I
106TH CONGRESS
1ST SESSION
H. R. 2488
To amend the Internal Revenue Code of 1986 to reduce individual income
tax rates, to provide marriage penalty relief, to reduce taxes on savings
and investments, to provide estate and gift tax relief, to provide incen-
tives for education savings and health care, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JULY 13, 1999
Mr. ARCHER introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to reduce
individual income tax rates, to provide marriage penalty
relief, to reduce taxes on savings and investments, to
provide estate and gift tax relief, to provide incentives
for education savings and health care, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Financial Freedom Act of 1999’’.
Sec. 206. Worthless securities of financial institutions.
TITLE III—INCENTIVES FOR BUSINESS INVESTMENT AND JOB
CREATION
Sec. 301. Reduction in corporate capital gain tax rate.
Sec. 302. Repeal of alternative minimum tax on corporations.
TITLE IV—EDUCATION SAVINGS INCENTIVES
Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.
Sec. 403. Exclusion of certain amounts received under the National Health
Service Corps scholarship program, the F. Edward Hebert
Armed Forces Health Professions Scholarship and Financial
Assistance Program, and certain other programs.
Sec. 404. Additional increase in arbitrage rebate exception for governmental
bonds used to finance educational facilities.
Sec. 405. Modification of arbitrage rebate rules applicable to public school con-
struction bonds.
Sec. 406. Repeal of 60-month limitation on deduction for interest on education
loans.
TITLE V—HEALTH CARE PROVISIONS
Sec. 501. Deduction for health and long-term care insurance costs of individ-
uals not participating in employer-subsidized health plans.
Sec. 502. Long-term care insurance permitted to be offered under cafeteria
plans and flexible spending arrangements.
Sec. 503. Expansion of availability of medical savings accounts.
Sec. 504. Additional personal exemption for taxpayer caring for elderly family
member in taxpayer’s home.
Sec. 505. Expanded human clinical trials qualifying for orphan drug credit.
Sec. 506. Inclusion of certain vaccines against streptococcus pneumoniae to list
of taxable vaccines.
TITLE VI—ESTATE TAX RELIEF
Subtitle A—Repeal of Estate, Gift, and Generation-Skipping Taxes; Repeal of
Step Up in Basis At Death
Sec. 601. Repeal of estate, gift, and generation-skipping taxes.
Sec. 602. Termination of step up in basis at death.
Sec. 603. Carryover basis at death.
Subtitle B—Reductions of Estate and Gift Tax Rates Prior to Repeal
Sec. 611. Additional reductions of estate and gift tax rates.
Subtitle C—Unified Credit Replaced With Unified Exemption Amount
Sec. 621. Unified credit against estate and gift taxes replaced with unified ex-
emption amount.
Subtitle D—Modifications of Generation-Skipping Transfer Tax
Sec. 631. Deemed allocation of GST exemption to lifetime transfers to trusts;
retroactive allocations.
Sec. 632. Severing of trusts.
Sec. 633. Modification of certain valuation rules.
Sec. 634. Relief provisions.
TITLE VII—TAX RELIEF FOR DISTRESSED COMMUNITIES AND
INDUSTRIES
Subtitle A—American Community Renewal Act of 1999
Sec. 701. Short title.
Sec. 702. Designation of and tax incentives for renewal communities.
Sec. 703. Extension of expensing of environmental remediation costs to renewal
communities.
Sec. 704. Extension of work opportunity tax credit for renewal communities
Sec. 705. Conforming and clerical amendments.
Sec. 706. Evaluation and reporting requirements.
Subtitle B—Farming Incentive
Sec. 711. Production flexibility contract payments.
Subtitle C—Oil and Gas Incentive
Sec. 721. 5-year net operating loss carryback for losses attributable to oper-
ating mineral interests of independent oil and gas producers.
Subtitle D—Timber Incentive
Sec. 731. Increase in maximum permitted amortization of reforestation expend-
itures.
Subtitle E—Steel Industry Incentive
Sec. 741. Minimum tax relief for steel industry.
TITLE VIII—RELIEF FOR SMALL BUSINESSES
Sec. 801. Deduction for 100 percent of health insurance costs of self-employed
individuals.
Sec. 802. Increase in expense treatment for small businesses.
Sec. 803. Repeal of Federal unemployment surtax.
Sec. 804. Restoration of 80 percent deduction for meal expenses.
TITLE IX—INTERNATIONAL TAX RELIEF
Sec. 901. Interest allocation rules.
Sec. 902. Look-thru rules to apply to dividends from noncontrolled section 902
corporations.
Sec. 903. Clarification of treatment of pipeline transportation income.
Sec. 904. Subpart F treatment of income from transmission of high voltage
electricity.
Sec. 905. Recharacterization of overall domestic loss.
Sec. 906. Treatment of military property of foreign sales corporations.
Sec. 907. Treatment of certain dividends of regulated investment companies.
Sec. 908. Repeal of special rules for applying foreign tax credit in case of for-
eign oil and gas income.
Sec. 909. Study of proper treatment of European Union under same country
exceptions.
Sec. 910. Application of denial of foreign tax credit with respect to certain for-
eign countries.
Sec. 911. Advance pricing agreements treated as confidential taxpayer informa-
tion.
Sec. 912. Increase in dollar limitation on section 911 exclusion.
TITLE X—PROVISIONS RELATING TO TAX-EXEMPT
ORGANIZATIONS
Sec. 1001. Exemption from income tax for State-created organizations pro-
viding property and casualty insurance for property for which
such coverage is otherwise unavailable.
Sec. 1002. Modification of special arbitrage rule for certain funds.
Sec. 1003. Charitable split-dollar life insurance, annuity, and endowment con-
tracts.
Sec. 1004. Exemption procedure from taxes on self-dealing.
Sec. 1005. Expansion of declaratory judgment remedy to tax-exempt organiza-
tions.
Sec. 1006. Modifications to section 512(b)(13).
TITLE XI—REAL ESTATE PROVISIONS
Subtitle A—Provisions Relating to Real Estate Investment Trusts
PART I—TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE
REIT SUBSIDIARIES
Sec. 1101. Modifications to asset diversification test.
Sec. 1102. Treatment of income and services provided by taxable REIT subsidi-
aries.
Sec. 1103. Taxable REIT subsidiary.
Sec. 1104. Limitation on earnings stripping.
Sec. 1105. 100 percent tax on improperly allocated amounts.
Sec. 1106. Effective date.
PART II—HEALTH CARE REITS
Sec. 1111. Health care REITs.
PART III—CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES
Sec. 1121. Conformity with regulated investment company rules.
PART IV—CLARIFICATION OF EXCEPTION FROM IMPERMISSIBLE TENANT
SERVICE INCOME
Sec. 1131. Clarification of exception for independent operators.
PART V—MODIFICATION OF EARNINGS AND PROFITS RULES
Sec. 1141. Modification of earnings and profits rules.
PART VI—STUDY RELATING TO TAXABLE REIT SUBSIDIARIES
Sec. 1151. Study relating to taxable REIT subsidiaries.
Subtitle B—Modification of At-Risk Rules for Publicly Traded Securities
Sec. 1161. Treatment under at-risk rules of publicly traded nonrecourse debt.
Subtitle C—Treatment of Construction Allowances and Certain Contributions
To Capital of Retailers
Sec. 1171. Exclusion from gross income of qualified lessee construction allow-
ances not limited for certain retailers to short-term leases.
Sec. 1172. Exclusion from gross income for certain contributions to the capital
of certain retailers.
TITLE XII—PROVISIONS RELATING TO PENSIONS
Subtitle A—Expanding Coverage
Sec. 1201. Increase in benefit and contribution limits.
Sec. 1202. Plan loans for subchapter S owners, partners, and sole proprietors.
Sec. 1203. Modification of top-heavy rules.
Sec. 1204. Elective deferrals not taken into account for purposes of deduction
limits.
Sec. 1205. Reduced PBGC premium for new plans of small employers.
Sec. 1206. Reduction of additional PBGC premium for new and small plans.
Sec. 1207. Repeal of coordination requirements for deferred compensation plans
of State and local governments and tax-exempt organizations.
Sec. 1208. Elimination of user fee for requests to IRS regarding pension plans.
Sec. 1209. Deduction limits.
Sec. 1210. Option to treat elective deferrals as after-tax contributions.
Subtitle B—Enhancing Fairness for Women
Sec. 1211. Additional salary reduction catch-up contributions.
Sec. 1212. Equitable treatment for contributions of employees to defined con-
tribution plans.
Sec. 1213. Faster vesting of certain employer matching contributions.
Sec. 1214. Simplify and update the minimum distribution rules.
Sec. 1215. Clarification of tax treatment of division of section 457 plan benefits
upon divorce.
Subtitle C—Increasing Portability for Participants
Sec. 1221. Rollovers allowed among various types of plans.
Sec. 1222. Rollovers of IRAs into workplace retirement plans.
Sec. 1223. Rollovers of after-tax contributions.
Sec. 1224. Hardship exception to 60-day rule.
Sec. 1225. Treatment of forms of distribution.
Sec. 1226. Rationalization of restrictions on distributions.
Sec. 1227. Purchase of service credit in governmental defined benefit plans.
Sec. 1228. Employers may disregard rollovers for purposes of cash-out
amounts.
Sec. 1229. Minimum distribution and inclusion requirements for deferred com-
pensation plans of State and local governments.
Subtitle D—Strengthening Pension Security and Enforcement
Sec. 1231. Repeal of 150 percent of current liability funding limit.
Sec. 1232. Maximum contribution deduction rules modified and applied to all
defined benefit plans.
Sec. 1233. Missing participants.
Sec. 1234. Excise tax relief for sound pension funding.
Sec. 1235. Excise tax on failure to provide notice by defined benefit plans sig-
nificantly reducing future benefit accruals.
Subtitle E—Reducing Regulatory Burdens
Sec. 1241. Repeal of the multiple use test.
Sec. 1242. Modification of timing of plan valuations.
Sec. 1243. Flexibility and nondiscrimination and line of business rules.
Sec. 1244. Substantial owner benefits in terminated plans.
Sec. 1245. ESOP dividends may be reinvested without loss of dividend deduc-
tion.
Sec. 1246. Notice and consent period regarding distributions.
Sec. 1247. Repeal of transition rule relating to certain highly compensated em-
ployees.
Sec. 1248. Employees of tax-exempt entities.
Sec. 1249. Clarification of treatment of employer-provided retirement advice.
Sec. 1250. Provisions relating to plan amendments.
Sec. 1251. Model plans for small businesses.
Sec. 1252. Simplified annual filing requirement for plans with fewer than 25
employees.
Sec. 1253. Intermediate sanctions for inadvertent failures.
TITLE XIII—MISCELLANEOUS PROVISIONS
Subtitle A—Provisions Primarily Affecting Individuals
Sec. 1301. Exclusion for foster care payments to apply to payments by quali-
fied placement agencies.
Sec. 1302. Mileage reimbursements to charitable volunteers excluded from
gross income.
Sec. 1303. W–2 to include employer social security taxes.
Subtitle B—Provisions Primarily Affecting Businesses
Sec. 1311. Distributions from publicly traded partnerships treated as qualifying
income of regulated investment companies.
Sec. 1312. Special passive activity rule for publicly traded partnerships to apply
to regulated investment companies.
Sec. 1313. Large electric trucks, vans, and buses eligible for deduction for
clean-fuel vehicles in lieu of credit.
Sec. 1314. Modifications to special rules for nuclear decommissioning costs.
Sec. 1315. Consolidation of life insurance companies with other corporations.
Subtitle C—Provisions Relating to Excise Taxes
Sec. 1321. Consolidation of Hazardous Substance Superfund and Leaking Un-
derground Storage Tank Trust Fund.
Sec. 1322. Repeal of certain motor fuel excise taxes on fuel used by railroads
and on inland waterway transportation.
Sec. 1323. Repeal of excise tax on fishing tackle boxes.
Subtitle D—Other Provisions
Sec. 1331. Increase in volume cap on private activity bonds.
Sec. 1332. Tax treatment of Alaska Native Settlement Trusts.
Sec. 1333. Increase in threshold for Joint Committee reports on refunds and
credits.
(D) Section 1(g)(7)(B)(ii)(II) is amended
by striking ‘‘15 percent’’ and inserting ‘‘the
percentage applicable to the lowest income
bracket in subsection (c)’’.
(E) Subparagraphs (A)(ii)(I) and (B)(i) of
section 1(h)(1) are each amended by striking
‘‘28 percent’’ and inserting ‘‘25.2 percent’’.
(F) Section 531 is amended by striking
‘‘39.6 percent of the accumulated taxable in-
come’’ and inserting ‘‘the product of the accu-
mulated taxable income and the percentage ap-
plicable to the highest income bracket in section
1(c)’’.
(G) Section 541 is amended by striking
‘‘39.6 percent of the undistributed personal
holding company income’’ and inserting ‘‘the
product of the undistributed personal holding
company income and the percentage applicable
to the highest income bracket in section 1(c)’’.
(H) Section 3402(p)(1)(B) is amended by
striking ‘‘specified is 7, 15, 28, or 31 percent’’
and all that follows and inserting ‘‘specified
is—
‘‘(i) 7 percent,
‘‘(ii) a percentage applicable to 1 of
the 3 lowest income brackets in section
1(c), or
‘‘(iii) such other percentage as is per-
mitted under regulations prescribed by the
Secretary.’’
(I) Section 3402(p)(2) is amended by
striking ‘‘15 percent of such payment’’ and in-
serting ‘‘the product of such payment and the
percentage applicable to the lowest income
bracket in section 1(c)’’.
(J) Section 3402(q)(1) is amended by
striking ‘‘28 percent of such payment’’ and in-
serting ‘‘the product of such payment and the
percentage applicable to the next to the lowest
income bracket in section 1(c)’’.
(K) Section 3402(r)(3) is amended by
striking ‘‘31 percent’’ and inserting ‘‘the rate
applicable to the third income bracket in such
section’’.
(L) Section 3406(a)(1) is amended by
striking ‘‘31 percent of such payment’’ and in-
serting ‘‘the product of such payment and the
percentage applicable to the third income brack-
et in section 1(c)’’.
(b) MINIMUM TAX RATES.—Subparagraph (A) of
section 55(b)(1) is amended by adding at the end the fol-
lowing new clause:
‘‘(iv) RATE REDUCTION.—In the case
of taxable years beginning after 2000, each
rate in clause (i) (without regard to this
clause) shall be reduced by the number of
percentage points (rounded to the next
lowest tenth) equal to the applicable per-
centage (determined in accordance with
section 1(f)(8)) of such rate.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2000.
Subtitle B—Marriage Penalty Tax
Relief
SEC. 111. ELIMINATION OF MARRIAGE PENALTY IN STAND-
ARD DEDUCTION.
(a) IN GENERAL.—Paragraph (2) of section 63(c)
(relating to standard deduction) is amended—
(1) by striking ‘‘$5,000’’ in subparagraph (A)
and inserting ‘‘twice the dollar amount in effect
under subparagraph (C) for the taxable year’’,
(2) by adding ‘‘or’’ at the end of subparagraph
(B),
(3) by striking ‘‘in the case of’’ and all that fol-
lows in subparagraph (C) and inserting ‘‘in any
other case.’’, and
(4) by striking subparagraph (D).
(b) PHASE-IN.—Subsection (c) of section 63 is
amended by adding at the end the following new para-
graph:
‘‘(7) PHASE-IN OF INCREASE IN BASIC STAND-
ARD DEDUCTION.—In the case of taxable years be-
ginning before January 1, 2003—
‘‘(A) paragraph (2)(A) shall be applied by
substituting for ‘twice’—
‘‘(i) ‘1.778 times’ in the case of tax-
able years beginning during 2001, and
‘‘(ii) ‘1.889 times’ in the case of tax-
able years beginning during 2002, and
‘‘(B) the basic standard deduction for a
married individual filing a separate return shall
be one-half of the amount applicable under
paragraph (2)(A).
If any amount determined under subparagraph (A)
is not a multiple of $50, such amount shall be
rounded to the next lowest multiple of $50.’’.
(c) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 1(f)(6) is
amended by striking ‘‘(other than with’’ and all that
follows through ‘‘shall be applied’’ and inserting
‘‘(other than with respect to sections 63(c)(4) and
151(d)(4)(A)) shall be applied’’.
(2) Paragraph (4) of section 63(c) is amended
by adding at the end the following flush sentence:
‘‘The preceding sentence shall not apply to the
amount referred to in paragraph (2)(A).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2000.
SEC. 112. ELIMINATION OF MARRIAGE PENALTY IN DEDUC-
TION FOR INTEREST ON EDUCATION LOANS.
(a) IN GENERAL.—Subparagraph (B) of section
221(b)(2) (relating to limitation based on modified ad-
justed gross income) is amended—
(1) by striking ‘‘$60,000’’ in clause (i)(II) and
inserting ‘‘twice such amount’’, and
(2) by inserting ‘‘($30,000 in the case of a joint
return)’’ after ‘‘$15,000’’ in clause (ii).
(b) CONFORMING AMENDMENT.—Paragraph (1) of
section 221(g) is amended by striking ‘‘and $60,000
amounts in subsection (b)(2) shall each’’ and inserting
‘‘amount in subsection (b)(2) shall’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1999.
SEC. 113. ROLLOVER FROM REGULAR IRA TO ROTH IRA.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
408A(c)(3)(B) is amended by inserting ‘‘($160,000 in the
case of a joint return)’’ after ‘‘$100,000’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1999.
Subtitle C—Repeal of Alternative
Minimum Tax on Individuals
SEC. 121. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDI-
VIDUALS.
(a) IN GENERAL.—Subsection (a) of section 55 is
amended by adding at the end the following new flush sen-
tence:
‘‘For purposes of this title, the tentative minimum tax on
any taxpayer other than a corporation for any taxable year
beginning after December 31, 2007, shall be zero.’’
(b) REDUCTION OF TAX ON INDIVIDUALS PRIOR TO
REPEAL.—Section 55 is amended by adding at the end
the following new subsection:
‘‘(f) PHASEOUT OF TAX ON INDIVIDUALS.—
‘‘(1) IN GENERAL.—The tax imposed by this
section on a taxpayer other than a corporation for
any taxable year beginning after December 31,
2002, and before January 1, 2008, shall be the ap-
plicable percentage of the tax which would be im-
posed but for this subsection.
‘‘(2) APPLICABLE PERCENTAGE.—For purposes
of paragraph (1), the applicable percentage shall be
determined in accordance with the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2003 .....................................................................................
2004 .....................................................................................
2005 .....................................................................................
2006 or 2007 .......................................................................
50.’’
(c) NONREFUNDABLE PERSONAL CREDITS FULLY
ALLOWED AGAINST REGULAR TAX LIABILITY.—
(1) IN GENERAL.—Subsection (a) of section 26
(relating to limitation based on amount of tax) is
amended to read as follows:
‘‘(a) LIMITATION BASED ON AMOUNT OF TAX.—The
aggregate amount of credits allowed by this subpart for
the taxable year shall not exceed the taxpayer’s regular
tax liability for the taxable year.’’
(2) CHILD CREDIT.—Subsection (d) of section
24 is amended by striking paragraph (2) and by re-
designating paragraph (3) as paragraph (2).
(d) LIMITATION
ON USE
OF CREDIT
FOR PRIOR
YEAR MINIMUM TAX LIABILITY.—Subsection (c) of sec-
tion 53 is amended to read as follows:
‘‘(c) LIMITATION.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the credit allowable under
subsection (a) for any taxable year shall not exceed
the excess (if any) of—
‘‘(A) the regular tax liability of the tax-
payer for such taxable year reduced by the sum
of the credits allowable under subparts A, B, D,
E, and F of this part, over
‘‘(B) the tentative minimum tax for the
taxable year.
‘‘(2) 
TAXABLE
YEARS
BEGINNING
AFTER
2007.—In the case of any taxable year beginning
after 2007, the credit allowable under subsection (a)
to a taxpayer other than a corporation for any tax-
able year shall not exceed 90 percent of the excess
(if any) of—
‘‘(A) regular tax liability of the taxpayer
for such taxable year, over
‘‘(B) the sum of the credits allowable
under subparts A, B, D, E, and F of this
part.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
TITLE 
II—RELIEF 
FROM 
TAX-
ATION ON SAVINGS AND IN-
VESTMENTS
SEC. 201. EXEMPTION OF CERTAIN INTEREST AND DIVI-
DEND INCOME FROM TAX.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to amounts specifically excluded from gross
income) is amended by inserting after section 115 the fol-
lowing new section:
‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER-
EST RECEIVED BY INDIVIDUALS.
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include dividends and interest otherwise in-
cludible in gross income which are received during the tax-
able year by an individual.
‘‘(b) LIMITATIONS.—
‘‘(1) 
MAXIMUM
AMOUNT.—The 
aggregate
amount excluded under subsection (a) for any tax-
able year shall not exceed—
‘‘(A) in the case of any taxable year begin-
ning in 2001 or 2002, $100 ($200 in the case
of a joint return), and
‘‘(B) in the case of any taxable year begin-
ning after 2002, $200 ($400 in the case of a
joint return).
‘‘(2) CERTAIN
DIVIDENDS
EXCLUDED.—Sub-
section (a) shall not apply to any dividend from a
corporation which for the taxable year of the cor-
poration in which the distribution is made is a cor-
poration exempt from tax under section 521 (relat-
ing to farmers’ cooperative associations).
‘‘(c) 
SPECIAL
RULES.—For 
purposes 
of 
this
section—
‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL
GAIN
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPANIES
AND
REAL
ESTATE
INVESTMENT
TRUSTS.—
‘‘For treatment of capital gain dividends, see sec-
tions 854(a) and 857(c).
‘‘(2) CERTAIN
NONRESIDENT
ALIENS
INELI-
GIBLE
FOR
EXCLUSION.—In the case of a non-
resident alien individual, subsection (a) shall apply
only in determining the taxes imposed for the tax-
able year pursuant to sections 871(b)(1) and 877(b).
‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN-
ERSHIP PLANS.—Subsection (a) shall not apply to
any dividend described in section 404(k).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 32(c)(5) is
amended by striking ‘‘or’’ at the end of clause (i),
by striking the period at the end of clause (ii) and
inserting ‘‘; or’’, and by inserting after clause (ii)
the following new clause:
‘‘(iii) interest and dividends received
during the taxable year which are excluded
from gross income under section 116.’’.
(2) Subparagraph (A) of section 32(i)(2) is
amended by inserting ‘‘(determined without regard
to section 116)’’ before the comma.
(3) Subparagraph (B) of section 86(b)(2) is
amended to read as follows:
‘‘(B) increased by the sum of—
‘‘(i) the amount of interest received or
accrued by the taxpayer during the taxable
year which is exempt from tax, and
‘‘(ii) the amount of interest and divi-
dends received during the taxable year
which are excluded from gross income
under section 116.’’.
(4) Subsection (d) of section 135 is amended by
redesignating paragraph (4) as paragraph (5) and
by inserting after paragraph (3) the following new
paragraph:
‘‘(4) COORDINATION WITH SECTION 116.—This
section shall be applied before section 116.’’.
(5) Paragraph (2) of section 265(a) is amended
by inserting before the period ‘‘, or to purchase or
carry obligations or shares, or to make deposits, to
the extent the interest thereon is excludable from
gross income under section 116’’.
(6) Subsection (c) of section 584 is amended by
adding at the end the following new flush sentence:
‘‘The proportionate share of each participant in the
amount of dividends or interest received by the common
trust fund and to which section 116 applies shall be con-
sidered for purposes of such section as having been re-
ceived by such participant.’’.
(7) Subsection (a) of section 643 is amended by
redesignating paragraph (7) as paragraph (8) and
by inserting after paragraph (6) the following new
paragraph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’.
(8) Section 854(a) is amended by inserting
‘‘section 116 (relating to partial exclusion of divi-
dends and interest received by individuals) and’’
after ‘‘For purposes of’’.
(9) Section 857(c) is amended to read as fol-
lows:
‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) TREATMENT FOR SECTION 116.—For pur-
poses of section 116 (relating to partial exclusion of
dividends and interest received by individuals), a
capital gain dividend (as defined in subsection
(b)(3)(C)) received from a real estate investment
trust which meets the requirements of this part shall
not be considered as a dividend.
‘‘(2) TREATMENT FOR SECTION 243.—For pur-
poses of section 243 (relating to deductions for divi-
dends received by corporations), a dividend received
from a real estate investment trust which meets the
requirements of this part shall not be considered as
a dividend.’’.
(10) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting after
the item relating to section 115 the following new
item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2000.
SEC. 202. REDUCTION IN INDIVIDUAL CAPITAL GAIN TAX
RATES.
(a) IN GENERAL.—
(1) Sections 1(h)(1)(B) and 55(b)(3)(B) are
each amended by striking ‘‘10 percent’’ and insert-
ing ‘‘7.5 percent’’.
(2) The following sections are each amended by
striking ‘‘20 percent’’ and inserting ‘‘15 percent’’:
(A) Section 1(h)(1)(C).
(B) Section 55(b)(3)(C).
(C) Section 1445(e)(1).
(D) The second sentence of section
7518(g)(6)(A).
(E) The second sentence of section
607(h)(6)(A) of the Merchant Marine Act,
1936.
(3) Sections 1(h)(1)(D) and 55(b)(3)(D) are
each amended by striking ‘‘25 percent’’ and insert-
ing ‘‘20 percent’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 311 of the Taxpayer Relief Act of
1997 is amended by striking subsection (e).
(2) Section 1(h) is amended—
(A) by striking paragraphs (2), (9), and
(13),
(B) 
by 
redesignating 
paragraphs 
(3)
through (8) as paragraphs (2) through (7), re-
spectively, and
(C) by redesignating paragraphs (10),
(11), and (12) as paragraphs (8), (9), and (10),
respectively.
(3) Paragraph (3) of section 55(b) is amended
by striking ‘‘In the case of taxable years beginning
after December 31, 2000, rules similar to the rules
of section 1(h)(2) shall apply for purposes of sub-
paragraphs (B) and (C).’’.
(4) 
Paragraph 
(7) 
of 
section 
57(a) 
is
amended—
(A) by striking ‘‘42 percent’’ and inserting
‘‘6 percent’’, and
(B) by striking the last sentence.
(c) TRANSITIONAL RULES
FOR TAXABLE YEARS
WHICH INCLUDE JULY 1, 1999.—For purposes of applying
section 1(h) of the Internal Revenue Code of 1986 in the
case of a taxable year which includes July 1, 1999—
(1) The amount of tax determined under sub-
paragraph (B) of section 1(h)(1) of such Code shall
be the sum of—
(A) 7.5 percent of the lesser of—
(i) the net capital gain taking into ac-
count only gain or loss properly taken into
account for the portion of the taxable year
on or after such date (determined without
regard to collectibles gain or loss, gain de-
scribed in section (1)(h)(6)(A)(i) of such
Code, and section 1202 gain), or
(ii) the amount on which a tax is de-
termined under such subparagraph (with-
out regard to this subsection), plus
(B) 10 percent of the excess (if any) of—
(i) the amount on which a tax is de-
termined under such subparagraph (with-
out regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A).
(2) The amount of tax determined under sub-
paragraph (C) of section (1)(h)(1) of such Code
shall be the sum of—
(A) 15 percent of the lesser of—
(i) the excess (if any) of the amount
of net capital gain determined under sub-
paragraph (A)(i) of paragraph (1) of this
subsection over the amount on which a tax
is determined under subparagraph (A) of
paragraph (1) of this subsection, or
(ii) the amount on which a tax is de-
termined under such subparagraph (C)
(without regard to this subsection), plus
(B) 20 percent of the excess (if any) of—
(i) the amount on which a tax is de-
termined under such subparagraph (C)
(without regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A) of this
paragraph.
(3) The amount of tax determined under sub-
paragraph (D) of section (1)(h)(1) of such Code
shall be the sum of—
(A) 20 percent of the lesser of—
(i) the amount which would be deter-
mined under section 1(h)(6)(A)(i) of such
Code taking into account only gain prop-
erly taken into account for the portion of
the taxable year on or after such date, or
(ii) the amount on which a tax is de-
termined under such subparagraph (D)
(without regard to this subsection), plus
(B) 25 percent of the excess (if any) of—
(i) the amount on which a tax is de-
termined under such subparagraph (D)
(without regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A) of this
paragraph.
(4) For purposes of applying section 55(b)(3)
of such Code, rules similar to the rules of para-
graphs (1), (2), and (3) of this subsection shall
apply.
(5) In applying this subsection with respect to
any pass-thru entity, the determination of when
gains and loss are properly taken into account shall
be made at the entity level.
(6) Terms used in this subsection which are
also used in section 1(h) of such Code shall have the
respective meanings that such terms have in such
section.
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided by this subsection, the amendments made by
this section shall apply to taxable years ending after
June 30, 1999.
(2) WITHHOLDING.—The amendment made by
subsection (a)(2)(C) shall apply to amounts paid
after the date of the enactment of this Act.
(3) SMALL
BUSINESS
STOCK.—The amend-
ments made by subsection (b)(4) shall apply to dis-
positions on or after July 1, 1999.
SEC. 203. CAPITAL GAINS TAX RATES APPLIED TO CAPITAL
GAINS OF DESIGNATED SETTLEMENT FUNDS.
(a) IN GENERAL.—Paragraph (1) of section 468B(b)
(relating to taxation of designated settlement funds) is
amended by inserting ‘‘(subject to section 1(h))’’ after
‘‘maximum rate’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1999.
SEC. 204. SPECIAL RULE FOR MEMBERS OF UNIFORMED
SERVICES 
AND 
FOREIGN 
SERVICE, 
AND
OTHER EMPLOYEES, IN DETERMINING EX-
CLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
(a) IN GENERAL.—Subsection (d) of section 121 (re-
lating to exclusion of gain from sale of principal residence)
is amended by adding at the end the following new para-
graphs:
(1) by striking ‘‘For purposes’’ and inserting
the following:
‘‘(a) IN GENERAL.—For purposes’’,
(2) by striking the period at the end of para-
graph (5) and inserting a semicolon, and
(3) by adding at the end the following:
‘‘(6) any commodities derivative financial in-
strument held by a commodities derivatives dealer,
unless—
‘‘(A) it is established to the satisfaction of
the Secretary that such instrument has no con-
nection to the activities of such dealer as a
dealer, and
‘‘(B) such instrument is clearly identified
in such dealer’s records as being described in
subparagraph (A) before the close of the day on
which it was acquired, originated, or entered
into (or such other time as the Secretary may
by regulations prescribe);
‘‘(7) any hedging transaction which is clearly
identified as such before the close of the day on
which it was acquired, originated, or entered into (or
such other time as the Secretary may by regulations
prescribe); or
‘‘(8) supplies of a type regularly used or con-
sumed by the taxpayer in the ordinary course of a
trade or business of the taxpayer.
‘‘(b) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMMODITIES DERIVATIVE FINANCIAL IN-
STRUMENTS.—For purposes of subsection (a)(6)—
‘‘(A) COMMODITIES
DERIVATIVES
DEAL-
ER.—The term ‘commodities derivatives dealer’
means a person which regularly offers to enter
into, assume, offset, assign, or terminate posi-
tions in commodities derivative financial instru-
ments with customers in the ordinary course of
a trade or business.
‘‘(B) COMMODITIES
DERIVATIVE
FINAN-
CIAL INSTRUMENT.—
‘‘(i) IN
GENERAL.—The term ‘com-
modities derivative financial instrument’
means any contract or financial instrument
with respect to commodities (other than a
share of stock in a corporation, a beneficial
interest in a partnership or trust, a note,
bond, debenture, or other evidence of in-
debtedness, or a section 1256 contract (as
defined in section 1256(b)) the value or
settlement price of which is calculated by
or determined by reference to a specified
index.
‘‘(ii) SPECIFIED
INDEX.—The term
‘specified index’ means any one or more or
any combination of—
‘‘(I) a fixed rate, price, or
amount, or
‘‘(II) a variable rate, price, or
amount,
which is based on any current, objectively
determinable financial or economic infor-
mation which is not within the control of
any of the parties to the contract or in-
strument and is not unique to any of the
parties’ circumstances.
‘‘(2) HEDGING TRANSACTION.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘hedging transaction’ means
any transaction entered into by the taxpayer in
the normal course of the taxpayer’s trade or
business primarily—
‘‘(i) to manage risk of price changes
or currency fluctuations with respect to or-
dinary property which is held or to be held
by the taxpayer, or
‘‘(ii) to manage risk of interest rate or
price changes or currency fluctuations with
respect to borrowings made or to be made,
or ordinary obligations incurred or to be
incurred, by the taxpayer.
‘‘(B) TREATMENT OF NONIDENTIFICATION
OR
IMPROPER
IDENTIFICATION
OF
HEDGING
TRANSACTIONS.—Notwithstanding 
subsection
(a)(7), the Secretary shall prescribe regulations
to properly characterize of any income, gain, ex-
pense, or loss arising from a transaction—
‘‘(i) which is a hedging transaction
but which was not identified as such in ac-
cordance with subsection (a)(7), or
‘‘(ii) which was so identified but is not
a hedging transaction.
‘‘(3) REGULATIONS.—The Secretary shall pre-
scribe such regulations as are appropriate to carry
out the purposes of paragraph (6) and (7) of sub-
section (a) in the case of transactions involving re-
lated parties.’’.
(b) MANAGEMENT OF RISK.—
(1) Section 475(c)(3) is amended by striking
‘‘reduces’’ and inserting ‘‘manages’’.
(2) Section 871(h)(4)(C)(iv) is amended by
striking ‘‘to reduce’’ and inserting ‘‘to manage’’.
(3) Clauses (i) and (ii) of section 988(d)(2)(A)
are each amended by striking ‘‘to reduce’’ and in-
serting ‘‘to manage’’.
(4) Paragraph (2) of section 1256(e) is amend-
ed to read as follows:
‘‘(2) DEFINITION OF HEDGING TRANSACTION.—
For purposes of this subsection, the term ‘hedging
transaction’ means any hedging transaction (as de-
fined in section 1221(b)(2)(A)) if, before the close of
the day on which such transaction was entered into
(or such earlier time as the Secretary may prescribe
by regulations), the taxpayer clearly identifies such
transaction as being a hedging transaction.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to any instrument held, acquired,
or entered into, any transaction entered into, and supplies
held or acquired on or after the date of enactment of this
Act.
SEC. 206. WORTHLESS SECURITIES OF FINANCIAL INSTITU-
TIONS.
(a) IN GENERAL.—The first sentence following sec-
tion 165(g)(3)(B) (relating to securities of affiliated cor-
poration) is amended to read as follows: ‘‘In computing
gross receipts for purposes of the preceding sentence, (i)
gross receipts from sales or exchanges of stocks and secu-
rities shall be taken into account only to the extent of
gains therefrom, and (ii) gross receipts from royalties,
rents, dividends, interest, annuities, and gains from sales
or exchanges of stocks and securities derived from (or di-
rectly related to) the conduct of an active trade or business
of an insurance company subject to tax under subchapter
L or a qualified financial institution (as defined in sub-
section (l)(3)) shall be treated as from such sources other
than royalties, rents, dividends, interest, annuities, and
gains.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to securities which become
worthless in taxable years beginning after December 31,
1999.
TITLE 
III—INCENTIVES 
FOR
BUSINESS INVESTMENT AND
JOB CREATION
SEC. 301. REDUCTION IN CORPORATE CAPITAL GAIN TAX
RATE.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
‘‘(2) in the case of regulated investment compa-
nies and their shareholders, see section 852(b)(3)(A)
and (D), and
‘‘(3) in the case of real estate investment
trusts, see section 857(b)(3)(A).’’
(b) TECHNICAL AMENDMENTS.—
(1) Paragraphs (1) and (2) of section 1445(e)
are each amended by striking ‘‘35 percent’’ and in-
serting ‘‘the applicable percentage determined under
section 1201(b) for the calendar year in which the
payment is made’’.
(2)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended by striking ‘‘34 percent’’
and inserting ‘‘the applicable percentage (within the
meaning of section 1201(b))’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936, is
amended by striking ‘‘34 percent’’ and inserting
‘‘the applicable percentage (within the meaning of
section 1201(b) of the Internal Revenue Code of
1986)’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 1999.
(2) WITHHOLDING.—The amendment made by
subsection (b)(1) shall apply to amounts paid after
December 31, 1999.
SEC. 302. REPEAL OF ALTERNATIVE MINIMUM TAX ON COR-
PORATIONS.
(a) IN GENERAL.—The last sentence of section 55(a),
as amended by section 121, is amended by striking ‘‘on
any taxpayer other than a corporation’’.
(b) REPEAL OF 90 PERCENT LIMITATION ON FOR-
EIGN TAX CREDIT.—
(1) IN GENERAL.—Section 59(a) (relating to al-
ternative minimum tax foreign tax credit) is amend-
ed by striking paragraph (2) and by redesignating
paragraphs (3) and (4) as paragraphs (2) and (3),
respectively.
(2) 
CONFORMING
AMENDMENT.—Section
53(d)(1)(B)(i)(II) is amended by striking ‘‘and if
section 59(a)(2) did not apply’’.
(c) LIMITATION
ON USE
OF CREDIT
FOR PRIOR
YEAR MINIMUM TAX LIABILITY.—
(1) IN GENERAL.—Subsection (c) of section 53,
as amended by section 121, is amended by redesig-
nating paragraph (2) as paragraph (3) and by in-
serting after paragraph (1) the following new para-
graph:
‘‘(2) CORPORATIONS FOR TAXABLE YEARS BE-
GINNING AFTER 2002.—In the case of corporation for
any taxable year beginning after 2002 and before
2008, the limitation under paragraph (1) shall be in-
creased by the applicable percentage (determined in
accordance with the following table) of the tentative
minimum tax for the taxable year.
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2003 .....................................................................................
2004 .....................................................................................
2005 .....................................................................................
2006 or 2007 .......................................................................
50.
In no event shall the limitation determined under
this paragraph be greater than the sum of the tax
imposed by section 55 and the regular tax reduced
by the sum of the credits allowed under subparts A,
B, D, E, and F of this part.’’
(2) CONFORMING AMENDMENT.—Section 55(e)
is amended by striking paragraph (5).
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amendments made by this
section shall apply to taxable years beginning after
December 31, 2002.
(2) REPEAL OF 90 PERCENT LIMITATION ON
FOREIGN TAX CREDIT.—The amendments made by
subsection (b) shall apply to taxable years beginning
after December 31, 2001.
(3) SUBSECTION (c)(2).—The amendment made
by subsection (c)(2) shall apply to taxable years be-
ginning after December 31, 2007.
TITLE IV—EDUCATION SAVINGS
INCENTIVES
SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RE-
TIREMENT ACCOUNTS.
(a) MAXIMUM ANNUAL CONTRIBUTIONS.—
(1) IN
GENERAL.—Section 530(b)(1)(A)(iii)
(defining education individual retirement account) is
amended 
by 
striking 
‘‘$500’’ 
and 
inserting
‘‘$2,000’’.
(2) 
CONFORMING
AMENDMENT.—Section
4973(e)(1)(A) is amended by striking ‘‘$500’’ and
inserting ‘‘$2,000’’.
(b) TAX-FREE EXPENDITURES
FOR ELEMENTARY
AND SECONDARY SCHOOL EXPENSES.—
(1) IN GENERAL.—Section 530(b)(2) (defining
qualified higher education expenses) is amended to
read as follows:
‘‘(2) QUALIFIED EDUCATION EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
education expenses’ means—
‘‘(i) qualified higher education ex-
penses (as defined in section 529(e)(3)),
and
‘‘(ii) qualified elementary and sec-
ondary education expenses (as defined in
paragraph (4)).
‘‘(B) QUALIFIED
STATE
TUITION
PRO-
GRAMS.—Such term shall include any contribu-
tion to a qualified State tuition program (as de-
fined in section 529(b)) on behalf of the des-
ignated beneficiary (as defined in section
529(e)(1)); but there shall be no increase in the
investment in the contract for purposes of ap-
plying section 72 by reason of any portion of
such contribution which is not includible in
gross income by reason of subsection (d)(2).’’
(2) QUALIFIED ELEMENTARY AND SECONDARY
EDUCATION EXPENSES.—Section 530(b) (relating to
definitions and special rules) is amended by adding
at the end the following new paragraph:
‘‘(4) QUALIFIED ELEMENTARY AND SECONDARY
EDUCATION EXPENSES.—
‘‘(A) IN GENERAL.—The term ‘qualified el-
ementary and secondary education expenses’
means—
‘‘(i) expenses for tuition, fees, aca-
demic tutoring, special needs services,
books, supplies, computer equipment (in-
cluding related software and services), and
other equipment which are incurred in con-
nection with the enrollment or attendance
of the designated beneficiary of the trust
as an elementary or secondary school stu-
dent at a public, private, or religious
school, and
‘‘(ii) expenses for room and board,
uniforms, 
transportation, 
and 
supple-
mentary items and services (including ex-
tended day programs) which are required
or provided by a public, private, or reli-
gious school in connection with such enroll-
ment or attendance.
‘‘(B) 
SPECIAL
RULE
FOR
HOMESCHOOLING.—Such term shall include ex-
penses described in subparagraph (A)(i) in con-
nection 
with 
education 
provided 
by
homeschooling if the requirements of any appli-
(D) Section 4973(e)(1) is amended by add-
ing ‘‘and’’ at the end of subparagraph (A), by
striking subparagraph (B), and by redesig-
nating subparagraph (C) as subparagraph (B).
(g) RENAMING EDUCATION INDIVIDUAL RETIRE-
MENT ACCOUNTS AS EDUCATION SAVINGS ACCOUNTS.—
(1) IN GENERAL.—
(A) Section 530 (as amended by the pre-
ceding provisions of this section) is amended by
striking ‘‘education individual retirement ac-
count’’ each place it appears and inserting
‘‘education savings account’’.
(B) The heading for paragraph (1) of sec-
tion 530(b) is amended by striking ‘‘EDU-
CATION
INDIVIDUAL
RETIREMENT
ACCOUNT’’
and inserting ‘‘EDUCATION SAVINGS ACCOUNT’’.
(C) The heading for section 530 is amend-
ed to read as follows:
‘‘SEC. 530. EDUCATION SAVINGS ACCOUNTS.’’.
(D) The item in the table of contents for
part VII of subchapter F of chapter 1 relating
to section 530 is amended to read as follows:
‘‘Sec. 530. Education savings accounts.’’.
(2) CONFORMING AMENDMENTS.—
(A) The following provisions are each
amended by striking ‘‘education individual re-
tirement’’ each place it appears and inserting
‘‘education savings’’:
(i) Section 25A(e)(2).
(ii) Section 26(b)(2)(E).
(iii) Section 72(e)(9).
(iv) Section 135(c)(2)(C).
(v) Subsections (a) and (e) of section
4973.
(vi) Subsections (c) and (e) of section
4975.
(vii) Section 6693(a)(2)(D).
(B) The headings for each of the following
provisions are amended by striking ‘‘EDU-
CATION
INDIVIDUAL
RETIREMENT
ACCOUNTS’’
each place it appears and inserting ‘‘EDU-
CATION SAVINGS ACCOUNTS’’.
(i) Section 72(e)(9).
(ii) Section 135(c)(2)(C).
(iii) Section 4973(e).
(iv) Section 4975(c)(5).
(h) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 2000.
(2) SUBSECTION (g).—The amendments made
by subsection (g) shall take effect on the date of the
enactment of this Act.
SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PRO-
GRAMS.
(a) ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
(1) IN
GENERAL.—Section 529(b)(1) (defining
qualified State tuition program) is amended by in-
serting ‘‘or by 1 or more eligible educational institu-
tions’’ after ‘‘maintained by a State or agency or in-
strumentality thereof ’’.
(2) PRIVATE
QUALIFIED
TUITION
PROGRAMS
LIMITED TO BENEFIT PLANS.—Clause (ii) of section
529(b)(1)(A) is amended by inserting ‘‘in the case of
a program established and maintained by a State or
agency or instrumentality thereof,’’ before ‘‘may
make’’.
(3) CONFORMING AMENDMENTS.—
(A) 
Sections 
72(e)(9), 
135(c)(2)(C),
135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and
6693(a)(2)(C) are each amended by striking
‘‘qualified State tuition’’ each place it appears
and inserting ‘‘qualified tuition’’.
(B) The headings for sections 72(e)(9) and
135(c)(2)(C) are each amended by striking
‘‘QUALIFIED
STATE
TUITION’’ and inserting
‘‘QUALIFIED TUITION’’.
(C) The headings for sections 529(b) and
530(b)(2)(B) are each amended by striking
‘‘QUALIFIED
STATE
TUITION’’ and inserting
‘‘QUALIFIED TUITION’’.
(D) The heading for section 529 is amend-
ed by striking ‘‘STATE’’.
(E) The item relating to section 529 in the
table of sections for part VIII of subchapter F
of chapter 1 is amended by striking ‘‘State’’.
(b) EXCLUSION FROM GROSS INCOME
OF EDU-
CATION DISTRIBUTIONS FROM QUALIFIED TUITION PRO-
GRAMS.—
(1) IN GENERAL.—Section 529(c)(3)(B) (relat-
ing to distributions) is amended to read as follows:
‘‘(B) 
DISTRIBUTIONS
FOR
QUALIFIED
HIGHER EDUCATION EXPENSES.—
‘‘(i) IN
GENERAL.—For purposes of
this paragraph—
‘‘(I) no amount shall be includ-
ible in gross income under subpara-
graph (A) by reason of a distribution
which consists of providing a benefit
to the distributee which, if paid for by
the distributee, would constitute pay-
ment of a qualified higher education
expense, and
‘‘(II) in the case of distributions
not described in subclause (I), the
amount otherwise includible in gross
income under subparagraph (A) shall
be reduced by an amount which bears
the same ratio to the otherwise includ-
ible amount as the qualified higher
education expenses (other than ex-
penses paid by distributions described
in subclause (I)) bear to the aggregate
of such distributions.
‘‘(ii) EXCEPTION FOR INSTITUTIONAL
PROGRAMS.—In the case of any taxable
year beginning before January 1, 2004,
clause (i) shall not apply with respect to
any distribution during such taxable year
under a qualified tuition program estab-
lished and maintained by 1 or more eligible
educational institutions.
wise taken into account under clause
(i) (after the application of clause
(iv)) for such year,
the taxpayer shall allocate such expenses
among such distributions for purposes of
determining the amount of the exclusion
under clause (i) and section 530(d)(2)(A).’’
(2) CONFORMING AMENDMENTS.—
(A) Section 135(d)(2)(B) is amended by
striking 
‘‘the 
exclusion 
under 
section
530(d)(2)’’ and inserting ‘‘the exclusions under
sections 529(c)(3)(B)(i) and 530(d)(2)’’.
(B) Section 221(e)(2)(A) is amended by
inserting ‘‘529,’’ after ‘‘135,’’.
(c) ROLLOVER TO DIFFERENT PROGRAM FOR BEN-
EFIT
OF
SAME
DESIGNATED
BENEFICIARY.—Section
529(c)(3)(C) (relating to change in beneficiaries) is
amended—
(1) by striking ‘‘transferred to the credit’’ in
clause (i) and inserting ‘‘transferred—
‘‘(I) to another qualified tuition
program for the benefit of the des-
ignated beneficiary, or
‘‘(II) to the credit’’,
(2) by adding at the end the following new
clause:
‘‘(iii) LIMITATION ON CERTAIN ROLL-
OVERS.—Clause (i)(I) shall not apply to
any amount transferred with respect to a
designated beneficiary if, at any time dur-
ing the 1-year period ending on the day of
such transfer, any other amount was
transferred which was not includible in
gross income by reason of clause (i)(I).’’,
and
(3) by inserting ‘‘OR PROGRAMS’’ after ‘‘BENE-
FICIARIES’’ in the heading.
(d) MEMBER OF FAMILY INCLUDES FIRST COUS-
IN.—Section 529(e)(2) (defining member of family) is
amended by striking ‘‘and’’ at the end of subparagraph
(B), by striking the period at the end of subparagraph
(C) and by inserting ‘‘; and’’, and by adding at the end
the following new subparagraph:
‘‘(D) any first cousin of such beneficiary.’’
(e) DEFINITION OF QUALIFIED HIGHER EDUCATION
EXPENSES.—
(1) IN GENERAL.—Subparagraph (A) of section
529(e)(3) (relating to definition of qualified higher
education expenses) is amended to read as follows:
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means—
‘‘(i) tuition and fees required for the
enrollment or attendance of a designated
beneficiary at an eligible educational insti-
tution for courses of instruction of such
beneficiary at such institution, and
‘‘(ii) expenses for books, supplies, and
equipment which are incurred in connec-
tion with such enrollment or attendance,
but not to exceed the allowance for books
and supplies included in the cost of attend-
ance (as defined in section 472 of the
Higher Education Act of 1965 (20 U.S.C.
1087ll), as in effect on the date of enact-
ment of the Financial Freedom Act of
1999) as determined by the eligible edu-
cational institution.’’.
(2) EXCEPTION
FOR
EDUCATION
INVOLVING
SPORTS, ETC..—Paragraph (3) of section 529(e) (re-
lating to qualified higher education expenses) is
amended by adding at the end the following new
subparagraph:
‘‘(C) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC..—The term ‘qualified higher
education expenses’ shall not include expenses
with respect to any course or other education
involving sports, games, or hobbies unless such
course or other education is part of the bene-
ficiary’s degree program or is taken to acquire
or improve job skills of the beneficiary.’’.
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 2000.
(2) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The amendments made by subsection (e)
shall apply to amounts paid for education furnished
after December 31, 1999.
SEC. 403. EXCLUSION OF CERTAIN AMOUNTS RECEIVED
UNDER THE NATIONAL HEALTH SERVICE
CORPS SCHOLARSHIP PROGRAM, THE F. ED-
WARD HEBERT ARMED FORCES HEALTH PRO-
FESSIONS SCHOLARSHIP AND FINANCIAL AS-
SISTANCE PROGRAM, AND CERTAIN OTHER
PROGRAMS.
(a) IN GENERAL.—Section 117(c) (relating to the ex-
clusion from gross income amounts received as a qualified
scholarship) is amended—
(1) by striking ‘‘Subsections (a)’’ and inserting
the following:
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a)’’, and
(2) by adding at the end the following new
paragraph:
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply to any amount received by an individual
under—
‘‘(A) the National Health Service Corps
Scholarship 
program 
under 
section
338A(g)(1)(A) of the Public Health Service
Act,
‘‘(B) the Armed Forces Health Professions
Scholarship and Financial Assistance program
under subchapter I of chapter 105 of title 10,
United States Code,
‘‘(C) the National Institutes of Health Un-
dergraduate Scholarship program under section
487D of the Public Health Service Act, or
‘‘(D) any State program determined by the
Secretary to have substantially similar objec-
tives as such programs.’’
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by subsection (a)
shall apply to amounts received in taxable years be-
ginning after December 31, 1993.
(2) STATE
PROGRAMS.—Section 117(c)(2)(D)
of the Internal Revenue Code of 1986 (as added by
the amendments made by subsection (a)) shall apply
to amounts received in taxable years beginning after
December 31, 1999.
SEC. 404. ADDITIONAL INCREASE IN ARBITRAGE REBATE
EXCEPTION 
FOR 
GOVERNMENTAL 
BONDS
USED TO FINANCE EDUCATIONAL FACILI-
TIES.
(a) IN GENERAL.—Section 148(f)(4)(D)(vii) (relat-
ing to increase in exception for bonds financing public
school capital expenditures) is amended by striking
‘‘$5,000,000’’ the second place it appears and inserting
‘‘$10,000,000’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to obligations issued in calendar
years beginning after December 31, 1999.
SEC. 405. MODIFICATION OF ARBITRAGE REBATE RULES
APPLICABLE TO PUBLIC SCHOOL CONSTRUC-
TION BONDS.
(a) IN GENERAL.—Subparagraph (C) of section
148(f)(4) is amended by adding at the end the following
new clause:
‘‘(xviii) 4-YEAR
SPENDING
REQUIRE-
MENT FOR PUBLIC SCHOOL CONSTRUCTION
ISSUE.—
‘‘(I) IN GENERAL.—In the case
of a public school construction issue,
the spending requirements of clause
(ii) shall be treated as met if at least
10 percent of the available construc-
tion proceeds of the construction issue
are spent for the governmental pur-
poses of the issue within the 1-year
period beginning on the date the
bonds are issued, 30 percent of such
proceeds are spent for such purposes
within the 2-year period beginning on
such date, 60 percent of such pro-
ceeds are spent for such purposes
within the 3-year period beginning on
such date, and 100 percent of such
proceeds are spent for such purposes
within the 4-year period beginning on
such date.
‘‘(II) 
PUBLIC
SCHOOL
CON-
STRUCTION ISSUE.—For purposes of
this clause, the term ‘public school
construction issue’ means any con-
struction issue if no bond which is
part of such issue is a private activity
bond and all of the available construc-
tion proceeds of such issue are to be
used for the construction (as defined
in clause (iv)) of public school facili-
ties to provide education or training
below the postsecondary level or for
the acquisition of land that is func-
tionally related and subordinate to
such facilities.
‘‘(III) 
OTHER
RULES
TO
APPLY.—Rules similar to the rules of
the preceding provisions of this sub-
paragraph which apply to clause (ii)
also apply to this clause.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to obligations issued after Decem-
ber 31, 1999.
SEC. 406. REPEAL OF 60-MONTH LIMITATION ON DEDUC-
TION FOR INTEREST ON EDUCATION LOANS.
(a) IN GENERAL.—Section 221 (relating to interest
on education loans) is amended by striking subsection (d)
and by redesignating subsections (e), (f), and (g) as sub-
sections (d), (e), and (f), respectively.
(b) CONFORMING AMENDMENT.—Subsection (e) of
section 6050S is amended by striking ‘‘section 221(e)(1)’’
and inserting ‘‘section 221(d)(1)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to loan interest payments made
after December 31, 1999, in taxable years ending after
such date.
TITLE V—HEALTH CARE
PROVISIONS
SEC. 501. DEDUCTION FOR HEALTH AND LONG-TERM CARE
INSURANCE COSTS OF INDIVIDUALS NOT
PARTICIPATING IN EMPLOYER-SUBSIDIZED
HEALTH PLANS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 is amended by redesignating section 222 as section
223 and by inserting after section 221 the following new
section:
‘‘SEC. 222. HEALTH AND LONG-TERM CARE INSURANCE
COSTS.
‘‘(a) IN GENERAL.—In the case of an individual,
there shall be allowed as a deduction an amount equal to
the applicable percentage of the amount paid during the
taxable year for insurance which constitutes medical care
for the taxpayer, the taxpayer’s spouse, and dependents.
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of
subsection (a), the applicable percentage shall be deter-
mined in accordance with the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2001 .............................................................................................
2002 .............................................................................................
2003, 2004, 2005, and 2006 .......................................................
2007 .............................................................................................
2008 and thereafter .....................................................................
100.
‘‘(c) LIMITATION BASED ON OTHER COVERAGE.—
‘‘(1) COVERAGE UNDER CERTAIN SUBSIDIZED
EMPLOYER PLANS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any taxpayer for any calendar
month for which the taxpayer participates in
any health plan maintained by any employer of
the taxpayer or of the spouse of the taxpayer if
50 percent or more of the cost of coverage
under such plan (determined under section
4980B) is paid or incurred by the employer.
‘‘(B) EMPLOYER CONTRIBUTIONS TO CAF-
ETERIA PLANS, FLEXIBLE SPENDING ARRANGE-
MENTS, AND
MEDICAL
SAVINGS
ACCOUNTS.—
Employer contributions to a cafeteria plan, a
flexible spending or similar arrangement, or a
medical savings account which are excluded
from gross income under section 106 shall be
treated for purposes of subparagraph (A) as
paid by the employer.
‘‘(C) AGGREGATION
OF
PLANS
OF
EM-
PLOYER.—A health plan which is not otherwise
described in subparagraph (A) shall be treated
as described in such subparagraph if such plan
would be so described if all health plans of per-
sons treated as a single employer under sub-
sections (b), (c), (m), or (o) of section 414 were
treated as one health plan.
‘‘(D) SEPARATE APPLICATION TO HEALTH
INSURANCE
AND
LONG-TERM
CARE
INSUR-
ANCE.—Subparagraphs (A) and (C) shall be
applied separately with respect to—
‘‘(i) plans which include primarily cov-
erage for qualified long-term care services
or are qualified long-term care insurance
contracts, and
‘‘(ii) plans which do not include such
coverage and are not such contracts.
‘‘(2) COVERAGE
UNDER
CERTAIN
FEDERAL
PROGRAMS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any amount paid for any coverage
for an individual for any calendar month if, as
of the first day of such month, the individual is
covered under any medical care program de-
scribed in—
‘‘(i) title XVIII, XIX, or XXI of the
Social Security Act,
‘‘(ii) chapter 55 of title 10, United
States Code,
‘‘(iii) chapter 17 of title 38, United
States Code,
‘‘(iv) chapter 89 of title 5, United
States Code, or
‘‘(v) the Indian Health Care Improve-
ment Act.
‘‘(B) EXCEPTIONS.—
‘‘(i) QUALIFIED LONG-TERM CARE.—
Subparagraph (A) shall not apply to
amounts paid for coverage under a quali-
fied long-term care insurance contract.
‘‘(i) each of the rates of tax shall be
reduced by the number of percentage
points determined under subparagraph
(B), and
‘‘(ii) the amounts setting forth the tax
shall be adjusted to the extent necessary to
reflect the adjustments under clause (i).
‘‘(B) PERCENTAGE
POINTS
OF
REDUC-
TION.—
The number of
‘‘For calendar year:
percentage points is:
2002 .............................................................................
2003 .............................................................................
2004 .............................................................................
2005 .............................................................................
2006 .............................................................................
2007 .............................................................................
2008 .............................................................................
11.
‘‘(C) COORDINATION
WITH
INCOME
TAX
RATES.—The reductions under subparagraph
(A)—
‘‘(i) shall not reduce any rate under
paragraph (1) below the lowest rate in sec-
tion 1(c), and
‘‘(ii) shall not reduce the highest rate
under paragraph (1) below the highest rate
in section 1(c).
‘‘(D) COORDINATION
WITH
CREDIT
FOR
STATE
DEATH
TAXES.—Rules similar to the
rules of subparagraph (A) shall apply to the
table contained in section 2011(b) except that
the Secretary shall prescribe percentage point
reductions which maintain the proportionate re-
lationship (as in effect before any reduction
under this paragraph) between the credit under
section 2011 and the tax rates under subsection
(c).’’
(d) EFFECTIVE DATES.—
(1) SUBSECTIONS
(a)
AND
(b).—The amend-
ments made by subsections (a) and (b) shall apply
to estates of decedents dying, and gifts made, after
December 31, 2000.
(2) SUBSECTION (c).—The amendment made by
subsection (c) shall apply to estates of decedents
dying, and gifts made, after December 31, 2001.
Subtitle 
C—Unified 
Credit 
Re-
placed With Unified Exemption
Amount
SEC. 621. UNIFIED CREDIT AGAINST ESTATE AND GIFT
TAXES REPLACED WITH UNIFIED EXEMPTION
AMOUNT.
(a) IN GENERAL.—
(1) ESTATE TAX.—Part IV of subchapter A of
chapter 11 is amended by inserting after section
2051 the following new section:
‘‘SEC. 2052. EXEMPTION.
‘‘(a) IN GENERAL.—For purposes of the tax imposed
by section 2001, the value of the taxable estate shall be
determined by deducting from the value of the gross estate
an amount equal to the excess (if any) of—
‘‘(1) the exemption amount for the calendar
year in which the decedent died, over
‘‘(2) the sum of—
‘‘(A) the aggregate amount allowed as an
exemption under section 2521 with respect to
gifts made by the decedent after December 31,
2000, and
‘‘(B) the aggregate amount of gifts made
by the decedent for which credit was allowed by
section 2505 (as in effect on the day before the
date of the enactment of the Financial Freedom
Act of 1999).
Gifts which are includible in the gross estate of the dece-
dent shall not be taken into account in determining the
amounts under paragraph (2).
‘‘(b) EXEMPTION AMOUNT.—For purposes of sub-
section (a), the term ‘exemption amount’ means the
amount determined in accordance with the following table:
‘‘In the case of
The exemption
calendar year:
amount is:
2001 .......................................................................
$675,000
2002 and 2003 ......................................................
$700,000
2004 .......................................................................
$850,000
2005 .......................................................................
$950,000
2006 or thereafter .................................................
$1,000,000.’’
(2) GIFT TAX.—Subchapter C of chapter 12
(relating to deductions) is amended by inserting be-
fore section 2522 the following new section:
‘‘SEC. 2521. EXEMPTION.
‘‘(a) IN GENERAL.—In computing taxable gifts for
any calendar year, there shall be allowed as a deduction
in the case of a citizen or resident of the United States
an amount equal to the excess of—
‘‘(1) the exemption amount determined under
section 2052 for such calendar year, over
‘‘(2) the sum of—
‘‘(A) the aggregate amount allowed as an
exemption under this section for all preceding
calendar years after 2000, and
‘‘(B) the aggregate amount of gifts for
which credit was allowed by section 2505 (as in
effect on the day before the date of the enact-
ment of the Financial Freedom Act of 1999).’’
(b) REPEAL OF UNIFIED CREDITS.—
(1) Section 2010 (relating to unified credit
against estate tax) is hereby repealed.
(2) Section 2505 (relating to unified credit
against gift tax) is hereby repealed.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subparagraph (B) of section 2001(b)(1)
is amended by inserting before the comma ‘‘reduced
by the amount of described in section 2052(a)(2)’’.
(B) Subsection (b) of section 2001 is amended
by adding at the end the following new sentence:
‘‘For purposes of paragraph (2), the amount of the
tax payable under chapter 12 shall be determined
without regard to the credit provided by section
2505 (as in effect on the day before the date of the
enactment of the Financial Freedom Act of 1999).’’
(2) Subsection (f) of section 2011 is amended
by striking ‘‘, reduced by the amount of the unified
credit provided by section 2010’’.
(3) Subsection (a) of section 2012 is amended
by striking ‘‘and the unified credit provided by sec-
tion 2010’’.
(4) Subsection (b) of section 2013 is amended
by inserting before the period at the end of the first
sentence ‘‘and increased by the exemption allowed
under section 2052 or 2106(a)(4) (or the cor-
responding provisions of prior law) in determining
the taxable estate of the transferor for purposes of
the estate tax’’.
(5) Subparagraph (A) of section 2013(c)(1) is
amended by striking ‘‘2010,’’.
(6) Paragraph (2) of section 2014(b) is amend-
ed by striking ‘‘2010,’’.
(7) Clause (ii) of section 2056A(b)(12)(C) is
amended to read as follows:
‘‘(ii) to treat any reduction in the tax
imposed by paragraph (1)(A) by reason of
the credit allowable under section 2010 (as
in effect on the day before the date of the
enactment of the Financial Freedom Act of
1999) or the exemption allowable under
section 2052 with respect to the decedent
as such a credit or exemption (as the case
may be) allowable to such surviving spouse
for purposes of determining the amount of
the exemption allowable under section
2521 with respect to taxable gifts made by
the surviving spouse during the year in
which the spouse becomes a citizen or any
subsequent year,’’.
(8) Section 2102 is amended by striking sub-
section (c).
(9) Subsection (a) of section 2106 is amended
by adding at the end the following new paragraph:
‘‘(4) EXEMPTION.—
‘‘(A) IN
GENERAL.—An exemption of
$60,000.
‘‘(B) RESIDENTS OF POSSESSIONS OF THE
UNITED STATES.—In the case of a decedent
who is considered to be a nonresident not a cit-
izen of the United States under section 2209,
the exemption under this paragraph shall be the
greater of—
‘‘(i) $60,000, or
‘‘(ii) that proportion of $175,000
which the value of that part of the dece-
dent’s gross estate which at the time of his
death is situated in the United States
bears to the value of his entire gross estate
wherever situated.
‘‘(C) SPECIAL RULES.—
‘‘(i) 
COORDINATION
WITH
TREA-
TIES.—To the extent required under any
treaty obligation of the United States, the
exemption allowed under this paragraph
shall be equal to the amount which bears
the same ratio to the exemption amount
under section 2052 (for the calendar year
in which the decedent died) as the value of
the part of the decedent’s gross estate
which at the time of his death is situated
in the United States bears to the value of
his entire gross estate wherever situated.
For purposes of the preceding sentence,
property shall not be treated as situated in
the United States if such property is ex-
empt from the tax imposed by this sub-
chapter under any treaty obligation of the
United States.
‘‘(ii) COORDINATION WITH GIFT TAX
EXEMPTION AND UNIFIED CREDIT.—If an
exemption has been allowed under section
2521 (or a credit has been allowed under
section 2505 as in effect on the day before
the date of the enactment of the Financial
Freedom Act of 1999) with respect to any
gift made by the decedent, each dollar
amount contained in subparagraph (A) or
(B) or the exemption amount applicable
under clause (i) of this subparagraph
(whichever applies) shall be reduced by the
exemption so allowed under 2521 (or, in
the case of such a credit, by the amount of
the gift for which the credit was so al-
lowed).’’
(10) 
Subsection 
(c) 
of 
section 
2107 
is
amended—
(A) by striking paragraph (1) and by re-
designating paragraphs (2) and (3) as para-
graphs (1) and (2), respectively, and
(B) by striking the second sentence of
paragraph (2) (as so redesignated).
(11) Section 2206 is amended by striking ‘‘the
taxable estate’’ in the first sentence and inserting
‘‘the sum of the taxable estate and the amount of
the exemption allowed under section 2052 or
2106(a)(4) in computing the taxable estate’’.
(12) Section 2207 is amended by striking ‘‘the
taxable estate’’ in the first sentence and inserting
‘‘the sum of the taxable estate and the amount of
the exemption allowed under section 2052 or
2106(a)(4) in computing the taxable estate’’.
(13) Subparagraph (B) of section 2207B(a)(1)
is amended to read as follows:
‘‘(B) the sum of the taxable estate and the
amount of the exemption allowed under section
2052 or 2106(a)(4) in computing the taxable
estate.’’
(14) Subsection (a) of section 2503 is amended
by striking ‘‘section 2522’’ and inserting ‘‘section
2521’’.
(15) Paragraph (1) of section 6018(a) is
amended by striking ‘‘$600,000’’ and inserting ‘‘the
exemption amount under section 2052 for the cal-
endar year which includes the date of death’’.
(16) Subparagraph (A) of section 6601(j)(2) is
amended to read as follows:
‘‘(A) the amount of the tax which would be
imposed by chapter 11 on an amount of taxable
estate equal to the excess of $1,000,000 over
the exemption amount allowable under section
2052, or’’.
(17) The table of sections for part II of sub-
chapter A of chapter 11 is amended by striking the
item relating to section 2010.
(18) The table of sections for subchapter A of
chapter 12 is amended by striking the item relating
to section 2505.
(d) EFFECTIVE DATE.—The amendments made by
this section—
(1) insofar as they relate to the tax imposed by
chapter 11 of the Internal Revenue Code of 1986,
shall apply to estates of decedents dying after De-
cember 31, 2000, and
(2) insofar as they relate to the tax imposed by
chapter 12 of such Code, shall apply to gifts made
after December 31, 2000.
Subtitle D—Modifications of
Generation-Skipping Transfer Tax
SEC. 631. DEEMED ALLOCATION OF GST EXEMPTION TO
LIFETIME TRANSFERS TO TRUSTS; RETRO-
ACTIVE ALLOCATIONS.
(a) IN GENERAL.—Section 2632 (relating to special
rules for allocation of GST exemption) is amended by re-
designating subsection (c) as subsection (e) and by insert-
ing after subsection (b) the following new subsections:
‘‘(c) DEEMED ALLOCATION TO CERTAIN LIFETIME
TRANSFERS TO GST TRUSTS.—
‘‘(1) IN GENERAL.—If any individual makes an
indirect skip during such individual’s lifetime, any
unused portion of such individual’s GST exemption
shall be allocated to the property transferred to the
extent necessary to make the inclusion ratio for such
property zero. If the amount of the indirect skip ex-
ceeds such unused portion, the entire unused portion
shall be allocated to the property transferred.
‘‘(2) UNUSED PORTION.—For purposes of para-
graph (1), the unused portion of an individual’s
GST exemption is that portion of such exemption
which has not previously been—
‘‘(A) allocated by such individual,
‘‘(B) treated as allocated under subsection
(b) with respect to a direct skip occurring dur-
ing or before the calendar year in which the in-
direct skip is made, or
‘‘(C) treated as allocated under paragraph
(1) with respect to a prior indirect skip.
‘‘(3) DEFINITIONS.—
‘‘(A) INDIRECT
SKIP.—For purposes of
this subsection, the term ‘indirect skip’ means
any transfer of property (other than a direct
skip) subject to the tax imposed by chapter 12
made to a GST trust.
‘‘(B) GST TRUST.—The term ‘GST trust’
means a trust that could have a generation-
skipping transfer with respect to the transferor
unless—
‘‘(i) the trust instrument provides that
more than 25 percent of the trust corpus
must be distributed to or may be with-
drawn by 1 or more individuals who are
non-skip persons—
‘‘(I) before the date that the indi-
vidual attains age 46,
‘‘(II) on or before 1 or more
dates specified in the trust instrument
that will occur before the date that
such individual attains age 46, or
‘‘(III) upon the occurrence of an
event that, in accordance with regula-
tions prescribed by the Secretary, may
reasonably be expected to occur before
the date that such individual attains
age 46;
‘‘(ii) the trust instrument provides
that more than 25 percent of the trust cor-
pus must be distributed to or may be with-
drawn by 1 or more individuals who are
non-skip persons and who are living on the
date of death of another person identified
in the instrument (by name or by class)
who is more than 10 years older than such
individuals;
‘‘(iii) the trust instrument provides
that, if 1 or more individuals who are non-
skip persons die on or before a date or
event described in clause (i) or (ii), more
than 25 percent of the trust corpus either
must be distributed to the estate or estates
of 1 or more of such individuals or is sub-
ject to a general power of appointment ex-
ercisable by 1 or more of such individuals;
‘‘(iv) the trust is a trust any portion
of which would be included in the gross es-
tate of a non-skip person (other than the
transferor) if such person died immediately
after the transfer;
‘‘(v) the trust is a charitable lead an-
nuity trust (within the meaning of section
2642(e)(3)(A)) or a charitable remainder
annuity trust or a charitable remainder
unitrust (within the meaning of section
664(d)); or
‘‘(vi) the trust is a trust with respect
to which a deduction was allowed under
section 2522 for the amount of an interest
in the form of the right to receive annual
payments of a fixed percentage of the net
fair market value of the trust property (de-
termined yearly) and which is required to
pay principal to a non-skip person if such
person is alive when the yearly payments
for which the deduction was allowed termi-
nate.
For purposes of this subparagraph, the value of
transferred property shall not be considered to
be includible in the gross estate of a non-skip
person or subject to a right of withdrawal by
reason of such person holding a right to with-
draw so much of such property as does not ex-
ceed the amount referred to in section 2503(b)
with respect to any transferor, and it shall be
assumed that powers of appointment held by
non-skip persons will not be exercised.
‘‘(4) AUTOMATIC
ALLOCATIONS
TO
CERTAIN
GST TRUSTS.—For purposes of this subsection, an
indirect skip to which section 2642(f) applies shall
be deemed to have been made only at the close of
the estate tax inclusion period. The fair market
value of such transfer shall be the fair market value
of the trust property at the close of the estate tax
inclusion period.
‘‘(5) APPLICABILITY AND EFFECT.—
‘‘(A) IN GENERAL.—An individual—
‘‘(i) may elect to have this subsection
not apply to—
‘‘(I) an indirect skip, or
‘‘(II) any or all transfers made
by such individual to a particular
trust, and
‘‘(ii) may elect to treat any trust as a
GST trust for purposes of this subsection
with respect to any or all transfers made
by such individual to such trust.
‘‘(B) ELECTIONS.—
‘‘(i) ELECTIONS
WITH
RESPECT
TO
INDIRECT SKIPS.—An election under sub-
paragraph (A)(i)(I) shall be deemed to be
timely if filed on a timely filed gift tax re-
turn for the calendar year in which the
transfer was made or deemed to have been
made pursuant to paragraph (4) or on
such later date or dates as may be pre-
scribed by the Secretary.
‘‘(ii) OTHER ELECTIONS.—An election
under clause (i)(II) or (ii) of subparagraph
(A) may be made on a timely filed gift tax
return for the calendar year for which the
election is to become effective.
100
‘‘(d) RETROACTIVE ALLOCATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a non-skip person has an interest or
a future interest in a trust to which any trans-
fer has been made,
‘‘(B) such person—
‘‘(i) is a lineal descendant of a grand-
parent of the transferor or of a grand-
parent of the transferor’s spouse or former
spouse, and
‘‘(ii) is assigned to a generation below
the generation assignment of the trans-
feror, and
‘‘(C) such person predeceases the trans-
feror,
then the transferor may make an allocation of any
of such transferor’s unused GST exemption to any
previous transfer or transfers to the trust on a
chronological basis.
‘‘(2) SPECIAL RULES.—If the allocation under
paragraph (1) by the transferor is made on a gift
tax return filed on or before the date prescribed by
section 6075(b) for gifts made within the calendar
year within which the non-skip person’s death
occurred—
101
‘‘(A) the value of such transfer or trans-
fers for purposes of section 2642(a) shall be de-
termined as if such allocation had been made
on a timely filed gift tax return for each cal-
endar year within which each transfer was
made,
‘‘(B) such allocation shall be effective im-
mediately before such death, and
‘‘(C) the amount of the transferor’s unused
GST exemption available to be allocated shall
be determined immediately before such death.
‘‘(3) FUTURE INTEREST.—For purposes of this
subsection, a person has a future interest in a trust
if the trust may permit income or corpus to be paid
to such person on a date or dates in the future.’’.
(b) CONFORMING AMENDMENT.—Paragraph (2) of
section 2632(b) is amended by striking ‘‘with respect to
a direct skip’’ and inserting ‘‘or subsection (c)(1)’’.
(c) EFFECTIVE DATES.—
(1) DEEMED ALLOCATION.—Section 2632(c) of
the Internal Revenue Code of 1986 (as added by
subsection (a)), and the amendment made by sub-
section (b), shall apply to transfers subject to chap-
ter 11 or 12 made after December 31, 1999, and to
102
estate tax inclusion periods ending after December
31, 1999.
(2) 
RETROACTIVE
ALLOCATIONS.—Section
2632(d) of the Internal Revenue Code of 1986 (as
added by subsection (a)) shall apply to deaths of
non-skip persons occurring after the date of the en-
actment of this Act.
SEC. 632. SEVERING OF TRUSTS.
(a) IN GENERAL.—Subsection (a) of section 2642
(relating to inclusion ratio) is amended by adding at the
end the following new paragraph:
‘‘(3) SEVERING OF TRUSTS.—
‘‘(A) IN GENERAL.—If a trust is severed in
a qualified severance, the trusts resulting from
such severance shall be treated as separate
trusts thereafter for purposes of this chapter.
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A)—
‘‘(i) IN GENERAL.—The term ‘quali-
fied severance’ means the division of a sin-
gle trust and the creation (by any means
available under the governing instrument
or under local law) of 2 or more trusts if—
‘‘(I) the single trust was divided
on a fractional basis, and
103
‘‘(II) the terms of the new trusts,
in the aggregate, provide for the same
succession of interests of beneficiaries
as are provided in the original trust.
‘‘(ii) TRUSTS WITH INCLUSION RATIO
GREATER THAN ZERO.—If a trust has an
inclusion ratio of greater than zero and
less than 1, a severance is a qualified sev-
erance only if the single trust is divided
into 2 trusts, one of which receives a frac-
tional share of the total value of all trust
assets equal to the applicable fraction of
the single trust immediately before the sev-
erance. In such case, the trust receiving
such fractional share shall have an inclu-
sion ratio of zero and the other trust shall
have an inclusion ratio of 1.
‘‘(iii) 
REGULATIONS.—The 
term
‘qualified severance’ includes any other
severance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) 
TIMING
AND
MANNER
OF
SEVERANCES.—A severance pursuant to this
paragraph may be made at any time. The Sec-
retary shall prescribe by forms or regulations
104
the manner in which the qualified severance
shall be reported to the Secretary.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to severances after the date of the
enactment of this Act.
SEC. 633. MODIFICATION OF CERTAIN VALUATION RULES.
(a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR
DEEMED ALLOCATION MADE.—Paragraph (1) of section
2642(b) (relating to valuation rules, etc.) is amended to
read as follows:
‘‘(1) GIFTS
FOR
WHICH
GIFT
TAX
RETURN
FILED OR DEEMED ALLOCATION MADE.—If the allo-
cation of the GST exemption to any transfers of
property is made on a gift tax return filed on or be-
fore the date prescribed by section 6075(b) for such
transfer or is deemed to be made under section 2632
(b)(1) or (c)(1)—
‘‘(A) the value of such property for pur-
poses of subsection (a) shall be its value as fi-
nally determined for purposes of chapter 12
(within the meaning of section 2001(f)(2)), or,
in the case of an allocation deemed to have been
made at the close of an estate tax inclusion pe-
riod, its value at the time of the close of the es-
tate tax inclusion period, and
105
‘‘(B) such allocation shall be effective on
and after the date of such transfer, or, in the
case of an allocation deemed to have been made
at the close of an estate tax inclusion period, on
and after the close of such estate tax inclusion
period.’’.
(b) TRANSFERS AT DEATH.—Subparagraph (A) of
section 2642(b)(2) is amended to read as follows:
‘‘(A) TRANSFERS AT DEATH.—If property
is transferred as a result of the death of the
transferor, the value of such property for pur-
poses of subsection (a) shall be its value as fi-
nally determined for purposes of chapter 11; ex-
cept that, if the requirements prescribed by the
Secretary respecting allocation of post-death
changes in value are not met, the value of such
property shall be determined as of the time of
the distribution concerned.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 1431 of the Tax Reform Act of
1986.
SEC. 634. RELIEF PROVISIONS.
(a) IN GENERAL.—Section 2642 is amended by add-
ing at the end the following new subsection:
106
‘‘(g) RELIEF PROVISIONS.—
‘‘(1) RELIEF FOR LATE ELECTIONS.—
‘‘(A) IN GENERAL.—The Secretary shall by
regulation prescribe such circumstances and
procedures under which extensions of time will
be granted to make—
‘‘(i) an allocation of GST exemption
described in paragraph (1) or (2) of sub-
section (b), and
‘‘(ii) an election under subsection
(b)(3) or (c)(5) of section 2632.
Such regulations shall include procedures for
requesting comparable relief with respect to
transfers made before the date of enactment of
this paragraph.
‘‘(B) BASIS
FOR
DETERMINATIONS.—In
determining whether to grant relief under this
paragraph, the Secretary shall take into ac-
count all relevant circumstances, including evi-
dence of intent contained in the trust instru-
ment or instrument of transfer and such other
factors as the Secretary deems relevant. For
purposes of determining whether to grant relief
under this paragraph, the time for making the
107
allocation (or election) shall be treated as if not
expressly prescribed by statute.
‘‘(2) SUBSTANTIAL
COMPLIANCE.—An alloca-
tion of GST exemption under section 2632 that
demonstrates an intent to have the lowest possible
inclusion ratio with respect to a transfer or a trust
shall be deemed to be an allocation of so much of
the transferor’s unused GST exemption as produces
the lowest possible inclusion ratio. In determining
whether there has been substantial compliance, all
relevant circumstances shall be taken into account,
including evidence of intent contained in the trust
instrument or instrument of transfer and such other
factors as the Secretary deems relevant.’’.
(b) EFFECTIVE DATES.—
(1) RELIEF
FOR
LATE
ELECTIONS.—Section
2642(g)(1) of the Internal Revenue Code of 1986
(as added by subsection (a)) shall apply to requests
pending on, or filed after, the date of the enactment
of this Act.
(2) 
SUBSTANTIAL
COMPLIANCE.—Section
2642(g)(2) of such Code (as so added) shall take ef-
fect on the date of the enactment of this Act and
shall apply to allocations made prior to such date for
purposes of determining the tax consequences of
108
generation-skipping transfers with respect to which
the period of time for filing claims for refund has
not expired. No negative implication is intended with
respect to the availability of relief for late elections
or the application of a rule of substantial compliance
prior to the enactment of this amendment.
TITLE VII—TAX RELIEF FOR DIS-
TRESSED COMMUNITIES AND
INDUSTRIES
Subtitle A—American Community
Renewal Act of 1999
SEC. 701. SHORT TITLE.
This subtitle may be cited as the ‘‘American Commu-
nity Renewal Act of 1999’’.
SEC. 702. DESIGNATION OF AND TAX INCENTIVES FOR RE-
NEWAL COMMUNITIES.
(a) IN GENERAL.—Chapter 1 is amended by adding
at the end the following new subchapter:
‘‘Subchapter X—Renewal Communities
‘‘Part I.
Designation.
‘‘Part II.
Renewal community capital gain; renewal community
business.
‘‘Part III. Family development accounts.
‘‘Part IV.
Additional incentives.
‘‘PART I—DESIGNATION
‘‘Sec. 1400E. Designation of renewal communities.
‘‘SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.
‘‘(a) DESIGNATION.—
109
‘‘(1) DEFINITIONS.—For purposes of this title,
the term ‘renewal community’ means any area—
‘‘(A) which is nominated by one or more
local governments and the State or States in
which it is located for designation as a renewal
community (hereinafter in this section referred
to as a ‘nominated area’); and
‘‘(B) which the Secretary of Housing and
Urban Development designates as a renewal
community, after consultation with—
‘‘(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury; the
Director of the Office of Management and
Budget; and the Administrator of the
Small Business Administration; and
‘‘(ii) in the case of an area on an In-
dian reservation, the Secretary of the Inte-
rior.
‘‘(2) NUMBER OF DESIGNATIONS.—
‘‘(A) IN
GENERAL.—The Secretary of
Housing and Urban Development may des-
ignate not more than 20 nominated areas as re-
newal communities.
110
‘‘(B) MINIMUM
DESIGNATION
IN
RURAL
AREAS.—Of the areas designated under para-
graph (1), at least 4 must be areas—
‘‘(i) which are within a local govern-
ment jurisdiction or jurisdictions with a
population of less than 50,000,
‘‘(ii) which are outside of a metropoli-
tan statistical area (within the meaning of
section 143(k)(2)(B)), or
‘‘(iii) which are determined by the
Secretary of Housing and Urban Develop-
ment, after consultation with the Secretary
of Commerce, to be rural areas.
‘‘(3) AREAS DESIGNATED BASED ON DEGREE
OF POVERTY, ETC.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this section, the nominated areas
designated as renewal communities under this
subsection shall be those nominated areas with
the highest average ranking with respect to the
criteria described in subparagraphs (B), (C),
and (D) of subsection (c)(3). For purposes of
the preceding sentence, an area shall be ranked
within each such criterion on the basis of the
amount by which the area exceeds such cri-
111
terion, with the area which exceeds such cri-
terion by the greatest amount given the highest
ranking.
‘‘(B) EXCEPTION
WHERE
INADEQUATE
COURSE OF ACTION, ETC.—An area shall not be
designated under subparagraph (A) if the Sec-
retary of Housing and Urban Development de-
termines that the course of action described in
subsection (d)(2) with respect to such area is
inadequate.
‘‘(C) PRIORITY FOR EMPOWERMENT ZONES
AND ENTERPRISE COMMUNITIES WITH RESPECT
TO FIRST HALF OF DESIGNATIONS.—With re-
spect to the first 10 designations made under
this section—
‘‘(i) all shall be chosen from nomi-
nated areas which are empowerment zones
or enterprise communities (and are other-
wise eligible for designation under this sec-
tion); and
‘‘(ii) 2 shall be areas described in
paragraph (2)(B).
‘‘(4) LIMITATION ON DESIGNATIONS.—
‘‘(A) PUBLICATION
OF
REGULATIONS.—
The Secretary of Housing and Urban Develop-
112
ment shall prescribe by regulation no later than
4 months after the date of the enactment of
this section, after consultation with the officials
described in paragraph (1)(B)—
‘‘(i) the procedures for nominating an
area under paragraph (1)(A);
‘‘(ii) the parameters relating to the
size and population characteristics of a re-
newal community; and
‘‘(iii) the manner in which nominated
areas will be evaluated based on the cri-
teria specified in subsection (d).
‘‘(B) TIME LIMITATIONS.—The Secretary
of Housing and Urban Development may des-
ignate nominated areas as renewal communities
only during the 24-month period beginning on
the first day of the first month following the
month in which the regulations described in
subparagraph (A) are prescribed.
‘‘(C) PROCEDURAL RULES.—The Secretary
of Housing and Urban Development shall not
make any designation of a nominated area as a
renewal 
community 
under 
paragraph 
(2)
unless—
113
‘‘(i) the local governments and the
States in which the nominated area is lo-
cated have the authority—
‘‘(I) to nominate such area for
designation as a renewal community;
‘‘(II) to make the State and local
commitments described in subsection
(d); and
‘‘(III) to provide assurances sat-
isfactory to the Secretary of Housing
and Urban Development that such
commitments will be fulfilled,
‘‘(ii) a nomination regarding such
area is submitted in such a manner and in
such form, and contains such information,
as the Secretary of Housing and Urban
Development shall by regulation prescribe;
and
‘‘(iii) the Secretary of Housing and
Urban Development determines that any
information furnished is reasonably accu-
rate.
‘‘(5) NOMINATION PROCESS FOR INDIAN RES-
ERVATIONS.—For purposes of this subchapter, in
the case of a nominated area on an Indian reserva-
114
tion, the reservation governing body (as determined
by the Secretary of the Interior) shall be treated as
being both the State and local governments with re-
spect to such area.
‘‘(b) PERIOD FOR WHICH DESIGNATION IS IN EF-
FECT.—
‘‘(1) IN GENERAL.—Any designation of an area
as a renewal community shall remain in effect dur-
ing the period beginning on the date of the designa-
tion and ending on the earliest of—
‘‘(A) December 31, 2007,
‘‘(B) the termination date designated by
the State and local governments in their nomi-
nation, or
‘‘(C) the date the Secretary of Housing
and Urban Development revokes such designa-
tion.
‘‘(2) REVOCATION OF DESIGNATION.—The Sec-
retary of Housing and Urban Development may re-
voke the designation under this section of an area if
such Secretary determines that the local government
or the State in which the area is located—
‘‘(A) has modified the boundaries of the
area, or
115
‘‘(B) is not complying substantially with,
or fails to make progress in achieving, the State
or local commitments, respectively, described in
subsection (d).
‘‘(c) AREA AND ELIGIBILITY REQUIREMENTS.—
‘‘(1) IN GENERAL.—The Secretary of Housing
and Urban Development may designate a nominated
area as a renewal community under subsection (a)
only if the area meets the requirements of para-
graphs (2) and (3) of this subsection.
‘‘(2) AREA REQUIREMENTS.—A nominated area
meets the requirements of this paragraph if—
‘‘(A) the area is within the jurisdiction of
one or more local governments;
‘‘(B) the boundary of the area is contin-
uous; and
‘‘(C) the area—
‘‘(i) has a population, of at least—
‘‘(I) 4,000 if any portion of such
area (other than a rural area de-
scribed in subsection (a)(2)(B)(i)) is
located within a metropolitan statis-
tical area (within the meaning of sec-
tion 143(k)(2)(B)) which has a popu-
lation of 50,000 or greater; or
116
‘‘(II) 1,000 in any other case; or
‘‘(ii) is entirely within an Indian res-
ervation (as determined by the Secretary of
the Interior).
‘‘(3) ELIGIBILITY
REQUIREMENTS.—A nomi-
nated area meets the requirements of this paragraph
if the State and the local governments in which it
is located certify (and the Secretary of Housing and
Urban Development, after such review of supporting
data as he deems appropriate, accepts such certifi-
cation) that—
‘‘(A) the area is one of pervasive poverty,
unemployment, and general distress;
‘‘(B) the unemployment rate in the area,
as determined by the most recent available
data, was at least 11⁄2 times the national unem-
ployment rate for the period to which such data
relate;
‘‘(C) the poverty rate for each population
census tract within the nominated area is at
least 20 percent; and
‘‘(D) in the case of an urban area, at least
70 percent of the households living in the area
have incomes below 80 percent of the median
income of households within the jurisdiction of
117
the local government (determined in the same
manner as under section 119(b)(2) of the
Housing and Community Development Act of
1974).
‘‘(4) CONSIDERATION OF HIGH INCIDENCE OF
CRIME.—The Secretary of Housing and Urban De-
velopment shall take into account, in selecting nomi-
nated areas for designation as renewal communities
under this section, the extent to which such areas
have a high incidence of crime.
‘‘(5) CONSIDERATION OF COMMUNITIES IDENTI-
FIED
IN
GAO
STUDY.—The Secretary of Housing
and Urban Development shall take into account, in
selecting nominated areas for designation as renewal
communities under this section, if the area has cen-
sus tracts identified in the May 12, 1998, report of
the Government Accounting Office regarding the
identification of economically distressed areas.
‘‘(d) REQUIRED
STATE
AND
LOCAL
COMMIT-
MENTS.—
‘‘(1) IN GENERAL.—The Secretary of Housing
and Urban Development may designate any nomi-
nated area as a renewal community under subsection
(a) only if—
118
‘‘(A) the local government and the State in
which the area is located agree in writing that,
during any period during which the area is a
renewal community, such governments will fol-
low a specified course of action which meets the
requirements of paragraph (2) and is designed
to reduce the various burdens borne by employ-
ers or employees in such area; and
‘‘(B) the economic growth promotion re-
quirements of paragraph (3) are met.
‘‘(2) COURSE OF ACTION.—
‘‘(A) IN
GENERAL.—A course of action
meets the requirements of this paragraph if
such course of action is a written document,
signed by a State (or local government) and
neighborhood organizations, which evidences a
partnership between such State or government
and community-based organizations and which
commits each signatory to specific and measur-
able goals, actions, and timetables. Such course
of action shall include at least five of the fol-
lowing:
‘‘(i) A reduction of tax rates or fees
applying within the renewal community.
119
‘‘(ii) An increase in the level of effi-
ciency of local services within the renewal
community.
‘‘(iii) Crime reduction strategies, such
as crime prevention (including the provi-
sion of such services by nongovernmental
entities).
‘‘(iv) Actions to reduce, remove, sim-
plify, or streamline governmental require-
ments applying within the renewal commu-
nity.
‘‘(v) Involvement in the program by
private entities, organizations, neighbor-
hood 
organizations, 
and 
community
groups, particularly those in the renewal
community, including a commitment from
such private entities to provide jobs and
job training for, and technical, financial, or
other assistance to, employers, employees,
and residents from the renewal community.
‘‘(vi) State or local income tax bene-
fits for fees paid for services performed by
a nongovernmental entity which were for-
merly performed by a governmental entity.
120
‘‘(vii) The gift (or sale at below fair
market value) of surplus real property
(such as land, homes, and commercial or
industrial structures) in the renewal com-
munity to neighborhood organizations,
community development corporations, or
private companies.
‘‘(B) RECOGNITION OF PAST EFFORTS.—
For purposes of this section, in evaluating the
course of action agreed to by any State or local
government, the Secretary of Housing and
Urban Development shall take into account the
past efforts of such State or local government
in reducing the various burdens borne by em-
ployers and employees in the area involved.
‘‘(3) ECONOMIC GROWTH PROMOTION REQUIRE-
MENTS.—The economic growth promotion require-
ments of this paragraph are met with respect to a
nominated area if the local government and the
State in which such area is located certify in writing
that such government and State, respectively, have
repealed or otherwise will not enforce within the
area, if such area is designated as a renewal
community—
121
‘‘(A) licensing requirements for occupa-
tions that do not ordinarily require a profes-
sional degree;
‘‘(B) zoning restrictions on home-based
businesses which do not create a public nui-
sance;
‘‘(C) permit requirements for street ven-
dors who do not create a public nuisance;
‘‘(D) zoning or other restrictions that im-
pede the formation of schools or child care cen-
ters; and
‘‘(E) franchises or other restrictions on
competition for businesses providing public
services, including but not limited to taxicabs,
jitneys, cable television, or trash hauling,
except to the extent that such regulation of busi-
nesses and occupations is necessary for and well-tai-
lored to the protection of health and safety.
‘‘(e) COORDINATION WITH TREATMENT
OF EM-
POWERMENT ZONES AND ENTERPRISE COMMUNITIES.—
For purposes of this title, if there are in effect with respect
to the same area both—
‘‘(1) a designation as a renewal community; and
‘‘(2) a designation as an empowerment zone or
enterprise community,
122
both of such designations shall be given full effect with
respect to such area.
‘‘(f) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this subchapter—
‘‘(1) GOVERNMENTS.—If more than one govern-
ment seeks to nominate an area as a renewal com-
munity, any reference to, or requirement of, this sec-
tion shall apply to all such governments.
‘‘(2) STATE.—The term ‘State’ includes Puerto
Rico, the Virgin Islands of the United States, Guam,
American Samoa, the Northern Mariana Islands,
and any other possession of the United States.
‘‘(3) LOCAL
GOVERNMENT.—The term ‘local
government’ means—
‘‘(A) any county, city, town, township, par-
ish, village, or other general purpose political
subdivision of a State;
‘‘(B) any combination of political subdivi-
sions described in subparagraph (A) recognized
by the Secretary of Housing and Urban Devel-
opment; and
‘‘(C) the District of Columbia.
‘‘(4) APPLICATION
OF
RULES
RELATING
TO
CENSUS TRACTS AND CENSUS DATA.—The rules of
sections 1392(b)(4) and 1393(a)(9) shall apply.
123
‘‘PART II—RENEWAL COMMUNITY CAPITAL GAIN;
RENEWAL COMMUNITY BUSINESS
‘‘Sec. 1400F. Renewal community capital gain.
‘‘Sec. 1400G. Renewal community business defined.
‘‘SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.
‘‘(a) GENERAL RULE.—Gross income does not in-
clude any qualified capital gain recognized on the sale or
exchange of a qualified community asset held for more
than 5 years.
‘‘(b) QUALIFIED COMMUNITY ASSET.—For purposes
of this section—
‘‘(1) IN GENERAL.—The term ‘qualified com-
munity asset’ means—
‘‘(A) any qualified community stock;
‘‘(B) any qualified community partnership
interest; and
‘‘(C) any qualified community business
property.
‘‘(2) QUALIFIED COMMUNITY STOCK.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘qualified commu-
nity stock’ means any stock in a domestic cor-
poration if—
‘‘(i) such stock is acquired by the tax-
payer after December 31, 2000, and before
January 1, 2008, at its original issue (di-
124
rectly or through an underwriter) from the
corporation solely in exchange for cash;
‘‘(ii) as of the time such stock was
issued, such corporation was a renewal
community business (or, in the case of a
new corporation, such corporation was
being organized for purposes of being a re-
newal community business); and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such stock,
such corporation qualified as a renewal
community business.
‘‘(B) REDEMPTIONS.—A rule similar to
the rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
‘‘(3) QUALIFIED COMMUNITY PARTNERSHIP IN-
TEREST.—The term ‘qualified community partner-
ship interest’ means any capital or profits interest in
a domestic partnership if—
‘‘(A) such interest is acquired by the tax-
payer after December 31, 2000, and before
January 1, 2008;
‘‘(B) as of the time such interest was ac-
quired, such partnership was a renewal commu-
nity business (or, in the case of a new partner-
125
ship, such partnership was being organized for
purposes of being a renewal community busi-
ness); and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as a renewal community
business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
‘‘(4) QUALIFIED COMMUNITY BUSINESS PROP-
ERTY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
community business property’ means tangible
property if—
‘‘(i) such property was acquired by
the taxpayer by purchase (as defined in
section 179(d)(2)) after December 31,
2000, and before January 1, 2008;
‘‘(ii) the original use of such property
in the renewal community commences with
the taxpayer; and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such prop-
erty, substantially all of the use of such
126
property was in a renewal community busi-
ness of the taxpayer.
‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM-
PROVEMENTS.—The requirements of clauses (i)
and (ii) of subparagraph (A) shall be treated as
satisfied with respect to—
‘‘(i) property which is substantially
improved (within the meaning of section
1400B(b)(4)(B)(ii)) by the taxpayer before
January 1, 2008; and
‘‘(ii) any land on which such property
is located.
‘‘(c) CERTAIN RULES TO APPLY.—Rules similar to
the rules of paragraphs (5), (6), and (7) of subsection (b),
and subsections (e), (f), and (g), of section 1400B shall
apply for purposes of this section.
‘‘SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.
‘‘For purposes of this part, the term ‘renewal commu-
nity business’ means any entity or proprietorship which
would be a qualified business entity or qualified propri-
etorship under section 1397B if—
‘‘(1) references to renewal communities were
substituted for references to empowerment zones in
such section; and
127
‘‘(2) ‘80 percent’ were substituted for ‘50 per-
cent’ in subsections (b)(2) and (c)(1) of such sec-
tion.
‘‘PART III—FAMILY DEVELOPMENT ACCOUNTS
‘‘Sec. 1400H. Family development accounts for renewal commu-
nity EITC recipients.
‘‘Sec. 1400I. Demonstration program to provide matching con-
tributions to family development accounts in certain
renewal communities.
‘‘Sec. 1400J. Designation of earned income tax credit payments
for deposit to family development account.
‘‘SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RE-
NEWAL COMMUNITY EITC RECIPIENTS.
‘‘(a) ALLOWANCE OF DEDUCTION.—
‘‘(1) IN GENERAL.—There shall be allowed as a
deduction—
‘‘(A) in the case of a qualified individual,
the amount paid in cash for the taxable year by
such individual to any family development ac-
count for such individual’s benefit; and
‘‘(B) in the case of any person other than
a qualified individual, the amount paid in cash
for the taxable year by such person to any fam-
ily development account for the benefit of a
qualified individual but only if the amount so
paid is designated for purposes of this section
by such individual.
No deduction shall be allowed under this paragraph
for any amount deposited in a family development
128
account under section 1400I (relating to demonstra-
tion program to provide matching amounts in re-
newal communities).
‘‘(2) LIMITATION.—
‘‘(A) IN GENERAL.—The amount allowable
as a deduction to any individual for any taxable
year by reason of paragraph (1)(A) shall not
exceed the lesser of—
‘‘(i) $2,000, or
‘‘(ii) an amount equal to the com-
pensation includible in the individual’s
gross income for such taxable year.
‘‘(B) PERSONS DONATING TO FAMILY DE-
VELOPMENT
ACCOUNTS
OF
OTHERS.—The
amount which may be designated under para-
graph (1)(B) by any qualified individual for any
taxable year of such individual shall not exceed
$1,000.
‘‘(3) SPECIAL RULES FOR CERTAIN MARRIED
INDIVIDUALS.—Rules similar to rules of section
219(c) shall apply to the limitation in paragraph
(2)(A).
‘‘(4) COORDINATION WITH IRAS.—No deduction
shall be allowed under this section for any taxable
year to any person by reason of a payment to an ac-
129
count for the benefit of a qualified individual if any
amount is paid for such taxable year into an indi-
vidual retirement account (including a Roth IRA)
for the benefit of such individual.
‘‘(5) ROLLOVERS.—No deduction shall be al-
lowed under this section with respect to any rollover
contribution.
‘‘(b) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) INCLUSION
OF
AMOUNTS
IN
GROSS
IN-
COME.—Except as otherwise provided in this sub-
section, any amount paid or distributed out of a
family development account shall be included in
gross income by the payee or distributee, as the case
may be.
‘‘(2) EXCLUSION OF QUALIFIED FAMILY DEVEL-
OPMENT DISTRIBUTIONS.—Paragraph (1) shall not
apply to any qualified family development distribu-
tion.
‘‘(c) QUALIFIED FAMILY DEVELOPMENT DISTRIBU-
TION.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified family
development distribution’ means any amount paid or
distributed out of a family development account
which would otherwise be includible in gross income,
to the extent that such payment or distribution is
130
used exclusively to pay qualified family development
expenses for the holder of the account or the spouse
or dependent (as defined in section 152) of such
holder.
‘‘(2) QUALIFIED
FAMILY
DEVELOPMENT
EX-
PENSES.—The term ‘qualified family development
expenses’ means any of the following:
‘‘(A) Qualified higher education expenses.
‘‘(B) Qualified first-time homebuyer costs.
‘‘(C) 
Qualified 
business 
capitalization
costs.
‘‘(D) Qualified medical expenses.
‘‘(E) Qualified rollovers.
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ has the meaning
given such term by section 72(t)(7), determined
by treating postsecondary vocational edu-
cational schools as eligible educational institu-
tions.
‘‘(B) POSTSECONDARY VOCATIONAL EDU-
CATION SCHOOL.—The term ‘postsecondary vo-
cational educational school’ means an area vo-
cational education school (as defined in sub-
131
paragraph (C) or (D) of section 521(4) of the
Carl D. Perkins Vocational and Applied Tech-
nology Education Act (20 U.S.C. 2471(4)))
which is in any State (as defined in section
521(33) of such Act), as such sections are in
effect on the date of the enactment of this sec-
tion.
‘‘(C) COORDINATION WITH OTHER BENE-
FITS.—The amount of qualified higher edu-
cation expenses for any taxable year shall be re-
duced as provided in section 25A(g)(2).
‘‘(4) 
QUALIFIED
FIRST-TIME
HOMEBUYER
COSTS.—The term ‘qualified first-time homebuyer
costs’ means qualified acquisition costs (as defined
in section 72(t)(8) without regard to subparagraph
(B) thereof) with respect to a principal residence
(within the meaning of section 121) for a qualified
first-time 
homebuyer 
(as 
defined 
in 
section
72(t)(8)).
‘‘(5) QUALIFIED
BUSINESS
CAPITALIZATION
COSTS.—
‘‘(A) IN
GENERAL.—The term ‘qualified
business capitalization costs’ means qualified
expenditures for the capitalization of a qualified
business pursuant to a qualified plan.
132
‘‘(B) 
QUALIFIED
EXPENDITURES.—The
term ‘qualified expenditures’ means expendi-
tures included in a qualified plan, including
capital, plant, equipment, working capital, and
inventory expenses.
‘‘(C) QUALIFIED
BUSINESS.—The term
‘qualified business’ means any trade or business
other than any trade or business—
‘‘(i) which consists of the operation of
any 
facility 
described 
in 
section
144(c)(6)(B), or
‘‘(ii) which contravenes any law.
‘‘(D) QUALIFIED PLAN.—The term ‘quali-
fied plan’ means a business plan which meets
such requirements as the Secretary may specify.
‘‘(6) QUALIFIED
MEDICAL
EXPENSES.—The
term ‘qualified medical expenses’ means any amount
paid during the taxable year, not compensated for by
insurance or otherwise, for medical care (as defined
in section 213(d)) of the taxpayer, his spouse, or his
dependent (as defined in section 152).
‘‘(7) QUALIFIED ROLLOVERS.—The term ‘quali-
fied rollover’ means any amount paid from a family
development account of a taxpayer into another such
account established for the benefit of—
133
‘‘(A) such taxpayer, or
‘‘(B) any qualified individual who is—
‘‘(i) the spouse of such taxpayer, or
‘‘(ii) any dependent (as defined in sec-
tion 152) of the taxpayer.
Rules similar to the rules of section 408(d)(3) shall
apply for purposes of this paragraph.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) IN GENERAL.—Any family development ac-
count is exempt from taxation under this subtitle
unless such account has ceased to be a family devel-
opment account by reason of paragraph (2). Not-
withstanding the preceding sentence, any such ac-
count is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc., organizations). Notwith-
standing any other provision of this title (including
chapters 11 and 12), the basis of any person in such
an account is zero.
‘‘(2) LOSS OF EXEMPTION IN CASE OF PROHIB-
ITED TRANSACTIONS.—For purposes of this section,
rules similar to the rules of section 408(e) shall
apply.
134
‘‘(3) OTHER RULES TO APPLY.—Rules similar
to the rules of paragraphs (4), (5), and (6) of sec-
tion 408(d) shall apply for purposes of this section.
‘‘(e) FAMILY DEVELOPMENT ACCOUNT.—For pur-
poses of this title, the term ‘family development account’
means a trust created or organized in the United States
for the exclusive benefit of a qualified individual or his
beneficiaries, but only if the written governing instrument
creating the trust meets the following requirements:
‘‘(1) Except in the case of a qualified rollover
(as defined in subsection (c)(7))—
‘‘(A) no contribution will be accepted un-
less it is in cash; and
‘‘(B) contributions will not be accepted for
the taxable year in excess of $3,000 (deter-
mined without regard to any contribution made
under section 1400I (relating to demonstration
program to provide matching amounts in re-
newal communities)).
‘‘(2) The requirements of paragraphs (2)
through (6) of section 408(a) are met.
‘‘(f) QUALIFIED INDIVIDUAL.—For purposes of this
section, the term ‘qualified individual’ means, for any tax-
able year, an individual—
135
‘‘(1) who is a bona fide resident of a renewal
community throughout the taxable year; and
‘‘(2) to whom a credit was allowed under sec-
tion 32 for the preceding taxable year.
‘‘(g) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMPENSATION.—The term ‘compensa-
tion’ has the meaning given such term by section
219(f)(1).
‘‘(2) MARRIED
INDIVIDUALS.—The maximum
deduction under subsection (a) shall be computed
separately for each individual, and this section shall
be applied without regard to any community prop-
erty laws.
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—For purposes of this section, a taxpayer
shall be deemed to have made a contribution to a
family development account on the last day of the
preceding taxable year if the contribution is made on
account of such taxable year and is made not later
than the time prescribed by law for filing the return
for such taxable year (not including extensions
thereof).
‘‘(4) EMPLOYER
PAYMENTS; CUSTODIAL
AC-
COUNTS.—Rules similar to the rules of sections
136
219(f)(5) and 408(h) shall apply for purposes of this
section.
‘‘(5) REPORTS.—The trustee of a family devel-
opment account shall make such reports regarding
such account to the Secretary and to the individual
for whom the account is maintained with respect to
contributions (and the years to which they relate),
distributions, and such other matters as the Sec-
retary may require under regulations. The reports
required by this paragraph—
‘‘(A) shall be filed at such time and in
such manner as the Secretary prescribes in
such regulations; and
‘‘(B) shall be furnished to individuals—
‘‘(i) not later than January 31 of the
calendar year following the calendar year
to which such reports relate; and
‘‘(ii) in such manner as the Secretary
prescribes in such regulations.
‘‘(6) INVESTMENT IN COLLECTIBLES TREATED
AS DISTRIBUTIONS.—Rules similar to the rules of
section 408(m) shall apply for purposes of this sec-
tion.
‘‘(h) PENALTY FOR DISTRIBUTIONS NOT USED FOR
QUALIFIED FAMILY DEVELOPMENT EXPENSES.—
137
‘‘(1) IN GENERAL.—If any amount is distrib-
uted from a family development account and is not
used exclusively to pay qualified family development
expenses for the holder of the account or the spouse
or dependent (as defined in section 152) of such
holder, the tax imposed by this chapter for the tax-
able year of such distribution shall be increased by
the sum of—
‘‘(A) 100 percent of the portion of such
amount which is includible in gross income and
is attributable to amounts contributed under
section 1400I (relating to demonstration pro-
gram to provide matching amounts in renewal
communities); and
‘‘(B) 10 percent of the portion of such
amount which is includible in gross income and
is not described in subparagraph (A).
For purposes of this subsection, distributions which
are includable in gross income shall be treated as at-
tributable to amounts contributed under section
1400I to the extent thereof. For purposes of the pre-
ceding sentence, all family development accounts of
an individual shall be treated as one account.
138
‘‘(2) EXCEPTION
FOR
CERTAIN
DISTRIBU-
TIONS.—Paragraph (1) shall not apply to distribu-
tions which are—
‘‘(A) made on or after the date on which
the account holder attains age 591⁄2,
‘‘(B) made to a beneficiary (or the estate
of the account holder) on or after the death of
the account holder, or
‘‘(C) attributable to the account holder’s
being disabled within the meaning of section
72(m)(7).
‘‘(i) APPLICATION OF SECTION.—This section shall
apply to amounts paid to a family development account
for any taxable year beginning after December 31, 2000,
and before January 1, 2008.
‘‘SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE
MATCHING CONTRIBUTIONS TO FAMILY DE-
VELOPMENT 
ACCOUNTS 
IN 
CERTAIN 
RE-
NEWAL COMMUNITIES.
‘‘(a) DESIGNATION.—
‘‘(1) DEFINITIONS.—For purposes of this sec-
tion, the term ‘FDA matching demonstration area’
means any renewal community—
‘‘(A) which is nominated under this section
by each of the local governments and States
139
which nominated such community for designa-
tion as a renewal community under section
1400E(a)(1)(A); and
‘‘(B) which the Secretary of Housing and
Urban Development designates as an FDA
matching demonstration area after consultation
with—
‘‘(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury, the
Director of the Office of Management and
Budget, and the Administrator of the
Small Business Administration; and
‘‘(ii) in the case of a community on an
Indian reservation, the Secretary of the In-
terior.
‘‘(2) NUMBER OF DESIGNATIONS.—
‘‘(A) IN
GENERAL.—The Secretary of
Housing and Urban Development may des-
ignate not more than 5 renewal communities as
FDA matching demonstration areas.
‘‘(B) MINIMUM
DESIGNATION
IN
RURAL
AREAS.—Of the areas designated under sub-
paragraph (A), at least 2 must be areas de-
scribed in section 1400E(a)(2)(B).
‘‘(3) LIMITATIONS ON DESIGNATIONS.—
140
‘‘(A) PUBLICATION
OF
REGULATIONS.—
The Secretary of Housing and Urban Develop-
ment shall prescribe by regulation no later than
4 months after the date of the enactment of
this section, after consultation with the officials
described in paragraph (1)(B)—
‘‘(i) the procedures for nominating a
renewal 
community 
under 
paragraph
(1)(A) (including procedures for coordi-
nating such nomination with the nomina-
tion of an area for designation as a re-
newal community under section 1400E);
and
‘‘(ii) the manner in which nominated
renewal communities will be evaluated for
purposes of this section.
‘‘(B) TIME LIMITATIONS.—The Secretary
of Housing and Urban Development may des-
ignate renewal communities as FDA matching
demonstration areas only during the 24-month
period beginning on the first day of the first
month following the month in which the regula-
tions described in subparagraph (A) are pre-
scribed.
141
‘‘(4) DESIGNATION BASED ON DEGREE OF POV-
ERTY, ETC.—The rules of section 1400E(a)(3) shall
apply for purposes of designations of FDA matching
demonstration areas under this section.
‘‘(b) PERIOD FOR WHICH DESIGNATION IS IN EF-
FECT.—Any designation of a renewal community as an
FDA matching demonstration area shall remain in effect
during the period beginning on the date of such designa-
tion and ending on the date on which such area ceases
to be a renewal community.
‘‘(c) MATCHING CONTRIBUTIONS TO FAMILY DEVEL-
OPMENT ACCOUNTS.—
‘‘(1) IN GENERAL.—Not less than once each
taxable year, the Secretary shall deposit (to the ex-
tent provided in appropriation Acts) into a family
development account of each qualified individual (as
defined in section 1400H(f))—
‘‘(A) who is a resident throughout the tax-
able year of an FDA matching demonstration
area; and
‘‘(B) who requests (in such form and man-
ner as the Secretary prescribes) such deposit
for the taxable year,
an amount equal to the sum of the amounts depos-
ited into all of the family development accounts of
142
such individual during such taxable year (determined
without regard to any amount contributed under this
section).
‘‘(2) LIMITATIONS.—
‘‘(A) ANNUAL LIMIT.—The Secretary shall
not deposit more than $1000 under paragraph
(1) with respect to any individual for any tax-
able year.
‘‘(B) AGGREGATE
LIMIT.—The Secretary
shall not deposit more than $2000 under para-
graph (1) with respect to any individual for all
taxable years.
‘‘(3) EXCLUSION
FROM
INCOME.—Except as
provided in section 1400H, gross income shall not
include any amount deposited into a family develop-
ment account under paragraph (1).
‘‘(d) NOTICE
OF PROGRAM.—The Secretary shall
provide appropriate notice to residents of FDA matching
demonstration areas of the availability of the benefits
under this section.
‘‘(e) TERMINATION.—No amount may be deposited
under this section for any taxable year beginning after De-
cember 31, 2007.
143
‘‘SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CRED-
IT PAYMENTS FOR DEPOSIT TO FAMILY DE-
VELOPMENT ACCOUNT.
‘‘(a) IN GENERAL.—With respect to the return of any
qualified individual (as defined in section 1400H(f)) for
the taxable year of the tax imposed by this chapter, such
individual may designate that a specified portion (not less
than $1) of any overpayment of tax for such taxable year
which is attributable to the earned income tax credit shall
be deposited by the Secretary into a family development
account of such individual. The Secretary shall so deposit
such portion designated under this subsection.
‘‘(b) MANNER AND TIME OF DESIGNATION.—A des-
ignation under subsection (a) may be made with respect
to any taxable year—
‘‘(1) at the time of filing the return of the tax
imposed by this chapter for such taxable year, or
‘‘(2) at any other time (after the time of filing
the return of the tax imposed by this chapter for
such taxable year) specified in regulations prescribed
by the Secretary.
Such designation shall be made in such manner as the
Secretary prescribes by regulations.
‘‘(c) PORTION ATTRIBUTABLE TO EARNED INCOME
TAX CREDIT.—For purposes of subsection (a), an over-
payment for any taxable year shall be treated as attrib-
144
utable to the earned income tax credit to the extent that
such overpayment does not exceed the credit allowed to
the taxpayer under section 32 for such taxable year.
‘‘(d) OVERPAYMENTS TREATED
AS REFUNDED.—
For purposes of this title, any portion of an overpayment
of tax designated under subsection (a) shall be treated as
being refunded to the taxpayer as of the last date pre-
scribed for filing the return of tax imposed by this chapter
(determined without regard to extensions) or, if later, the
date the return is filed.
‘‘(e) TERMINATION.—This section shall not apply to
any taxable year beginning after December 31, 2007.
‘‘PART IV—ADDITIONAL INCENTIVES
‘‘Sec. 1400K. Commercial revitalization deduction.
‘‘Sec. 1400L. Increase in expensing under section 179.
‘‘SEC. 1400K. COMMERCIAL REVITALIZATION DEDUCTION.
‘‘(a) GENERAL RULE.—At the election of the tax-
payer, either—
‘‘(1) one-half of any qualified revitalization ex-
penditures chargeable to capital account with respect
to any qualified revitalization building shall be allow-
able as a deduction for the taxable year in which the
building is placed in service, or
‘‘(2) a deduction for all such expenditures shall
be allowable ratably over the 120-month period be-
145
ginning with the month in which the building is
placed in service.
The deduction provided by this section with respect to
such expenditure shall be in lieu of any depreciation de-
duction otherwise allowable on account of such expendi-
ture.
‘‘(b) QUALIFIED REVITALIZATION BUILDINGS AND
EXPENDITURES.—For purposes of this section—
‘‘(1) QUALIFIED REVITALIZATION BUILDING.—
The term ‘qualified revitalization building’ means
any building (and its structural components) if—
‘‘(A) such building is located in a renewal
community and is placed in service after De-
cember 31, 2000;
‘‘(B) a commercial revitalization deduction
amount is allocated to the building under sub-
section (d); and
‘‘(C) depreciation (or amortization in lieu
of depreciation) is allowable with respect to the
building (without regard to this section).
‘‘(2) QUALIFIED
REVITALIZATION
EXPENDI-
TURE.—
‘‘(A) IN
GENERAL.—The term ‘qualified
revitalization expenditure’ means any amount
properly chargeable to capital account—
146
‘‘(i) for property for which deprecia-
tion is allowable under section 168 (with-
out regard to this section) and which is—
‘‘(I) nonresidential real property;
or
‘‘(II) an addition or improvement
to property described in subclause (I);
‘‘(ii) in connection with the construc-
tion of any qualified revitalization building
which was not previously placed in service
or in connection with the substantial reha-
bilitation (within the meaning of section
47(c)(1)(C)) of a building which was
placed in service before the beginning of
such rehabilitation; and
‘‘(iii) for land (including land which is
functionally related to such property and
subordinate thereto).
‘‘(B) DOLLAR
LIMITATION.—The aggre-
gate amount which may be treated as qualified
revitalization expenditures with respect to any
qualified revitalization building for any taxable
year shall not exceed the excess of—
‘‘(i) $10,000,000, reduced by
147
‘‘(ii) any such expenditures with re-
spect to the building taken into account by
the taxpayer or any predecessor in deter-
mining the amount of the deduction under
this section for all preceding taxable years.
‘‘(C) CERTAIN
EXPENDITURES
NOT
IN-
CLUDED.—The term ‘qualified revitalization ex-
penditure’ does not include—
‘‘(i) ACQUISITION COSTS.—The costs
of acquiring any building or interest there-
in and any land in connection with such
building to the extent that such costs ex-
ceed 30 percent of the qualified revitaliza-
tion expenditures determined without re-
gard to this clause.
‘‘(ii) 
CREDITS.—Any 
expenditure
which the taxpayer may take into account
in computing any credit allowable under
this title unless the taxpayer elects to take
the expenditure into account only for pur-
poses of this section.
‘‘(c) WHEN
EXPENDITURES
TAKEN
INTO
AC-
COUNT.—Qualified revitalization expenditures with re-
spect to any qualified revitalization building shall be taken
into account for the taxable year in which the qualified
148
revitalization building is placed in service. For purposes
of the preceding sentence, a substantial rehabilitation of
a building shall be treated as a separate building.
‘‘(d) LIMITATION ON AGGREGATE DEDUCTIONS AL-
LOWABLE WITH RESPECT TO BUILDINGS LOCATED IN A
STATE.—
‘‘(1) IN GENERAL.—The amount of the deduc-
tion determined under this section for any taxable
year with respect to any building shall not exceed
the commercial revitalization deduction amount (in
the case of an amount determined under subsection
(a)(2), the present value of such amount as deter-
mined under the rules of section 42(b)(2)(C) by sub-
stituting ‘100 percent’ for ‘72 percent’ in clause (ii)
thereof) allocated to such building under this sub-
section by the commercial revitalization agency.
Such allocation shall be made at the same time and
in the same manner as under paragraphs (1) and
(7) of section 42(h).
‘‘(2) COMMERCIAL REVITALIZATION DEDUCTION
AMOUNT FOR AGENCIES.—
‘‘(A) IN GENERAL.—The aggregate com-
mercial revitalization deduction amount which a
commercial revitalization agency may allocate
for any calendar year is the amount of the
149
State commercial revitalization deduction ceil-
ing determined under this paragraph for such
calendar year for such agency.
‘‘(B) STATE COMMERCIAL REVITALIZATION
DEDUCTION
CEILING.—The State commercial
revitalization deduction ceiling applicable to any
State—
‘‘(i) for each calendar year after 2000
and before 2008 is $6,000,000 for each re-
newal community in the State; and
‘‘(ii) zero for each calendar year
thereafter.
‘‘(C) COMMERCIAL REVITALIZATION AGEN-
CY.—For purposes of this section, the term
‘commercial revitalization agency’ means any
agency authorized by a State to carry out this
section.
‘‘(e) RESPONSIBILITIES OF COMMERCIAL REVITAL-
IZATION AGENCIES.—
‘‘(1) 
PLANS
FOR
ALLOCATION.—Notwith-
standing any other provision of this section, the
commercial revitalization deduction amount with re-
spect to any building shall be zero unless—
‘‘(A) such amount was allocated pursuant
to a qualified allocation plan of the commercial
150
revitalization agency which is approved (in ac-
cordance with rules similar to the rules of sec-
tion 147(f)(2) (other than subparagraph (B)(ii)
thereof)) by the governmental unit of which
such agency is a part; and
‘‘(B) such agency notifies the chief execu-
tive officer (or its equivalent) of the local juris-
diction within which the building is located of
such allocation and provides such individual a
reasonable opportunity to comment on the allo-
cation.
‘‘(2) QUALIFIED ALLOCATION PLAN.—For pur-
poses of this subsection, the term ‘qualified alloca-
tion plan’ means any plan—
‘‘(A) which sets forth selection criteria to
be used to determine priorities of the commer-
cial revitalization agency which are appropriate
to local conditions;
‘‘(B) which considers—
‘‘(i) the degree to which a project con-
tributes to the implementation of a stra-
tegic plan that is devised for a renewal
community through a citizen participation
process;
151
‘‘(ii) the amount of any increase in
permanent, full-time employment by reason
of any project; and
‘‘(iii) the active involvement of resi-
dents and nonprofit groups within the re-
newal community; and
‘‘(C) which provides a procedure that the
agency (or its agent) will follow in monitoring
compliance with this section.
‘‘(f) REGULATIONS.—For purposes of this section,
the Secretary shall, by regulations, provide for the applica-
tion of rules similar to the rules of section 49 and sub-
sections (a) and (b) of section 50.
‘‘(g) TERMINATION.—This section shall not apply to
any building placed in service after December 31, 2007.
‘‘SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.
‘‘(a) GENERAL RULE.—In the case of a renewal com-
munity business (as defined in section 1400G), for pur-
poses of section 179—
‘‘(1) the limitation under section 179(b)(1)
shall be increased by the lesser of—
‘‘(A) $35,000; or
‘‘(B) the cost of section 179 property
which is qualified renewal property placed in
service during the taxable year; and
152
‘‘(2) the amount taken into account under sec-
tion 179(b)(2) with respect to any section 179 prop-
erty which is qualified renewal property shall be 50
percent of the cost thereof.
‘‘(b) RECAPTURE.—Rules similar to the rules under
section 179(d)(10) shall apply with respect to any quali-
fied renewal property which ceases to be used in a renewal
community by a renewal community business.
‘‘(c) QUALIFIED RENEWAL PROPERTY.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—The term ‘qualified renewal
property’ means any property to which section 168
applies (or would apply but for section 179) if—
‘‘(A) such property was acquired by the
taxpayer by purchase (as defined in section
179(d)(2)) after December 31, 2000, and be-
fore January 1, 2008; and
‘‘(B) such property would be qualified zone
property (as defined in section 1397C) if ref-
erences to renewal communities were sub-
stituted for references to empowerment zones in
section 1397C.
‘‘(2) CERTAIN RULES TO APPLY.—The rules of
subsections (a)(2) and (b) of section 1397C shall
apply for purposes of this section.’’.
153
SEC. 703. EXTENSION OF EXPENSING OF ENVIRONMENTAL
REMEDIATION COSTS TO RENEWAL COMMU-
NITIES.
(a) EXTENSION.—Paragraph (2) of section 198(c)
(defining targeted area) is amended by redesignating sub-
paragraph (C) as subparagraph (D) and by inserting after
subparagraph (B) the following new subparagraph:
‘‘(C) 
RENEWAL
COMMUNITIES
IN-
CLUDED.—Except as provided in subparagraph
(B), such term shall include a renewal commu-
nity (as defined in section 1400E) with respect
to expenditures paid or incurred after Decem-
ber 31, 2000.’’.
(b) EXTENSION OF TERMINATION DATE FOR RE-
NEWAL COMMUNITIES.—Subsection (h) of section 198 is
amended by inserting before the period ‘‘(December 31,
2007, in the case of a renewal community, as defined in
section 1400E).’’.
SEC. 704. EXTENSION OF WORK OPPORTUNITY TAX CREDIT
FOR RENEWAL COMMUNITIES
(a) EXTENSION.—Subsection (c) of section 51 (relat-
ing to termination) is amended by adding at the end the
following new paragraph:
‘‘(5) EXTENSION
OF
CREDIT
FOR
RENEWAL
COMMUNITIES.—
154
‘‘(A) IN GENERAL.—In the case of an indi-
vidual who begins work for the employer after
the date contained in paragraph (4)(B), for
purposes of section 38—
‘‘(i) in lieu of applying subsection (a),
the amount of the work opportunity credit
determined under this section for the tax-
able year shall be equal to—
‘‘(I) 15 percent of the qualified
first-year wages for such year; and
‘‘(II) 30 percent of the qualified
second-year wages for such year;
‘‘(ii) subsection (b)(3) shall be applied
by substituting ‘$10,000’ for ‘$6,000’;
‘‘(iii) paragraph (4)(B) shall be ap-
plied by substituting for the date contained
therein the last day for which the designa-
tion under section 1400E of the renewal
community referred to in subparagraph
(B)(i) is in effect; and
‘‘(iv) rules similar to the rules of sec-
tion 51A(b)(5)(C) shall apply.
‘‘(B) QUALIFIED
FIRST- AND
SECOND-
YEAR WAGES.—For purposes of subparagraph
(A)—
155
‘‘(i) IN GENERAL.—The term ‘quali-
fied wages’ means, with respect to each 1-
year period referred to in clause (ii) or
(iii), as the case may be, the wages paid or
incurred by the employer during the tax-
able year to any individual but only if—
‘‘(I) the employer is engaged in a
trade or business in a renewal com-
munity throughout such 1-year period;
‘‘(II) the principal place of abode
of such individual is in such renewal
community throughout such 1-year
period; and
‘‘(III) substantially all of the
services which such individual per-
forms for the employer during such 1-
year period are performed in such re-
newal community.
‘‘(ii) 
QUALIFIED
FIRST-YEAR
WAGES.—The term ‘qualified first-year
wages’ means, with respect to any indi-
vidual, qualified wages attributable to serv-
ice rendered during the 1-year period be-
ginning with the day the individual begins
work for the employer.
156
‘‘(iii) 
QUALIFIED
SECOND-YEAR
WAGES.—The term ‘qualified second-year
wages’ means, with respect to any indi-
vidual, qualified wages attributable to serv-
ice rendered during the 1-year period be-
ginning on the day after the last day of the
1-year period with respect to such indi-
vidual determined under clause (ii).’’.
(b) CONGRUENT TREATMENT OF RENEWAL COMMU-
NITIES
AND ENTERPRISE ZONES
FOR PURPOSES
OF
YOUTH RESIDENCE REQUIREMENTS.—
(1) HIGH-RISK YOUTH.—Subparagraphs (A)(ii)
and (B) of section 51(d)(5) are each amended by
striking ‘‘empowerment zone or enterprise commu-
nity’’ and inserting ‘‘empowerment zone, enterprise
community, or renewal community’’.
(2) QUALIFIED SUMMER YOUTH EMPLOYEE.—
Clause (iv) of section 51(d)(7)(A) is amended by
striking ‘‘empowerment zone or enterprise commu-
nity’’ and inserting ‘‘empowerment zone, enterprise
community, or renewal community’’.
(3) HEADINGS.—Paragraphs (5)(B) and (7)(C)
of section 51(d) are each amended by inserting ‘‘OR
COMMUNITY’’ in the heading after ‘‘ZONE’’.
157
(4) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
begin work for the employer after December 31,
2000.
SEC. 705. CONFORMING AND CLERICAL AMENDMENTS.
(a) DEDUCTION FOR CONTRIBUTIONS TO FAMILY
DEVELOPMENT ACCOUNTS ALLOWABLE WHETHER
OR
NOT TAXPAYER ITEMIZES.—Subsection (a) of section 62
(relating to adjusted gross income defined) is amended by
inserting after paragraph (18) the following new para-
graph:
‘‘(19) FAMILY DEVELOPMENT ACCOUNTS.—The
deduction allowed by section 1400H(a)(1).’’.
(b) TAX ON EXCESS CONTRIBUTIONS.—
(1) TAX IMPOSED.—Subsection (a) of section
4973 is amended by striking ‘‘or’’ at the end of
paragraph (3), adding ‘‘or’’ at the end of paragraph
(4), and inserting after paragraph (4) the following
new paragraph:
‘‘(5) a family development account (within the
meaning of section 1400H(e)),’’.
(2) EXCESS CONTRIBUTIONS.—Section 4973 is
amended by adding at the end the following new
subsection:
158
‘‘(g) FAMILY DEVELOPMENT ACCOUNTS.—For pur-
poses of this section, in the case of family development
accounts, the term ‘excess contributions’ means the sum
of—
‘‘(1) the excess (if any) of—
‘‘(A) the amount contributed for the tax-
able year to the accounts (other than a quali-
fied rollover, as defined in section 1400H(c)(7),
or a contribution under section 1400I), over
‘‘(B) the amount allowable as a deduction
under section 1400H for such contributions;
and
‘‘(2) the amount determined under this sub-
section for the preceding taxable year reduced by the
sum of—
‘‘(A) the distributions out of the accounts
for the taxable year which were included in the
gross income of the payee under section
1400H(b)(1);
‘‘(B) the distributions out of the accounts
for the taxable year to which rules similar to
the rules of section 408(d)(5) apply by reason
of section 1400H(d)(3); and
‘‘(C) the excess (if any) of the maximum
amount allowable as a deduction under section
159
1400H for the taxable year over the amount
contributed to the account for the taxable year
(other than a contribution under section
1400I).
For purposes of this subsection, any contribution which
is distributed from the family development account in a
distribution to which rules similar to the rules of section
408(d)(4) apply by reason of section 1400H(d)(3) shall
be treated as an amount not contributed.’’.
(c) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(6) SPECIAL
RULE
FOR
FAMILY
DEVELOP-
MENT ACCOUNTS.—An individual for whose benefit a
family development account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if, with re-
spect to such transaction, the account ceases to be
a family development account by reason of the appli-
cation of section 1400H(d)(2) to such account.’’;
and
160
(2) in subsection (e)(1), by striking ‘‘or’’ at the
end of subparagraph (E), by redesignating subpara-
graph (F) as subparagraph (G), and by inserting
after subparagraph (E) the following new subpara-
graph:
‘‘(F) a family development account de-
scribed in section 1400H(e), or’’.
(d) INFORMATION RELATING TO CERTAIN TRUSTS
AND ANNUITY PLANS.—Subsection (c) of section 6047 is
amended—
(1) by inserting ‘‘or section 1400H’’ after ‘‘sec-
tion 219’’; and
(2) by inserting ‘‘, of any family development
account described in section 1400H(e),’’, after ‘‘sec-
tion 408(a)’’.
(e) INSPECTION OF APPLICATIONS FOR TAX EXEMP-
TION.—Clause (i) of section 6104(a)(1)(B) is amended by
inserting ‘‘a family development account described in sec-
tion 1400H(e),’’ after ‘‘section 408(a),’’.
(f) FAILURE TO PROVIDE REPORTS ON FAMILY DE-
VELOPMENT
ACCOUNTS.—Paragraph (2) of section
6693(a) is amended by striking ‘‘and’’ at the end of sub-
paragraph (C), by striking the period and inserting ‘‘,
and’’ at the end of subparagraph (D), and by adding at
the end the following new subparagraph:
161
‘‘(E) section 1400H(g)(6) (relating to fam-
ily development accounts).’’.
(g) CONFORMING AMENDMENTS REGARDING COM-
MERCIAL REVITALIZATION DEDUCTION.—
(1) Section 172 is amended by redesignating
subsection (j) as subsection (k) and by inserting
after subsection (i) the following new subsection:
‘‘(j) NO CARRYBACK OF SECTION 1400K DEDUCTION
BEFORE DATE OF ENACTMENT.—No portion of the net
operating loss for any taxable year which is attributable
to any commercial revitalization deduction determined
under section 1400K may be carried back to a taxable
year ending before the date of the enactment of section
1400K.’’.
(2) Subparagraph (B) of section 48(a)(2) is
amended by inserting ‘‘or commercial revitalization’’
after ‘‘rehabilitation’’ each place it appears in the
text and heading.
(3) Subparagraph (C) of section 469(i)(3) is
amended—
(A) by inserting ‘‘or section 1400K’’ after
‘‘section 42’’; and
(B) by inserting ‘‘AND COMMERCIAL REVI-
TALIZATION
DEDUCTION’’ after ‘‘CREDIT’’ in
the heading.
162
(h) CLERICAL AMENDMENTS.—The table of sub-
chapters for chapter 1 is amended by adding at the end
the following new item:
‘‘Subchapter X. Renewal Communities.’’.
SEC. 706. EVALUATION AND REPORTING REQUIREMENTS.
Not later than the close of the fourth calendar year
after the year in which the Secretary of Housing and
Urban Development first designates an area as a renewal
community under section 1400E of the Internal Revenue
Code of 1986, and at the close of each fourth calendar
year thereafter, such Secretary shall prepare and submit
to the Congress a report on the effects of such designa-
tions in stimulating the creation of new jobs, particularly
for disadvantaged workers and long-term unemployed in-
dividuals, and promoting the revitalization of economically
distressed areas.
Subtitle B—Farming Incentive
SEC. 711. PRODUCTION FLEXIBILITY CONTRACT PAY-
MENTS.
Any option to accelerate the receipt of any payment
under a production flexibility contract which is payable
under the Federal Agriculture Improvement and Reform
Act of 1996 (7 U.S.C. 7200 et seq.), as in effect on the
date of the enactment of this Act, shall be disregarded
in determining the taxable year for which such payment
163
is properly includible in gross income for purposes of the
Internal Revenue Code of 1986.
Subtitle C—Oil and Gas Incentive
SEC. 721. 5-YEAR NET OPERATING LOSS CARRYBACK FOR
LOSSES ATTRIBUTABLE TO OPERATING MIN-
ERAL INTERESTS OF INDEPENDENT OIL AND
GAS PRODUCERS.
(a) IN GENERAL.—Paragraph (1) of section 172(b)
(relating to years to which loss may be carried) is amended
by adding at the end the following new subparagraph:
‘‘(H) LOSSES ON OPERATING MINERAL IN-
TERESTS OF INDEPENDENT OIL AND GAS PRO-
DUCERS.—In the case of a taxpayer—
‘‘(i) which has an eligible oil and gas
loss (as defined in subsection (j)) for a tax-
able year, and
‘‘(ii) which is not an integrated oil
company (as defined in section 291(b)(4)),
such eligible oil and gas loss shall be a net op-
erating loss carryback to each of the 5 taxable
years preceding the taxable year of such loss.’’
(b) ELIGIBLE OIL AND GAS LOSS.—Section 172 is
amended by redesignating subsection (j) as subsection (k)
and by inserting after subsection (i) the following new sub-
section:
164
‘‘(j) ELIGIBLE OIL AND GAS LOSS.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘eligible oil and
gas loss’ means the lesser of—
‘‘(A) the amount which would be the net
operating loss for the taxable year if only in-
come and deductions attributable to operating
mineral interests (as defined in section 614(d))
in oil and gas wells are taken into account, or
‘‘(B) the amount of the net operating loss
for such taxable year.
‘‘(2) 
COORDINATION
WITH
SUBSECTION
(b)(2).—For purposes of applying subsection (b)(2),
an eligible oil and gas loss for any taxable year shall
be treated in a manner similar to the manner in
which a specified liability loss is treated.
‘‘(3) ELECTION.—Any taxpayer entitled to a 5-
year carryback under subsection (b)(1)(H) from any
loss year may elect to have the carryback period
with respect to such loss year determined without re-
gard to subsection (b)(1)(H).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to net operating losses for taxable
years beginning after December 31, 1998.
165
Subtitle D—Timber Incentive
SEC. 731. INCREASE IN MAXIMUM PERMITTED AMORTIZA-
TION OF REFORESTATION EXPENDITURES.
(a) IN GENERAL.—Paragraph (1) of section 194(b)
(relating to amortization of reforestation expenditures) is
amended by striking ‘‘$10,000 ($5,000’’ and inserting
‘‘$25,000 ($12,500’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to additions to capital account
made in taxable years beginning after December 31, 1998.
Subtitle E—Steel Industry
Incentive
SEC. 741. MINIMUM TAX RELIEF FOR STEEL INDUSTRY.
(a) IN GENERAL.—Subsection (c) of section 53 (as
amended by section 302) is amended by adding at the end
the following new paragraph:
‘‘(4) STEEL COMPANIES.—In the case of a
qualified corporation (as defined in section
212(g)(1) of the Tax Reform Act of 1986), in
lieu of applying paragraph (2), the limitation
under paragraph (1) for any taxable year begin-
ning after December 31, 1998, shall be in-
creased (subject to the rule of the last sentence
of paragraph (2)) by 90 percent of the tentative
minimum tax.’’
166
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1998.
TITLE VIII—RELIEF FOR SMALL
BUSINESSES
SEC. 801. DEDUCTION FOR 100 PERCENT OF HEALTH IN-
SURANCE COSTS OF SELF-EMPLOYED INDI-
VIDUALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l)
is amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—In the case
of an individual who is an employee within the
meaning of section 401(c)(1), there shall be allowed
as a deduction under this section an amount equal
to 100 percent of the amount paid during the tax-
able year for insurance which constitutes medical
care for the taxpayer, his spouse, and dependents.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1999.
SEC. 802. INCREASE IN EXPENSE TREATMENT FOR SMALL
BUSINESSES.
(a) IN GENERAL.—Paragraph (1) of section 179(b)
(relating to dollar limitation) is amended to read as fol-
lows:
167
‘‘(1) DOLLAR LIMITATION.—The aggregate cost
which may be taken into account under subsection
(a) for any taxable year shall not exceed $30,000.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1999.
SEC. 803. REPEAL OF FEDERAL UNEMPLOYMENT SURTAX.
(a) IN GENERAL.—Section 3301 (relating to rate of
Federal unemployment tax) is amended—
(1) by striking ‘‘2007’’ and inserting ‘‘2004’’,
and
(2) by striking ‘‘2008’’ and inserting ‘‘2005’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to calendar years beginning after
the date of the enactment of this Act.
SEC. 804. RESTORATION OF 80 PERCENT DEDUCTION FOR
MEAL EXPENSES.
(a) IN GENERAL.—Paragraph (1) of section 274(n)
(relating to only 50 percent of meal and entertainment
expenses allowed as deduction) is amended by striking ‘‘50
percent’’ in the text and inserting ‘‘the allowable percent-
age’’.
(b) ALLOWABLE PERCENTAGES.—Subsection (n) of
section 274 is amended by redesignating paragraphs (2)
168
and (3) as paragraphs (3) and (4), respectively, and by
inserting after paragraph (2) the following new paragraph:
‘‘(2) ALLOWABLE PERCENTAGE.—For purposes
of paragraph (1), the allowable percentage is—
‘‘(A) in the case of amounts for items de-
scribed in paragraph (1)(B), 50 percent, and
‘‘(B) in the case of expenses for food or
beverages, the percentage determined in accord-
ance with the following table:
‘‘For taxable years beginning
The allowable
in calendar year—
percentage is—
2000 through 2003 ......................................................
2004 .............................................................................
2005 .............................................................................
2006 .............................................................................
2007 .............................................................................
2008 .............................................................................
2009 and thereafter .....................................................
80.’’
(b) CONFORMING AMENDMENTS.—
(1) The heading for subsection (n) of section
274 is amended by striking ‘‘50 PERCENT’’ and in-
serting ‘‘LIMITED PERCENTAGES’’.
(2) Subparagraph (A) of section 274(n)(4), as
redesignated by subsection (a), is amended by strik-
ing ‘‘50 percent’’ and inserting ‘‘the allowable per-
centage’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1999.
169
TITLE IX—INTERNATIONAL TAX
RELIEF
SEC. 901. INTEREST ALLOCATION RULES.
(a) ELECTION
TO
ALLOCATE
INTEREST
ON
A
WORLDWIDE BASIS.—Subsection (e) of section 864 (relat-
ing to rules for allocating interest, etc.) is amended by
redesignating paragraphs (6) and (7) as paragraphs (7)
and (8), respectively, and by inserting after paragraph (5)
the following new paragraph:
‘‘(6) ELECTION TO ALLOCATE INTEREST ON A
WORLDWIDE BASIS.—
‘‘(A) IN GENERAL.—Except as provided in
this paragraph, this subsection (other than
paragraph (7)) shall be applied by treating each
worldwide affiliated group for which an election
under this paragraph is in effect as an affiliated
group.
‘‘(B) WORLDWIDE AFFILIATED GROUP.—
For purposes of this paragraph, the term
‘worldwide affiliated group’ means the group of
corporations which consists of—
‘‘(i) all corporations in an affiliated
group (as defined in paragraph (5)), and
‘‘(ii) all foreign corporations (other
than a FSC, as defined in section 922(a))
170
with respect to which corporations de-
scribed in clause (i) own stock meeting the
ownership requirements of section 957(a)
(without regard to stock considered as
owned under section 958(b)).
‘‘(C) ALLOCATION.—
‘‘(i) IN
GENERAL.—For purposes of
paragraph (1), only the applicable percent-
age of the interest expense and assets of a
foreign corporation described in subpara-
graph (B)(ii) shall be taken into account.
‘‘(ii) APPLICABLE PERCENTAGE.—For
purposes of this paragraph, the term ‘ap-
plicable percentage’ means, with respect to
any foreign corporation, the percentage
equal to the ratio which the value of the
stock in such corporation taken into ac-
count under subparagraph (B)(ii) bears to
the aggregate value of all stock in such
corporation.
‘‘(D) TREATMENT OF FOREIGN INTEREST
EXPENSE.—Interest expense of members of an
electing worldwide affiliated group which is allo-
cated to foreign source income under this sub-
section shall be reduced (but not below zero) by
171
the applicable percentage of the interest ex-
pense incurred by any foreign corporation in
the electing worldwide affiliated group to the
extent such interest would have been allocated
and apportioned to foreign source income of
such corporation if this subsection were applied
to a group consisting of all the foreign corpora-
tions in such affiliated group.
‘‘(E) ELECTION.—An election under this
paragraph with respect to any worldwide affili-
ated group may be made only by the common
parent of the affiliated group referred to in sub-
paragraph (B)(i) and may be made only for the
first taxable year beginning after December 31,
2001, in which a worldwide affiliated group ex-
ists which includes such affiliated group and at
least 1 corporation described in subparagraph
(B)(ii). Such an election, once made, shall apply
to such parent and all other corporations which
are included in such worldwide affiliated group
for such taxable year and all subsequent years
unless revoked with the consent of the Sec-
retary.’’.
(b) ELECTION TO ALLOCATE INTEREST WITHIN FI-
NANCIAL
INSTITUTION
GROUPS
AND
SUBSIDIARY
172
GROUPS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection:
‘‘(f) ELECTION TO APPLY SUBSECTION (e) ON BASIS
OF FINANCIAL INSTITUTION GROUP
AND SUBSIDIARY
GROUPS.—
‘‘(1) IN GENERAL.—Subsection (e) (other than
paragraph (7) thereof) shall be applied—
‘‘(A) as if the electing financial institution
group were a separate affiliated group, and
‘‘(B) for purposes of allocating interest ex-
pense with respect to qualified indebtedness of
members of an electing subsidiary group, as if
each electing subsidiary group were a separate
affiliated group.
Subsection (e) shall apply to any such electing group
in the same manner as subsection (e) applies to the
pre-election affiliated group of which such electing
group is a part.
‘‘(2) 
ELECTING
FINANCIAL
INSTITUTION
GROUP.—For purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘electing fi-
nancial institution group’ means any group of
corporations if—
173
‘‘(i) such group consists only of all of
the financial corporations in the pre-elec-
tion affiliated group, and
‘‘(ii) an election under this paragraph
is in effect for such group of corporations.
‘‘(B) 
FINANCIAL
CORPORATION.—The
term ‘financial corporation’ means any corpora-
tion if at least 80 percent of its gross income
is income described in section 904(d)(2)(C)(ii)
and the regulations thereunder. To the extent
provided in regulations prescribed by the Sec-
retary, such term includes a bank holding com-
pany (within the meaning of section 2(a) of the
Bank Holding Company Act of 1956).
‘‘(C) 
EFFECT
OF
CERTAIN
TRANS-
ACTIONS.—Rules similar to the rules of para-
graph (3)(D) shall apply to transactions be-
tween any member of the electing financial in-
stitution group and any member of the pre-elec-
tion affiliated group (other than a member of
the electing financial institution group).
‘‘(D) ELECTION.—An election under this
paragraph with respect to any financial institu-
tion group may be made only by the common
parent of the pre-election affiliated group. Such
174
an election, once made, shall apply only to the
taxable year for which made.
‘‘(3) ELECTING SUBSIDIARY GROUPS.—
‘‘(A) IN
GENERAL.—The term ‘electing
subsidiary group’ means any group of corpora-
tions if—
‘‘(i) such group consists only of cor-
porations in the pre-election affiliated
group,
‘‘(ii) such group includes—
‘‘(I) 
a 
domestic 
corporation
(which is not the common parent of
the pre-election affiliated group or a
member of an electing financial insti-
tution group) which incurs interest ex-
pense with respect to qualified indebt-
edness, and
‘‘(II) every other corporation
(other than a member of an electing
financial institution group) which is in
the pre-election affiliated group and
which would be a member of an affili-
ated group having such domestic cor-
poration as the common parent, and
175
‘‘(iii) an election under this paragraph
is in effect for such group.
‘‘(B) EQUALIZATION
RULE.—All interest
expense of a pre-election affiliated group (other
than subgroup interest expense) shall be treated
as allocated to foreign source income to the ex-
tent such expense does not exceed the excess (if
any) of—
‘‘(i) the interest expense of the pre-
election affiliated group (including sub-
group interest expense) which would (but
for any election under this paragraph) be
allocated to foreign source income, over
‘‘(ii) the subgroup interest expense al-
located to foreign source income.
For purposes of the preceding sentence, the
subgroup interest expense is the interest ex-
pense to which subsection (e) applies separately
by reason of paragraph (1)(B).
‘‘(C) 
QUALIFIED
INDEBTEDNESS.—For
purposes of this subsection, the term ‘qualified
indebtedness’ means any indebtedness of a do-
mestic corporation—
‘‘(i) which is held by an unrelated per-
son, and
176
‘‘(ii) which is not guaranteed (or oth-
erwise supported) by any corporation
which is a member of the pre-election af-
filiated group other than a corporation
which is a member of the electing sub-
sidiary group.
For purposes of this subparagraph, the term
‘unrelated person’ means any person not bear-
ing a relationship specified in section 267(b) or
707(b)(1) to the corporation.
‘‘(D) EFFECT OF CERTAIN TRANSACTIONS
ON QUALIFIED INDEBTEDNESS.—In the case of
a corporation which is a member of an electing
subsidiary group, to the extent that such
corporation—
‘‘(i) distributes dividends or makes
other distributions with respect to its stock
after the date of the enactment of this
paragraph to any member of the pre-elec-
tion affiliated group (other than to a mem-
ber of the electing subsidiary group) in ex-
cess of the greater of—
‘‘(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-
177
taxable-year period ending with the
taxable year preceding the taxable
year, or
‘‘(II) 25 percent of its average
annual earnings and profits for such 5
taxable year period, or
‘‘(ii) deals with any person in any
manner not clearly reflecting the income of
the corporation (as determined under prin-
ciples similar to the principles of section
482),
an amount of qualified indebtedness equal to
the excess distribution or the understatement or
overstatement of income, as the case may be,
shall be recharacterized (for the taxable year
and subsequent taxable years) for purposes of
this subsection as indebtedness which is not
qualified indebtedness. If a corporation has not
been in existence for 5 taxable years, this sub-
paragraph shall be applied with respect to the
period it was in existence.
‘‘(E) ELECTION.—An election under this
paragraph with respect to any electing sub-
sidiary group may be made only by the common
parent of the pre-election affiliated group. Such
178
an election, once made, shall apply only to the
taxable year for which made. No election may
be made under this paragraph if the effect of
the election would be to have the same member
of the pre-election affiliated group included in
more than 1 electing subsidiary group.
‘‘(4) PRE-ELECTION AFFILIATED GROUP.—For
purposes of this subsection, the term ‘pre-election
affiliated group’ means, with respect to a corpora-
tion, the affiliated group or electing worldwide affili-
ated group of which such corporation would (but for
an election under this subsection) be a member for
purposes of applying subsection (e).
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to
carry out this subsection and subsection (e), includ-
ing regulations—
‘‘(A) providing for the direct allocation of
interest expense in other circumstances where
such allocation would be appropriate to carry
out the purposes of this subsection,
‘‘(B) preventing assets or interest expense
from being taken into account more than once,
and
179
‘‘(C) dealing with changes in members of
any group (through acquisitions or otherwise)
treated under this subsection as an affiliated
group for purposes of subsection (e).’’
(c) INSURANCE COMPANIES INCLUDED IN AFFILI-
ATED GROUPS.—Paragraph (5) of section 864(e) is
amended to read as follows:
‘‘(5) AFFILIATED GROUP.—The term ‘affiliated
group’ has the meaning given such term by section
1504 (determined without regard to paragraphs (2)
and (4) of section 1504(b)).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 902. LOOK-THRU RULES TO APPLY TO DIVIDENDS
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS.
(a) IN GENERAL.—Section 904(d)(4) (relating to ap-
plication of look-thru rules to dividends from noncon-
trolled section 902 corporations) is amended to read as
follows:
‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM
NONCONTROLLED SECTION 902 CORPORATIONS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, any dividend from a noncontrolled
180
section 902 corporation with respect to the tax-
payer shall be treated as income in a separate
category in proportion to the ratio of—
‘‘(i) the portion of earnings and prof-
its attributable to income in such category,
to
‘‘(ii) the total amount of earnings and
profits.
‘‘(B) SPECIAL
RULES.—For purposes of
this paragraph—
‘‘(i) IN
GENERAL.—Rules similar to
the rules of paragraph (3)(F) shall apply;
except that the term ‘separate category’
shall include the category of income de-
scribed in paragraph (1)(I).
‘‘(ii) EARNINGS AND PROFITS.—
‘‘(I) IN GENERAL.—The rules of
section 316 shall apply.
‘‘(II) REGULATIONS.—The Sec-
retary may prescribe regulations re-
garding the treatment of distributions
out of earnings and profits for periods
before the taxpayer’s acquisition of
the stock to which the distributions
relate.
181
‘‘(iii) DIVIDENDS NOT ALLOCABLE TO
SEPARATE CATEGORY.—The portion of any
dividend from a noncontrolled section 902
corporation which is not treated as income
in a separate category under subparagraph
(A) shall be treated as a dividend to which
subparagraph (A) does not apply.
‘‘(iv) LOOK-THRU WITH RESPECT TO
CARRYFORWARDS OF CREDIT.—Rules simi-
lar to subparagraph (A) also shall apply to
any carryforward under subsection (c)
from a taxable year beginning before Janu-
ary 1, 2002, of tax allocable to a dividend
from a noncontrolled section 902 corpora-
tion with respect to the taxpayer.’’
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (E) of section 904(d)(1), as
in effect both before and after the amendments
made by section 1105 of the Taxpayer Relief Act of
1997, is hereby repealed.
(2) Section 904(d)(2)(C)(iii), as so in effect, is
amended by striking subclause (II) and by redesig-
nating subclause (III) as subclause (II).
182
(3) The last sentence of section 904(d)(2)(D),
as so in effect, is amended to read as follows: ‘‘Such
term does not include any financial services income.’’
(4) Section 904(d)(2)(E) is amended by strik-
ing clauses (ii) and (iv) and by redesignating clause
(iii) as clause (ii).
(5) Section 904(d)(3)(F) is amended by strik-
ing ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’.
(6) Section 864(d)(5)(A)(i) is amended by
striking ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 903. CLARIFICATION OF TREATMENT OF PIPELINE
TRANSPORTATION INCOME.
(a) IN GENERAL.—Section 954(g)(1) (defining for-
eign base company oil related income) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and inserting ‘‘,
or’’, and by inserting after subparagraph (B) the following
new subparagraph:
‘‘(C) the pipeline transportation of oil or
gas within such foreign country.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years of controlled for-
183
eign corporations beginning after December 31, 2001, and
taxable years of United States shareholders with or within
which such taxable years of controlled foreign corporations
end.
SEC. 904. SUBPART F TREATMENT OF INCOME FROM
TRANSMISSION OF HIGH VOLTAGE ELEC-
TRICITY.
(a) IN GENERAL.—Paragraph (2) of section 954(e)
(relating to foreign base company services income) is
amended by striking ‘‘or’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph (B) and
inserting ‘‘, or’’, and by inserting after subparagraph (B)
the following new subparagraph:
‘‘(C) the transmission of high voltage elec-
tricity.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years of controlled for-
eign corporations beginning after December 31, 2001, and
taxable years of United States shareholders with or within
which such taxable years of controlled foreign corporations
end.
SEC. 905. RECHARACTERIZATION OF OVERALL DOMESTIC
LOSS.
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
184
sections (h), (i), (j), (k), and (l), respectively, and by in-
serting after subsection (f) the following new subsection:
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC
LOSS.—
‘‘(1) GENERAL
RULE.—For purposes of this
subpart and section 936, in the case of any taxpayer
who sustains an overall domestic loss for any taxable
year beginning after December 31, 2004, that por-
tion of the taxpayer’s taxable income from sources
within the United States for each succeeding taxable
year which is equal to the lesser of—
‘‘(A) the amount of such loss (to the extent
not used under this paragraph in prior taxable
years), or
‘‘(B) 50 percent of the taxpayer’s taxable
income from sources within the United States
for such succeeding taxable year,
shall be treated as income from sources without the
United States (and not as income from sources with-
in the United States).
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For
purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the ex-
tent such loss offsets taxable income from
185
sources without the United States for the tax-
able year or for any preceding taxable year by
reason of a carryback. For purposes of the pre-
ceding sentence, the term ‘domestic loss’ means
the amount by which the gross income for the
taxable year from sources within the United
States is exceeded by the sum of the deductions
properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a
subsequent taxable year).
‘‘(B) TAXPAYER
MUST
HAVE
ELECTED
FOREIGN TAX CREDIT FOR YEAR OF LOSS.—
The term ‘overall domestic loss’ shall not in-
clude any loss for any taxable year unless the
taxpayer chose the benefits of this subpart for
such taxable year.
‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN-
COME.—
‘‘(A) IN
GENERAL.—Any income from
sources within the United States that is treated
as income from sources without the United
States under paragraph (1) shall be allocated
among and increase the income categories in
proportion to the loss from sources within the
186
United States previously allocated to those in-
come categories.
‘‘(B) INCOME CATEGORY.—For purposes of
this paragraph, the term ‘income category’ has
the meaning given such term by subsection
(f)(5)(E)(i).
‘‘(4) COORDINATION WITH SUBSECTION (f).—
The Secretary shall prescribe such regulations as
may be necessary to coordinate the provisions of this
subsection with the provisions of subsection (f).’’
(b) CONFORMING AMENDMENTS.—
(1) Section 535(d)(2) is amended by striking
‘‘section 
904(g)(6)’’ 
and 
inserting 
‘‘section
904(h)(6)’’.
(2) Subparagraph (A) of section 936(a)(2) is
amended by striking ‘‘section 904(f)’’ and inserting
‘‘subsections (f) and (g) of section 904’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to losses for taxable years begin-
ning after December 31, 2004.
SEC. 906. TREATMENT OF MILITARY PROPERTY OF FOR-
EIGN SALES CORPORATIONS.
(a) IN GENERAL.—Section 923(a) (defining exempt
foreign trade income) is amended by striking paragraph
(5) and by redesignating paragraph (6) as paragraph (5).
187
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 907. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES.
(a) TREATMENT OF CERTAIN DIVIDENDS.—
(1) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 871 (relating to tax on nonresident alien indi-
viduals) is amended by redesignating subsection (k)
as subsection (l) and by inserting after subsection (j)
the following new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any interest-related dividend received from a
regulated investment company.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any interest-related dividend
received from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than
188
interest described in subparagraph (E) (i)
or (iii)) received by such company on in-
debtedness issued by such person or by any
corporation or partnership with respect to
which such person is a 10-percent share-
holder,
‘‘(ii) to any interest-related dividend
with respect to stock of a regulated invest-
ment company unless the person who
would otherwise be required to deduct and
withhold tax from such dividend under
chapter 3 receives a statement (which
meets requirements similar to the require-
ments of subsection (h)(5)) that the bene-
ficial owner of such stock is not a United
States person, and
‘‘(iii) to any interest-related dividend
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of,
persons within such foreign country) dur-
ing any period described in subsection
(h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock the holding period of which
189
begins on or before the date of the publication
of the Secretary’s determination under sub-
section (h)(6).
‘‘(C) INTEREST-RELATED DIVIDEND.—For
purposes of this paragraph, an interest-related
dividend is any dividend (or part thereof) which
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later
than 60 days after the close of its taxable year.
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year
described in section 855) is greater than the
qualified net interest income of the company for
such taxable year, the portion of each distribu-
tion which shall be an interest-related dividend
shall be only that portion of the amounts so
designated which such qualified net interest in-
come bears to the aggregate amount so des-
ignated.
‘‘(D) 
QUALIFIED
NET
INTEREST
IN-
COME.—For purposes of subparagraph (C), the
term ‘qualified net interest income’ means the
190
qualified interest income of the regulated in-
vestment company reduced by the deductions
properly allocable to such income.
‘‘(E) QUALIFIED INTEREST INCOME.—For
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United
States:
‘‘(i) Any amount includible in gross
income as original issue discount (within
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date
of original issue (without regard to the pe-
riod held by the company).
‘‘(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original issue
discount or market discount or acquisition
discount under part V of subchapter P and
such other amounts as regulations may
provide) on an obligation which is in reg-
istered form; except that this clause shall
not apply to—
191
‘‘(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company
is a 10-percent shareholder in such
corporation or partnership, and
‘‘(II) any interest which is treat-
ed as not being portfolio interest
under the rules of subsection (h)(4).
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the
trade or business of the regulated invest-
ment company).
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to
stock of another regulated investment com-
pany.
Such term includes any interest derived by the
regulated investment company from sources
outside the United States other than interest
that is subject to a tax imposed by a foreign ju-
risdiction if the amount of such tax is reduced
(or eliminated) by a treaty with the United
States.
‘‘(F) 10-PERCENT
SHAREHOLDER.—For
purposes of this paragraph, the term ‘10-per-
192
cent shareholder’ has the meaning given such
term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any short-term capital gain dividend received
from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE
UNDER SUBSECTION (a)(2).—Subparagraph (A)
shall not apply in the case of any nonresident
alien individual subject to tax under subsection
(a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a
short-term capital gain dividend is any dividend
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to
its shareholders not later than 60 days after the
close of its taxable year. If the aggregate
amount so designated with respect to a taxable
year of the company (including amounts so des-
ignated with respect to dividends paid after the
close of the taxable year described in section
193
855) is greater than the qualified short-term
gain of the company for such taxable year, the
portion of each distribution which shall be a
short-term capital gain dividend shall be only
that portion of the amounts so designated
which such qualified short-term gain bears to
the aggregate amount so designated.
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the
net short-term capital gain of the regulated in-
vestment company for the taxable year over the
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this
subparagraph—
‘‘(i) the net short-term capital gain of
the regulated investment company shall be
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to stock of another regu-
lated investment company as a short-term
capital gain, and
‘‘(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
194
which an election under section 4982(e)(4)
does not apply) shall be determined with-
out regard to any net capital loss or net
short-term capital loss attributable to
transactions after October 31 of such year,
and any such net capital loss or net short-
term capital loss shall be treated as arising
on the 1st day of the next taxable year.
To the extent provided in regulations, clause
(ii) shall apply also for purposes of computing
the taxable income of the regulated investment
company.’’
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating to tax on income of foreign corporations not
connected with United States business) is amended
by redesignating subsection (e) as subsection (f) and
by inserting after subsection (d) the following new
subsection:
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS
OF REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1) of subsection (a) on any
interest-related dividend (as defined in section
195
871(k)(1)) received from a regulated investment
company.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and
‘‘(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to
the extent such dividend is attributable to
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section
864(d)(4)) with respect to such controlled
foreign corporation.
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall
apply to any interest-related dividend received
by a controlled foreign corporation (within the
meaning of section 957(a)) to the extent such
dividend is attributable to interest received by
the regulated investment company which is de-
scribed in clause (ii) of section 871(k)(1)(E)
196
(and not described in clause (i) or (iii) of such
section).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend
(as defined in section 871(k)(2)) received from a
regulated investment company.’’
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to excep-
tions) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM
REGULATED INVESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the
tax imposed by section 871(a)(1)(A) by reason
of section 871(k).
‘‘(B) SPECIAL
RULE.—For purposes of
subparagraph 
(A), 
clause 
(i) 
of 
section
871(k)(1)(B) shall not apply to any dividend
unless the regulated investment company knows
that such dividend is a dividend referred to in
such clause. A similar rule shall apply with re-
197
spect to the exception contained in section
871(k)(2)(B).’’
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is
amended—
(i) by striking ‘‘and the reference in
section 1441(c)(10)’’ and inserting ‘‘the
reference in section 1441(c)(10)’’, and
(ii) by inserting before the period at
the end the following: ‘‘, and the references
in section 1441(c)(12) to sections 871(a)
and 871(k) shall be treated as referring to
sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply
to any dividend unless the regulated invest-
ment company knows that such dividend is
a dividend referred to in such clause)’’.
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN
REGULATED
INVESTMENT
COMPANIES.—Section
2105 (relating to property without the United States for
estate tax purposes) is amended by adding at the end the
following new subsection:
‘‘(d) STOCK IN A RIC.—
198
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company
(as defined in section 851) owned by a nonresident
not a citizen of the United States shall not be
deemed property within the United States in the
proportion that, at the end of the quarter of such in-
vestment company’s taxable year immediately pre-
ceding a decedent’s date of death (or at such other
time as the Secretary may designate in regulations),
the assets of the investment company that were
qualifying assets with respect to the decedent bore
to the total assets of the investment company.
‘‘(2) QUALIFYING
ASSETS.—For purposes of
this subsection, qualifying assets with respect to a
decedent are assets that, if owned directly by the de-
cedent, would have been—
‘‘(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
‘‘(B) debt obligations described in the last
sentence of section 2104(c), or
‘‘(C) other property not within the United
States.’’
(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES UNDER SECTION 897.—
199
(1) Paragraph (1) of section 897(h) is amended
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘qualified investment entity’’.
(2) Paragraphs (2) and (3) of section 897(h)
are amended to read as follows:
‘‘(2) SALE OF STOCK IN DOMESTICALLY CON-
TROLLED ENTITY NOT TAXED.—The term ‘United
States real property interest’ does not include any
interest in a domestically controlled qualified invest-
ment entity.
‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON-
TROLLED
QUALIFIED
INVESTMENT
ENTITIES.—In
the case of a domestically controlled qualified invest-
ment entity, rules similar to the rules of subsection
(d) shall apply to the foreign ownership percentage
of any gain.’’
(3) Subparagraphs (A) and (B) of section
897(h)(4) are amended to read as follows:
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
The term ‘qualified investment entity’ means
any real estate investment trust and any regu-
lated investment company.
‘‘(B) DOMESTICALLY
CONTROLLED.—The
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
200
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock
was held directly or indirectly by foreign per-
sons.’’
(4) Subparagraphs (C) and (D) of section
897(h)(4) are each amended by striking ‘‘REIT’’
and inserting ‘‘qualified investment entity’’.
(5) The subsection heading for subsection (h) of
section 897 is amended by striking ‘‘REITS’’ and
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to dividends with respect to
taxable years of regulated investment companies be-
ginning after December 31, 2004.
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates
of decedents dying after December 31, 2004.
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph
(1) thereof) shall take effect on January 1, 2005.
201
SEC. 908. REPEAL OF SPECIAL RULES FOR APPLYING FOR-
EIGN TAX CREDIT IN CASE OF FOREIGN OIL
AND GAS INCOME.
(a) IN GENERAL.—Section 907 (relating to special
rules in case of foreign oil and gas income) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Each of the following provisions are amend-
ed by striking ‘‘907,’’:
(A) Section 245(a)(10).
(B) Section 865(h)(1)(B).
(C) Section 904(d)(1).
(D) Section 904(g)(10)(A).
(2) Section 904(f)(5)(E)(iii) is amended by in-
serting ‘‘, as in effect before its repeal by the Finan-
cial 
Freedom 
Act 
of 
1999’’ 
after 
‘‘section
907(c)(4)(B)’’.
(3) Section 954(g)(1) is amended by inserting
‘‘, as in effect before its repeal by the Financial
Freedom Act of 1999’’ after ‘‘907(c)’’.
(4) Section 6501(i) is amended—
(A) by striking ‘‘, or under section 907(f)
(relating to carryback and carryover of dis-
allowed oil and gas extraction taxes)’’, and
(B) by striking ‘‘or 907(f)’’.
202
(5) The table of sections for subpart A of part
III of subchapter N of chapter 1 is amended by
striking the item relating to section 907.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2004.
SEC. 909. STUDY OF PROPER TREATMENT OF EUROPEAN
UNION UNDER SAME COUNTRY EXCEPTIONS.
(a) STUDY.—The Secretary of the Treasury or the
Secretary’s delegate shall conduct a study on the feasi-
bility of treating all countries included in the European
Union as 1 country for purposes of applying the same
country exceptions under subpart F of part III of sub-
chapter N of chapter 1 of the Internal Revenue Code of
1986.
(b) REPORT.—Not later than 6 months after the date
of the enactment of this Act, the Secretary of the Treasury
shall report to the Committee on Ways and Means of the
House of Representatives and the Committee on Finance
of the Senate the results of the study conducted under
subsection (a), including recommendations (if any) for leg-
islation.
203
SEC. 910. APPLICATION OF DENIAL OF FOREIGN TAX CRED-
IT WITH RESPECT TO CERTAIN FOREIGN
COUNTRIES.
(a) IN GENERAL.—Clause (ii) of section 901(j)(2)(B)
(relating to denial of foreign tax credit, etc., with respect
to certain foreign countries) is amended by inserting be-
fore the period ‘‘or, if earlier, ending on the date that the
President determines that the application of this sub-
section to such foreign country is no longer in the national
interests of the United States’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on the date of the enactment
of this Act.
SEC. 911. ADVANCE PRICING AGREEMENTS TREATED AS
CONFIDENTIAL TAXPAYER INFORMATION.
(a) IN GENERAL.—
(1) TREATMENT AS RETURN INFORMATION.—
Paragraph (2) of section 6103(b) (defining return
information) is amended by striking ‘‘and’’ at the
end of subparagraph (A), by inserting ‘‘and’’ at the
end of subparagraph (B), and by inserting after sub-
paragraph (B) the following new subparagraph:
‘‘(C) any advance pricing agreement en-
tered into by a taxpayer and the Secretary and
any background information related to such
204
agreement or any application for an advance
pricing agreement,’’.
(2) EXCEPTION FROM PUBLIC INSPECTION AS
WRITTEN DETERMINATION.—Paragraph (1) of sec-
tion 6110(b) (defining written determination) is
amended by adding at the end the following new
sentence: ‘‘Such term shall not include any advance
pricing agreement entered into by a taxpayer and
the Secretary and any background information re-
lated to such agreement or any application for an
advance pricing agreement.’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall take effect on the date of the
enactment of this Act.
(b) ANNUAL REPORT REGARDING ADVANCE PRICING
AGREEMENTS.—
(1) IN GENERAL.—Not later than 90 days after
the end of each calendar year, the Secretary of the
Treasury shall prepare and publish a report regard-
ing advance pricing agreements.
(2) CONTENTS OF REPORT.—The report shall
include the following for the calendar year to which
such report relates:
205
(A) Information about the structure, com-
position, and operation of the advance pricing
agreement program office.
(B) A copy of each model advance pricing
agreement.
(C) The number of—
(i) applications filed during such cal-
endar year for advanced pricing agree-
ments;
(ii) advance pricing agreements exe-
cuted cumulatively to date and during such
calendar year;
(iii) renewals of advanced pricing
agreements issued;
(iv) pending requests for advance pric-
ing agreements;
(v) pending renewals of advance pric-
ing agreements;
(vi) for each of the items in clauses
(ii) through (v), the number that are uni-
lateral, bilateral, and multilateral, respec-
tively;
(vii) advance pricing agreements re-
voked or canceled, and the number of with-
206
drawals from the advance pricing agree-
ment program; and
(viii) advanced pricing agreements fi-
nalized or renewed by industry.
(D) General descriptions of—
(i) the nature of the relationships be-
tween the related organizations, trades, or
businesses covered by advance pricing
agreements;
(ii) the covered transactions and the
business functions performed and risks as-
sumed by such organizations, trades, or
businesses;
(iii) the related organizations, trades,
or businesses whose prices or results are
tested to determine compliance with trans-
fer pricing methodologies prescribed in ad-
vanced pricing agreements;
(iv) methodologies used to evaluate
tested parties and transactions and the cir-
cumstances leading to the use of those
methodologies;
(v) critical assumptions made and
sources of comparables used;
207
(vi) comparable selection criteria and
the rationale used in determining such cri-
teria;
(vii) the nature of adjustments to
comparables or tested parties;
(viii) the nature of any ranges agreed
to, including information regarding when
no range was used and why, when inter-
quartile ranges were used, and when there
was 
a 
statistical 
narrowing 
of 
the
comparables;
(ix) adjustment mechanisms provided
to rectify results that fall outside of the
agreed upon advance pricing agreement
range;
(x) the various term lengths for ad-
vance pricing agreements, including roll-
back years, and the number of advance
pricing agreements with each such term
length;
(xi) the nature of documentation re-
quired; and
(xii) approaches for sharing of cur-
rency or other risks.
208
(E) Statistics regarding the amount of
time taken to complete new and renewal ad-
vance pricing agreements.
(3) CONFIDENTIALITY.—The reports required
by this subsection shall be treated as authorized by
the Internal Revenue Code of 1986 for purposes of
section 6103 of such Code, but the reports shall not
include information—
(A) which would not be permitted to be
disclosed under section 6110(c) of such Code if
such report were a written determination as de-
fined in section 6110 of such Code, or
(B) which can be associated with, or other-
wise identify, directly or indirectly, a particular
taxpayer.
(4) FIRST REPORT.—The report for calendar
year 1999 shall include prior calendar years after
1990.
(c) USER FEE.—Section 7527, as added by title XV
of this Act, is amended by redesignating subsection (c)
as subsection (d) and by inserting after subsection (b) the
following new subsection:
‘‘(c) ADVANCE PRICING AGREEMENTS.—
‘‘(1) IN GENERAL.—In addition to any fee oth-
erwise imposed under this section, the fee imposed
209
for requests for advance pricing agreements shall be
increased by $500.
‘‘(2) REDUCED FEE FOR SMALL BUSINESSES.—
The Secretary shall provide an appropriate reduction
in the amount imposed by reason of paragraph (1)
for requests for advance pricing agreements for
small businesses.’’
(d) REGULATIONS.—The Secretary of the Treasury
or the Secretary’s delegate shall prescribe such regulations
as may be necessary or appropriate to carry out the pur-
poses of section 6103(b)(2)(C), and the last sentence of
section 6110(b)(1), of the Internal Revenue Code of 1986,
as added by this section.
SEC. 912. INCREASE IN DOLLAR LIMITATION ON SECTION
911 EXCLUSION.
(a) GENERAL RULE.—The table contained in clause
(i) of section 911(b)(2)(D) is amended to read as follows:
‘‘For calendar year—
The exclusion amount is—
2000 .........................................................................................
$76,000
2001 .........................................................................................
78,000
2002 .........................................................................................
80,000
2003 .........................................................................................
83,000
2004 .........................................................................................
86,000
2005 .........................................................................................
89,000
2006 .........................................................................................
92,000
2007 and thereafter .................................................................
95,000.’’
(b) CONFORMING AMENDMENT.—Clause (ii) of sec-
tion 911(b)(2)(D) is amended by striking ‘‘$80,000’’ and
inserting ‘‘$95,000’’.
210
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1999.
TITLE 
X—PROVISIONS 
RELAT-
ING TO TAX-EXEMPT ORGANI-
ZATIONS
SEC. 1001. EXEMPTION FROM INCOME TAX FOR STATE-CRE-
ATED 
ORGANIZATIONS 
PROVIDING 
PROP-
ERTY AND CASUALTY INSURANCE FOR PROP-
ERTY FOR WHICH SUCH COVERAGE IS OTH-
ERWISE UNAVAILABLE.
(a) IN GENERAL.—Subsection (c) of section 501 (re-
lating to exemption from tax on corporations, certain
trusts, etc.) is amended by adding at the end the following
new paragraph:
‘‘(28)(A) Any association created before Janu-
ary 1, 1999, by State law and organized and oper-
ated exclusively to provide property and casualty in-
surance coverage for property located within the
State for which the State has determined that cov-
erage in the authorized insurance market is limited
or unavailable at reasonable rates, if—
‘‘(i) no part of the net earnings of which
inures to the benefit of any private shareholder
or individual,
211
‘‘(ii) except as provided in clause (v), no
part of the assets of which may be used for, or
diverted to, any purpose other than—
‘‘(I) to satisfy, in whole or in part, the
liability of the association for, or with re-
spect to, claims made on policies written
by the association,
‘‘(II) to invest in investments author-
ized by applicable law, or
‘‘(III) to pay reasonable and nec-
essary administration expenses in connec-
tion with the establishment and operation
of the association and the processing of
claims against the association,
‘‘(iii) the State law governing the associa-
tion permits the association to levy assessments
on property and casualty insurance policy-
holders with insurable interests in property lo-
cated in the State to fund deficits of the asso-
ciation, including the creation of reserves,
‘‘(iv) the plan of operation of the associa-
tion is subject to approval by the chief executive
officer or other executive branch official of the
State, by the State legislature, or both, and
212
‘‘(v) the assets of the association revert
upon dissolution to the State, the State’s des-
ignee, or an entity designated by the State law
governing the association, or State law does not
permit the dissolution of the association.
‘‘(B)(i) An entity described in clause (ii) shall
be disregarded as a separate entity and treated as
part of the association described in subparagraph
(A) from which it receives remittances described in
clause (ii) if an election is made within 30 days after
the date that such association is determined to be
exempt from tax.
‘‘(ii) An entity is described in this clause if it
is an entity or fund created before January 1, 1999,
pursuant to State law and organized and operated
exclusively to receive, hold, and invest remittances
from an association described in subparagraph (A)
and exempt from tax under subsection (a) and to
make disbursements to pay claims on insurance con-
tracts issued by such association.
‘‘(C) Subparagraph (A) shall not apply to an
association for any taxable year if the association’s
surplus income for such year exceeds 15 percent of
the total coverage in force under insurance contracts
213
issued by such association and outstanding as of the
close of the taxable year.’’
(b) TRANSITIONAL RULE.—No income or gain shall
be recognized by an association as a result of a change
in status to that of an association described by section
501(c)(28) of the Internal Revenue Code of 1986, as
amended by subsection (a).
(c) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1999.
SEC. 1002. MODIFICATION OF SPECIAL ARBITRAGE RULE
FOR CERTAIN FUNDS.
(a) IN GENERAL.—Paragraph (1) of section 648 of
the Tax Reform Act of 1984 is amended to read as fol-
lows:
‘‘(1) such securities or obligations are held in a
fund—
‘‘(A) which, except to the extent of the in-
vestment earnings on such securities or obliga-
tions, cannot be used, under State constitu-
tional or statutory restrictions continuously in
effect since October 9, 1969, through the date
of issue of the bond issue, to pay debt service
on the bond issue or to finance the facilities
214
that are to be financed with the proceeds of the
bonds, or
‘‘(B) the annual distributions from which
cannot exceed 7 percent of the average fair
market value of the assets held in such fund ex-
cept to the extent distributions are necessary to
pay debt service on the bond issue,’’.
(b) CONFORMING AMENDMENT.—Paragraph (3) of
such section is amended by striking ‘‘the investment earn-
ings of’’ and inserting ‘‘distributions from’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 2000.
SEC. 1003. CHARITABLE SPLIT-DOLLAR LIFE INSURANCE,
ANNUITY, AND ENDOWMENT CONTRACTS.
(a) IN GENERAL.—Subsection (f) of section 170 (re-
lating to disallowance of deduction in certain cases and
special rules) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(10) SPLIT-DOLLAR LIFE INSURANCE, ANNU-
ITY, AND ENDOWMENT CONTRACTS.—
‘‘(A) IN GENERAL.—Nothing in this sec-
tion or in section 545(b)(2), 556(b)(2), 642(c),
2055, 2106(a)(2), or 2522 shall be construed to
allow a deduction, and no deduction shall be al-
lowed, for any transfer to or for the use of an
215
organization described in subsection (c) if in
connection with such transfer—
‘‘(i) the organization directly or indi-
rectly pays, or has previously paid, any
premium on any personal benefit contract
with respect to the transferor, or
‘‘(ii) there is an understanding or ex-
pectation that any person will directly or
indirectly pay any premium on any per-
sonal benefit contract with respect to the
transferor.
‘‘(B) PERSONAL
BENEFIT
CONTRACT.—
For purposes of subparagraph (A), the term
‘personal benefit contract’ means, with respect
to the transferor, any life insurance, annuity, or
endowment contract if any direct or indirect
beneficiary under such contract is the trans-
feror, any member of the transferor’s family, or
any other person (other than an organization
described in subsection (c)) designated by the
transferor.
‘‘(C) APPLICATION
TO
CHARITABLE
RE-
MAINDER TRUSTS.—In the case of a transfer to
a trust referred to in subparagraph (E), ref-
erences in subparagraphs (A) and (F) to an or-
216
ganization described in subsection (c) shall be
treated as a reference to such trust.
‘‘(D) EXCEPTION FOR CERTAIN ANNUITY
CONTRACTS.—If, in connection with a transfer
to or for the use of an organization described
in subsection (c), such organization incurs an
obligation to pay a charitable gift annuity (as
defined in section 501(m)) and such organiza-
tion purchases any annuity contract to fund
such obligation, persons receiving payments
under the charitable gift annuity shall not be
treated for purposes of subparagraph (B) as in-
direct beneficiaries under such contract if—
‘‘(i) such organization possesses all of
the incidents of ownership under such con-
tract,
‘‘(ii) such organization is entitled to
all the payments under such contract, and
‘‘(iii) the timing and amount of pay-
ments under such contract are substan-
tially the same as the timing and amount
of payments to each such person under
such obligation (as such obligation is in ef-
fect at the time of such transfer).
217
‘‘(E) EXCEPTION
FOR
CERTAIN
CON-
TRACTS
HELD
BY
CHARITABLE
REMAINDER
TRUSTS.—A person shall not be treated for pur-
poses of subparagraph (B) as an indirect bene-
ficiary under any life insurance, annuity, or en-
dowment contract held by a charitable remain-
der annuity trust or a charitable remainder
unitrust (as defined in section 664(d)) solely by
reason of being entitled to any payment re-
ferred to in paragraph (1)(A) or (2)(A) of sec-
tion 664(d) if—
‘‘(i) such trust possesses all of the in-
cidents of ownership under such contract,
and
‘‘(ii) such trust is entitled to all the
payments under such contract.
‘‘(F) EXCISE TAX ON PREMIUMS PAID.—
‘‘(i) IN
GENERAL.—There is hereby
imposed on any organization described in
subsection (c) an excise tax equal to the
premiums paid by such organization on
any life insurance, annuity, or endowment
contract if the payment of premiums on
such contract is in connection with a trans-
fer for which a deduction is not allowable
218
under subparagraph (A), determined with-
out regard to when such transfer is made.
‘‘(ii) PAYMENTS
BY
OTHER
PER-
SONS.—For purposes of clause (i), pay-
ments made by any other person pursuant
to an understanding or expectation re-
ferred to in subparagraph (A) shall be
treated as made by the organization.
‘‘(iii) REPORTING.—Any organization
on which tax is imposed by clause (i) with
respect to any premium shall file an an-
nual return which includes—
‘‘(I) the amount of such pre-
miums paid during the year and the
name and TIN of each beneficiary
under the contract to which the pre-
mium relates, and
‘‘(II) such other information as
the Secretary may require.
The penalties applicable to returns re-
quired under section 6033 shall apply to
returns required under this clause. Returns
required under this clause shall be fur-
nished at such time and in such manner as
219
the Secretary shall by forms or regulations
require.
‘‘(iv) CERTAIN
RULES
TO
APPLY.—
The tax imposed by this subparagraph
shall be treated as imposed by chapter 42
for purposes of this title other than sub-
chapter B of chapter 42.
‘‘(G) SPECIAL
RULE
WHERE
STATE
RE-
QUIRES
SPECIFICATION
OF
CHARITABLE
GIFT
ANNUITANT IN CONTRACT.—In the case of an
obligation to pay a charitable gift annuity re-
ferred to in subparagraph (D) which is entered
into under the laws of a State which requires,
in order for the charitable gift annuity to be ex-
empt from insurance regulation by such State,
that each beneficiary under the charitable gift
annuity be named as a beneficiary under an an-
nuity contract issued by an insurance company
authorized to transact business in such State,
the requirements of clauses (i) and (ii) of sub-
paragraph (D) shall be treated as met if—
‘‘(i) such State law requirement was
in effect on February 8, 1999,
‘‘(ii) each such beneficiary under the
charitable gift annuity is a bona fide resi-
220
dent of such State at the time the obliga-
tion to pay a charitable gift annuity is en-
tered into, and
‘‘(iii) the only persons entitled to pay-
ments under such contract are persons en-
titled to payments as beneficiaries under
such obligation on the date such obligation
is entered into.
‘‘(H) MEMBER OF FAMILY.—For purposes
of this paragraph, an individual’s family con-
sists of the individual’s grandparents, the
grandparents of such individual’s spouse, the
lineal descendants of such grandparents, and
any spouse of such a lineal descendant.
‘‘(I) REGULATIONS.—The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of this
paragraph, including regulations to prevent the
avoidance of such purposes.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this section, the amendment made by this
section shall apply to transfers made after February
8, 1999.
221
(2) EXCISE TAX.—Except as provided in para-
graph (3) of this subsection, section 170(f)(10)(F)
of the Internal Revenue Code of 1986 (as added by
this section) shall apply to premiums paid after the
date of the enactment of this Act.
(3) REPORTING.—Clause (iii) of such section
170(f)(10)(F) shall apply to premiums paid after
February 8, 1999 (determined as if the tax imposed
by such section applies to premiums paid after such
date).
SEC. 1004. EXEMPTION PROCEDURE FROM TAXES ON SELF-
DEALING.
(a) IN GENERAL.—Subsection (d) of section 4941
(relating to taxes on self-dealing) is amended by adding
at the end the following new paragraph:
‘‘(3) SPECIAL
EXEMPTION.—The Secretary
shall establish an exemption procedure for purposes
of this subsection. Pursuant to such procedure, the
Secretary may grant a conditional or unconditional
exemption of any disqualified person or transaction
or class of disqualified persons or transactions, from
all or part of the restrictions imposed by paragraph
(1). The Secretary may not grant an exemption
under this paragraph unless he finds that such ex-
emption is—