In the Senate of the United States,
July 9, 1996.
Resolved, That the bill from the House of Representa-
tives (H.R. 3448) entitled ‘‘An Act to provide tax relief for
small businesses, to protect jobs, to create opportunities, to
increase the take home pay of workers, to amend the Portal-
to-Portal Act of 1947 relating to the payment of wages to
employees who use employer owned vehicles, and to amend
the Fair Labor Standards Act of 1938 to increase the mini-
mum wage rate and to prevent job loss by providing flexibility
to employers in complying with minimum wage and overtime
requirements under that Act.’’, do pass with the following
AMENDMENTS:
Ω1æPage 2, strike out all after line 5, over to and includ-
ing line 9 on page 236 and insert:
(b) TABLE OF CONTENTS.—
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Sec. 1. Short title; table of contents.
TITLE I—SMALL BUSINESS AND OTHER TAX PROVISIONS
Sec. 1101. Amendment of 1986 Code.
Sec. 1102. Underpayments of estimated tax.
Subtitle A—Expensing; Etc.
Sec. 1111. Increase in expense treatment for small businesses.
Sec. 1112. Treatment of employee tips.
Sec. 1113. Treatment of dues paid to agricultural or horticultural organizations.
Sec. 1114. Clarification of employment tax status of certain fishermen.
Sec. 1115. Modifications of tax-exempt bond rules for first-time farmers.
Sec. 1116. Newspaper distributors treated as direct sellers.
Sec. 1117. Application of involuntary conversion rules to presidentially declared
disasters.
Sec. 1118. Class life for gas station convenience stores and similar structures.
Sec. 1119. Treatment of abandonment of lessor improvements at termination of
lease.
Sec. 1120. Deductibility of business meal expenses for certain seafood processing
facilities.
Sec. 1121. Clarification of tax treatment of hard cider.
Sec. 1122. Special rules relating to determination whether individuals are em-
ployees for purposes of employment taxes.
Sec. 1123. Treatment of housing provided to employees by academic health cen-
ters.
Subtitle B—Extension of Certain Expiring Provisions
Sec. 1201. Work opportunity tax credit.
Sec. 1202. Employer-provided educational assistance programs.
Sec. 1203. Research credit.
Sec. 1204. Orphan drug tax credit.
Sec. 1205. Contributions of stock to private foundations.
Sec. 1206. Extension of binding contract date for biomass and coal facilities.
Sec. 1207. Moratorium for excise tax on diesel fuel sold for use or used in diesel-
powered motorboats.
Sec. 1208. Extension of transition rule for certain publicly traded partnerships.
Subtitle C—Provisions Relating to S Corporations
Sec. 1301. S corporations permitted to have 75 shareholders.
Sec. 1302. Electing small business trusts.
Sec. 1303. Expansion of post-death qualification for certain trusts.
Sec. 1304. Financial institutions permitted to hold safe harbor debt.
Sec. 1305. Rules relating to inadvertent terminations and invalid elections.
Sec. 1306. Agreement to terminate year.
Sec. 1307. Expansion of post-termination transition period.
Sec. 1308. S corporations permitted to hold subsidiaries.
Sec. 1309. Treatment of distributions during loss years.
Sec. 1310. Treatment of S corporations under subchapter C.
Sec. 1311. Elimination of certain earnings and profits.
Sec. 1312. Carryover of disallowed losses and deductions under at-risk rules al-
lowed.
Sec. 1313. Adjustments to basis of inherited S stock to reflect certain items of in-
come.
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Sec. 1314. S corporations eligible for rules applicable to real property subdivided
for sale by noncorporate taxpayers.
Sec. 1315. Financial institutions.
Sec. 1316. Certain exempt organizations allowed to be shareholders.
Sec. 1317. Effective date.
Subtitle D—Pension Simplification
CHAPTER 1—SIMPLIFIED DISTRIBUTION RULES
Sec. 1401. Repeal of 5-year income averaging for lump-sum distributions.
Sec. 1402. Repeal of $5,000 exclusion of employees’ death benefits.
Sec. 1403. Simplified method for taxing annuity distributions under certain em-
ployer plans.
Sec. 1404. Required distributions.
CHAPTER 2—INCREASED ACCESS TO RETIREMENT PLANS
SUBCHAPTER A—SIMPLE SAVINGS PLANS
Sec. 1421. Establishment of savings incentive match plans for employees of small
employers.
Sec. 1422. Extension of simple plan to 401(k) arrangements.
SUBCHAPTER B—OTHER PROVISIONS
Sec. 1426. Tax-exempt organizations eligible under section 401(k).
Sec. 1427. Homemakers eligible for full IRA deduction.
CHAPTER 3—NONDISCRIMINATION PROVISIONS
Sec. 1431. Definition of highly compensated employees; repeal of family aggrega-
tion.
Sec. 1432. Modification of additional participation requirements.
Sec. 1433. Nondiscrimination rules for qualified cash or deferred arrangements
and matching contributions.
Sec. 1434. Definition of compensation for section 415 purposes.
CHAPTER 4—MISCELLANEOUS PROVISIONS
Sec. 1441. Plans covering self-employed individuals.
Sec. 1442. Elimination of special vesting rule for multiemployer plans.
Sec. 1443. Distributions under rural cooperative plans.
Sec. 1444. Treatment of governmental plans under section 415.
Sec. 1445. Uniform retirement age.
Sec. 1446. Contributions on behalf of disabled employees.
Sec. 1447. Treatment of deferred compensation plans of State and local govern-
ments and tax-exempt organizations.
Sec. 1448. Trust requirement for deferred compensation plans of State and local
governments.
Sec. 1449. Transition rule for computing maximum benefits under section 415
limitations.
Sec. 1450. Modifications of section 403(b).
Sec. 1451. Missing participants.
Sec. 1452. Repeal of limitation in case of defined benefit plan and defined con-
tribution plan for same employee; excess distributions.
Sec. 1453. Tax on prohibited transactions.
Sec. 1454. Treatment of leased employees.
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Sec. 1455. Uniform penalty provisions to apply to certain pension reporting re-
quirements.
Sec. 1456. Retirement benefits of ministers not subject to tax on net earnings
from self-employment.
Sec. 1457. Model forms for spousal consent and qualified domestic relations
forms.
Sec. 1458. Treatment of length of service awards to volunteers performing fire
fighting or prevention services, emergency medical services, or
ambulance services.
Sec. 1459. Alternative nondiscrimination rules for certain plans that provide for
early participation.
Sec. 1460. Modifications of joint and survivor annuity requirements.
Sec. 1461. Clarification of application of ERISA to insurance company general
accounts.
Sec. 1462. Special rules for chaplains and self-employed ministers.
Sec. 1463. Definition of highly compensated employee for pre-ERISA church
plans.
Sec. 1464. Rule relating to investment in contract not to apply to foreign mis-
sionaries.
Sec. 1465. Increase in guaranteed amount of multi-employer plan benefits.
Sec. 1466. Waiver of excise tax on failure to pay liquidity shortfall.
Sec. 1467. Treatment of multiemployer plans under section 415.
Sec. 1468. Payment of lump-sum credit for former spouses of Federal employees.
Sec. 1469. Date for adoption of plan amendments.
Subtitle E—Revenue Offsets
PART I—GENERAL PROVISIONS
Sec. 1601. Modifications of Puerto Rico and possession tax credit.
Sec. 1602. Repeal of exclusion for interest on loans used to acquire employer secu-
rities.
Sec. 1603. Repeal of exclusion for punitive damages.
Sec. 1604. Extension and phasedown of luxury passenger automobile tax.
Sec. 1605. Termination of future tax-exempt bond financing for local furnishers
of electricity and gas.
Sec. 1606. Repeal of financial institution transition rule to interest allocation
rules.
Sec. 1607. Extension of airport and airway trust fund excise taxes.
Sec. 1608. Basis adjustment to property held by corporation where stock in cor-
poration is replacement property under involuntary conversion
rules.
Sec. 1609. Extension of withholding to certain gambling winnings.
Sec. 1610. Treatment of certain insurance contracts on retired lives.
Sec. 1611. Treatment of contributions in aid of construction.
Sec. 1612. Election to cease status as qualified scholarship funding corporation.
Sec. 1613. Certain tax benefits denied to individuals failing to provide taxpayer
identification numbers.
PART II—FINANCIAL ASSET SECURITIZATION INVESTMENTS
Sec. 1621. Financial asset securitization investment trusts.
PART III—TREATMENT OF INDIVIDUALS WHO EXPATRIATE
Sec. 1631. Revision of tax rules on expatriation.
Sec. 1632. Information on individuals expatriating.
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Sec. 1633. Report on tax compliance by United States citizens and residents liv-
ing abroad.
Subtitle F—Technical Corrections
Sec. 1701. Coordination with other subtitles.
Sec. 1702. Amendments related to Revenue Reconciliation Act of 1990.
Sec. 1703. Amendments related to Revenue Reconciliation Act of 1993.
Sec. 1704. Miscellaneous provisions.
Subtitle G—Other Provisions
Sec. 1801. Exemption from diesel fuel dyeing requirements with respect to certain
States.
Sec. 1802. Treatment of certain university accounts.
Sec. 1803. Modifications to excise tax on ozone-depleting chemicals.
Sec. 1804. Tax-exempt bonds for sale of Alaska Power Administration facility.
Sec. 1805. Nonrecognition treatment for certain transfers by common trust funds
to regulated investment companies.
Sec. 1806. Qualified State tuition programs.
TITLE II—PAYMENT OF WAGES
Sec. 2101. Short title.
Sec. 2102. Proper compensation for use of employer vehicles.
Sec. 2103. Effective date.
Sec. 2104. Minimum wage increase.
Sec. 2105. Fair Labor Standards Act Amendments.
TITLE I—SMALL BUSINESS AND
OTHER TAX PROVISIONS
SEC. 1101. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in
this title an amendment or repeal is expressed in terms of
an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or
other provision of the Internal Revenue Code of 1986.
SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX.
No addition to the tax shall be made under section
6654 or 6655 of the Internal Revenue Code of 1986 (relating
to failure to pay estimated tax) with respect to any under-
payment of an installment required to be paid before the
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date of the enactment of this Act to the extent such under-
payment was created or increased by any provision of this
title.
Subtitle A—Expensing; Etc.
SEC. 1111. INCREASE IN EXPENSE TREATMENT FOR SMALL
BUSINESSES.
(a) GENERAL RULE.—Paragraph (1) of section 179(b)
(relating to dollar limitation) is amended to read as follows:
‘‘(1) DOLLAR LIMITATION.—The aggregate cost
which may be taken into account under subsection (a)
for any taxable year shall not exceed the following ap-
plicable amount:
‘‘If the taxable year
The applicable
begins in:
amount is:
1997 ............................................................................
18,000
1998 ............................................................................
18,500
1999 ............................................................................
19,000
2000 ............................................................................
20,000
2001 ............................................................................
24,000
2002 ............................................................................
24,000
2003 or thereafter .......................................................
25,000.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 1996.
SEC. 1112. TREATMENT OF EMPLOYEE TIPS.
(a) EMPLOYEE CASH TIPS.—
(1) REPORTING
REQUIREMENT
NOT
CONSID-
ERED.—Subparagraph (A) of section 45B(b)(1) (re-
lating to excess employer social security tax) is
amended by inserting ‘‘(without regard to whether
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SEC. 1113. TREATMENT OF DUES PAID TO AGRICULTURAL
OR HORTICULTURAL ORGANIZATIONS.
(a) GENERAL RULE.—Section 512 (defining unrelated
business taxable income) is amended by adding at the end
the following new subsection:
‘‘(d) TREATMENT
OF DUES
OF AGRICULTURAL
OR
HORTICULTURAL ORGANIZATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) an agricultural or horticultural orga-
nization described in section 501(c)(5) requires
annual dues to be paid in order to be a member
of such organization, and
‘‘(B) the amount of such required annual
dues does not exceed $100,
in no event shall any portion of such dues be treated
as derived by such organization from an unrelated
trade or business by reason of any benefits or privi-
leges to which members of such organization are enti-
tled.
‘‘(2) INDEXATION OF $100 AMOUNT.—In the case
of any taxable year beginning in a calendar year
after 1995, the $100 amount in paragraph (1) shall
be increased by an amount equal to—
‘‘(A) $100, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar year
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in which the taxable year begins, by substituting
‘calendar year 1994’ for ‘calendar year 1992’ in
subparagraph (B) thereof.
‘‘(3) DUES.—For purposes of this subsection, the
term ‘dues’ means any payment (whether or not des-
ignated as dues) which is required to be made in
order to be recognized by the organization as a mem-
ber of the organization.’’.
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendment made by this
section shall apply to taxable years beginning after
December 31, 1986.
(2) TRANSITIONAL RULE.—If—
(A) for purposes of applying part III of
subchapter F of chapter 1 of the Internal Reve-
nue Code of 1986 to any taxable year beginning
before January 1, 1987, an agricultural or horti-
cultural organization did not treat any portion
of membership dues received by it as income de-
rived in an unrelated trade or business, and
(B) such organization had a reasonable
basis for not treating such dues as income de-
rived in an unrelated trade or business,
then, for purposes of applying such part III to any
such taxable year, in no event shall any portion of
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such dues be treated as derived in an unrelated trade
or business.
(3) REASONABLE BASIS.—For purposes of para-
graph (2), an organization shall be treated as having
a reasonable basis for not treating membership dues
as income derived in an unrelated trade or business
if the taxpayer’s treatment of such dues was in rea-
sonable reliance on any of the following:
(A) Judicial precedent, published rulings,
technical advice with respect to the organization,
or a letter ruling to the organization.
(B) A past Internal Revenue Service audit
of the organization in which there was no assess-
ment attributable to the reclassification of mem-
bership dues for purposes of the tax on unrelated
business income.
(C) Long-standing recognized practice of
agricultural or horticultural organizations.
SEC. 1114. CLARIFICATION OF EMPLOYMENT TAX STATUS
OF CERTAIN FISHERMEN.
(a) CLARIFICATION OF EMPLOYMENT TAX STATUS.—
(1) AMENDMENTS OF INTERNAL REVENUE CODE
OF 1986.—
(A) DETERMINATION OF SIZE OF CREW.—
Subsection (b) of section 3121 (defining employ-
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ment) is amended by adding at the end the fol-
lowing new sentence:
‘‘For purposes of paragraph (20), the operating crew of a
boat shall be treated as normally made up of fewer than
10 individuals if the average size of the operating crew on
trips made during the preceding 4 calendar quarters con-
sisted of fewer than 10 individuals.’’.
(B) CERTAIN
CASH
REMUNERATION
PER-
MITTED.—Subparagraph 
(A) 
of 
section
3121(b)(20) is amended to read as follows:
‘‘(A) such individual does not receive any
cash remuneration other than as provided in
subparagraph (B) and other than cash remu-
neration—
‘‘(i) which does not exceed $100 per
trip;
‘‘(ii) which is contingent on a mini-
mum catch; and
‘‘(iii) which is paid solely for addi-
tional duties (such as mate, engineer, or
cook) for which additional cash remunera-
tion is traditional in the industry,’’.
(C) 
CONFORMING
AMENDMENT.—Section
6050A(a) is amended by striking ‘‘and’’ at the
end of paragraph (3), by striking the period at
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the end of paragraph (4) and inserting ‘‘; and’’,
and by adding at the end the following new
paragraph:
‘‘(5) any cash remuneration described in section
3121(b)(20)(A).’’.
(2) AMENDMENT OF SOCIAL SECURITY ACT.—
(A) DETERMINATION OF SIZE OF CREW.—
Subsection (a) of section 210 of the Social Secu-
rity Act is amended by adding at the end the fol-
lowing new sentence:
‘‘For purposes of paragraph (20), the operating crew of a
boat shall be treated as normally made up of fewer than
10 individuals if the average size of the operating crew on
trips made during the preceding 4 calendar quarters con-
sisted of fewer than 10 individuals.’’.
(B) CERTAIN
CASH
REMUNERATION
PER-
MITTED.—Subparagraph 
(A) 
of 
section
210(a)(20) of such Act is amended to read as fol-
lows:
‘‘(A) such individual does not receive any
additional compensation other than as provided
in subparagraph (B) and other than cash remu-
neration—
‘‘(i) which does not exceed $100 per
trip;
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‘‘(ii) which is contingent on a mini-
mum catch; and
‘‘(iii) which is paid solely for addi-
tional duties (such as mate, engineer, or
cook) for which additional cash remunera-
tion is traditional in the industry,’’.
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to remuneration paid—
(A) after December 31, 1994, and
(B) after December 31, 1984, and before
January 1, 1995, unless the payor treated such
remuneration (when paid) as being subject to tax
under chapter 21 of the Internal Revenue Code
of 1986.
(2) REPORTING
REQUIREMENT.—The amend-
ment made by subsection (a)(1)(C) shall apply to re-
muneration paid after December 31, 1996.
SEC. 1115. MODIFICATIONS OF TAX-EXEMPT BOND RULES
FOR FIRST-TIME FARMERS.
(a) ACQUISITION
FROM
RELATED
PERSON
AL-
LOWED.—Section 147(c)(2) (relating to exception for first-
time farmers) is amended by adding at the end the follow-
ing new subparagraph:
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‘‘(G) ACQUISITION
FROM
RELATED
PER-
SON.—For purposes of this paragraph and sec-
tion 144(a), the acquisition by a first-time farm-
er of land or personal property from a related
person (within the meaning of section 144(a)(3))
shall not be treated as an acquisition from a re-
lated person, if—
‘‘(i) the acquisition price is for the fair
market value of such land or property, and
‘‘(ii) subsequent to such acquisition,
the related person does not have a financial
interest in the farming operation with re-
spect to which the bond proceeds are to be
used.’’.
(b) SUBSTANTIAL FARMLAND AMOUNT DOUBLED.—
Clause (i) of section 147(c)(2)(E) (defining substantial
farmland) is amended by striking ‘‘15 percent’’ and insert-
ing ‘‘30 percent’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to bonds issued after the date of the en-
actment of this Act.
SEC. 1116. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT
SELLERS.
(a) IN GENERAL.—Section 3508(b)(2)(A) is amended
by striking ‘‘or’’ at the end of clause (i), by inserting ‘‘or’’
HR 3448 EAS
at the end of clause (ii), and by inserting after clause (ii)
the following new clause:
‘‘(iii) is engaged in the trade or busi-
ness of the delivering or distribution of
newspapers or shopping news (including
any services directly related to such trade or
business),’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to services performed after December 31,
1995.
SEC. 1117. APPLICATION OF INVOLUNTARY CONVERSION
RULES TO PRESIDENTIALLY DECLARED DIS-
ASTERS.
(a) IN GENERAL.—Section 1033(h) is amended by re-
designating paragraphs (2) and (3) as paragraphs (3) and
(4) and by inserting after paragraph (1) the following new
paragraph:
‘‘(2) TRADE
OR
BUSINESS
AND
INVESTMENT
PROPERTY.—If a taxpayer’s property held for produc-
tive use in a trade or business or for investment is
compulsorily or involuntarily converted as a result of
a Presidentially declared disaster, tangible property
of a type held for productive use in a trade or busi-
ness shall be treated for purposes of subsection (a) as
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property similar or related in service or use to the
property so converted.’’.
(b) CONFORMING AMENDMENTS.—Section 1033(h) is
amended—
(1) by striking ‘‘residence’’ in paragraph (3) (as
redesignated by subsection (a)) and inserting ‘‘prop-
erty’’,
(2) by striking ‘‘PRINCIPAL RESIDENCES’’ in the
heading and inserting ‘‘PROPERTY’’, and
(3) by striking ‘‘(1) IN GENERAL.—’’ and insert-
ing ‘‘(1) PRINCIPAL RESIDENCES.—’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to disasters declared after December 31,
1994, in taxable years ending after such date.
SEC. 1118. CLASS LIFE FOR GAS STATION CONVENIENCE
STORES AND SIMILAR STRUCTURES.
(a) IN GENERAL.—Section 168(e)(3)(E) (classifying
certain property as 15-year property) is amended by strik-
ing ‘‘and’’ at the end of clause (i), by striking the period
at the end of clause (ii) and inserting ‘‘, and’’, and by add-
ing at the end the following new clause:
‘‘(iii) any section 1250 property which
is a retail motor fuels outlet (whether or not
food or other convenience items are sold at
the outlet).’’.
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(b) CONFORMING AMENDMENT.—Subparagraph (B) of
section 168(g)(3) is amended by inserting after the item re-
lating to subparagraph (E)(ii) in the table contained there-
in the following new item:
‘‘(E)(iii) . . . . . . . . . . . . . . . . . 20’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to property which is placed in service
on or after the date of the enactment of this Act and to
which section 168 of the Internal Revenue Code of 1986 ap-
plies after the amendment made by section 201 of the Tax
Reform Act of 1986. A taxpayer may elect (in such form
and manner as the Secretary of the Treasury may pre-
scribe) to have such amendments apply with respect to any
property placed in service before such date and to which
such section so applies.
SEC. 1119. TREATMENT OF ABANDONMENT OF LESSOR IM-
PROVEMENTS AT TERMINATION OF LEASE.
(a) IN GENERAL.—Paragraph (8) of section 168(i) is
amended to read as follows:
‘‘(8) TREATMENT
OF
LEASEHOLD
IMPROVE-
MENTS.—
‘‘(A) IN
GENERAL.—In the case of any
building erected (or improvements made) on
leased property, if such building or improvement
is property to which this section applies, the de-
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preciation deduction shall be determined under
the provisions of this section.
‘‘(B) TREATMENT
OF
LESSOR
IMPROVE-
MENTS WHICH ARE ABANDONED AT TERMINATION
OF LEASE.—An improvement—
‘‘(i) which is made by the lessor of
leased property for the lessee of such prop-
erty, and
‘‘(ii) which is irrevocably disposed of
or abandoned by the lessor at the termi-
nation of the lease by such lessee,
shall be treated for purposes of determining gain
or loss under this title as disposed of by the les-
sor when so disposed of or abandoned.’’.
(b) EFFECTIVE DATE.—Subparagraph (B) of section
168(i)(8) of the Internal Revenue Code of 1986, as added
by the amendment made by subsection (a), shall apply to
improvements disposed of or abandoned after June 12,
1996.
SEC. 1120. DEDUCTIBILITY OF BUSINESS MEAL EXPENSES
FOR CERTAIN SEAFOOD PROCESSING FACILI-
TIES.
(a) IN
GENERAL.—Subparagraph (E) of section
274(n)(2) is amended by striking ‘‘or’’ at the end of clause
(iii), by striking the period at the end of clause (iv) and
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inserting ‘‘, or’’, and by inserting after clause (iv) the fol-
lowing new clause:
‘‘(v) provided at a remote seafood proc-
essing facility located in the United States
north of 53 degrees north latitude.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1121. CLARIFICATION OF TAX TREATMENT OF HARD
CIDER.
(a) HARD CIDER CONTAINING NOT MORE THAN 7
PERCENT ALCOHOL TAXED AS WINE.—Subsection (b) of
section 5041 (relating to imposition and rate of tax) is
amended by striking ‘‘and’’ at the end of paragraph (4),
by striking the period at the end of paragraph (5) and in-
serting ‘‘; and’’, and by adding at the end the following
new paragraph:
‘‘(6) On hard cider derived primarily from ap-
ples or apple concentrate and water, containing no
other fruit product, and containing at least one-half
of 1 percent and not more than 7 percent of alcohol
by volume, 22.6 cents per wine gallon.’’.
(b) EXCLUSION FROM SMALL PRODUCER CREDIT.—
Paragraph (1) of section 5041(c) (relating to credit for
small domestic producers) is amended by striking ‘‘sub-
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section (b)(4)’’ and inserting ‘‘paragraphs (4) and (6) of
subsection (b)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect on January 1, 1997.
SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION
WHETHER 
INDIVIDUALS 
ARE 
EMPLOYEES
FOR PURPOSES OF EMPLOYMENT TAXES.
(a) IN GENERAL.—Section 530 of the Revenue Act of
1978 is amended by adding at the end the following new
subsection:
‘‘(e) SPECIAL RULES
FOR APPLICATION
OF SEC-
TION.—
‘‘(1) NOTICE REQUIREMENTS.—
‘‘(A) WRITTEN AGREEMENT REQUIRED BE-
TWEEN TAXPAYER AND INDIVIDUAL.—The provi-
sions of subsection (a)(1) shall not apply with
respect to a taxpayer and any individual unless
such taxpayer and individual sign a statement
(at such time and in such form as the Secretary
may prescribe) which provides that such individ-
ual will not be treated as an employee of the tax-
payer for purposes of employment taxes.
‘‘(B) NOTICE
OF
AVAILABILITY
OF
SEC-
TION.—An officer or employee of the Internal
Revenue Service shall, before or at the commence-
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ment of any audit relating to the employment
status of one or more individuals who perform
services for the taxpayer, provide the taxpayer
with a written notice of the provisions of this
section.
‘‘(2) RULES RELATING TO STATUTORY STAND-
ARDS.—For purposes of subsection (a)(2)—
‘‘(A) a taxpayer may not rely on an audit
commenced after December 31, 1996, for pur-
poses of subparagraph (B) thereof unless such
audit included an examination for employment
tax purposes of whether the individual involved
(or any individual holding a position substan-
tially similar to the position held by the individ-
ual involved) should be treated as an employee of
the taxpayer,
‘‘(B) in no event shall the significant seg-
ment requirement of subparagraph (C) thereof be
construed to require a reasonable showing of the
practice of more than 25 percent of the industry
(determined by not taking into account the tax-
payer), and
‘‘(C) in applying the long-standing recog-
nized practice requirement of subparagraph (C)
thereof—
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‘‘(i) such requirement shall not be con-
strued as requiring the practice to have con-
tinued for more than 10 years, and
‘‘(ii) a practice shall not fail to be
treated as long-standing merely because
such practice began after 1978.
‘‘(3) AVAILABILITY OF SAFE HARBORS.—Nothing
in this section shall be construed to provide that sub-
section (a) only applies where the individual involved
is otherwise an employee of the taxpayer.
‘‘(4) BURDEN OF PROOF.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a taxpayer establishes a prima
facie case that it was reasonable not to treat
an individual as an employee for purposes
of this section, and
‘‘(ii) the taxpayer has fully cooperated
with reasonable requests from the Secretary
of the Treasury or his delegate,
then the burden of proof with respect to such
treatment shall be on the Secretary.
‘‘(B) EXCEPTION FOR OTHER REASONABLE
BASIS.—In the case of any issue involving
whether the taxpayer had a reasonable basis not
to treat an individual as an employee for pur-
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poses of this section, subparagraph (A) shall only
apply for purposes of determining whether the
taxpayer meets the requirements of subparagraph
(A), (B), or (C) of subsection (a)(2).
‘‘(5) PRESERVATION
OF
PRIOR
PERIOD
SAFE
HARBOR.—If—
‘‘(A) an individual would (but for the treat-
ment referred to in subparagraph (B)) be deemed
not to be an employee of the taxpayer under sub-
section (a) for any prior period, and
‘‘(B) such individual is treated by the tax-
payer as an employee for employment tax pur-
poses for any subsequent period,
then, for purposes of applying such taxes for such
prior period with respect to the taxpayer, the individ-
ual shall be deemed not to be an employee.
‘‘(6) SUBSTANTIALLY
SIMILAR
POSITION.—For
purposes of this section, the determination as to
whether an individual holds a position substantially
similar to a position held by another individual shall
include consideration of the relationship between the
taxpayer and such individuals.’’.
(b) EFFECTIVE DATES.—
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(1) IN GENERAL.—The amendment made by this
section shall apply to periods after December 31,
1996.
(2) NOTICE REQUIREMENTS.—
(A) WRITTEN AGREEMENT.—In the case of
individuals who first perform services for a tax-
payer before January 1, 1997, the requirements
of section 530(e)(1)(A) of the Revenue Act of
1978 (as added by subsection (a)) shall not
apply before January 1, 1998, unless the tax-
payer elects to apply such requirements before
such date.
(B) NOTICE BY INTERNAL REVENUE SERV-
ICE.—Section 530(e)(1)(B) of the Revenue Act of
1978 (as added by subsection (a)) shall apply to
audits which commence after December 31, 1996.
(3) BURDEN OF PROOF.—
(A) IN GENERAL.—Section 530(e)(4) of the
Revenue Act of 1978 (as added by subsection (a))
shall apply to disputes involving periods after
December 31, 1996.
(B) 
NO
INFERENCE.—Nothing 
in 
the
amendments made by this section shall be con-
strued to infer the proper treatment of the bur-
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den of proof with respect to disputes involving
periods before January 1, 1997.
SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EM-
PLOYEES BY ACADEMIC HEALTH CENTERS.
(a) IN GENERAL.—Paragraph (4) of section 119(d)
(relating to lodging furnished by certain educational insti-
tutions to employees) is amended to read as follows:
‘‘(4) EDUCATIONAL INSTITUTION.—For purposes
of this subsection—
‘‘(A) IN GENERAL.—The term ‘educational
institution’ means—
‘‘(i) an institution described in section
170(b)(1)(A)(ii), or
‘‘(ii) an academic health center.
‘‘(B) ACADEMIC
HEALTH
CENTER.—For
purposes of subparagraph (A), the term ‘aca-
demic health center’ means an entity—
‘‘(i) which is described in section
170(b)(1)(A)(iii),
‘‘(ii) which receives (during the cal-
endar year in which the taxable year of the
taxpayer begins) payments under subsection
(d)(5)(B) or (h) of section 1886 of the So-
cial Security Act (relating to graduate med-
ical education), and
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‘‘(iii) which has as one of its principal
purposes or functions the providing and
teaching of basic and clinical medical
science and research with the entity’s own
faculty.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1995.
Subtitle B—Extension of Certain
Expiring Provisions
SEC. 1201. WORK OPPORTUNITY TAX CREDIT.
(a) AMOUNT OF CREDIT.—Subsection (a) of section 51
(relating to amount of credit) is amended by striking ‘‘40
percent’’ and inserting ‘‘35 percent’’.
(b) MEMBERS OF TARGETED GROUPS.—Subsection (d)
of section 51 is amended to read as follows:
‘‘(d) MEMBERS OF TARGETED GROUPS.—For purposes
of this subpart—
‘‘(1) IN GENERAL.—An individual is a member
of a targeted group if such individual is—
‘‘(A) a qualified IV–A recipient,
‘‘(B) a qualified veteran,
‘‘(C) a qualified ex-felon,
‘‘(D) a high-risk youth,
‘‘(E) a vocational rehabilitation referral,
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‘‘(F) a qualified summer youth employee, or
‘‘(G) a qualified food stamp recipient.
‘‘(2) QUALIFIED IV–A RECIPIENT.—
‘‘(A) IN GENERAL.—The term ‘qualified IV–
A recipient’ means any individual who is cer-
tified by the designated local agency as being a
member of a family receiving assistance under a
IV–A program for at least a 9-month period end-
ing during the 9-month period ending on the
hiring date.
‘‘(B) IV–A PROGRAM.—For purposes of this
paragraph, the term ‘IV–A program’ means any
program providing assistance under a State
plan approved under part A of title IV of the So-
cial Security Act (relating to assistance for
needy families with minor children) and any
successor of such program.
‘‘(3) QUALIFIED VETERAN.—
‘‘(A) IN GENERAL.—The term ‘qualified vet-
eran’ means any veteran who is certified by the
designated local agency as being—
‘‘(i) a member of a family receiving as-
sistance under a IV–A program (as defined
in paragraph (2)(B)) for at least a 9-month
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period ending during the 12-month period
ending on the hiring date, or
‘‘(ii) 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 during the
12-month period ending on the hiring date.
‘‘(B) VETERAN.—For purposes of subpara-
graph (A), the term ‘veteran’ means any individ-
ual who is certified by the designated local agen-
cy as—
‘‘(i)(I) having served on active duty
(other than active duty for training) in the
Armed Forces of the United States for a pe-
riod of more than 180 days, or
‘‘(II) having been discharged or re-
leased from active duty in the Armed Forces
of the United States for a service-connected
disability, and
‘‘(ii) not having any day during the
60-day period ending on the hiring date
which was a day of extended active duty in
the Armed Forces of the United States.
For purposes of clause (ii), the term ‘extended
active duty’ means a period of more than 90
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days during which the individual was on active
duty (other than active duty for training).
‘‘(4) QUALIFIED EX-FELON.—The term ‘qualified
ex-felon’ means any individual who is certified by the
designated local agency—
‘‘(A) as having been convicted of a felony
under any statute of the United States or any
State,
‘‘(B) as having a hiring date which is not
more than 1 year after the last date on which
such individual was so convicted or was released
from prison, and
‘‘(C) as being a member of a family which
had an income during the 6 months immediately
preceding the earlier of the month in which such
income determination occurs or the month in
which the hiring date occurs, which, on an an-
nual basis, would be 70 percent or less of the Bu-
reau of Labor Statistics lower living standard.
Any determination under subparagraph (C) shall be
valid for the 45-day period beginning on the date
such determination is made.
‘‘(5) HIGH-RISK YOUTH.—
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‘‘(A) IN
GENERAL.—The term ‘high-risk
youth’ means any individual who is certified by
the designated local agency—
‘‘(i) as having attained age 18 but not
age 25 on the hiring date, and
‘‘(ii) as having his principal place of
abode within an empowerment zone or en-
terprise community.
‘‘(B) YOUTH MUST CONTINUE TO RESIDE IN
ZONE.—In the case of a high-risk youth, the term
‘qualified wages’ shall not include wages paid or
incurred for services performed while such
youth’s principal place of abode is outside an
empowerment zone or enterprise community.
‘‘(6) VOCATIONAL REHABILITATION REFERRAL.—
The term ‘vocational rehabilitation referral’ means
any individual who is certified by the designated
local agency as—
‘‘(A) having a physical or mental disability
which, for such individual, constitutes or results
in a substantial handicap to employment, and
‘‘(B) having been referred to the employer
upon completion of (or while receiving) rehabili-
tative services pursuant to—
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‘‘(i) an individualized written rehabili-
tation plan under a State plan for voca-
tional 
rehabilitation 
services 
approved
under the Rehabilitation Act of 1973, or
‘‘(ii) a program of vocational rehabili-
tation carried out under chapter 31 of title
38, United States Code.
‘‘(7) QUALIFIED SUMMER YOUTH EMPLOYEE.—
‘‘(A) IN
GENERAL.—The term ‘qualified
summer youth employee’ means any individ-
ual—
‘‘(i) who performs services for the em-
ployer between May 1 and September 15,
‘‘(ii) who is certified by the designated
local agency as having attained age 16 but
not 18 on the hiring date (or if later, on
May 1 of the calendar year involved),
‘‘(iii) who has not been an employee of
the employer during any period prior to the
90-day period described in subparagraph
(B)(i), and
‘‘(iv) who is certified by the designated
local agency as having his principal place
of abode within an empowerment zone or
enterprise community.
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‘‘(B) SPECIAL
RULES
FOR
DETERMINING
AMOUNT OF CREDIT.—For purposes of applying
this subpart to wages paid or incurred to any
qualified summer youth employee—
‘‘(i) subsection (b)(2) shall be applied
by substituting ‘any 90-day period between
May 1 and September 15’ for ‘the 1-year
period beginning with the day the individ-
ual begins work for the employer’, and
‘‘(ii) subsection (b)(3) shall be applied
by substituting ‘$3,000’ for ‘$6,000’.
The preceding sentence shall not apply to an in-
dividual who, with respect to the same employer,
is certified as a member of another targeted
group after such individual has been a qualified
summer youth employee.
‘‘(C) YOUTH MUST CONTINUE TO RESIDE IN
ZONE.—Paragraph (5)(B) shall apply for pur-
poses of subparagraph (A)(iv).
‘‘(8) QUALIFIED FOOD STAMP RECIPIENT.—
‘‘(A) IN
GENERAL.—The term ‘qualified
food stamp recipient’ means any individual who
is certified by the designated local agency—
‘‘(i) as having attained age 18 but not
age 25 on the hiring date, and
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‘‘(ii) as being a member of a family re-
ceiving assistance under a food stamp pro-
gram under the Food Stamp Act of 1977 for
the 3-month period ending on the hiring
date.
‘‘(B) PARTICIPATION
INFORMATION.—Not-
withstanding any other provision of law, the
Secretary of the Treasury and the Secretary of
Agriculture shall enter into an agreement to pro-
vide information to designated local agencies
with respect to participation in the food stamp
program.
‘‘(9) HIRING
DATE.—The term ‘hiring date’
means the day the individual is hired by the em-
ployer.
‘‘(10) DESIGNATED LOCAL AGENCY.—The term
‘designated local agency’ means a State employment
security agency established in accordance with the Act
of June 6, 1933, as amended (29 U.S.C. 49–49n).
‘‘(11) SPECIAL RULES FOR CERTIFICATIONS.—
‘‘(A) IN GENERAL.—An individual shall not
be treated as a member of a targeted group un-
less—
‘‘(i) on or before the day on which such
individual begins work for the employer, the
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employer has received a certification from a
designated local agency that such individual
is a member of a targeted group, or
‘‘(ii)(I) on or before the day the indi-
vidual is offered employment with the em-
ployer, a pre-screening notice is completed
by the employer with respect to such indi-
vidual, and
‘‘(II) not later than the 21st day after
the individual begins work for the employer,
the employer submits such notice, signed by
the employer and the individual under pen-
alties of perjury, to the designated local
agency as part of a written request for such
a certification from such agency.
For purposes of this paragraph, the term ‘pre-
screening notice’ means a document (in such
form as the Secretary shall prescribe) which con-
tains information provided by the individual on
the basis of which the employer believes that the
individual is a member of a targeted group.
‘‘(B) INCORRECT CERTIFICATIONS.—If—
‘‘(i) an individual has been certified by
a designated local agency as a member of a
targeted group, and
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‘‘(ii) such certification is incorrect be-
cause it was based on false information pro-
vided by such individual,
the certification shall be revoked and wages paid
by the employer after the date on which notice
of revocation is received by the employer shall
not be treated as qualified wages.
‘‘(C) EXPLANATION
OF
DENIAL
OF
RE-
QUEST.—If a designated local agency denies a
request for certification of membership in a tar-
geted group, such agency shall provide to the per-
son making such request a written explanation
of the reasons for such denial.’’.
(c) MINIMUM EMPLOYMENT PERIOD.—Paragraph (3)
of section 51(i) (relating to certain individuals ineligible)
is amended to read as follows:
‘‘(3) INDIVIDUALS NOT MEETING MINIMUM EM-
PLOYMENT PERIOD.—No wages shall be taken into ac-
count under subsection (a) with respect to any indi-
vidual unless such individual either—
‘‘(A) is employed by the employer at least
180 days (20 days in the case of a qualified
summer youth employee), or
‘‘(B) has completed at least 375 hours (120
hours in the case of a qualified summer youth
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employee) of services performed for the em-
ployer.’’.
(d) TERMINATION.—Paragraph (4) of section 51(c)
(relating to wages defined) is amended to read as follows:
‘‘(4) TERMINATION.—The term ‘wages’ shall not
include any amount paid or incurred to an individ-
ual who begins work for the employer—
‘‘(A) after December 31, 1994, and before
October 1, 1996, or
‘‘(B) after September 30, 1997.’’.
(e) REDESIGNATION OF CREDIT.—
(1) Sections 38(b)(2) and 51(a) are each amend-
ed by striking ‘‘targeted jobs credit’’ and inserting
‘‘work opportunity credit’’.
(2) The subpart heading for subpart F of part IV
of subchapter A of chapter 1 is amended by striking
‘‘Targeted Jobs Credit’’ and inserting ‘‘Work
Opportunity Credit’’.
(3) The table of subparts for such part IV is
amended by striking ‘‘targeted jobs credit’’ and insert-
ing ‘‘work opportunity credit’’.
(4) The heading for paragraph (3) of section
1396(c) is amended by striking ‘‘TARGETED
JOBS
CREDIT’’ and inserting ‘‘WORK OPPORTUNITY CRED-
IT’’.
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(f) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 51(c) is amended by striking ‘‘, subsection (d)(8)(D),’’.
(g) EFFECTIVE DATE.—The amendments made by this
section shall apply to individuals who begin work for the
employer after September 30, 1996.
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSIST-
ANCE PROGRAMS.
(a) EXTENSION.—Subsection (d) of section 127 (relat-
ing to educational assistance programs) is amended by
striking ‘‘December 31, 1994’’ and inserting ‘‘December 31,
1997’’.
(b) EFFECTIVE DATES.—
(1) EXTENSION.—The amendment made by sub-
section (a) shall apply to taxable years beginning
after December 31, 1994.
(2) EXPEDITED PROCEDURES.—The Secretary of
the Treasury shall establish expedited procedures for
the refund of any overpayment of taxes imposed by
the Internal Revenue Code of 1986 which is attrib-
utable to amounts excluded from gross income during
1995 or 1996 under section 127 of such Code, includ-
ing procedures waiving the requirement that an em-
ployer obtain an employee’s signature where the em-
ployer demonstrates to the satisfaction of the Sec-
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retary that any refund collected by the employer on
behalf of the employee will be paid to the employee.
SEC. 1203. RESEARCH CREDIT.
(a) IN GENERAL.—Subsection (h) of section 41 (relat-
ing to credit for research activities) is amended to read as
follows:
‘‘(h) TERMINATION.—
‘‘(1) IN GENERAL.—This section shall not apply
to any amount paid or incurred—
‘‘(A) after June 30, 1995, and before July
1, 1996, or
‘‘(B) after December 31, 1997.
Notwithstanding the preceding sentence, in the case of
a taxpayer making an election under subsection (c)(4)
for its first taxable year beginning after June 30,
1996, and before July 1, 1997, this section shall
apply to amounts paid or incurred during such first
taxable year and the first 6 months of the succeeding
taxable year.’’
‘‘(2) COMPUTATION OF BASE AMOUNT.—In the
case of any taxable year with respect to which this
section applies to a number of days which is less than
the total number of days in such taxable year, the
base amount with respect to such taxable year shall
be the amount which bears the same ratio to the base
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amount for such year (determined without regard to
this paragraph) as the number of days in such tax-
able year to which this section applies bears to the
total number of days in such taxable year.’’.
(b) BASE AMOUNT
FOR START-UP COMPANIES.—
Clause (i) of section 41(c)(3)(B) (relating to start-up com-
panies) is amended to read as follows:
‘‘(i) TAXPAYERS TO WHICH SUBPARA-
GRAPH APPLIES.—The fixed-base percentage
shall be determined under this subpara-
graph if—
‘‘(I) the first taxable year in
which a taxpayer had both gross re-
ceipts and qualified research expenses
begins after December 31, 1983, or
‘‘(II) there are fewer than 3 tax-
able years beginning after December
31, 1983, and before January 1, 1989,
in which the taxpayer had both gross
receipts and qualified research ex-
penses.’’.
(c) ELECTION OF ALTERNATIVE INCREMENTAL CRED-
IT.—Subsection (c) of section 41 is amended by redesignat-
ing paragraphs (4) and (5) as paragraphs (5) and (6), re-
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spectively, and by inserting after paragraph (3) the follow-
ing new paragraph:
‘‘(4) ELECTION OF ALTERNATIVE INCREMENTAL
CREDIT.—
‘‘(A) IN GENERAL.—At the election of the
taxpayer, the credit determined under subsection
(a)(1) shall be equal to the sum of—
‘‘(i) 1.65 percent of so much of the
qualified research expenses for the taxable
year as exceeds 1 percent of the average de-
scribed in subsection (c)(1)(B) but does not
exceed 1.5 percent of such average,
‘‘(ii) 2.2 percent of so much of such ex-
penses as exceeds 1.5 percent of such average
but does not exceed 2 percent of such aver-
age, and
‘‘(iii) 2.75 percent of so much of such
expenses as exceeds 2 percent of such aver-
age.
‘‘(B) ELECTION.—An election under this
paragraph may be made only for the first tax-
able year of the taxpayer beginning after June
30, 1996. Such an election shall apply to the
taxable year for which made and all succeeding
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taxable years unless revoked with the consent of
the Secretary.’’.
(d) INCREASED CREDIT FOR CONTRACT RESEARCH
EXPENSES WITH RESPECT TO CERTAIN RESEARCH CON-
SORTIA.—Paragraph (3) of section 41(b) is amended by
adding at the end the following new subparagraph:
‘‘(C) AMOUNTS PAID TO CERTAIN RESEARCH
CONSORTIA.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall be applied by substituting ‘75 percent’
for ‘65 percent’ with respect to amounts
paid or incurred by the taxpayer to a quali-
fied research consortium for qualified re-
search on behalf of the taxpayer and 1 or
more unrelated taxpayers. For purposes of
the preceding sentence, all persons treated
as a single employer under subsection (a) or
(b) of section 52 shall be treated as related
taxpayers.
‘‘(ii) QUALIFIED
RESEARCH
CONSOR-
TIUM.—The term ‘qualified research consor-
tium’ means any organization which—
‘‘(I) 
is 
described 
in 
section
501(c)(3) or 501(c)(6) and is exempt
from tax under section 501(a),
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‘‘(II) is organized and operated
primarily to conduct scientific re-
search, and
‘‘(III) is not a private founda-
tion.’’.
(e) CONFORMING AMENDMENT.—Subparagraph (D) of
section 28(b)(1) is amended by inserting ‘‘, and before July
1, 1996, and periods after December 31, 1997’’ after ‘‘June
30, 1995’’.
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years ending after June 30, 1996.
(2) SUBSECTIONS (c) AND (d).—The amendments
made by subsections (c) and (d) shall apply to taxable
years beginning after June 30, 1996.
(3) ESTIMATED TAX.—The amendments made by
this section shall not be taken into account under sec-
tion 6654 or 6655 of the Internal Revenue Code of
1986 (relating to failure to pay estimated tax) in de-
termining the amount of any installment required to
be paid before October 1, 1996.
SEC. 1204. ORPHAN DRUG TAX CREDIT.
(a) RECATEGORIZED AS A BUSINESS CREDIT.—
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(1) IN GENERAL.—Section 28 (relating to clini-
cal testing expenses for certain drugs for rare diseases
or conditions) is transferred to subpart D of part IV
of subchapter A of chapter 1, inserted after section
45B, and redesignated as section 45C.
(2) CONFORMING
AMENDMENT.—Subsection (b)
of section 38 (relating to general business credit) is
amended by striking ‘‘plus’’ at the end of paragraph
(10), by striking the period at the end of paragraph
(11) and inserting ‘‘, plus’’, and by adding at the end
the following new paragraph:
‘‘(12) the orphan drug credit determined under
section 45C(a).’’.
(3) CLERICAL AMENDMENTS.—
(A) The table of sections for subpart B of
such part IV is amended by striking the item re-
lating to section 28.
(B) The table of sections for subpart D of
such part IV is amended by adding at the end
the following new item:
‘‘Sec. 45C. Clinical testing expenses for certain drugs for rare diseases or
conditions.’’.
(b) CREDIT TERMINATION.—Subsection (e) of section
45C, as redesignated by subsection (a)(1), is amended to
read as follows:
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‘‘(e) TERMINATION.—This section shall not apply to
any amount paid or incurred—
‘‘(A) after December 31, 1994, and before
July 1, 1996, or
‘‘(B) after December 31, 1997.’’.
(c) NO PRE-JULY 1, 1996 CARRYBACKS.—Subsection
(d) of section 39 (relating to carryback and carryforward
of unused credits) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) NO CARRYBACK OF SECTION 45C CREDIT BE-
FORE JULY 1, 1996.—No portion of the unused busi-
ness credit for any taxable year which is attributable
to the orphan drug credit determined under section
45C may be carried back to a taxable year ending be-
fore July 1, 1996.’’.
(d) ADDITIONAL CONFORMING AMENDMENTS.—
(1) Section 45C(a), as redesignated by subsection
(a)(1), is amended by striking ‘‘There shall be allowed
as a credit against the tax imposed by this chapter
for the taxable year’’ and inserting ‘‘For purposes of
section 38, the credit determined under this section
for the taxable year is’’.
(2) Section 45C(d), as so redesignated, is amend-
ed by striking paragraph (2) and by redesignating
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paragraphs (3), (4), and (5) as paragraphs (2), (3),
and (4).
(3) Section 29(b)(6)(A) is amended by striking
‘‘sections 27 and 28’’ and inserting ‘‘section 27’’.
(4) Section 30(b)(3)(A) is amended by striking
‘‘sections 27, 28, and 29’’ and inserting ‘‘sections 27
and 29’’.
(5) Section 53(d)(1)(B) is amended—
(A) by striking ‘‘or not allowed under sec-
tion 28 solely by reason of the application of sec-
tion 28(d)(2)(B),’’ in clause (iii), and
(B) by striking ‘‘or not allowed under sec-
tion 28 solely by reason of the application of sec-
tion 28(d)(2)(B)’’ in clause (iv)(II).
(6) Section 55(c)(2) is amended by striking
‘‘28(d)(2),’’.
(7) Section 280C(b) is amended—
(A) by striking ‘‘section 28(b)’’ in para-
graph (1) and inserting ‘‘section 45C(b)’’,
(B) by striking ‘‘section 28’’ in paragraphs
(1) and (2)(A) and inserting ‘‘section 45C(b)’’,
and
(C) by striking ‘‘subsection (d)(2) thereof’’
in paragraphs (1) and (2)(A) and inserting ‘‘sec-
tion 38(c)’’.
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(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred in taxable
years ending after June 30, 1996.
SEC. 1205. CONTRIBUTIONS OF STOCK TO PRIVATE FOUN-
DATIONS.
(a) IN
GENERAL.—Subparagraph (D) of section
170(e)(5) (relating to special rule for contributions of stock
for which market quotations are readily available) is
amended to read as follows:
‘‘(D) TERMINATION.—This paragraph shall
not apply to contributions made—
‘‘(A) after December 31, 1994, and before
July 1, 1996, or
‘‘(B) after December 31, 1997.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to contributions made after June 30,
1996.
SEC. 1206. EXTENSION OF BINDING CONTRACT DATE FOR
BIOMASS AND COAL FACILITIES.
(a) IN
GENERAL.—Subparagraph (A) of section
29(g)(1) (relating to extension of certain facilities) is
amended by striking ‘‘January 1, 1997’’ and inserting
‘‘January 1, 1999’’ and by striking ‘‘January 1, 1996’’ and
inserting ‘‘the date which is 6 months after the date of the
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enactment of the Small Business Job Protection Act of
1996’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect on the date of the enactment of this
Act.
SEC. 1207. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL
SOLD FOR USE OR USED IN DIESEL-POWERED
MOTORBOATS.
Subparagraph (D) of section 4041(a)(1) (relating to
the imposition of tax on diesel fuel and special motor fuels)
is amended by redesignating clauses (i) and (ii) as clauses
(ii) and (iii), respectively, and by inserting before clause
(ii) (as redesignated) the following new clause:
‘‘(i) no tax shall be imposed by sub-
section (a) or (d)(1) during the period be-
ginning on the date which is 7 days after
the date of the enactment of the Small Busi-
ness Job Protection Act of 1996 and ending
on December 31, 1997.’’.
SEC. 1208. EXTENSION OF TRANSITION RULE FOR CERTAIN
PUBLICLY TRADED PARTNERSHIPS.
(a) IN
GENERAL.—Subparagraph (B) of section
10211(c)(1) of the Revenue Act of 1987 (Public Law 100–
203) is amended by striking ‘‘December 31, 1997’’ and in-
serting ‘‘December 31, 1999’’.
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(b) CONFORMING AMENDMENT.—Subparagraph (C)(i)
of section 10211(c)(2) of the Revenue Act of 1987, as added
by section 2004(f)(2) of the Technical and Miscellaneous
Revenue Act of 1988, is amended by striking ‘‘December 31,
1997’’ and inserting ‘‘December 31, 1999’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect as if included in the provisions of
section 10211 of the Revenue Act of 1987.
Subtitle C—Provisions Relating to
S Corporations
SEC. 1301. S CORPORATIONS PERMITTED TO HAVE 75
SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining
small business corporation) is amended by striking ‘‘35
shareholders’’ and inserting ‘‘75 shareholders’’.
SEC. 1302. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
holders) is amended by inserting after clause (iv) the follow-
ing new clause:
‘‘(v) An electing small business trust.’’.
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—Subparagraph (B) of section 1361(c)(2) is
amended by adding at the end the following new clause:
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‘‘(v) In the case of a trust described in
clause (v) of subparagraph (A), each poten-
tial current beneficiary of such trust shall
be treated as a shareholder; except that, if
for any period there is no potential current
beneficiary of such trust, such trust shall be
treated as the shareholder during such pe-
riod.’’.
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—
Section 1361 (defining S corporation) is amended by add-
ing at the end the following new subsection:
‘‘(e) ELECTING SMALL BUSINESS TRUST DEFINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small busi-
ness trust’ means any trust if—
‘‘(i) such trust does not have as a bene-
ficiary any person other than (I) an indi-
vidual, (II) an estate, or (III) an organiza-
tion described in paragraph (2), (3), (4), or
(5) of section 170(c) which holds a contin-
gent interest and is not a potential current
beneficiary,
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‘‘(ii) no interest in such trust was ac-
quired by purchase, and
‘‘(iii) an election under this subsection
applies to such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—The
term ‘electing small business trust’ shall not in-
clude—
‘‘(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an elec-
tion under subsection (d)(2) applies to any
corporation the stock of which is held by
such trust, and
‘‘(ii) any trust exempt from tax under
this subtitle.
‘‘(C) PURCHASE.—For purposes of subpara-
graph (A), the term ‘purchase’ means any acqui-
sition if the basis of the property acquired is de-
termined under section 1012.
‘‘(2) POTENTIAL
CURRENT
BENEFICIARY.—For
purposes of this section, the term ‘potential current
beneficiary’ means, with respect to any period, any
person who at any time during such period is entitled
to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust.
If a trust disposes of all of the stock which it holds
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in an S corporation, then, with respect to such cor-
poration, the term ‘potential current beneficiary’ does
not include any person who first met the requirements
of the preceding sentence during the 60-day period
ending on the date of such disposition.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such election
shall apply to the taxable year of the trust for which
made and all subsequent taxable years of such trust
unless revoked with the consent of the Secretary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’.
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
S corporations shall be treated as a separate
trust, and
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‘‘(B) the amount of the tax imposed by this
chapter on such separate trust shall be deter-
mined with the modifications of paragraph (2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (1), the modifications of this paragraph are the
following:
‘‘(A) Except as provided in section 1(h), the
amount of the tax imposed by section 1(e) shall
be determined by using the highest rate of tax set
forth in section 1(e).
‘‘(B) The exemption amount under section
55(d) shall be zero.
‘‘(C) The only items of income, loss, deduc-
tion, or credit to be taken into account are the
following:
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the disposi-
tion of stock in an S corporation.
‘‘(iii) To the extent provided in regula-
tions, State or local income taxes or admin-
istrative expenses to the extent allocable to
items described in clauses (i) and (ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
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item described in this paragraph shall be appor-
tioned to any beneficiary.
‘‘(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
‘‘(3) TREATMENT OF REMAINDER OF TRUST AND
DISTRIBUTIONS.—For purposes of determining—
‘‘(A) the amount of the tax imposed by this
chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the en-
tire trust,
the items referred to in paragraph (2)(C) shall be ex-
cluded. Except as provided in the preceding sentence,
this subsection shall not affect the taxation of any dis-
tribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE
TERMINATION
OF
SEPARATE
TRUST.—If a
portion of an electing small business trust ceases to
be treated as a separate trust under paragraph (1),
any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be
taken into account by the entire trust.
‘‘(5) ELECTING SMALL BUSINESS TRUST.—For
purposes of this subsection, the term ‘electing small
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business trust’ has the meaning given such term by
section 1361(e)(1).’’.
(e) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 1366(a) is amended by inserting ‘‘, or of a trust or
estate which terminates,’’ after ‘‘who dies’’.
SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION
FOR CERTAIN TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to
certain trusts permitted as shareholders) is amended—
(1) by striking ‘‘60-day period’’ each place it ap-
pears in clauses (ii) and (iii) and inserting ‘‘2-year
period’’, and
(2) by striking the last sentence in clause (ii).
SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD
SAFE HARBOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining straight
debt) is amended by striking ‘‘or a trust described in para-
graph (2)’’ and inserting ‘‘a trust described in paragraph
(2), or a person which is actively and regularly engaged
in the business of lending money’’.
SEC. 1305. RULES RELATING TO INADVERTENT TERMI-
NATIONS AND INVALID ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
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‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.—If—
‘‘(1) an election under subsection (a) by any cor-
poration—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to obtain
shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or termi-
nation were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken—
‘‘(A) so that the corporation is a small busi-
ness corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection, agrees
to make such adjustments (consistent with the treat-
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ment of the corporation as an S corporation) as may
be required by the Secretary with respect to such pe-
riod,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified by
the Secretary.’’.
(b) LATE ELECTIONS, ETC.—Subsection (b) of section
1362 is amended by adding at the end the following new
paragraph:
‘‘(5) AUTHORITY
TO
TREAT
LATE
ELECTIONS,
ETC., AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year or no such election is
made for any taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such an election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’.
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(c) EFFECTIVE DATE.—The amendments made by sub-
section (a) and (b) shall apply with respect to elections for
taxable years beginning after December 31, 1982.
SEC. 1306. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro rata
share) is amended to read as follows:
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN GENERAL.—Under regulations pre-
scribed by the Secretary, if any shareholder ter-
minates the shareholder’s interest in the corpora-
tion during the taxable year and all affected
shareholders and the corporation agree to the ap-
plication of this paragraph, paragraph (1) shall
be applied to the affected shareholders as if the
taxable year consisted of 2 taxable years the first
of which ends on the date of the termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘affected
shareholders’ means the shareholder whose inter-
est is terminated and all shareholders to whom
such shareholder has transferred shares during
the taxable year. If such shareholder has trans-
ferred shares to the corporation, the term ‘af-
fected shareholders’ shall include all persons who
are shareholders during the taxable year.’’.
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SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION
PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b)
(relating to post-termination transition period) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by redes-
ignating subparagraph (B) as subparagraph (C), and by
inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(B) the 120-day period beginning on the
date of any determination pursuant to an audit
of the taxpayer which follows the termination of
the corporation’s election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of sec-
tion 1377(b) is amended by striking subparagraphs (A) and
(B), by redesignating subparagraph (C) as subparagraph
(B), and by inserting before subparagraph (B) (as so redes-
ignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR SUB-
CHAPTER S ITEMS.—
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(1) GENERAL RULE.—Subchapter D of chapter
63 (relating to tax treatment of subchapter S items)
is hereby repealed.
(2) CONSISTENT
TREATMENT
REQUIRED.—Sec-
tion 6037 (relating to return of S corporation) is
amended by adding at the end the following new sub-
section:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT
WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF
INCONSISTENCY.—
‘‘(1) IN GENERAL.—A shareholder of an S cor-
poration shall, on such shareholder’s return, treat a
subchapter S item in a manner which is consistent
with the treatment of such item on the corporate re-
turn.
‘‘(2) NOTIFICATION
OF
INCONSISTENT
TREAT-
MENT.—
‘‘(A) IN GENERAL.—In the case of any sub-
chapter S item, if—
‘‘(i)(I) the corporation has filed a re-
turn but the shareholder’s treatment on his
return is (or may be) inconsistent with the
treatment of the item on the corporate re-
turn, or
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‘‘(II) the corporation has not filed a re-
turn, and
‘‘(ii) the shareholder files with the Sec-
retary a statement identifying the inconsist-
ency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER RECEIVING INCORRECT
INFORMATION.—A shareholder shall be treated as
having complied with clause (ii) of subpara-
graph (A) with respect to a subchapter S item if
the shareholder—
‘‘(i) demonstrates to the satisfaction of
the Secretary that the treatment of the sub-
chapter S item on the shareholder’s return
is consistent with the treatment of the item
on the schedule furnished to the shareholder
by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
‘‘(B) in which the shareholder does not com-
ply with subparagraph (A)(ii) of paragraph (2),
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any adjustment required to make the treatment of the
items by such shareholder consistent with the treat-
ment of the items on the corporate return shall be
treated as arising out of mathematical or clerical er-
rors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sentence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of this
subsection, the term ‘subchapter S item’ means any
item of an S corporation to the extent that regula-
tions prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appro-
priately determined at the corporation level than at
the shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of sub-
chapter A of chapter 68.’’.
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking
subsection (g).
(B) Subsection (b) of section 6233 is
amended to read as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a part-
nership return is filed for any taxable year but it is deter-
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mined that there is no entity for such taxable year, to the
extent provided in regulations, rules similar to the rules
of subsection (a) shall apply.’’.
(C) The table of subchapters for chapter 63
is amended by striking the item relating to sub-
chapter D.
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDI-
ARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b)
(defining ineligible corporation) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B),
(C), (D), and (E) as subparagraphs (A), (B), (C), and (D),
respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S COR-
PORATION SUBSIDIARIES.—Section 1361(b) (defining small
business corporation) is amended by adding at the end the
following new paragraph:
‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED
SUBSIDIARIES.—
‘‘(A) IN
GENERAL.—For purposes of this
title—
‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treated
as a separate corporation, and
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‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
STA-
TUS.—For purposes of this title, if any corpora-
tion which was a qualified subchapter S subsidi-
ary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as
a new corporation acquiring all of its assets
(and assuming all of its liabilities) immediately
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before such cessation from the S corporation in
exchange for its stock.
‘‘(D) ELECTION AFTER TERMINATION.—If a
corporation’s status as a qualified subchapter S
subsidiary terminates, such corporation (and
any successor corporation) shall not be eligible to
make—
‘‘(i) an election under subparagraph
(B)(ii) to be treated as a qualified sub-
chapter S subsidiary, or
‘‘(ii) an election under section 1362(a)
to be treated as an S corporation,
before its 5th taxable year which begins after the
1st taxable year for which such termination was
effective, unless the Secretary consents to such
election.’’.
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE
INVESTMENT INCOME.—Paragraph (3) of section 1362(d) is
amended by adding at the end the following new subpara-
graph:
‘‘(F) 
TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a C
corporation meeting the requirements of section
1504(a)(2), the term ‘passive investment income’
shall not include dividends from such C corpora-
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tion to the extent such dividends are attributable
to the earnings and profits of such C corporation
derived from the active conduct of a trade or
business.’’.
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended by
striking paragraph (6).
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’.
SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1) (re-
lating to losses and deductions cannot exceed share-
holder’s basis in stock and debt) is amended by strik-
ing ‘‘paragraph (1)’’ and inserting ‘‘paragraphs (1)
and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to
certain adjustments taken into account) is amended
by adding at the end the following new sentence:
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined with
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regard to the adjustments provided in paragraph (1) of sec-
tion 1367(a) for the taxable year.’’.
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end the
following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net negative
adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative ad-
justment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’.
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
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(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to application
of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C shall
apply to an S corporation and its shareholders.’’.
SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROF-
ITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business
corporation under subchapter S of chapter 1 of the
Internal Revenue Code of 1986 for any taxable year
beginning before January 1, 1983, and
(2) such corporation is an S corporation under
subchapter S of chapter 1 of such Code for its first
taxable year beginning after December 31, 1996,
the amount of such corporation’s accumulated earnings and
profits (as of the beginning of such first taxable year) shall
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be reduced by an amount equal to the portion (if any) of
such accumulated earnings and profits which were accumu-
lated in any taxable year beginning before January 1, 1983,
for which such corporation was an electing small business
corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1362(d), as amend-
ed by section 1308, is amended—
(A) by striking ‘‘SUBCHAPTER
C’’ in the
paragraph heading and inserting ‘‘ACCUMU-
LATED’’,
(B) by striking ‘‘subchapter C’’ in subpara-
graph (A)(i)(I) and inserting ‘‘accumulated’’,
and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amended
by striking ‘‘subchapter C’’ in paragraph (1) and in-
serting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amended
to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross receipts’
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have the same respective meanings as when used in
paragraph (3) of section 1362(d).’’.
(C) The section heading for section 1375 is
amended by striking ‘‘SUBCHAPTER C’’ and insert-
ing ‘‘ACCUMULATED’’.
(D) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking ‘‘sub-
chapter C’’ in the item relating to section 1375 and
inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is amend-
ed by striking ‘‘section 1362(d)(3)(D)’’ and inserting
‘‘section 1362(d)(3)(C)’’.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover
of disallowed losses and deductions to post-termination
transition period) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the extent
that any increase in adjusted basis described in
subparagraph (B) would have increased the
shareholder’s amount at risk under section 465 if
such increase had occurred on the day preceding
the commencement of the post-termination tran-
sition period, rules similar to the rules described
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in subparagraphs (A) through (C) shall apply to
any losses disallowed by reason of section
465(a).’’.
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK
TO REFLECT CERTAIN ITEMS OF INCOME.
(a) IN GENERAL.—Subsection (b) of section 1367 (re-
lating to adjustments to basis of stock of shareholders, etc.)
is amended by adding at the end the following new para-
graph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the death
of a decedent or by bequest, devise, or inherit-
ance, section 691 shall be applied with respect to
any item of income of the S corporation in the
same manner as if the decedent had held directly
his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the portion
of the value of the stock which is attributable to
items constituting income in respect of the dece-
dent.’’.
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(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply in the case of decedents dying after
the date of the enactment of this Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237 (re-
lating to real property subdivided for sale) is amended by
striking ‘‘other than a corporation’’ in the material preced-
ing paragraph (1) and inserting ‘‘other than a C corpora-
tion’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A) of
section 1237(a)(2) is amended by inserting ‘‘an S corpora-
tion which included the taxpayer as a shareholder,’’ after
‘‘controlled by the taxpayer,’’.
SEC. 1315. FINANCIAL INSTITUTIONS.
Subparagraph (A) of section 1361(b)(2) (defining in-
eligible corporation), as redesignated by section 1308(a), is
amended to read as follows:
‘‘(A) a financial institution which uses the
reserve method of accounting for bad debts de-
scribed in section 585 or 593,’’.
SEC. 1316. CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO
BE SHAREHOLDERS.
(a) ELIGIBILITY TO BE SHAREHOLDERS.—
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(1) IN GENERAL.—Subparagraph (B) of section
1361(b)(1) (defining small business corporation) is
amended to read as follows:
‘‘(B) have as a shareholder a person (other
than an estate, a trust described in subsection
(c)(2), or an organization described in subsection
(c)(7)) who is not an individual,’’.
(2) ELIGIBLE EXEMPT ORGANIZATIONS.—Section
1361(c) (relating to special rules for applying sub-
section (b)) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) CERTAIN
EXEMPT
ORGANIZATIONS
PER-
MITTED AS SHAREHOLDERS.—For purposes of sub-
section (b)(1)(B), an organization which is—
‘‘(A) 
described 
in 
section 
401(a) 
or
501(c)(3), and
‘‘(B) exempt from taxation under section
501(a),
may be a shareholder in an S corporation.’’.
(b) CONTRIBUTIONS OF S CORPORATION STOCK.—Sec-
tion 170(e)(1) (relating to certain contributions of ordinary
income and capital gain property) is amended by adding
at the end the following new sentence: ‘‘For purposes of ap-
plying this paragraph in the case of a charitable contribu-
tion of stock in an S corporation, rules similar to the rules
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of section 751 shall apply in determining whether gain on
such stock would have been long-term capital gain if such
stock were sold by the taxpayer.’’
(c) TREATMENT OF INCOME.—Section 512 (relating to
unrelated business taxable income), as amended by section
1113, is amended by adding at the end the following new
subsection:
‘‘(e) SPECIAL RULES APPLICABLE TO S CORPORA-
TIONS.—If an organization described in section 1361(c)(7)
holds stock in an S corporation—
‘‘(1) such interest shall be treated as an interest
in an unrelated trade or business; and
‘‘(2) notwithstanding any other provision of this
part, all items of income, loss, deduction, or credit
taken into account under section 1366(a) and any
gain or loss on the disposition of the stock in the S
corporation shall be taken into account in computing
the unrelated business taxable income of such organi-
zation.’’.
(d) CERTAIN BENEFITS NOT APPLICABLE TO S COR-
PORATIONS.—
(1) CONTRIBUTION TO ESOPS.—Paragraph (9) of
section 404(a) (relating to certain contributions to
employee ownership plans) is amended by inserting
at the end the following new subparagraph:
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‘‘(C) S CORPORATIONS.—This paragraph
shall not apply to an S corporation.’’.
(2) DIVIDENDS
ON
EMPLOYER
SECURITIES.—
Paragraph (1) of section 404(k) (relating to deduction
for dividends on certain employer securities) is
amended by striking ‘‘a corporation’’ and inserting
‘‘a C corporation’’.
(3) EXCHANGE TREATMENT.—Subparagraph (A)
of section 1042(c)(1) (defining qualified securities) is
amended by striking ‘‘domestic corporation’’ and in-
serting ‘‘domestic C corporation’’.
(e) CONFORMING AMENDMENT.—Clause (i) of section
1361(e)(1)(A), as added by section 1302, is amended by
striking ‘‘which holds a contingent interest and is not a
potential current beneficiary’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
SEC. 1317. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this subtitle, the amendments made by this subtitle shall
apply to taxable years beginning after December 31, 1996.
(b) TREATMENT
OF CERTAIN ELECTIONS UNDER
PRIOR LAW.—For purposes of section 1362(g) of the Inter-
nal Revenue Code of 1986 (relating to election after termi-
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nation), any termination under section 1362(d) of such
Code in a taxable year beginning before January 1, 1997,
shall not be taken into account.
Subtitle D—Pension Simplification
CHAPTER 1—SIMPLIFIED DISTRIBUTION
RULES
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR
LUMP-SUM DISTRIBUTIONS.
(a) IN GENERAL.—Subsection (d) of section 402 (relat-
ing to taxability of beneficiary of employees’ trust) is
amended to read as follows:
‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOR-
EIGN SITUS TRUSTS.—For purposes of subsections (a), (b),
and (c), a stock bonus, pension, or profit-sharing trust
which would qualify for exemption from tax under section
501(a) except for the fact that it is a trust created or orga-
nized outside the United States shall be treated as if it were
a trust exempt from tax under section 501(a).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (D) of section 402(e)(4) (relat-
ing to other rules applicable to exempt trusts) is
amended to read as follows:
‘‘(D) LUMP-SUM DISTRIBUTION.—For pur-
poses of this paragraph—
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‘‘(i) IN
GENERAL.—The term ‘lump
sum distribution’ means the distribution or
payment within one taxable year of the re-
cipient of the balance to the credit of an em-
ployee which becomes payable to the recipi-
ent—
‘‘(I) on account of the employee’s
death,
‘‘(II) after the employee attains
age 591⁄2,
‘‘(III) on account of the employ-
ee’s separation from service, or
‘‘(IV) after the employee has be-
come disabled (within the meaning of
section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is ex-
empt from tax under section 501 or from a
plan described in section 403(a). Subclause
(III) of this clause shall be applied only
with respect to an individual who is an em-
ployee without regard to section 401(c)(1),
and subclause (IV) shall be applied only
with respect to an employee within the
meaning of section 401(c)(1). For purposes
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of this clause, a distribution to two or more
trusts shall be treated as a distribution to
one recipient. For purposes of this para-
graph, the balance to the credit of the em-
ployee does not include the accumulated de-
ductible employee contributions under the
plan (within the meaning of section
72(o)(5)).
‘‘(ii) 
AGGREGATION
OF
CERTAIN
TRUSTS AND PLANS.—For purposes of deter-
mining the balance to the credit of an em-
ployee under clause (i)—
‘‘(I) all trusts which are part of a
plan shall be treated as a single trust,
all pension plans maintained by the
employer shall be treated as a single
plan, all profit-sharing plans main-
tained by the employer shall be treated
as a single plan, and all stock bonus
plans maintained by the employer
shall be treated as a single plan, and
‘‘(II) trusts which are not quali-
fied trusts under section 401(a) and
annuity contracts which do not satisfy
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the requirements of section 404(a)(2)
shall not be taken into account.
‘‘(iii) COMMUNITY PROPERTY LAWS.—
The provisions of this paragraph shall be
applied without regard to community prop-
erty laws.
‘‘(iv) AMOUNTS
SUBJECT
TO
PEN-
ALTY.—This paragraph shall not apply to
amounts described in subparagraph (A) of
section 72(m)(5) to the extent that section
72(m)(5) applies to such amounts.
‘‘(v) BALANCE
TO
CREDIT
OF
EM-
PLOYEE
NOT
TO
INCLUDE
AMOUNTS
PAY-
ABLE UNDER QUALIFIED DOMESTIC RELA-
TIONS ORDER.—For purposes of this para-
graph, the balance to the credit of an em-
ployee shall not include any amount pay-
able to an alternate payee under a qualified
domestic relations order (within the mean-
ing of section 414(p)).
‘‘(vi) TRANSFERS
TO
COST-OF-LIVING
ARRANGEMENT NOT TREATED AS DISTRIBU-
TION.—For purposes of this paragraph, the
balance to the credit of an employee under
a defined contribution plan shall not in-
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clude any amount transferred from such de-
fined contribution plan to a qualified cost-
of-living arrangement (within the meaning
of section 415(k)(2)) under a defined benefit
plan.
‘‘(vii) LUMP-SUM
DISTRIBUTIONS
OF
ALTERNATE
PAYEES.—If any distribution
or payment of the balance to the credit of
an employee would be treated as a lump-
sum distribution, then, for purposes of this
paragraph, the payment under a qualified
domestic relations order (within the mean-
ing of section 414(p)) of the balance to the
credit of an alternate payee who is the
spouse or former spouse of the employee
shall be treated as a lump-sum distribution.
For purposes of this clause, the balance to
the credit of the alternate payee shall not
include any amount payable to the em-
ployee.’’.
(2) Section 402(c) (relating to rules applicable to
rollovers from exempt trusts) is amended by striking
paragraph (10).
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(3) Paragraph (1) of section 55(c) (defining reg-
ular tax) is amended by striking ‘‘shall not include
any tax imposed by section 402(d) and’’.
(4) Paragraph (8) of section 62(a) (relating to
certain portion of lump-sum distributions from pen-
sion plans taxed under section 402(d)) is hereby re-
pealed.
(5) Section 401(a)(28)(B) (relating to coordina-
tion with distribution rules) is amended by striking
clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10)
(relating to distributions that must be lump-sum dis-
tributions) is amended to read as follows:
‘‘(ii) LUMP-SUM
DISTRIBUTION.—For
purposes of this subparagraph, the term
‘lump-sum distribution’ has the meaning
given such term by section 402(e)(4)(D)
(without regard to subclauses (I), (II), (III),
and (IV) of clause (i) thereof).’’.
(7) Section 406(c) (relating to termination of
status as deemed employee not to be treated as sepa-
ration from service for purposes of limitation of tax)
is hereby repealed.
(8) Section 407(c) (relating to termination of
status as deemed employee not to be treated as sepa-
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ration from service for purposes of limitation of tax)
is hereby repealed.
(9) Section 691(c) (relating to deduction for es-
tate tax) is amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to
imposition of tax) is amended by striking ‘‘section 1,
55, or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(11) Subsection (b) of section 877 (relating to al-
ternative tax) is amended by striking ‘‘section 1, 55,
or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(12) Section 4980A(c)(4) is amended—
(A) by striking ‘‘to which an election under
section 402(d)(4)(B) applies’’ and inserting ‘‘(as
defined in section 402(e)(4)(D)) with respect to
which the individual elects to have this para-
graph apply’’,
(B) by adding at the end the following new
flush sentence:
‘‘An individual may elect to have this paragraph
apply to only one lump-sum distribution.’’, and
(C) by striking the heading and inserting:
‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.
(13) Section 402(e) is amended by striking para-
graph (5).
(c) EFFECTIVE DATES.—
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(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1999.
(2) 
RETENTION
OF
CERTAIN
TRANSITION
RULES.—The amendments made by this section shall
not apply to any distribution for which the taxpayer
is eligible to elect the benefits of section 1122 (h)(3)
or (h)(5) of the Tax Reform Act of 1986. Notwith-
standing the preceding sentence, individuals who elect
such benefits after December 31, 1999, shall not be eli-
gible for 5-year averaging under section 402(d) of the
Internal Revenue Code of 1986 (as in effect imme-
diately before such amendments).
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES’
DEATH BENEFITS.
(a) IN GENERAL.—Subsection (b) of section 101 is
hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 101 is amended by
striking ‘‘subsection (a) or (b)’’ and inserting ‘‘sub-
section (a)’’.
(2) Sections 406(e) and 407(e) are each amended
by striking paragraph (2) and by redesignating para-
graph (3) as paragraph (2).
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(3) Section 7701(a)(20) is amended by striking
‘‘, for the purpose of applying the provisions of sec-
tion 101(b) with respect to employees’ death benefits’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to decedents dying after the
date of the enactment of this Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DIS-
TRIBUTIONS 
UNDER 
CERTAIN 
EMPLOYER
PLANS.
(a) GENERAL RULE.—Subsection (d) of section 72 (re-
lating to annuities; certain proceeds of endowment and life
insurance contracts) is amended to read as follows:
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER RE-
TIREMENT PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY
PAYMENTS.—
‘‘(A) IN
GENERAL.—In the case of any
amount received as an annuity under a qualified
employer retirement plan—
‘‘(i) subsection (b) shall not apply, and
‘‘(ii) the investment in the contract
shall be recovered as provided in this para-
graph.
‘‘(B) METHOD OF RECOVERING INVESTMENT
IN CONTRACT.—
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‘‘(i) IN GENERAL.—Gross income shall
not include so much of any monthly annu-
ity payment under a qualified employer re-
tirement plan as does not exceed the amount
obtained by dividing—
‘‘(I) the investment in the con-
tract (as of the annuity starting date),
by
‘‘(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) 
applies, 
the 
number 
of
monthly annuity payments under such
contract).
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall
apply for purposes of this paragraph.
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—
‘‘If the age of the
primary annuitant on
The number
the annuity starting
of anticipated
date is:
payments is:
Not more than 55 ....................................
360
More than 55 but not more than 60 ......
310
More than 60 but not more than 65 ......
260
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More than 65 but not more than 70 ......
210
More than 70 ...........................................
160.
‘‘(C) ADJUSTMENT FOR REFUND FEATURE
NOT APPLICABLE.—For purposes of this para-
graph, investment in the contract shall be deter-
mined under subsection (c)(1) without regard to
subsection (c)(2).
‘‘(D) SPECIAL
RULE
WHERE
LUMP
SUM
PAID IN CONNECTION WITH COMMENCEMENT OF
ANNUITY PAYMENTS.—If, in connection with the
commencement of annuity payments under any
qualified employer retirement plan, the taxpayer
receives a lump sum payment—
‘‘(i) such payment shall be taxable
under subsection (e) as if received before the
annuity starting date, and
‘‘(ii) the investment in the contract for
purposes of this paragraph shall be deter-
mined as if such payment had been so re-
ceived.
‘‘(E) EXCEPTION.—This paragraph shall
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of
guaranteed payments under the annuity.
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‘‘(F) ADJUSTMENT
WHERE
ANNUITY
PAY-
MENTS NOT ON MONTHLY BASIS.—In any case
where the annuity payments are not made on a
monthly basis, appropriate adjustments in the
application of this paragraph shall be made to
take into account the period on the basis of
which such payments are made.
‘‘(G) QUALIFIED
EMPLOYER
RETIREMENT
PLAN.—For purposes of this paragraph, the term
‘qualified employer retirement plan’ means any
plan or contract described in paragraph (1), (2),
or (3) of section 4974(c).
‘‘(2) TREATMENT OF EMPLOYEE CONTRIBUTIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.—For pur-
poses of this section, employee contributions (and any
income allocable thereto) under a defined contribution
plan may be treated as a separate contract.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply in cases where the annuity starting date
is after the 90th day after the date of the enactment of this
Act.
SEC. 1404. REQUIRED DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C) (defining re-
quired beginning date) is amended to read as follows:
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‘‘(C) REQUIRED
BEGINNING
DATE.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘required
beginning date’ means April 1 of the cal-
endar year following the later of—
‘‘(I) the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) the calendar year in which
the employee retires.
‘‘(ii) EXCEPTION.—Subclause (II) of
clause (i) shall not apply—
‘‘(I) except as provided in section
409(d), in the case of an employee who
is a 5-percent owner (as defined in sec-
tion 416) with respect to the plan year
ending in the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) for purposes of section 408
(a)(6) or (b)(3).
‘‘(iii) ACTUARIAL
ADJUSTMENT.—In
the case of an employee to whom clause
(i)(II) applies who retires in a calendar
year after the calendar year in which the
employee attains age 701⁄2, the employee’s
accrued benefit shall be actuarially in-
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creased to take into account the period after
age 701⁄2 in which the employee was not re-
ceiving any benefits under the plan.
‘‘(iv) EXCEPTION FOR GOVERNMENTAL
AND CHURCH PLANS.—Clauses (ii) and (iii)
shall not apply in the case of a govern-
mental plan or church plan. For purposes
of this clause, the term ‘church plan’ means
a plan maintained by a church for church
employees, and the term ‘church’ means any
church 
(as 
defined 
in 
section
3121(w)(3)(A)) or qualified church-con-
trolled organization (as defined in section
3121(w)(3)(B)).’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to years beginning after December
31, 1996.
CHAPTER 2—INCREASED ACCESS TO
RETIREMENT PLANS
Subchapter A—Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH
PLANS FOR EMPLOYEES OF SMALL EMPLOY-
ERS.
(a) IN GENERAL.—Section 408 (relating to individual
retirement accounts) is amended by redesignating sub-
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section (p) as subsection (q) and by inserting after sub-
section (o) the following new subsection:
‘‘(p) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) IN GENERAL.—For purposes of this title, the
term ‘simple retirement account’ means an individual
retirement plan (as defined in section 7701(a)(37))—
‘‘(A) with respect to which the requirements
of paragraphs (3), (4), and (5) are met; and
‘‘(B) with respect to which the only con-
tributions allowed are contributions under a
qualified salary reduction arrangement.
‘‘(2) QUALIFIED SALARY REDUCTION ARRANGE-
MENT.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the term ‘qualified salary reduction
arrangement’ means a written arrangement of
an eligible employer under which—
‘‘(i) an employee eligible to participate
in the arrangement may elect to have the
employer make payments—
‘‘(I) as elective employer contribu-
tions to a simple retirement account on
behalf of the employee, or
‘‘(II) to the employee directly in
cash,
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‘‘(ii) the amount which an employee
may elect under clause (i) for any year is
required to be expressed as a percentage of
compensation and may not exceed a total of
$6,000 for any year,
‘‘(iii) the employer is required to make
a matching contribution to the simple re-
tirement account for any year in an
amount equal to so much of the amount the
employee elects under clause (i)(I) as does
not exceed the applicable percentage of com-
pensation for the year, and
‘‘(iv) no contributions may be made
other than contributions described in clause
(i) or (iii).
‘‘(B) EMPLOYER
MAY
ELECT
2-PERCENT
NONELECTIVE CONTRIBUTION.—
‘‘(i) IN GENERAL.—An employer shall
be treated as meeting the requirements of
subparagraph (A)(iii) for any year if, in
lieu of the contributions described in such
clause, the employer elects to make nonelec-
tive contributions of 2 percent of compensa-
tion for each employee who is eligible to
participate in the arrangement and who
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has at least $5,000 of compensation from
the employer for the year. If an employer
makes an election under this subparagraph
for any year, the employer shall notify em-
ployees of such election within a reasonable
period of time before the 60-day period for
such year under paragraph (5)(C).
‘‘(ii) 
COMPENSATION
LIMITATION.—
The compensation taken into account under
clause (i) for any year shall not exceed the
limitation in effect for such year under sec-
tion 401(a)(17).
‘‘(C) DEFINITIONS.—For purposes of this
subsection—
‘‘(i) ELIGIBLE EMPLOYER.—
‘‘(I) IN GENERAL.—The term ‘eli-
gible employer’ means, with respect to
any year, an employer which had no
more than 100 employees who received
at least $5,000 of compensation from
the employer for the preceding year.
‘‘(II) 2-YEAR GRACE PERIOD.—An
eligible employer who establishes and
maintains a plan under this subsection
for 1 or more years and who fails to be
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an eligible employer for any subsequent
year shall be treated as an eligible em-
ployer for the 2 years following the last
year the employer was an eligible em-
ployer. If such failure is due to any ac-
quisition, disposition, or similar trans-
action involving an eligible employer,
the preceding sentence shall apply only
in accordance with rules similar to the
rules of section 410(b)(6)(C)(i).
‘‘(ii) APPLICABLE PERCENTAGE.—
‘‘(I) IN GENERAL.—The term ‘ap-
plicable percentage’ means 3 percent.
‘‘(II) ELECTION OF LOWER PER-
CENTAGE.—An employer may elect to
apply a lower percentage (not less than
1 percent) for any year for all employ-
ees eligible to participate in the plan
for such year if the employer notifies
the employees of such lower percentage
within a reasonable period of time be-
fore the 60-day election period for such
year under paragraph (5)(C). An em-
ployer may not elect a lower percent-
age under this subclause for any year
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if that election would result in the ap-
plicable percentage being lower than 3
percent in more than 2 of the years in
the 5-year period ending with such
year.
‘‘(III) SPECIAL RULE FOR YEARS
ARRANGEMENT
NOT
IN
EFFECT.—If
any year in the 5-year period de-
scribed in subclause (II) is a year
prior to the first year for which any
qualified salary reduction arrangement
is in effect with respect to the employer
(or any predecessor), the employer
shall be treated as if the level of the
employer matching contribution was at
3 percent of compensation for such
prior year.
‘‘(D) ARRANGEMENT MAY BE ONLY PLAN OF
EMPLOYER.—
‘‘(i) IN
GENERAL.—An arrangement
shall not be treated as a qualified salary re-
duction arrangement for any year if the
employer (or any predecessor employer)
maintained a qualified plan with respect to
which contributions were made, or benefits
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were accrued, for service in any year in the
period beginning with the year such ar-
rangement became effective and ending with
the year for which the determination is
being made.
‘‘(ii) QUALIFIED PLAN.—For purposes
of this subparagraph, the term ‘qualified
plan’ means a plan, contract, pension, or
trust described in subparagraph (A) or (B)
of section 219(g)(5).
‘‘(E) COST-OF-LIVING
ADJUSTMENT.—The
Secretary shall adjust the $6,000 amount under
subparagraph (A)(ii) at the same time and in
the same manner as under section 415(d), except
that the base period taken into account shall be
the calendar quarter ending September 30, 1996,
and any increase under this subparagraph which
is not a multiple of $500 shall be rounded to the
next lower multiple of $500.
‘‘(3) VESTING
REQUIREMENTS.—The require-
ments of this paragraph are met with respect to a
simple retirement account if the employee’s rights to
any contribution to the simple retirement account are
nonforfeitable. For purposes of this paragraph, rules
similar to the rules of subsection (k)(4) shall apply.
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‘‘(4) PARTICIPATION REQUIREMENTS.—
‘‘(A) IN
GENERAL.—The requirements of
this paragraph are met with respect to any sim-
ple retirement account for a year only if, under
the qualified salary reduction arrangement, all
employees of the employer who—
‘‘(i) received at least $5,000 in com-
pensation from the employer during any 2
preceding years, and
‘‘(ii) are reasonably expected to receive
at least $5,000 in compensation during the
year,
are eligible to make the election under paragraph
(2)(A)(i) or receive the nonelective contribution
described in paragraph (2)(B).
‘‘(B) EXCLUDABLE
EMPLOYEES.—An em-
ployer may elect to exclude from the requirement
under subparagraph (A) employees described in
section 410(b)(3).
‘‘(5) ADMINISTRATIVE REQUIREMENTS.—The re-
quirements of this paragraph are met with respect to
any simplified retirement account if, under the quali-
fied salary reduction arrangement—
‘‘(A) an employer must—
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‘‘(i) make the elective employer con-
tributions under paragraph (2)(A)(i) not
later than the close of the 30-day period fol-
lowing the last day of the month with re-
spect to which the contributions are to be
made, and
‘‘(ii) make the matching contributions
under paragraph (2)(A)(iii) or the nonelec-
tive contributions under paragraph (2)(B)
not later than the date described in section
404(m)(2)(B),
‘‘(B) an employee may elect to terminate
participation in such arrangement at any time
during the year, except that if an employee so
terminates, the arrangement may provide that
the employee may not elect to resume participa-
tion until the beginning of the next year, and
‘‘(C) each employee eligible to participate
may elect, during the 60-day period before the
beginning of any year (and the 60-day period
before the first day such employee is eligible to
participate), to participate in the arrangement,
or to modify the amounts subject to such ar-
rangement, for such year.
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‘‘(6) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) COMPENSATION.—
‘‘(i) IN
GENERAL.—The term ‘com-
pensation’ means amounts described in
paragraphs (3) and (8) of section 6051(a).
‘‘(ii) SELF-EMPLOYED.—In the case of
an employee described in subparagraph (B),
the term ‘compensation’ means net earnings
from self-employment determined under sec-
tion 1402(a) without regard to any con-
tribution under this subsection.
‘‘(B) EMPLOYEE.—The term ‘employee’ in-
cludes an employee as defined in section
401(c)(1).
‘‘(C) YEAR.—The term ‘year’ means the cal-
endar year.
‘‘(7) USE OF DESIGNATED FINANCIAL INSTITU-
TION.—A plan shall not be treated as failing to sat-
isfy the requirements of this subsection or any other
provision of this title merely because the employer
makes all contributions to the individual retirement
accounts or annuities of a designated trustee or is-
suer. The preceding sentence shall not apply unless
each plan participant is notified in writing (either
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separately or as part of the notice under subsection
(l)(2)(C)) that the participant’s balance may be
transferred without cost or penalty to another indi-
vidual account or annuity in accordance with section
408(d)(3)(G).’’.
(b) TAX TREATMENT OF SIMPLE RETIREMENT AC-
COUNTS.—
(1) DEDUCTIBILITY OF CONTRIBUTIONS BY EM-
PLOYEES.—
(A) Section 219(b) (relating to maximum
amount of deduction) is amended by adding at
the end the following new paragraph:
‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT
ACCOUNTS.—This section shall not apply with respect
to any amount contributed to a simple retirement ac-
count established under section 408(p).’’.
(B) Section 219(g)(5)(A) (defining active
participant) is amended by striking ‘‘or’’ at the
end of clause (iv) and by adding at the end the
following new clause:
‘‘(vi) any simple retirement account
(within the meaning of section 408(p)), or’’.
(2) DEDUCTIBILITY
OF
EMPLOYER
CONTRIBU-
TIONS.—Section 404 (relating to deductions for con-
tributions of an employer to pension, etc. plans) is
HR 3448 EAS
amended by adding at the end the following new sub-
section:
‘‘(m) SPECIAL RULES FOR SIMPLE RETIREMENT AC-
COUNTS.—
‘‘(1) IN GENERAL.—Employer contributions to a
simple retirement account shall be treated as if they
are made to a plan subject to the requirements of this
section.
‘‘(2) TIMING.—
‘‘(A) DEDUCTION.—Contributions described
in paragraph (1) shall be deductible in the tax-
able year of the employer with or within which
the calendar year for which the contributions
were made ends.
‘‘(B) 
CONTRIBUTIONS
AFTER
END
OF
YEAR.—For purposes of this subsection, contribu-
tions shall be treated as made for a taxable year
if they are made on account of the taxable year
and are made not later than the time prescribed
by law for filing the return for the taxable year
(including extensions thereof).’’.
(3) CONTRIBUTIONS AND DISTRIBUTIONS.—
(A) Section 402 (relating to taxability of
beneficiary of employees’ trust) is amended by
adding at the end the following new subsection:
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‘‘(k) TREATMENT
OF
SIMPLE
RETIREMENT
AC-
COUNTS.—Rules similar to the rules of paragraphs (1) and
(3) of subsection (h) shall apply to contributions and dis-
tributions with respect to a simple retirement account
under section 408(p).’’.
(B) Section 408(d)(3) is amended by add-
ing at the end the following new subparagraph:
‘‘(G) SIMPLE
RETIREMENT
ACCOUNTS.—
This paragraph shall not apply to any amount
paid or distributed out of a simple retirement
account (as defined in section 408(p)) unless—
‘‘(i) it is paid into another simple re-
tirement account, or
‘‘(ii) in the case of any payment or
distribution to which section 72(t)(6) does
not apply, it is paid into an individual re-
tirement plan.’’.
(C) Clause (i) of section 457(c)(2)(B) is
amended by striking ‘‘section 402(h)(1)(B)’’ and
inserting ‘‘section 402(h)(1)(B) or (k)’’.
(4) PENALTIES.—
(A) EARLY
WITHDRAWALS.—Section 72(t)
(relating to additional tax in early distribu-
tions) is amended by adding at the end the fol-
lowing new paragraph:
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‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT
ACCOUNTS.—In the case of any amount received from
a simple retirement account (within the meaning of
section 408(p)) during the 2-year period beginning on
the date such individual first participated in any
qualified salary reduction arrangement maintained
by the individual’s employer under section 408(p)(2),
paragraph (1) shall be applied by substituting ‘25
percent’ for ‘10 percent’.’’.
(B) FAILURE TO REPORT.—Section 6693 is
amended by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b)
the following new subsection:
‘‘(c) PENALTIES RELATING TO SIMPLE RETIREMENT
ACCOUNTS.—
‘‘(1) EMPLOYER PENALTIES.—An employer who
fails to provide 1 or more notices required by section
408(l)(2)(C) shall pay a penalty of $50 for each day
on which such failures continue.
‘‘(2) TRUSTEE
PENALTIES.—A trustee who
fails—
‘‘(A) to provide 1 or more statements re-
quired by the last sentence of section 408(i) shall
pay a penalty of $50 for each day on which such
failures continue, or
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‘‘(B) to provide 1 or more summary de-
scriptions required by section 408(l)(2)(B) shall
pay a penalty of $50 for each day on which such
failures continue.
‘‘(3) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed under this subsection with re-
spect to any failure which the taxpayer shows was
due to reasonable cause.’’.
(5) REPORTING REQUIREMENTS.—
(A) Section 408(l) is amended by adding at
the end the following new paragraph:
‘‘(2) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(A) NO EMPLOYER REPORTS.—Except as
provided in this paragraph, no report shall be
required under this section by an employer
maintaining a qualified salary reduction ar-
rangement under subsection (p).
‘‘(B) SUMMARY DESCRIPTION.—The trustee
of any simple retirement account established
pursuant to a qualified salary reduction ar-
rangement under subsection (p) shall provide to
the employer maintaining the arrangement, each
year a description containing the following in-
formation:
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‘‘(i) The name and address of the em-
ployer and the trustee.
‘‘(ii) The requirements for eligibility
for participation.
‘‘(iii) The benefits provided with re-
spect to the arrangement.
‘‘(iv) The time and method of making
elections with respect to the arrangement.
‘‘(v) The procedures for, and effects of,
withdrawals (including rollovers) from the
arrangement.
‘‘(C) EMPLOYEE
NOTIFICATION.—The em-
ployer shall notify each employee immediately
before the period for which an election described
in subsection (p)(5)(C) may be made of the em-
ployee’s opportunity to make such election. Such
notice shall include a copy of the description de-
scribed in subparagraph (B).’’.
(B) Section 408(l) is amended by striking
‘‘An employer’’ and inserting the following:
‘‘(1) IN GENERAL.—An employer’’.
(6) REPORTING REQUIREMENTS.—Section 408(i)
is amended by adding at the end the following new
flush sentence:
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‘‘In the case of a simple retirement account under sub-
section (p), only one report under this subsection shall be
required to be submitted each calendar year to the Secretary
(at the time provided under paragraph (2)) but, in addition
to the report under this subsection, there shall be furnished,
within 30 days after each calendar year, to the individual
on whose behalf the account is maintained a statement with
respect to the account balance as of the close of, and the
account activity during, such calendar year.’’.
(7) 
EXEMPTION
FROM
TOP-HEAVY
PLAN
RULES.—Section 416(g)(4) (relating to special rules
for top-heavy plans) is amended by adding at the end
the following new subparagraph:
‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—The
term ‘top-heavy plan’ shall not include a simple
retirement account under section 408(p).’’.
(8) EMPLOYMENT TAXES.—
(A) Paragraph (5) of section 3121(a) is
amended by striking ‘‘or’’ at the end of subpara-
graph (F), by inserting ‘‘or’’ at the end of sub-
paragraph (G), and by adding at the end the fol-
lowing new subparagraph:
‘‘(H) under an arrangement to which sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
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(B) Section 209(a)(4) of the Social Security
Act is amended by inserting ‘‘; or (J) under an
arrangement to which section 408(p) of such
Code applies, other than any elective contribu-
tions under paragraph (2)(A)(i) thereof’’ before
the semicolon at the end thereof.
(C) Paragraph (5) of section 3306(b) is
amended by striking ‘‘or’’ at the end of subpara-
graph (F), by inserting ‘‘or’’ at the end of sub-
paragraph (G), and by adding at the end the fol-
lowing new subparagraph:
‘‘(H) under an arrangement to which sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
(D) Paragraph (12) of section 3401(a) is
amended by adding the following new subpara-
graph:
‘‘(D) under an arrangement to which sec-
tion 408(p) applies; or’’.
(9) CONFORMING AMENDMENTS.—
(A) Section 280G(b)(6) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, or’’ and by adding after
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subparagraph (C) the following new subpara-
graph:
‘‘(D) a simple retirement account described
in section 408(p).’’.
(B) Section 402(g)(3) is amended by strik-
ing ‘‘and’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, and’’, and by adding after
subparagraph (C) the following new subpara-
graph:
‘‘(D) any elective employer contribution
under section 408(p)(2)(A)(i).’’.
(C) Subsections (b), (c), (m)(4)(B), and
(n)(3)(B) of section 414 are each amended by in-
serting ‘‘408(p),’’ after ‘‘408(k),’’.
(D) Section 4972(d)(1)(A) is amended by
striking ‘‘and’’ at the end of clause (ii), by strik-
ing the period at the end of clause (iii) and in-
serting ‘‘, and’’, and by adding after clause (iii)
the following new clause:
‘‘(iv) any simple retirement account
(within the meaning of section 408(p)).’’.
(c) REPEAL OF SALARY REDUCTION SIMPLIFIED EM-
PLOYEE PENSIONS.—Section 408(k)(6) is amended by add-
ing at the end the following new subparagraph:
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‘‘(H) TERMINATION.—This paragraph shall
not apply to years beginning after December 31,
1996. The preceding sentence shall not apply to
a simplified employee pension if the terms of
such pension, as in effect on December 31, 1996,
provide that an employee may make the election
described in subparagraph (A).’’.
(d) MODIFICATIONS OF ERISA.—
(1) REPORTING REQUIREMENTS.—Section 101 of
the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1021) is amended by redesignating
subsection (g) as subsection (h) and by inserting after
subsection (f) the following new subsection:
‘‘(g) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) NO EMPLOYER REPORTS.—Except as pro-
vided in this subsection, no report shall be required
under this section by an employer maintaining a
qualified salary reduction arrangement under section
408(p) of the Internal Revenue Code of 1986.
‘‘(2) SUMMARY
DESCRIPTION.—The trustee of
any simple retirement account established pursuant
to a qualified salary reduction arrangement under
section 408(p) of such Code shall provide to the em-
ployer maintaining the arrangement each year a de-
scription containing the following information:
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‘‘(A) The name and address of the employer
and the trustee.
‘‘(B) The requirements for eligibility for
participation.
‘‘(C) The benefits provided with respect to
the arrangement.
‘‘(D) The time and method of making elec-
tions with respect to the arrangement.
‘‘(E) The procedures for, and effects of,
withdrawals (including rollovers) from the ar-
rangement.
‘‘(3) EMPLOYEE
NOTIFICATION.—The employer
shall notify each employee immediately before the pe-
riod for which an election described in section
408(p)(5)(C) of such Code may be made of the em-
ployee’s opportunity to make such election. Such no-
tice shall include a copy of the description described
in paragraph (2).’’
(2) FIDUCIARY DUTIES.—Section 404(c) of such
Act (29 U.S.C. 1104(c)) is amended by inserting
‘‘(1)’’ after ‘‘(c)’’, by redesignating paragraphs (1)
and (2) as subparagraphs (A) and (B), respectively,
and by adding at the end the following new para-
graph:
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‘‘(2) In the case of a simple retirement account
established pursuant to a qualified salary reduction
arrangement under section 408(p) of the Internal
Revenue Code of 1986, a participant or beneficiary
shall, for purposes of paragraph (1), be treated as ex-
ercising control over the assets in the account upon
the earliest of—
‘‘(A) an affirmative election with respect to
the initial investment of any contribution,
‘‘(B) a rollover to any other simple retire-
ment account or individual retirement plan, or
‘‘(C) one year after the simple retirement
account is established.
No reports, other than those required under section
101(g), shall be required with respect to a simple re-
tirement account established pursuant to such a
qualified salary reduction arrangement.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) AR-
RANGEMENTS.
(a) ALTERNATIVE METHOD OF SATISFYING SECTION
401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relat-
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ing to cash or deferred arrangements) is amended by adding
at the end the following new paragraph:
‘‘(11) ADOPTION OF SIMPLE PLAN TO MEET NON-
DISCRIMINATION TESTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph 
(3)(A)(ii) 
if 
such 
arrangement
meets—
‘‘(i) the contribution requirements of
subparagraph (B),
‘‘(ii) the exclusive plan requirements of
subparagraph (C), and
‘‘(iii) the vesting requirements of sec-
tion 408(p)(3).
‘‘(B) CONTRIBUTION REQUIREMENTS.—
‘‘(i) IN
GENERAL.—The requirements
of this subparagraph are met if, under the
arrangement—
‘‘(I) an employee may elect to
have the employer make elective con-
tributions for the year on behalf of the
employee to a trust under the plan in
an amount which is expressed as a
percentage of compensation of the em-
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ployee but which in no event exceeds
$6,000,
‘‘(II) the employer is required to
make a matching contribution to the
trust for the year in an amount equal
to so much of the amount the employee
elects under subclause (I) as does not
exceed 3 percent of compensation for
the year, and
‘‘(III) no other contributions may
be made other than contributions de-
scribed in subclause (I) or (II).
‘‘(ii) EMPLOYER
MAY
ELECT
2-PER-
CENT
NONELECTIVE
CONTRIBUTION.—An
employer shall be treated as meeting the re-
quirements of clause (i)(II) for any year if,
in lieu of the contributions described in
such clause, the employer elects (pursuant to
the terms of the arrangement) to make non-
elective contributions of 2 percent of com-
pensation for each employee who is eligible
to participate in the arrangement and who
has at least $5,000 of compensation from
the employer for the year. If an employer
makes an election under this subparagraph
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for any year, the employer shall notify em-
ployees of such election within a reasonable
period of time before the 60th day before the
beginning of such year.
‘‘(C) EXCLUSIVE PLAN REQUIREMENT.—The
requirements of this subparagraph are met for
any year to which this paragraph applies if no
contributions were made, or benefits were ac-
crued, for services during such year under any
qualified plan of the employer on behalf of any
employee eligible to participate in the cash or de-
ferred arrangement, other than contributions de-
scribed in subparagraph (B).
‘‘(D) DEFINITIONS AND SPECIAL RULE.—
‘‘(i) DEFINITIONS.—For purposes of
this paragraph, any term used in this para-
graph which is also used in section 408(p)
shall have the meaning given such term by
such section.
‘‘(ii) COORDINATION WITH TOP-HEAVY
RULES.—A plan meeting the requirements
of this paragraph for any year shall not be
treated as a top-heavy plan under section
416 for such year.’’.
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(b) ALTERNATIVE METHODS OF SATISFYING SECTION
401(m) NONDISCRIMINATION TESTS.—Section 401(m) (re-
lating to nondiscrimination test for matching contributions
and employee contributions) is amended by redesignating
paragraph (10) as paragraph (11) and by adding after
paragraph (9) the following new paragraph:
‘‘(10) ALTERNATIVE
METHOD
OF
SATISFYING
TESTS.—A defined contribution plan shall be treated
as meeting the requirements of paragraph (2) with re-
spect to matching contributions if the plan—
‘‘(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
‘‘(B) meets the exclusive plan requirements
of subsection (k)(11)(C), and
‘‘(C) meets the vesting requirements of sec-
tion 408(p)(3).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning after December
31, 1996.
Subchapter B—Other Provisions
SEC. 1426. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER
SECTION 401(k).
(a) IN
GENERAL.—Subparagraph (B) of section
401(k)(4) is amended to read as follows:
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‘‘(B) ELIGIBILITY
OF
STATE
AND
LOCAL
GOVERNMENTS
AND
TAX-EXEMPT
ORGANIZA-
TIONS.—
‘‘(i) TAX-EXEMPTS ELIGIBLE.—Except
as provided in clause (ii), any organization
exempt from tax under this subtitle may in-
clude a qualified cash or deferred arrange-
ment as part of a plan maintained by it.
‘‘(ii) GOVERNMENTS
INELIGIBLE.—A
cash or deferred arrangement shall not be
treated as a qualified cash or deferred ar-
rangement if it is part of a plan main-
tained by a State or local government or
political subdivision thereof, or any agency
or instrumentality thereof. This clause shall
not apply to a rural cooperative plan or to
a plan of an employer described in clause
(iii).
‘‘(iii) TREATMENT OF INDIAN TRIBAL
GOVERNMENTS.—An employer which is an
Indian tribal government (as defined in sec-
tion 7701(a)(40)), a subdivision of an In-
dian tribal government (determined in ac-
cordance with section 7871(d)), an agency
or instrumentality of an Indian tribal gov-
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ernment or subdivision thereof, or a cor-
poration chartered under Federal, State, or
tribal law which is owned in whole or in
part by any of the foregoing may include a
qualified cash or deferred arrangement as
part of a plan maintained by the em-
ployer.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to plan years beginning after December
31, 1996, but shall not apply to any cash or deferred ar-
rangement to which clause (i) of section 1116(f)(2)(B) of
the Tax Reform Act of 1986 applies.
SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUC-
TION.
(a) SPOUSAL IRA COMPUTED ON BASIS OF COM-
PENSATION OF BOTH SPOUSES.—Subsection (c) of section
219 (relating to special rules for certain married individ-
uals) is amended to read as follows:
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVID-
UALS.—
‘‘(1) IN GENERAL.—In the case of an individual
to whom this paragraph applies for the taxable year,
the limitation of paragraph (1) of subsection (b) shall
be equal to the lesser of—
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‘‘(A) the dollar amount in effect under sub-
section (b)(1)(A) for the taxable year, or
‘‘(B) the sum of—
‘‘(i) the compensation includible in
such individual’s gross income for the tax-
able year, plus
‘‘(ii) the compensation includible in
the gross income of such individual’s spouse
for the taxable year reduced by the amount
allowed as a deduction under subsection (a)
to such spouse for such taxable year.
‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1) AP-
PLIES.—Paragraph (1) shall apply to any individual
if—
‘‘(A) such individual files a joint return for
the taxable year, and
‘‘(B) the amount of compensation (if any)
includible in such individual’s gross income for
the taxable year is less than the compensation
includible in the gross income of such individ-
ual’s spouse for the taxable year.’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 219(f) (relating to
other definitions and special rules) is amended by
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striking ‘‘subsections (b) and (c)’’ and inserting ‘‘sub-
section (b)’’.
(2) Section 219(g)(1) is amended by striking
‘‘(c)(2)’’ and inserting ‘‘(c)(1)(A)’’.
(3) Section 408(d)(5) is amended by striking
‘‘$2,250’’ and inserting ‘‘the dollar amount in effect
under section 219(b)(1)(A)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
CHAPTER 3—NONDISCRIMINATION
PROVISIONS
SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOY-
EES; REPEAL OF FAMILY AGGREGATION.
(a) IN GENERAL.—Paragraph (1) of section 414(q)
(defining highly compensated employee) is amended to read
as follows:
‘‘(1) IN
GENERAL.—The term ‘highly com-
pensated employee’ means any employee who—
‘‘(A) was a 5-percent owner at any time
during the year or the preceding year, or
‘‘(B) for the preceding year had compensa-
tion from the employer in excess of $80,000.
The Secretary shall adjust the $80,000 amount under
subparagraph (B) at the same time and in the same
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manner as under section 415(d), except that the base
period shall be the calendar quarter ending September
30, 1996.’’.
(b) REPEAL OF FAMILY AGGREGATION RULES.—
(1) IN
GENERAL.—Paragraph (6) of section
414(q) is hereby repealed.
(2) COMPENSATION LIMIT.—Paragraph (17)(A)
of section 401(a) is amended by striking the last sen-
tence.
(3) DEDUCTION.—Subsection (l) of section 404 is
amended by striking the last sentence.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subsection (q) of section 414 is amended
by striking paragraphs (2), (4), (5), (8), and (12)
and by redesignating paragraphs (3), (7), (9), (10),
and (11) as paragraphs (2) through (6), respectively.
(B) 
Sections 
129(d)(8)(B), 
401(a)(5)(D)(ii),
408(k)(2)(C), and 416(i)(1)(D) are each amended by
striking ‘‘section 414(q)(7)’’ and inserting ‘‘section
414(q)(3)’’.
(C) Section 416(i)(1)(A) is amended by striking
‘‘section 414(q)(8)’’ and inserting ‘‘section 414(r)(9)’’.
(2)(A) Section 414(r) is amended by adding at
the end the following new paragraph:
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‘‘(9) EXCLUDED EMPLOYEES.—For purposes of
paragraph (2)(A), the following employees shall be ex-
cluded:
‘‘(A) Employees who have not completed 6
months of service.
‘‘(B) Employees who normally work less
than 171⁄2 hours per week.
‘‘(C) Employees who normally work not
more than 6 months during any year.
‘‘(D) Employees who have not attained the
age of 21.
‘‘(E) Except to the extent provided in regu-
lations, employees who are included in a unit of
employees covered by an agreement which the
Secretary of Labor finds to be a collective bar-
gaining agreement between employee representa-
tives and the employer.
Except as provided by the Secretary, the employer
may elect to apply subparagraph (A), (B), (C), or (D)
by substituting a shorter period of service, smaller
number of hours or months, or lower age for the pe-
riod of service, number of hours or months, or age (as
the case may be) specified in such subparagraph.’’.
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(B) Subparagraph (A) of section 414(r)(2) is
amended by striking ‘‘subsection (q)(8)’’ and inserting
‘‘paragraph (9)’’.
(3) Section 1114(c)(4) of the Tax Reform Act of
1986 is amended by adding at the end the following
new sentence: ‘‘Any reference in this paragraph to
section 414(q) shall be treated as a reference to such
section as in effect on the day before the date of the
enactment of the Small Business Job Protection Act
of 1996.’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to years beginning after De-
cember 31, 1996, except that in determining whether
an employee is a highly compensated employee for
years beginning in 1997, such amendments shall be
treated as having been in effect for years beginning in
1996.
(2) FAMILY
AGGREGATION.—The amendments
made by subsection (b) shall apply to years beginning
after December 31, 1996.
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SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION
REQUIREMENTS.
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating
to additional participation requirements) is amended to
read as follows:
‘‘(A) IN GENERAL.—In the case of a trust
which is a part of a defined benefit plan, such
trust shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser of—
‘‘(i) 50 employees of the employer, or
‘‘(ii) the greater of—
‘‘(I) 40 percent of all employees of
the employer, or
‘‘(II) 2 employees (or if there is
only 1 employee, such employee).’’.
(b) SEPARATE LINE
OF BUSINESS TEST.—Section
401(a)(26)(G) (relating to separate line of business) is
amended by striking ‘‘paragraph (7)’’ and inserting ‘‘para-
graph (2)(A) or (7)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
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SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED
CASH OR DEFERRED ARRANGEMENTS AND
MATCHING CONTRIBUTIONS.
(a) ALTERNATIVE METHODS OF SATISFYING SECTION
401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relat-
ing to cash or deferred arrangements), as amended by sec-
tion 1422, is amended by adding at the end the following
new paragraph:
‘‘(12) ALTERNATIVE METHODS OF MEETING NON-
DISCRIMINATION REQUIREMENTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement shall be treated as meeting the re-
quirements of paragraph (3)(A)(ii) if such ar-
rangement—
‘‘(i) meets the contribution require-
ments of subparagraph (B) or (C), and
‘‘(ii) meets the notice requirements of
subparagraph (D).
‘‘(B) MATCHING CONTRIBUTIONS.—
‘‘(i) IN
GENERAL.—The requirements
of this subparagraph are met if, under the
arrangement, the employer makes matching
contributions on behalf of each employee
who is not a highly compensated employee
in an amount equal to—
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‘‘(I) 100 percent of the elective
contributions of the employee to the ex-
tent such elective contributions do not
exceed 3 percent of the employee’s com-
pensation, and
‘‘(II) 50 percent of the elective
contributions of the employee to the ex-
tent that such elective contributions ex-
ceed 3 percent but do not exceed 5 per-
cent of the employee’s compensation.
‘‘(ii) RATE FOR HIGHLY COMPENSATED
EMPLOYEES.—The requirements of this sub-
paragraph are not met if, under the ar-
rangement, the rate of matching contribu-
tion with respect to any elective contribu-
tion of a highly compensated employee at
any rate of elective contribution is greater
than that with respect to an employee who
is not a highly compensated employee.
‘‘(iii) ALTERNATIVE PLAN DESIGNS.—
If the rate of any matching contribution
with respect to any rate of elective contribu-
tion is not equal to the percentage required
under clause (i), an arrangement shall not
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be treated as failing to meet the require-
ments of clause (i) if—
‘‘(I) the rate of an employer’s
matching contribution does not in-
crease as an employee’s rate of elective
contributions increase, and
‘‘(II) the aggregate amount of
matching contributions at such rate of
elective contribution is at least equal to
the aggregate amount of matching con-
tributions which would be made if
matching contributions were made on
the basis of the percentages described in
clause (i).
‘‘(C) NONELECTIVE
CONTRIBUTIONS.—The
requirements of this subparagraph are met if,
under the arrangement, the employer is required,
without regard to whether the employee makes an
elective contribution or employee contribution, to
make a contribution to a defined contribution
plan on behalf of each employee who is not a
highly compensated employee and who is eligible
to participate in the arrangement in an amount
equal to at least 3 percent of the employee’s com-
pensation.
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‘‘(D) NOTICE REQUIREMENT.—An arrange-
ment meets the requirements of this paragraph
if, under the arrangement, each employee eligible
to participate is, within a reasonable period be-
fore any year, given written notice of the em-
ployee’s rights and obligations under the ar-
rangement which—
‘‘(i) is sufficiently accurate and com-
prehensive to appraise the employee of such
rights and obligations, and
‘‘(ii) is written in a manner calculated
to be understood by the average employee el-
igible to participate.
‘‘(E) OTHER REQUIREMENTS.—
‘‘(i) WITHDRAWAL
AND
VESTING
RE-
STRICTIONS.—An arrangement shall not be
treated as meeting the requirements of sub-
paragraph (B) or (C) of this paragraph un-
less the requirements of subparagraphs (B)
and (C) of paragraph (2) are met with re-
spect to all employer contributions (includ-
ing matching contributions) taken into ac-
count in determining whether the require-
ments of subparagraphs (B) and (C) of this
paragraph are met.
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‘‘(ii) SOCIAL SECURITY AND SIMILAR
CONTRIBUTIONS
NOT
TAKEN
INTO
AC-
COUNT.—An arrangement shall not be treat-
ed as meeting the requirements of subpara-
graph (B) or (C) unless such requirements
are met without regard to subsection (l),
and, for purposes of subsection (l), employer
contributions under subparagraph (B) or
(C) shall not be taken into account.
‘‘(F) OTHER PLANS.—An arrangement shall
be treated as meeting the requirements under
subparagraph (A)(i) if any other plan main-
tained by the employer meets such requirements
with respect to employees eligible under the ar-
rangement.’’.
(b) ALTERNATIVE METHODS OF SATISFYING SECTION
401(m) NONDISCRIMINATION TESTS.—Section 401(m) (re-
lating to nondiscrimination test for matching contributions
and employee contributions), as amended by this section
1422(b), is amended by redesignating paragraph (11) as
paragraph (12) and by adding after paragraph (10) the
following new paragraph:
‘‘(11) ALTERNATIVE
METHOD
OF
SATISFYING
TESTS.—
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‘‘(A) IN GENERAL.—A defined contribution
plan shall be treated as meeting the requirements
of paragraph (2) with respect to matching con-
tributions if the plan—
‘‘(i) meets the contribution require-
ments of subparagraph (B) or (C) of sub-
section (k)(12),
‘‘(ii) meets the notice requirements of
subsection (k)(12)(D), and
‘‘(iii) meets the requirements of sub-
paragraph (B).
‘‘(B) LIMITATION ON MATCHING CONTRIBU-
TIONS.—The requirements of this subparagraph
are met if—
‘‘(i) matching contributions on behalf
of any employee may not be made with re-
spect to an employee’s contributions or elec-
tive deferrals in excess of 6 percent of the
employee’s compensation,
‘‘(ii) the rate of an employer’s match-
ing contribution does not increase as the
rate of an employee’s contributions or elec-
tive deferrals increase, and
‘‘(iii) the matching contribution with
respect to any highly compensated employee
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at any rate of an employee contribution or
rate of elective deferral is not greater than
that with respect to an employee who is not
a highly compensated employee.’’.
(c) YEAR FOR COMPUTING NONHIGHLY COMPENSATED
EMPLOYEE PERCENTAGE.—
(1) CASH OR DEFERRED ARRANGEMENTS.—Sec-
tion 401(k)(3)(A) is amended—
(A) by striking ‘‘such year’’ in clause (ii)
and inserting ‘‘the plan year’’,
(B) by striking ‘‘for such plan year’’ in
clause (ii) and inserting ‘‘for the preceding plan
year’’, and
(C) by adding at the end the following new
sentence: ‘‘An arrangement may apply clause
(ii) by using the plan year rather than the pre-
ceding plan year if the employer so elects, except
that if such an election is made, it may not be
changed except as provided by the Secretary.’’.
(2) 
MATCHING
AND
EMPLOYEE
CONTRIBU-
TIONS.—Section 401(m)(2)(A) is amended—
(A) by inserting ‘‘for such plan year’’ after
‘‘highly compensated employees’’,
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(B) by inserting ‘‘for the preceding plan
year’’ after ‘‘eligible employees’’ each place it ap-
pears in clause (i) and clause (ii), and
(C) by adding at the end the following flush
sentence:
‘‘This subparagraph may be applied by using the
plan year rather than the preceding plan year if
the employer so elects, except that if such an elec-
tion is made, it may not be changed except as
provided the Secretary.’’.
(d) SPECIAL RULE FOR DETERMINING AVERAGE DE-
FERRAL PERCENTAGE FOR FIRST PLAN YEAR, ETC.—
(1) Paragraph (3) of section 401(k) is amended
by adding at the end the following new subparagraph:
‘‘(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of non-
highly compensated employees for the preceding
plan year shall be—
‘‘(i) 3 percent, or
‘‘(ii) if the employer makes an election
under this subclause, the actual deferral
percentage of nonhighly compensated em-
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ployees determined for such first plan
year.’’.
(2) Paragraph (3) of section 401(m) is amended
by adding at the end the following: ‘‘Rules similar to
the rules of subsection (k)(3)(E) shall apply for pur-
poses of this subsection.’’.
(e) DISTRIBUTION OF EXCESS CONTRIBUTIONS AND
EXCESS AGGREGATE CONTRIBUTIONS.—
(1) Subparagraph (C) of section 401(k)(8) (relat-
ing to arrangement not disqualified if excess contribu-
tions distributed) is amended by striking ‘‘on the
basis of the respective portions of the excess contribu-
tions attributable to each of such employees’’ and in-
serting ‘‘on the basis of the amount of contributions
by, or on behalf of, each of such employees’’.
(2) Subparagraph (C) of section 401(m)(6) (re-
lating to method of distributing excess aggregate con-
tributions) is amended by striking ‘‘on the basis of the
respective portions of such amounts attributable to
each of such employees’’ and inserting ‘‘on the basis
of the amount of contributions on behalf of, or by,
each such employee’’.
(f) EFFECTIVE DATES.—
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(1) IN
GENERAL.—The amendments made by
this section shall apply to years beginning after De-
cember 31, 1998.
(2) EXCEPTIONS.—The amendments made by
subsections (c), (d), and (e) shall apply to years be-
ginning after December 31, 1996.
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION
415 PURPOSES.
(a) GENERAL RULE.—Section 415(c)(3) (defining par-
ticipant’s compensation) is amended by adding at the end
the following new subparagraph:
‘‘(D) CERTAIN DEFERRALS INCLUDED.—The
term ‘participant’s compensation’ shall in-
clude—
‘‘(i) any elective deferral (as defined in
section 402(g)(3)), and
‘‘(ii) any amount which is contributed
or deferred by the employer at the election
of the employee and which is not includible
in the gross income of the employee by rea-
son of section 125 or 457.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 414(q)(3), as redesignated by section
1431, is amended to read as follows:
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‘‘(4) COMPENSATION.—For purposes of this sub-
section, the term ‘compensation’ has the meaning
given such term by section 415(c)(3).’’.
(2) Section 414(s)(2) is amended by inserting
‘‘not’’ after ‘‘elect’’ in the text and heading thereof.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1997.
CHAPTER 4—MISCELLANEOUS
PROVISIONS
SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVID-
UALS.
(a) AGGREGATION RULES.—Section 401(d) (relating
to additional requirements for qualification of trusts and
plans benefiting owner-employees) is amended to read as
follows:
‘‘(d) CONTRIBUTION LIMIT ON OWNER-EMPLOYEES.—
A trust forming part of a pension or profit-sharing plan
which provides contributions or benefits for employees some
or all of whom are owner-employees shall constitute a quali-
fied trust under this section only if, in addition to meeting
the requirements of subsection (a), the plan provides that
contributions on behalf of any owner-employee may be
made only with respect to the earned income of such owner-
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employee which is derived from the trade or business with
respect to which such plan is established.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR
MULTIEMPLOYER PLANS.
(a) AMENDMENTS TO 1986 CODE.—Paragraph (2) of
section 411(a) (relating to minimum vesting standards) is
amended—
(1) by striking ‘‘subparagraph (A), (B), or (C)’’
and inserting ‘‘subparagraph (A) or (B)’’; and
(2) by striking subparagraph (C).
(b) AMENDMENTS TO ERISA.—Paragraph (2) of sec-
tion 203(a) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1053(a)) is amended—
(1) by striking ‘‘subparagraph (A), (B), or (C)’’
and inserting ‘‘subparagraph (A) or (B)’’; and
(2) by striking subparagraph (C).
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning on or after the
earlier of—
(1) the later of—
(A) January 1, 1997, or
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(B) the date on which the last of the collec-
tive bargaining agreements pursuant to which
the plan is maintained terminates (determined
without regard to any extension thereof after the
date of the enactment of this Act), or
(2) January 1, 1999.
Such amendments shall not apply to any individual who
does not have more than 1 hour of service under the plan
on or after the 1st day of the 1st plan year to which such
amendments apply.
SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE
PLANS.
(a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A CER-
TAIN AGE.—Section 401(k)(7) is amended by adding at the
end the following new subparagraph:
‘‘(C) SPECIAL
RULE
FOR
CERTAIN
DIS-
TRIBUTIONS.—A rural cooperative plan which
includes a qualified cash or deferred arrange-
ment shall not be treated as violating the re-
quirements of section 401(a) or of paragraph (2)
merely by reason of a hardship distribution or a
distribution to a participant after attainment of
age 591⁄2. For purposes of this section, the term
‘hardship distribution’ means a distribution de-
scribed in paragraph (2)(B)(i)(IV) (without re-
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gard to the limitation of its application to prof-
it-sharing or stock bonus plans).’’.
(b) PUBLIC UTILITY DISTRICTS.—Clause (i) of section
401(k)(7)(B) (defining rural cooperative) is amended to
read as follows:
‘‘(i) any organization which—
‘‘(I) is engaged primarily in pro-
viding electric service on a mutual or
cooperative basis, or
‘‘(II) is engaged primarily in pro-
viding electric service to the public in
its area of service and which is exempt
from tax under this subtitle or which is
a State or local government (or an
agency or instrumentality thereof),
other than a municipality (or an agen-
cy or instrumentality thereof),’’.
(c) EFFECTIVE DATES.—
(1) DISTRIBUTIONS.—The amendments made by
subsection (a) shall apply to distributions after the
date of the enactment of this Act.
(2) PUBLIC
UTILITY
DISTRICTS.—The amend-
ments made by subsection (b) shall apply to plan
years beginning after December 31, 1996.
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SEC. 1444. TREATMENT OF GOVERNMENTAL PLANS UNDER
SECTION 415.
(a) COMPENSATION LIMIT.—Subsection (b) of section
415 is amended by adding immediately after paragraph
(10) the following new paragraph:
‘‘(11) SPECIAL LIMITATION RULE FOR GOVERN-
MENTAL PLANS.—In the case of a governmental plan
(as defined in section 414(d)), subparagraph (B) of
paragraph (1) shall not apply.’’.
(b) TREATMENT
OF
CERTAIN
EXCESS
BENEFIT
PLANS.—
(1) IN GENERAL.—Section 415 is amended by
adding at the end the following new subsection:
‘‘(m) TREATMENT OF QUALIFIED GOVERNMENTAL EX-
CESS BENEFIT ARRANGEMENTS.—
‘‘(1) GOVERNMENTAL PLAN NOT AFFECTED.—In
determining whether a governmental plan (as defined
in section 414(d)) meets the requirements of this sec-
tion, benefits provided under a qualified governmental
excess benefit arrangement shall not be taken into ac-
count. Income accruing to a governmental plan (or to
a trust that is maintained solely for the purpose of
providing benefits under a qualified governmental ex-
cess benefit arrangement) in respect of a qualified
governmental excess benefit arrangement shall con-
stitute income derived from the exercise of an essen-
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tial governmental function upon which such govern-
mental plan (or trust) shall be exempt from tax under
section 115.
‘‘(2) TAXATION OF PARTICIPANT.—For purposes
of this chapter—
‘‘(A) the taxable year or years for which
amounts in respect of a qualified governmental
excess benefit arrangement are includible in
gross income by a participant, and
‘‘(B) the treatment of such amounts when so
includible by the participant,
shall be determined as if such qualified governmental
excess benefit arrangement were treated as a plan for
the deferral of compensation which is maintained by
a corporation not exempt from tax under this chapter
and which does not meet the requirements for quali-
fication under section 401.
‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BENE-
FIT ARRANGEMENT.—For purposes of this subsection,
the term ‘qualified governmental excess benefit ar-
rangement’ means a portion of a governmental plan
if—
‘‘(A) such portion is maintained solely for
the purpose of providing to participants in the
plan that part of the participant’s annual bene-
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fit otherwise payable under the terms of the plan
that exceeds the limitations on benefits imposed
by this section,
‘‘(B) under such portion no election is pro-
vided at any time to the participant (directly or
indirectly) to defer compensation, and
‘‘(C) benefits described in subparagraph (A)
are not paid from a trust forming a part of such
governmental plan unless such trust is main-
tained solely for the purpose of providing such
benefits.’’.
(2) COORDINATION
WITH
SECTION
457.—Sub-
section (e) of section 457 is amended by adding at the
end the following new paragraph:
‘‘(14) TREATMENT
OF
QUALIFIED
GOVERN-
MENTAL
EXCESS
BENEFIT
ARRANGEMENTS.—Sub-
sections (b)(2) and (c)(1) shall not apply to any
qualified governmental excess benefit arrangement (as
defined in section 415(m)(3)), and benefits provided
under such an arrangement shall not be taken into
account in determining whether any other plan is an
eligible deferred compensation plan.’’.
(3) CONFORMING AMENDMENT.—Paragraph (2)
of section 457(f) is amended by striking ‘‘and’’ at the
end of subparagraph (C), by striking the period at the
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end of subparagraph (D) and inserting ‘‘, and’’, and
by inserting immediately thereafter the following new
subparagraph:
‘‘(E) a qualified governmental excess benefit
arrangement described in section 415(m).’’.
(c) EXEMPTION FOR SURVIVOR AND DISABILITY BENE-
FITS.—Paragraph (2) of section 415(b) is amended by add-
ing at the end the following new subparagraph:
‘‘(I) EXEMPTION FOR SURVIVOR AND DIS-
ABILITY
BENEFITS
PROVIDED
UNDER
GOVERN-
MENTAL
PLANS.—Subparagraph (C) of this
paragraph and paragraph (5) shall not apply
to—
‘‘(i) income received from a govern-
mental plan (as defined in section 414(d))
as a pension, annuity, or similar allowance
as the result of the recipient becoming dis-
abled by reason of personal injuries or sick-
ness, or
‘‘(ii) amounts received from a govern-
mental plan by the beneficiaries, survivors,
or the estate of an employee as the result of
the death of the employee.’’.
(d) REVOCATION OF GRANDFATHER ELECTION.—
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(1) IN GENERAL.—Subparagraph (C) of section
415(b)(10) is amended by adding at the end the fol-
lowing new clause:
‘‘(ii) REVOCATION OF ELECTION.—An
election under clause (i) may be revoked not
later than the last day of the third plan
year beginning after the date of the enact-
ment of this clause. The revocation shall
apply to all plan years to which the election
applied and to all subsequent plan years.
Any amount paid by a plan in a taxable
year ending after the revocation shall be in-
cludible in income in such taxable year
under the rules of this chapter in effect for
such taxable year, except that, for purposes
of applying the limitations imposed by this
section, any portion of such amount which
is attributable to any taxable year during
which the election was in effect shall be
treated as received in such taxable year.’’.
(2) CONFORMING
AMENDMENT.—Subparagraph
(C) of section 415(b)(10) is amended by striking
‘‘This’’ and inserting:
‘‘(i) IN GENERAL.—This’’.
(e) EFFECTIVE DATE.—
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(1) IN
GENERAL.—The amendments made by
subsections (a), (b), and (c) shall apply to years be-
ginning after December 31, 1994. The amendments
made by subsection (d) shall apply with respect to
revocations adopted after the date of the enactment of
this Act.
(2) TREATMENT FOR YEARS BEGINNING BEFORE
JANUARY 1, 1995.—Nothing in the amendments made
by this section shall be construed to imply that a gov-
ernmental plan (as defined in section 414(d) of the
Internal Revenue Code of 1986) fails to satisfy the re-
quirements of section 415 of such Code for any tax-
able year beginning before January 1, 1995.
SEC. 1445. UNIFORM RETIREMENT AGE.
(a) DISCRIMINATION TESTING.—Paragraph (5) of sec-
tion 401(a) (relating to special rules relating to non-
discrimination requirements) is amended by adding at the
end the following new subparagraph:
‘‘(F) SOCIAL SECURITY RETIREMENT AGE.—
For purposes of testing for discrimination under
paragraph (4)—
‘‘(i) the social security retirement age
(as defined in section 415(b)(8)) shall be
treated as a uniform retirement age, and
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‘‘(ii) subsidized early retirement bene-
fits and joint and survivor annuities shall
not be treated as being unavailable to em-
ployees on the same terms merely because
such benefits or annuities are based in
whole or in part on an employee’s social se-
curity retirement age (as so defined).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EM-
PLOYEES.
(a) ALL DISABLED PARTICIPANTS RECEIVING CON-
TRIBUTIONS.—Section 415(c)(3)(C) is amended by adding
at the end the following: ‘‘If a defined contribution plan
provides for the continuation of contributions on behalf of
all participants described in clause (i) for a fixed or deter-
minable period, this subparagraph shall be applied without
regard to clauses (ii) and (iii).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to years beginning after December 31,
1996.
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SEC. 1447. TREATMENT OF DEFERRED COMPENSATION
PLANS OF STATE AND LOCAL GOVERNMENTS
AND TAX-EXEMPT ORGANIZATIONS.
(a) SPECIAL RULES
FOR PLAN DISTRIBUTIONS.—
Paragraph (9) of section 457(e) (relating to other defini-
tions and special rules) is amended to read as follows:
‘‘(9) BENEFITS NOT TREATED AS MADE AVAIL-
ABLE BY REASON OF CERTAIN ELECTIONS, ETC.—
‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500 OR
LESS.—The total amount payable to a partici-
pant under the plan shall not be treated as made
available merely because the participant may
elect to receive such amount (or the plan may
distribute such amount without the participant’s
consent) if—
‘‘(i) such amount does not exceed
$3,500, and
‘‘(ii) such amount may be distributed
only if—
‘‘(I) no amount has been deferred
under the plan with respect to such
participant during the 2-year period
ending on the date of the distribution,
and
‘‘(II) there has been no prior dis-
tribution under the plan to such par-
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ticipant to which this subparagraph
applied.
A plan shall not be treated as failing to meet the
distribution requirements of subsection (d) by
reason of a distribution to which this subpara-
graph applies.
‘‘(B) ELECTION TO DEFER COMMENCEMENT
OF DISTRIBUTIONS.—The total amount payable
to a participant under the plan shall not be
treated as made available merely because the
participant may elect to defer commencement of
distributions under the plan if—
‘‘(i) such election is made after
amounts may be available under the plan
in accordance with subsection (d)(1)(A) and
before commencement of such distributions,
and
‘‘(ii) the participant may make only 1
such election.’’.
(b) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DE-
FERRAL AMOUNT.—Subsection (e) of section 457, as amend-
ed by section 1444(b)(2) (relating to governmental plans),
is amended by adding at the end the following new para-
graph:
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‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM
DEFERRAL AMOUNT.—The Secretary shall adjust the
$7,500 amount specified in subsections (b)(2) and
(c)(1) at the same time and in the same manner as
under section 415(d), except that the base period shall
be the calendar quarter ending September 30, 1994,
and any increase under this paragraph which is not
a multiple of $500 shall be rounded to the next lowest
multiple of $500.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COM-
PENSATION PLANS OF STATE AND LOCAL
GOVERNMENTS.
(a) IN GENERAL.—Section 457 is amended by adding
at the end the following new subsection:
‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET-
ASIDES FOR EXCLUSIVE BENEFIT OF PARTICIPANTS.—
‘‘(1) IN GENERAL.—A plan maintained by an el-
igible employer described in subsection (e)(1)(A) shall
not be treated as an eligible deferred compensation
plan unless all assets and income of the plan de-
scribed in subsection (b)(6) are held in trust for the
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exclusive benefit of participants and their bene-
ficiaries.
‘‘(2) TAXABILITY
OF
TRUSTS
AND
PARTICI-
PANTS.—For purposes of this title—
‘‘(A) a trust described in paragraph (1)
shall be treated as an organization exempt from
taxation under section 501(a), and
‘‘(B) notwithstanding any other provision
of this title, amounts in the trust shall be includ-
ible in the gross income of participants and
beneficiaries only to the extent, and at the time,
provided in this section.
‘‘(3) CUSTODIAL ACCOUNTS AND CONTRACTS.—
For purposes of this subsection, custodial accounts
and contracts described in section 401(f) shall be
treated as trusts under rules similar to the rules
under section 401(f).’’.
(b) CONFORMING AMENDMENT.—Paragraph (6) of sec-
tion 457(b) is amended by inserting ‘‘except as provided
in subsection (g),’’ before ‘‘which provides that’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to assets and income described in section
457(b)(6) of the Internal Revenue Code of 1986 held
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by a plan on and after the date of the enactment of
this Act.
(2) TRANSITION RULE.—In the case of a plan in
existence on the date of the enactment of this Act, a
trust need not be established by reason of the amend-
ments made by this section before January 1, 1999.
SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM
BENEFITS UNDER SECTION 415 LIMITATIONS.
(a) IN
GENERAL.—Subparagraph (A) of section
767(d)(3) of the Uruguay Round Agreements Act is amend-
ed to read as follows:
‘‘(A) EXCEPTION.—A plan that was adopt-
ed and in effect before December 8, 1994, shall
not be required to apply the amendments made
by subsection (b) with respect to benefits accrued
before the earlier of—
‘‘(i) the later of the date a plan amend-
ment applying the amendments made by
subsection (b) is adopted or made effective,
or
‘‘(ii) the first day of the first limita-
tion year beginning after December 31,
1999.
Determinations under section 415(b)(2)(E) of the
Internal Revenue Code of 1986 before such ear-
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lier date shall be made with respect to such bene-
fits on the basis of such section as in effect on
December 7, 1994 (except that the modification
made by section 1449(b) of the Small Business
Job Protection Act of 1996 shall be taken into
account), and the provisions of the plan as in ef-
fect on December 7, 1994, but only if such provi-
sions of the plan meet the requirements of such
section (as so in effect).’’.
(b) MODIFICATION OF CERTAIN ASSUMPTIONS FOR AD-
JUSTING BENEFITS
OF DEFINED BENEFIT PLANS
FOR
EARLY RETIREES.—Subparagraph (E) of section 415(b)(2)
(relating to limitation on certain assumptions) is amend-
ed—
(1) by striking ‘‘Except as provided in clause
(ii), for purposes of adjusting any benefit or limita-
tion under subparagraph (B) or (C),’’ in clause (i)
and inserting ‘‘For purposes of adjusting any limita-
tion under subparagraph (C) and, except as provided
in clause (ii), for purposes of adjusting any benefit
under subparagraph (B),’’, and
(2) by striking ‘‘For purposes of adjusting the
benefit or limitation of any form of benefit subject to
section 417(e)(3),’’ in clause (ii) and inserting ‘‘For
purposes of adjusting any benefit under subparagraph
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(B) for any form of benefit subject to section
417(e)(3),’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect as if included in the provisions of
section 767 of the Uruguay Round Agreements Act.
(d) TRANSITIONAL RULE.—In the case of a plan that
was adopted and in effect before December 8, 1994, if—
(1) a plan amendment was adopted or made ef-
fective on or before the date of the enactment of this
Act applying the amendments made by section 767 of
the Uruguay Round Agreements Act, and
(2) within 1 year after the date of the enactment
of this Act, a plan amendment is adopted which re-
peals the amendment referred to in paragraph (1),
the amendment referred to in paragraph (1) shall not be
taken into account in applying section 767(d)(3)(A) of the
Uruguay Round Agreements Act, as amended by subsection
(a).
SEC. 1450. MODIFICATIONS OF SECTION 403(b).
(a) MULTIPLE
SALARY
REDUCTION
AGREEMENTS
PERMITTED.—
(1) GENERAL
RULE.—For purposes of section
403(b) of the Internal Revenue Code of 1986, the fre-
quency that an employee is permitted to enter into a
salary reduction agreement, the salary to which such
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an agreement may apply, and the ability to revoke
such an agreement shall be determined under the rules
applicable to cash or deferred elections under section
401(k) of such Code.
(2) CONSTRUCTIVE RECEIPT.—Section 402(e)(3)
is amended by inserting ‘‘or which is part of a salary
reduction agreement under section 403(b)’’ after ‘‘sec-
tion 401(k)(2))’’.
(3) EFFECTIVE
DATE.—This subsection shall
apply to taxable years beginning after December 31,
1995.
(b) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.—
(1) IN GENERAL.—Subparagraph (A) of section
403(b)(1) (relating to taxability of beneficiary under
annuity purchased by section 501(c)(3) organization
or public school) is amended by striking ‘‘or’’ at the
end of clause (i), by inserting ‘‘or’’ at the end of
clause (ii), and by adding at the end the following
new clause:
‘‘(iii) for an employee by an employer
which is an Indian tribal government (as
defined in section 7701(a)(40)), a subdivi-
sion of an Indian tribal government (deter-
mined in accordance with section 7871(d)),
an agency or instrumentality of an Indian
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tribal government or subdivision thereof, or
a corporation chartered under Federal,
State, or tribal law which is owned in
whole or part by any of the foregoing,’’.
(2) CONFORMING AMENDMENT.—The heading for
section 403(b) is amended by striking ‘‘OR PUBLIC
SCHOOL’’ and inserting ‘‘, PUBLIC SCHOOL, OR IN-
DIAN TRIBE’’.
(3) EFFECTIVE DATES.—
(A) IN GENERAL.—The amendments made
by this section shall apply to plan years begin-
ning after December 31, 1996.
(B) TRANSITION RULES.—
(i) IN GENERAL.—In the case of any
contract purchased in a plan year begin-
ning before January 1, 1997, section 403(b)
of the Internal Revenue Code of 1986 shall
be applied as if any reference to an em-
ployer described in section 501(c)(3) of the
Internal Revenue Code of 1986 which is ex-
empt from tax under section 501 of such
Code included a reference to an employer
which is an Indian tribal government (as
defined by section 7701(a)(40) of such
Code), a subdivision of an Indian tribal
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government (determined in accordance with
section 7871(d) of such Code), an agency or
instrumentality of an Indian tribal govern-
ment or subdivision thereof, or a corpora-
tion chartered under Federal, State, or trib-
al law which is owned in whole or in part
by any of the foregoing.
(ii) ROLLOVERS.—Solely for purposes
of applying section 403(b)(8) of such Code
to a contract to which clause (i) applies, a
qualified cash or deferred arrangement
under section 401(k) of such Code shall be
treated as if it were a plan or contract de-
scribed in clause (ii) of section 403(b)(8)(A)
of such Code.
(c) ELECTIVE DEFERRALS.—
(1) IN GENERAL.—Subparagraph (E) of section
403(b)(1) is amended to read as follows:
‘‘(E) in the case of a contract purchased
under a salary reduction agreement, the contract
meets the requirements of section 401(a)(30),’’.
(2) EFFECTIVE DATE.—The amendment made by
this subsection shall apply to years beginning after
December 31, 1995, except a contract shall not be re-
quired to meet any change in any requirement by
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reason of such amendment before the 90th day after
the date of the enactment of this Act.
SEC. 1451. MISSING PARTICIPANTS.
(a) IN GENERAL.—Section 4050 of the Employee Re-
tirement Income Security Act of 1974 (29 U.S.C. 1350) is
amended by redesignating subsection (c) as subsection (e)
and by inserting after subsection (b) the following new sub-
sections:
‘‘(c) MULTIEMPLOYER PLANS.—The corporation shall
prescribe rules similar to the rules in subsection (a) for mul-
tiemployer plans covered by this title that terminate under
section 4041A.
‘‘(d) PLANS NOT OTHERWISE SUBJECT TO TITLE.—
‘‘(1) TRANSFER TO CORPORATION.—The plan ad-
ministrator of a plan described in paragraph (4) may
elect to transfer a missing participant’s benefits to the
corporation upon termination of the plan.
‘‘(2) INFORMATION TO THE CORPORATION.—To
the extent provided in regulations, the plan adminis-
trator of a plan that makes the election described in
paragraph (1) shall, upon termination of the plan,
provide the corporation information with respect to
benefits of a missing participant.
‘‘(3) PAYMENT BY THE CORPORATION.—If bene-
fits of a missing participant were transferred to the
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corporation under paragraph (1), the corporation
shall, upon location of the participant or beneficiary,
pay to the participant or beneficiary the amount
transferred (or the appropriate survivor benefit) ei-
ther—
‘‘(A) in a single sum (plus interest), or
‘‘(B) in such other form as is specified in
regulations of the corporation.
‘‘(4) PLANS DESCRIBED.—A plan is described in
this paragraph if—
‘‘(A) the plan is a pension plan (within the
meaning of section 3(2))—
‘‘(i) to which the provisions of this sec-
tion do not apply (without regard to this
subsection), and
‘‘(ii) which is not a plan described in
paragraphs (2) through (11) of section
4021(b), and
‘‘(B) at the time the assets are to be distrib-
uted upon termination, the plan—
‘‘(i) has missing participants, and
‘‘(ii) has not provided for the transfer
of assets to pay the benefits of all missing
participants to another pension plan (with-
in the meaning of section 3(2)).
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‘‘(5) CERTAIN PROVISIONS NOT TO APPLY.—Sub-
sections (a)(1) and (a)(3) shall not apply to a plan
described in paragraph (4).’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 206(f) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1056(f)) is
amended—
(A) by striking ‘‘title IV’’ and inserting
‘‘section 4050’’, and
(B) by striking ‘‘the plan shall provide
that’’.
(2) Section 401(a)(34) (relating to benefits of
missing participants on plan termination) is amend-
ed by striking ‘‘title IV’’ and inserting ‘‘section
4050’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to distributions made after final regula-
tions implementing subsections (c) and (d) of section 4050
of the Employee Retirement Income Security Act of 1974
(as added by subsection (a)), respectively, are prescribed.
SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED
BENEFIT PLAN AND DEFINED CONTRIBUTION
PLAN FOR SAME EMPLOYEE; EXCESS DIS-
TRIBUTIONS.
(a) IN GENERAL.—Section 415(e) is repealed.
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(b) EXCESS
DISTRIBUTIONS.—Section 4980A is
amended by adding at the end the following new subsection:
‘‘(g) LIMITATION ON APPLICATION.—This section shall
not apply to distributions during years beginning after De-
cember 31, 1996, and before January 1, 2000, and such dis-
tributions shall be treated as made first from amounts not
described in subsection (f).’’.
(c) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 415(a) is amend-
ed—
(A) by adding ‘‘or’’ at the end of subpara-
graph (A),
(B) by striking ‘‘, or’’ at the end of sub-
paragraph (B) and inserting a period, and
(C) by striking subparagraph (C).
(2) Subparagraph (B) of section 415(b)(5) is
amended by striking ‘‘and subsection (e)’’.
(3) Paragraph (1) of section 415(f) is amended
by striking ‘‘subsections (b), (c), and (e)’’ and insert-
ing ‘‘subsections (b) and (c)’’.
(4) Subsection (g) of section 415 is amended by
striking ‘‘subsections (e) and (f)’’ in the last sentence
and inserting ‘‘subsection (f)’’.
(5) Clause (i) of section 415(k)(2)(A) is amended
to read as follows:
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‘‘(i) any contribution made directly by
an employee under such an arrangement
shall not be treated as an annual addition
for purposes of subsection (c), and’’.
(6) Clause (ii) of section 415(k)(2)(A) is amend-
ed by striking ‘‘subsections (c) and (e)’’ and inserting
‘‘subsection (c)’’.
(7) Section 416 is amended by striking sub-
section (h).
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to limitation years beginning after December
31, 1999.
(2) EXCESS
DISTRIBUTIONS.—The amendment
made by subsection (b) shall apply to years beginning
after December 31, 1996.
SEC. 1453. TAX ON PROHIBITED TRANSACTIONS.
(a) IN GENERAL.—Section 4975(a) is amended by
striking ‘‘5 percent’’ and inserting ‘‘10 percent’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to prohibited transactions occurring
after the date of the enactment of this Act.
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SEC. 1454. TREATMENT OF LEASED EMPLOYEES.
(a) GENERAL RULE.—Subparagraph (C) of section
414(n)(2) (defining leased employee) is amended to read as
follows:
‘‘(C) such services are performed under pri-
mary direction or control by the recipient.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to years beginning after December
31, 1996, but shall not apply to any relationship deter-
mined under an Internal Revenue Service ruling issued be-
fore the date of the enactment of this Act pursuant to section
414(n)(2)(C) of the Internal Revenue Code of 1986 (as in
effect on the day before such date) not to involve a leased
employee.
SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO
CERTAIN 
PENSION 
REPORTING 
REQUIRE-
MENTS.
(a) PENALTIES.—
(1) STATEMENTS.—Paragraph (1) of section
6724(d) is amended by striking ‘‘and’’ at the end of
subparagraph (A), by striking the period at the end
of subparagraph (B) and inserting ‘‘, and’’, and by
inserting after subparagraph (B) the following new
subparagraph:
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‘‘(C) any statement of the amount of pay-
ments to another person required to be made to
the Secretary under—
‘‘(i) section 408(i) (relating to reports
with respect to individual retirement ac-
counts or annuities), or
‘‘(ii) section 6047(d) (relating to re-
ports by employers, plan administrators,
etc.).’’.
(2) REPORTS.—Paragraph (2) of section 6724(d)
is amended by striking ‘‘or’’ at the end of subpara-
graph (S), by striking the period at the end of sub-
paragraph (T) and inserting a comma, and by insert-
ing after subparagraph (T) the following new sub-
paragraphs:
‘‘(U) section 408(i) (relating to reports with
respect to individual retirement plans) to any
person other than the Secretary with respect to
the amount of payments made to such person, or
‘‘(V) section 6047(d) (relating to reports by
plan administrators) to any person other than
the Secretary with respect to the amount of pay-
ments made to such person.’’.
(b) MODIFICATION OF REPORTABLE DESIGNATED DIS-
TRIBUTIONS.—
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(1) SECTION 408.—Subsection (i) of section 408
(relating to individual retirement account reports) is
amended by inserting ‘‘aggregating $10 or more in
any calendar year’’ after ‘‘distributions’’.
(2) SECTION
6047.—Paragraph (1) of section
6047(d) (relating to reports by employers, plan ad-
ministrators, etc.) is amended by adding at the end
the following new sentence: ‘‘No return or report may
be required under the preceding sentence with respect
to distributions to any person during any year unless
such distributions aggregate $10 or more.’’.
(c) QUALIFYING ROLLOVER DISTRIBUTIONS.—Section
6652(i) is amended—
(1) by striking ‘‘the $10’’ and inserting ‘‘$100’’,
and
(2) 
by 
striking 
‘‘$5,000’’ 
and 
inserting
‘‘$50,000’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 6047(f) is amended
to read as follows:
‘‘(1) For provisions relating to penalties for fail-
ures to file returns and reports required under this
section, see sections 6652(e), 6721, and 6722.’’.
(2) Subsection (e) of section 6652 is amended by
adding at the end the following new sentence: ‘‘This
subsection shall not apply to any return or statement
which is an information return described in section
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6724(d)(1)(C)(ii) or a payee statement described in
section 6724(d)(2)(V).’’.
(3) Subsection (a) of section 6693 is amended by
adding at the end the following new sentence: ‘‘This
subsection shall not apply to any report which is an
information 
return 
described 
in 
section
6724(d)(1)(C)(i) or a payee statement described in
section 6724(d)(2)(U).’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to returns, reports, and other statements
the due date for which (determined without regard to exten-
sions) is after December 31, 1996.
SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUB-
JECT TO TAX ON NET EARNINGS FROM SELF-
EMPLOYMENT.
(a) IN GENERAL.—Section 1402(a)(8) (defining net
earning from self-employment) is amended by inserting ‘‘,
but shall not include in such net earnings from self-employ-
ment the rental value of any parsonage or any parsonage
allowance (whether or not excludable under section 107)
provided after the individual retires, or any other retire-
ment benefit received by such individual from a church plan
(as defined in section 414(e)) after the individual retires’’
before the semicolon at the end.
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning before, on, or after
December 31, 1994.
SEC. 1457. MODEL FORMS FOR SPOUSAL CONSENT AND
QUALIFIED DOMESTIC RELATIONS FORMS.
(a) DEVELOPMENT OF FORMS.—Not later than Janu-
ary 1, 1997, the Secretary of the Treasury shall develop—
(1) a model form for the spousal consent required
under section 417(a)(2) of the Internal Revenue Code
of 1986 and section 205(c)(2) of the Employee Retire-
ment Income Security Act of 1974 which—
(A) is written in a manner calculated to be
understood by the average person, and
(B) discloses in plain form—
(i) whether the waiver to which the
spouse consents is irrevocable, and
(ii) whether such waiver may be re-
voked by a qualified domestic relations
order, and
(2) a model form for a qualified domestic rela-
tions order described in section 414(p)(1)(A) of such
Code and section 206(d)(3)(B)(i) of such Act which—
(A) meets the requirements contained in
such sections, and
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(B) the provisions of which focus attention
on the need to consider the treatment of any
lump sum payment, qualified joint and survivor
annuity, or qualified preretirement survivor an-
nuity.
(b) PUBLICITY.—The Secretary of the Treasury shall
include publicity for the model forms developed under sub-
section (a) in the pension outreach efforts undertaken by
the Secretary.
SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS
TO VOLUNTEERS PERFORMING FIRE FIGHT-
ING OR PREVENTION SERVICES, EMERGENCY
MEDICAL SERVICES, OR AMBULANCE SERV-
ICES.
(a) IN GENERAL.—Paragraph (11) of section 457(e)
(relating to deferred compensation plans of State and local
governments and tax-exempt organizations) is amended to
read as follows:
‘‘(11) CERTAIN PLANS EXCLUDED.—
‘‘(A) IN
GENERAL.—The following plans
shall be treated as not providing for the deferral
of compensation:
‘‘(i) Any bona fide vacation leave, sick
leave, compensatory time, severance pay,
disability pay, or death benefit plan.
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‘‘(ii) Any plan paying solely length of
service awards to bona fide volunteers (or
their beneficiaries) on account of qualified
services performed by such volunteers.
‘‘(B) 
SPECIAL
RULES
APPLICABLE
TO
LENGTH OF SERVICE AWARD PLANS.—
‘‘(i) BONA FIDE VOLUNTEER.—An in-
dividual shall be treated as a bona fide vol-
unteer for purposes of subparagraph (A)(ii)
if the only compensation received by such
individual for performing qualified services
is in the form of—
‘‘(I) reimbursement for (or a rea-
sonable allowance for) reasonable ex-
penses incurred in the performance of
such services, or
‘‘(II) reasonable benefits (includ-
ing length of service awards), and
nominal fees for such services, cus-
tomarily paid by eligible employers in
connection with the performance of
such services by volunteers.
‘‘(ii) LIMITATION
ON
ACCRUALS.—A
plan shall not be treated as described in
subparagraph 
(A)(ii) 
if 
the 
aggregate
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amount of length of service awards accruing
with respect to any year of service for any
bona fide volunteer exceeds $3,000.
‘‘(C) QUALIFIED SERVICES.—For purposes
of this paragraph, the term ‘qualified services’
means fire fighting and prevention services,
emergency medical services, and ambulance serv-
ices.’’.
(b) EXEMPTION FROM SOCIAL SECURITY TAXES.—
(1) Subsection (a)(5) of section 3121, as amend-
ed by section 1421, is amended by striking ‘‘(or)’’ at
the end of subparagraph (G), by inserting ‘‘or’’ at the
end of subparagraph (H), and by adding at the end
the following new subparagraph:
‘‘(I) under a plan described in section
457(e)(11)(A)(ii) and maintained by an eligible
employer (as defined in section 457(e)(1)).’’.
(2) Section 209(a)(4) of the Social Security Act
is amended by inserting ‘‘; or (K) under a plan de-
scribed in section 457(e)(11)(A)(ii) of the Internal
Revenue Code of 1986 and maintained by an eligible
employer (as defined in section 457(e)(1) of such
Code)’’ before the semicolon at the end thereof.
(c) EFFECTIVE DATE.—
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(1) SUBSECTION (a).—The amendment made by
subsection (a) shall apply to accruals of length of
service awards after December 31, 1996.
(2) SUBSECTION (b).—The amendments made by
subsection (b) shall apply to remuneration paid after
December 31, 1996.
SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR
CERTAIN PLANS THAT PROVIDE FOR EARLY
PARTICIPATION.
(a) CASH
OR DEFERRED ARRANGEMENTS.—Para-
graph (3) of section 401(k) (relating to application of par-
ticipation and discrimination standards), as amended by
section 1433(d)(1) of this Act, is amended by adding at the
end the following new subparagraph:
‘‘(F) SPECIAL RULE FOR EARLY PARTICIPA-
TION.—If an employer elects to apply section
410(b)(4)(B) in determining whether a cash or
deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in de-
termining whether the arrangement meets the re-
quirements of subparagraph (A)(ii), exclude from
consideration all eligible employees (other than
highly compensated employees) who have not met
the minimum age and service requirements of
section 410(a)(1)(A).’’.
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(b) MATCHING CONTRIBUTIONS.—Paragraph (5) of
section 401(m) (relating to employees taken into consider-
ation) is amended by adding at the end the following new
subparagraph:
‘‘(C) SPECIAL RULE FOR EARLY PARTICIPA-
TION.—If an employer elects to apply section
410(b)(4)(B) in determining whether a plan
meets the requirements of section 410(b), the em-
ployer may, in determining whether the plan
meets the requirements of paragraph (2), exclude
from consideration all eligible employees (other
than highly compensated employees) who have
not met the minimum age and service require-
ments of section 410(a)(1)(A).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning after December
31, 1998.
SEC. 1460. MODIFICATIONS OF JOINT AND SURVIVOR ANNU-
ITY REQUIREMENTS.
(a) AMENDMENTS TO INTERNAL REVENUE CODE.—
Section 417(b) is amended—
(1) by striking ‘‘For’’ and inserting:
‘‘(1) IN GENERAL.—’’,
(2) by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B), respectively, and
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(3) by adding at the end the following new para-
graph:
‘‘(2) ELECTION OF 662⁄3 PERCENT SURVIVOR AN-
NUITY.—
‘‘(A) IN GENERAL.—In the case of any plan
with respect to which the survivor annuity under
a qualified joint and survivor annuity is not
equal to 662⁄3 percent of the amount of the annu-
ity which is payable during the joint lives of the
participant and the spouse, such plan shall not
be treated as meeting the requirements of section
401(a)(11) unless the participant may elect a
qualified joint and survivor annuity with a sur-
vivor annuity which is equal to 662⁄3 percent of
such amount.
‘‘(B) TREATMENT OF ANNUITY.—If a par-
ticipant elects a survivor annuity under sub-
paragraph (A), such annuity shall be treated as
a qualified joint and survivor annuity for pur-
poses of this title (other than subsection
(c)(1)(A)).’’.
(b) AMENDMENTS TO ERISA.—Subsection (d) of sec-
tion 205 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1055) is amended—
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(1) by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B), respectively,
(2) by inserting ‘‘(1)’’ after ‘‘(d)’’, and
(3) by adding at the end the following new para-
graph:
‘‘(2)(A) In the case of any plan with respect to
which the survivor annuity under a qualified joint
and survivor annuity is not equal to 662⁄3 percent of
the amount of the annuity which is payable during
the joint lives of the participant and the spouse, such
plan shall not be treated as meeting the requirements
of subsection (a) unless the participant may elect a
qualified joint and survivor annuity with a survivor
annuity which is equal to 662⁄3 percent of such
amount.
‘‘(B) If a participant elects a survivor annuity
under subparagraph (A), such annuity shall be treat-
ed as a qualified joint and survivor annuity for pur-
poses of this title (other than subsection (e)(1)(A)).’’.
(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to plan years beginning after
December 31, 1996.
(2) SPECIAL RULE FOR EXISTING PLANS.—In the
case of a plan in existence on the date of the enact-
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ment of this Act, the amendments made by this sec-
tion shall apply to any plan year following the first
plan year with respect to which the first plan amend-
ment adopted after such date of enactment takes ef-
fect.
SEC. 1461. CLARIFICATION OF APPLICATION OF ERISA TO
INSURANCE COMPANY GENERAL ACCOUNTS.
(a) IN GENERAL.—Section 401 of the Employee Re-
tirement Income Security Act of 1974 (29 U.S.C. 1101) is
amended by adding at the end the following new subsection:
‘‘(c)(1)(A) Not later than December 31, 1996, the Sec-
retary shall issue proposed regulations to provide guidance
for the purpose of determining, in cases where an insurer
issues 1 or more policies to or for the benefit of an employee
benefit plan (and such policies are supported by the assets
of such insurer’s general account), which assets of the in-
surer (other than plan assets held in its separate accounts)
constitute assets of the plan for purposes of this part and
section 4975 of the Internal Revenue Code of 1986.
‘‘(B) The proposed regulations under subparagraph
(A) shall be subject to public notice and comment until
March 31, 1997.
‘‘(C) The Secretary shall issue final regulations pro-
viding the guidance described in subparagraph (A) not later
than June 30, 1997.
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‘‘(2) In issuing regulations under paragraph (1), the
Secretary—
‘‘(A) subject to subparagraph (C), may exclude
any assets of the insurer with respect to its oper-
ations, products, or services from treatment as plan
assets,
‘‘(B) shall provide that assets not treated as plan
assets under subsection (b)(2) shall not be treated as
plan assets under paragraph (1), and
‘‘(C) shall ensure that the regulations—
‘‘(i) are administratively feasible, and
‘‘(ii) are designed to protect the inter-
ests and rights of the plan and of its par-
ticipants and beneficiaries.
‘‘(3)(A) Subject to subparagraph (B), any regulations
issued under paragraph (1) shall not take effect before the
date on which such regulations become final.
‘‘(B) No person shall be subject to liability under this
part or section 4975 of the Internal Revenue Code of 1986
for conduct which occurred before the date which is 18
months following the date described in subparagraph (A)
on the basis of a claim that the assets of an insurer (other
than plan assets held in a separate account) constitute as-
sets of the plan, except—
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‘‘(i) as otherwise provided by the Secretary in
regulations intended to prevent avoidance of the regu-
lations issued under paragraph (1), or
‘‘(ii) as provided in an action brought by the
Secretary pursuant to subsection (a) (2) or (5) of sec-
tion 502 for a breach of fiduciary responsibilities
which would also constitute a violation of Federal
criminal law or constitute a felony under applicable
State law.
‘‘(4) Nothing in this subsection shall preclude the ap-
plication of any Federal criminal law.
‘‘(5) For purposes of this subsection, the term ‘policy’
includes a contract.’’.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendment made by this section shall
take effect on January 1, 1975.
(2) CIVIL ACTIONS.—The amendment made by
this section shall not apply to any civil action com-
menced before November 7, 1995.
SEC. 1462. SPECIAL RULES FOR CHAPLAINS AND SELF-EM-
PLOYED MINISTERS.
(a) IN GENERAL.—Section 414(e) (defining church
plan) is amended by adding at the end the following new
paragraph:
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‘‘(5) SPECIAL RULES FOR CHAPLAINS AND SELF-
EMPLOYED MINISTERS.—
‘‘(A) CERTAIN
MINISTERS
MAY
PARTICI-
PATE.—For purposes of this part—
‘‘(i) IN GENERAL.—An employee of a
church or a convention or association of
churches shall include a duly ordained,
commissioned, or licensed minister of a
church who, in connection with the exercise
of his or her ministry—
‘‘(I) is a self-employed individual
(within 
the 
meaning 
of 
section
401(c)(1)(B)), or
‘‘(II) is employed by an organiza-
tion other than an organization de-
scribed in section 501(c)(3).
‘‘(ii) TREATMENT AS EMPLOYER AND
EMPLOYEE.—
‘‘(I) SELF-EMPLOYED.—A min-
ister described in clause (i)(I) shall be
treated as his or her own employer
which is an organization described in
section 501(c)(3) and which is exempt
from tax under section 501(a).
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‘‘(II) OTHERS.—A minister de-
scribed in clause (i)(II) shall be treated
as employed by an organization de-
scribed in section 501(c)(3) and exempt
from tax under section 501(a).
‘‘(B) SPECIAL RULES FOR APPLYING SEC-
TION 403(b) TO SELF-EMPLOYED MINISTERS.—In
the case of a minister described in subparagraph
(A)(i)(I)—
‘‘(i) the minister’s includible com-
pensation under section 403(b)(3) shall be
determined by reference to the minister’s
earned income (within the meaning of sec-
tion 401(c)(2)) from such ministry rather
than the amount of compensation which is
received from an employer, and
‘‘(ii) the years (and portions of years)
in which such minister was a self-employed
individual (within the meaning of section
401(c)(1)(B)) with respect to such ministry
shall be included for purposes of section
403(b)(4).
‘‘(C) EFFECT
ON
NON-DENOMINATIONAL
PLANS.—If a duly ordained, commissioned, or li-
censed minister of a church in the exercise of his
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or her ministry participates in a church plan
(within the meaning of this section) and is em-
ployed by an employer not eligible to participate
in such church plan, then such minister shall not
be treated as an employee of such employer for
purposes 
of 
applying 
sections 
401(a)(3),
401(a)(4), and 401(a)(5), as in effect on Septem-
ber 1, 1974, and sections 401(a)(4), 401(a)(5),
401(a)(26), 401(k)(3), 401(m), 403(b)(1)(D) (in-
cluding section 403(b)(12)), and 410 to any stock
bonus, pension, profit-sharing, or annuity plan
(including an annuity described in section
403(b) or a retirement income account described
in section 403(b)(9)).’’.
(b) CONTRIBUTIONS BY CERTAIN MINISTERS TO RE-
TIREMENT INCOME ACCOUNTS.—Section 404(a) (relating to
deduction for contributions of an employer to an employees’
trust or annuity plan and compensation under a deferred-
payment plan) is amended by adding at the end the follow-
ing new paragraph:
‘‘(10) CONTRIBUTIONS
BY
CERTAIN
MINISTERS
TO RETIREMENT INCOME ACCOUNTS.—In the case of
contributions made by a minister described in section
414(e)(5) to a retirement income account described in
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section 403(b)(9) and not by a person other than such
minister, such contributions—
‘‘(A) shall be treated as made to a trust
which is exempt from tax under section 501(a)
and which is part of a plan which is described
in section 401(a), and
‘‘(B) shall be deductible under this sub-
section to the extent such contributions do not ex-
ceed the limit on elective deferrals under section
402(g), the exclusion allowance under section
403(b)(2), or the limit on annual additions
under section 415.
For purposes of this paragraph, all plans in which
the minister is a participant shall be treated as one
plan.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1463. DEFINITION OF HIGHLY COMPENSATED EM-
PLOYEE FOR PRE-ERISA CHURCH PLANS.
(a) IN GENERAL.—Section 414(q) (defining highly
compensated employee), as amended by section 1431(c)1(A)
of this Act, is amended by adding at the end the following
new paragraph:
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‘‘(7) CERTAIN
EMPLOYEES
NOT
CONSIDERED
HIGHLY COMPENSATED AND EXCLUDED EMPLOYEES
UNDER PRE-ERISA CHURCH PLANS.—In the case of a
church plan (as defined in subsection (e)), no em-
ployee shall be considered an officer, a person whose
principal duties consist in supervising the work of
other employees, or a highly compensated employee
for any year unless such employee is a highly com-
pensated employee under paragraph (1) for such
year.’’.
(b) SAFEHARBOR AUTHORITY.—The Secretary of the
Treasury may design nondiscrimination and coverage safe
harbors for church plans.
(c) EFFECTIVE DATE.—The amendments made by sub-
section (a) shall apply to years beginning after December
31, 1996.
SEC. 1464. RULE RELATING TO INVESTMENT IN CONTRACT
NOT TO APPLY TO FOREIGN MISSIONARIES.
(a) IN GENERAL.—The last sentence of section 72(f)
is amended by inserting ‘‘, or to the extent such credits are
attributable to services performed as a foreign missionary
(within the meaning of section 403(b)(2)(D)(iii))’’ before
the end period.
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(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1465. INCREASE IN GUARANTEED AMOUNT OF MULTI-
EMPLOYER PLAN BENEFITS.
(a) IN GENERAL.—Section 4022A(c) of the Employee
Retirement Income Security Act of 1974 is amended by
adding at the end the following new paragraph:
‘‘(7)(A) In the case of a multiemployer plan
which first receives financial assistance (within the
meaning of section 4261) during the applicable pe-
riod—
‘‘(i) paragraph (1) shall be applied with re-
spect to the guarantee of benefits under such plan
by substituting ‘$11’ for ‘$5’ each place it ap-
pears and by substituting ‘$33’ for ‘$15’, and
‘‘(ii) paragraphs (2), (5), and (6) shall not
apply with respect to such plan.
‘‘(B) For purposes of subparagraph (A), the ap-
plicable period is the period—
‘‘(i) beginning on the date of the enactment
of this paragraph, and
‘‘(ii) ending on the last day of the first fis-
cal year for which the surplus in the corpora-
tion’s multiemployer insurance program is less
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than 50 percent of such surplus for the fiscal
year ending September 30, 1995.
‘‘(C) For purposes of subparagraph (B), the sur-
plus for any fiscal year shall be the surplus reflected
in the Statement of Financial Condition for the fiscal
year contained in the corporation’s annual report, ex-
cept that the assumptions used in computing such
surplus shall be the same as those used for the fiscal
year ending September 30, 1995.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall take effect on the date of the enactment of this
Act.
SEC. 1466. WAIVER OF EXCISE TAX ON FAILURE TO PAY LI-
QUIDITY SHORTFALL.
(a) IN GENERAL.—Section 4971(f) (relating to failure
to pay liquidity shortfall) is amended by adding at the end
the following new paragraph:
‘‘(4) WAIVER BY SECRETARY.—If the taxpayer
establishes to the satisfaction of the Secretary that—
‘‘(A) the liquidity shortfall described in
paragraph (1) was due to reasonable cause and
not willful neglect, and
‘‘(B) reasonable steps have been taken to
remedy such liquidity shortfall,
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the Secretary may waive all or part of the tax im-
posed by this subsection.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect as if included in the amendment
made by clause (ii) of section 751(a)(9)(B) of the Retire-
ment Protection Act of 1994 (108 Stat. 5020).
SEC. 1467. TREATMENT OF MULTIEMPLOYER PLANS UNDER
SECTION 415.
(a) COMPENSATION LIMIT.—Paragraph (11) of section
415(b), as added by section 1444(a), is amended—
(1) by inserting ‘‘or a multiemployer plan (as
defined in section 414(f))’’ after ‘‘section 414(d))’’,
and
(2) by inserting ‘‘AND MULTIEMPLOYER’’ after
‘‘GOVERNMENTAL’’ in the heading thereof.
(b) EXEMPTION FOR SURVIVOR AND DISABILITY BENE-
FITS.—Subparagraph (I) of section 415(b)(2), as added by
section 1444(c), is amended—
(1) by inserting ‘‘or a multiemployer plan (as
defined in section 414(f))’’ after ‘‘section 414(d))’’ in
clause (i) thereof,
(2) by inserting ‘‘or multiemployer’’ after ‘‘gov-
ernmental’’ in clause (ii) thereof, and
(3) by inserting ‘‘AND MULTIEMPLOYER’’ after
‘‘GOVERNMENTAL’’ in the heading thereof.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1468. PAYMENT OF LUMP-SUM CREDIT FOR FORMER
SPOUSES OF FEDERAL EMPLOYEES.
(a) IN GENERAL.—Title 5, United States Code, is
amended—
(1) in section 8342(c) by striking ‘‘Lump-sum’’
and inserting ‘‘Except as provided in section 8345(j),
lump-sum’’;
(2) in section 8345(j)—
(A) in paragraph (1) by inserting after
‘‘that individual’’ the following: ‘‘, or be made
under section 8342(d) through (f) to an individ-
ual entitled under section 8342(c),’’; and
(B) by adding at the end the following:
‘‘(4) Any payment under this subsection to a person
bars recovery by any other person.’’;
(3) in section 8424(d) by striking ‘‘Lump-sum’’
and inserting ‘‘Except as provided in section 8467(a),
lump-sum’’; and
(4) in section 8467—
(A) in subsection (a) by inserting after
‘‘that individual’’ the following: ‘‘, or be made
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under section 8424 (e) through (g) to an individ-
ual entitled under section 8424(d),’’; and
(B) by adding at the end the following:
‘‘(d) Any payment under this section to a person bars
recovery by any other person.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to any death occurring after
the 90th day after the date of the enactment of this Act.
SEC. 1469. DATE FOR ADOPTION OF PLAN AMENDMENTS.
If any amendment made by this subtitle requires an
amendment to any plan or annuity contract, such amend-
ment shall not be required to be made before the first day
of the first plan year beginning on or after January 1,
1997, if—
(1) during the period after such amendment
takes effect and before such first plan year, the plan
or contract is operated in accordance with the re-
quirements of such amendment, and
(2) such amendment applies retroactively to such
period.
In the case of a governmental plan (as defined in section
414(d) of the Internal Revenue Code of 1986), this section
shall be applied by substituting ‘‘1999’’ for ‘‘1997’’.
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Subtitle E—Revenue Offsets
PART I—GENERAL PROVISIONS
SEC. 1601. MODIFICATIONS OF PUERTO RICO AND POSSES-
SION TAX CREDIT.
(a) IN GENERAL.—Section 936 is amended by adding
at the end the following new subsection:
‘‘(j) TERMINATION OF QPSII AND REDUCED CREDIT;
REDUCTION IN ECONOMIC ACTIVITY CREDIT.—
‘‘(1) IN GENERAL.—Except as otherwise provided
in this subsection, this section shall not apply to any
taxable year beginning after December 31, 1995.
‘‘(2) SPECIAL RULES FOR ACTIVE BUSINESS IN-
COME
CREDIT.—Except as provided in paragraph
(3)—
‘‘(A) ECONOMIC ACTIVITY CREDIT.—In the
case of an existing credit claimant—
‘‘(i) with respect to a possession other
than Puerto Rico, and
‘‘(ii) to which subsection (a)(4)(B) does
not apply,
the credit determined under subsection (a)(1)(A)
shall be allowed for taxable years beginning after
December 31, 1995, except that in the case of
taxable years beginning after December 31, 2005,
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subsection (a)(4)(A)(i) shall be applied by sub-
stituting ‘40 percent’ for ‘60 percent’.
‘‘(B) REDUCED CREDIT.—
‘‘(i) IN GENERAL.—In the case of an
existing credit claimant to which subsection
(a)(4)(B) applies, the credit determined
under subsection (a)(1)(A) shall be allowed
for taxable years beginning after December
31, 1995, and before January 1, 2006.
‘‘(ii) ELECTION
IRREVOCABLE
AFTER
1997.—An 
election 
under 
subsection
(a)(4)(B)(iii) which is in effect for the tax-
payer’s last taxable year beginning before
1997 may not be revoked unless it is re-
voked for the taxpayer’s first taxable year
beginning in 1997 and all subsequent tax-
able years.
‘‘(C) ECONOMIC
ACTIVITY
CREDIT
FOR
PUERTO RICO.—
‘‘For economic activity credit for Puerto Rico, see
section 30A.
‘‘(3) ADDITIONAL RESTRICTION ON CREDIT.—
‘‘(A) IN GENERAL.—In the case of an exist-
ing credit claimant, the aggregate amount of
taxable income taken into account under sub-
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section (a)(1)(A) shall not exceed the adjusted
base period income of such claimant—
‘‘(i) in the case of the credit described
in paragraph (2)(A), for any taxable year
beginning after December 31, 2001, and
‘‘(ii) in the case of the credit described
in paragraph (2)(B), for any taxable year
beginning after December 31, 1997.
‘‘(B) COORDINATION
WITH
SUBSECTION
(a)(4).—The amount of income described in sub-
section (a)(1)(A) which is taken into account in
applying subsection (a)(4) shall be such income
as reduced under this paragraph.
‘‘(4) ADJUSTED
BASE
PERIOD
INCOME.—For
purposes of paragraph (3)—
‘‘(A) IN GENERAL.—The term ‘adjusted base
period income’ means the average of the infla-
tion-adjusted possession incomes of the corpora-
tion for each base period year.
‘‘(B) INFLATION-ADJUSTED POSSESSION IN-
COME.—For purposes of subparagraph (A), the
inflation-adjusted possession income of any cor-
poration for any base period year shall be an
amount equal to the sum of—
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‘‘(i) the possession income of such cor-
poration for such base period year, plus
‘‘(ii) such possession income multiplied
by the inflation adjustment percentage for
such base period year.
‘‘(C) INFLATION
ADJUSTMENT
PERCENT-
AGE.—For purposes of subparagraph (B), the in-
flation adjustment percentage for any base pe-
riod year means the percentage (if any) by
which—
‘‘(i) the CPI for 1995, exceeds
‘‘(ii) the CPI for the calendar year in
which the base period year for which the de-
termination is being made ends.
For purposes of the preceding sentence, the CPI
for any calendar year is the CPI (as defined in
section 1(f)(5)) for such year under section
1(f)(4).
‘‘(D) INCREASE IN INFLATION ADJUSTMENT
PERCENTAGE
FOR
GROWTH
DURING
BASE
YEARS.—The inflation adjustment percentage
(determined under subparagraph (C) without re-
gard to this subparagraph) for each of the 5 tax-
able years referred to in paragraph (5)(A) shall
be increased by—
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‘‘(i) 5 percentage points in the case of
a taxable year ending during the 1-year pe-
riod ending on October 13, 1995;
‘‘(ii) 10.25 percentage points in the
case of a taxable year ending during the 1-
year period ending on October 13, 1994;
‘‘(iii) 15.76 percentage points in the
case of a taxable year ending during the 1-
year period ending on October 13, 1993;
‘‘(iv) 21.55 percentage points in the
case of a taxable year ending during the 1-
year period ending on October 13, 1992;
and
‘‘(v) 27.63 percentage points in the
case of a taxable year ending during the 1-
year period ending on October 13, 1991.
‘‘(5) BASE PERIOD YEAR.—For purposes of this
subsection—
‘‘(A) IN GENERAL.—The term ‘base period
year’ means each of 3 taxable years which are
among the 5 most recent taxable years of the cor-
poration ending before October 14, 1995, deter-
mined by disregarding—
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‘‘(i) one taxable year for which the cor-
poration had the largest inflation-adjusted
possession income, and
‘‘(ii) one taxable year for which the
corporation had the smallest inflation-ad-
justed possession income.
‘‘(B) CORPORATIONS NOT HAVING SIGNIFI-
CANT POSSESSION INCOME THROUGHOUT 5-YEAR
PERIOD.—
‘‘(i) IN
GENERAL.—If a corporation
does not have significant possession income
for each of the most recent 5 taxable years
ending before October 14, 1995, then, in lieu
of applying subparagraph (A), the term
‘base period year’ means only those taxable
years (of such 5 taxable years) for which the
corporation has significant possession in-
come; except that, if such corporation has
significant possession income for 4 of such
5 taxable years, the rule of subparagraph
(A)(ii) shall apply.
‘‘(ii) SPECIAL RULE.—If there is no
year (of such 5 taxable years) for which a
corporation has significant possession in-
come—
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‘‘(I) the term ‘base period year’
means the first taxable year ending on
or after October 14, 1995, but
‘‘(II) the amount of possession in-
come for such year which is taken into
account under paragraph (4) shall be
the amount which would be determined
if such year were a short taxable year
ending on September 30, 1995.
‘‘(iii) SIGNIFICANT
POSSESSION
IN-
COME.—For purposes of this subparagraph,
the term ‘significant possession income’
means possession income which exceeds 2
percent of the possession income of the tax-
payer for the taxable year (of the period of
6 taxable years ending with the first taxable
year ending on or after October 14, 1995)
having the greatest possession income.
‘‘(C) ELECTION TO USE ONE BASE PERIOD
YEAR.—
‘‘(i) IN GENERAL.—At the election of
the taxpayer, the term ‘base period year’
means—
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‘‘(I) only the last taxable year of
the corporation ending in calendar
year 1992, or
‘‘(II) a deemed taxable year which
includes the first ten months of cal-
endar year 1995.
‘‘(ii) 
BASE
PERIOD
INCOME
FOR
1995.—In determining the adjusted base pe-
riod income of the corporation for the
deemed taxable year under clause (i)(II),
the possession income shall be annualized
and shall be determined without regard to
any extraordinary item.
‘‘(iii) ELECTION.—An election under
this subparagraph by any possession cor-
poration may be made only for the corpora-
tion’s first taxable year beginning after De-
cember 31, 1995, for which it is a possession
corporation. The rules of subclauses (II)
and (III) of subsection (a)(4)(B)(iii) shall
apply to the election under this subpara-
graph.
‘‘(D) ACQUISITIONS
AND
DISPOSITIONS.—
Rules similar to the rules of subparagraphs (A)
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and (B) of section 41(f)(3) shall apply for pur-
poses of this subsection.
‘‘(6) POSSESSION INCOME.—For purposes of this
subsection, the term ‘possession income’ means, with
respect to any possession, the income referred to in
subsection (a)(1)(A) determined with respect to that
possession. In no event shall possession income be
treated as being less than zero.
‘‘(7) SHORT YEARS.—If the current year or a
base period year is a short taxable year, the applica-
tion of this subsection shall be made with such
annualizations as the Secretary shall prescribe.
‘‘(8) SPECIAL
RULES
FOR
CERTAIN
POSSES-
SIONS.—
‘‘(A) IN GENERAL.—In the case of an exist-
ing credit claimant with respect to an applicable
possession—
‘‘(i) this section (other than the preced-
ing paragraphs of this subsection) shall
apply to such claimant with respect to such
applicable possession for taxable years be-
ginning after December 31, 1995, and before
January 1, 2006, and
‘‘(ii) this section (including the preced-
ing paragraphs of this subsection) shall