.
(a) IN GENERAL.—Paragraph (1) of section 280A(c)
is amended by adding at the end the following new sen-
tence: ‘‘For purposes of subparagraph (A), the term ‘prin-
cipal place of business’ includes a place of business which
is used by the taxpayer for the administrative or manage-
ment activities of any trade or business of the taxpayer
if there is no other fixed location of such trade or business
where the taxpayer conducts substantial administrative or
management activities of such trade or business.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
Subtitle F—Other Provisions
SEC. 951. USE OF ESTIMATES OF SHRINKAGE FOR INVEN-
TORY ACCOUNTING.
(a) IN GENERAL.—Section 471 (relating to general
rule for inventories) is amended by redesignating sub-
250
section (b) as subsection (c) and by inserting after sub-
section (a) the following new subsection:
‘‘(b) ESTIMATES OF INVENTORY SHRINKAGE PER-
MITTED.—A method of determining inventories shall not
be deemed not to clearly reflect income solely because it
utilizes estimates of inventory shrinkage that are con-
firmed by a physical count only after the last day of the
taxable year if—
‘‘(1) the taxpayer normally does a physical
count of inventories at each location on a regular
and consistent basis, and
‘‘(2) the taxpayer makes proper adjustments to
such inventories and to its estimating methods to
the extent such estimates are greater than or less
than the actual shrinkage.’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to taxable years ending after
the date of the enactment of this Act.
(2) COORDINATION WITH SECTION 481.—In the
case of any taxpayer permitted by this section to
change its method of accounting to a permissible
method for any taxable year—
(A) such changes shall be treated as initi-
ated by the taxpayer,
251
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the period for taking into account the
adjustments under section 481 by reason of
such change shall be 4 years.
SEC. 952. ASSIGNMENT OF WORKMEN’S COMPENSATION LI-
ABILITY ELIGIBLE FOR EXCLUSION RELAT-
ING TO PERSONAL INJURY LIABILITY AS-
SIGNMENTS.
(a) IN GENERAL.—Subsection (c) of section 130 (re-
lating to certain personal injury liability assignments) is
amended—
(1) by inserting ‘‘, or as compensation under
any workmen’s compensation act,’’ after ‘‘(whether
by suit or agreement)’’ in the material preceding
paragraph (1),
(2) by inserting ‘‘or the workmen’s compensa-
tion claim,’’ after ‘‘agreement,’’ in paragraph (1),
and
(3) by striking ‘‘section 104(a)(2)’’ in para-
graph (2)(D) and inserting ‘‘paragraph (1) or (2) of
section 104(a)’’.
(b) EFFECTIVE DATE.—The amendments made by
subsection (a) shall apply to claims under workmen’s com-
252
pensation acts filed after the date of the enactment of this
Act.
SEC. 953. TAX-EXEMPT STATUS FOR CERTAIN STATE WORK-
ER’S COMPENSATION ACT COMPANIES.
(a) IN GENERAL.—Section 501(c)(27) (relating to
membership organizations under workmen’s compensation
acts) is amended by adding at the end the following:
‘‘(B) Any organization (including a mutual in-
surance company) if—
‘‘(i) such organization is created by State
law and is organized and operated under State
law exclusively to—
‘‘(I) provide workmen’s compensation
insurance which is required by State law or
with respect to which State law provides
significant disincentives if such insurance
is not purchased by an employer, and
‘‘(II) provide related coverage which is
incidental to workmen’s compensation in-
surance,
‘‘(ii) such organization must provide work-
men’s compensation insurance to any employer
in the State (for employees in the State or tem-
porarily assigned out-of-State) which seeks such
253
insurance and meets other reasonable require-
ments relating thereto,
‘‘(iii)(I) the State makes a financial com-
mitment with respect to such organization ei-
ther by extending the full faith and credit of
the State to debt of such organization or by
providing the initial operating capital of such
organization and (II) in the case of periods
after the date of enactment of this subpara-
graph, the assets of such organization revert to
the State upon dissolution, and
‘‘(iv) the majority of the board of directors
or oversight body of such organization are ap-
pointed by the chief executive officer or other
executive branch official of the State, by the
State legislature, or by both.’’.
(b) 
CONFORMING
AMENDMENTS.—Section
501(c)(27) of such Code is amended by inserting ‘‘(A)’’
after ‘‘(27)’’, by redesignating subparagraphs (A), (B),
and (C) as clauses (i), (ii), and (iii), respectively, and by
redesignating clauses (i) and (ii) of subparagraphs (B)
and (C) (before redesignation) as subclauses (I) and (II),
respectively.
254
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 954. ELECTION TO CONTINUE EXCEPTION FROM
TREATMENT OF PUBLICLY TRADED PART-
NERSHIPS AS CORPORATIONS.
(a) IN GENERAL.—Section 7704 is amended by add-
ing at the end thereof the following new subsection:
‘‘(g) EXCEPTION FOR EXISTING PUBLICLY TRADED
PARTNERSHIPS.—
‘‘(1) IN
GENERAL.—Subsection (a) shall not
apply to an existing publicly traded partnership
which elects the application of this subsection and
consents to the application of the tax imposed by
paragraph (3).
‘‘(2) EXISTING
PUBLICLY
TRADED
PARTNER-
SHIP.—For purposes of this section, the term ‘exist-
ing publicly traded partnership’ means any publicly
traded partnership to which subsection (a) does not
apply as of the date of the enactment of this para-
graph (other than by reason of subsection (c)(1)).
‘‘(3) ADDITIONAL TAX ON ELECTING PUBLICLY
TRADED PARTNERSHIPS.—
‘‘(A) IMPOSITION OF TAX.—There is here-
by imposed for each taxable year on the income
255
of every electing publicly traded partnership a
tax equal to 15 percent of the gross income for
such taxable year from the active conduct of
trades and businesses by the partnership.
‘‘(B) ELECTING PUBLICLY TRADED PART-
NERSHIP.—For purposes of this paragraph, the
term ‘electing publicly traded partnership’
means any partnership for which the consent
under paragraph (1) is in effect.
‘‘(C) ADJUSTMENTS
IN
THE
CASE
OF
TIERED PARTNERSHIPS.—For purposes of this
paragraph, if the income of the partnership in-
cludes its distributive share of income from an-
other partnership for any taxable year, the
gross income referred to in subparagraph (A)
shall include the gross income of such other
partnership from the active conduct of trades
and businesses of such other partnership (in
lieu of such distributive share). A similar rule
shall apply in the case of lower-tiered partner-
ships.
‘‘(D) TREATMENT OF TAX.—For purposes
of this title, the tax imposed by this paragraph
shall be treated as imposed by chapter 1 other
256
than for purposes of determining the amount of
any credit allowable under chapter 1.
‘‘(4) ELECTION.—An election and consent
under this subsection shall apply to the taxable year
for which made and all subsequent taxable years un-
less revoked by the partnership. Such revocation
may be made without the consent of the Secretary,
but, once so revoked, may not be reinstated.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 955. EXCLUSION FROM UNRELATED BUSINESS TAX-
ABLE INCOME FOR CERTAIN SPONSORSHIP
PAYMENTS.
(a) IN GENERAL.—Section 513 (relating to unrelated
trade or business income) is amended by adding at the
end the following new subsection:
‘‘(i) TREATMENT OF CERTAIN SPONSORSHIP PAY-
MENTS.—
‘‘(1) IN GENERAL.—The term ‘unrelated trade
or business’ does not include the activity of soliciting
and receiving qualified sponsorship payments.
‘‘(2) QUALIFIED
SPONSORSHIP
PAYMENTS.—
For purposes of this subsection—
257
‘‘(A) IN
GENERAL.—The term ‘qualified
sponsorship payment’ means any payment made
by any person engaged in a trade or business
with respect to which there is no arrangement
or expectation that such person will receive any
substantial return benefit other than the use or
acknowledgement of the name or logo (or prod-
uct lines) of such person’s trade or business in
connection with the activities of the organiza-
tion that receives such payment. Such a use or
acknowledgement does not include advertising
such person’s products or services (including
messages containing qualitative or comparative
language, price information or other indications
of savings or value, an endorsement, or an in-
ducement to purchase, sell, or use such prod-
ucts or services).
‘‘(B) LIMITATIONS.—
‘‘(i) CONTINGENT
PAYMENTS.—The
term ‘qualified sponsorship payment’ does
not include any payment if the amount of
such payment is contingent upon the level
of attendance at one or more events,
broadcast ratings, or other factors indicat-
258
ing the degree of public exposure to one or
more events.
‘‘(ii) ACKNOWLEDGEMENTS
OR
AD-
VERTISING
IN
PERIODICALS.—The term
‘qualified sponsorship payment’ does not
include any payment which entitles the
payor to an acknowledgement or advertis-
ing in regularly scheduled and printed ma-
terial published by or on behalf of the
payee organization that is not related to
and primarily distributed in connection
with a specific event conducted by the
payee organization.
‘‘(3) ALLOCATION
OF
PORTIONS
OF
SINGLE
PAYMENT.—For purposes of this subsection, to the
extent that a portion of a payment would (if made
as a separate payment) be a qualified sponsorship
payment, such portion of such payment and the
other portion of such payment shall be treated as
separate payments.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to payments solicited or received
after December 31, 1997.
259
SEC. 956. ASSOCIATIONS OF HOLDERS OF TIMESHARE IN-
TERESTS TO BE TAXED LIKE OTHER HOME-
OWNERS ASSOCIATIONS.
(a) TIMESHARE ASSOCIATIONS INCLUDED AS HOME-
OWNER ASSOCIATIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
528(c) (defining homeowners association) is amend-
ed—
(A) by striking ‘‘or a residential real estate
management association’’ and inserting ‘‘, a
residential real estate management association,
or a timeshare association’’ in the material pre-
ceding subparagraph (A),
(B) by striking ‘‘or’’ at the end of clause
(i) of subparagraph (B), by striking the period
at the end of clause (ii) of subparagraph (B)
and inserting ‘‘, or’’, and by adding at the end
of subparagraph (B) the following new clause:
‘‘(iii) owners of timeshare rights to
use, or timeshare ownership interests in,
association property in the case of a
timeshare association,’’, and
(C) by inserting ‘‘and, in the case of a
timeshare association, for activities provided to
or on behalf of members of the association’’ be-
fore the comma at the end of subparagraph (C).
260
(2) TIMESHARE ASSOCIATION DEFINED.—Sub-
section (c) of section 528 is amended by redesignat-
ing paragraph (4) as paragraph (5) and by inserting
after paragraph (3) the following new paragraph:
‘‘(4) 
TIMESHARE
ASSOCIATION.—The 
term
‘timeshare association’ means any organization
(other than a condominium management associa-
tion) meeting the requirement of subparagraph (A)
of paragraph (1) if any member thereof holds a
timeshare right to use, or a timeshare ownership in-
terest in, real property constituting association prop-
erty.’’.
(b) EXEMPT FUNCTION INCOME.—Paragraph (3) of
section 528(d) is amended by striking ‘‘or’’ at the end of
subparagraph (A), by striking the period at the end of
subparagraph (B) and inserting ‘‘, or’’, and by adding at
the end the following new subparagraph:
‘‘(C) owners of timeshare rights to use, or
timeshare ownership interests in, real property
in the case of a timeshare association.’’.
(c) RATE OF TAX.—Subsection (b) of section 528 (re-
lating to certain homeowners associations) is amended by
inserting before the period ‘‘(32 percent of such income
in the case of a timeshare association)’’.
261
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
SEC. 957. ADDITIONAL ADVANCE REFUNDING OF CERTAIN
VIRGIN ISLAND BONDS.
Subclause (I) of section 149(d)(3)(A)(i) of the Inter-
nal Revenue Code of 1986 shall not apply to the second
advance refunding of any issue of the Virgin Islands which
was first advance refunded before June 9, 1997, if the
debt provisions of the refunding bonds are changed to re-
peal the priority first lien requirement of the refunded
bonds.
SEC. 958. NONRECOGNITION OF GAIN ON SALE OF STOCK
TO CERTAIN FARMERS’ COOPERATIVES.
(a) IN GENERAL.—Section 1042 (relating to sales of
stock to employee stock ownership plans or certain co-
operatives) is amended by adding at the end the following
new subsection:
‘‘(g) APPLICATION OF SECTION TO SALES OF STOCK
IN AGRICULTURAL REFINERS AND PROCESSORS TO ELI-
GIBLE FARM COOPERATIVES.—
‘‘(1) IN GENERAL.—This section shall apply to
the sale of stock of a qualified refiner or processor
to an eligible farmers’ cooperative.
262
‘‘(2) QUALIFIED REFINER OR PROCESSOR.—For
purposes of this subsection, the term ‘qualified re-
finer or processor’ means a domestic corporation—
‘‘(A) substantially all of the activities of
which consist of the active conduct of the trade
or business of refining or processing agricul-
tural or horticultural products, and
‘‘(B) which purchases more than one-half
of such products to be refined or processed
from—
‘‘(i) farmers who make up the eligible
farmers’ cooperative which is purchasing
stock in the corporation in a transaction to
which this subsection is to apply, and
‘‘(ii) such cooperative.
‘‘(3) ELIGIBLE FARMERS’ COOPERATIVE.—For
purposes of this section, the term ‘eligible farmers’
cooperative’ means an organization to which part I
of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products.
‘‘(4) SPECIAL RULES.—In applying this section
to a sale to which paragraph (1) applies—
‘‘(A) the eligible farmers’ cooperative shall
be treated in the same manner as a cooperative
described in subsection (b)(1)(B),
263
‘‘(B) subsection (b)(2) shall be applied by
substituting ‘100 percent’ for ‘30 percent’ each
place it appears,
‘‘(C) the determination as to whether any
stock in the domestic corporation is a qualified
security shall be made without regard to wheth-
er the stock is an employer security or to sub-
section (c)(1)(A), and
‘‘(D) paragraphs (2)(D) and (7) of sub-
section (c) shall not apply.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to sales after December 31, 1997.
SEC. 959. EXCEPTION FROM REPORTING OF REAL ESTATE
TRANSACTIONS FOR SALES AND EXCHANGES
OF CERTAIN PRINCIPAL RESIDENCES.
(a) IN GENERAL.—Subsection (e) of section 6045
(relating to return required in the case of real estate
transactions) is amended by adding at the end the follow-
ing new paragraph:
‘‘(5) EXCEPTION FOR SALES OR EXCHANGES OF
CERTAIN PRINCIPAL RESIDENCES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any sale or exchange of a residence
for $250,000 or less if the person referred to in
paragraph (2)(A) receives written assurance in
264
a form acceptable to the Secretary from the
seller that—
‘‘(i) such residence is the principal
residence (within the meaning of section
121) of the seller,
‘‘(ii) there is no federally subsidized
mortgage financing assistance with respect
to the mortgage on such residence, and
‘‘(iii) the seller meets the require-
ments of section 121(a) with respect to
such sale or exchange.
If such assurance includes an assurance that
the seller is married, the preceding sentence
shall be applied by substituting ‘$500,000’ for
‘$250,000’.
‘‘(B) SELLER.—For purposes of this para-
graph, the term ‘seller’ includes the person re-
linquishing the residence in an exchange.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to sales and exchanges after the
date of the enactment of this Act.
265
SEC. 960. INCREASED DEDUCTIBILITY OF BUSINESS MEAL
EXPENSES FOR INDIVIDUALS SUBJECT TO
FEDERAL HOURS OF SERVICE.
(a) IN GENERAL.—Section 274(n) (relating to only
50 percent of meal and entertainment expenses allowed
as deduction) is amended by adding at the end the follow-
ing new paragraph:
‘‘(3) SPECIAL RULE FOR INDIVIDUALS SUBJECT
TO FEDERAL HOURS OF SERVICE.—
‘‘(A) IN GENERAL.—In the case of any ex-
penses for food or beverages consumed while
away from home (within the meaning of section
162(a)(2)) by an individual during, or incident
to, the period of duty subject to the hours of
service limitations of the Department of Trans-
portation, paragraph (1) shall be applied by
substituting ‘the applicable percentage’ for ‘50
percent’.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of this paragraph, the term ‘applicable
percentage’ means the percentage determined
under the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
1998 or 1999 ...........................................................................
2000 or 2001 ...........................................................................
2002 or 2003 ...........................................................................
2004 or 2005 ...........................................................................
2006 or 2007 ...........................................................................
2008 or thereafter ....................................................................
80.’’.
266
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
SEC. 961. QUALIFIED LESSEE CONSTRUCTION ALLOW-
ANCES FOR SHORT-TERM LEASES.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 is amended by inserting after section 109 the follow-
ing new section:
‘‘SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOW-
ANCES FOR SHORT-TERM LEASES.
‘‘(a) IN GENERAL.—Gross income of a lessee does
not include any amount received in cash (or treated as
a rent reduction) by a lessee from a lessor—
‘‘(1) under a short-term lease of retail space,
and
‘‘(2) for the purpose of such lessee’s construct-
ing or improving qualified long-term real property
for use in such lessee’s trade or business at such re-
tail space,
but only to the extent that such amount does not exceed
the amount expended by the lessee for such construction
or improvement.
‘‘(b) CONSISTENT TREATMENT BY LESSOR.—Quali-
fied long-term real property constructed or improved in
connection with any amount excluded from a lessee’s in-
267
come by reason of subsection (a) shall be treated as non-
residential real property by the lessor.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
LONG-TERM
REAL
PROP-
ERTY.—The term ‘qualified long-term real property’
means nonresidential real property which is part of,
or otherwise present at, the retail space referred to
in subsection (a) and which reverts to the lessor at
the termination of the lease.
‘‘(2) SHORT-TERM
LEASE.—The term ‘short-
term lease’ means a lease (or other agreement for
occupancy or use) of retail space for 15 years or less
(as determined under the rules of section 168(i)(3)).
‘‘(3) RETAIL SPACE.—The term ‘retail space’
means real property leased, occupied, or otherwise
used by a lessee in its trade or business of selling
tangible personal property or services to the general
public.
‘‘(d) INFORMATION REQUIRED TO BE FURNISHED
TO SECRETARY.—Under regulations, the lessee and lessor
described in subsection (a) shall, at such times and in such
manner as may be provided in such regulations, furnish
to the Secretary—
268
‘‘(1) information concerning the amounts re-
ceived (or treated as a rent reduction) and expended
as described in subsection (a), and
‘‘(2) any other information which the Secretary
deems necessary to carry out the provisions of this
section.’’.
(b) TREATMENT AS INFORMATION RETURN.—Sub-
paragraph (A) of section 6724(d)(1)(A) is amended by
striking ‘‘or’’ at the end of clause (vii), by adding ‘‘or’’
at the end of clause (viii), and by adding at the end the
following new clause:
‘‘(ix) section 110(d) (relating to quali-
fied lessee construction allowances for
short-term leases),’’.
(c) CROSS REFERENCE.—Paragraph (8) of section
168(i) (relating to treatment of leasehold improvements)
is amended by adding at the end the following new sub-
paragraph:
‘‘(C) CROSS REFERENCE.—
‘‘For treatment of qualified long-term real prop-
erty constructed or improved in connection with
cash or rent reduction from lessor to lessee, see sec-
tion 110(b).’’.
(d) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter B of chapter 1 is amended by
inserting after the item relating to section 109 the follow-
ing new item:
269
‘‘Sec. 110. Qualified lessee construction allowances for short-term
leases.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to leases entered into after the date
of the enactment of this Act.
SEC. 962. TAX TREATMENT OF CONSOLIDATIONS OF LIFE
INSURANCE DEPARTMENTS OF MUTUAL SAV-
INGS BANKS.
(a) GENERAL RULE.—Section 594 (relating to alter-
native tax for mutual savings banks conducting life insur-
ance business) is amended by adding at the end thereof
the following new subsection:
‘‘(c) TREATMENT
OF CONSOLIDATIONS.—If 2 or
more life insurance departments to which subsection (a)
applied are consolidated into a single life insurance com-
pany pursuant to a requirement of State law—
‘‘(1) such consolidation shall be treated as a re-
organization described in section 368(a)(1)(E), and
‘‘(2) any payments required to be made to pol-
icyholders in connection with such consolidation
shall be treated as policyholder dividends deductible
under section 808 but only if—
‘‘(A) such payments are only with respect
to policies in effect immediately before such
consolidation,
270
‘‘(B) such payments are only with respect
to policies which are participating before and
after such consolidation,
‘‘(C) such payments shall cease with re-
spect to any policy if such policy lapses after
such consolidation,
‘‘(D) the policyholders before such consoli-
dation had no divisible right to the surplus of
any such department and had no right to vote,
and
‘‘(E) the approval of such policyholders
was not required for such consolidation.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on December 31, 1991.
SEC. 963. OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE
STATE TAX OBLIGATIONS AGAINST OVERPAY-
MENTS.
(a) IN GENERAL.—Section 6402 is amended by re-
designating subsections (e) through (i) as subsections (f)
through (j), respectively, and by inserting after subsection
(d) the following new subsection:
‘‘(e) COLLECTION
OF PAST-DUE, LEGALLY EN-
FORCEABLE STATE TAX OBLIGATIONS.—
‘‘(1) IN GENERAL.—Upon receiving notice from
any State that a named person owes a past-due, le-
271
gally enforceable State tax obligation to such State,
the Secretary shall, under such conditions as may be
prescribed by the Secretary—
‘‘(A) reduce the amount of any overpay-
ment payable to such person by the amount of
such State tax obligation;
‘‘(B) pay the amount by which such over-
payment is reduced under subparagraph (A) to
such State and notify such State of such per-
son’s name, taxpayer identification number, ad-
dress, and the amount collected; and
‘‘(C) notify the person making such over-
payment that the overpayment has been re-
duced by an amount necessary to satisfy a past-
due, legally enforceable State tax obligation.
If an offset is made pursuant to a joint return, the
notice under subparagraph (B) shall include the
names, taxpayer identification numbers, and ad-
dresses of each person filing such return.
‘‘(2) OFFSET PERMITTED ONLY AGAINST RESI-
DENTS OF STATE SEEKING OFFSET.—Paragraph (1)
shall apply to an overpayment by any person for a
taxable year only if the address shown on the return
for such taxable year is an address within the State
seeking the offset.
272
‘‘(3) PRIORITIES FOR OFFSET.—Any overpay-
ment by a person shall be reduced pursuant to this
subsection—
‘‘(A) after such overpayment is reduced
pursuant to—
‘‘(i) subsection (a) with respect to any
liability for any internal revenue tax on the
part of the person who made the overpay-
ment,
‘‘(ii) subsection (c) with respect to
past-due support, and
‘‘(iii) subsection (d) with respect to
any past-due, legally enforceable debt owed
to a Federal agency, and
‘‘(B) before such overpayment is credited
to the future liability for any Federal internal
revenue tax of such person pursuant to sub-
section (b).
If the Secretary receives notice from 1 or more
agencies of the State of more than 1 debt subject to
paragraph (1) that is owed by such person to such
an agency, any overpayment by such person shall be
applied against such debts in the order in which
such debts accrued.
273
‘‘(4) NOTICE; CONSIDERATION OF EVIDENCE.—
No State may take action under this subsection until
such State—
‘‘(A) notifies the person owing the past-due
State tax liability that the State proposes to
take action pursuant to this section,
‘‘(B) gives such person at least 60 days to
present evidence that all or part of such liability
is not past-due or not legally enforceable,
‘‘(C) considers any evidence presented by
such person and determines that an amount of
such debt is past-due and legally enforceable,
and
‘‘(D) satisfies such other conditions as the
Secretary may prescribe to ensure that the de-
termination made under subparagraph (C) is
valid and that the State has made reasonable
efforts to obtain payment of such State tax ob-
ligation.
‘‘(5) PAST-DUE, LEGALLY ENFORCEABLE STATE
TAX OBLIGATION.—For purposes of this subsection,
the term ‘past-due, legally enforceable State tax obli-
gation’ means a debt—
‘‘(A)(i) which resulted from—
274
‘‘(I) a judgment rendered by a court
of competent jurisdiction which has deter-
mined an amount of State tax to be due,
or
‘‘(II) a determination after an admin-
istrative hearing which has determined an
amount of State tax to be due, and
‘‘(ii) which is no longer subject to judicial
review, or
‘‘(B) which resulted from a State tax
which has been assessed but not collected, the
time for redetermination of which has expired,
and which has not been delinquent for more
than 10 years.
For purposes of this paragraph, the term ‘State tax’
includes any local tax administered by the chief tax
administration agency of the State.
‘‘(6) REGULATIONS.—The Secretary shall issue
regulations prescribing the time and manner in
which States must submit notices of past-due, legally
enforceable State tax obligations and the necessary
information that must be contained in or accompany
such notices. The regulations shall specify the types
of State taxes and the minimum amount of debt to
which the reduction procedure established by para-
275
graph (1) may be applied. The regulations may re-
quire States to pay a fee to reimburse the Secretary
for the cost of applying such procedure. Any fee paid
to the Secretary pursuant to the preceding sentence
shall be used to reimburse appropriations which bore
all or part of the cost of applying such procedure.
‘‘(7) ERRONEOUS
PAYMENT
TO
STATE.—Any
State receiving notice from the Secretary that an er-
roneous payment has been made to such State under
paragraph (1) shall pay promptly to the Secretary,
in accordance with such regulations as the Secretary
may prescribe, an amount equal to the amount of
such erroneous payment (without regard to whether
any other amounts payable to such State under such
paragraph have been paid to such State).’’.
(b) DISCLOSURE
OF CERTAIN INFORMATION
TO
STATES REQUESTING REFUND OFFSETS FOR PAST-DUE,
LEGALLY ENFORCEABLE STATE TAX OBLIGATIONS.—
(1) Paragraph (10) of section 6103(l) is amend-
ed by striking ‘‘(c) or (d)’’ each place it appears and
inserting ‘‘(c), (d), or (e)’’.
(2) The paragraph heading for such paragraph
(10) is amended by striking ‘‘SECTION 6402(c) OR
6402(d)’’ and inserting ‘‘SUBSECTION (c), (d), OR (e)
OF SECTION 6402’’.
276
(c) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 6402 is amended
by striking ‘‘(c) and (d)’’ and inserting ‘‘(c), (d),
and (e)’’.
(2) Paragraph (2) of section 6402(d) is amend-
ed by striking ‘‘and before such overpayment’’ and
inserting ‘‘and before such overpayment is reduced
pursuant to subsection (e) and before such overpay-
ment’’.
(3) Subsection (f) of section 6402, as redesig-
nated by subsection (a), is amended—
(A) by striking ‘‘(c) or (d)’’ and inserting
‘‘(c), (d), or (e)’’, and
(B) by striking ‘‘Federal agency’’ and in-
serting ‘‘Federal agency or State’’.
(4) Subsection (h) of section 6402, as redesig-
nated by subsection (a), is amended by striking
‘‘subsection (c)’’ and inserting ‘‘subsection (c) or
(e)’’.
(d) AMENDMENTS APPLIED AFTER TECHNICAL COR-
RECTIONS TO PERSONAL RESPONSIBILITY AND WORK OP-
PORTUNITY RECONCILIATION ACT OF 1996.—
(1) Section 110(l) of the Personal Responsibil-
ity and Work Opportunity Reconciliation Act of
1996 is amended by striking paragraphs (4), (5),
277
and (7) (and the amendments made by such para-
graphs), and the Internal Revenue Code of 1986
shall be applied as if such paragraphs (and amend-
ments) had never been enacted.
(2) For purposes of applying the amendments
made by this section other than this subsection, the
provisions of this subsection shall be treated as hav-
ing been enacted immediately before the other provi-
sions of this section.
(e) EFFECTIVE DATE.—The amendments made by
this section (other than subsection (d)) shall apply to re-
funds payable under section 6402 of the Internal Revenue
Code of 1986 after December 31, 1998.
SEC. 964. EXEMPTION OF THE INCREMENTAL COST OF A
CLEAN FUEL VEHICLE FROM THE LIMITS ON
DEPRECIATION FOR VEHICLES.
(a) IN GENERAL.—Section 280F(a)(1) (relating to
limiting depreciation on luxury automobiles) is amended
by adding at the end the following new subparagraph:
‘‘(C) SPECIAL RULE FOR CERTAIN CLEAN-
FUEL PASSENGER AUTOMOBILES.—
‘‘(i) 
MODIFIED
AUTOMOBILES.—In
the case of a passenger automobile which
is propelled by a fuel which is not a clean-
burning fuel to which is installed qualified
278
clean-fuel vehicle property (as defined in
section 179A(c)(1)(A)) for purposes of per-
mitting such vehicle to be propelled by a
clean burning fuel (as defined in section
179A(e)(1)), subparagraph (A) shall not
apply to the cost of the installed qualified
clean burning vehicle property as depre-
ciated pursuant to section 168 by applying
the rules under subsections (b)(1), (d)(1),
and (e)(3)(B) thereof.
‘‘(ii) PURPOSE BUILT PASSENGER VE-
HICLES.—In the case of a purpose built
passenger vehicle (as defined in section
4001(a)(2)(C)(ii)), each of the annual limi-
tations specified in subparagraph (A) shall
be tripled.’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to property placed in service on
or after the date of enactment of this Act and before Janu-
ary 1, 2005.
SEC. 965. TAX BENEFITS FOR LAW ENFORCEMENT OFFI-
CERS KILLED IN THE LINE OF DUTY.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to items specifically excluded from gross
income) is amended by redesignating section 138 as sec-
279
tion 139 and by inserting after section 137 the following
new section:
‘‘SEC. 138. SURVIVOR BENEFITS ATTRIBUTABLE TO SERV-
ICE BY A LAW ENFORCEMENT OFFICER WHO
IS KILLED IN THE LINE OF DUTY.
‘‘(a) IN GENERAL.—Gross income shall not include
any amount paid as a survivor annuity on account of the
death of a law enforcement officer killed in the line of
duty—
‘‘(1) if such annuity is provided under a govern-
mental plan which meets the requirements of section
401(a) to the spouse (or a former spouse) of the law
enforcement officer or to a child of such officer, and
‘‘(2) to the extent such annuity is attributable
to such officer’s service as a law enforcement officer.
‘‘(b) EXCEPTIONS.—
‘‘(1) IN
GENERAL.—Subsection (a) shall not
apply with respect to the death of any law enforce-
ment officer if—
‘‘(A) the death was caused by the inten-
tional misconduct of the officer or by such offi-
cer’s intention to bring about such officer’s
death,
‘‘(B) the officer was voluntarily intoxicated
(as defined in section 1204 of the Omnibus
280
Crime Control and Safe Streets Act of 1968) at
the time of death, or
‘‘(C) the officer was performing such offi-
cer’s duties in a grossly negligent manner at
the time of death.
‘‘(2) EXCEPTION FOR BENEFITS PAID TO CER-
TAIN INDIVIDUALS.—Subsection (a) shall not apply
to any payment to an individual whose actions were
a substantial contributing factor to the death of the
officer.
‘‘(c) LAW ENFORCEMENT OFFICER.—For purposes
of this section, the term ‘law enforcement officer’ means
an individual serving a public agency (as defined in section
1204 of the Omnibus Crime Control and Safe Streets Act
of 1968) in an official capacity, with or without compensa-
tion, as a law enforcement officer (as defined in such sec-
tion).’’.
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter B of chapter 1 is amended by
striking the last item and inserting the following new
items:
‘‘Sec. 138. Survivor benefits attributable to service by a law en-
forcement officer who is killed in the line of duty.
‘‘Sec. 139. Cross references to other Acts.’’.
(c) EFFECTIVE DATE.—The amendments made by
this subsection shall apply to amounts received in taxable
281
years beginning after December 31, 1996, with respect to
individuals dying after such date.
SEC. 966. TEMPORARY SUSPENSION OF TAXABLE INCOME
LIMIT ON PERCENTAGE DEPLETION FOR
MARGINAL PRODUCTION.
In the case of taxable years beginning after December
31, 1997, and before January 1, 2000, paragraph (1) of
section 613A(d) of the Internal Revenue Code of 1986
shall not apply to so much of the allowance for depletion
computed under section 613A(c) of such Code as is attrib-
utable to paragraph (6) thereof.
Subtitle G—Extension of Duty-Free
Treatment Under Generalized
System of Preferences; Tariff
Treatment of Certain Equip-
ment and Repair of Vessels
SEC. 971. GENERALIZED SYSTEM OF PREFERENCES.
(a) EXTENSION OF DUTY-FREE TREATMENT UNDER
SYSTEM.—Section 505 of the Trade Act of 1974 (19
U.S.C. 2465) is amended by striking ‘‘May 31, 1997’’ and
inserting ‘‘May 31, 1999’’.
(b) RETROACTIVE APPLICATION FOR CERTAIN LIQ-
UIDATIONS AND RELIQUIDATIONS.—
282
(1) IN GENERAL.—Notwithstanding section 514
of the Tariff Act of 1930 or any other provision of
law and subject to paragraph (2), the entry—
(A) of any article to which duty-free treat-
ment under title V of the Trade Act of 1974
would have applied if the entry had been made
on May 31, 1997, and
(B) that was made after May 31, 1997,
and before the date of the enactment of this
Act,
shall be liquidated or reliquidated as free of duty,
and the Secretary of the Treasury shall refund any
duty paid with respect to such entry. As used in this
subsection, the term ‘‘entry’’ includes a withdrawal
from warehouse for consumption.
(2) REQUESTS.—Liquidation or reliquidation
may be made under paragraph (1) with respect to
an entry only if a request therefor is filed with the
Customs Service, within 180 days after the date of
the enactment of this Act, that contains sufficient
information to enable the Customs Service—
(A) to locate the entry; or
(B) to reconstruct the entry if it cannot be
located.
283
SEC. 972. EQUIPMENT AND REPAIR OF VESSELS.
(a) TARIFF TREATMENT.—Section 466 of the Tariff
Act of 1930 (19 U.S.C. 1466), is amended by adding at
the end the following new subsection:
‘‘(i)(1) The duty imposed by subsection (a) shall not
apply with respect to activities occurring in a Shipbuilding
Agreement Party, with respect to—
‘‘(A) self-propelled seagoing vessels of 100 gross
tons or more that are used for transportation of
goods or persons or for performance of a specialized
service (including, but not limited to, ice breakers
and dredges), and
‘‘(B) tugs of 365 kilowatts or more.
A vessel shall be considered ‘self-propelled seagoing’ if its
permanent propulsion and steering provide it all the char-
acteristics of self-navigability in the high seas.
‘‘(2) As used in this subsection—
‘‘(A) the term ‘Shipbuilding Agreement Party’
means a state or separate customs territory that is
a signatory to the Shipbuilding Agreement; and
‘‘(B) the term ‘Shipbuilding Agreement’ means
The Agreement Respecting Normal Competitive
Conditions in the Commercial Shipbuilding and Re-
pair Industry, resulting from negotiations under the
auspices of the Organization for Economic Coopera-
284
tion and Development, and entered into on Decem-
ber 21, 1994.’’.
(b) APPLICABILITY.—The amendment made by sub-
section (a) applies only with respect to activities occurring
in a Shipbuilding Agreement Party (as defined in section
466(i) of the Tariff Act of 1930) during the 1-year period
beginning on the date of the enactment of this Act.
Subtitle 
H—United 
States-Carib-
bean Basin Trade Partnership
Act
SEC. 981. SHORT TITLE.
This subtitle may be cited as the ‘‘United States-Car-
ibbean Basin Trade Partnership Act’’.
SEC. 982. FINDINGS AND POLICY.
(a) FINDINGS.—The Congress makes the following
findings:
(1) The United States apparel industry is a
major component of the United States manufactur-
ing sector of the United States, employing nearly
825,000 people who are located in every State in the
country. The United States apparel industry con-
sumes 42 percent of the fabric produced by United
States textile mills, which employ more than
650,000 people.
285
(2) In 1973 the United States apparel industry
supplied 88 percent of the garments consumed by
Americans, and in 1995 that share fell to less than
50 percent.
(3) Countries in the Western Hemisphere offer
the greatest opportunities for increased exports of
United States textile and apparel products.
(4) Given the greater propensity of countries lo-
cated in the Western Hemisphere to use United
States components and to purchase United States
products compared to other countries, increased
trade and economic activity between the United
States and countries in the Western Hemisphere will
create new jobs in the United States as a result of
expanding export opportunities.
(5) The Caribbean Basin Economic Recovery
Act represents a permanent commitment by the
United States to encourage the development of
strong democratic governments and revitalized
economies in neighboring countries in the Caribbean
Basin.
(6) The economic security of the countries in
the Caribbean Basin is potentially threatened by the
diversion of investment to Mexico as a result of the
North American Free Trade Agreement.
286
(7) Offering NAFTA equivalent benefits to
Caribbean Basin beneficiary countries, pending their
eventual accession to the NAFTA or a free trade
agreement comparable to the NAFTA, will promote
the growth of free enterprise and economic oppor-
tunity in the region, and thereby enhance the na-
tional security interests of the United States.
(b) POLICY.—It is the policy of the United States—
(1) to assure that the domestic textile and ap-
parel industry remains competitive in the global
marketplace by encouraging the formation and ex-
pansion of ‘‘partnerships’’ between the textile and
apparel industry of the United States and the textile
and apparel industry of various countries located in
the Western Hemisphere; and
(2) to offer to the products of Caribbean Basin
partnership countries tariffs and quota treatment
equivalent to that accorded to products of NAFTA
countries, and to seek the accession of these partner-
ship countries to the NAFTA or a free trade agree-
ment comparable to the NAFTA at the earliest pos-
sible date, with the goal of achieving full participa-
tion in the NAFTA or in a free trade agreement
comparable to the NAFTA by all partnership coun-
tries by not later than January 1, 2005.
287
SEC. 983. DEFINITIONS.
As used in this Act:
(1) PARTNERSHIP COUNTRY.—The term ‘‘part-
nership country’’ means a beneficiary country as de-
fined in section 212(a)(1)(A) of the Caribbean Basin
Economic Recovery Act (19 U.S.C. 2702(a)(1)(A)).
(2) NAFTA.—The term ‘‘NAFTA’’ means the
North American Free Trade Agreement entered into
between the United States, Mexico, and Canada on
December 17, 1992.
(3) 
TRADE
REPRESENTATIVE.—The 
term
‘‘Trade Representative’’ means the United States
Trade Representative.
(4) WTO AND
WTO
MEMBER.—The terms
‘‘WTO’’ and ‘‘WTO member’’ have the meanings
given those terms in section 2 of the Uruguay
Round Agreements Act (19 U.S.C. 3501).
SEC. 984. TEMPORARY PROVISIONS TO PROVIDE NAFTA
PARITY TO PARTNERSHIP COUNTRIES.
(a) TEMPORARY PROVISIONS.—Section 213(b) of the
Caribbean Basin Economic Recovery Act (19 U.S.C.
2703(b)) is amended to read as follows:
‘‘(b) IMPORT-SENSITIVE ARTICLES.—
‘‘(1) IN GENERAL.—Subject to paragraphs (2)
through (5), the duty-free treatment provided under
this title does not apply to—
288
‘‘(A) textile and apparel articles which are
subject to textile agreements;
‘‘(B) footwear not designated at the time
of the effective date of this title as eligible arti-
cles for the purpose of the generalized system
of preferences under title V of the Trade Act of
1974;
‘‘(C) tuna, prepared or preserved in any
manner, in airtight containers;
‘‘(D) petroleum, or any product derived
from petroleum, provided for in headings 2709
and 2710 of the HTS;
‘‘(E) watches and watch parts (including
cases, bracelets and straps), of whatever type
including, but not limited to, mechanical, quartz
digital, or quartz analog, if such watches or
watch parts contain any material which is the
product of any country with respect to which
HTS column 2 rates of duty apply; or
‘‘(F) articles to which reduced rates of
duty apply under subsection (h).
‘‘(2) NAFTA TRANSITION PERIOD TREATMENT
OF CERTAIN TEXTILE AND APPAREL ARTICLES.—
‘‘(A) EQUIVALENT
TARIFF
AND
QUOTA
TREATMENT.—During the transition period—
289
‘‘(i) the tariff treatment accorded at
any time to any textile or apparel article
that originates in the territory of a part-
nership country shall be identical to the
tariff treatment that is accorded at such
time under section 2 of the Annex to an
article described in the same 8-digit sub-
heading of the HTS that is an originating
good of Mexico and is imported into the
United States;
‘‘(ii) duty-free treatment under this
title shall apply to any textile or apparel
article that is imported into the United
States from a partnership country and
that—
‘‘(I) is assembled in a partner-
ship country, from fabrics wholly
formed and cut in the United States
from yarns formed in the United
States, and is entered—
‘‘(aa) 
under 
subheading
9802.00.80 of the HTS; or
‘‘(bb) under chapter 61 or
62 of the HTS if, after such as-
sembly, the article would have
290
qualified for treatment under
subheading 9802.00.80 of the
HTS, but for the fact the article
was subjected to bleaching, dye-
ing, stone-washing, enzyme-wash-
ing, acid-washing, perma-press-
ing, or similar processes or em-
broidery; or
‘‘(II) is knit-to-shape in a part-
nership country from yarns wholly
formed in the United States;
‘‘(III) is made from fabric knit in
a partnership country from yarns
wholly formed in the United States;
‘‘(IV) is cut and assembled in a
partnership country from yarns wholly
formed in the United States; or
‘‘(V) is identified under subpara-
graph (C) as a handloomed, hand-
made, or folklore article of such coun-
try and is certified as such by the
competent authority of such country;
and
‘‘(iii) no quantitative restriction under
any bilateral textile agreement may be ap-
291
plied to the importation into the United
States of any textile or apparel article
that—
‘‘(I) originates in the territory of
a partnership country, or
‘‘(II) qualifies for duty-free treat-
ment under subclause (I), (II), (III),
(IV), or (V) of clause (ii).
‘‘(B) NAFTA TRANSITION PERIOD TREAT-
MENT OF NONORIGINATING TEXTILE AND AP-
PAREL ARTICLES.—
‘‘(i) PREFERENTIAL
TARIFF
TREAT-
MENT.—Subject to clause (ii), the Presi-
dent may place in effect at any time dur-
ing the transition period with respect to
any textile or apparel article that—
‘‘(I) is a product of a partnership
country, but
‘‘(II) does not qualify as a good
that originates in the territory of a
partnership country,
tariff treatment that is identical to the in-
preference-level tariff treatment accorded
at such time under Appendix 6.B of the
Annex to an article described in the same
292
8-digit subheading of the HTS that is a
product of Mexico and is imported into the
United States. For purposes of this clause,
the ‘in-preference-level tariff treatment’ ac-
corded to an article that is a product of
Mexico is the rate of duty applied to that
article when imported in quantities less
than or equal to the quantities specified in
Schedule 6.B.1, 6.B.2., or 6.B.3. of the
Annex for imports of that article from
Mexico into the United States.
‘‘(ii) LIMITATIONS ON CERTAIN ARTI-
CLES.—(I) Tariff treatment under clause
(i) may be extended, during any calendar
year, to not more than 45,000,000 square
meter equivalents of cotton or man-made
fiber apparel, to not more than 1,500,000
square meter equivalents of wool apparel,
and to not more than 25,000,000 square
meter equivalents of goods entered under
subheading 9802.00.80 of the HTS.
‘‘(II) Except as provided in subclause
(III), the amounts set forth in subclause
(I) shall be allocated among the 7 partner-
ship countries with the largest volume of
293
exports to the United States of textile and
apparel goods in calendar year 1996, based
upon a pro rata share of the volume of tex-
tile and apparel goods of each of those 7
countries that entered the United States
under subheading 9802.00.80 of the HTS
during the first 12 months of the 14-
month period ending on the date of the en-
actment of the United States-Caribbean
Basin Trade Partnership Act.
‘‘(III) Five percent of the amounts set
forth in subclause (I) shall be allocated
among the partnership countries, other
than those to which subclause (II) applies,
based upon a pro rata share of the exports
to the United States of textile and apparel
goods of each of those countries during the
first 12 months of the 14-month period
ending on the date of the enactment of the
United 
States-Caribbean 
Basin 
Trade
Partnership Act.
‘‘(iii) 
PRIOR
CONSULTATION.—The
President may implement the preferential
tariff treatment described in clause (i) only
after consultation with representatives of
294
the United States textile and apparel in-
dustry and other interested parties regard-
ing—
‘‘(I) the specific articles to which
such treatment will be extended,
‘‘(II) the annual quantities of
such articles that may be imported at
the preferential duty rates described
in clause (i), and
‘‘(III) the allocation of such an-
nual quantities among beneficiary
countries.
‘‘(C) 
HANDLOOMED, 
HANDMADE, 
AND
FOLKLORE
ARTICLES.—For purposes of sub-
paragraph (A), the Trade Representative shall
consult with representatives of the partnership
country for the purpose of identifying particular
textile and apparel goods that are mutually
agreed upon as being handloomed, handmade,
or folklore goods of a kind described in section
2.3 (a), (b), or (c) or Appendix 3.1.B.11 of the
Annex.
‘‘(D) BILATERAL EMERGENCY ACTIONS.—
(i) The President may take—
295
‘‘(I) bilateral emergency tariff actions
of a kind described in section 4 of the
Annex with respect to any textile or ap-
parel article imported from a partnership
country if the application of tariff treat-
ment under subparagraph (A) to such arti-
cle results in conditions that would be
cause for the taking of such actions under
such section 4 with respect to an article
described in the same 8-digit subheading
of the HTS that is imported from Mexico;
or
‘‘(II) bilateral emergency quantitative
restriction actions of a kind described in
section 5 of the Annex with respect to im-
ports of any textile or apparel article de-
scribed in subparagraph (B)(i) (I) and (II)
if the importation of such article into the
United States results in conditions that
would be cause for the taking of such ac-
tions under such section 5 with respect to
a like article that is a product of Mexico.
‘‘(ii) The requirement in paragraph (5) of
section 4 of the Annex (relating to providing
compensation) shall not be deemed to apply to
296
a bilateral emergency action taken under this
subparagraph.
‘‘(iii) For purposes of applying bilateral
emergency action under this subparagraph—
‘‘(I) the term ‘transition period’ in
sections 4 and 5 of the Annex shall be
deemed to be the period defined in para-
graph (5)(D); and
‘‘(II) any requirements to consult
specified in section 4 or 5 of the Annex are
deemed to be satisfied if the President re-
quests consultations with the partnership
country in question and the country does
not agree to consult within the time period
specified in such section.
‘‘(3) NAFTA TRANSITION PERIOD TREATMENT
OF CERTAIN OTHER ARTICLES ORIGINATING IN BEN-
EFICIARY COUNTRIES.—
‘‘(A) EQUIVALENT TARIFF TREATMENT.—
‘‘(i) IN GENERAL.—Subject to clause
(ii), the tariff treatment accorded at any
time during the transition period to any
article referred to in any of subparagraphs
(B) through (F) of paragraph (1) that
originates in the territory of a partnership
297
country shall be identical to the tariff
treatment that is accorded at such time
under Annex 302.2 of the NAFTA to an
article described in the same 8-digit sub-
heading of the HTS that is an originating
good of Mexico and is imported into the
United States.
‘‘(ii) EXCEPTION.—Clause (i) does not
apply to any article accorded duty-free
treatment under U.S. Note 2(b) to sub-
chapter II of chapter 98 of the HTS.
‘‘(B) RELATIONSHIP TO SUBSECTION (h)
DUTY REDUCTIONS.—If at any time during the
transition period the rate of duty that would
(but for action taken under subparagraph (A)(i)
in regard to such period) apply with respect to
any article under subsection (h) is a rate of
duty that is lower than the rate of duty result-
ing from such action, then such lower rate of
duty shall be applied for the purposes of imple-
menting such action.
‘‘(4) CUSTOMS PROCEDURES.—
‘‘(A) IN GENERAL.—
‘‘(i) The obligations under chapter 5
of the NAFTA regarding customs proce-
298
dures, as such obligations apply to the ex-
porting country, shall apply to importa-
tions under paragraphs (2) and (3) of arti-
cles from partnership countries.
‘‘(ii) The Secretary of the Treasury
shall prescribe regulations that require, as
a condition of entry, that any importer of
record that claims preferential treatment
under paragraph (2) or (3) must comply
with requirements similar in all material
respects to the requirements of article
502.1 of the NAFTA. The certificate of or-
igin that otherwise would be required
under this subparagraph shall not be re-
quired in the case of an article imported
under paragraph (2) or (3) if such certifi-
cate of origin would not be required under
article 503 of the NAFTA for a similar
importation from Mexico.
‘‘(B) 
PENALTIES
FOR
ENGAGING
IN
TRANSSHIPMENT
OR
OTHER
CUSTOMS
FRAUD.—If an exporter is determined under
the laws of the United States to have engaged
in illegal transshipment of textile or apparel
products from a partnership country, then the
299
President shall deny all benefits under this title
to such exporter, and any successors of such ex-
porter, for a period of 2 years.
‘‘(C) STUDY BY USTR ON COOPERATION
OF
OTHER
COUNTRIES
CONCERNING
CIR-
CUMVENTION.—The Trade Representative, in
consultation with the United States Commis-
sioner of Customs, shall conduct a study ana-
lyzing the extent to which each partnership
country—
‘‘(i) has cooperated fully with the
United States, consistent with its domestic
laws and procedures, in instances of cir-
cumvention or alleged circumvention of ex-
isting quotas on imports of textile and ap-
parel goods, to establish necessary relevant
facts in the places of import, export, and,
where applicable, transshipment, including
investigation of circumvention practices,
exchanges of documents, correspondence,
reports, and other relevant information, to
the extent such information is available;
‘‘(ii) has taken appropriate measures,
consistent with its domestic laws and pro-
cedures, against exporters and importers
300
involved in instances of false declaration
concerning fiber content, quantities, de-
scription, classification, or origin of textile
and apparel goods; and
‘‘(iii) has penalized the individuals
and entities involved in any such cir-
cumvention, consistent with its domestic
laws and procedures, and has worked
closely to seek the cooperation of any third
country to prevent such circumvention
from taking place in that third country.
The Trade Representative shall submit to the
Congress, not later than October 1, 1998, a re-
port on the study conducted under this sub-
paragraph.
‘‘(5) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) The term ‘the Annex’ means Annex
300–B of the NAFTA.
‘‘(B) The term ‘NAFTA’ means the North
American Free Trade Agreement entered into
between the United States, Mexico, and Canada
on December 17, 1992.
‘‘(C) The term ‘partnership country’
means a beneficiary country.
301
‘‘(D) The term ‘textile or apparel article’
means any article referred to in paragraph
(1)(A) that is a good listed in Appendix 1.1 of
the Annex.
‘‘(E) The term ‘transition period’ means,
with respect to a partnership country, the pe-
riod that begins on January 1, 1998, and ends
on the earlier of—
‘‘(i) December 31, 1998; or
‘‘(ii) the date on which—
‘‘(I) the United States first ap-
plies the NAFTA to the partnership
country upon its accession to the
NAFTA, or
‘‘(II) there enters into force with
respect to the United States and the
partnership country a free trade
agreement comparable to the NAFTA
that makes substantial progress in
achieving the negotiating objectives
set forth in section 108(b)(5) of the
North American Free Trade Agree-
ment Implementation Act (19 U.S.C.
3317(b)(5)).
302
‘‘(F) An article shall be deemed as origi-
nating in the territory of a partnership country
if the article meets the rules of origin for a
good set forth in chapter 4 of the NAFTA, and,
in the case of an article described in Appendix
6.A of the Annex, the requirements stated in
such Appendix 6.A for such article to be treated
as if it were an originating good. In applying
such chapter 4 or Appendix 6.A with respect to
a partnership country for purposes of this sub-
section—
‘‘(i) no countries other than the Unit-
ed States and partnership countries may
be treated as being Parties to the NAFTA,
‘‘(ii) references to trade between the
United States and Mexico shall be deemed
to refer to trade between the United States
and partnership countries, and
‘‘(iii) references to a Party shall be
deemed to refer to the United States or a
partnership country, and references to the
Parties shall be deemed to refer to any
combination of partnership countries or
the United States.’’.
303
(b) DETERMINATION REGARDING RETENTION
OF
DESIGNATION.—Section 212(e)(1) of the Caribbean Basin
Economic Recovery Act (19 U.S.C. 2702(e)) is amended—
(1) by inserting ‘‘(A)’’ after ‘‘(1)’’;
(2) by redesignating subparagraphs (A) and
(B) as clauses (i) and (ii), respectively;
(3) by adding at the end the following:
‘‘(B)(i) Based on the President’s review and
analysis described in subsection (f), the President
may determine if the preferential treatment under
section 213(b)(2) and (3) should be withdrawn, sus-
pended, or limited with respect to any article of a
partnership country. Such determination shall be in-
cluded in the report required by subsection (f).
‘‘(ii) Withdrawal, suspension, or limitation of
the preferential treatment under section 213(b)(2)
and (3) with respect to a partnership country shall
be taken only after the requirements of subsection
(a)(2) and paragraph (2) of this subsection have
been met.’’.
(c) REPORTING REQUIREMENTS.—Section 212(f) of
the Caribbean Basin Economic Recovery Act (19 U.S.C.
2702(f)) is amended to read as follows:
‘‘(f) REPORTING REQUIREMENTS.—Not later than 1
year after the date of the enactment of the United States-
304
Caribbean Basin Trade Partnership Act and at the close
of each 3-year period thereafter, the President shall sub-
mit to the Congress a complete report regarding the oper-
ation of this title, including—
‘‘(1) with respect to subsections (b) and (c) of
this section, the results of a general review of bene-
ficiary countries based on the considerations de-
scribed in such subsections;
‘‘(2) with respect to subsection (c)(4), the de-
gree to which a country follows accepted rules of
international trade provided for under the General
Agreement on Tariffs and Trade and the World
Trade Organization;
‘‘(3) with respect to subsection (c)(9), the ex-
tent to which beneficiary countries are providing or
taking steps to provide protection of intellectual
property rights comparable to the protection pro-
vided to the United States in bilateral intellectual
property rights agreements;
‘‘(4) with respect to subsection (b)(2) and sub-
section (c)(5), the extent that beneficiary countries
are providing or taking steps to provide protection of
investment and investors comparable to the protec-
tion provided to the United States in bilateral in-
vestment treaties;
305
‘‘(5) with respect to subsection (c)(3), the ex-
tent that beneficiary countries are providing the
United States with equitable and reasonable market
access in the product sectors for which benefits are
provided under this title;
‘‘(6) with respect to subsection (c)(11), the ex-
tent that beneficiary countries are cooperating with
the United States in administering the provisions of
section 213(b); and
‘‘(7) with respect to subsection (c)(8), the ex-
tent that beneficiary countries are meeting the inter-
nationally recognized worker rights criteria under
such subsection.
In the first report under this subsection, the President
shall include a review of the implementation of section
213(b), and his analysis of whether the benefits under
paragraphs (2) and (3) of such section further the objec-
tives of this title and whether such benefits should be con-
tinued.’’.
(d) CONFORMING AMENDMENT.—Section 213(a)(1)
of the Caribbean Basin Economic Recovery Act is amend-
ed by inserting ‘‘and except as provided in section
213(b)(2) and (3),’’ after ‘‘Tax Reform Act of 1986,’’.
306
SEC. 985. EFFECT OF NAFTA ON SUGAR IMPORTS FROM
BENEFICIARY COUNTRIES.
The President shall monitor the effects, if any, that
the implementation of the NAFTA has on the access of
beneficiary countries under the Caribbean Basin Economic
Recovery Act to the United States market for sugars, syr-
ups, and molasses. If the President considers that the im-
plementation of the NAFTA is affecting, or will likely af-
fect, in an adverse manner the access of such countries
to the United States market, the President shall prompt-
ly—
(1) take such actions, after consulting with in-
terested parties and with the appropriate committees
of the House of Representatives and the Senate, or
(2) propose to the Congress such legislative ac-
tions,
as may be necessary or appropriate to ameliorate such ad-
verse effect.
SEC. 986. DUTY-FREE TREATMENT FOR CERTAIN BEV-
ERAGES MADE WITH CARIBBEAN RUM.
Section 213(a) of the Caribbean Basin Economic Re-
covery Act (19 U.S.C. 2703(a)) is amended—
(1) in paragraph (5), by striking ‘‘chapter’’ and
inserting ‘‘title’’; and
(2) by adding at the end the following new
paragraph:
307
‘‘(6) Notwithstanding paragraph (1), the duty-free
treatment provided under this title shall apply to liqueurs
and spirituous beverages produced in the territory of Can-
ada from rum if—
‘‘(A) such rum is the growth, product, or manu-
facture of a beneficiary country or of the Virgin Is-
lands of the United States;
‘‘(B) such rum is imported directly from a ben-
eficiary country or the Virgin Islands of the United
States into the territory of Canada, and such li-
queurs and spirituous beverages are imported di-
rectly from the territory of Canada into the customs
territory of the United States;
‘‘(C) when imported into the customs territory
of the United States, such liqueurs and spirituous
beverages are classified in subheading 2208.90 or
2208.40 of the HTS; and
‘‘(D) such rum accounts for at least 90 percent
by volume of the alcoholic content of such liqueurs
and spiritous beverages.’’.
SEC. 987. MEETINGS OF TRADE MINISTERS AND USTR.
(a) SCHEDULE OF MEETINGS.—The President shall
take the necessary steps to convene a meeting with the
trade ministers of the partnership countries in order to
establish a schedule of regular meetings, to commence as
308
soon as is practicable, of the trade ministers and the
Trade Representative, for the purpose set forth in sub-
section (b).
(b) PURPOSE.—The purpose of the meetings sched-
uled under subsection (a) is to reach agreement between
the United States and partnership countries on the likely
timing and procedures for initiating negotiations for part-
nership to accede to the NAFTA, or to enter into mutually
advantageous free trade agreements with the United
States that contain provisions comparable to those in the
NAFTA and would make substantial progress in achieving
the negotiating objectives set forth in section 108(b)(5)
of the North American Free Trade Agreement Implemen-
tation Act (19 U.S.C. 3317(b)(5)).
SEC. 988. REPORT ON ECONOMIC DEVELOPMENT AND MAR-
KET ORIENTED REFORMS IN THE CARIB-
BEAN.
(a) IN GENERAL.—The Trade Representative shall
make an assessment of the economic development efforts
and market oriented reforms in each partnership country
and the ability of each such country, on the basis of such
efforts and reforms, to undertake the obligations of the
NAFTA. The Trade Representative shall, not later than
July 1, 1998, submit to the President and to the Commit-
tee on Finance of the Senate and the Committee on Ways
309
and Means of the House of Representatives a report on
that assessment.
(b) ACCESSION TO NAFTA.—
(1) ABILITY
OF
COUNTRIES
TO
IMPLEMENT
NAFTA.—The Trade Representative shall include in
the report under subsection (a) a discussion of pos-
sible timetables and procedures pursuant to which
partnership countries can complete the economic re-
forms necessary to enable them to negotiate acces-
sion to the NAFTA. The Trade Representative shall
also include an assessment of the potential phase-in
periods that may be necessary for those partnership
countries with less developed economies to imple-
ment the obligations of the NAFTA.
(2) FACTORS IN ASSESSING ABILITY TO IMPLE-
MENT NAFTA.—In assessing the ability of each part-
nership country to undertake the obligations of the
NAFTA, the Trade Representative should consider,
among other factors—
(A) whether the country has joined the
WTO;
(B) the extent to which the country pro-
vides equitable access to the markets of that
country;
310
(C) the degree to which the country uses
export subsidies or imposes export performance
requirements or local content requirements;
(D) macroeconomic reforms in the country
such as the abolition of price controls on traded
goods and fiscal discipline;
(E) progress the country has made in the
protection of intellectual property rights;
(F) progress the country has made in the
elimination of barriers to trade in services;
(G) whether the country provides national
treatment to foreign direct investment;
(H) the level of tariffs bound by the coun-
try under the WTO (if the country is a WTO
member);
(I) the extent to which the country has
taken other trade liberalization measures; and
(J) the extent which the country works to
accommodate market access objectives of the
United States.
(c) PARITY REVIEW IN THE EVENT A NEW COUNTRY
ACCEDES TO NAFTA.—If—
(1) a country or group of countries accedes to
the NAFTA, or
311
(2) the United States negotiates a comparable
free trade agreement with another country or group
of countries,
the Trade Representative shall provide to the committees
referred to in subsection (a) a separate report on the eco-
nomic impact of the new trade relationship on partnership
countries. The report shall include any measures the
Trade Representative proposes to minimize the potential
for the diversion of investment from partnership countries
to the new NAFTA member or free trade agreement part-
ner.
TITLE X—REVENUES
Subtitle A—Financial Products
SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRE-
CIATED FINANCIAL POSITIONS.
(a) IN GENERAL.—Part IV of subchapter P of chap-
ter 1 is amended by adding at the end the following new
section:
‘‘SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR AP-
PRECIATED FINANCIAL POSITIONS.
‘‘(a) IN GENERAL.—If there is a constructive sale of
an appreciated financial position—
‘‘(1) the taxpayer shall recognize gain as if such
position were sold, assigned, or otherwise terminated
at its fair market value on the date of such con-
312
structive sale (and any gain shall be taken into ac-
count for the taxable year which includes such date),
and
‘‘(2) for purposes of applying this title for peri-
ods after the constructive sale—
‘‘(A) proper adjustment shall be made in
the amount of any gain or loss subsequently re-
alized with respect to such position for any gain
taken into account by reason of paragraph (1),
and
‘‘(B) the holding period of such position
shall be determined as if such position were
originally acquired on the date of such con-
structive sale.
‘‘(b) APPRECIATED FINANCIAL POSITION.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘appreciated financial position’
means any position with respect to any stock, debt
instrument, or partnership interest if there would be
gain were such position sold, assigned, or otherwise
terminated at its fair market value.
‘‘(2) EXCEPTIONS.—The term ‘appreciated fi-
nancial position’ shall not include—
313
‘‘(A) any position with respect to straight
debt (as defined in section 1361(c)(5)(B) with-
out regard to clause (iii) thereof), and
‘‘(B) any position which is marked to mar-
ket under any provision of this title or the regu-
lations thereunder.
‘‘(3) POSITION.—The term ‘position’ means an
interest, including a futures or forward contract,
short sale, or option.
‘‘(c) CONSTRUCTIVE SALE.—For purposes of this
section—
‘‘(1) IN GENERAL.—A taxpayer shall be treated
as having made a constructive sale of an appreciated
financial position if the taxpayer (or a related per-
son)—
‘‘(A) enters into a short sale of the same
or substantially identical property,
‘‘(B) enters into an offsetting notional
principal contract with respect to the same or
substantially identical property,
‘‘(C) enters into a futures or forward con-
tract to deliver the same or substantially iden-
tical property,
‘‘(D) in the case of an appreciated finan-
cial position that is a short sale or a contract
314
described in subparagraph (B) or (C) with re-
spect to any property, acquires the same or
substantially identical property, or
‘‘(E) to the extent prescribed by the Sec-
retary in regulations, enters into 1 or more
other transactions (or acquires 1 or more posi-
tions) that have substantially the same effect as
a transaction described in any of the preceding
subparagraphs.
‘‘(2) EXCEPTION FOR SALES OF NONPUBLICLY
TRADED
PROPERTY.—The term ‘constructive sale’
shall not include any contract for sale of any stock,
debt instrument, or partnership interest which is not
a marketable security (as defined in section 453(f))
if the contract settles within 1 year after the date
such contract is entered into.
‘‘(3) EXCEPTION FOR CERTAIN CLOSED TRANS-
ACTIONS.—In applying this section, there shall be
disregarded any transaction (which would otherwise
be treated as a constructive sale) during the taxable
year if—
‘‘(A) such transaction is closed before the
end of the 30th day after the close of such tax-
able year, and
315
‘‘(B) in the case of a transaction which is
closed during the 90-day period ending on such
30th day—
‘‘(i) the taxpayer holds the appre-
ciated financial position throughout the 60-
day period beginning on the date such
transaction is closed, and
‘‘(ii) at no time during such 60-day
period is the taxpayer’s risk of loss with
respect to such position reduced by reason
of a circumstance which would be de-
scribed in section 246(c)(4) if references to
stock included references to such position.
‘‘(4) RELATED PERSON.—A person is related to
another person with respect to a transaction if—
‘‘(A) the relationship is described in sec-
tion 267 or 707(b), and
‘‘(B) such transaction is entered into with
a view toward avoiding the purposes of this sec-
tion.
‘‘(d) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) FORWARD CONTRACT.—The term ‘forward
contract’ means a contract to deliver a substantially
316
fixed amount of property for a substantially fixed
price.
‘‘(2) OFFSETTING NOTIONAL PRINCIPAL CON-
TRACT.—The term ‘offsetting notional principal con-
tract’ means, with respect to any property, an agree-
ment which includes—
‘‘(A) a requirement to pay (or provide
credit for) all or substantially all of the invest-
ment yield (including appreciation) on such
property for a specified period, and
‘‘(B) a right to be reimbursed for (or re-
ceive credit for) all or substantially all of any
decline in the value of such property.
‘‘(e) SPECIAL RULES.—
‘‘(1) TREATMENT
OF
SUBSEQUENT
SALE
OF
POSITION WHICH WAS DEEMED SOLD.—If—
‘‘(A) there is a constructive sale of any ap-
preciated financial position,
‘‘(B) such position is subsequently dis-
posed of, and
‘‘(C) at the time of such disposition, the
transaction resulting in the constructive sale of
such position is open with respect to the tax-
payer or any related person,
317
solely for purposes of determining whether the tax-
payer has entered into a constructive sale of any
other appreciated financial position held by the tax-
payer, the taxpayer shall be treated as entering into
such transaction immediately after such disposition.
For purposes of the preceding sentence, an assign-
ment or other termination shall be treated as a dis-
position.
‘‘(2) CERTAIN TRUST INSTRUMENTS TREATED
AS STOCK.—For purposes of this section, an interest
in a trust which is actively traded (within the mean-
ing of section 1092(d)(1)) shall be treated as stock.
‘‘(3) MULTIPLE POSITIONS IN PROPERTY.—If a
taxpayer holds multiple positions in property, the de-
termination of whether a specific transaction is a
constructive sale and, if so, which appreciated finan-
cial position is deemed sold shall be made in the
same manner as actual sales.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) ELECTION OF MARK TO MARKET FOR SECURI-
TIES TRADERS AND FOR TRADERS AND DEALERS IN COM-
MODITIES.—Subsection (d) of section 475 (relating to
mark to market accounting method for dealers in securi-
318
ties) is amended by adding at the end the following new
paragraph:
‘‘(4) ELECTION OF MARK TO MARKET FOR SE-
CURITIES TRADERS AND FOR TRADERS AND DEAL-
ERS IN COMMODITIES.—
‘‘(A) IN GENERAL.—In the case of a per-
son—
‘‘(i) who is engaged in a trade or busi-
ness to which this paragraph applies, and
‘‘(ii) who elects to be treated as a
dealer in securities for purposes of this
section with respect to such trade or busi-
ness,
subsections (a), (b)(3), (c)(3), and (e) and the
preceding provisions of this subsection (or, in
the case of a dealer in commodities, this sec-
tion) shall apply to all commodities and securi-
ties held by such person in any trade or busi-
ness with respect to which such election is in ef-
fect in the same manner as if such person were
a dealer in securities and all references to secu-
rities included references to commodities.
‘‘(B) APPLICATION OF PARAGRAPH.—This
paragraph shall apply to any active trade or
business—
319
‘‘(i) as a trader in securities, or
‘‘(ii) as a trader or dealer in commod-
ities.
‘‘(C) EXCEPTION FOR CERTAIN HOLDINGS
OF TRADERS.—In the case of a trader in securi-
ties or commodities, subsection (a) shall not
apply to any security or commodity (to which
subsection (a) would otherwise apply solely by
reason of this paragraph) if such security or
commodity is clearly identified in the trader’s
records (before the close of the day applicable
under subsection (b)(2)) as being held other
than in a trade or business to which the elec-
tion under subparagraph (A) is in effect. A se-
curity or commodity so identified shall be treat-
ed as described in subsection (b)(1).
‘‘(D) COMMODITY.—For purposes of this
paragraph, the term ‘commodities’ includes only
commodities of a kind customarily dealt in on
an organized commodity exchange.
‘‘(E) ELECTION.—An election under this
paragraph may be made separately for each
trade or business and without the consent of
the Secretary. Such an election, once made,
shall apply to the taxable year for which made
320
and all subsequent taxable years unless revoked
with the consent of the Secretary.’’.
(c) CLERICAL AMENDMENT.—The table of sections
for part IV of subchapter P of chapter 1 is amended by
adding at the end the following new item:
‘‘Sec. 1259. Constructive sales treatment for appreciated financial
positions.’’.
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to any constructive sale after
June 8, 1997.
(2) EXCEPTION FOR SALES OF POSITIONS, ETC.
HELD BEFORE JUNE 9, 1997.—A constructive sale
before June 9, 1997, and the property to which the
position involved in the transaction relates, shall not
be taken into account in determining whether any
other constructive sale after June 8, 1997, has oc-
curred if, within before the close of the 30-day pe-
riod beginning on the date of the enactment of this
Act, such position and property are clearly identified
in the taxpayer’s records as offsetting. The preced-
ing sentence shall cease to apply as of the date the
taxpayer ceases to hold such position or property.
(3) SPECIAL RULE.—In the case of a decedent
dying after June 8, 1997, if—
321
(A) there was a constructive sale on or be-
fore such date of any appreciated financial posi-
tion,
(B) the transaction resulting in such con-
structive sale of such position remains open
(with respect to the decedent or any related
person) for not less than 2 years after the date
of such transaction (whether such period is be-
fore or after such date), and
(C) such transaction is not closed within
the 30-day period beginning on the date of the
enactment of this Act,
then, for purposes of such Code, such position (and
any property related thereto, as determined under
the principles of section 1259(d)(1) of such Code (as
so added)) shall be treated as property constituting
rights to receive an item of income in respect of a
decedent under section 691 of such Code.
(4) ELECTION OF SECURITIES TRADERS, AND
FOR TRADERS AND DEALERS IN COMMODITIES, TO
BE TREATED AS DEALERS IN SECURITIES.—
(A) IN GENERAL.—The amendment made
by subsection (b) shall apply to taxable years
ending after the date of the enactment of this
Act.
322
(B) 4-YEAR SPREAD OF ADJUSTMENTS.—
In the case of a taxpayer who elects under sec-
tion 475(d)(4) of the Internal Revenue Code of
1986 (as added by this section) to change its
method of accounting for its first taxable year
ending after the date of the enactment of this
Act, the net amount of the adjustments re-
quired to be taken into account by the taxpayer
under section 481 of the Internal Revenue Code
of 1986 shall be taken into account ratably over
the 4-taxable year period beginning with such
first taxable year.
SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT
COMPANIES UNDER SECTION 351.
(a) IN GENERAL.—Paragraph (1) of section 351(e)
(relating to exceptions) is amended by adding at the end
the following: ‘‘For purposes of the preceding sentence,
the determination of whether a company is an investment
company shall be made—
‘‘(A) by taking into account all stock and
securities held by the company, whether or not
readily marketable, and
‘‘(B) by treating all of the following as se-
curities:
‘‘(i) Money.
323
‘‘(ii) Any financial instrument (as de-
fined in section 731(c)(2)(C)).
‘‘(iii) Any foreign currency.
‘‘(iv) Any interest in a real estate in-
vestment trust, a common trust fund, a
regulated investment company, or a pub-
licly traded partnership (as defined in sec-
tion 7704(b)).
‘‘(v) Any interest described in clause
(iv), (v), or (vi) of section 731(c)(2)(B) (or
which would be so described without re-
gard to any reference to active trading or
marketability).
‘‘(vi) Any other asset specified in reg-
ulations prescribed by the Secretary.’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall apply to transfers after June 8,
1997, in taxable years ending after such date.
(2) BINDING
CONTRACTS.—The amendment
made by subsection (a) shall not apply to any trans-
fer pursuant to a written binding contract in effect
on June 8, 1997, that provides for the transfer of
a fixed amount of property, and at all times there-
after before such transfer.
324
SEC. 1003. MODIFICATION OF RULES FOR ALLOCATING IN-
TEREST EXPENSE TO TAX-EXEMPT INTEREST.
(a) PRO RATA ALLOCATION RULES APPLICABLE TO
CORPORATIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
265(b) is amended by striking ‘‘In the case of a fi-
nancial institution’’ and inserting ‘‘In the case of a
corporation’’.
(2) ONLY OBLIGATIONS ACQUIRED AFTER JUNE
8, 1997, TAKEN INTO ACCOUNT.—Subparagraph (A)
of section 265(b)(2) is amended by striking ‘‘August
7, 1986’’ and inserting ‘‘June 8, 1997 (August 7,
1986, in the case of a financial institution)’’.
(3) 
SMALL
ISSUER
EXCEPTION
NOT
TO
APPLY.—Subparagraph (A) of section 265(b)(3) is
amended by striking ‘‘Any qualified’’ and inserting
‘‘In the case of a financial institution, any quali-
fied’’.
(4) EXCEPTION FOR CERTAIN BONDS ACQUIRED
ON SALE OF GOODS OR SERVICES.—Subparagraph
(B) of section 265(b)(4) is amended by adding at
the end the following new sentence: ‘‘In the case of
a taxpayer other than a financial institution, such
term shall not include a nonsalable obligation ac-
quired by such taxpayer in the ordinary course of
325
business as payment for goods or services provided
by such taxpayer to any State or local government.’’.
(5) LOOK-THRU RULES FOR PARTNERSHIPS.—
Paragraph (6) of section 265(b) is amended by add-
ing at the end the following new subparagraph:
‘‘(C) LOOK-THRU
RULES
FOR
PARTNER-
SHIPS.—In the case of a corporation which is a
partner in a partnership, such corporation shall
be treated for purposes of this subsection as
holding directly its allocable share of the assets
of the partnership.’’.
(6) APPLICATION OF PRO RATA DISALLOWANCE
ON
AFFILIATED
GROUP
BASIS.—Subsection (b) of
section 265 is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) APPLICATION OF DISALLOWANCE ON AF-
FILIATED GROUP BASIS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, all members of an affiliated group
filing a consolidated return under section 1501
shall be treated as 1 taxpayer.
‘‘(B) TREATMENT OF INSURANCE COMPA-
NIES.—This subsection shall not apply to an in-
surance company, and subparagraph (A) shall
be applied without regard to any member of an
326
affiliated group which is an insurance com-
pany.’’.
(6) 
DE
MINIMIS
EXCEPTION
FOR
NON-
FINANCIAL
INSTITUTIONS.—Subsection (b) of sec-
tion 265 is amended by adding at the end the follow-
ing new paragraph:
‘‘(8) DE
MINIMIS
EXCEPTION
FOR
NON-
FINANCIAL
INSTITUTIONS.—In the case of a cor-
poration, paragraph (1) shall not apply for any tax-
able year if the amount described in paragraph
(2)(A) with respect to such corporation does not ex-
ceed the lesser of—
‘‘(A) 2 percent of the amount described in
paragraph (2)(B), or
‘‘(B) $1,000,000.
The preceding sentence shall not apply to a financial
institution or to a dealer in tax-exempt obligations.’’.
(7) CLERICAL
AMENDMENT.—The subsection
heading for section 265(b) is amended by striking
‘‘FINANCIAL INSTITUTIONS’’ and inserting ‘‘COR-
PORATIONS’’.
(b) APPLICATION OF SECTION 265(a)(2) WITH RE-
SPECT TO CONTROLLED GROUPS.—Paragraph (2) of sec-
tion 265(a) is amended after ‘‘obligations’’ by inserting
‘‘held by the taxpayer (or any corporation which is a mem-
327
ber of a controlled group (as defined in section 267(f)(1))
which includes the taxpayer)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 1004. GAINS AND LOSSES FROM CERTAIN TERMI-
NATIONS WITH RESPECT TO PROPERTY.
(a) APPLICATION OF CAPITAL TREATMENT TO PROP-
ERTY OTHER THAN PERSONAL PROPERTY.—
(1) IN
GENERAL.—Paragraph (1) of section
1234A (relating to gains and losses from certain ter-
minations) is amended by striking ‘‘personal prop-
erty (as defined in section 1092(d)(1))’’ and insert-
ing ‘‘property’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to terminations more
than 30 days after the date of the enactment of this
Act.
(b) APPLICATION OF CAPITAL TREATMENT, ETC. TO
OBLIGATIONS ISSUED BY NATURAL PERSONS.—
(1) IN GENERAL.—Section 1271(b) is amended
to read as follows:
‘‘(b) EXCEPTION FOR CERTAIN OBLIGATIONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to—
328
‘‘(A) any obligation issued by a natural
person before June 9, 1997, and
‘‘(B) any obligation issued before July 2,
1982, by an issuer which is not a corporation
and is not a government or political subdivision
thereof.
‘‘(2) TERMINATION.—Paragraph (1) shall not
apply to any obligation purchased (within the mean-
ing of section 179(d)(2)) after June 8, 1997.’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of en-
actment of this Act.
SEC. 1005. DETERMINATION OF ORIGINAL ISSUE DISCOUNT
WHERE POOLED DEBT OBLIGATIONS SUB-
JECT TO ACCELERATION.
(a) IN GENERAL.—Subparagraph (C) of section
1272(a)(6) (relating to debt instruments to which the
paragraph applies) is amended by striking ‘‘or’’ at the end
of clause (i), by striking the period at the end of clause
(ii) and inserting ‘‘, or’’, and by inserting after clause (i)
the following:
‘‘(iii) any pool of debt instruments the
yield on which may be reduced by reason
of prepayments (or to the extent provided
in regulations, by reason of other events).
329
To the extent provided in regulations prescribed
by the Secretary, in the case of a small business
engaged in the trade or business of selling tan-
gible personal property at retail, clause (iii)
shall not apply to debt instruments incurred in
the ordinary course of such trade or business
while held by such business.’’.
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to taxable years beginning
after the date of the enactment of this Act.
(2) CHANGE IN METHOD OF ACCOUNTING.—In
the case of any taxpayer required by this section to
change its method of accounting for its first taxable
year beginning after the date of the enactment of
this Act—
(A) such change shall be treated as initi-
ated by the taxpayer,
(B) such change shall be treated as made
with the consent of the Secretary, and
(C) the net amount of the adjustments re-
quired to be taken into account by the taxpayer
under section 481 of the Internal Revenue Code
of 1986 shall be taken into account ratably over
330
the 4-taxable year period beginning with such
first taxable year.
SEC. 1006. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN
DEBT INSTRUMENTS.
(a) IN GENERAL.—Section 163 (relating to deduction
for interest) is amended by redesignating subsection (k)
as subsection (l) and by inserting after subsection (j) the
following new subsection:
‘‘(k) DISALLOWANCE OF DEDUCTION ON CERTAIN
DEBT INSTRUMENTS OF CORPORATIONS.—
‘‘(1) IN GENERAL.—No deduction shall be al-
lowed under this chapter for any interest paid or ac-
crued on a disqualified debt instrument.
‘‘(2) DISQUALIFIED DEBT INSTRUMENT.—For
purposes of this subsection, the term ‘disqualified
debt instrument’ means any indebtedness of a cor-
poration which is payable in equity of the issuer or
a related party.
‘‘(3) SPECIAL RULES FOR AMOUNTS PAYABLE
IN EQUITY.—For purposes of paragraph (2), indebt-
edness shall be treated as payable in equity of the
issuer or a related party only if—
‘‘(A) a substantial amount of the principal
or interest is required to be paid or converted,
331
or at the option of the issuer or a related party
is payable in, or convertible into, such equity,
‘‘(B) a substantial amount of the principal
or interest is required to be determined, or at
the option of the issuer or a related party is de-
termined, by reference to the value of such eq-
uity, or
‘‘(C) the indebtedness is part of an ar-
rangement which is reasonably expected to re-
sult in a transaction described in subparagraph
(A) or (B).
For purposes of subparagraphs (A) and (B), prin-
cipal or interest shall be treated as required to be
so paid, converted, or determined if it may be re-
quired at the option of the holder or a related party
and there is a substantial certainty the option will
be exercised.
‘‘(4) RELATED PARTY.—For purposes of this
subsection, a person is a related party with respect
to another person if such person bears a relationship
to such other person described in section 267(b) or
707(b).
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
332
section, including regulations preventing avoidance
of this subsection through the use of an issuer other
than a corporation.’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to disqualified debt instru-
ments issued after June 8, 1997.
(2) TRANSITION RULE.—The amendment made
by this section shall not apply to any instrument is-
sued after June 8, 1997, if such instrument is—
(A) issued pursuant to a written agree-
ment which was binding on such date and at all
times thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
333
Subtitle B—Corporate
Organizations and Reorganizations
SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY
DIVIDENDS.
(a) TREATMENT OF EXTRAORDINARY DIVIDENDS IN
EXCESS OF BASIS.—Paragraph (2) of section 1059(a) (re-
lating to corporate shareholder’s recognition of gain at-
tributable to nontaxed portion of extraordinary dividends)
is amended to read as follows:
‘‘(2) AMOUNTS IN EXCESS OF BASIS.—If the
nontaxed portion of such dividends exceeds such
basis, such excess shall be treated as gain from the
sale or exchange of such stock for the taxable year
in which the extraordinary dividend is received.’’.
(b) TREATMENT OF REDEMPTIONS WHERE OPTIONS
INVOLVED.—Paragraph (1) of section 1059(e) (relating to
treatment of partial liquidations and non-pro rata redemp-
tions) is amended to read as follows:
‘‘(1) TREATMENT
OF
PARTIAL
LIQUIDATIONS
AND CERTAIN REDEMPTIONS.—Except as otherwise
provided in regulations—
‘‘(A) REDEMPTIONS.—In the case of any
redemption of stock—
334
‘‘(i) which is part of a partial liquida-
tion (within the meaning of section 302(e))
of the redeeming corporation,
‘‘(ii) which is not pro rata as to all
shareholders, or
‘‘(iii) which would not have been
treated (in whole or in part) as a dividend
if any options had not been taken into ac-
count under section 318(a)(4),
any amount treated as a dividend with respect
to such redemption shall be treated as an ex-
traordinary dividend to which paragraphs (1)
and (2) of subsection (a) apply without regard
to the period the taxpayer held such stock. In
the case of a redemption described in clause
(iii), only the basis in the stock redeemed shall
be taken into account under subsection (a).
‘‘(B) REORGANIZATIONS, 
ETC.—An ex-
change described in section 356 which is treat-
ed as a dividend shall be treated as a redemp-
tion of stock for purposes of applying subpara-
graph (A).’’.
(c) TIME FOR REDUCTION.—Paragraph (1) of sec-
tion 1059(d) is amended to read as follows:
335
‘‘(1) TIME FOR REDUCTION.—Any reduction in
basis under subsection (a)(1) shall be treated as oc-
curring at the beginning of the ex-dividend date of
the extraordinary dividend to which the reduction re-
lates.’’.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to distributions after May 3,
1995.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion made pursuant to the terms of—
(A) a written binding contract in effect on
May 3, 1995, and at all times thereafter before
such distribution, or
(B) a tender offer outstanding on May 3,
1995.
(3) CERTAIN
DIVIDENDS
NOT
PURSUANT
TO
CERTAIN
REDEMPTIONS.—In determining whether
the amendment made by subsection (a) applies to
any extraordinary dividend other than a dividend
treated as an extraordinary dividend under section
1059(e)(1) of the Internal Revenue Code of 1986
(as amended by this Act), paragraphs (1) and (2)
336
shall be applied by substituting ‘‘September 13,
1995’’ for ‘‘May 3, 1995’’.
SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBU-
TIONS FOLLOWED BY ACQUISITIONS AND TO
INTRAGROUP TRANSACTIONS.
(a) DISTRIBUTIONS FOLLOWED BY ACQUISITIONS.—
Section 355 (relating to distribution of stock and securi-
ties of a controlled corporation) is amended by adding at
the end the following new subsection:
‘‘(e) RECOGNITION OF GAIN WHERE CERTAIN DIS-
TRIBUTIONS OF STOCK OR SECURITIES ARE FOLLOWED
BY ACQUISITION.—
‘‘(1) GENERAL RULE.—If there is a distribution
to which this subsection applies, the following rules
shall apply:
‘‘(A) ACQUISITION OF CONTROLLED COR-
PORATION.—If there is an acquisition described
in paragraph (2)(A)(ii) with respect to any con-
trolled corporation, any stock or securities in
the controlled corporation shall not be treated
as qualified property for purposes of subsection
(c)(2) of this section or section 361(c)(2).
‘‘(B) ACQUISITION OF DISTRIBUTING COR-
PORATION.—If there is an acquisition described
in paragraph (2)(A)(ii) with respect to the dis-
337
tributing corporation, the controlled corporation
shall recognize gain in an amount equal to the
amount of net gain which would be recognized
if all the assets of the distributing corporation
(immediately after the distribution) were sold
(at such time) for fair market value. Any gain
recognized under the preceding sentence shall
be treated as long-term capital gain and shall
be taken into account for the taxable year
which includes the day after the date of such
distribution.
‘‘(2) DISTRIBUTIONS
TO
WHICH
SUBSECTION
APPLIES.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any distribution—
‘‘(i) to which this section (or so much
of section 356 as relates to this section)
applies, and
‘‘(ii) which is part of a plan (or series
of related transactions) pursuant to which
1 or more persons acquire directly or indi-
rectly stock representing a 50-percent or
greater interest in the distributing corpora-
tion or any controlled corporation.
338
‘‘(B) PLAN PRESUMED TO EXIST IN CER-
TAIN CASES.—If 1 or more persons acquire di-
rectly or indirectly stock representing a 50-per-
cent or greater interest in the distributing cor-
poration or any controlled corporation during
the 4-year period beginning on the date which
is 2 years before the date of the distribution,
such acquisition shall be treated as pursuant to
a plan described in subparagraph (A)(ii) unless
it is established that the distribution and the
acquisition are not pursuant to a plan or series
of related transactions.
‘‘(C) COORDINATION
WITH
SUBSECTION
(d).—This subsection shall not apply to any
distribution to which subsection (d) applies.
‘‘(3) SPECIAL
RULES
RELATING
TO
ACQUISI-
TIONS.—
‘‘(A) CERTAIN ACQUISITIONS NOT TAKEN
INTO ACCOUNT.—Except as provided in regula-
tions, the following acquisitions shall not be
treated as described in paragraph (2)(A)(ii):
‘‘(i) The acquisition of stock in any
controlled corporation by the distributing
corporation.
339
‘‘(ii) The acquisition by a person of
stock in any controlled corporation by rea-
son of holding stock in the distributing
corporation.
‘‘(iii) The acquisition by a person of
stock in any successor corporation of the
distributing corporation or any controlled
corporation by reason of holding stock in
such distributing or controlled corporation.
‘‘(iv) The acquisition of stock in a cor-
poration if shareholders owning directly or
indirectly a 50-percent or greater interest
in the distributing corporation or any con-
trolled corporation before such acquisition
own indirectly a 50-percent or greater in-
terest in such distributing or controlled
corporation after such acquisition.
This subparagraph shall not apply to any acqui-
sition if the stock held before the acquisition
was acquired pursuant to a plan described in
subparagraph (A)(ii).
‘‘(B) ASSET
ACQUISITIONS.—Except as
provided in regulations, for purposes of this
subsection, if the assets of the distributing cor-
poration or any controlled corporation are ac-
340
quired by a successor corporation in a trans-
action described in subparagraph (A), (C), or
(D) of section 368(a)(1) or any other trans-
action specified in regulations by the Secretary,
the shareholders (immediately before the acqui-
sition) of the corporation acquiring such assets
shall be treated as acquiring stock in the cor-
poration from which the assets were acquired.
‘‘(4) DEFINITION
AND
SPECIAL
RULES.—For
purposes of this subsection—
‘‘(A) 50-PERCENT
OR
GREATER
INTER-
EST.—The term ‘50-percent or greater interest’
has the meaning given such term by subsection
(d)(4).
‘‘(B) DISTRIBUTIONS IN TITLE 11 OR SIMI-
LAR CASE.—Paragraph (1) shall not apply to
any distribution made in a title 11 or similar
case (as defined in section 368(a)(3)).
‘‘(C) AGGREGATION
AND
ATTRIBUTION
RULES.—
‘‘(i) AGGREGATION.—The rules of
paragraph (7)(A) of subsection (d) shall
apply.
‘‘(ii) 
ATTRIBUTION.—Section
355(d)(8)(A) shall apply in determining
341
whether a person holds stock or securities
in any corporation.
‘‘(D) SUCCESSORS AND PREDECESSORS.—
For purposes of this subsection, any reference
to a controlled corporation or a distributing cor-
poration shall include a reference to any prede-
cessor or successor of such corporation.
‘‘(E) STATUTE OF LIMITATIONS.—If there
is an acquisition to which paragraph (1) (A) or
(B) applies—
‘‘(i) the statutory period for the as-
sessment of any deficiency attributable to
any part of the gain recognized under this
subsection by reason of such acquisition
shall not expire before the expiration of 3
years from the date the Secretary is noti-
fied by the taxpayer (in such manner as
the Secretary may by regulations pre-
scribe) that such acquisition occurred, and
‘‘(ii) such deficiency may be assessed
before the expiration of such 3-year period
notwithstanding the provisions of any
other law or rule of law which would other-
wise prevent such assessment.
342
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry
out the purposes of this subsection, including regula-
tions—
‘‘(A) providing for the application of this
subsection where there is more than 1 con-
trolled corporation,
‘‘(B) treating 2 or more distributions as 1
distribution where necessary to prevent the
avoidance of such purposes, and
‘‘(C) providing for the application of rules
similar to the rules of subsection (d)(6) where
appropriate for purposes of paragraph (2)(B).’’.
(b) SECTION
355 NOT TO APPLY
TO CERTAIN
INTRAGROUP TRANSACTIONS.—Section 355, as amended
by subsection (a), is amended by adding at the end the
following new subsection:
‘‘(f) SECTION
NOT
TO
APPLY
TO
CERTAIN
INTRAGROUP TRANSACTIONS.—Except as provided in reg-
ulations, this section shall not apply to the distribution
of stock from 1 member of an affiliated group filing a con-
solidated return to another member of such group, and
the Secretary shall provide proper adjustments for the
treatment of such distribution, including (if necessary) ad-
justments to—
343
‘‘(1) the adjusted basis of any stock which—
‘‘(A) is in a corporation which is a member
of such group, and
‘‘(B) is held by another member of such
group, and
‘‘(2) the earnings and profits of any member of
such group.’’.
(c) DETERMINATION OF CONTROL IN CERTAIN DIVI-
SIVE TRANSACTIONS.—
(1) 
SECTION
351
TRANSACTIONS.—Section
351(c) (relating to special rule) is amended to read
as follows:
‘‘(c) SPECIAL RULES WHERE DISTRIBUTION
TO
SHAREHOLDERS.—
‘‘(1) IN GENERAL.—In determining control for
purposes of this section—
‘‘(A) the fact that any corporate transferor
distributes part or all of the stock in the cor-
poration which it receives in the exchange to its
shareholders shall not be taken into account,
and
‘‘(B) if the requirements of section 355 are
met with respect to such distribution, the share-
holders shall be treated as in control of such
corporation immediately after the exchange if
344
the shareholders hold at least a 50-percent in-
terest in such corporation immediately after the
distribution.
‘‘(2) 50-PERCENT INTEREST.—For purposes of
this subsection, the term ‘50-percent interest’ means
stock possessing 50 percent of the total combined
voting power of all classes of stock entitled to vote
and 50 percent of the total value of shares of all
classes of stock.’’.
(2) 
D 
REORGANIZATIONS.—Section
368(a)(2)(H) (relating to special rule for determin-
ing whether certain transactions are qualified under
paragraph (1)(D)) is amended to read as follows:
‘‘(H) SPECIAL RULES FOR DETERMINING
WHETHER CERTAIN TRANSACTIONS ARE QUALI-
FIED UNDER PARAGRAPH (1)(D).—For purposes
of determining whether a transaction qualifies
under paragraph (1)(D)—
‘‘(i) in the case of a transaction with
respect to which the requirements of sub-
paragraphs 
(A) 
and 
(B) 
of 
section
354(b)(1) are met, the term ‘control’ has
the meaning given such term by section
304(c), and
345
‘‘(ii) in the case of a transaction with
respect to which the requirements of sec-
tion 355 are met, the shareholders de-
scribed in paragraph (1)(D) shall be treat-
ed as having control of the corporation to
which the assets are transferred if such
shareholders hold a 50-percent or greater
interest (as defined in section 351(c)(2)) in
such corporation immediately after the
transfer.’’.
(d) EFFECTIVE DATES.—
(1) SECTION
355
RULES.—The amendments
made by subsections (a) and (b) shall apply to dis-
tributions after April 16, 1997.
(2) DIVISIVE
TRANSACTIONS.—The amend-
ments made by subsection (c) shall apply to trans-
fers after the date of the enactment of this Act.
(3) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion after April 16, 1997, if such distribution is—
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
346
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission required
solely by reason of the distribution.
This paragraph shall not apply to any written agree-
ment, ruling request, or public announcement or fil-
ing unless it identifies the unrelated acquirer of the
distributing corporation or of any controlled corpora-
tion, whichever is applicable.
SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING
RELATED CORPORATIONS.
(a) STOCK PURCHASES
BY RELATED CORPORA-
TIONS.—The last sentence of section 304(a)(1) (relating
to acquisition by related corporation other than subsidi-
ary) is amended to read as follows: ‘‘To the extent that
such distribution is treated as a distribution to which sec-
tion 301 applies, the transferor and the acquiring corpora-
tion shall be treated in the same manner as if the trans-
feror had transferred the stock so acquired to the acquir-
ing corporation in exchange for stock of the acquiring cor-
poration in a transaction to which section 351(a) applies,
347
and then the acquiring corporation had redeemed the
stock it was treated as issuing in such transaction.’’.
(b) COORDINATION WITH SECTION 1059.—Clause
(iii) of section 1059(e)(1)(A), as amended by this title, is
amended to read as follows:
‘‘(iii) which would not have been
treated (in whole or in part) as a dividend
if—
‘‘(I) any options had not been
taken into account under section
318(a)(4), or
‘‘(II) section 304(a) had not ap-
plied,’’.
(c) SPECIAL RULE FOR ACQUISITIONS BY FOREIGN
CORPORATIONS.—Section 304(b) (relating to special rules
for application of subsection (a)) is amended by adding
at the end the following new paragraph:
‘‘(5) ACQUISITIONS
BY
FOREIGN
CORPORA-
TIONS.—
‘‘(A) IN GENERAL.—In the case of any ac-
quisition to which subsection (a) applies in
which the acquiring corporation is a foreign
corporation, the only earnings and profits taken
into account under paragraph (2)(A) shall be
those earnings and profits—
348
‘‘(i) which are attributable (under reg-
ulations prescribed by the Secretary) to
stock of the acquiring corporation owned
(within the meaning of section 958(a)) by
a corporation or individual which is—
‘‘(I) a United States shareholder
(within 
the 
meaning 
of 
section
951(b)) of the acquiring corporation,
and
‘‘(II) the transferor or a person
who bears a relationship to the trans-
feror described in section 267(b) or
707(b), and
‘‘(ii) which were accumulated during
the period or periods such stock was owned
by such person while the acquiring cor-
poration was a controlled foreign corpora-
tion.
‘‘(B) APPLICATION OF SECTION 1248.—For
purposes of subparagraph (A), the rules of sec-
tion 1248(d) shall apply except to the extent
otherwise provided by the Secretary.
‘‘(C) REGULATIONS.—The Secretary shall
prescribe such regulations as are appropriate to
carry out the purposes of this paragraph.’’.
349
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to distributions and acquisi-
tions after June 8, 1997.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion or acquisition after June 8, 1997, if such dis-
tribution or acquisition is—
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described in a public announcement or
filing with the Securities and Exchange Com-
mission on or before such date.
SEC. 1014. MODIFICATION OF HOLDING PERIOD APPLICA-
BLE TO DIVIDENDS RECEIVED DEDUCTION.
(a) IN GENERAL.—Subparagraph (A) of section
246(c)(1) is amended to read as follows:
‘‘(A) which is held by the taxpayer for 45
days or less during the 90-day period beginning
on the date which is 45 days before the date on