IB
Union Calendar No. 88
105TH CONGRESS
1ST SESSION
H. R. 2014
[Report No. 105–148]
To provide for reconciliation pursuant to subsections (b)(2) and (d) of section
105 of the concurrent resolution on the budget for fiscal year 1998.
IN THE HOUSE OF REPRESENTATIVES
JUNE 24, 1997
Mr. KASICH from the Committee on the Budget, reported the following bill;
which was committed to the Committee of the Whole House on the State
of the Union and ordered to be printed
A BILL
To provide for reconciliation pursuant to subsections (b)(2)
and (d) of section 105 of the concurrent resolution on
the budget for fiscal year 1998.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Revenue Reconciliation Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code.
TITLE I—CHILD TAX CREDIT; TAX INCENTIVES FOR DEPENDENT
CARE AND HEALTH CARE FOR CHILDREN
Sec. 101. Child tax credit.
Sec. 102. Inflation adjustment of limits and other modifications of dependent
care credit.
TITLE II—EDUCATION INCENTIVES
Subtitle A—Tax Benefits Relating to Education Expenses
Sec. 201. Hope credit for higher education tuition and related expenses.
Sec. 202. Deduction for qualified higher education expenses.
Sec. 203. Penalty-free withdrawals from individual retirement plans for higher
education expenses.
Sec. 204. Expenses for education which supplements elementary and secondary
education.
Subtitle B—Expanded Education Investment Savings Opportunities
Sec. 211. Eligible educational institutions permitted to maintain qualified tui-
tion programs; other modifications of qualified State tuition
programs.
Sec. 212. Education investment accounts.
Subtitle C—Other Education Initiatives
Sec. 221. Extension of exclusion for employer-provided educational assistance.
Sec. 222. Increase in limitation on qualified 501(c)(3) bonds other than hos-
pital bonds.
Sec. 223. Contributions of computer technology and equipment for elementary
or secondary school purposes.
Sec. 224. Treatment of cancellation of certain student loans.
TITLE III—SAVINGS AND INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
Sec. 301. Establishment of American Dream IRA.
Subtitle B—Capital Gains
PART I—INDIVIDUAL CAPITAL GAINS
Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Indexing of certain assets acquired after December 31, 2000, for pur-
poses of determining gain.
Sec. 313. Exemption from tax for gain on sale of principal residence.
PART II—CORPORATE CAPITAL GAINS
Sec. 321. Reduction of alternative capital gain tax for corporations.
TITLE IV—ALTERNATIVE MINIMUM TAX REFORM
Sec. 401. Adjustment of exemption amounts for taxpayers other than corpora-
tions.
Sec. 402. Exemption from alternative minimum tax for small corporations.
Sec. 403. Repeal of adjustment for depreciation.
Sec. 404. Minimum tax not to apply to farmers’ installment sales.
TITLE V—ESTATE, GIFT, AND GENERATION-SKIPPING TAX
PROVISIONS
Subtitle A—Estate and Gift Tax Provisions
Sec. 501. Cost-of-living adjustments relating to estate and gift tax provisions.
Sec. 502. 20-year installment payment where estate consists largely of interest
in closely held business.
Sec. 503. No interest on certain portion of estate tax extended under section
6166, reduced interest on remaining portion, and no deduction
for such reduced interest.
Sec. 504. Extension of treatment of certain rents under section 2032A to lineal
descendants.
Sec. 505. Clarification of judicial review of eligibility for extension of time for
payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after expiration of
statute of limitations.
Sec. 507. Termination of throwback rules for domestic trusts.
Sec. 508. Unified credit of decedent increased by unified credit of spouse used
on split gift included in decedent’s gross estate.
Sec. 509. Reformation of defective bequests, etc., to spouse of decedent.
Subtitle B—Generation-Skipping Tax Provisions
Sec. 511. Severing of trusts holding property having an inclusion ratio of great-
er than zero.
Sec. 512. Expansion of exception from generation-skipping transfer tax for
transfers to individuals with deceased parents.
TITLE VI—EXTENSION AND MODIFICATION OF CERTAIN
EXPIRING PROVISIONS
Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.
TITLE VII—INCENTIVES FOR REVITALIZATION OF THE DISTRICT
OF COLUMBIA
Sec. 701. Tax incentives for revitalization of the District of Columbia.
Sec. 702. Incentives conditioned on other DC reform.
TITLE VIII—WELFARE-TO-WORK INCENTIVES
Sec. 801. Incentives for employing long-term family assistance recipients.
TITLE IX—MISCELLANEOUS PROVISIONS
Subtitle A—Provisions Relating to Excise Taxes
Sec. 901. Repeal of tax on diesel fuel used in recreational boats.
Sec. 902. Continued application of tax on imported recycled Halon-1211.
Sec. 903. Uniform rate of tax on vaccines.
Sec. 904. Operators of multiple gasoline retail outlets treated as wholesale dis-
tributor for refund purposes.
Sec. 905. Exemption of electric and other clean-fuel motor vehicles from luxury
automobile classification.
Subtitle B—Provisions Relating to Pensions and Fringe Benefits
Sec. 911. Section 401(k) plans for certain irrigation and drainage entities.
Sec. 912. Extension of moratorium on application of certain nondiscrimination
rules to State and local governments.
Sec. 913. Treatment of certain disability benefits received by former police offi-
cers or firefighters.
Sec. 914. Portability of permissive service credit under governmental pension
plans.
Sec. 915. Gratuitous transfers for the benefit of employees.
Sec. 916. Treatment of certain transportation on non-commercially operated
aircraft as a fringe benefit excludable from gross income.
Sec. 917. Minimum pension accrued benefit distributable without consent in-
creased to $5,000.
Sec. 918. Clarification of certain rules relating to employee stock ownership
plans of S corporations.
Subtitle C—Revisions Relating to Disasters
Sec. 921. Authority to postpone certain tax-related deadlines by reason of presi-
dentially declared disaster.
Sec. 922. Use of certain appraisals to establish amount of disaster loss.
Sec. 923. Treatment of livestock sold on account of weather-related conditions.
Sec. 924. Mortgage financing for residences located in disaster areas.
Subtitle D—Provisions Relating to Employment Taxes
Sec. 931. Clarification of employment tax status of individuals distributing bak-
ery products.
Sec. 932. Clarification of standard to be used in determining employment tax
status of retail securities brokers.
Sec. 933. Clarification of exemption from self-employment tax for certain termi-
nation payments received by former insurance salesmen.
Sec. 934. Standards for determining whether individuals are not employees.
Subtitle E—Provisions Relating to Small Businesses
Sec. 941. Waiver of penalty through 1998 on small businesses failing to make
electronic fund transfers of taxes.
Sec. 942. Clarification of treatment of home office use for administrative and
management activities.
Subtitle F—Other Provisions
Sec. 951. Use of estimates of shrinkage for inventory accounting.
Sec. 952. Assignment of workmen’s compensation liability eligible for exclusion
relating to personal injury liability assignments.
Sec. 953. Tax-exempt status for certain State worker’s compensation act com-
panies.
Sec. 954. Election to continue exception from treatment of publicly traded part-
nerships as corporations.
Sec. 955. Exclusion from unrelated business taxable income for certain sponsor-
ship payments.
Sec. 956. Associations of holders of timeshare interests to be taxed like other
homeowners associations.
Sec. 957. Additional advance refunding of certain Virgin Island bonds.
Sec. 958. Nonrecognition of gain on sale of stock to certain farmers’ coopera-
tives.
Sec. 959. Exception from reporting of real estate transactions for sales and ex-
changes of certain principal residences.
Sec. 960. Increased deductibility of business meal expenses for individuals sub-
ject to Federal hours of service.
Sec. 961. Qualified lessee construction allowances for short-term leases.
Sec. 962. Tax treatment of consolidations of life insurance departments of mu-
tual savings banks.
Sec. 963. Offset of past-due, legally enforceable State tax obligations against
overpayments.
Sec. 964. Exemption of the incremental cost of a clean fuel vehicle from the
limits on depreciation for vehicles.
Sec. 965. Tax benefits for law enforcement officers killed in the line of duty.
Sec. 966. Temporary suspension of taxable income limit on percentage deple-
tion for marginal production.
Subtitle G—Extension of Duty-Free Treatment Under Generalized System of
Preferences; Tariff Treatment of Certain Equipment and Repair of Vessels
Sec. 971. Generalized system of preferences.
Sec. 972. Equipment and repair of vessels.
Subtitle H—United States-Caribbean Basin Trade Partnership Act
Sec. 981. Short title.
Sec. 982. Findings and policy.
Sec. 983. Definitions.
Sec. 984. Temporary provisions to provide NAFTA parity to partnership coun-
tries.
Sec. 985. Effect of NAFTA on sugar imports from beneficiary countries.
Sec. 986. Duty-free treatment for certain beverages made with Caribbean rum.
Sec. 987. Meetings of trade ministers and USTR.
Sec. 988. Report on economic development and market oriented reforms in the
Caribbean.
TITLE X—REVENUES
Subtitle A—Financial Products
Sec. 1001. Constructive sales treatment for appreciated financial positions.
Sec. 1002. Limitation on exception for investment companies under section
351.
Sec. 1003. Modification of rules for allocating interest expense to tax-exempt
interest.
Sec. 1004. Gains and losses from certain terminations with respect to property.
Sec. 1005. Determination of original issue discount where pooled debt obliga-
tions subject to acceleration.
Sec. 1006. Denial of interest deductions on certain debt instruments.
Subtitle B—Corporate Organizations and Reorganizations
Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions followed by acquisitions
and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Modification of holding period applicable to dividends received de-
duction.
Subtitle C—Other Corporate Provisions
Sec. 1021. Registration and other provisions relating to confidential corporate
tax shelters.
Sec. 1022. Certain preferred stock treated as boot.
Subtitle D—Administrative Provisions
Sec. 1031. Reporting of certain payments made to attorneys.
Sec. 1032. Decrease of threshold for reporting payments to corporations per-
forming services for Federal agencies.
Sec. 1033. Disclosure of return information for administration of certain veter-
ans programs.
Sec. 1034. Continuous levy on certain payments.
Sec. 1035. Modification of levy exemption.
Sec. 1036. Confidentiality and disclosure of returns and return information.
Sec. 1037. Returns of beneficiaries of estates and trusts required to file returns
consistent with estate or trust return or to notify secretary of
inconsistency.
Subtitle E—Excise Tax Provisions
Sec. 1041. Extension and modification of Airport and Airway Trust Fund
taxes.
Sec. 1042. Kerosene taxed as diesel fuel.
Sec. 1043. Reduction of incentives for alcohol fuels.
Sec. 1044. Restoration of Leaking Underground Storage Tank Trust Fund
taxes.
Sec. 1045. Application of communications tax to long-distance prepaid tele-
phone cards.
Subtitle F—Provisions Relating to Tax-Exempt Entities
Sec. 1051. Expansion of look-thru rule for interest, annuities, royalties, and
rents derived by subsidiaries of tax-exempt organizations.
Sec. 1052. Limitation on increase in basis of property resulting from sale by
tax-exempt entity to a related person.
Sec. 1053. Modifications to exception from reporting, etc. of lobbying activities.
Sec. 1054. Termination of certain exceptions from rules relating to exempt or-
ganizations which provide commercial-type insurance.
Subtitle G—Other Revenue Provisions
Sec. 1061. Termination of suspense accounts for family corporations required
to use accrual method of accounting.
Sec. 1062. Modification of taxable years to which net operating losses may be
carried.
Sec. 1063. Expansion of denial of deduction for certain amounts paid in con-
nection with insurance.
Sec. 1064. Allocation of basis among properties distributed by partnership.
Sec. 1065. Repeal of requirement that inventory be substantially appreciated.
Sec. 1066. Extension of time for taxing precontribution gain.
Sec. 1067. Restrictions on availability of earned income credit for taxpayers
who improperly claimed credit in prior year.
Sec. 1068. Limitation on property for which income forecast method may be
used.
Sec. 1069. Repeal of special rule for rental use of vacation homes, etc., for less
than 15 days.
Sec. 1070. Expansion of requirement that involuntarily converted property be
replaced with property acquired from an unrelated person.
Sec. 1071. Treatment of exception from installment sales rules for sales of
property by a manufacturer to a dealer.
TITLE XI—SIMPLIFICATION AND OTHER FOREIGN-RELATED
PROVISIONS
Subtitle A—General Provisions
Sec. 1101. Treatment of computer software as FSC export property.
Sec. 1102. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1103. Certain individuals exempt from foreign tax credit limitation.
Sec. 1104. Exchange rate used in translating foreign taxes.
Sec. 1105. Election to use simplified section 904 limitation for alternative mini-
mum tax.
Sec. 1106. Treatment of personal transactions by individuals under foreign cur-
rency rules.
Sec. 1107. All noncontrolled section 902 corporations which are not passive for-
eign investment companies in one foreign tax limitation basket.
Subtitle B—Treatment of Controlled Foreign Corporations
Sec. 1111. Gain on certain stock sales by controlled foreign corporations treat-
ed as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower tier companies.
Subtitle C—Treatment of Passive Foreign Investment Companies
Sec. 1121. United States shareholders of controlled foreign corporations not
subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in passive foreign
investment company.
Sec. 1123. Effective date.
Subtitle D—Repeal of Excise Tax on Transfers to Foreign Entities
Sec. 1131. Repeal of excise tax on transfers to foreign entities; recognition of
gain on certain transfers to foreign trusts and estates.
Subtitle E—Information Reporting
Sec. 1141. Clarification of application of return requirement to foreign partner-
ships.
Sec. 1142. Controlled foreign partnerships subject to information reporting
comparable to information reporting for controlled foreign cor-
porations.
Sec. 1143. Modifications relating to returns required to be filed by reason of
changes in ownership interests in foreign partnership.
Sec. 1144. Transfers of property to foreign partnerships subject to information
reporting comparable to information reporting for such trans-
fers to foreign corporations.
Sec. 1145. Extension of statute of limitation for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to organization of foreign
corporations and acquisitions of stock in such corporations.
Subtitle F—Determination of Foreign or Domestic Status of Partnerships
Sec. 1151. Determination of foreign or domestic status of partnerships.
Subtitle G—Other Simplification Provisions
Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement that principal
office be outside the United States.
Subtitle H—Other Provisions
Sec. 1171. Definition of foreign personal holding company income.
Sec. 1172. Personal property used predominantly in the United States treated
as not property of a like kind with respect to property used
predominantly outside the United States.
Sec. 1173. Holding period requirement for certain foreign taxes.
Sec. 1174. Penalties for failure to disclose position that certain international
transportation income is not includible in gross income.
Sec. 1175. Denial of treaty benefits for certain payments through hybrid enti-
ties.
Sec. 1176. Interest on underpayments not reduced by foreign tax credit
carrybacks.
Sec. 1177. Clarification of period of limitations on claim for credit or refund
attributable to foreign tax credit carryforward.
Sec. 1178. Miscellaneous clarifications.
TITLE XII—SIMPLIFICATION PROVISIONS RELATING TO
INDIVIDUALS AND BUSINESSES
Subtitle A—Provisions Relating to Individuals
Sec. 1201. Basic standard deduction and minimum tax exemption amount for
certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax requirements.
Sec. 1203. Optional methods for computing SECA tax combined.
Sec. 1204. Treatment of certain reimbursed expenses of rural mail carriers.
Sec. 1205. Treatment of traveling expenses of certain Federal employees en-
gaged in criminal investigations.
Sec. 1206. Payment of tax by commercially acceptable means.
Subtitle B—Provisions Relating to Businesses Generally
Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty insurance
companies.
Subtitle C—Simplification Relating to Electing Large Partnerships
PART I—GENERAL PROVISIONS
Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of electing large
partnerships.
Sec. 1224. Returns may be required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement accounts.
Sec. 1226. Effective date.
PART II—PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures to be fol-
lowed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on assess-
ment.
Sec. 1236. Extension of time for filing a request for administrative adjustment.
Sec. 1237. Availability of innocent spouse relief in context of partnership pro-
ceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or 5-per-
cent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational adjustment re-
sulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with respect to
bad debts or worthless securities.
PART III—PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE
YEAR WITH RESPECT TO DECEASED PARTNER, ETC.
Sec. 1246. Closing of partnership taxable year with respect to deceased partner,
etc.
Subtitle D—Provisions Relating to Real Estate Investment Trusts
Sec. 1251. Clarification of limitation on maximum number of shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to tenant ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for determining whether
REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.
Subtitle E—Provisions Relating to Regulated Investment Companies
Sec. 1271. Repeal of 30-percent gross income limitation.
Subtitle F—Taxpayer Protections
Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror has been
audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
Sec. 1286. Penalty for unauthorized inspection of tax returns or tax return in-
formation.
Sec. 1287. Civil damages for unauthorized inspection of returns and return in-
formation; notification of unlawful inspection or disclosure.
TITLE XIII—SIMPLIFICATION PROVISIONS RELATING TO ESTATE
AND GIFT TAXES
Sec. 1301. Gifts to charities exempt from gift tax filing requirements.
Sec. 1302. Clarification of waiver of certain rights of recovery.
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Clarifications relating to disclaimers.
Sec. 1305. Increase of amount of lapse of general power of appointment not
treated as release for purposes of estate and gift tax (5 or 5
power).
Sec. 1306. Treatment for estate tax purposes of short-term obligations held by
nonresident aliens.
Sec. 1307. Certain revocable trusts treated as part of estate.
Sec. 1308. Distributions during first 65 days of taxable year of estate.
Sec. 1309. Separate share rules available to estates.
Sec. 1310. Executor of estate and beneficiaries treated as related persons for
disallowance of losses, etc.
Sec. 1311. Limitation on taxable year of estates.
Sec. 1312. Treatment of funeral trusts.
Sec. 1313. Adjustments for gifts within 3 years of decedent’s death.
Sec. 1314. Clarification of treatment of survivor annuities under qualified ter-
minable interest rules.
Sec. 1315. Treatment under qualified domestic trust rules of forms of owner-
ship which are not trusts.
Sec. 1316. Opportunity to correct certain failures under section 2032A.
Sec. 1317. Authority to waive requirement of United States trustee for quali-
fied domestic trusts.
TITLE XIV—SIMPLIFICATION PROVISIONS RELATING TO EXCISE
TAXES, TAX-EXEMPT BONDS, AND OTHER MATTERS
Subtitle A—Excise Tax Simplification
PART I—EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
Sec. 1401. Increase in de minimis limit for after-market alterations for heavy
trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires in computing
price.
PART II—PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
Sec. 1411. Credit or refund for imported bottled distilled spirits returned to
distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without submission of
records.
Sec. 1413. Repeal of required maintenance of records on premises of distilled
spirits plant.
Sec. 1414. Fermented material from any brewery may be received at a distilled
spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to
unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax for use
of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without submission of
records.
Sec. 1421. Transfer to brewery of beer imported in bulk without payment of
tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk without
payment of tax.
PART III—OTHER EXCISE TAX PROVISIONS
Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.
Subtitle B—Tax-Exempt Bond Provisions
Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-year ex-
ception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt service fund
under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment in certain non-
purpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.
Subtitle C—Tax Court Procedures
Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of litigation costs.
Sec. 1454. Proceedings for determination of employment status.
Subtitle D—Other Provisions
Sec. 1461. Extension of due date of first quarter estimated tax payment by pri-
vate foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico income taxes from
salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing interest rate
on large corporate underpayments.
TITLE XV—TECHNICAL AMENDMENTS RELATED TO SMALL BUSI-
NESS JOB PROTECTION ACT OF 1996 AND OTHER LEGISLATION
Sec. 1501. Amendments related to Small Business Job Protection Act of 1996.
Sec. 1502. Amendments related to Health Insurance Portability and Account-
ability Act of 1996.
Sec. 1503. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1504. Miscellaneous provisions.
TITLE 
I—CHILD 
TAX 
CREDIT;
MODIFICATION OF DEPEND-
ENT CARE CREDIT
SEC. 101. CHILD TAX CREDIT.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 23 the fol-
lowing new section:
‘‘SEC. 24. CHILD TAX CREDIT.
‘‘(a) ALLOWANCE OF CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter
for the taxable year an amount equal to $500 multiplied
by the number of qualifying children of the taxpayer.
‘‘(b) LIMITATIONS.—
‘‘(1) LIMITATION BASED ON ADJUSTED GROSS
INCOME.—For limitation based on adjusted gross in-
come, see section 26(c).
‘‘(2) REDUCTION FOR DEPENDENT CARE CRED-
IT.—In the case of taxable years beginning after De-
cember 31, 2001—
‘‘(A) IN GENERAL.—The credit allowed by
subsection (a) for the taxable year (determined
after paragraph (1) but before paragraph (3))
shall be reduced by the amount equal to 50 per-
cent of the credit allowed under section 21 for
such taxable year (determined after section
26(c)).
‘‘(B) NO
REDUCTION
FOR
DEPENDENT
CARE
OF
INDIVIDUALS
INCAPABLE
OF
SELF-
CARE.—Subparagraph (A) shall not apply to so
much of the credit which would have been al-
lowed under section 21 (determined without re-
gard to section 26(c)) if only qualifying individ-
uals described in subparagraph (B) or (C) of
section 21(b)(1) were taken into account.
‘‘(3) LIMITATION
BASED
ON
AMOUNT
OF
TAX.—The credit allowed by subsection (a) (deter-
mined after paragraphs (1) and (2)) shall not exceed
the excess (if any) of—
‘‘(A) the taxpayer’s regular tax liability for
the taxable year reduced by the credits allow-
able against such tax under this subpart (other
than this section), over
‘‘(B) the sum of—
‘‘(i) the taxpayer’s tentative minimum
tax for such taxable year (determined with-
out regard to the alternative minimum tax
foreign tax credit), plus
‘‘(ii) the credit allowed for the taxable
year under section 32.
‘‘(c) QUALIFYING CHILD.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The term ‘qualifying child’
means any individual if—
‘‘(A) the taxpayer is allowed a deduction
under section 151 with respect to such individ-
ual for the taxable year,
‘‘(B) such individual has not attained the
age of 17 as of the close of the calendar year
in which the taxable year of the taxpayer be-
gins, and
‘‘(C) such individual bears a relationship to
the taxpayer described in section 32(c)(3)(B).
‘‘(2) EXCEPTION FOR CERTAIN NONCITIZENS.—
The term ‘qualifying child’ shall not include any in-
dividual who would not be a dependent if the first
sentence of section 152(b)(3) were applied without
regard to all that follows ‘resident of the United
States’.
‘‘(d) TAXABLE YEAR MUST BE FULL TAXABLE
YEAR.—Except in the case of a taxable year closed by rea-
son of the death of the taxpayer, no credit shall be allow-
able under this section in the case of a taxable year cover-
ing a period of less than 12 months.
‘‘(e) PHASEIN OF CREDIT.—In the case of taxable
years beginning in 1998, subsection (a) shall be applied
by substituting ‘$400’ for ‘$500’.’’
(b) HIGH RISK POOLS PERMITTED TO COVER DE-
PENDENTS
OF HIGH RISK INDIVIDUALS.—Paragraph
(26) of section 501(c) is amended by adding at the end
the following flush sentence:
‘‘A qualifying child (as defined in section 24(c)) of
an individual described in subparagraph (B) (with-
out regard to this sentence) shall be treated as de-
scribed in subparagraph (B).’’
(c) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 26 is amended by
inserting ‘‘(other than the credit allowed by section
24)’’ after ‘‘credits allowed by this subpart’’.
(2) The table of sections for subpart A of part
IV of subchapter A of chapter 1 is amended by in-
serting after the item relating to section 23 the fol-
lowing new item:
‘‘Sec. 24. Child tax credit.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 102. INFLATION ADJUSTMENT OF LIMITS AND OTHER
MODIFICATIONS OF DEPENDENT CARE CRED-
IT.
(a) INFLATION ADJUSTMENT.—
(1) IN GENERAL.—Subsection (c) of section 21
(relating to expenses for household and dependent
care services necessary for gainful employment) is
amended to read as follows:
‘‘(c) DOLLAR LIMIT ON AMOUNT CREDITABLE.—
‘‘(1) IN GENERAL.—The amount of the employ-
ment-related expenses incurred during any taxable
year which may be taken into account under sub-
section (a) shall not exceed—
‘‘(A) $2,400 if there is 1 qualifying indi-
vidual with respect to the taxpayer for such tax-
able year, or
‘‘(B) $4,800 if there are 2 or more qualify-
ing individuals with respect to the taxpayer for
such taxable year.
The amount determined under subparagraph (A) or
(B) (whichever is applicable) shall be reduced by the
aggregate amount excludable from gross income
under section 129 for the taxable year.
‘‘(2) INFLATION ADJUSTMENT.—In the case of
taxable years beginning in a calendar year after
1997, each of the dollar amounts contained in para-
graph (1) shall be increased by an amount equal
to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1996’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $50, such amount shall be
rounded to the next lowest multiple of $50.’’
(2) CONFORMING AMENDMENT.—Paragraph (2)
of section 21(d) is amended by striking ‘‘(c)(1)’’ and
inserting ‘‘(c)(1)(A)’’ and by striking ‘‘(c)(2)’’ and
inserting ‘‘(c)(1)(B)’’.
(b) REDUCTION OF BENEFIT BASED ON ADJUSTED
GROSS INCOME.—
(1) IN GENERAL.—Section 26 is amended by
redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new sub-
section:
‘‘(c) REDUCTION OF DEPENDENT CARE CREDIT AND
CHILD CREDIT BASED ON ADJUSTED GROSS INCOME.—
‘‘(1) IN
GENERAL.—The aggregate amount
which would (but for subsection (a), this subsection,
and paragraphs (2) and (3) of section 24(b)) be al-
lowed under sections 21 and 24 shall be reduced
(but not below zero) by $25 for each $1,000 (or
fraction thereof) by which the taxpayer’s modified
adjusted gross income exceeds the threshold amount.
For purposes of the preceding sentence, the term
‘modified adjusted gross income’ means adjusted
gross income increased by any amount excluded
from gross income under section 911, 931, or 933.
‘‘(2) THRESHOLD AMOUNT.—For purposes of
paragraph (1), the term ‘threshold amount’ means—
‘‘(A) $110,000 in the case of a joint re-
turn,
‘‘(B) $75,000 in the case of an individual
who is not married, and
‘‘(C) $55,000 in the case of a married in-
dividual filing a separate return.
For purposes of this paragraph, marital status shall
be determined under section 7703.
‘‘(3) REMAINING CREDIT TREATED AS ATTRIB-
UTABLE TO DEPENDENT CARE TAX CREDIT.—The
aggregate amount allowable under sections 21 and
24 after the application of paragraph (1) shall be
treated as allowable solely under section 21 to the
extent such amount does not exceed the amount al-
lowable under section 21 (determined without regard
to section 21(a)(3)).’’
(2) CONFORMING AMENDMENTS.—
(A) Subsection (a) of section 21 is amend-
ed by adding at the end the following new para-
graph:
‘‘(3) LIMITATION BASED ON ADJUSTED GROSS
INCOME.—
‘‘For limitation based on adjusted gross income,
see section 26(c).’’
(B) The section heading for section 26 is
amended by inserting before the period ‘‘;
PHASEOUT
OF
CERTAIN
CREDITS
BASED
ON INCOME’’.
(C) The item relating to section 26 in the
table of sections for subpart A of part IV of
subchapter A of chapter 1 is amended by in-
serting before the period ‘‘; phaseout of certain
credits based on income’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
TITLE II—EDUCATION
INCENTIVES
Subtitle A—Tax Benefits Relating
to Education Expenses
SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION
AND RELATED EXPENSES.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 25 the fol-
lowing new section:
‘‘SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EX-
PENSES.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year the amount
equal to 50 percent of qualified tuition and related ex-
penses paid by the taxpayer during such taxable year for
education furnished during any academic period beginning
in such year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount al-
lowed as a credit under subsection (a) for any tax-
able year with respect to the qualified tuition and re-
lated expenses of any 1 individual shall not exceed
$1,500.
‘‘(2) CREDIT ALLOWED ONLY FOR 2 TAXABLE
YEARS.—No credit shall be allowed under subsection
(a) for a taxable year with respect to the qualified
tuition and related expenses of an individual unless
the taxpayer elects to have this section apply with
respect to such individual for such year. An election
under this paragraph shall not take effect with re-
spect to an individual for any taxable year if an elec-
tion under this paragraph (by the taxpayer or any
other individual) is in effect with respect to such in-
dividual for any 2 prior taxable years.
‘‘(3) CREDIT ALLOWED FOR YEAR ONLY IF IN-
DIVIDUAL IS AT LEAST 1⁄2 TIME STUDENT FOR POR-
TION OF YEAR.—No credit shall be allowed under
subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an individ-
ual unless such individual is an eligible student for
at least one academic period which begins during
such year.
‘‘(4) CREDIT ALLOWED ONLY FOR FIRST TWO
YEARS OF POSTSECONDARY EDUCATION.—No credit
shall be allowed under subsection (a) for a taxable
year with respect to the qualified tuition and related
expenses of an individual if the individual has com-
pleted (before the beginning of such taxable year)
the first 2 years of postsecondary education at an el-
igible educational institution.
‘‘(c) LIMITATION BASED ON MODIFIED ADJUSTED
GROSS INCOME.—
‘‘(1) IN GENERAL.—The amount which would
(but for this subsection) be taken into account under
subsection (a) for the taxable year shall be reduced
(but not below zero) by the amount determined
under paragraph (2).
‘‘(2) AMOUNT
OF
REDUCTION.—The amount
determined under this paragraph is the amount
which bears the same ratio to the amount which
would be so taken into account as—
‘‘(A) the excess of—
‘‘(i) the taxpayer’s modified adjusted
gross income for such taxable year, over
‘‘(ii) $40,000 ($80,000 in the case of
a joint return), bears to
‘‘(B) $10,000 ($20,000 in the case of a
joint return).
‘‘(3) MODIFIED
ADJUSTED
GROSS
INCOME.—
The term ‘modified adjusted gross income’ means
the adjusted gross income of the taxpayer for the
taxable year increased by any amount excluded from
gross income under section 911, 931, or 933.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
TUITION
AND
RELATED
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
tuition and related expenses’ means tuition and
fees required for the enrollment or attendance
of—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any dependent of the taxpayer
with respect to whom the taxpayer is al-
lowed a deduction under section 151,
at an eligible educational institution and books
required for courses of instruction of such indi-
vidual at such institution.
‘‘(B) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC.—Such term does 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 individual’s degree program.
‘‘(C) 
EXCEPTION
FOR
NONACADEMIC
FEES.—Such term does not include student ac-
tivity fees, athletic fees, insurance expenses, or
other expenses unrelated to an individual’s aca-
demic course of instruction.
‘‘(2) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ means an
institution—
‘‘(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the enactment
of this section, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.
‘‘(3) ELIGIBLE STUDENT.—The term ‘eligible
student’ means, with respect to any academic period,
a student who—
‘‘(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the date
of the enactment of this section, and
‘‘(B) is carrying at least 1⁄2 the normal
full-time work load for the course of study the
student is pursuing.
‘‘(4) OTHER TERMS RELATING TO THE HIGHER
EDUCATION ACT.—The following terms shall have
the meanings prescribed in regulations under section
481(g) of the Higher Education Act of 1965 (20
U.S.C. 1088(g)), as added by the Student Financial
Aid Improvements Act of 1997:
‘‘(A) Academic period.
‘‘(B) Normal full-time workload.
‘‘(C) First two years of postsecondary edu-
cation.
‘‘(e) TREATMENT OF EXPENSES PAID BY DEPEND-
ENT.—If a deduction under section 151 with respect to
an individual is allowed to another taxpayer for a taxable
year beginning in the calendar year in which such individ-
ual’s taxable year begins—
‘‘(1) no credit shall be allowed under subsection
(a) to such individual for such individual’s taxable
year, and
‘‘(2) qualified tuition and related expenses paid
by such individual during such individual’s taxable
year shall be treated for purposes of this section as
paid by such other taxpayer.
‘‘(f) TREATMENT OF CERTAIN PREPAYMENTS.—If
qualified tuition and related expenses are paid by the tax-
payer during a taxable year for an academic period which
begins during the first 3 months following such taxable
year, such academic period shall be treated for purposes
of this section as beginning during such taxable year.
‘‘(g) SPECIAL RULES.—
‘‘(1) 
IDENTIFICATION
REQUIREMENT.—No
credit shall be allowed under subsection (a) to a tax-
payer with respect to the qualified tuition and relat-
ed expenses of an individual unless the taxpayer in-
cludes the name and taxpayer identification number
of such individual on the return of tax for the tax-
able year.
‘‘(2) ADJUSTMENT
FOR
CERTAIN
SCHOLAR-
SHIPS, ETC.—The amount of qualified tuition and
related expenses otherwise taken into account under
subsection (a) with respect to an individual for an
academic period shall be reduced (before the applica-
tion of subsections (b) and (c)) by the sum of any
amounts paid for the benefit of such individual
which are allocable to such period as—
‘‘(A) a qualified scholarship which is ex-
cludable from gross income under section 117,
‘‘(B) an educational assistance allowance
under chapter 30, 31, 32, 34, or 35 of title 38,
United States Code, or under chapter 1606 of
title 10, United States Code, and
‘‘(C) a payment (other than a gift, be-
quest, devise, or inheritance within the meaning
of section 102(a)) for such individual’s edu-
cational expenses, or attributable to such indi-
vidual’s enrollment at an eligible educational in-
stitution, which is excludable from gross income
under any law of the United States.
‘‘(3) DENIAL
OF
CREDIT
IF
STUDENT
CON-
VICTED OF A FELONY DRUG OFFENSE.—No credit
shall be allowed under subsection (a) for qualified
tuition and related expenses for the enrollment or
attendance of a student for any academic period if
such student has been convicted of a Federal or
State felony offense consisting of the possession or
distribution of a controlled substance before the end
of the taxable year with or within which such period
ends.
‘‘(4) DENIAL OF DOUBLE BENEFIT.—No credit
shall be allowed under this section for any expense
for which a deduction is allowed under any other
provision of this chapter.
‘‘(5) NO
CREDIT
FOR
MARRIED
INDIVIDUALS
FILING SEPARATE RETURNS.—If the taxpayer is a
married individual (within the meaning of section
7703), this section shall apply only if the taxpayer
and the taxpayer’s spouse file a joint return for the
taxable year.
‘‘(6) NONRESIDENT ALIENS.—If the taxpayer is
a nonresident alien individual for any portion of the
taxable year, this section shall apply only if such in-
dividual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
‘‘(h) INFLATION ADJUSTMENTS.—
‘‘(1) DOLLAR
LIMITATION
ON
AMOUNT
OF
CREDIT.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 1998, the $1,500
amount in subsection (b)(1) shall be increased
by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $50, such amount shall be rounded to the
next lowest multiple of $50.
‘‘(2) INCOME LIMITS.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 2000, the $40,000
and $80,000 amounts in subsection (c)(2) shall
each be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1999’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $5,000, such amount shall be rounded to the
next lowest multiple of $5,000.
‘‘(i) REGULATIONS.—The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out this section, including regulations providing for
a recapture of credit allowed under this section in cases
where there is a refund in a subsequent taxable year of
any amount which was taken into account in determining
the amount of such credit.’’
(b) EXTENSION OF PROCEDURES APPLICABLE TO
MATHEMATICAL OR CLERICAL ERRORS.—Paragraph (2)
of section 6213(g) (relating to the definition of mathe-
matical or clerical errors) is amended by striking ‘‘and’’
at the end of subparagraph (G), by striking the period
at the end of subparagraph (H) and inserting ‘‘, and’’,
and by inserting after subparagraph (H) the following new
subparagraph:
‘‘(I) an omission of a correct TIN required
under section 25A(g)(1) (relating to higher edu-
cation tuition and related expenses) to be in-
cluded on a return.’’
(c) RETURNS RELATING TO TUITION AND RELATED
EXPENSES.—
(1) IN GENERAL.—Subpart B of part III of
subchapter A of chapter 61 (relating to information
concerning transactions with other persons) is
amended by inserting after section 6050R the fol-
lowing new section:
‘‘SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION
TUITION AND RELATED EXPENSES.
‘‘(a) IN GENERAL.—Any person—
‘‘(1) which is an eligible educational institution
which receives payments for qualified tuition and re-
lated expenses with respect to any individual for any
calendar year, or
‘‘(2) which is engaged in a trade or business
and which, in the course of such trade or business,
makes payments during any calendar year to any in-
dividual which constitute reimbursements or refunds
(or similar amounts) of qualified tuition and related
expenses of such individual,
shall make the return described in subsection (b) with re-
spect to the individual at such time as the Secretary may
by regulations prescribe.
‘‘(b) FORM AND MANNER OF RETURNS.—A return
is described in this subsection if such return—
‘‘(1) is in such form as the Secretary may pre-
scribe,
‘‘(2) contains—
‘‘(A) the name, address, and TIN of the
individual with respect to whom payments de-
scribed in subsection (a) were received from (or
were paid to),
‘‘(B) the name, address, and TIN of any
individual certified by the individual described
in subparagraph (A) as the taxpayer who will
claim the individual as a dependent for pur-
poses of the deduction allowable under section
151 for any taxable year ending with or within
the calendar year, and
‘‘(C) the—
‘‘(i) aggregate amount of payments
for qualified tuition and related expenses
received with respect to the individual de-
scribed in subparagraph (A) during the
calendar year, and
‘‘(ii) aggregate amount of reimburse-
ments or refunds (or similar amounts)
paid to such individual during the calendar
year, and
‘‘(D) such other information as the Sec-
retary may prescribe.
‘‘(c) APPLICATION TO GOVERNMENTAL UNITS.—For
purposes of this section—
‘‘(1) a governmental unit or any agency or in-
strumentality thereof shall be treated as a person,
and
‘‘(2) any return required under subsection (a)
by such governmental entity shall be made by the of-
ficer or employee appropriately designated for the
purpose of making such return.
‘‘(d) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required to be set forth in such return under subpara-
graph (A) or (B) of subsection (b)(2) a written statement
showing—
‘‘(1) the name, address, and phone number of
the information contact of the person required to
make such return, and
‘‘(2) the aggregate amounts described in sub-
section (b)(2)(C).
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the
year following the calendar year for which the return
under subsection (a) was required to be made.
‘‘(e) DEFINITIONS.—For purposes of this section, the
terms ‘eligible educational institution’ and ‘qualified tui-
tion and related expenses’ have the meanings given such
terms by section 25A.
‘‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE
MADE BY 2 OR MORE PERSONS.—Except to the extent
provided in regulations prescribed by the Secretary, in the
case of any amount received by any person on behalf of
another person, only the person first receiving such
amount shall be required to make the return under sub-
section (a).
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pro-
visions of this section. No penalties shall be imposed under
section 6724 with respect to any return or statement re-
quired under this section until such time as such regula-
tions are issued.’’
(2) ASSESSABLE PENALTIES.—
(A) 
Subparagraph 
(B) 
of 
section
6724(d)(1) (relating to definitions) is amended
by redesignating clauses (ix) through (xiv) as
clauses (x) through (xv), respectively, and by
inserting after clause (viii) the following new
clause:
‘‘(ix) section 6050S (relating to re-
turns relating to payments for qualified
tuition and related expenses),’’.
(B) Paragraph (2) of section 6724(d) is
amended by striking ‘‘or’’ at the end of the next
to last subparagraph, by striking the period at
the end of the last subparagraph and inserting
‘‘, or’’, and by adding at the end the following
new subparagraph:
‘‘(Z) section 6050S(d) (relating to returns
relating to qualified tuition and related ex-
penses).’’
(3) CLERICAL AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of
chapter 61 is amended by inserting after the item
relating to section 6050R the following new item:
‘‘Sec. 6050S. Returns relating to higher education tuition and re-
lated expenses.’’
(d) COORDINATION WITH SECTION 135.—Subsection
(d) of section 135 is amended by redesignating paragraphs
(2) and (3) as paragraphs (3) and (4), respectively, and
by inserting after paragraph (1) the following new para-
graph:
‘‘(2) COORDINATION WITH HIGHER EDUCATION
CREDIT.—The amount of the qualified higher edu-
cation expenses otherwise taken into account under
subsection (a) with respect to the education of an in-
dividual shall be reduced (before the application of
subsection (b)) by the amount of such expenses
which are taken into account in determining the
credit allowable to the taxpayer or any other person
under section 25A with respect to such expenses.’’
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
25 the following new item:
‘‘Sec. 25A. Higher education tuition and related expenses.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to expenses paid after December
31, 1997 (in taxable years ending after such date), for
education furnished in academic periods beginning after
such date.
SEC. 202. DEDUCTION FOR QUALIFIED HIGHER EDUCATION
EXPENSES.
(a) DEDUCTION ALLOWED.— Part VII of subchapter
B of chapter 1 (relating to additional itemized deductions
for individuals) is amended by redesignating section 221
as section 222 and by inserting after section 220 the fol-
lowing new section:
‘‘SEC. 221. QUALIFIED HIGHER EDUCATION EXPENSES.
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an
individual, there shall be allowed as a deduction the
amount of qualified higher education expenses paid by the
taxpayer during the taxable year for education furnished
during any academic period (within the meaning of section
25A) beginning in such year.
‘‘(b) LIMITATIONS.—
‘‘(1) ANNUAL LIMIT.—The amount allowed as a
deduction under subsection (a) for any taxable year
with respect to expenses paid for education fur-
nished to any 1 individual shall not exceed the lesser
of—
‘‘(A) $10,000, or
‘‘(B) the amount includible in the tax-
payer’s gross income for such taxable year by
reason of a distribution from a qualified tuition
program (as defined in section 529), or an edu-
cation investment account (as defined in section
530), the beneficiary of which is such individ-
ual.
‘‘(2) AGGREGATE LIMIT.—The amount allowed
as a deduction under subsection (a) to the taxpayer
or any other individual with respect to expenses paid
for education furnished to any 1 individual shall not
exceed $40,000 for all taxable years.
‘‘(3) DEDUCTION ALLOWED FOR YEAR ONLY IF
INDIVIDUAL IS AT LEAST
1⁄2 TIME STUDENT FOR
PORTION OF YEAR.—No deduction shall be allowed
under subsection (a) for a taxable year with respect
to the qualified higher education expenses of an indi-
vidual unless such individual is an eligible student
(as defined in section 25A(d)(3)) for at least one
academic period which begins during such year.
‘‘(4) DEDUCTION ALLOWED ONLY FOR FIRST 4
YEARS OF POSTSECONDARY EDUCATION.—No deduc-
tion shall be allowed under subsection (a) for a tax-
able year with respect to the qualified higher edu-
cation expenses of an individual if the individual has
completed (before the beginning of such taxable
year) the equivalent of the first 4 years of post-
secondary education at an eligible educational insti-
tution (determined under the rules of section 25A).
‘‘(5) COORDINATION WITH CREDIT FOR HIGHER
EDUCATION EXPENSES.—No deduction shall be al-
lowed under this section for a taxable year with re-
spect to the qualified higher education expenses of
an individual if an election is in effect under section
25A with respect to such individual for such taxable
year.
‘‘(c) QUALIFIED HIGHER EDUCATION EXPENSES.—
The term ‘qualified higher education expenses’ means
qualified higher education expenses (as defined in section
529) for the education of—
‘‘(1) the taxpayer,
‘‘(2) the taxpayer’s spouse, or
‘‘(3) any dependent of the taxpayer with respect
to whom the taxpayer is allowed a deduction under
section 151,
at an eligible educational institution (as defined in section
529(e)(5)).
‘‘(d) TREATMENT OF EXPENSES PAID BY DEPEND-
ENT.—If a deduction under section 151 with respect to
an individual is allowed to another taxpayer for a taxable
year beginning in the calendar year in which such individ-
ual’s taxable year begins—
‘‘(1) no deduction shall be allowed under sub-
section (a) to such individual for such individual’s
taxable year, and
‘‘(2) qualified higher education expenses paid
by such individual during such individual’s taxable
year shall be treated for purposes of this section as
paid by such other taxpayer.
‘‘(e) COORDINATION WITH AMOUNTS INCLUDIBLE IN
GROSS INCOME UNDER SECTION 529 OR 530.—If any de-
duction is allowed under subsection (a) with respect to the
qualified higher education expenses of an individual with
respect to whom the taxpayer is allowed a deduction under
section 151(c), any amount which would (but for this sub-
section) be includible in such individual’s gross income by
reason of section 529 or section 530 shall be includible
in the gross income of the taxpayer and not such individ-
ual.
‘‘(f) ADJUSTMENT
FOR CERTAIN SCHOLARSHIPS,
ETC.—The amount of qualified higher education expenses
otherwise taken into account under subsection (a) with re-
spect to an individual for an academic period shall be re-
duced (before the application of subsection (b)) by the sum
of—
‘‘(1) the aggregate amount of the reductions
under section 25A(g)(2) for the benefit of such indi-
vidual for such period, and
‘‘(2) the amount excludable from gross income
under section 135 by reason of such expenses with
respect to such individual which are allocable to such
period.
‘‘(g) DENIAL
OF DEDUCTION
IF STUDENT CON-
VICTED OF A FELONY DRUG OFFENSE.—No deduction
shall be allowed under subsection (a) for qualified higher
education expenses for the enrollment or attendance of a
student for any academic period if such student has been
convicted of a Federal or State felony offense consisting
of the possession or distribution of a controlled substance
before the end of the taxable year with or within which
such period ends.
‘‘(h) DENIAL OF DOUBLE BENEFIT.—No deduction
shall be allowed under subsection (a) for any expense for
which a deduction is allowed to the taxpayer under any
other provision of this chapter.’’
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—
(1) IN GENERAL.—Subsection (b) of section 63
is amended by striking ‘‘and’’ at the end of para-
graph (1), by striking the period at the end of para-
graph (2) and inserting ‘‘, and’’, and by adding at
the end the following new paragraph:
‘‘(3) the deduction allowed by section 221 (re-
lating to deduction for qualified higher education ex-
penses).’’
(2) CONFORMING AMENDMENT.—Subsection (d)
of section 63 is amended by striking ‘‘and’’ at the
end of paragraph (1), by striking the period at the
end of paragraph (2) and inserting ‘‘, and’’, and by
adding at the end the following new paragraph:
‘‘(3) the deduction allowed by section 221 (re-
lating to deduction for qualified higher education ex-
penses).’’
(c) PHASEOUT OF EXCLUSION FOR QUALIFIED TUI-
TION REDUCTIONS.—Subsection (d) of section 117 is
amended by redesignating the last paragraph as para-
graph (4) and by adding at the end the following new
paragraph:
‘‘(5) PHASEOUT OF EXCLUSION.—
‘‘(A) TERMINATION.—Paragraph (1) shall
not apply to any qualified tuition reduction for
any course of instruction beginning after De-
cember 31, 2001.
‘‘(B) PHASEOUT.—The amount excludable
from gross income under paragraph (1) for any
course of instruction beginning in a calendar
year after 1997 and before 2002 shall not ex-
ceed the applicable percentage (determined in
accordance with the following table) for such
calendar year of the amount which would be so
excludable but for this subparagraph:
In the case of
The applicable
calendar year:
percentage is:
1998 .......................................................................
1999 .......................................................................
2000 .......................................................................
2001 .......................................................................
20.’’
(d) TECHNICAL AMENDMENTS.—
(1) Subparagraph (A) of section 529(e)(3) is
amended by inserting ‘‘(except as provided in section
221(e))’’ after ‘‘distributee’’.
(2) The table of sections for part VII of sub-
chapter B of chapter 1 is amended by striking the
item relating to section 221 and inserting:
‘‘Sec. 221. Qualified higher education expenses.
‘‘Sec. 222. Cross reference.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to expenses paid after December
31, 1997 (in taxable years ending after such date), for
education furnished in academic periods beginning after
such date.
SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL
RETIREMENT 
PLANS 
FOR 
HIGHER 
EDU-
CATION EXPENSES.
(a) IN GENERAL.—Paragraph (2) of section 72(t)
(relating to exceptions to 10-percent additional tax on
early distributions from qualified retirement plans) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL
RETIREMENT PLANS FOR HIGHER EDUCATION
EXPENSES.—Distributions 
to 
an 
individual
from an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year.
Distributions shall not be taken into account
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or
(D) or to the extent paragraph (1) does not
apply to such distributions by reason of sub-
paragraph (B).’’
(b) DEFINITION.—Section 72(t) is amended by add-
ing at the end the following new paragraph:
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means qualified
higher education expenses (as defined in section
529(e)(3) without regard to subparagraph (C)
thereof) for education furnished to—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any child (as defined in section
151(c)(3)) or grandchild of the taxpayer or
the taxpayer’s spouse,
at an eligible educational institution (as defined
in section 529(e)(5)).
‘‘(B) 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).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions after December 31,
1997, with respect to expenses paid after such date (in
taxable years ending after such date), for education fur-
nished in academic periods beginning after such date.
SEC. 204. EXPENSES FOR EDUCATION WHICH SUPPLE-
MENTS ELEMENTARY AND SECONDARY EDU-
CATION.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 25A, as
added by this title, the following new section:
‘‘SEC. 25B. EXPENSES FOR EDUCATION WHICH SUPPLE-
MENTS ELEMENTARY AND SECONDARY EDU-
CATION.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed a credit against the tax
imposed by this chapter for the taxable year an amount
equal to 50 percent of the qualifying educational assist-
ance expenses paid by the taxpayer during the taxable
year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount al-
lowed as a credit under subsection (a) for any tax-
able year with respect to the qualified educational
assistance expenses of any 1 individual shall not ex-
ceed $150.
‘‘(2) REDUCTION
OF
CREDIT
BASED
ON
AD-
JUSTED GROSS INCOME.—
‘‘(A) 
IN
GENERAL.—The 
aggregate
amount which would (but for this paragraph)
be allowed by this section shall be reduced (but
not below zero) by $25 for each $1,000 (or
fraction thereof) by which the taxpayer’s modi-
fied adjusted gross income exceeds the thresh-
old amount. For purposes of the preceding sen-
tence, the term ‘modified adjusted gross in-
come’ means adjusted gross income increased
by any amount excluded from gross income
under section 911, 931, or 933.
‘‘(B) THRESHOLD AMOUNT.—For purposes
of subparagraph (A), the term ‘threshold
amount’ means—
‘‘(i) $80,000 in the case of a joint re-
turn,
‘‘(ii) $50,000 in the case of an indi-
vidual who is not married, and
‘‘(iii) $40,000 in the case of a married
individual filing a separate return.
For purposes of this subparagraph, marital sta-
tus shall be determined under section 7703.
‘‘(c) QUALIFIED EDUCATIONAL ASSISTANCE EX-
PENSES.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified edu-
cational assistance expenses’ means amounts paid to
a qualified entity to provide supplementary edu-
cation to any dependent (within the meaning of sec-
tion 152) of the taxpayer—
‘‘(A) who is less than 18 years of age as
of the close of the taxable year, and
‘‘(B) who is enrolled as a full-time student
in an elementary or secondary school.
‘‘(2) SUPPLEMENTARY EDUCATION.—For pur-
poses of paragraph (1), supplementary education is
education provided with respect to reading, mathe-
matics, or any subject that the dependent student is
studying at the time in elementary or secondary
school classes. Eligible courses of study shall not in-
clude courses providing assistance with respect to
preparation for college entrance examinations.
‘‘(3) QUALIFIED ENTITY.—The term ‘qualified
entity’ means a person that is accredited as a sup-
plementary education service provider by an accredi-
tation organization that is recognized by the Sec-
retary of Education or by any other agency, associa-
tion, or group that is certified by the Secretary for
purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for subpart A of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
25A the following new item:
‘‘Sec. 25B. Expenses for education which supplements elementary
and secondary education.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle B—Expanded Education
Investment Savings Opportunities
SEC. 211. ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION
PROGRAMS; 
OTHER 
MODIFICATIONS 
OF
QUALIFIED STATE TUITION PROGRAMS.
(a) ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
Paragraph (1) of section 529(b) (defining qualified State
tuition program) is amended by inserting ‘‘or by one or
more eligible educational institutions’’ after ‘‘maintained
by a State or agency or instrumentality thereof’’.
(b) QUALIFIED HIGHER EDUCATION EXPENSES TO
INCLUDE ROOM AND BOARD.—Paragraph (3) of section
529(e) (defining qualified higher education expenses) is
amended to read as follows:
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means tuition, fees,
books, supplies, and equipment required for the
enrollment or attendance of a designated bene-
ficiary at an eligible education institution.
‘‘(B) ROOM
AND
BOARD
INCLUDED
FOR
STUDENTS WHO ARE AT LEAST HALF-TIME.—In
the case of an individual who is an eligible stu-
dent (as defined in section 25A(d)(3)) for any
academic period, such term shall also include
reasonable costs for such period (as determined
under the qualified tuition program) incurred
by the designated beneficiary for room and
board while attending such institution. The
amount treated as qualified higher education
expenses by reason of the preceding sentence
shall not exceed the minimum amount (applica-
ble to the student) included for room and board
for such period in the cost of attendance (as de-
fined in section 472 of the Higher Education
Act of 1965, 20 U.S.C. 1087ll, as in effect on
the date of the enactment of this paragraph)
for the eligible educational institution for such
period.
‘‘(C) EXCLUSION
FOR
GRADUATE
LEVEL
COURSES.—Such term shall not include ex-
penses for any graduate level course of a kind
normally taken by an individual pursuing a pro-
gram leading to a law, business, medical, or
other advanced academic or professional degree.
Such courses shall not be taken into account in
determining whether an individual is described
in subsection (f)(3)(A).’’
(c) ADDITIONAL MODIFICATIONS.—
(1) MEMBER
OF
FAMILY.—Paragraph (2) of
section 529(e) (relating to other definitions and spe-
cial rules) is amended to read as follows:
‘‘(2) MEMBER OF FAMILY.—The term ‘member
of the family’ means—
‘‘(A) an individual who bears a relationship
to another individual which is a relationship de-
scribed in paragraphs (1) through (8) of section
152(a), and
‘‘(B) the spouse of any individual described
in subparagraph (A).’’
(2) ELIGIBLE
EDUCATIONAL
INSTITUTION.—
Section 529(e) is amended by adding at the end the
following:
‘‘(5) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ means an
institution—
‘‘(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the enactment
of this paragraph, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.’’
(3) NO
CONTRIBUTIONS
AFTER
BENEFICIARY
ATTAINS AGE 18; DISTRIBUTIONS REQUIRED IN CER-
TAIN
CASES.—Subsection (b) of section 529 (as
amended by subsection (f) of this section) is amend-
ed by adding at the end the following new para-
graph:
‘‘(7) RESTRICTIONS RELATING TO AGE OF BEN-
EFICIARY; COMPLETION OF EDUCATION.—
‘‘(A) IN GENERAL.—A program shall be
treated as a qualified tuition program only if—
‘‘(i) no contribution is accepted on be-
half of a designated beneficiary after the
date on which such beneficiary attains age
18, and
‘‘(ii) any balance to the credit of a
designated beneficiary (if any) on the ac-
count termination date shall be distributed
within 30 days after such date to such
beneficiary (or in the case of death, the es-
tate of the beneficiary).
‘‘(B) ACCOUNT TERMINATION DATE.—For
purposes of subparagraph (A), the term ‘ac-
count termination date’ means whichever of the
following dates is the earliest:
‘‘(i) The date on which the designated
beneficiary completes the equivalent of 4
years of post-secondary education (whether
or not at the same eligible educational in-
stitution).
‘‘(ii) The date on which the des-
ignated beneficiary attains age 30.
‘‘(iii) The date on which the des-
ignated beneficiary dies.’’
(4) ESTATE AND GIFT TAX TREATMENT.—
(A) GIFT TAX TREATMENT.—
(i) Paragraph (2) of section 529(c) is
amended to read as follows:
‘‘(2) GIFT
TAX
TREATMENT
OF
CONTRIBU-
TIONS.—For purposes of chapters 12 and 13, any
contribution to a qualified tuition program on behalf
of any designated beneficiary—
‘‘(A) shall be treated as a completed gift to
such beneficiary which is not a future interest
in property, and
‘‘(B) shall not be treated as a qualified
transfer under section 2503(e).’’
(ii) Paragraph (5) of section 529(c) is
amended to read as follows:
‘‘(5) OTHER GIFT TAX RULES.—For purposes
of chapters 12 and 13—
‘‘(A) TREATMENT OF DISTRIBUTIONS.—In
no event shall a distribution from a qualified
tuition program be treated as a taxable gift.
‘‘(B) TREATMENT
OF
DESIGNATION
OF
NEW
BENEFICIARY.—The taxes imposed by
chapters 12 and 13 shall apply to a transfer by
reason of a change in the designated beneficiary
under the program (or a rollover to the account
of a new beneficiary) only if the new beneficiary
is a generation below the generation of the old
beneficiary (determined in accordance with sec-
tion 2651).’’
(B) ESTATE
TAX
TREATMENT.—Para-
graph (4) of section 529(c) is amended to read
as follows:
‘‘(4) ESTATE TAX TREATMENT.—
‘‘(A) IN GENERAL.—No amount shall be
includible in the gross estate of any individual
for purposes of chapter 11 by reason of an in-
terest in a qualified tuition program.
‘‘(B) AMOUNTS INCLUDIBLE IN ESTATE OF
DESIGNATED
BENEFICIARY
IN
CERTAIN
CASES.—Subparagraph (A) shall not apply to
amounts distributed on account of the death of
a beneficiary.’’
(5) LIMITATION ON CONTRIBUTIONS TO QUALI-
FIED TUITION PROGRAMS NOT MAINTAINED BY A
STATE.—Subsection (b) of section 529 is amended
by adding at the end the following new paragraph:
‘‘(9) 
LIMITATION
ON
CONTRIBUTIONS
TO
QUALIFIED TUITION PROGRAMS NOT MAINTAINED BY
A STATE.—In the case of a program not maintained
by a State or agency or instrumentality thereof, such
program shall not be treated as a qualified tuition
program unless it limits the annual contribution to
the program on behalf of a designated beneficiary to
an amount equal to the lesser of—
‘‘(A) $5,000, or
‘‘(B) the excess of—
‘‘(i) $50,000, over
‘‘(ii) the aggregate amount contrib-
uted to such program on behalf of such
beneficiary for all prior taxable years.’’
(d) ADDITIONAL TAX ON AMOUNTS NOT USED FOR
HIGHER EDUCATION EXPENSES.—Section 529 is amend-
ed by adding at the end the following new subsection:
‘‘(f) IMPOSITION OF ADDITIONAL TAX.—
‘‘(1) IN GENERAL.—The tax imposed by this
chapter for any taxable year on any taxpayer who
receives a payment or distribution from a qualified
tuition program which is includible in gross income
shall be increased by 10 percent of the amount
which is so includible.
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply if the payment or distribution is—
‘‘(A) used for qualified higher education
expenses of the designated beneficiary,
‘‘(B) made to a beneficiary (or to the es-
tate of the designated beneficiary) on or after
the death of the designated beneficiary,
‘‘(C) attributable to the designated bene-
ficiary’s being disabled (within the meaning of
section 72(m)(7)), or
‘‘(D) made on account of a scholarship, al-
lowance, or payment described in subparagraph
(A), (B), or (C) of section 135(d)(1) received by
the account holder to the extent the amount of
the payment or distribution does not exceed the
amount of the scholarship, allowance, or pay-
ment.
‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—In the case of a
qualified tuition program not maintained by a State
or any agency or instrumentality thereof, paragraph
(1) shall not apply to the distribution to a contribu-
tor of any contribution made during a taxable year
on behalf of a designated beneficiary to the extent
that such contribution exceeds the limitation in sec-
tion 4973(e) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such contributor’s re-
turn for such taxable year, and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the contributor
for the taxable year in which such excess contribu-
tion was made.’’
(e) COORDINATION
WITH
EDUCATION
SAVINGS
BOND.—Section 135(c)(2) (defining qualified higher edu-
cation expenses) is amended by adding at the end the fol-
lowing:
‘‘(C) CONTRIBUTIONS TO QUALIFIED TUI-
TION PROGRAM.—Such term shall include any
contribution to a qualified tuition program (as
defined in section 529) on behalf of a des-
ignated beneficiary (as defined in such section)
who is an individual described in subparagraph
(A); but there shall be no increase in the invest-
ment in the contract for purposes of applying
section 72 by reason of the portion of such con-
tribution which is not includible in gross income
by reason of this subparagraph.’’
(f) TAX ON EXCESS CONTRIBUTIONS.—
(1) IN
GENERAL.—Subsection (a) of section
4973 is amended by striking ‘‘or’’ at the end of
paragraph (2) and by inserting after paragraph (3)
the following new paragraphs:
‘‘(4) a qualified tuition program (as defined in
section 529) not maintained by a State or any agen-
cy or instrumentality thereof, or
‘‘(5) an education investment account (as de-
fined in section 530),’’.
(2) EXCESS
CONTRIBUTIONS
DEFINED.—Sec-
tion 4973 is amended by adding at the end the fol-
lowing new subsection:
‘‘(e) 
EXCESS
CONTRIBUTIONS
TO
PRIVATE
QUALFIED TUITION PROGRAM AND EDUCATION INVEST-
MENT ACCOUNTS.—For purposes of this section—
‘‘(1) IN GENERAL.—In the case of private edu-
cation investment accounts maintained for the bene-
fit of any 1 beneficiary, the term ‘excess contribu-
tions’ means the amount by which the amount con-
tributed for the taxable year to such accounts ex-
ceeds the lesser of—
‘‘(A) the excess of—
‘‘(i) $5,000, over
‘‘(ii) the aggregate amount contrib-
uted to all qualified tuition programs (as
defined in section 529) maintained by a
State or any agency or instrumentality
thereof on behalf of such beneficiary for
such taxable year, or
‘‘(B) the excess of—
‘‘(i) $50,000, over
‘‘(ii) the sum of—
‘‘(I) the aggregate amount con-
tributed to such accounts for all prior
taxable years, and
‘‘(II) the aggregate amount con-
tributed to all qualified tuition pro-
grams (as defined in section 529)
maintained by a State or any agency
or instrumentality thereof on behalf of
such beneficiary for such taxable year
and all prior taxable years.
‘‘(2) PRIVATE
EDUCATION
INVESTMENT
AC-
COUNT.—For purposes of paragraph (1), the term
‘private education investment account’ means—
‘‘(A) a qualified tuition program (as de-
fined in section 529) not maintained by a State
or any agency or instrumentality thereof, and
‘‘(B) an education investment account (as
defined in section 530).
‘‘(3) SPECIAL RULES.—For purposes of para-
graph (1), the following contributions shall not be
taken into account:
‘‘(A) Any contribution which is distributed
out of the education investment account in a
distribution to which section 530(c)(3)(B) ap-
plies.
‘‘(B) Any contribution to a qualified tui-
tion program (as so defined) described in sec-
tion 530(b)(2)(B) from any such account.
‘‘(C) Any rollover contribution.’’
(g) TECHNICAL AMENDMENTS.—
(1) Paragraph (2) of section 26(b) is amended
by redesignating subparagraphs (E) through (P) as
subparagraphs (F) through (Q), respectively, and by
inserting after subparagraph (D) the following new
subparagraph:
‘‘(E) section 529(f) (relating to additional
tax on certain distributions from qualified tui-
tion programs),’’.
(2) The text of section 529 is amended by strik-
ing ‘‘qualified State tuition program’’ each place it
appears and inserting ‘‘qualified tuition program’’.
(3) Subsection (b) of section 529 is amended by
striking paragraph (3) and by redesignating para-
graphs (4) through (7) as paragraphs (3) through
(6), respectively.
(4)(A) The section heading of section 529 is
amended to read as follows:
‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’
(B) 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’’.
(5)(A) The heading for part VIII of subchapter
F of chapter 1 is amended to read as follows:
‘‘PART VIII—HIGHER EDUCATION SAVINGS
ENTITIES’’.
(B) The table of parts for subchapter F of
chapter 1 is amended by striking the item relating
to part VIII and inserting:
‘‘Part VIII. Higher education savings entities.’’
(h) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall take effect on January 1, 1998.
(2) EXPENSES TO INCLUDE ROOM AND BOARD,
ETC.—The amendments made by subsection (b) and
(c)(2) shall apply to distributions after December
31, 1997, with respect to expenses paid after such
date (in taxable years ending after such date), for
education furnished in academic periods beginning
after such date.
(3) PENALTY FOR NONEDUCATION WITHDRAW-
ALS.—The amendment made by subsection (d) shall
apply to distributions after December 31, 1997.
(4) COORDINATION WITH EDUCATION SAVINGS
BONDS.—The amendment made by subsection (e)
shall apply to taxable years beginning after Decem-
ber 31, 1997.
(5) ESTATE AND GIFT TAX CHANGES.—
(A) GIFT TAX CHANGES.—Paragraphs (2)
and (5) of section 529(c) of the Internal Reve-
nue Code of 1986, as amended by this section,
shall apply to transfers (including designations
of new beneficiaries) made after the date of the
enactment of this Act.
(B) ESTATE
TAX
CHANGES.—Paragraph
(4) of such section 529(c) shall apply to estates
of decedents dying after June 8, 1997.
SEC. 212. EDUCATION INVESTMENT ACCOUNTS.
(a) IN GENERAL.—Part VIII of subchapter F of
chapter 1 (relating to qualified State tuition programs)
is amended by adding at the end the following new section:
‘‘SEC. 530. EDUCATION INVESTMENT ACCOUNTS.
‘‘(a) GENERAL RULE.—An education investment ac-
count shall be exempt from taxation under this subtitle.
Notwithstanding the preceding sentence, the education in-
vestment account shall be subject to the taxes imposed by
section 511 (relating to imposition of tax on unrelated
business income of charitable organizations).
‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EDUCATION INVESTMENT ACCOUNT.—The
term ‘education investment account’ means a trust
created or organized in the United States exclusively
for the purpose of paying the qualified higher edu-
cation expenses of the account holder, but only if the
written governing instrument creating the trust
meets the following requirements:
‘‘(A) No contribution will be accepted—
‘‘(i) unless it is in cash,
‘‘(ii) after the date on which the ac-
count holder attains age 18, or
‘‘(iii) in excess of $5,000 for the tax-
able year.
‘‘(B) The trustee is a bank (as defined in
section 408(n)) or another person who dem-
onstrates to the satisfaction of the Secretary
that the manner in which that person will ad-
minister the trust will be consistent with the re-
quirements of this section.
‘‘(C) No part of the trust assets will be in-
vested in life insurance contracts.
‘‘(D) The assets of the trust shall not be
commingled with other property except in a
common trust fund or common investment
fund.
‘‘(E) Any balance in the account will be
distributed 
as 
required 
under 
section
529(b)(8)(B) (as if such account were a quali-
fied tuition program).
For $50,000 limit on aggregate contributions to ac-
counts, see section 4973(e).
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ has the same mean-
ing given such term by section 529(e)(3).
‘‘(B) QUALIFIED
TUITION
PROGRAMS.—
Such term shall include amounts paid or in-
curred to purchase tuition credits or certifi-
cates, or to make contributions to an account,
under a qualified tuition program (as defined in
section 529(b)) for the benefit of the account
holder.
‘‘(3) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ has the
meaning given such term by section 529(e)(5).
‘‘(4) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual for whose benefit the
education investment account is established.
‘‘(c) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Any amount paid or dis-
tributed shall be includible in gross income as re-
quired by section 529(c)(3) (determined as if such
account were a qualified tuition program).
‘‘(2) SPECIAL
RULES
FOR
APPLYING
ESTATE
AND GIFT TAXES WITH RESPECT TO ACCOUNT.—
Rules similar to the rules of paragraphs (2), (4),
and (5) of section 529(c) shall apply for purposes of
this section.
‘‘(3) ADDITIONAL TAX FOR DISTRIBUTIONS NOT
USED FOR EDUCATIONAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
section 529(f) shall apply to payments and dis-
tributions from an education investment ac-
count in the same manner as such tax applies
to qualified tuition programs (as defined in sec-
tion 529).
‘‘(B) EXCESS CONTRIBUTIONS RETURNED
BEFORE
DUE
DATE
OF
RETURN.—Subpara-
graph (A) shall not apply to the distribution to
a contributor of any contribution paid during a
taxable year to an education investment account
to the extent that such contribution exceeds the
limitation in section 4973(e) if such distribution
(and the net income with respect to such excess
contribution) meet requirements comparable to
the requirements of section 529(f)(3).
‘‘(4) ROLLOVER
CONTRIBUTIONS—Paragraph
(1) shall not apply to any amount paid or distrib-
uted from an education investment account to the
extent that the amount received is paid into another
education investment account for the benefit of the
account holder or a member of the family (within
the meaning of section 529(e)(2)) of the account
holder not later than the 60th day after the date of
such payment or distribution. The preceding sen-
tence shall not apply to any payment or distribution
if it applied to any prior payment or distribution
during the 12-month period ending on the date of
the payment or distribution.
‘‘(5) CHANGE
IN
ACCOUNT
HOLDER.—Any
change in the account holder of an education invest-
ment account shall not be treated as a distribution
for purposes of paragraph (1) if the new account
holder is a member of the family (as so defined) of
the old account holder.
‘‘(6) SPECIAL
RULES
FOR
DEATH
AND
DI-
VORCE.—Rules similar to the rules of paragraphs
(7) and (8) of section 220(f) shall apply.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—Rules similar
to the rules of paragraphs (2) and (4) of section 408(e)
shall apply to any education investment account.
‘‘(e) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(f) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if
the assets of such account are held by a bank (as defined
in section 408(n)) or another person who demonstrates,
to the satisfaction of the Secretary, that the manner in
which he will administer the account will be consistent
with the requirements of this section, and if the custodial
account would, except for the fact that it is not a trust,
constitute an account described in subsection (b)(1). For
purposes of this title, in the case of a custodial account
treated as a trust by reason of the preceding sentence,
the custodian of such account shall be treated as the trust-
ee thereof.
‘‘(g) REPORTS.—The trustee of an education invest-
ment account shall make such reports regarding such ac-
count to the Secretary and to the account holder with re-
spect to contributions, distributions, and such other mat-
ters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals
at such time and in such manner as may be required by
those regulations.’’
(b) TAX ON PROHIBITED TRANSACTIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
4975(e) (relating to prohibited transactions) is
amended by striking ‘‘or’’ at the end of subpara-
graph (D), by redesignating subparagraph (E) as
subparagraph (F), and by inserting after subpara-
graph (D) the following new subparagraph:
‘‘(E) an education investment account de-
scribed in section 530, or’’.
(2) SPECIAL RULE.—Subsection (c) of section
4975 is amended by adding at the end of subsection
(c) the following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION INVEST-
MENT ACCOUNTS.—An individual for whose benefit
an education investment 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 sec-
tion 530(d) applies with respect to such trans-
action.’’
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION
INVESTMENT ACCOUNTS.—
(1) IN
GENERAL.—Paragraph (2) of section
6693(a) (relating to failure to provide reports on in-
dividual retirement accounts or annuities) is amend-
ed by striking ‘‘and’’ at the end of subparagraph
(A), by striking the period at the end of subpara-
graph (B) and inserting ‘‘, and’’, and by adding at
the end the following new subparagraph:
‘‘(C) section 530(g) (relating to education
investment accounts).’’
(2) CLERICAL AMENDMENT.—The section head-
ing for section 6693 is amended by striking ‘‘INDI-
VIDUAL RETIREMENT’’ and inserting ‘‘CERTAIN
TAX-FAVORED’’.
(d) TECHNICAL AMENDMENTS.—
(1) Subparagraph (F) of section 26(b)(2), as
added by the preceding section, is amended by in-
serting before the comma ‘‘and section 530(c)(3)
(relating to additional tax on certain distributions
from education investment accounts)’’.
(2) Subparagraph (C) of section 135(c)(2), as
added by the preceding section, is amended by in-
serting ‘‘, or to an education investment account (as
defined in section 530) on behalf of an account hold-
er (as defined in such section),’’ after ‘‘(as defined
in such section)’’.
(3) The table of sections for part VIII of sub-
chapter F of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 530. Education investment accounts.’’
(4) The item relating to section 6693 in the
table of sections for part I of subchapter B of chap-
ter 68 is amended by striking ‘‘individual retire-
ment’’ and inserting ‘‘certain tax-favored’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Other Education
Initiatives
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PRO-
VIDED EDUCATIONAL ASSISTANCE.
(a) IN GENERAL.—Subsection (d) of section 127 (re-
lating to educational assistance programs) is amended to
read as follows:
‘‘(d) TERMINATION.—This section shall not apply to
expenses paid with respect to courses of instruction begin-
ning after December 31, 1997.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1996.
SEC. 222. INCREASE IN LIMITATION ON QUALIFIED 501(C)(3)
BONDS OTHER THAN HOSPITAL BONDS.
(a) IN GENERAL.—The text of paragraph (1) of sec-
tion 145(b) is amended by striking ‘‘$150,000,000.’’ and
inserting ‘‘the limitation determined in accordance with
the following table:
In the case of
calendar year:
The limitation is:
1998 ..................................................................................
$160,000,000
1999 ..................................................................................
170,000,000
2000 ..................................................................................
180,000,000
2001 ..................................................................................
190,000,000
2002 or thereafter .............................................................
200,000,000.’’
(b) CONFORMING AMENDMENT.—The heading for
subsection (b) of section 145 is amended by striking
‘‘$150,000,000’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1998.
SEC. 223. CONTRIBUTIONS OF COMPUTER TECHNOLOGY
AND EQUIPMENT FOR ELEMENTARY OR SEC-
ONDARY SCHOOL PURPOSES.
(a) CONTRIBUTIONS
OF COMPUTER TECHNOLOGY
AND EQUIPMENT
FOR ELEMENTARY
OR SECONDARY
SCHOOL PURPOSES.—Subsection (e) of section 170 is
amended by adding at the end the following new para-
graph:
‘‘(6) SPECIAL RULE FOR CONTRIBUTIONS OF
COMPUTER TECHNOLOGY AND EQUIPMENT FOR ELE-
MENTARY OR SECONDARY SCHOOL PURPOSES.—
‘‘(A) LIMIT ON REDUCTION.—In the case
of a qualified elementary or secondary edu-
cational contribution, the reduction under para-
graph (1)(A) shall be no greater than the
amount determined under paragraph (3)(B).
‘‘(B) QUALIFIED
ELEMENTARY
OR
SEC-
ONDARY
EDUCATIONAL
CONTRIBUTION.—For
purposes of this paragraph, the term ‘qualified
elementary or secondary educational contribu-
tion’ means a charitable contribution by a cor-
poration of any computer technology or equip-
ment, but only if—
‘‘(i) the contribution is to—
‘‘(I) an educational organization
described in subsection (b)(1)(A)(ii),
or
‘‘(II) an entity described in sec-
tion 501(c)(3) and exempt from tax
under section 501(a) (other than an
entity described in subclause (I)) that
is organized primarily for purposes of
supporting elementary and secondary
education,
‘‘(ii) the contribution is made not
later than 2 years after the date the tax-
payer acquired the property (or in the case
of property constructed by the taxpayer,
the date the construction of the property is
substantially completed),
‘‘(iii) substantially all of the use of the
property by the donee is for use within the
United States for educational purposes in
any of the grades K–12 that are related to
the purpose or function of the organization
or entity,
‘‘(iv) the property is not transferred
by the donee in exchange for money, other
property, or services, except for shipping,
installation and transfer costs,
‘‘(v) the property will fit productively
into the entity’s education plan, and
‘‘(vi) the entity’s use and disposition
of the property will be in accordance with
the provisions of clauses (iii) and (iv).
‘‘(C) CONTRIBUTION TO PRIVATE FOUNDA-
TION.—A contribution by a corporation of any
computer technology or equipment to a private
foundation (as defined in section 509) shall be
treated as a qualified elementary or secondary
educational contribution for purposes of this
paragraph if—
‘‘(i) the contribution to the private
foundation satisfies the requirements of
clauses (ii) and (iv) of subparagraph (B),
and
‘‘(ii) within 30 days after such con-
tribution, the private foundation—
‘‘(I) contributes the property to
an entity described in clause (i) of
subparagraph (B) that satisfies the
requirements of clauses (iii) through
(vi) of subparagraph (B), and
‘‘(II) notifies the donor of such
contribution.
‘‘(D) SPECIAL RULE RELATING TO CON-
STRUCTION OF PROPERTY.—For the purposes
of this paragraph, the rules of paragraph (4)(C)
shall apply.
‘‘(E) DEFINITIONS.—For the purposes of
this paragraph—
‘‘(i) 
COMPUTER
TECHNOLOGY
OR
EQUIPMENT.—The term ‘computer tech-
nology or equipment’ means computer soft-
ware (as defined by section 197(e)(3)(B)),
computer or peripheral equipment (as de-
fined by section 168(i)(2)(B)), and fiber
optic cable related to computer use.
‘‘(ii) CORPORATION.—The term ‘cor-
poration’ has the meaning given to such
term by paragraph (4)(D).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
the calendar year in which this Act is enacted.
SEC. 224. TREATMENT OF CANCELLATION OF CERTAIN STU-
DENT LOANS.
(a) CERTAIN DIRECT STUDENT LOANS THE REPAY-
MENT OF WHICH IS INCOME CONTINGENT.—Paragraph
(1) of section 108(f) is amended by striking ‘‘any student
loan if’’ and all that follows and inserting ‘‘any student
loan if—
‘‘(A) such discharge was pursuant to a
provision of such loan under which all or part
of the indebtedness of the individual would be
discharged if the individual worked for a certain
period of time in certain professions for any of
a broad class of employers, or
‘‘(B) in the case of a loan made under part
D of title IV of the Higher Education Act of
1965 which has a repayment schedule estab-
lished under section 455(e)(4) of such Act (re-
lating to income contingent repayments), such
discharge is after the maximum repayment pe-
riod under such loan (as prescribed under such
part).’’
(b) CERTAIN LOANS BY EXEMPT ORGANIZATIONS.—
(1) IN
GENERAL.—Paragraph (2) of section
108(f) (defining student loan) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (B) and by
striking subparagraph (D) and inserting the follow-
ing:
‘‘(D) any educational organization de-
scribed in section 170(b)(1)(A)(ii) if such loan
is made—
‘‘(i) pursuant to an agreement with
any entity described in subparagraph (A),
(B), or (C) under which the funds from
which the loan was made were provided to
such educational organization, or
‘‘(ii) pursuant to a program of such
educational organization which is designed
to encourage its students to serve in occu-
pations with unmet needs or in areas with
unmet needs and under which the services
provided by the students (or former stu-
dents) are for or under the direction of a
governmental unit or an organization de-
scribed in section 501(c)(3) and exempt
from tax under section 501(a).
The term ‘student loan’ includes any loan made by
an educational organization so described or by an or-
ganization exempt from tax under section 501(a) to
refinance a loan meeting the requirements of the
preceding sentence.’’
(2) EXCEPTION FOR DISCHARGES ON ACCOUNT
OF
SERVICES
PERFORMED
FOR
CERTAIN
LEND-
ERS.—Subsection (f) of section 108 is amended by
adding at the end the following new paragraph:
‘‘(3) EXCEPTION
FOR
DISCHARGES
ON
AC-
COUNT
OF
SERVICES
PERFORMED
FOR
CERTAIN
LENDERS.—Paragraph (1) shall not apply to the
discharge of a loan made by an organization de-
scribed in paragraph (2)(D) (or by an organization
described in paragraph (2)(E) from funds provided
by an organization described in paragraph (2)(D)) if
the discharge is on account of services performed for
either such organization.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to discharges of indebtedness after
the date of the enactment of this Act.
TITLE III—SAVINGS AND
INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
SEC. 301. ESTABLISHMENT OF AMERICAN DREAM IRA.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 (relating to pension, profit-sharing, stock
bonus plans, etc.) is amended by inserting after section
408 the following new section:
‘‘SEC. 408A. AMERICAN DREAM IRA.
‘‘(a) GENERAL RULE.—Except as provided in this
section, an American Dream IRA shall be treated for pur-
poses of this title in the same manner as an individual
retirement plan.
‘‘(b) AMERICAN DREAM IRA.—For purposes of this
title, the term ‘American Dream IRA’ or ‘AD IRA’ means
an individual retirement plan (as defined in section
7701(a)(37)) which is designated at the time of the estab-
lishment of the plan as an American Dream IRA. Such
designation shall be made in such manner as the Secretary
may prescribe.
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed under section 219 for a contribution
to an AD IRA.
‘‘(2) CONTRIBUTION LIMIT.—
‘‘(A) 
IN
GENERAL.—The 
aggregate
amount of contributions for any taxable year to
all AD IRAs maintained for the benefit of an
individual shall not exceed $2,000.
‘‘(B) INFLATION
ADJUSTMENT.—In the
case of taxable years beginning in a calendar
year after 1998, the $2,000 amount contained
in subparagraph (A) shall be increased by an
amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such
calendar year by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
If the amount as adjusted under the preceding
sentence is not a multiple of $50, such amount
shall be rounded to the next lowest multiple of
$50.
‘‘(3) CONTRIBUTIONS PERMITTED AFTER AGE
701⁄2.—Contributions to an AD IRA may be made
even after the individual for whom the account is
maintained has attained age 701⁄2.
‘‘(4) MANDATORY
DISTRIBUTION
RULES
NOT
TO APPLY, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), subsections (a)(6) and (b)(3)
of section 408 (relating to required distribu-
tions) and section 4974 (relating to excise tax
on certain accumulations in qualified retirement
plans) shall not apply to any AD IRA.
‘‘(B) POST-DEATH DISTRIBUTIONS.—Rules
similar to the rules of section 401(a)(9) (other
than subparagraph (A) thereof) shall apply for
purposes of this section.
‘‘(5) RULES
RELATING
TO
ROLLOVER
CON-
TRIBUTIONS.—
‘‘(A) IN GENERAL.—No rollover contribu-
tion may be made to an AD IRA unless it is
a qualified rollover contribution.
‘‘(B) 
COORDINATION
WITH
LIMIT.—A
qualified rollover contribution shall not be taken
into account for purposes of paragraph (2).
‘‘(6) TIME WHEN CONTRIBUTIONS MADE.—For
purposes of this section, the rule of section 219(f)(3)
shall apply.
‘‘(d) DISTRIBUTION RULES.—For purposes of this
title—
‘‘(1) GENERAL RULES.—
‘‘(A) EXCLUSIONS FROM GROSS INCOME.—
Any qualified distribution from an AD IRA
shall not be includible in gross income.
‘‘(B) NONQUALIFIED DISTRIBUTIONS.—In
applying section 72 to any distribution from an
AD IRA which is not a qualified distribution,
such distribution shall be treated as made from
contributions to the AD IRA to the extent that
such distribution, when added to all previous
distributions from the AD IRA, does not exceed
the aggregate amount of contributions to the
AD IRA. For purposes of the preceding sen-
tence, all AD IRAs maintained for the benefit
of an individual shall be treated as 1 account.
‘‘(C) EXCEPTION FROM PENALTY TAX.—
Section 72(t) shall not apply to—
‘‘(i) any qualified distribution from an
AD IRA, and
‘‘(ii) any qualified first-time home-
buyer distribution (whether or not a quali-
fied distribution) from an AD IRA.
‘‘(2) QUALIFIED DISTRIBUTION.—For purposes
of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
distribution’ means any payment or distribu-
tion—
‘‘(i) made on or after the date on
which the individual attains age 591⁄2,
‘‘(ii) made to a beneficiary (or to the
estate of the individual) on or after the
death of the individual,
‘‘(iii) attributable to the individual’s
being disabled (within the meaning of sec-
tion 72(m)(7)), or
‘‘(iv) which is a qualified first-time
homebuyer distribution.
‘‘(B) DISTRIBUTIONS WITHIN 5 YEARS.—
No payment or distribution shall be treated as
a qualified distribution if—
‘‘(i) it is made within the 5-taxable
year period beginning with the 1st taxable
year for which the individual made a con-
tribution to an AD IRA (or such individ-
ual’s spouse made a contribution to an AD
IRA) established for such individual, or
‘‘(ii) in the case of a payment or dis-
tribution properly allocable (as determined
in the manner prescribed by the Secretary)
to a qualified rollover contribution (or in-
come allocable thereto), it is made within
the 5-taxable year period beginning with
the taxable year in which the rollover con-
tribution was made.
Clause (ii) shall not apply to a qualified rollover
contribution from an AD IRA.
‘‘(3) ROLLOVERS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any distribution which is trans-
ferred in a qualified rollover contribution to an
AD IRA.
‘‘(B) INCOME INCLUSION FOR ROLLOVERS
FROM NON-AD IRAS.—
‘‘(i) IN GENERAL.—In the case of any
distribution to which this subparagraph
applies—
‘‘(I) sections 72(t) and 408(d)(3)
shall not apply (but section 4980A
shall apply), and
‘‘(II) any amount required to be
included in gross income by reason of
this paragraph shall be so included
ratably over the 4-taxable year period
beginning with the taxable year in
which the distribution is made.
‘‘(ii) DISTRIBUTIONS TO WHICH SUB-
PARAGRAPH APPLIES.—This subparagraph
shall apply to a distribution before Janu-
ary 1, 1999, from an individual retirement
plan (other than an AD IRA) maintained
for the benefit of an individual to an AD
IRA maintained for the benefit of such in-
dividual if such distribution would be a
qualified rollover contribution were such
individual retirement plan an AD IRA.
‘‘(iii) CONVERSIONS.—The conversion
of an individual retirement plan (other
than an AD IRA) to an AD IRA shall be
treated for purposes of this subparagraph
as a distribution from such plan to such
AD IRA.
‘‘(C) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—The Secretary shall require that
trustees of AD IRAs, trustees of individual re-
tirement plans, or both, whichever is appro-
priate, shall include such additional information
in reports required under section 408(i) as is
necessary to ensure that amounts required to be
included in gross income under subparagraph
(B) are so included.
‘‘(4) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTION.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘qualified
first-time homebuyer distribution’ means any
payment or distribution received by an individ-
ual to the extent such payment or distribution
is used by the individual before the close of the
60th day after the day on which such payment
or distribution is received to pay qualified ac-
quisition costs with respect to a principal resi-
dence of a first-time homebuyer who is such in-
dividual, the spouse of such individual, or any
child, grandchild, or ancestor of such individual
or the individual’s spouse.
‘‘(B) LIFETIME
DOLLAR
LIMITATION.—
The aggregate amount of payments or distribu-
tions received by an individual which may be
treated as qualified first-time homebuyer dis-
tributions for any taxable year shall not exceed
the excess (if any) of—
‘‘(i) $10,000, over
‘‘(ii) the aggregate amounts treated as
qualified first-time homebuyer distributions
with respect to such individual for all prior
taxable years.
‘‘(C) QUALIFIED
ACQUISITION
COSTS.—
For purposes of this paragraph, the term
‘qualified acquisition costs’ means the costs of
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(D) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual if—
‘‘(I) such individual (and if mar-
ried, such individual’s spouse) had no
present ownership interest in a prin-
cipal residence during the 2-year pe-
riod ending on the date of acquisition
of the principal residence to which
this paragraph applies, and
‘‘(II) subsection (h) or (k) of sec-
tion 1034 (as in effect on the day be-
fore the date of the enactment of this
section) did not suspend the running
of any period of time specified in sec-
tion 1034 (as so in effect) with re-
spect to such individual on the day be-
fore the date the distribution is ap-
plied pursuant to subparagraph (A).
‘‘(ii) 
PRINCIPAL
RESIDENCE.—The
term ‘principal residence’ has the same
meaning as when used in section 121.
‘‘(iii) DATE
OF
ACQUISITION.—The
term ‘date of acquisition’ means the date—
‘‘(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is en-
tered into, or
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced.
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—If any distribution from any indi-
vidual retirement plan fails to meet the require-
ments of subparagraph (A) solely by reason of
a delay or cancellation of the purchase or con-
struction of the residence, the amount of the
distribution may be contributed to an individual
retirement 
plan 
as 
provided 
in 
section
408(d)(3)(A)(i) (determined by substituting
‘120 days’ for ‘60 days’ in such section), except
that—
‘‘(i) section 408(d)(3)(B) shall not be
applied to such contribution, and
‘‘(ii) such amount shall not be taken
into account in determining whether sec-
tion 408(d)(3)(A)(i) applies to any other
amount.
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For
purposes of this section, the term ‘qualified rollover con-
tribution’ means a rollover contribution to an AD IRA
from another such account, but only if such rollover con-
tribution meets the requirements of section 408(d)(3).’’
(b) 
REPEAL
OF
NONDEDUCTIBLE
CONTRIBU-
TIONS.—
(1) Subsection (f) of section 219 is amended by
striking paragraph (7).
(2) Paragraph (5) of section 408(d) is amended
by striking the last sentence.
(3) Section 408(o) is amended by adding at the
end the following new paragraph:
‘‘(5) TERMINATION.—This subsection shall not
apply to any designated nondeductible contribution
for any taxable year beginning after December 31,
1997.’’
(4) Subsection (b) of section 4973 is amended
by striking the last sentence.
(c) EXCESS DISTRIBUTIONS TAX NOT TO APPLY.—
(1) Subparagraph (A) of section 4980A(d)(3) is
amended by inserting ‘‘(other than AD IRAs, as de-
fined in section 4980A(b))’’ after ‘‘individual retire-
ment plans’’.
(2) Subparagraph (B) of section 4980A(e)(1) is
amended by inserting ‘‘other than an AD IRA (as
defined in section 408A(b))’’ after ‘‘retirement
plan’’.
(d) EXCESS CONTRIBUTIONS.—
(1) Section 4973 is amended by adding at the
end the following new subsection:
‘‘(f) EXCESS CONTRIBUTIONS TO AMERICAN DREAM
IRAS.—For purposes of this section, in the case of Amer-
ican Dream IRAs, the term ‘excess contributions’ means
the amount by which the amount contributed for the tax-
able year to such IRAs exceeds the limitation in section
408A(c)(2).’’
(2) Subsection (b) of section 4973 is amended
by adding at the end the following new sentence:
‘‘For purposes of this subsection, an American
Dream IRA shall not be treated as an individual re-
tirement plan.’’
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part I of subchapter D of chapter 1 is
amended by inserting after the item relating to section
408 the following new item:
‘‘Sec. 408A. American Dream IRA.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle B—Capital Gains
PART I—INDIVIDUAL CAPITAL GAINS
SEC. 311. 20 PERCENT MAXIMUM CAPITAL GAINS RATE FOR
INDIVIDUALS.
(a) IN GENERAL.—Subsection (h) of section 1 (relat-
ing to maximum capital gains rate) is amended to read
as follows:
‘‘(h) MAXIMUM CAPITAL GAINS RATE.—
‘‘(1) IN GENERAL.—If a taxpayer has a net
capital gain for any taxable year, the tax imposed by
this section for such taxable year shall not exceed
the sum of—
‘‘(A) the base tax amount,
‘‘(B) 10 percent of so much of the tax-
payer’s adjusted net capital gain (or, if less,
taxable income) as does not exceed the excess
(if any) of—
‘‘(i) the amount of taxable income
which would (without regard to this para-
graph) be taxed at a rate of 15 percent or
less, over
‘‘(ii) the taxable income reduced by
the adjusted net capital gain, plus
‘‘(C) 20 percent of the taxpayer’s adjusted
net capital gain (or, if less, taxable income) in
excess of the amount on which a tax is deter-
mined under subparagraph (B).
‘‘(2) NET CAPITAL GAIN TAKEN INTO ACCOUNT
AS INVESTMENT INCOME.—For purposes of this sub-
section, the net capital gain for any taxable year
shall be reduced (but not below zero) by the amount
which the taxpayer takes into account as investment
income under section 163(d)(4)(B)(iii).
‘‘(3) BASE
TAX
AMOUNT.—For purposes of
paragraph (1), the base tax amount is the lesser
of—
‘‘(A) a tax computed at the rates and in
the same manner as if this subsection had not
been enacted on taxable income reduced by the
adjusted net capital gain, or
‘‘(B) the sum of—
‘‘(i) a tax computed at the rates and
in the same manner as if this subsection
had not been enacted on the greater of—
‘‘(I) taxable income reduced by
the net capital gain, or
‘‘(II) the amount of taxable in-
come taxed at a rate below 28 per-
cent,
‘‘(ii) a tax of 26 percent of the lesser
of—
‘‘(I) the section 1250 gain, or
‘‘(II) the amount of taxable in-
come in excess of the sum of the
amount on which tax is determined
under clause (i) plus the net capital
gain determined without regard to
section 1250 gain, plus
‘‘(iii) a tax of 28 percent of the
amount of taxable income in excess of the
sum of—
‘‘(I) the adjusted net capital
gain, plus
‘‘(II) the sum of the amounts on
which tax is determined under clauses
(i) and (ii).
‘‘(4) ADJUSTED NET CAPITAL GAIN.—For pur-
poses of this subsection, the term ‘adjusted net cap-
ital gain’ means net capital gain determined without
regard to—
‘‘(A) collectibles gain,
‘‘(B) section 1202 gain, and
‘‘(C) section 1250 gain.
‘‘(5) COLLECTIBLES
GAIN.—For purposes of
paragraph (4)—
‘‘(A) IN GENERAL.—The term ‘collectibles
gain’ means gain from the sale or exchange of
a collectible (as defined in section 408(m) with-
out regard to paragraph (3) thereof) which is a
capital asset held for more than 1 year but only
to the extent such gain is taken into account in
computing gross income.
‘‘(B) 
COORDINATION
WITH
SECTION
1022.—Gain from the disposition of a collectible
which is an indexed asset to which section
1022(a) applies shall be disregarded for pur-
poses of this subsection. A taxpayer may elect
to treat any collectible specified in such election
as not being an indexed asset for purposes of
section 1022. Any such election, and any speci-
fication therein, once made, shall be irrevocable.
‘‘(C) PARTNERSHIPS, ETC.—For purposes
of subparagraph (A), any gain from the sale of
an interest in a partnership, S corporation, or
trust which is attributable to unrealized appre-
ciation in the value of collectibles shall be treat-
ed as gain from the sale or exchange of a col-
lectible. Rules similar to the rules of section
751 shall apply for purposes of the preceding
sentence.
‘‘(6) SECTION
1202
GAIN.—For purposes of
paragraph (4), the term ‘section 1202 gain’ means
gain from the sale or exchange of any qualified small
business stock (as defined in section 1202(c)) held
more than 5 years which is taken into account in
computing gross income.
‘‘(7) SECTION
1250
GAIN.—For purposes of
paragraph (4), the term ‘section 1250 gain’ means
the excess (if any) of—
‘‘(A) the amount which would be treated as
ordinary income under section 1245 if all sec-
tion 1250 property disposed of by the taxpayer
were section 1245 property, over
‘‘(B) the amount treated as ordinary in-
come under section 1250.
In the case of a taxable year which includes May 7,
1997, section 1250 gain shall be determined by tak-
ing into account only the gain properly taken into
account for the portion of the taxable year after May
6, 1997.
‘‘(8) PRE-EFFECTIVE DATE GAIN.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year which includes May 7, 1997, adjusted
net capital gain shall be determined without re-
gard to pre-May 7, 1997, gain.
‘‘(B) PRE-MAY 7, 1997, GAIN.—The term
‘pre-May 7, 1997, gain’ means the amount
which would be adjusted net capital gain for the
taxable year if adjusted net capital gain were
determined by taking into account only the gain
or loss properly taken into account for the por-
tion of the taxable year before May 7, 1997.
‘‘(C) SPECIAL RULES FOR PASS-THRU EN-
TITIES.—In applying subparagraph (A) with re-
spect to any pass-thru entity, the determination
of when gains and loss are properly taken into
account shall be made at the entity level.
‘‘(D) PASS-THRU ENTITY DEFINED.—For
purposes of subparagraph (C), the term ‘pass-
thru entity’ means—
‘‘(i) a regulated investment company,
‘‘(ii) a real estate investment trust,
‘‘(iii) an S corporation,
‘‘(iv) a partnership,
‘‘(v) an estate or trust, and
‘‘(vi) a common trust fund.’’
(b) MINIMUM TAX.—
(1) IN GENERAL.—Subsection (b) of section 55
is amended by adding at the end the following new
paragraph:
‘‘(3) MAXIMUM RATE OF TAX ON NET CAPITAL
GAIN OF NONCORPORATE TAXPAYERS.—The amount
determined under the first sentence of paragraph
(1)(A)(i) shall not exceed the sum of—
‘‘(A) the lesser of—
‘‘(i) the amount determined under
such first sentence computed at the rates
and in the same manner as if this para-
graph had not been enacted on the taxable
excess reduced by the adjusted net capital
gain (as defined in section 1(h)(4)), or
‘‘(ii) the sum of—
‘‘(I) 
the 
amount 
determined
under such first sentence computed at
the rates and in the same manner as
if this paragraph had not been en-
acted on the taxable excess reduced by
the sum of the adjusted net capital
gain (as so defined) and the section
1250 gain (as defined in section
1(h)(7)), plus
‘‘(II) 26 percent of the lesser of
the section 1250 gain (as so defined)
or the taxable excess reduced by the
adjusted net capital gain (as so de-
fined),
‘‘(B) a tax of 10 percent of so much of the
taxpayer’s adjusted net capital gain (or, if less,
taxable excess) as does not exceed the amount
on which a tax is determined under section
1(h)(1)(B), plus
‘‘(C) a tax of 20 percent of the taxpayer’s
adjusted net capital gain (or, if less, taxable ex-
cess) in excess of the amount on which tax is
determined under subparagraph (B).’’
(2) CONFORMING AMENDMENT.—Clause (ii) of
section 55(b)(1)(A) is amended by striking ‘‘clause
(i)’’ and inserting ‘‘this subsection’’.
(c) OTHER CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 291 is amended by
inserting at the end the following new sentence:
‘‘Any capital gain dividend treated as having been
paid out of such difference to a shareholder which
is not a corporation retains its characters as section
1250 gain for purposes of applying section 1(h) to
such shareholder.’’
(2) Paragraph (1) of section 1445(e) is amend-
ed by striking ‘‘28 percent’’ and inserting ‘‘20 per-
cent’’.
(3) 
The 
second 
sentence 
of 
section
7518(g)(6)(A), and the second sentence of section
607(h)(6)(A) of the Merchant Marine Act, 1936, are
each amended by striking ‘‘28 percent’’ and insert-
ing ‘‘20 percent’’.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years ending after May 6,
1997.
(2) WITHHOLDING.—The amendment made by
subsection (c)(2) shall apply only to amounts paid
after the date of the enactment of this Act.
(3) APPLICATION OF ESTIMATED TAX RULES.—
Clause (i) of section 6654(d)(1)(C) of the Internal
Revenue Code of 1986 shall be applied by substitut-
ing ‘‘109 percent’’ for ‘‘110 percent’’ where the pre-
ceding taxable year referred in such clause is a tax-
able year beginning in calendar year 1996.
100
SEC. 312. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER
DECEMBER 31, 2000, FOR PURPOSES OF DE-
TERMINING GAIN.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 (relating to basis rules of general application) is
amended by inserting after section 1021 the following new
section:
‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED
AFTER DECEMBER 31, 2000, FOR PURPOSES
OF DETERMINING GAIN.
‘‘(a) GENERAL RULE.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED BASIS.—Solely for purposes of determining
gain on the sale or other disposition by a taxpayer
(other than a corporation) of an indexed asset which
has been held for more than 3 years, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deductions for depreciation, depletion, and am-
ortization shall be determined without regard to the
application of paragraph (1) to the taxpayer or any
other person.
‘‘(3) 
EXCEPTION
FOR
PRINCIPAL
RESI-
DENCES.—Paragraph (1) shall not apply to any dis-
101
position of the principal residence (within the mean-
ing of section 121) of the taxpayer .
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) common stock in a C corporation
(other than a foreign corporation), and
‘‘(B) tangible property,
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)).
‘‘(2) STOCK
IN
CERTAIN
FOREIGN
CORPORA-
TIONS INCLUDED.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘indexed
asset’ includes common stock in a foreign cor-
poration which is regularly traded on an estab-
lished securities market.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to—
‘‘(i) stock of a foreign investment
company (within the meaning of section
1246(b)),
‘‘(ii) stock in a passive foreign invest-
ment company (as defined in section
1296),
102
‘‘(iii) stock in a foreign corporation
held by a United States person who meets
the requirements of section 1248(a)(2),
and
‘‘(iv) stock in a foreign personal hold-
ing company (as defined in section 552).
‘‘(C) TREATMENT OF AMERICAN DEPOSI-
TORY RECEIPTS.—An American depository re-
ceipt for common stock in a foreign corporation
shall be treated as common stock in such cor-
poration.
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) GENERAL RULE.—The indexed basis for
any asset is—
‘‘(A) the adjusted basis of the asset, in-
creased by
‘‘(B) the applicable inflation adjustment.
‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—
The applicable inflation adjustment for any asset is
an amount equal to—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the percentage (if any) by which—
103
‘‘(i) the chain-type price index for
GDP for the last calendar quarter ending
before the asset is disposed of, exceeds
‘‘(ii) the chain-type price index for
GDP for the last calendar quarter ending
before the asset was acquired by the tax-
payer.
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percentage point.
‘‘(3) CHAIN-TYPE PRICE INDEX FOR GDP.—
The chain-type price index for GDP for any calendar
quarter is such index for such quarter (as shown in
the last revision thereof released by the Secretary of
Commerce before the close of the following calendar
quarter).
‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI-
MINISHED
RISK
OF
LOSS; TREATMENT
OF
SHORT
SALES.—
‘‘(1) IN GENERAL.—If the taxpayer (or a relat-
ed person) enters into any transaction which sub-
stantially reduces the risk of loss from holding any
asset, such asset shall not be treated as an indexed
asset for the period of such reduced risk.
‘‘(2) SHORT SALES.—
104
‘‘(A) IN GENERAL.—In the case of a short
sale of an indexed asset with a short sale period
in excess of 3 years, for purposes of this title,
the amount realized shall be an amount equal
to the amount realized (determined without re-
gard to this paragraph) increased by the appli-
cable inflation adjustment. In applying sub-
section (c)(2) for purposes of the preceding sen-
tence, the date on which the property is sold
short shall be treated as the date of acquisition
and the closing date for the sale shall be treat-
ed as the date of disposition.
‘‘(B) SHORT SALE PERIOD.—For purposes
of subparagraph (A), the short sale period be-
gins on the day that the property is sold and
ends on the closing date for the sale.
‘‘(e) TREATMENT
OF
REGULATED
INVESTMENT
COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this paragraph, the adjustment
under subsection (a) shall be allowed to any
qualified investment entity (including for pur-
poses of determining the earnings and profits of
such entity).
105
‘‘(B) EXCEPTION FOR CORPORATE SHARE-
HOLDERS.—Under regulations—
‘‘(i) in the case of a distribution by a
qualified investment entity (directly or in-
directly) to a corporation—
‘‘(I) the determination of whether
such distribution is a dividend shall be
made without regard to this section,
and
‘‘(II) the amount treated as gain
by reason of the receipt of any capital
gain dividend shall be increased by the
percentage by which the entity’s net
capital gain for the taxable year (de-
termined without regard to this sec-
tion) exceeds the entity’s net capital
gain for such year determined with re-
gard to this section, and
‘‘(ii) there shall be other appropriate
adjustments (including deemed distribu-
tions) so as to ensure that the benefits of
this section are not allowed (directly or in-
directly) to corporate shareholders of quali-
fied investment entities.
106
For purposes of the preceding sentence, any
amount includible in gross income under section
852(b)(3)(D) shall be treated as a capital gain
dividend and an S corporation shall not be
treated as a corporation.
‘‘(C) 
EXCEPTION
FOR
QUALIFICATION
PURPOSES.—This section shall not apply for
purposes of sections 851(b) and 856(c).
‘‘(D) EXCEPTION FOR CERTAIN TAXES IM-
POSED AT ENTITY LEVEL.—
‘‘(i) TAX ON FAILURE TO DISTRIBUTE
ENTIRE GAIN.—If any amount is subject to
tax under section 852(b)(3)(A) for any
taxable year, the amount on which tax is
imposed under such section shall be in-
creased by the percentage determined
under subparagraph (B)(i)(II). A similar
rule shall apply in the case of any amount
subject to tax under paragraph (2) or (3)
of section 857(b) to the extent attributable
to the excess of the net capital gain over
the deduction for dividends paid deter-
mined with reference to capital gain divi-
dends only. The first sentence of this
clause shall not apply to so much of the
107
amount subject to tax under section
852(b)(3)(A) as is designated by the com-
pany under section 852(b)(3)(D).
‘‘(ii) OTHER
TAXES.—This section
shall not apply for purposes of determining
the amount of any tax imposed by para-
graph (4), (5), or (6) of section 857(b).
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN
ENTITY.—
‘‘(A) REGULATED
INVESTMENT
COMPA-
NIES.—Stock in a regulated investment com-
pany (within the meaning of section 851) shall
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the average of the fair market
values of the indexed assets held by such
company at the close of each month during
such quarter, bears to
‘‘(ii) the average of the fair market
values of all assets held by such company
at the close of each such month.
‘‘(B) 
REAL
ESTATE
INVESTMENT
TRUSTS.—Stock in a real estate investment
trust (within the meaning of section 856) shall
108
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the fair market value of the in-
dexed assets held by such trust at the close
of such quarter, bears to
‘‘(ii) the fair market value of all as-
sets held by such trust at the close of such
quarter.
‘‘(C) RATIO OF 80 PERCENT OR MORE.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 80 percent or more, such
ratio for such quarter shall be 100 percent.
‘‘(D) RATIO OF 20 PERCENT OR LESS.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 20 percent or less, such
ratio for such quarter shall be zero.
‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For
purposes of this paragraph, a qualified invest-
ment entity which holds a partnership interest
shall be treated (in lieu of holding a partnership
interest) as holding its proportionate share of
the assets held by the partnership.
109
‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS-
TRIBUTIONS.—Except as otherwise provided by the
Secretary, a distribution with respect to stock in a
qualified investment entity which is not a dividend
and which results in a reduction in the adjusted
basis of such stock shall be treated as allocable to
stock acquired by the taxpayer in the order in which
such stock was acquired.
‘‘(4) QUALIFIED
INVESTMENT
ENTITY.—For
purposes of this subsection, the term ‘qualified in-
vestment entity’ means—
‘‘(A) a regulated investment company
(within the meaning of section 851), and
‘‘(B) a real estate investment trust (within
the meaning of section 856).
‘‘(f) OTHER PASS-THRU ENTITIES.—
‘‘(1) PARTNERSHIPS.—
‘‘(A) IN GENERAL.—In the case of a part-
nership, the adjustment made under subsection
(a) at the partnership level shall be passed
through to the partners.
‘‘(B) SPECIAL RULE IN THE CASE OF SEC-
TION 754 ELECTIONS.—In the case of a transfer
of an interest in a partnership with respect to
110
which the election provided in section 754 is in
effect—
‘‘(i) the adjustment under section
743(b)(1) shall, with respect to the trans-
feror partner, be treated as a sale of the
partnership assets for purposes of applying
this section, and
‘‘(ii) with respect to the transferee
partner, the partnership’s holding period
for purposes of this section in such assets
shall be treated as beginning on the date
of such adjustment.
‘‘(2) S CORPORATIONS.—In the case of an S
corporation, the adjustment made under subsection
(a) at the corporate level shall be passed through to
the shareholders. This section shall not apply for
purposes of determining the amount of any tax im-
posed by section 1374 or 1375.
‘‘(3) COMMON TRUST FUNDS.—In the case of a
common trust fund, the adjustment made under sub-
section (a) at the trust level shall be passed through
to the participants.
‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN
DETERMINING LOSS ON SALE OF INTEREST IN EN-
TITY.—Notwithstanding the preceding provisions of
111
this subsection, for purposes of determining the
amount of any loss on a sale or exchange of an in-
terest in a partnership, S corporation, or common
trust fund, the adjustment made under subsection
(a) shall not be taken into account in determining
the adjusted basis of such interest.
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to any sale or other disposition of property between
related persons except to the extent that the basis
of such property in the hands of the transferee is a
substituted basis.
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’
means—
‘‘(A) persons bearing a relationship set
forth in section 267(b), and
‘‘(B) persons treated as single employer
under subsection (b) or (c) of section 414.
‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST-
MENT.—If any person transfers cash, debt, or any other
property to another person and the principal purpose of
such transfer is to secure or increase an adjustment under
subsection (a), the Secretary may disallow part or all of
such adjustment or increase.
112
‘‘(i) SPECIAL RULES.—For purposes of this section—
‘‘(1) TREATMENT OF IMPROVEMENTS, ETC.—If
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to
such property or a contribution to capital of such
corporation—
‘‘(A) such addition shall never be taken
into account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
‘‘(B) such addition shall be treated as a
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is ap-
propriate to carry out the purposes of this section.
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation adjustment shall be appropriately reduced for
113
periods during which the asset was not an indexed
asset.
‘‘(3) TREATMENT
OF
CERTAIN
DISTRIBU-
TIONS.—A distribution with respect to stock in a
corporation which is not a dividend shall be treated
as a disposition.
‘‘(4) ACQUISITION
DATE
WHERE
THERE
HAS
BEEN
PRIOR
APPLICATION
OF
SUBSECTION
(a)(1)
WITH RESPECT TO THE TAXPAYER.—If there has
been a prior application of subsection (a)(1) to an
asset while such asset was held by the taxpayer, the
date of acquisition of such asset by the taxpayer
shall be treated as not earlier than the date of the
most recent such prior application.
‘‘(5) COLLAPSIBLE CORPORATIONS.—The appli-
cation of section 341(a) (relating to collapsible cor-
porations) shall be determined without regard to this
section.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter O of chapter 1 is amended by
inserting after the item relating to section 1021 the follow-
ing new item:
114
‘‘Sec. 1022. Indexing of certain assets acquired after December
31, 2000, for purposes of determining gain.’’
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to the disposition of any
property the holding period of which begins after
December 31, 2000.
(2) CERTAIN TRANSACTIONS BETWEEN RELAT-
ED PERSONS.—The amendments made by this sec-
tion shall not apply to the disposition of any prop-
erty acquired after December 31, 2000, from a re-
lated person (as defined in section 1022(g)(2) of the
Internal Revenue Code of 1986, as added by this
section) if—
(A) such property was so acquired for a
price less than the property’s fair market value,
and
(B) the amendments made by this section
did not apply to such property in the hands of
such related person.
(d) ELECTION TO RECOGNIZE GAIN
ON ASSETS
HELD ON JANUARY 1, 2001.—For purposes of the Inter-
nal Revenue Code of 1986—
(1) IN GENERAL.—A taxpayer other than a cor-
poration may elect to treat—
115
(A) any readily tradable stock (which is an
indexed asset) held by such taxpayer on Janu-
ary 1, 2001, and not sold before the next busi-
ness day after such date, as having been sold
on such next business day for an amount equal
to its closing market price on such next busi-
ness day (and as having been reacquired on
such next business day for an amount equal to
such closing market price), and
(B) any other indexed asset held by the
taxpayer on January 1, 2001, as having been
sold on such date for an amount equal to its
fair market value on such date (and as having
been reacquired on such date for an amount
equal to such fair market value).
(2) TREATMENT OF GAIN OR LOSS.—
(A) Any gain resulting from an election
under paragraph (1) shall be treated as received
or accrued on the date the asset is treated as
sold under paragraph (1) and shall be recog-
nized notwithstanding any provision of the In-
ternal Revenue Code of 1986.
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
116
(3) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
of the Treasury or his delegate may prescribe and
shall specify the assets for which such election is
made. Such an election, once made with respect to
any asset, shall be irrevocable.
(4) READILY TRADABLE STOCK.—For purposes
of this subsection, the term ‘‘readily tradable stock’’
means any stock which, as of January 1, 2001, is
readily tradable on an established securities market
or otherwise.
SEC. 313. EXEMPTION FROM TAX FOR GAIN ON SALE OF
PRINCIPAL RESIDENCE.
(a) IN GENERAL.—Section 121 (relating to one-time
exclusion of gain from sale of principal residence by indi-
vidual who has attained age 55) is amended to read as
follows:
‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
‘‘(a) EXCLUSION.—Gross income shall not include
gain from the sale or exchange of property if, during the
5-year period ending on the date of the sale or exchange,
such property has been owned and used by the taxpayer
as the taxpayer’s principal residence for periods aggregat-
ing 2 years or more.
117
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount of
gain excluded from gross income under subsection
(a) with respect to any sale or exchange shall not ex-
ceed $250,000 ($500,000 in the case of a joint re-
turn where both spouses meet the use requirement
of subsection (a)).
‘‘(2) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the
date of such sale or exchange, there was any
other sale or exchange by the taxpayer or his
spouse to which subsection (a) applied.
‘‘(B) PREMARRIAGE
SALES
BY
SPOUSE
NOT TAKEN INTO ACCOUNT.—If, but for this
subparagraph, subsection (a) would not apply
to a sale or exchange by a married individual
by reason of a sale or exchange by such individ-
ual’s spouse before their marriage—
‘‘(i) subparagraph (A) shall be applied
without regard to the sale or exchange by
such individual’s spouse, but
118
‘‘(ii) the amount of gain excluded
from gross income under subsection (a)
with respect to the sale or exchange by
such individual shall not exceed $250,000.
‘‘(C) PRE-MAY 7, 1997, SALES NOT TAKEN
INTO
ACCOUNT.—Subparagraph (A) shall be
applied without regard to any sale or exchange
before May 7, 1997.
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
ship and use requirements of subsection (a) shall not
apply and subsection (b)(2) shall not apply; but the
amount of gain excluded from gross income under
subsection (a) with respect to such sale of exchange
shall not exceed—
‘‘(A) the amount which bears the same
ratio to the amount which would be so excluded
if such requirements had been met, as
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the
5-year period ending on the date of such
sale or exchange, such property has been
119
owned and used by the taxpayer as the
taxpayer’s principal residence, or
‘‘(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer or his spouse to which subsection
(a) applied and before the date of such sale
or exchange,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to
any sale or exchange if—
‘‘(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of—
‘‘(i) a failure to meet the ownership
and use requirements of subsection (a), or
‘‘(ii) subsection (b)(2), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, other unfore-
seen circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT
RETURNS.—For purposes of this
section, if a husband and wife make a joint return
for the taxable year of the sale or exchange of the
120
property, subsection (a) shall, subject to the provi-
sions of subsection (b), apply if either spouse meets
the ownership and use requirements of subsection
(a) with respect to such property.
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For
purposes of this section, in the case of an unmarried
individual whose spouse is deceased on the date of
the sale or exchange of property, the period such un-
married individual owned such property shall include
the period such deceased spouse held such property
before death.
‘‘(3) PROPERTY
OF
DIVORCED
SPOUSE.—For
purposes of this section, in the case of an individual
holding property transferred to such individual inci-
dent to divorce (within the meaning of section
1041(c))—
‘‘(A) the period such individual owns such
property shall include the period the former
spouse owned the property, and
‘‘(B) the dollar limitation applicable under
paragraph (1) shall not be less than the amount
such limitation would have been had the sale or
exchange occurred on the date the divorce be-
came final.
121
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder (as defined in section 216) in a cooperative
housing corporation (as defined in such section),
then—
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of
such stock, and
‘‘(B) the use requirements of subsection
(a) shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
‘‘(5) INVOLUNTARY CONVERSIONS.—
‘‘(A) IN GENERAL.—For purposes of this
section, the destruction, theft, seizure, requisi-
tion, or condemnation of property shall be
treated as the sale of such property.
‘‘(B) APPLICATION OF SECTION 1033.—In
applying section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as
being the amount determined without regard to
this section, reduced by the amount of gain not
122
included in gross income pursuant to this sec-
tion.
‘‘(C) PROPERTY ACQUIRED AFTER INVOL-
UNTARY
CONVERSION.—If the basis of the
property sold or exchanged is determined (in
whole or in part) under section 1033(b) (relat-
ing to basis of property acquired through invol-
untary conversion), then the holding and use by
the taxpayer of the converted property shall be
treated as holding and use by the taxpayer of
the property sold or exchanged.
‘‘(6) RECOGNITION OF GAIN ATTRIBUTABLE TO
DEPRECIATION.—Subsection (a) shall not apply to
so much of the gain from the sale of any property
as does not exceed the portion of the depreciation
adjustments (as defined in section 1250(b)(3)) at-
tributable to periods after May 6, 1997, in respect
of such property.
‘‘(7) DETERMINATION OF USE DURING PERIODS
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable of self-care, and
‘‘(B) owns property and uses such property
as the taxpayer’s principal residence during the
123
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer’s principal residence during
any time during such 5-year period in which the tax-
payer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer’s condition.
‘‘(8) DETERMINATION OF MARITAL STATUS.—
In the case of any sale or exchange, for purposes of
this section—
‘‘(A) the determination of whether an indi-
vidual is married shall be made as of the date
of the sale or exchange, and
‘‘(B) an individual legally separated from
his spouse under a decree of divorce or of sepa-
rate maintenance shall not be considered as
married.
‘‘(9) SALES OF LIFE ESTATES AND REMAINDER
INTERESTS.—For purposes of this section—
‘‘(A) IN GENERAL.—This section shall not
fail to apply to the sale or exchange of an inter-
est in a principal residence by reason of such
interest being a life estate or a remainder inter-
124
est in such residence, but this section shall
apply only to one such interest in such resi-
dence which is sold or exchanged separately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
any sale to, or exchange with, any person who
bears a relationship to the taxpayer which is de-
scribed in section 267(b) or 707(b).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if the treatment provided by section
877(a)(1) applies to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
respect to which the taxpayer elects not to have this sec-
tion apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
sulted under section 1034 (as in effect on the day before
the date of the enactment of this sentence) in the non-
recognition of any part of the gain realized on the sale
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such
property as the taxpayer’s principal residence, there shall
125
be included the aggregate periods for which such other
residence (and each prior residence taken into account
under section 1223(7) in determining the holding period
of such property) had been so owned and used.’’
(b) REPEAL
OF NONRECOGNITION
OF GAIN
ON
ROLLOVER
OF PRINCIPAL RESIDENCE.—Section 1034
(relating to rollover of gain on sale of principal residence)
is hereby repealed.
(c) CONFORMING AMENDMENTS.—
(1) The following provisions of the Internal
Revenue Code of 1986 are each amended by striking
‘‘section 1034’’ and inserting ‘‘section 121’’: sections
25(e)(7), 
56(e)(1)(A), 
56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 
163(h)(4)(A)(i)(I),
280A(d)(4)(A), 
464(f)(3)(B)(i), 
1033(h)(4),
1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) is amended
by striking ‘‘(as defined in section 1034(h)(3))’’ and
by adding at the end the following new sentence:
‘‘For purposes of the preceding sentence, the term
‘extended active duty’ means any period of active
duty pursuant to a call or order to such duty for a
period in excess of 90 days or for an indefinite pe-
riod.’’
126
(3) Subparagraph (A) of 143(m)(6) is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Revenue Reconciliation Act
of 1997)’’ after ‘‘1034(e)’’.
(4) Subsection (e) of section 216 is amended by
striking ‘‘such exchange qualifies for nonrecognition
of gain under section 1034(f)’’ and inserting ‘‘such
dwelling unit is used as his principal residence (with-
in the meaning of section 121)’’.
(5) Section 512(a)(3)(D) is amended by insert-
ing ‘‘(as in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1997)’’ after ‘‘1034’’.
(6) Paragraph (7) of section 1016(a) is amend-
ed by inserting ‘‘(as in effect on the day before the
date of the enactment of the Revenue Reconciliation
Act of 1997)’’ after ‘‘1034’’ and by inserting ‘‘(as so
in effect)’’ after ‘‘1034(e)’’.
(7) Paragraph (3) of section 1033(k) is amend-
ed to read as follows:
‘‘(3) For exclusion from gross income of gain
from involuntary conversion of principal residence,
see section 121.’’
(8) Subsection (e) of section 1038 is amended
to read as follows:
127
‘‘(e) PRINCIPAL RESIDENCES.—If—
‘‘(1) subsection (a) applies to a reacquisition of
real property with respect to the sale of which gain
was not recognized under section 121 (relating to
gain on sale of principal residence); and
‘‘(2) within 1 year after the date of the reacqui-
sition of such property by the seller, such property
is resold by him,
then, under regulations prescribed by the Secretary, sub-
sections (b), (c), and (d) of this section shall not apply
to the reacquisition of such property and, for purposes of
applying section 121, the resale of such property shall be
treated as a part of the transaction constituting the origi-
nal sale of such property.’’
(9) Paragraph (7) of section 1223 is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Revenue Reconciliation Act
of 1997)’’ after ‘‘1034’’.
(10) Paragraph (7) of section 1250(d) is
amended to read as follows:
‘‘(7) DISPOSITION OF PRINCIPAL RESIDENCE.—
Subsection (a) shall not apply to a disposition of
property to the extent used by the taxpayer as his
principal residence (within the meaning of section
121, relating to gain on sale of principal residence).’’
128
(11) Subsection (c) of section 6012 is amended
by striking ‘‘(relating to one-time exclusion of gain
from sale of principal residence by individual who
has attained age 55)’’ and inserting ‘‘(relating to
gain from sale of principal residence)’’.
(12) Paragraph (2) of section 6212(c) is
amended by striking subparagraph (C) and by redes-
ignating the succeeding subparagraphs accordingly.
(13) Section 6504 is amended by striking para-
graph (4) and by redesignating the succeeding para-
graphs accordingly.
(14) The item relating to section 121 in the
table of sections for part III of subchapter B of
chapter 1 is amended to read as follows:
‘‘Sec. 121. Exclusion of gain from sale of principal residence.’’
(15) The table of sections for part III of sub-
chapter O of chapter 1 of such Code is amended by
striking the item relating to section 1034.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to sales and exchanges after
May 6, 1997.
(2) SALES BEFORE DATE OF ENACTMENT.—At
the election of the taxpayer, the amendments made
by this section shall not apply to any sale or ex-
change before the date of the enactment of this Act.
129
(3) BINDING CONTRACTS.—At the election of
the taxpayer, the amendments made by this section
shall not apply to a sale or exchange after the date
of the enactment of this Act, if—
(A) such sale or exchange is pursuant to a
contract which was binding on such date, or
(B) without regard to such amendments,
gain would not be recognized under section
1034 of the Internal Revenue Code of 1986 (as
in effect on the day before the date of the en-
actment of this Act) on such sale or exchange
by reason of a new residence acquired on or be-
fore such date or with respect to the acquisition
of which by the taxpayer a binding contract was
in effect on such date.
This paragraph shall not apply to any sale or ex-
change by an individual if the treatment provided by
section 877(a)(1) of the Internal Revenue Code of
1986 applies to such individual.
PART II—CORPORATE CAPITAL GAINS
SEC. 321. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX
FOR CORPORATIONS.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
130
‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has 8-year gain, then, in lieu of the tax imposed
by sections 11, 511, and 831 (a) and (b) (whichever is
applicable), there is hereby imposed a tax (if such tax is
less than the tax imposed by such sections) which shall
consist of the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the amount of the 8-year gain, at the rates
and in the manner as if this subsection had not been
enacted, plus
‘‘(2) a tax of the applicable percentage of the
amount of the 8-year gain (or, if less, taxable in-
come).
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of
subsection (a)—
‘‘(1) IN GENERAL.—The term ‘applicable per-
centage’ means—
‘‘(A) 32 percent for the portion of any tax-
able year within 1998,
‘‘(B) 31 percent for the portion of any tax-
able year within 1999, and
‘‘(C) 30 percent for the portion of any tax-
able year after 1999.
‘‘(2) FISCAL YEAR TAXPAYERS.—
131
‘‘(A) TAXABLE
YEARS
BEGINNING
IN
1997.—In applying this section to taxable years
beginning in 1997, 8-year gain shall not exceed
the 8-year gain determined by taking into ac-
count only gains and losses properly taken into
account for the portion of the taxable year after
December 31, 1997.
‘‘(B) TAXABLE YEARS BEGINNING IN 1998
OR 1999.—In the case of a taxable year begin-
ning in 1998 or 1999 which includes portions
of 2 calendar years, the applicable percentage
shall be applied separately to such portions by
taking into account—
‘‘(i) in the case of the first such por-
tion, the lesser of—
‘‘(I) the 8-year gain determined
by taking into account only gains and
losses properly taken into account for
such portion, or
‘‘(II) the 8-year gain determined
for the entire taxable year, and
‘‘(ii) in the case of the second such
portion, the 8-year gain (and the taxable
income) determined for the entire taxable
year reduced by the amount on which tax
132
is determined under subsection (a)(2) for
the first such portion determined under
clause (i).
‘‘(C) SPECIAL RULE FOR PASS-THRU ENTI-
TIES.—Section 1(h)(8)(C) shall apply for pur-
poses of this paragraph.
‘‘(c) 8-YEAR GAIN.—For purposes of this section, the
term ‘8-year gain’ means the lesser of—
‘‘(1) the amount of long-term capital gain
which would be computed for the taxable year if only
gain from the sale or exchange of property held by
the taxpayer for more than 8 years were taken into
account, or
‘‘(2) net capital gain.
The determination under the preceding sentence shall be
made without regard to collectibles gain (as defined in sec-
tion 1(h)(5)) or section 1250 gain (as defined in section
1(h)(7)).
‘‘(d) CROSS REFERENCES.—
‘‘For computation of the alternative tax—
‘‘(1) in the case of life insurance companies, see
section 801(a)(2),
‘‘(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.—
133
(1) Subsection (d) of section 291 is amended by
striking ‘‘subsection (a)(1) to such shareholder’’ and
inserting ‘‘subsection (a)(1) and section 1201 to
such shareholder’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘65 percent’’ and inserting
‘‘the applicable percentage’’ and by inserting at the
end the following new sentence: ‘‘For purposes of
the preceding sentence, the term ‘applicable percent-
age’ means the percentage equal to the excess of 100
percent over the percentage applicable under section
1201(a).’’
(3)(A) Subparagraph (B) of section 852(b)(3)
is amended to read as follows:
‘‘(B) TREATMENT OF CAPITAL GAIN DIVI-
DENDS BY SHAREHOLDERS.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), a capital gain dividend
shall be treated by the shareholders as
gain from the sale or exchange of a capital
asset held for more than 1 year.
‘‘(ii) COORDINATION
WITH
8-YEAR
HOLDING
PERIOD
FOR
CORPORATE
NET
CAPITAL GAIN.—The portion of any capital
gain dividend designated by the company
134
as allocable to gain from the sale or ex-
change of property held by the company
for more than 8 years shall be treated as
gain from the sale or exchange of a capital
asset held for more than 8 years. Rules
similar to the rules of subparagraph (C)
shall apply to any designation under the
preceding sentence.’’
(B) Clause (i) of section 851(b)(3)(D) is
amended by adding at the end thereof the following
new sentence: ‘‘Rules similar to the rules of subpara-
graph (B) shall apply in determining character of
the amount to be so included by any such share-
holder which is a corporation.’’
(4) Subparagraph (B) of section 857(b)(3) is
amended to read as follows:
‘‘(B) TREATMENT OF CAPITAL GAIN DIVI-
DENDS BY SHAREHOLDERS.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), a capital gain dividend
shall be treated by the shareholders or
holders of beneficial interests as gain from
the sale or exchange of a capital asset held
for more than 1 year.
135
‘‘(ii) COORDINATION
WITH
8-YEAR
HOLDING
PERIOD
FOR
CORPORATE
NET
CAPITAL GAIN.—The portion of any capital
gain dividend designated by the company
as allocable to gain from the sale or ex-
change of property held by the company
for more than 8 years shall be treated as
gain from the sale or exchange of a capital
asset held for more than 8 years. Rules
similar to the rules of subparagraph (C)
shall apply to any designation under the
preceding sentence.’’
(5) Subsection (c) of section 584 is amended—
(A) by inserting ‘‘but not more than 8
years’’ after ‘‘1 year’’ each place it appears in
paragraph (2),
(B) by striking ‘‘and’’ at the end of para-
graph (2), and
(C) by redesignating paragraph (3) as
paragraph (4) and inserting after paragraph
(2) the following new paragraph:
‘‘(3) as part of its gains and losses from sales
or exchanges of capital assets held for more than 8
years, its proportionate share of the gains and losses
136
of the common trust fund from sales or exchanges
of capital assets held for more than 8 years, and’’.
(6) Subparagraph (E) of section 904(b)(3) is
amended by adding at the end the following new
clause:
‘‘(iv) REGULATIONS.—The Secretary
shall prescribe regulations that adjust the
limitation under subsection (a) to reflect
the rate differential for 8-year gain (as de-
fined in section 1201(c)) between the high-
est rate of tax specified in section 11(b)
and the alternate rate of tax under section
1201(a) and the limitation on the deduc-
tion for capital losses under section 1211.’’
(c) EFFECTIVE DATES.—The amendments made by
this section shall apply to taxable years ending after De-
cember 31, 1997.
TITLE IV—ALTERNATIVE
MINIMUM TAX REFORM
SEC. 401. ADJUSTMENT OF EXEMPTION AMOUNTS FOR TAX-
PAYERS OTHER THAN CORPORATIONS.
(a) IN GENERAL.—Subsection (d) of section 55 is
amended by adding at the end the following new para-
graph:
137
‘‘(4) ADJUSTMENT
OF
EXEMPTION
AMOUNTS
FOR TAXPAYERS OTHER THAN CORPORATIONS.—
‘‘(A) TAXABLE YEARS BEGINNING BEFORE
JANUARY 1, 2008.—In the case of any taxable
year beginning in a calendar year after 1998
and before 2008—
‘‘(i) IN GENERAL.—The dollar amount
applicable under paragraph (1)(A) for any
odd-numbered calendar year—
‘‘(I) shall be $1,000 greater than
the dollar amount applicable under
paragraph (1)(A) for the prior odd-
numbered calendar year, and
‘‘(II) shall apply to taxable years
beginning in such odd-numbered cal-
endar year and the succeeding cal-
endar year.
‘‘(B) TAXABLE YEARS BEGINNING AFTER
DECEMBER 31, 2007.—In the case of any taxable
year beginning in a calendar year after 2007,
the dollar amount applicable under paragraph
(1)(A) for taxable years beginning in 2007 shall
be increased by an amount equal to the product
of—
‘‘(i) such dollar amount, and
138
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 2006’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
If any increase determined under the preceding
sentence is not a multiple of $100, such in-
crease shall be rounded to the next lowest mul-
tiple of $100.
‘‘(C) OTHER AMOUNTS.—
‘‘(i) The dollar amount applicable
under paragraph (1)(B) for any taxable
year shall be an amount equal to 75 per-
cent of the dollar amount applicable under
paragraph (1)(A) for such year.
‘‘(ii) The dollar amount applicable
under paragraph (1)(C) for any taxable
year shall be an amount equal to 50 per-
cent of the dollar amount applicable under
paragraph (1)(A) for such year.’’
(b) CONFORMING AMENDMENT.—The last sentence
of section 55(d)(3) is amended by striking ‘‘$165,000 or
(ii) $22,500’’ and inserting ‘‘the minimum amount of such
income (as so determined) for which the exemption
139
amount under paragraph (1)(C) is zero, or (ii) such ex-
emption amount (determined without regard to this para-
graph)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
SEC. 402. EXEMPTION FROM ALTERNATIVE MINIMUM TAX
FOR SMALL CORPORATIONS.
(a) IN GENERAL.—Section 55 (relating to alternative
minimum tax imposed) is amended by adding at the end
the following new subsection:
‘‘(e) EXEMPTION FOR SMALL CORPORATIONS.—
‘‘(1) IN GENERAL.—The tentative minimum tax
of a corporation shall be zero for any taxable year
if—
‘‘(A) such corporation met the $5,000,000
gross receipts test of section 448(c) for any
prior taxable year beginning after December 31,
1996, and
‘‘(B) such corporation would meet such
test for the taxable year and all prior taxable
years beginning after December 31, 1997, if
such 
test 
were 
applied 
by 
substituting
‘$7,500,000’ for ‘$5,000,000’.
140
‘‘(2) PROSPECTIVE APPLICATION OF MINIMUM
TAX
IF
SMALL
CORPORATION
CEASES
TO
BE
SMALL.—In the case of a corporation whose ten-
tative minimum tax is zero for any prior taxable
year by reason of paragraph (1), the application of
this part for taxable years beginning with the first
taxable year such corporation ceases to be described
in paragraph (1) shall be determined without regard
to transactions entered into or other items arising in
taxable years prior to such first taxable year.
‘‘(3) LIMITATION
ON
USE
OF
CREDIT
FOR
PRIOR YEAR MINIMUM TAX LIABILITY.—In the case
of a taxpayer whose tentative minimum tax for any
taxable year is zero by reason of paragraph (1), the
amount described in paragraph (2) of section 53(b)
shall not be less than the greater of—
‘‘(A) the tentative minimum tax for the
taxable year, or
‘‘(B) 25 percent of so much of the regular
tax liability (reduced by the credit allowed by
section 27) as exceeds $25,000.
Rules similar to the rules of section 38(c)(3)(B)
shall apply for purposes of the preceding sentence.’’
141
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 403. REPEAL OF ADJUSTMENT FOR DEPRECIATION.
Clause (i) of section 56(a)(1)(A) is amended by in-
serting ‘‘and before January 1, 1999,’’ after ‘‘December
31, 1986,’’.
SEC. 404. MINIMUM TAX NOT TO APPLY TO FARMERS’
INSTALLMENT SALES.
(a) IN GENERAL.—The last sentence of paragraph
(6) of section 56(a) (relating to treatment of installment
sales in computing alternative minimum taxable income)
is amended to read as follows: ‘‘This paragraph shall not
apply to any disposition—
‘‘(A) in the case of a taxpayer using the
cash receipts and disbursements method of ac-
counting, described in section 453(l)(2)(A) (re-
lating to farm property), or
‘‘(B) with respect to which an election is in
effect under section 453(l)(2)(B) (relating to
timeshares and residential lots).’’
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to dispositions in taxable
years beginning after December 31, 1987.
142
(2) SPECIAL RULE FOR 1987.—In the case of
taxable years beginning in 1987, the last sentence of
section 56(a)(6) of the Internal Revenue Code of
1986 (as in effect for such taxable years) shall be
applied by inserting ‘‘or in the case of a taxpayer
using the cash receipts and disbursements method of
accounting, any disposition described in section
453C(e)(1)(B)(ii)’’ after ‘‘section 453C(e)(4)’’.
TITLE 
V—ESTATE, 
GIFT, 
AND
GENERATION-SKIPPING 
TAX
PROVISIONS
Subtitle A—Estate and Gift Tax
Provisions
SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ES-
TATE AND GIFT TAX PROVISIONS.
(a) INCREASE IN UNIFIED ESTATE AND GIFT TAX
CREDIT.—
(1) ESTATE TAX CREDIT.—
(A) IN GENERAL.—Subsection (a) of sec-
tion 2010 (relating to unified credit against es-
tate tax) is amended by striking ‘‘$192,800’’
and inserting ‘‘the applicable credit amount’’.
(B) APPLICABLE
CREDIT
AMOUNT.—Sec-
tion 2010 is amended by redesignating sub-
section (c) as subsection (d) and by inserting
143
after subsection (b) the following new sub-
section:
‘‘(c) APPLICABLE CREDIT AMOUNT.—For purposes
of this section—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the applicable credit amount is the amount of
the tentative tax which would be determined under
the rate schedule set forth in section 2001(c) if the
amount with respect to which such tentative tax is
to be computed were the applicable exclusion amount
determined in accordance with the following table:l
‘‘In the case of estates of decedents
The applicable
dying, and gifts made, during:
exclusion amount is:
1998 .......................................................................
$ 650,000
1999 .......................................................................
$ 750,000
2000 .......................................................................
$ 765,000
2001 through 2004 ...............................................
$ 775,000
2005 .......................................................................
$ 800,000
2006 .......................................................................
$ 825,000
2007 or thereafter .................................................
$1,000,000.
‘‘(2) COST-OF-LIVING
ADJUSTMENT.—In the
case of any decedent dying, and gift made, in a cal-
endar year after 2007, the $1,000,000 amount set
forth in paragraph (1) shall be increased by an
amount equal to—
‘‘(A) $1,000,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 2006’ for
144
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the next lowest multiple of
$10,000.’’
(C) ESTATE
TAX
RETURNS.—Paragraph
(1) of section 6018(a) is amended by striking
‘‘$600,000’’ and inserting ‘‘the applicable exclu-
sion amount in effect under section 2010(c) for
the calendar year which includes the date of
death’’.
(D) PHASEOUT
OF
GRADUATED
RATES
AND UNIFIED CREDIT.—Paragraph (2) of sec-
tion 
2001(c) 
is 
amended 
by 
striking
‘‘$21,040,000’’ and inserting ‘‘the amount at
which the average tax rate under this section is
55 percent’’.
(E) ESTATES OF NONRESIDENTS NOT CITI-
ZENS.—Subparagraph (A) of section 2102(c)(3)
is amended by striking ‘‘$192,800’’ and insert-
ing ‘‘the applicable credit amount in effect
under section 2010(c) for the calendar year
which includes the date of death’’.
145
(2) UNIFIED
GIFT
TAX
CREDIT.—Paragraph
(1) of section 2505(a) is amended by striking
‘‘$192,800’’ and inserting ‘‘the applicable credit
amount in effect under section 2010(c) for such cal-
endar year’’.
(b) ALTERNATE VALUATION
OF CERTAIN FARM,
ETC., REAL PROPERTY.—Subsection (a) of section 2032A
is amended by adding at the end the following new para-
graph:
‘‘(3) INFLATION ADJUSTMENT.—In the case of
estates of decedents dying in a calendar year after
1998, the $750,000 amount contained in paragraph
(2) shall be increased by an amount equal to—
‘‘(A) $750,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the next lowest multiple of
$10,000.’’
(c) ANNUAL GIFT TAX EXCLUSION.—Subsection (b)
of section 2503 is amended—
146
(1) by striking the subsection heading and in-
serting the following:
‘‘(b) EXCLUSIONS FROM GIFTS.—
‘‘(1) IN GENERAL.—’’,
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new
paragraph:
‘‘(2) INFLATION ADJUSTMENT.—In the case of
gifts made in a calendar year after 1998, the
$10,000 amount contained in paragraph (1) shall be
increased by an amount equal to—
‘‘(A) $10,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $1,000, such amount shall
be rounded to the next lowest multiple of $1,000.’’
(d) 
EXEMPTION
FROM
GENERATION-SKIPPING
TAX.—Section 2631 (relating to GST exemption) is
amended by adding at the end the following new sub-
section:
148
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the next lowest multiple of
$10,000.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to the estates of decedents dying,
and gifts made, after December 31, 1997.
SEC. 502. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSE-
LY HELD BUSINESS.
(a) IN GENERAL.—Section 6166(a) (relating to ex-
tension of time for payment of estate tax where estate con-
sists largely of interest in closely held business) is amend-
ed by striking ‘‘10’’ in paragraph (1) and the heading
thereof and inserting ‘‘20’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
December 31, 1997.
149
SEC. 503. NO INTEREST ON CERTAIN PORTION OF ESTATE
TAX EXTENDED UNDER SECTION 6166, RE-
DUCED INTEREST ON REMAINING PORTION,
AND NO DEDUCTION FOR SUCH REDUCED IN-
TEREST.
(a) NO INTEREST AND REDUCED INTEREST.—
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 6601(j) (relating to 4-percent rate on certain
portion of estate tax extended under section 6166),
as amended by section 501(e), are amended to read
as follows:
‘‘(1) IN GENERAL.—If the time for payment of
an amount of tax imposed by chapter 11 is extended
as provided in section 6166, then in lieu of the an-
nual rate provided by subsection (a)—
‘‘(A) no interest shall be paid on the no-
interest portion of such amount, and
‘‘(B) interest on so much of such amount
as exceeds such no-interest portion shall be paid
at a rate equal to 45 percent of the annual rate
provided by subsection (a).
For purposes of this subsection, the amount of any
deficiency which is prorated to installments payable
under section 6166 shall be treated as an amount of
tax payable in installments under such section.
150
‘‘(2) NO-INTEREST PORTION.—For purposes of
this section, the term ‘no-interest portion’ means the
lesser of—
‘‘(A)(i) the amount of the tentative tax
which would be determined under the rate
schedule set forth in section 2001(c) if the
amount with respect to which such tentative tax
is to be computed were the sum of $1,000,000
and the applicable exclusion amount in effect
under section 2010(c), reduced by
‘‘(ii) the applicable credit amount in effect
under section 2010(c), or
‘‘(B) the amount of the tax imposed by
chapter 11 which is extended as provided in
section 6166.’’
(2) CONFORMING AMENDMENTS.—
(A) Section 6601(j), as amended by section
501, is amended—
(i) by striking ‘‘4-percent’’ each place
it appears in paragraph (3) and inserting
‘‘no-interest’’, and
(ii) by striking ‘‘4-PERCENT RATE ON
CERTAIN PORTION OF’’ in the heading and
inserting ‘‘RATE ON’’.
151
(B) Section 6166(b)(7)(A)(iii) is amended
to read as follows:
‘‘(iii) for purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’
(C) Section 6166(b)(8)(A)(iii) is amended
to read as follows:
‘‘(iii) NO-INTEREST PORTION NOT TO
APPLY.—For purposes of applying section
6601(j) (relating to rate on estate tax ex-
tended under section 6166), the no-interest
portion shall be zero.’’
(b) DISALLOWANCE OF INTEREST DEDUCTION.—
(1) ESTATE
TAX.—Paragraph (1) of section
2053(c) is amended by adding at the end the follow-
ing new subparagraph:
‘‘(D) SECTION 6166 INTEREST.—No deduc-
tion shall be allowed under this section for any
interest payable under section 6601 on any un-
paid portion of the tax imposed by section 2001
for the period during which an extension of
time for payment of such tax is in effect under
section 6166.’’
152
(2) INCOME TAX.—Subparagraph (E) of section
163(h)(2) is amended by striking ‘‘or 6166’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
December 31, 1997.
SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS
UNDER SECTION 2032A TO LINEAL DESCEND-
ANTS.
(a) GENERAL RULE.—Paragraph (7) of section
2032A(c) (relating to special rules for tax treatment of
dispositions and failures to use for qualified use) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) CERTAIN RENTS TREATED AS QUALI-
FIED USE.—For purposes of this subsection, a
surviving spouse or lineal descendant of the de-
cedent shall not be treated as failing to use
qualified real property in a qualified use solely
because such spouse or descendant rents such
property to a member of the family of such
spouse or descendant on a net cash basis. For
purposes of the preceding sentence, a legally
adopted child of an individual shall be treated
as the child of such individual by blood.’’
153
(b) 
CONFORMING
AMENDMENT.—Section
2032A(b)(5)(A) is amended by striking the last sentence.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to leases entered into
after December 31, 1976.
SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGI-
BILITY FOR EXTENSION OF TIME FOR PAY-
MENT OF ESTATE TAX.
(a) IN GENERAL.—Part IV of subchapter C of chap-
ter 76 of the Internal Revenue Code of 1986 (relating to
declaratory judgments) is amended by adding at the end
the following new section:
‘‘SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELI-
GIBILITY OF ESTATE WITH RESPECT TO IN-
STALLMENT 
PAYMENTS 
UNDER 
SECTION
6166.
(a) CREATION OF REMEDY.—In a case of actual con-
troversy involving a determination by the Secretary of (or
a failure by the Secretary to make a determination with
respect to)—
‘‘(1) whether an election may be made under
section 6166 (relating to extension of time for pay-
ment of estate tax where estate consists largely of
interest in closely held business) with respect to an
estate, or
154
‘‘(2) whether the extension of time for payment
of tax provided in section 6166(a) has ceased to
apply with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court
may make a declaration with respect to whether such elec-
tion may be made, whether such extension has ceased to
apply, or the amount of such installment payments. Any
such declaration shall have the force and effect of a deci-
sion of the Tax Court and shall be reviewable as such.
‘‘(b) LIMITATIONS.—
‘‘(1) PETITIONER.—A pleading may be filed
under this section, with respect to any estate, only—
‘‘(A) by the executor of such estate, or
‘‘(B) by any person who has assumed an
obligation to make payments under section
6166 with respect to such estate (but only if
each other such person is joined as a party).
‘‘(2) EXHAUSTION
OF
ADMINISTRATIVE
REM-
EDIES.—The court shall not issue a declaratory
judgment or decree under this section in any pro-
ceeding unless it determines that the petitioner has
exhausted all available administrative remedies with-
in the Internal Revenue Service. A petitioner shall
be deemed to have exhausted its administrative rem-
edies with respect to a failure of the Secretary to
155
make a determination at the expiration of 180 days
after the date on which the request for such deter-
mination was made if the petitioner has taken, in a
timely manner, all reasonable steps to secure such
determination.
‘‘(3) TIME FOR BRINGING ACTION.—If the Sec-
retary sends by certified or registered mail notice of
his determination as described in subsection (a) to
the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the
91st day after the date of such mailing.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part IV of subchapter C of chapter 76 of such Code
is amended by adding at the end the following new item:
‘‘Sec. 7479. Declaratory judgments relating to eligibility of estate
with respect to installment payments under section
6166.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to the estates of decedents dying
after the date of the enactment of this Act.
SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX
PURPOSES AFTER EXPIRATION OF STATUTE
OF LIMITATIONS.
(a) IN GENERAL.—Section 2001 (relating to imposi-
tion and rate of estate tax) is amended by adding at the
end the following new subsection:
‘‘(f) VALUATION OF GIFTS.—If—
156
‘‘(1) the time has expired within which a tax
may be assessed under chapter 12 (or under cor-
responding provisions of prior laws) on the transfer
of property by gift made during a preceding cal-
endar period (as defined in section 2502(b)), and
‘‘(2) the value of such gift is shown on the re-
turn for such preceding calendar period or is dis-
closed in such return, or in a statement attached to
the return, in a manner adequate to apprise the Sec-
retary of the nature of such gift,
the value of such gift shall, for purposes of computing the
tax under this chapter, be the value of such gift as finally
determined for purposes of chapter 12.’’
(b) MODIFICATION OF APPLICATION OF STATUTE OF
LIMITATIONS.—Paragraph (9) of section 6501(c) is
amended to read as follows:
‘‘(9) GIFT TAX ON CERTAIN GIFTS NOT SHOWN
ON RETURN.—If any gift of property the value of
which (or any increase in taxable gifts required
under section 2701(d) which) is required to be
shown on a return of tax imposed by chapter 12
(without regard to section 2503(b)), and is not
shown on such return, any tax imposed by chapter
12 on such gift may be assessed, or a proceeding in
court for the collection of such tax may be begun
157
without assessment, at any time. The preceding sen-
tence shall not apply to any item which is disclosed
in such return, or in a statement attached to the re-
turn, in a manner adequate to apprise the Secretary
of the nature of such item. The value of any item
which is so disclosed may not be redetermined by the
Secretary after the expiration of the period under
subsection (a).’’
(c) DECLARATORY JUDGMENT PROCEDURE FOR DE-
TERMINING VALUE OF GIFT.—
(1) IN GENERAL.—Part IV of subchapter C of
chapter 76 is amended by inserting after section
7476 the following new section:
‘‘SEC. 7477. DECLARATORY JUDGMENTS RELATING TO
VALUE OF CERTAIN GIFTS.
‘‘(a) CREATION OF REMEDY.—In a case of an actual
controversy involving a determination by the Secretary of
the value of any gift shown on the return of tax imposed
by chapter 12 or disclosed on such return or in any state-
ment attached to such return, upon the filing of an appro-
priate pleading, the Tax Court may make a declaration
of the value of such gift. Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(b) LIMITATIONS.—
158
‘‘(1) PETITIONER.—A pleading may be filed
under this section only by the donor.
‘‘(2) EXHAUSTION
OF
ADMINISTRATIVE
REM-
EDIES.—The court shall not issue a declaratory
judgment or decree under this section in any pro-
ceeding unless it determines that the petitioner has
exhausted all available administrative remedies with-
in the Internal Revenue Service.
‘‘(3) TIME FOR BRINGING ACTION.—If the Sec-
retary sends by certified or registered mail notice of
his determination as described in subsection (a) to
the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the
91st day after the date of such mailing.’’
(2) CLERICAL AMENDMENT.—The table of sec-
tions for such part IV is amended by inserting after
the item relating to section 7476 the following new
item:
‘‘Sec. 7477. Declaratory judgments relating to value of certain
gifts.’’
(d) CONFORMING AMENDMENT.—Subsection (c) of
section 2504 is amended by striking ‘‘, and if a tax under
this chapter or under corresponding provisions of prior
laws has been assessed or paid for such preceding calendar
period’’.
(e) EFFECTIVE DATES.—
162
‘‘(i) the surviving spouse is entitled to
all of the income from the property for life,
‘‘(ii) no person other than such spouse
is entitled to any distribution of such prop-
erty during such spouse’s life, and
‘‘(iii) there is a change of a governing
instrument (by reformation, amendment,
construction, or otherwise) as of the appli-
cable date which results in the satisfaction
of the requirements of such provision as of
the date of the decedent’s death,
the determination of whether such deduction is
allowable shall be made as of the applicable
date.
‘‘(B) SPECIAL RULE WHERE TIMELY COM-
MENCEMENT
OF
REFORMATION.—Clauses (i)
and (ii) of subparagraph (A) shall not apply to
any interest if, not later than the date described
in subparagraph (C)(i), a judicial proceeding is
commenced to change such interest into an in-
terest which satisfies the requirements of the
provision by reason of which (but for this para-
graph) a deduction would not be allowable
under subsection (a) for such interest.
163
‘‘(C) APPLICABLE DATE.—For purposes of
subparagraph (A), the term ‘applicable date’
means—
‘‘(i) the last date (including exten-
sions) for filing the return of tax imposed
by this chapter, or
‘‘(ii) if a judicial proceeding is com-
menced to comply with such provision, the
time when the changes pursuant to such
proceeding are made.
‘‘(D) SPECIAL RULE.—If the change re-
ferred to in subparagraph (A)(iii) is to qualify
the passage of the interest under paragraph
(7), subparagraph (A) shall apply only if the
election under paragraph (7)(B) is made.
‘‘(E) STATUTE OF LIMITATIONS.—If a ju-
dicial proceeding described in subparagraph
(C)(ii) is commenced with respect to any inter-
est, the period for assessing any deficiency of
tax attributable to such interest shall not expire
before the date 1 year after the date on which
the Secretary is notified that such provision has
been complied with or that such proceeding has
been terminated.’’
164
(b) COMPARABLE RULE FOR GIFT TAX.—Section
2523 (relating to gift to spouse) is amended by adding
at the end the following new subsection:
‘‘(j) REFORMATIONS PERMITTED.—Rules similar to
the rules of section 2056(b)(11) shall apply for purposes
of this section.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying, and
gifts made, after the date of the enactment of this Act.
Subtitle B—Generation-Skipping
Tax Provisions
SEC. 511. SEVERING OF TRUSTS HOLDING PROPERTY HAV-
ING AN INCLUSION RATIO OF GREATER THAN
ZERO.
(a) IN GENERAL.—Subsection (a) of section 2642
(relating to inclusion ratio) is amended by adding at the
end the following new paragraph:
‘‘(3) SEVERING OF TRUSTS HOLDING PROPERTY
HAVING AN INCLUSION RATIO OF GREATER THAN
ZERO.—
‘‘(A) IN
GENERAL.—If a trust holding
property having an inclusion ratio of greater
than zero is severed in a qualified severance, at
the election of the trustee of such trust, the
trusts resulting from such severance shall be
165
treated as separate trusts for purposes of this
chapter and 1 such trust shall have an inclusion
ratio of 1 and the other such trust shall have
an inclusion ratio of zero.
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A), the term ‘qualified
severance’ means the creation of 2 trusts from
a single trust if each property held by the single
trust was divided between the 2 created trusts
such that one trust received an interest in each
such property equal to the applicable fraction of
the single trust. Such term includes any other
severance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) ELECTION.—The election under this
paragraph shall be made at the time prescribed
by the Secretary. Such an election, once made,
shall be irrevocable.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to severances after the date of
the enactment of this Act.
166
SEC. 512. EXPANSION OF EXCEPTION FROM GENERATION-
SKIPPING TRANSFER TAX FOR TRANSFERS
TO INDIVIDUALS WITH DECEASED PARENTS.
(a) IN GENERAL.—Section 2651 (relating to genera-
tion assignment) is amended by redesignating subsection
(e) as subsection (f), and by inserting after subsection (d)
the following new subsection:
‘‘(e) SPECIAL RULE
FOR PERSONS WITH
A DE-
CEASED PARENT.—
‘‘(1) IN GENERAL.—For purposes of determin-
ing whether any transfer is a generation-skipping
transfer, if—
‘‘(A) an individual is a descendant of a
parent of the transferor (or the transferor’s
spouse or former spouse), and
‘‘(B) such individual’s parent who is a lin-
eal descendant of the parent of the transferor
(or the transferor’s spouse or former spouse) is
dead at the time the transfer (from which an
interest of such individual is established or de-
rived) is subject to a tax imposed by chapter 11
or 12 upon the transferor (and if there shall be
more than 1 such time, then at the earliest
such time),
such individual shall be treated as if such individual
were a member of the generation which is 1 genera-
167
tion below the lower of the transferor’s generation or
the generation assignment of the youngest living an-
cestor of such individual who is also a descendant of
the parent of the transferor (or the transferor’s
spouse or former spouse), and the generation assign-
ment of any descendant of such individual shall be
adjusted accordingly.
‘‘(2) LIMITED APPLICATION OF SUBSECTION TO
COLLATERAL
HEIRS.—This subsection shall not
apply with respect to a transfer to any individual
who is not a lineal descendant of the transferor (or
the transferor’s spouse or former spouse) if, at the
time of the transfer, such transferor has any living
lineal descendant.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 2612(c) (defining direct skip) is
amended by striking paragraph (2) and by redesig-
nating paragraph (3) as paragraph (2).
(2) Section 2612(c)(2) (as so redesignated) is
amended by striking ‘‘section 2651(e)(2)’’ and in-
serting ‘‘section 2651(f)(2)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to terminations, distributions, and
transfers occurring after December 31, 1997.
168
TITLE VI—EXTENSIONS
SEC. 601. RESEARCH TAX CREDIT.
(a) IN GENERAL.—Paragraph (1) of section 41(h)
(relating to termination) is amended—
(1) by striking ‘‘May 31, 1997’’ and inserting
‘‘December 31, 1998’’, and
(2) by striking in the last sentence ‘‘during the
first 11 months of such taxable year.’’ and inserting
‘‘during the 30-month period beginning with the
first month of such year. The 30 months referred to
in the preceding sentence shall be reduced by the
number of full months after June 1996 (and before
the first month of such first taxable year) during
which the taxpayer paid or incurred any amount
which is taken into account in determining the credit
under this section.’’
(b) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 41(c)(4) is
amended to read as follows:
‘‘(B) ELECTION.—An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the Sec-
retary.’’
169
(2) Paragraph (1) of section 45C(b) is amended
by striking ‘‘May 31, 1997’’ and inserting ‘‘Decem-
ber 31, 1998’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts paid or incurred after
May 31, 1997.
SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDA-
TIONS.
(a) 
IN
GENERAL.—Clause 
(ii) 
of 
section
170(e)(5)(D) (relating to termination) is amended by
striking ‘‘May 31, 1997’’ and inserting ‘‘December 31,
1998’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to contributions made after May
31, 1997.
SEC. 603. WORK OPPORTUNITY TAX CREDIT.
(a) EXTENSION.—
(1) IN GENERAL.—Subparagraph (B) of section
51(c)(4) (relating to termination) is amended by
striking ‘‘September 30, 1997’’ and inserting ‘‘Sep-
tember 30, 1998’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to individuals who
begin work for the employer after September 30,
1997.
170
(b) 
WORK
OPPORTUNITY
CREDIT
ALLOWED
AGAINST MINIMUM TAX.—
(1) IN GENERAL.—Subsection (c) of section 38
(relating to limitation based on amount of tax) is
amended by redesignating paragraph (3) as para-
graph (4) and by inserting after paragraph (2) the
following new paragraph:
‘‘(3) SPECIAL RULES FOR WORK OPPORTUNITY
CREDIT.—
‘‘(A) IN
GENERAL.—In the case of the
work opportunity credit—
‘‘(i) this section and section 39 shall
be applied separately with respect to the
credit, and
‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) subparagraph (A) shall not
apply, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the
taxable year (other than the work op-
portunity credit).
171
‘‘(B) WORK
OPPORTUNITY
CREDIT.—For
purposes of this subsection, the term ‘work op-
portunity credit’ means the credit allowable
under subsection (a) by reason of section
51(a).’’
(2) CONFORMING AMENDMENT.—Subclause (II)
of section 38(c)(2)(A)(ii) is amended by inserting
‘‘or the work opportunity credit’’ after ‘‘employment
credit’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to taxable years begin-
ning after December 31, 1997.
(c) PERCENTAGE OF WAGES ALLOWED AS CRED-
IT.—
(1) IN GENERAL.—Subsection (a) of section 51
(relating to determination of amount) is amended by
striking ‘‘35 percent’’ and inserting ‘‘40 percent’’.
(2) APPLICATION OF CREDIT FOR INDIVIDUALS
PERFORMING
FEWER
THAN
400
HOURS
OF
SERV-
ICES.—Paragraph (3) of section 51(i) is amended to
read as follows:
‘‘(3) INDIVIDUALS NOT MEETING MINIMUM EM-
PLOYMENT PERIODS.—
‘‘(A) REDUCTION OF CREDIT FOR INDIVID-
UALS PERFORMING FEWER THAN 400 HOURS OF
172
SERVICES.—In the case of an individual who
has completed at least 120 hours, but less than
400 hours, of services performed for the em-
ployer, subsection (a) shall be applied by sub-
stituting ‘25 percent’ for ‘40 percent’.
‘‘(B) DENIAL OF CREDIT FOR INDIVIDUALS
PERFORMING
FEWER
THAN
120
HOURS
OF
SERVICES.—No wages shall be taken into ac-
count under subsection (a) with respect to any
individual unless such individual has completed
at least 120 hours of services performed for the
employer.’’
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
begin work for the employer after September 30,
1997.
(d) MODIFICATION OF ELIGIBILITY REQUIREMENT
BASED ON PERIOD ON WELFARE.—
(1) IN GENERAL.—Subparagraph (A) of section
51(d)(2) (defining qualified IV–A recipient) is
amended by striking all that follows ‘‘a IV–A pro-
gram’’ and inserting ‘‘for any 9 months during the
18-month period ending on the hiring date.’’
173
(2) CONFORMING AMENDMENT.—Subparagraph
(A) of section 51(d)(3) is amended to read as fol-
lows:
‘‘(A) IN
GENERAL.—The term ‘qualified
veteran’ means any veteran who is certified by
the designated local agency as being a member
of a family receiving assistance under a food
stamp program under the Food Stamp Act of
1977 for at least a 3-month period ending dur-
ing the 12-month period ending on the hiring
date.’’
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
begin work for the employer after September 30,
1997.
SEC. 604. ORPHAN DRUG TAX CREDIT.
(a) IN GENERAL.—Section 45C (relating to clinical
testing expenses for certain drugs for rare diseases or con-
ditions) is amended by striking subsection (e).
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts paid or incurred
after May 31, 1997.
174
TITLE VII—INCENTIVES FOR RE-
VITALIZATION OF THE DIS-
TRICT OF COLUMBIA
SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE
DISTRICT OF COLUMBIA.
(a) IN GENERAL.—Chapter 1 is amended by adding
at the end the following new subchapter:
‘‘Subchapter W—District of Columbia
Enterprise Zone
‘‘Sec. 1400.
Establishment of DC Zone.
‘‘Sec. 1400A. Tax-exempt economic development bonds.
‘‘Sec. 1400B. Credit for equity investments in and loans to Dis-
trict of Columbia businesses.
‘‘Sec. 1400C. Zero percent capital gains rate.
‘‘Sec. 1400D. Credit to provide equivalent of 10 percent rate
bracket in lieu of 15 percent bracket.
‘‘SEC. 1400. ESTABLISHMENT OF DC ZONE.
‘‘(a) IN GENERAL.—The applicable DC area is here-
by designated as the District of Columbia Enterprise
Zone. For purposes of this title (except as otherwise pro-
vided in this subchapter), the District of Columbia Enter-
prise Zone shall be treated as an empowerment zone des-
ignated under subchapter U.
‘‘(b) APPLICABLE DC AREA.—For purposes of sub-
section (a), the term ‘applicable DC area’ means the area
consisting of—
‘‘(1) the census tracts located in the District of
Columbia which are part of an enterprise community
175
designated under subchapter U before the date of
the enactment of this subchapter, and
‘‘(2) all other census tracts—
‘‘(A) which are located in the District of
Columbia, and
‘‘(B) for which the poverty rate is not less
than 35 percent.
‘‘(c) DISTRICT OF COLUMBIA ENTERPRISE ZONE.—
For purposes of this subchapter, the terms ‘District of Co-
lumbia Enterprise Zone’ and ‘DC Zone’ mean the District
of Columbia Enterprise Zone designated by subsection (a).
(d) SPECIAL RULE FOR APPLICATION OF EMPLOY-
MENT CREDIT.—In the case of the DC Zone, section 1396
(relating to empowerment zone employment credit) shall
be applied by substituting ‘‘20’’ for ‘‘15’’ in the table con-
tained in section 1396(b). The preceding sentence shall
apply only with respect to qualified zone employees, as de-
fined in section 1396(d), determined by treating no area
other than the DC Zone as an empowerment zone or en-
terprise community.
‘‘(e) TIME FOR WHICH DESIGNATION APPLICA-
BLE.—
‘‘(1) IN GENERAL.—The designation made by
subsection (a) shall apply for the period beginning
176
on January 1, 1998, and ending on December 31,
2002.
‘‘(2) COORDINATION
WITH
DC
ENTERPRISE
COMMUNITY DESIGNATED UNDER SUBCHAPTER U.—
The designation as an enterprise community, under
subchapter U, of the census tracts referred to in
subsection (b)(1) shall terminate on December 31,
2002.
‘‘SEC. 
1400A. 
TAX-EXEMPT 
ECONOMIC 
DEVELOPMENT
BONDS.
‘‘(a) IN GENERAL.—In the case of the District of Co-
lumbia Enterprise Zone—
‘‘(1) subsection (a) of section 1394 (relating to
tax-exempt facility bonds for empowerment zones
and enterprise communities) applies only with re-
spect to bonds issued by the Economic Development
Corporation, and
‘‘(2) subparagraph (A) of section 1394(c)(1)
(relating to limitation on amount of bonds) shall be
applied 
by 
substituting 
‘$15,000,000’ 
for
‘$3,000,000’.
‘‘(b) ECONOMIC DEVELOPMENT CORPORATION.—For
purposes of this section, the term ‘Economic Development
Corporation’ means an entity which is created by Federal
177
law in 1997 as part of the District of Columbia govern-
ment.
‘‘(c) PERIOD OF APPLICABILITY.—This section shall
apply to bonds issued during the period beginning on Jan-
uary 1, 1998, and ending on December 31, 2002.
‘‘SEC. 1400B. CREDIT FOR EQUITY INVESTMENTS IN AND
LOANS TO DISTRICT OF COLUMBIA BUSI-
NESSES.
‘‘(a) GENERAL RULE.—For purposes of section 38,
the DC Zone investment credit determined under this sec-
tion for any taxable year is—
‘‘(1) the qualified lender credit for such year,
and
‘‘(2) the qualified equity investment credit for
such year.
‘‘(b) QUALIFIED LENDER CREDIT.—For purposes of
this section—
‘‘(1) IN GENERAL.—The qualified lender credit
for any taxable year is the amount of credit specified
for such year by the Economic Development Cor-
poration with respect to qualified District loans
made by the taxpayer.
‘‘(2) LIMITATION.—In no event may the quali-
fied lender credit with respect to any loan exceed 25
178
percent of the cost of the property purchased with
the proceeds of the loan.
‘‘(3) QUALIFIED
DISTRICT
LOAN.—For pur-
poses of paragraph (1), the term ‘qualified district
loan’ means any loan for the purchase (as defined in
section 179(d)(2)) of property to which section 168
applies (or would apply but for section 179) (or land
which is functionally related and subordinate to such
property) and substantially all of the use of which
is in the District of Columbia and is in the active
conduct of a trade or business in the District of Co-
lumbia. A rule similar to the rule of section
1397C(a)(2) shall apply for purposes of the preced-
ing sentence.
‘‘(c) QUALIFIED EQUITY INVESTMENT CREDIT.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the qualified equity investment credit deter-
mined under this section for any taxable year is an
amount equal to the percentage specified by the
Economic Development Corporation (but not greater
than 25 percent) of the aggregate amount paid in
cash by the taxpayer during the taxable year for the
purchase of District business investments.
179
‘‘(2) DISTRICT
BUSINESS
INVESTMENT.—For
purposes of this subsection, the term ‘District busi-
ness investment’ means—
‘‘(A) any District business stock, and
‘‘(B) any District partnership interest.
‘‘(3) DISTRICT
BUSINESS
STOCK.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘District business
stock’ means any stock in a domestic corpora-
tion if—
‘‘(i) such stock is acquired by the tax-
payer at its original issue (directly or
through an underwriter) solely in exchange
for cash, and
‘‘(ii) as of the time such stock was is-
sued, such corporation was engaged in a
trade or business in the District of Colum-
bia (or, in the case of a new corporation,
such corporation was being organized for
purposes of engaging in such a trade or
business).
‘‘(B) REDEMPTIONS.—A rule similar to
the rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
180
‘‘(4) QUALIFIED
DISTRICT
PARTNERSHIP
IN-
TEREST.—For purposes of this subsection, the term
‘qualified District partnership interest’ means any
interest in a partnership if—
‘‘(A) such interest is acquired by the tax-
payer from the partnership solely in exchange
for cash, and
‘‘(B) as of the time such interest was ac-
quired, such partnership was engaging in a
trade or business in the District of Columbia
(or, in the case of a new partnership, such part-
nership was being organized for purposes of en-
gaging in such a trade or business).
A rule similar to the rule of paragraph (3)(B) shall
apply for purposes of this paragraph.
‘‘(5) RECAPTURE
OF
CREDIT
UPON
CERTAIN
DISPOSITIONS
OF
DISTRICT
BUSINESS
INVEST-
MENTS.—
‘‘(A) IN GENERAL.—If a taxpayer disposes
of any District business investment (or any
other property the basis of which is determined
in whole or in part by reference to the adjusted
basis of such investment) before the end of the
5-year period beginning on the date such invest-
ment was acquired by the taxpayer, the tax-
181
payer’s tax imposed by this chapter for the tax-
able year in which such distribution occurs shall
be increased by the aggregate decrease in the
credits allowed under section 38 for all prior
taxable years which would have resulted solely
from reducing to zero any credit determined
under this section with respect to such invest-
ment.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply to any gift, transfer, or trans-
action described in paragraph (1), (2), or (3) of
section 1245(b).
‘‘(C) SPECIAL RULE.—Any increase in tax
under subparagraph (A) shall not be treated as
a tax imposed by this chapter for purposes of—
‘‘(i) determining the amount of any
credit allowable under this chapter, and
‘‘(ii) determining the amount of the
tax imposed by section 55.
‘‘(6) BASIS REDUCTION.—For purposes of this
title, the basis of any District business investment
shall be reduced by the amount of the credit deter-
mined under this section with respect to such invest-
ment.
‘‘(d) LIMITATION ON AMOUNT OF CREDIT.—
182
‘‘(1) IN
GENERAL.—The amount of the DC
Zone investment credit determined under this sec-
tion with respect to any taxpayer for any taxable
year shall not exceed the credit amount allocated to
such taxpayer for such taxable year by the Economic
Development Corporation.
‘‘(2) OVERALL
LIMITATION.—The aggregate
credit amount which may be allocated by the Eco-
nomic Development Corporation under this section
shall not exceed $75,000,000.
‘‘(3) 
CRITERIA
FOR
ALLOCATING
CREDIT
AMOUNTS.—The allocation of credit amounts under
this section shall be made in accordance with criteria
established by the Economic Development Corpora-
tion. In establishing such criteria, such Corporation
shall take into account—
‘‘(A) the degree to which the business re-
ceiving the loan or investment will provide job
opportunities for low and moderate income resi-
dents of the DC Zone, and
‘‘(B) whether such business is within the
DC Zone.
‘‘(e) ECONOMIC DEVELOPMENT CORPORATION.—For
purposes of this section, the term ‘Economic Development
183
Corporation’ has the meaning given such term by section
1400A(b).
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out this
section.
‘‘(g) APPLICATION OF SECTION.—This section shall
apply to any credit amount allocated for taxable years be-
ginning after December 31, 1997, and before January 1,
2003.
‘‘SEC. 1400C. ZERO PERCENT CAPITAL GAINS RATE.
‘‘(a) EXCLUSION.—Gross income shall not include
qualified capital gain from the sale or exchange of any
DC Zone asset held for more than 5 years.
‘‘(b) DC ZONE ASSET.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The term ‘DC Zone asset’
means—
‘‘(A) any DC Zone business stock,
‘‘(B) any DC Zone partnership interest,
and
‘‘(C) any DC Zone business property.
‘‘(2) DC ZONE BUSINESS STOCK.—
‘‘(A) IN GENERAL.—The term ‘DC Zone
business stock’ means any stock in a domestic
184
corporation which is originally issued after De-
cember 31, 1997, if—
‘‘(i) such stock is acquired by the tax-
payer, before January 1, 2003, at its origi-
nal issue (directly or through an under-
writer) solely in exchange for cash,
‘‘(ii) as of the time such stock was is-
sued, such corporation was a DC Zone
business (or, in the case of a new corpora-
tion, such corporation was being organized
for purposes of being a DC Zone business),
and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such stock,
such corporation qualified as a DC Zone
business.
‘‘(B) REDEMPTIONS.—A rule similar to
the rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
‘‘(3) DC ZONE PARTNERSHIP INTEREST.—The
term ‘DC Zone partnership interest’ means any cap-
ital or profits interest in a domestic partnership
which is originally issued after December 31, 1997,
if—
185
‘‘(A) such interest is acquired by the tax-
payer, before January 1, 2003, from the part-
nership solely in exchange for cash,
‘‘(B) as of the time such interest was ac-
quired, such partnership was a DC Zone busi-
ness (or, in the case of a new partnership, such
partnership was being organized for purposes of
being a DC Zone business), and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as a DC Zone business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
‘‘(4) DC ZONE BUSINESS PROPERTY.—
‘‘(A) IN GENERAL.—The term ‘DC Zone
business property’ means tangible property if—
‘‘(i) such property was acquired by
the taxpayer by purchase (as defined in
section 179(d)(2)) after December 31,
1997, and before January 1, 2003,
‘‘(ii) the original use of such property
in the DC Zone commences with the tax-
payer, and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such prop-
186
erty, substantially all of the use of such
property was in a DC Zone business of the
taxpayer.
‘‘(B) SPECIAL
RULE
FOR
BUILDINGS
WHICH ARE SUBSTANTIALLY IMPROVED.—
‘‘(i) IN GENERAL.—The requirements
of clauses (i) and (ii) of subparagraph (A)
shall be treated as met with respect to—
‘‘(I) property which is substan-
tially improved by the taxpayer before
January 1, 2003, and
‘‘(II) any land on which such
property is located.
‘‘(ii) SUBSTANTIAL IMPROVEMENT.—
For purposes of clause (i), property shall
be treated as substantially improved by the
taxpayer only if, during any 24-month pe-
riod beginning after December 31, 1997,
additions to basis with respect to such
property in the hands of the taxpayer ex-
ceed the greater of—
‘‘(I) an amount equal to the ad-
justed basis of such property at the
beginning of such 24-month period in
the hands of the taxpayer, or
187
‘‘(II) $5,000.
‘‘(6) 
TREATMENT
OF
SUBSEQUENT
PUR-
CHASERS, ETC.—The term ‘DC Zone asset’ includes
any property which would be a DC Zone asset but
for paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) in the
hands of the taxpayer if such property was a DC
Zone asset in the hands of a prior holder.
‘‘(7) 5-YEAR SAFE HARBOR.—If any property
ceases to be a DC Zone asset by reason of para-
graph (2)(A)(iii), (3)(C), or (4)(A)(iii) after the 5-
year period beginning on the date the taxpayer ac-
quired such property, such property shall continue to
be treated as meeting the requirements of such
paragraph; except that the amount of gain to which
subsection (a) applies on any sale or exchange of
such property shall not exceed the amount which
would be qualified capital gain had such property
been sold on the date of such cessation.
‘‘(c) DC ZONE BUSINESS.—For purposes of this sec-
tion, the term ‘DC Zone business’ means any entity which
is an enterprise zone business (as defined in section
1397B), determined by treating no area other than the
DC Zone as an empowerment zone or enterprise commu-
nity.