587
until the decision in the refund action becomes
final).
‘‘(e) LIMITATIONS PERIOD.—
‘‘(1) IN GENERAL.—Any notice to a taxpayer
under subsection (a) shall be mailed before the expi-
ration of the period prescribed by section 6501 (re-
lating to the period of limitations on assessment).
‘‘(2) SUSPENSION WHEN SECRETARY MAILS NO-
TICE OF ADJUSTMENT.—If the Secretary mails a no-
tice of adjustment to the taxpayer for a taxable year,
the period of limitations on the making of assess-
ments shall be suspended for the period during
which the Secretary is prohibited from making the
assessment (and, in any event, if a proceeding in re-
spect of the notice of adjustment is placed on the
docket of the Tax Court, until the decision of the
Tax Court becomes final), and for 60 days there-
after.
‘‘(3) RESTRICTIONS ON ASSESSMENT.—Except
as otherwise provided in section 6851, 6852, or
6861, no assessment of a deficiency with respect to
any tax imposed by subtitle A attributable to any
item (other than a partnership item or any item af-
fected by a partnership item) shall be made—
588
‘‘(A) until the expiration of the applicable
90-day or 150-day period set forth in sub-
section (c) for filing a petition with the Tax
Court, or
‘‘(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
‘‘(f) FURTHER
NOTICES
OF
ADJUSTMENT
RE-
STRICTED.—If the Secretary mails a notice of adjustment
to the taxpayer for a taxable year and the taxpayer files
a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such
notice to the taxpayer with respect to the same taxable
year in the absence of a showing of fraud, malfeasance,
or misrepresentation of a material fact.
‘‘(g) COORDINATION WITH OTHER PROCEEDINGS
UNDER THIS SUBCHAPTER.—
‘‘(1) IN GENERAL.—The treatment of any item
that has been determined pursuant to subsection (c)
or (d) shall be taken into account in determining the
amount of any computational adjustment that is
made in connection with a partnership proceeding
under this subchapter (other than under this sec-
tion), or the amount of any deficiency attributable to
affected items in a proceeding under section
589
6230(a)(2), for the taxable year involved. Notwith-
standing any other law or rule of law pertaining to
the period of limitations on the making of assess-
ments, for purposes of the preceding sentence, any
adjustment made in accordance with this section
shall be taken into account regardless of whether
any assessment has been made with respect to such
adjustment.
‘‘(2) SPECIAL
RULE
IN
CASE
OF
COMPUTA-
TIONAL ADJUSTMENT.—In the case of a computa-
tional adjustment that is made in connection with a
partnership proceeding under this subchapter (other
than under this section), the provisions of paragraph
(1) shall apply only if the computational adjustment
is made within the period prescribed by section 6229
for assessing any tax under subtitle A which is at-
tributable to any partnership item or affected item
for the taxable year involved.
‘‘(3) CONVERSION
TO
DEFICIENCY
PROCEED-
ING.—If—
‘‘(A) after the notice referred to in sub-
section (a) is mailed to a taxpayer for a taxable
year but before the expiration of the period for
filing a petition with the Tax Court under sub-
section (c) (or, if a petition is filed with the Tax
590
Court, before the Tax Court makes a declara-
tion for that taxable year), the treatment of any
partnership item for the taxable year is finally
determined, or any such item ceases to be a
partnership item pursuant to section 6231(b),
and
‘‘(B) as a result of that final determination
or cessation, a deficiency can be determined
with respect to the items that are the subject
of the notice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition
filed in respect of the notice shall be treated as an
action brought under section 6213.
‘‘(4) FINALLY DETERMINED.—For purposes of
this subsection, the treatment of partnership items
shall be treated as finally determined if—
‘‘(A) the Secretary enters into a settlement
agreement (within the meaning of section 6224)
with the taxpayer regarding such items,
‘‘(B) a notice of final partnership adminis-
trative adjustment has been issued and—
‘‘(i) no petition has been filed under
section 6226 and the time for doing so has
expired, or
591
‘‘(ii) a petition has been filed under
section 6226 and the decision of the court
has become final, or
‘‘(C) the period within which any tax at-
tributable to such items may be assessed
against the taxpayer has expired.
‘‘(h) SPECIAL RULES IF SECRETARY INCORRECTLY
DETERMINES APPLICABLE PROCEDURE.—
‘‘(1) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF ADJUSTMENT.—If the
Secretary erroneously determines that subchapter B
does not apply to a taxable year of a taxpayer and
consistent with that determination timely mails a no-
tice of adjustment to the taxpayer pursuant to sub-
section (a) of this section, the notice of adjustment
shall be treated as a notice of deficiency under sec-
tion 6212 and any petition that is filed in respect of
the notice shall be treated as an action brought
under section 6213.
‘‘(2) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY
MAILS
NOTICE
OF
DEFICIENCY.—If the
Secretary erroneously determines that subchapter B
applies to a taxable year of a taxpayer and consist-
ent with that determination timely mails a notice of
deficiency to the taxpayer pursuant to section 6212,
592
the notice of deficiency shall be treated as a notice
of adjustment under subsection (a) and any petition
that is filed in respect of the notice shall be treated
as an action brought under subsection (c).’’.
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY
PROCEEDINGS.—Section 6211 (defining defi-
ciency) is amended by adding at the end the following new
subsection:
‘‘(c) COORDINATION WITH SUBCHAPTER C.—In de-
termining the amount of any deficiency for purposes of
this subchapter, adjustments to partnership items shall be
made only as provided in subchapter C.’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter C of chapter 63 is amended by adding at
the end the following new item:
‘‘Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an
oversheltered return.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE
OF AUDIT PROCEDURES TO BE FOLLOWED.
(a) IN GENERAL.—Section 6231 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
593
‘‘(g) PARTNERSHIP RETURN TO BE DETERMINATIVE
OF WHETHER SUBCHAPTER APPLIES.—
‘‘(1) DETERMINATION THAT SUBCHAPTER AP-
PLIES.—If, on the basis of a partnership return for
a taxable year, the Secretary reasonably determines
that this subchapter applies to such partnership for
such year but such determination is erroneous, then
the provisions of this subchapter are hereby ex-
tended to such partnership (and its items) for such
taxable year and to partners of such partnership.
‘‘(2) DETERMINATION THAT SUBCHAPTER DOES
NOT APPLY.—If, on the basis of a partnership re-
turn for a taxable year, the Secretary reasonably de-
termines that this subchapter does not apply to such
partnership for such year but such determination is
erroneous, then the provisions of this subchapter
shall not apply to such partnership (and its items)
for such taxable year or to partners of such partner-
ship.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
594
SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITA-
TIONS.
(a) SUSPENSION OF STATUTE WHERE UNTIMELY
PETITION FILED.—Paragraph (1) of section 6229(d) (re-
lating to suspension where Secretary makes administrative
adjustment) is amended by striking all that follows ‘‘sec-
tion 6226’’ and inserting the following: ‘‘(and, if a petition
is filed under section 6226 with respect to such adminis-
trative adjustment, until the decision of the court becomes
final), and’’.
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY
PROCEEDING.—Section 6229 is amended by adding at the
end the following new subsection:
‘‘(h) SUSPENSION DURING PENDENCY
OF BANK-
RUPTCY PROCEEDING.—If a petition is filed naming a
partner as a debtor in a bankruptcy proceeding under title
11 of the United States Code, the running of the period
of limitations provided in this section with respect to such
partner shall be suspended—
‘‘(1) for the period during which the Secretary
is prohibited by reason of such bankruptcy proceed-
ing from making an assessment, and
‘‘(2) for 60 days thereafter.’’.
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Sec-
tion 6229(b) is amended by redesignating paragraph (2)
595
as paragraph (3) and by inserting after paragraph (1) the
following new paragraph:
‘‘(2) SPECIAL RULE WITH RESPECT TO DEBT-
ORS IN TITLE 11 CASES.—Notwithstanding any other
law or rule of law, if an agreement is entered into
under paragraph (1)(B) and the agreement is signed
by a person who would be the tax matters partner
but for the fact that, at the time that the agreement
is executed, the person is a debtor in a bankruptcy
proceeding under title 11 of the United States Code,
such agreement shall be binding on all partners in
the partnership unless the Secretary has been noti-
fied of the bankruptcy proceeding in accordance with
regulations prescribed by the Secretary.’’.
(d) EFFECTIVE DATES.—
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall apply
to partnership taxable years with respect to which
the period under section 6229 of the Internal Reve-
nue Code of 1986 for assessing tax has not expired
on or before the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendment made
by subsection (c) shall apply to agreements entered
into after the date of the enactment of this Act.
596
SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEP-
TION.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
6231(a)(1)(B) (relating to exception for small partner-
ships) is amended to read as follows:
‘‘(i) IN
GENERAL.—The term ‘part-
nership’ shall not include any partnership
having 10 or fewer partners each of whom
is an individual (other than a nonresident
alien), a C corporation, or an estate of a
deceased partner. For purposes of the pre-
ceding sentence, a husband and wife (and
their estates) shall be treated as 1 part-
ner.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-
YEAR LIMITATION ON ASSESSMENT.
(a) IN GENERAL.—Subsection (f) of section 6229 (re-
lating to items becoming nonpartnership items) is amend-
ed—
(1) by striking ‘‘(f) ITEMS BECOMING NON-
PARTNERSHIP ITEMS.—If’’ and inserting the follow-
ing:
‘‘(f) SPECIAL RULES.—
597
‘‘(1) 
ITEMS
BECOMING
NONPARTNERSHIP
ITEMS.—If’’,
(2) by moving the text of such subsection 2 ems
to the right, and
(3) by adding at the end the following new
paragraph:
‘‘(2) SPECIAL RULE FOR PARTIAL SETTLEMENT
AGREEMENTS.—If a partner enters into a settlement
agreement with the Secretary with respect to the
treatment of some of the partnership items in dis-
pute for a partnership taxable year but other part-
nership items for such year remain in dispute, the
period of limitations for assessing any tax attrib-
utable to the settled items shall be determined as if
such agreement had not been entered into.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to settlements entered into after
the date of the enactment of this Act.
SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST
FOR ADMINISTRATIVE ADJUSTMENT.
(a) IN GENERAL.—Section 6227 (relating to admin-
istrative adjustment requests) is amended by redesignat-
ing subsections (b) and (c) as subsections (c) and (d), re-
spectively, and by inserting after subsection (a) the follow-
ing new subsection:
598
‘‘(b) SPECIAL RULE IN CASE OF EXTENSION OF PE-
RIOD OF LIMITATIONS UNDER SECTION 6229.—The pe-
riod prescribed by subsection (a)(1) for filing of a request
for an administrative adjustment shall be extended—
‘‘(1) for the period within which an assessment
may be made pursuant to an agreement (or any ex-
tension thereof) under section 6229(b), and
‘‘(2) for 6 months thereafter.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN
CONTEXT OF PARTNERSHIP PROCEEDINGS.
(a) IN GENERAL.—Subsection (a) of section 6230 is
amended by adding at the end the following new para-
graph:
‘‘(3) SPECIAL RULE IN CASE OF ASSERTION BY
PARTNER’S
SPOUSE
OF
INNOCENT
SPOUSE
RE-
LIEF.—
‘‘(A) Notwithstanding section 6404(b), if
the spouse of a partner asserts that section
6013(e) applies with respect to a liability that
is attributable to any adjustment to a partner-
ship item, then such spouse may file with the
599
Secretary within 60 days after the notice of
computational adjustment is mailed to the
spouse a request for abatement of the assess-
ment specified in such notice. Upon receipt of
such request, the Secretary shall abate the as-
sessment. Any reassessment of the tax with re-
spect to which an abatement is made under this
subparagraph shall be subject to the deficiency
procedures prescribed by subchapter B. The pe-
riod for making any such reassessment shall
not expire before the expiration of 60 days after
the date of such abatement.
‘‘(B) If the spouse files a petition with the
Tax Court pursuant to section 6213 with re-
spect to the request for abatement described in
subparagraph (A), the Tax Court shall only
have jurisdiction pursuant to this section to de-
termine whether the requirements of section
6013(e) have been satisfied. For purposes of
such determination, the treatment of partner-
ship items under the settlement, the final part-
nership administrative adjustment, or the deci-
sion of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.
600
‘‘(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.’’.
(b) CLAIMS FOR REFUND.—Subsection (c) of section
6230 is amended by adding at the end the following new
paragraph:
‘‘(5) RULES FOR SEEKING INNOCENT SPOUSE
RELIEF.—
‘‘(A) IN GENERAL.—The spouse of a part-
ner may file a claim for refund on the ground
that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is at-
tributable to an adjustment to a partnership
item.
‘‘(B) TIME FOR FILING CLAIM.—Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the Secretary
mails to the spouse the notice of computational
adjustment referred to in subsection (a)(3)(A).
‘‘(C) SUIT IF CLAIM NOT ALLOWED.—If
the claim under subparagraph (B) is not al-
lowed, the spouse may bring suit with respect
to the claim within the period specified in para-
graph (3).
601
‘‘(D) PRIOR DETERMINATIONS ARE BIND-
ING.—For purposes of any claim or suit under
this paragraph, the treatment of partnership
items under the settlement, the final partner-
ship administrative adjustment, or the decision
of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.’’.
(c) TECHNICAL AMENDMENTS.—
(1) Paragraph (1) of section 6230(a) is amend-
ed by striking ‘‘paragraph (2)’’ and inserting ‘‘para-
graph (2) or (3)’’.
(2) Subsection (a) of section 6503 is amended
by striking ‘‘section 6230(a)(2)(A)’’ and inserting
‘‘paragraph (2)(A) or (3) of section 6230(a)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 1238. DETERMINATION OF PENALTIES AT PARTNER-
SHIP LEVEL.
(a) IN GENERAL.—Section 6221 (relating to tax
treatment determined at partnership level) is amended by
striking ‘‘item’’ and inserting ‘‘item (and the applicability
602
of any penalty, addition to tax, or additional amount which
relates to an adjustment to a partnership item)’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (f) of section 6226 is amended—
(A) by striking ‘‘relates and’’ and inserting
‘‘relates,’’, and
(B) by inserting before the period ‘‘, and
the applicability of any penalty, addition to tax,
or additional amount which relates to an ad-
justment to a partnership item’’.
(2) Clause (i) of section 6230(a)(2)(A) is
amended to read as follows:
‘‘(i) affected items which require part-
ner level determinations (other than pen-
alties, additions to tax, and additional
amounts that relate to adjustments to
partnership items), or’’.
(3)(A) Subparagraph (A) of section 6230(a)(3),
as added by section 14317, is amended by inserting
‘‘(including any liability for any penalty, addition to
tax, or additional amount relating to such adjust-
ment)’’ after ‘‘partnership item’’.
(B) Subparagraph (B) of such section is
amended by inserting ‘‘(and the applicability of any
603
penalties, additions to tax, or additional amounts)’’
after ‘‘partnership items’’.
(C) Subparagraph (A) of section 6230(c)(5), as
added by section 14317, is amended by inserting be-
fore the period ‘‘(including any liability for any pen-
alties, additions to tax, or additional amounts relat-
ing to such adjustment)’’.
(D) Subparagraph (D) of section 6230(c)(5), as
added by section 14317, is amended by inserting
‘‘(and the applicability of any penalties, additions to
tax, or additional amounts)’’ after ‘‘partnership
items’’.
(4) Paragraph (1) of section 6230(c) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph
(B) and inserting ‘‘, or’’, and by adding at the end
the following new subparagraph:
‘‘(C) the Secretary erroneously imposed
any penalty, addition to tax, or additional
amount which relates to an adjustment to a
partnership item.’’.
(5) So much of subparagraph (A) of section
6230(c)(2) as precedes ‘‘shall be filed’’ is amended
to read as follows:
604
‘‘(A) UNDER PARAGRAPH (1) (A) OR (C).—
Any claim under subparagraph (A) or (C) of
paragraph (1)’’.
(6) Paragraph (4) of section 6230(c) is amend-
ed by adding at the end the following: ‘‘In addition,
the determination under the final partnership ad-
ministrative adjustment or under the decision of the
court (whichever is appropriate) concerning the ap-
plicability of any penalty, addition to tax, or addi-
tional amount which relates to an adjustment to a
partnership item shall also be conclusive. Notwith-
standing the preceding sentence, the partner shall be
allowed to assert any partner level defenses that may
apply or to challenge the amount of the computa-
tional adjustment.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1239. PROVISIONS RELATING TO COURT JURISDIC-
TION, ETC.
(a) TAX COURT JURISDICTION TO ENJOIN PRE-
MATURE ASSESSMENTS OF DEFICIENCIES ATTRIBUTABLE
TO PARTNERSHIP ITEMS.—Subsection (b) of section 6225
is amended by striking ‘‘the proper court.’’ and inserting
‘‘the proper court, including the Tax Court. The Tax
605
Court shall have no jurisdiction to enjoin any action or
proceeding under this subsection unless a timely petition
for a readjustment of the partnership items for the taxable
year has been filed and then only in respect of the adjust-
ments that are the subject of such petition.’’.
(b) JURISDICTION TO CONSIDER STATUTE OF LIMI-
TATIONS WITH RESPECT TO PARTNERS.—Paragraph (1)
of section 6226(d) is amended by adding at the end the
following new sentence:
‘‘Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an action
shall be permitted to participate in such action (or
file a readjustment petition under subsection (b) or
paragraph (2) of this subsection) solely for the pur-
pose of asserting that the period of limitations for
assessing any tax attributable to partnership items
has expired with respect to such person, and the
court having jurisdiction of such action shall have
jurisdiction to consider such assertion.’’.
(c) TAX
COURT
JURISDICTION
TO
DETERMINE
OVERPAYMENTS ATTRIBUTABLE TO AFFECTED ITEMS.—
(1) Paragraph (6) of section 6230(d) is amend-
ed by striking ‘‘(or an affected item)’’.
(2) Paragraph (3) of section 6512(b) is amend-
ed by adding at the end the following new sentence:
606
‘‘In the case of a credit or refund relating to an af-
fected 
item 
(within 
the 
meaning 
of 
section
6231(a)(5)), the preceding sentence shall be applied
by substituting the periods under sections 6229 and
6230(d) for the periods under section 6511(b)(2),
(c), and (d).’’.
(d) VENUE ON APPEAL.—
(1) Paragraph (1) of section 7482(b) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (D),
by striking the period at the end of subparagraph
(E) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (E) the following new subparagraph:
‘‘(F) in the case of a petition under section
6234(c)—
‘‘(i) the legal residence of the peti-
tioner if the petitioner is not a corporation,
and
‘‘(ii) the place or office applicable
under subparagraph (B) if the petitioner is
a corporation.’’.
(2) The last sentence of section 7482(b)(1) is
amended by striking ‘‘or 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(e) OTHER PROVISIONS.—
607
(1) Subsection (c) of section 7459 is amended
by striking ‘‘or section 6228(a)’’ and inserting ‘‘,
6228(a), or 6234(c)’’.
(2) Subsection (o) of section 6501 is amended
by adding at the end the following new paragraph:
‘‘(3) For declaratory judgment relating to treat-
ment of items other than partnership items with re-
spect to an oversheltered return, see section 6234.’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED
BY 
NOTICE 
PARTNERS 
OR 
5-PERCENT
GROUPS.
(a) IN GENERAL.—Subsection (b) of section 6226
(relating to judicial review of final partnership administra-
tive adjustments) is amended by redesignating paragraph
(5) as paragraph (6) and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) 
TREATMENT
OF
PREMATURE
PETI-
TIONS.—If—
‘‘(A) a petition for a readjustment of part-
nership items for the taxable year involved is
filed by a notice partner (or a 5-percent group)
608
during the 90-day period described in sub-
section (a), and
‘‘(B) no action is brought under paragraph
(1) during the 60-day period described therein
with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of para-
graph (1) as filed on the last day of such 60-day pe-
riod.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to petitions filed after the date of
the enactment of this Act.
SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN
PROCEEDING.
(a) IN GENERAL.—Subsection (b) of section 7485
(relating to bonds to stay assessment of collection) is
amended—
(1) by inserting ‘‘penalties,’’ after ‘‘any inter-
est,’’, and
(2) by striking ‘‘aggregate of such deficiencies’’
and inserting ‘‘aggregate liability of the parties to
the action’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
609
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN
COMPUTATIONAL ADJUSTMENT RESULTING
FROM CERTAIN SETTLEMENTS.
(a) IN GENERAL.—Subsection (c) of section 6601
(relating to interest on underpayment, nonpayment, or ex-
tension of time for payment, of tax) is amended by adding
at the end the following new sentence: ‘‘In the case of a
settlement under section 6224(c) which results in the con-
version of partnership items to nonpartnership items pur-
suant to section 6231(b)(1)(C), the preceding sentence
shall apply to a computational adjustment resulting from
such settlement in the same manner as if such adjustment
were a deficiency and such settlement were a waiver re-
ferred to in the preceding sentence.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to adjustments with respect to
partnership taxable years beginning after the date of the
enactment of this Act.
610
SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUST-
MENT REQUESTS WITH RESPECT TO BAD
DEBTS OR WORTHLESS SECURITIES.
(a) GENERAL RULE.—Section 6227 (relating to ad-
ministrative adjustment requests) is amended by adding
at the end the following new subsection:
‘‘(e) REQUESTS WITH RESPECT TO BAD DEBTS OR
WORTHLESS SECURITIES.—In the case of that portion of
any request for an administrative adjustment which re-
lates to the deductibility by the partnership under section
166 of a debt as a debt which became worthless, or under
section 165(g) of a loss from worthlessness of a security,
the period prescribed in subsection (a)(1) shall be 7 years
from the last day for filing the partnership return for the
year with respect to which such request is made (deter-
mined without regard to extensions).’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall take effect as if included in the
amendments made by section 402 of the Tax Equity
and Fiscal Responsibility Act of 1982.
(2) TREATMENT OF REQUESTS FILED BEFORE
DATE OF ENACTMENT.—In the case of that portion
of any request (filed before the date of the enact-
ment of this Act) for an administrative adjustment
which relates to the deductibility of a debt as a debt
611
which became worthless or the deductibility of a loss
from the worthlessness of a security—
(A) paragraph (2) of section 6227(a) of
the Internal Revenue Code of 1986 shall not
apply,
(B) the period for filing a petition under
section 6228 of the Internal Revenue Code of
1986 with respect to such request shall not ex-
pire before the date 6 months after the date of
the enactment of this Act, and
(C) such a petition may be filed without
regard to whether there was a notice of the be-
ginning of an administrative proceeding or a
final partnership administrative adjustment.
PART III—PROVISION RELATING TO CLOSING OF
PARTNERSHIP TAXABLE YEAR WITH RE-
SPECT TO DECEASED PARTNER, ETC.
SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH
RESPECT TO DECEASED PARTNER, ETC.
(a) GENERAL RULE.—Subparagraph (A) of section
706(c)(2) (relating to disposition of entire interest) is
amended to read as follows:
‘‘(A) DISPOSITION
OF
ENTIRE
INTER-
EST.—The taxable year of a partnership shall
close with respect to a partner whose entire in-
612
terest in the partnership terminates (whether
by reason of death, liquidation, or otherwise).’’.
(b) CLERICAL AMENDMENT.—The paragraph head-
ing for paragraph (2) of section 706(c) is amended to read
as follows:
‘‘(2) TREATMENT OF DISPOSITIONS.—’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years begin-
ning after December 31, 1997.
Subtitle D—Provisions Relating to
Real Estate Investment Trusts
SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM
NUMBER OF SHAREHOLDERS.
(a) RULES RELATING TO DETERMINATION OF OWN-
ERSHIP.—
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND
LETTER NOT TO DISQUALIFY REIT.—Section 857(a)
(relating to requirements applicable to real estate in-
vestment trusts) is amended by striking paragraph
(2) and by redesignating paragraph (3) as para-
graph (2).
(2) SHAREHOLDER DEMAND LETTER REQUIRE-
MENT; PENALTY.—Section 857 (relating to taxation
of real estate investment trusts and their bene-
ficiaries) is amended by redesignating subsection (f)
613
as subsection (g) and by inserting after subsection
(e) the following new subsection:
‘‘(f) REAL ESTATE INVESTMENT TRUSTS TO ASCER-
TAIN OWNERSHIP.—
‘‘(1) IN
GENERAL.—Each real estate invest-
ment trust shall each taxable year comply with regu-
lations prescribed by the Secretary for the purposes
of ascertaining the actual ownership of the outstand-
ing shares, or certificates of beneficial interest, of
such trust.
‘‘(2) FAILURE TO COMPLY.—
‘‘(A) IN GENERAL.—If a real estate invest-
ment trust fails to comply with the require-
ments of paragraph (1) for a taxable year, such
trust shall pay (on notice and demand by the
Secretary and in the same manner as tax) a
penalty of $25,000.
‘‘(B) INTENTIONAL
DISREGARD.—If any
failure under paragraph (1) is due to inten-
tional disregard of the requirement under para-
graph (1), the penalty under subparagraph (A)
shall be $50,000.
‘‘(C) FAILURE
TO
COMPLY
AFTER
NO-
TICE.—The Secretary may require a real estate
investment trust to take such actions as the
614
Secretary determines appropriate to ascertain
actual ownership if the trust fails to meet the
requirements of paragraph (1). If the trust fails
to take such actions, the trust shall pay (on no-
tice and demand by the Secretary and in the
same manner as tax) an additional penalty
equal to the penalty determined under subpara-
graph (A) or (B), whichever is applicable.
‘‘(D) REASONABLE
CAUSE.—No penalty
shall be imposed under this paragraph with re-
spect to any failure if it is shown that such fail-
ure is due to reasonable cause and not to willful
neglect.’’.
(b) COMPLIANCE WITH CLOSELY HELD PROHIBI-
TION.—
(1) IN GENERAL.—Section 856 (defining real
estate investment trust) is amended by adding at the
end the following new subsection:
‘‘(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY
HELD TREATED AS MET IN CERTAIN CASES.—A corpora-
tion, trust, or association—
‘‘(1) which for a taxable year meets the require-
ments of section 857(f)(1), and
‘‘(2) which does not know, or exercising reason-
able diligence would not have known, whether the
615
entity failed to meet the requirement of subsection
(a)(6),
shall be treated as having met the requirement of sub-
section (a)(6) for the taxable year.’’.
(2) CONFORMING AMENDMENT.—Paragraph (6)
of section 856(a) is amended by inserting ‘‘subject
to the provisions of subsection (k),’’ before ‘‘which
is not’’.
SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES IN-
COME.
(a) IN GENERAL.—Paragraph (2) of section 856(d)
(defining rents from real property) is amended by striking
subparagraph (C) and the last sentence and inserting:
‘‘(C) any impermissible tenant service in-
come (as defined in paragraph (7)).’’.
(b) IMPERMISSIBLE TENANT SERVICE INCOME.—
Section 856(d) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) IMPERMISSIBLE
TENANT
SERVICE
IN-
COME.—For purposes of paragraph (2)(C)—
‘‘(A) IN GENERAL.—The term ‘impermis-
sible tenant service income’ means, with respect
to any real or personal property, any amount
received or accrued directly or indirectly by the
real estate investment trust for—
616
‘‘(i) services furnished or rendered by
the trust to the tenants of such property,
or
‘‘(ii) managing or operating such
property.
‘‘(B) DISQUALIFICATION OF ALL AMOUNTS
WHERE MORE THAN DE MINIMIS AMOUNT.—If
the amount described in subparagraph (A) with
respect to a property for any taxable year ex-
ceeds 1 percent of all amounts received or ac-
crued during such taxable year directly or indi-
rectly by the real estate investment trust with
respect to such property, the impermissible ten-
ant service income of the trust with respect to
the property shall include all such amounts.
‘‘(C) EXCEPTIONS.—For purposes of sub-
paragraph (A)—
‘‘(i) services furnished or rendered, or
management 
or 
operation 
provided,
through an independent contractor from
whom the trust itself does not derive or re-
ceive any income shall not be treated as
furnished, rendered, or provided by the
trust, and
617
‘‘(ii) there shall not be taken into ac-
count any amount which would be excluded
from unrelated business taxable income
under section 512(b)(3) if received by an
organization 
described 
in 
section
511(a)(2).
‘‘(D) AMOUNT ATTRIBUTABLE TO IMPER-
MISSIBLE SERVICES.—For purposes of subpara-
graph (A), the amount treated as received for
any service (or management or operation) shall
not be less than 150 percent of the direct cost
of the trust in furnishing or rendering the serv-
ice (or providing the management or operation).
‘‘(E) 
COORDINATION
WITH
LIMITA-
TIONS.—For purposes of paragraphs (2) and
(3) of subsection (c), amounts described in sub-
paragraph (A) shall be included in the gross in-
come of the corporation, trust, or association.’’.
SEC. 1253. ATTRIBUTION RULES APPLICABLE TO TENANT
OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership
of stock) is amended by adding at the end the following:
‘‘For purposes of paragraph (2)(B), section 318(a)(3)(A)
shall be applied under the preceding sentence in the case
of a partnership by taking into account only partners who
618
own (directly or indirectly) 25 percent or more of the cap-
ital interest, or the profits interest, in the partnership.’’.
SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED
CAPITAL GAINS.
(a) GENERAL RULE.—Paragraph (3) of section
857(b) (relating to capital gains) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph:
‘‘(D) TREATMENT BY SHAREHOLDERS OF
UNDISTRIBUTED CAPITAL GAINS.—
‘‘(i) Every shareholder of a real estate
investment trust at the close of the trust’s
taxable year shall include, in computing his
long-term capital gains in his return for
his taxable year in which the last day of
the trust’s taxable year falls, such amount
as the trust shall designate in respect of
such shares in a written notice mailed to
its shareholders at any time prior to the
expiration of 60 days after the close of its
taxable year (or mailed to its shareholders
or holders of beneficial interests with its
annual report for the taxable year), but the
amount so includible by any shareholder
619
shall not exceed that part of the amount
subjected to tax in subparagraph (A)(ii)
which he would have received if all of such
amount had been distributed as capital
gain dividends by the trust to the holders
of such shares at the close of its taxable
year.
‘‘(ii) For purposes of this title, every
such shareholder shall be deemed to have
paid, for his taxable year under clause (i),
the tax imposed by subparagraph (A)(ii)
on the amounts required by this subpara-
graph to be included in respect of such
shares in computing his long-term capital
gains for that year; and such shareholders
shall be allowed credit or refund as the
case may be, for the tax so deemed to have
been paid by him.
‘‘(iii) The adjusted basis of such
shares in the hands of the holder shall be
increased with respect to the amounts re-
quired by this subparagraph to be included
in computing his long-term capital gains,
by the difference between the amount of
such includible gains and the tax deemed
620
paid by such shareholder in respect of such
shares under clause (ii).
‘‘(iv) In the event of such designation,
the tax imposed by subparagraph (A)(ii)
shall be paid by the real estate investment
trust within 30 days after the close of its
taxable year.
‘‘(v) The earnings and profits of such
real estate investment trust, and the earn-
ings and profits of any such shareholder
which is a corporation, shall be appro-
priately adjusted in accordance with regu-
lations prescribed by the Secretary.
‘‘(vi) As used in this subparagraph,
the terms ‘shares’ and ‘shareholders’ shall
include beneficial interests and holders of
beneficial interests, respectively.’’.
(b) CONFORMING AMENDMENTS.—
(1) Clause (i) of section 857(b)(7)(A) is amend-
ed by striking ‘‘subparagraph (B)’’ and inserting
‘‘subparagraph (B) or (D)’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘by 65 percent’’ and all that
follows and inserting ‘‘by the difference between the
amount of such includible gains and the tax deemed
621
paid by such shareholder in respect of such shares
under clause (ii).’’.
SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME RE-
QUIREMENT.
(a) GENERAL RULE.—Subsection (c) of section 856
(relating to limitations) is amended—
(1) by adding ‘‘and’’ at the end of paragraph
(3),
(2) by striking paragraphs (4) and (8), and
(3) by redesignating paragraphs (5), (6), and
(7) as paragraphs (4), (5), and (6), respectively.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (G) of section 856(c)(5), as
redesignated by subsection (a), is amended by strik-
ing ‘‘and such agreement shall be treated as a secu-
rity for purposes of paragraph (4)(A)’’.
(2) Paragraph (5) of section 857(b) is amended
by striking ‘‘section 856(c)(7)’’ and inserting ‘‘sec-
tion 856(c)(6)’’.
(3) Subparagraph (C) of section 857(b)(6) is
amended by striking ‘‘section 856(c)(6)(B)’’ and in-
serting ‘‘section 856(c)(5)(B)’’.
643
(b) GIFT TAX.—Paragraph (1) of section 2514(e)
(relating to lapse of power) is amended by striking
‘‘$5,000’’ and inserting ‘‘$10,000’’.
(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. 1306. TREATMENT FOR ESTATE TAX PURPOSES OF
SHORT-TERM OBLIGATIONS HELD BY NON-
RESIDENT ALIENS.
(a) IN GENERAL.—Subsection (b) of section 2105 is
amended by striking ‘‘and’’ at the end of paragraph (2),
by striking the period at the end of paragraph (3) and
inserting ‘‘, and’’, and by inserting after paragraph (3)
the following new paragraph:
‘‘(4) obligations which would be original issue
discount obligations as defined in section 871(g)(1)
but for subparagraph (B)(i) thereof, if any interest
thereon (were such interest received by the decedent
at the time of his death) would not be effectively
connected with the conduct of a trade or business
within the United States.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to estates of decedents dying after
the date of the enactment of this Act.