232
(B) The section heading for section 6035 is
amended by striking ‘‘FOREIGN PERSONAL HOLD-
ING COMPANIES’’ and inserting ‘‘CLOSELY HELD
PASSIVE FOREIGN CORPORATIONS’’.
(C) The table of sections for subpart A of part
III of subchapter A of chapter 61 is amended by
striking ‘‘foreign personal holding companies’’ in the
item relating to section 6035 and inserting ‘‘closely-
held passive foreign corporations’’.
(27) Subparagraph (D) of section 6103(e)(1) is
amended by striking clause (iv) and redesignating
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively.
(28) Subparagraph (B) of section 6501(e)(1) is
amended to read as follows:
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the
taxpayer omits from gross income an amount
properly 
includible 
therein 
under 
section
951(a), the tax may be assessed, or a proceed-
ing in court for the collection of such tax may
be done without assessing, at any time within
6 years after the return was filed.’’
(29) Section 4947 and section 4948(c)(4) are
each amended by striking ‘‘556(b)(2),’’ each place it
appears.
233
(b) CLERICAL AMENDMENTS.—
(1) The table of parts for subchapter G of
chapter 1 is amended by striking the item relating
to part III.
(2) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the
items relating to sections 1246 and 1247.
(3) The table of parts for subchapter P of chap-
ter 1 is amended by striking the item relating to
part VI and inserting the following:
‘‘Part VI. Treatment of passive foreign corporations.’’
SEC. 404. EFFECTIVE DATE.
(a) GENERAL RULE.—Except as otherwise provided
in this section, the amendments made by this subtitle shall
apply to—
(1) taxable years of United States persons be-
ginning after December 31, 1993, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
(b) DENIAL OF INSTALLMENT SALES TREATMENT.—
The amendment made by section 402(b) shall apply to dis-
positions after December 31, 1993.
(c) BASIS RULE.—The amendments made by this
subtitle shall not affect the determination of the basis of
234
any stock acquired from a decedent in a taxable year be-
ginning before January 1, 1994.
Subtitle B—Treatment of
Controlled Foreign Corporations
SEC. 411. GAIN 
ON 
CERTAIN 
STOCK 
SALES 
BY 
CON-
TROLLED FOREIGN CORPORATIONS TREAT-
ED AS DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
thereof the following new subsection:
‘‘(f) (e) GAIN ON CERTAIN STOCK SALES BY CON-
TROLLED FOREIGN CORPORATIONS TREATED AS DIVI-
DENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other for-
eign corporation, gain recognized on such sale or ex-
change shall be included in the gross income of such
controlled foreign corporation as a dividend to the
same extent that it would have been so included
under section 1248(a) if such controlled foreign cor-
poration were a United States person. For purposes
of determining the amount which would have been so
includible, the determination of whether such other
foreign corporation was a controlled foreign corpora-
235
tion shall be made without regard to the preceding
sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA-
BLE.—Clause (i) of section 954(c)(3)(A) shall not
apply to any amount treated as a dividend by reason
of paragraph (1).
‘‘(3) CLARIFICATION OF DEEMED SALES.—For
purposes of this subsection, a controlled foreign cor-
poration shall be treated as having sold or ex-
changed any stock if, under any provision of this
subtitle, such controlled foreign corporation is treat-
ed as having gain from the sale or exchange of such
stock.’’
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of
section 904(d)(2)(E) is amended by striking ‘‘and except
as provided in regulations, the taxpayer was a United
States shareholder in such corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a)
shall apply to gain recognized on transactions occur-
ring after the date of the enactment of this Act.
(2) The amendment made by subsection (b)
shall apply to distributions after the date of the en-
actment of this Act.
236
SEC. 412. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN
DETERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F in-
come) is amended by adding at the end thereof the
following new sentence: ‘‘For purposes of subpara-
graph (B), any gain included in the gross income of
any person as a dividend under section 1248 shall
be treated as a distribution received by such person
with respect to the stock involved.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end thereof the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
other controlled foreign corporation, adjustments similar
237
to the adjustments provided by subsections (a) and (b)
shall be made to the basis of such stock in the hands of
such other controlled foreign corporation, but only for the
purposes of determining the amount included under sec-
tion 951 in the gross income of such United States share-
holder (or any other United States shareholder who ac-
quires from any person any portion of the interest of such
United States shareholder by reason of which such share-
holder was treated as owning such stock, but only to the
extent of such portion, and subject to such proof of iden-
tity of such interest as the Secretary may prescribe by reg-
ulations).’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply for purposes of deter-
mining inclusions for taxable years of United States
shareholders beginning after December 31, 1993.
(c) DETERMINATION
OF PREVIOUSLY TAXED IN-
COME IN SECTION 304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings and profits) is amended by adding at the end
thereof the following new subsection:
‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—
If by reason of—
‘‘(1) a transaction to which section 304 applies,
238
‘‘(2) the structure of a United States sharehold-
er’s holdings in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income
(or an inclusion or exclusion without an appropriate basis
adjustment) by reason of this subpart, the Secretary may
prescribe regulations providing such modifications in the
application of this subpart as may be necessary to elimi-
nate such multiple inclusion or provide such basis adjust-
ment, as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of the
enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end thereof the fol-
lowing new sentence: ‘‘For purposes of this sub-
section, any exemption (or reduction) with respect to
the tax imposed by section 884 shall not be taken
into account.’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
239
SEC. 413. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR
CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN
GENERAL.—Subsection (b) of section
902 (relating to deemed taxes increased in case of
certain 2nd and 3rd tier foreign corporations) is
amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER-
TAIN LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have
paid the same proportion of such other member’s
post-1986 foreign income taxes as would be deter-
mined under subsection (a) if such foreign corpora-
tion were a domestic corporation.
‘‘(2) QUALIFIED
GROUP.—For purposes of
paragraph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
240
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other 
foreign 
corporation 
indirectly
through a chain of foreign corporations
connected through stock ownership of at
least 10 percent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corpora-
tion in such chain, and
‘‘(iii) such other corporation is not
below the sixth tier in such chain,
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corpora-
tion is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a Unit-
ed States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall
apply to those taxes paid by a member of the quali-
fied group below the third tier only with respect to
periods during which it was a controlled foreign cor-
poration.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
241
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corpora-
tion’’ and inserting ‘‘sixth tier foreign corpora-
tion’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC
CORPORATION
ACQUIRES
PERCENT
OF
FOREIGN
CORPORATION’’ and inserting
‘‘WHERE FOREIGN CORPORATION FIRST QUALI-
FIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits)
is amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under
section 951(a) in the gross income of a domestic cor-
poration any amount attributable to earnings and
242
profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b))
with respect to the domestic corporation, then, ex-
cept to the extent provided in regulations, section
902 shall be applied as if the amount so included
were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accord-
ance with section 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxes of foreign corpora-
tions for taxable years of such corporations begin-
ning after the date of enactment of this Act.
(2) SPECIAL RULE.—In the case of any chain
of foreign corporations described in clauses (i) and
(ii) of section 902(b)(2)(B) of the Internal Revenue
Code of 1986 (as amended by this section), no liq-
uidation, reorganization, or similar transaction in a
taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting
taxes to be taken into account under section 902 of
the Internal Revenue Code of 1986 which could not
have been taken into account under such section but
for such transaction.
243
Subtitle C—Other Provisions
SEC. 421. EXCHANGE RATE USED IN TRANSLATING FOR-
EIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVER-
AGE RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to translation of foreign taxes) is
amended to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of
any foreign income taxes (and any adjustment
thereto) shall be translated into dollars by using
the average exchange rate for the taxable year
to which such taxes relate.
‘‘(B) EXCEPTION
FOR
TAXES
NOT
PAID
WITHIN FOLLOWING 2 YEARS.—
‘‘(i) Subparagraph (A) shall not apply
to any foreign income taxes paid after the
date 2 years after the close of the taxable
year to which such taxes relate.
244
‘‘(ii) Subparagraph (A) shall not
apply to taxes paid before the beginning of
the taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—To the extent provided in regula-
tions, subparagraph (A) shall not apply to any
foreign income taxes the liability for which is
denominated in any currency determined to be
an inflationary currency under such regulations.
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of de-
termining the amount of the foreign tax credit, in
the case of any foreign income taxes to which sub-
paragraph (A) of paragraph (1) does not apply—
‘‘(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
‘‘(B) any adjustment to the amount of
such taxes shall be translated into dollars
using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
245
adjustment is paid to the foreign country
or possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes
of this subsection, the term ‘foreign income taxes’
means any income, war profits, or excess profits
taxes paid or accrued to any foreign country or to
any possession of the United States.’’
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2
YEARS AFTER YEAR TO WHICH TAXES RELATE.—
Subsection (c) of section 905 is amended to read as
follows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year
to which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
246
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—In making the redetermination
under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in
subparagraph (B) of paragraph (1). Any such taxes
if subsequently paid shall be taken into account for
the taxable year in which paid and no redetermina-
tion under this section shall be made on account of
such payment.
‘‘(3) ADJUSTMENTS.—The amount of tax due
on any redetermination under paragraph (1) (if any)
shall be paid by the taxpayer on notice and demand
by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in
accordance with subchapter B of chapter 66 (section
6511 et seq.).
‘‘(4) BOND
REQUIREMENTS.—In the case of
any tax accrued but not paid, the Secretary, as a
condition precedent to the allowance of the credit
provided in this subpart, may require the taxpayer
to give a bond, with sureties satisfactory to and ap-
proved by the Secretary, in such sum as the Sec-
247
retary may require, conditioned on the payment by
the taxpayer of any amount of tax found due on any
such redetermination. Any such bond shall contain
such further conditions as the Secretary may re-
quire.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of
the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of
the taxes refunded for which credit has been allowed
under this section shall be reduced by the amount of
any tax described in section 901 imposed by the for-
eign country or possession of the United States with
respect to such refund; but no credit under this sub-
part, or deduction under section 164, shall be al-
lowed for any taxable year with respect to any such
tax imposed on the refund. No interest shall be as-
sessed or collected on any amount of tax due on any
redetermination by the Secretary, resulting from a
refund to the taxpayer, for any period before the re-
ceipt of such refund, except to the extent interest
was paid by the foreign country or possession of the
United States on such refund for such period.’’
(b) AUTHORITY TO USE AVERAGE RATES.—
248
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to foreign taxes) is amended by adding
at the end thereof the following new paragraph:
(1) IN GENERAL.—Subsection (a) of section 986
(as amended by subsection (a)) is amended by redes-
ignating paragraph (3) as paragraph (4) and insert-
ing after paragraph (2) the following new paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in
such regulations) during which the taxes or adjust-
ment is paid may be used instead of the exchange
rate as of the time of such payment.’’
(2) DETERMINATION
OF
AVERAGE
RATES.—
Subsection (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ‘‘,
and’’, and by adding at the end thereof the following
new paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘weight-
ed’’ each place it appears.
(c) EFFECTIVE DATES.—
249
(1) IN GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
or accrued in taxable years beginning after Decem-
ber 31, 1992.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1992.
SEC. 422. ELECTION TO USE SIMPLIFIED SECTION 904 LIM-
ITATION FOR ALTERNATIVE MINIMUM TAX.
(a) GENERAL RULE.—Subsection (a) of section 59
(relating to alternative minimum tax foreign tax credit)
is amended by adding at the end thereof the following new
paragraph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
‘‘(ii) the limitation of section 904
shall be based on the proportion which—
‘‘(I) the taxpayer’s taxable in-
come (as determined for purposes of
250
the regular tax) from sources without
the United States (but not in excess
of the taxpayer’s entire alternative
minimum taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
after December 31, 1993, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
‘‘(ii) ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with
the consent of the Secretary.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1993.
251
SEC. 423. MODIFICATION OF SECTION 1491.
(a) GENERAL RULE.—So much of chapter 5 (relating
to tax on transfers to avoid income tax) as precedes sec-
tion 1492 is amended to read as follows:
‘‘CHAPTER 5—TREATMENT OF TRANSFERS
TO AVOID INCOME TAX
‘‘Sec. 1491. Recognition of gain.
‘‘Sec. 1492. Exceptions.
‘‘SEC. 1491. RECOGNITION OF GAIN.
‘‘In the case of any transfer of property by a United
States person to a foreign corporation as paid-in surplus
or as a contribution to capital, to a foreign estate or trust,
or to a foreign partnership, for purposes of this subtitle,
such transfer shall be treated as a sale or exchange for
an amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the
excess of—
‘‘(1) the fair market value of the property so
transferred, over
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the
transferor.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1057 is hereby repealed.
(2) Section 1492 is amended to read as follows:
252
‘‘SEC. 1492. EXCEPTIONS.
‘‘The provisions of section 1491 shall not apply—
‘‘(1) If the transferee is an organization exempt
from income tax under part I of subchapter F of
chapter 1 (other than an organization described in
section 401(a)),
‘‘(2) To a transfer described in section 367, or
‘‘(3) To any other transfer, to the extent pro-
vided in regulations in accordance with principles
similar to the principles of section 367 or otherwise
consistent with the purpose of section 1491.’’
(3) Section 1494 is hereby repealed.
(4) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(5) The table of chapters for subtitle A is
amended by striking ‘‘Tax on’’ in the item relating
to chapter 5 and inserting ‘‘Treatment of’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after December 31,
1994.
SEC. 424. MODIFICATION OF SECTION 367(b).
(a) GENERAL RULE.—Paragraph (1) of section
367(b) is amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any trans-
action described in section 332, 351, 354, 355, 356,
253
or 361 in which the status of a foreign corporation
as a corporation is a general condition for non-
recognition by 1 or more of the parties to the trans-
action, income shall be required to be recognized to
the extent provided in regulations prescribed by the
Secretary which are necessary or appropriate to pre-
vent the avoidance of Federal income taxes. This
subsection shall not apply to a transaction in which
the foreign corporation is not treated as a corpora-
tion under subsection (a)(1).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after December 31,
1994.
TITLE V—OTHER INCOME TAX
PROVISIONS
Subtitle A—Provisions Relating to
Subchapter S Corporations
SEC. 501. AUTHORITY TO VALIDATE CERTAIN INVALID
ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.—If—
254
‘‘(1) an election under subsection (a) by any
corporation—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to ob-
tain shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or ter-
mination were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were
taken—
‘‘(A) so that the corporation is a small
business corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with
the treatment of the corporation as an S corpora-
255
tion) as may be required by the Secretary with re-
spect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified
by the Secretary.’’
(b) LATE ELECTIONS.—Subsection (b) of section
1362 is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(5) AUTHORITY TO TREAT LATE ELECTIONS
AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to elections for taxable
years beginning after December 31, 1982.
256
SEC. 502. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1) is
amended by striking ‘‘paragraph (1)’’ and inserting
‘‘paragraphs (1) and (2)(A)’’.
(2) Subsection (d) of section 1368 is amended
by adding at the end thereof the following new sen-
tence:
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined
with regard to the adjustments provided in paragraph (1)
of section 1367(a) for the taxable year.’’
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end there-
of the following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net nega-
tive adjustment for such taxable year.
257
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative
adjustment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions in taxable years
beginning after December 31, 1992.
SEC. 503. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
holders) is amended by inserting after clause (iv) the fol-
lowing new clause:
‘‘(v) An electing small business trust.’’
258
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—Subparagraph (B) of section 1361(c)(2) is
amended by adding at the end the following new clause:
‘‘(v) In the case of a trust described
in clause (v) of subparagraph (A), each po-
tential current beneficiary of such trust
shall be treated as a shareholder; except
that, if for any period there is no potential
current beneficiary of such trust, such
trust shall be treated as the shareholder
during such period.’’
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—
Section 1361 (defining S corporation) is amended by add-
ing at the end the following new subsection:
‘‘(e) ELECTING
SMALL
BUSINESS
TRUST
DE-
FINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small
business trust’ means any trust if—
‘‘(i) such trust does not have as a
beneficiary any person other than (I) an
individual, (II) an estate, or (III) an orga-
nization described in paragraph (2), (3),
259
(4), or (5) of section 170(c) which holds a
contingent interest and is not a potential
current beneficiary,
‘‘(ii) no interest in such trust was ac-
quired by purchase, and
‘‘(iii) an election under this subsection
applies to such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—
The term ‘electing small business trust’ shall
not include—
‘‘(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an elec-
tion under subsection (d)(2) applies to any
corporation the stock of which is held by
such trust, and
‘‘(ii) any trust exempt from tax under
this subtitle.
‘‘(C) PURCHASE.—For purposes of sub-
paragraph (A), the term ‘purchase’ means any
acquisition if the basis of the property acquired
is determined under section 1012.
‘‘(2) POTENTIAL CURRENT BENEFICIARY.—For
purposes of this section, the term ‘potential current
beneficiary’ means, with respect to any period, any
person who at any time during such period is enti-
260
tled to, or at the discretion of any person may re-
ceive, a distribution from the principal or income of
the trust. If a trust disposes of all of the stock which
it holds in an S corporation, then, with respect to
such corporation, the term ‘potential current bene-
ficiary’ does not include any person who first met
the requirements of the preceding sentence during
the 60-day period ending on the date of such dis-
position.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such elec-
tion shall apply to the taxable year of the trust for
which made and all subsequent taxable years of such
trust unless revoked with the consent of the Sec-
retary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
261
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
S corporations shall be treated as a separate
trust, and
‘‘(B) the amount of the tax imposed by
this chapter on such separate trust shall be de-
termined with the modifications of paragraph
(2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (1), the modifications of this paragraph are
the following:
‘‘(A) Except as provided in section 1(h),
the amount of the tax imposed by section 1(e)
shall be determined by using the highest rate of
tax set forth in section 1(e).
‘‘(B) The exemption amount under section
55(d) shall be zero.
‘‘(C) The only items of income, loss, deduc-
tion, or credit to be taken into account are the
following:
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the dis-
position of stock in an S corporation.
262
‘‘(iii) To the extent provided in regu-
lations, State or local income taxes or ad-
ministrative expenses to the extent alloca-
ble to items described in clauses (i) and
(ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be appor-
tioned to any beneficiary.
‘‘(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
‘‘(3) TREATMENT
OF
REMAINDER
OF
TRUST
AND
DISTRIBUTIONS.—For purposes of determin-
ing—
‘‘(A) the amount of the tax imposed by
this chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the
entire trust,
the items referred to in paragraph (2)(C) shall be
excluded. Except as provided in the preceding sen-
tence, this subsection shall not affect the taxation of
any distribution from the trust.
263
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE TERMINATION OF SEPARATE TRUST.—If a
portion of an electing small business trust ceases to
be treated as a separate trust under paragraph (1),
any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be
taken into account by the entire trust.
‘‘(5) ELECTING SMALL BUSINESS TRUST.—For
purposes of this subsection, the term ‘electing small
business trust’ has the meaning given such term by
section 1361(e)(1).’’
(e) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 1366(a) is amended by inserting ‘‘, or of a trust or
estate which terminates,’’ after ‘‘who dies’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 504. OTHER MODIFICATIONS.
(a) TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.—Subsection (a) of section 1371 (relating to
application of subchapter C rules) is amended to read as
follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
264
extent inconsistent with this subchapter, subchapter C
shall apply to an S corporation and its shareholders.’’
(b) S CORPORATIONS PERMITTED TO HOLD SUB-
SIDIARIES.—
(1) IN
GENERAL.—Paragraph (2) of section
1361(b) (defining ineligible corporation) is amended
by striking subparagraph (A) and by redesignating
subparagraphs (B), (C), (D), and (E) as subpara-
graphs (A), (B), (C), and (D), respectively.
(2) CONFORMING AMENDMENTS.—
(A) Subsection (c) of section 1361 is
amended by striking paragraph (6).
(B) Subsection (b) of section 1504 (defin-
ing includible corporation) is amended by add-
ing at the end thereof the following new para-
graph:
‘‘(8) An S corporation.’’
(c) ELIMINATION
OF PRE-1983 EARNINGS
AND
PROFITS.—
(1) IN GENERAL.—If—
(A) a corporation was an electing small
business corporation under subchapter S of
chapter 1 of the Internal Revenue Code of 1986
for any taxable year beginning before January
1, 1983, and
265
(B) such corporation is an S corporation
under subchapter S of chapter 1 of such Code
for its first taxable year beginning after Decem-
ber 31, 1992,
the amount of such corporation’s accumulated earn-
ings and profits (as of the beginning of such first
taxable year) shall be reduced by an amount equal
to the portion (if any) of such accumulated earnings
and profits which were accumulated in any taxable
year beginning before January 1, 1983, for which
such corporation was an electing small business cor-
poration under such subchapter S.
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (3) of section 1362(d) is
amended—
(i) by striking ‘‘SUBCHAPTER C’’ in
the paragraph heading and inserting ‘‘AC-
CUMULATED’’,
(ii) by striking ‘‘subchapter C’’ in
subparagraph (A)(i)(I) and inserting ‘‘ac-
cumulated’’, and
(iii) by striking subparagraph (B) and
redesignating the following subparagraphs
accordingly.
266
(B)(i) Subsection (a) of section 1375 is
amended by striking ‘‘subchapter C’’ in para-
graph (1) and inserting ‘‘accumulated’’.
(ii) Paragraph (3) of section 1375(b) is
amended to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross re-
ceipts’ have the same respective meanings as when
used in paragraph (3) of section 1362(d).’’
(iii) The section heading for section 1375
is amended by striking ‘‘SUBCHAPTER C’’ and
inserting ‘‘ACCUMULATED’’.
(iv) The table of sections for part III of
subchapter S of chapter 1 is amended by strik-
ing ‘‘subchapter C’’ in the item relating to sec-
tion 1375 and inserting ‘‘accumulated’’.
(C) Clause (i) of section 1042(c)(4)(A) is
amended by striking ‘‘section 1362(d)(3)(D)’’
and inserting ‘‘section 1362(d)(3)(C)’’.
(d) ADJUSTMENTS TO BASIS OF INHERITED S STOCK
TO REFLECT CERTAIN ITEMS OF INCOME.—Subsection
(b) of section 1367 (relating to adjustments to basis of
stock of shareholders, etc.) is amended by adding at the
end thereof the following new paragraph:
267
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the
death of a decedent or by bequest, devise, or in-
heritance, section 691 shall be applied with re-
spect to any item of income of the S corpora-
tion in the same manner as if the decedent had
held directly his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the por-
tion of the value of the stock which is attrib-
utable to items constituting income in respect
of the decedent.’’
(e) EFFECTIVE DATES.—
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall take ef-
fect on the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendments made
by subsection (c) shall apply to taxable years begin-
ning after December 31, 1992.
(3) SUBSECTION (d).—The amendment made
by subsection (d) shall apply in the case of decedents
dying after the date of the enactment of this Act.
268
Subtitle B—Accounting Provision
SEC. 511. MODIFICATIONS TO LOOK-BACK METHOD FOR
LONG-TERM CONTRACTS.
(a) LOOK-BACK METHOD NOT TO APPLY IN CER-
TAIN CASES.—Subsection (b) of section 460 (relating to
percentage of completion method) is amended by adding
at the end thereof the following new paragraph:
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
‘‘(A) AMOUNTS
TAKEN
INTO
ACCOUNT
AFTER
COMPLETION
OF
CONTRACT.—Para-
graph (1)(B) shall not apply with respect to
any taxable year (beginning after the taxable
year in which the contract is completed) if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
such taxable year, is within
‘‘(ii) 10 percent of the cumulative
look-back taxable income (or loss) under
the contract as of the close of the most re-
cent taxable year to which paragraph
(1)(B) applied (or would have applied but
for subparagraph (B)).
269
‘‘(B) DE MINIMIS DISCREPANCIES.—Para-
graph (1)(B) shall not apply in any case to
which it would otherwise apply if—
‘‘(i) the cumulative taxable income (or
loss) under the contract as of the close of
each prior contract year, is within
‘‘(ii) 10 percent of the cumulative
look-back income (or loss) under the con-
tract as of the close of such prior contract
year.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) CONTRACT
YEAR.—The term
‘contract year’ means any taxable year for
which income is taken into account under
the contract.
‘‘(ii) LOOK-BACK INCOME OR LOSS.—
The look-back income (or loss) is the
amount which would be the taxable income
(or loss) under the contract if the alloca-
tion method set forth in paragraph (2)(A)
were used in determining taxable income.
‘‘(iii) DISCOUNTING
NOT
APPLICA-
BLE.—The amounts taken into account
after the completion of the contract shall
270
be determined without regard to any dis-
counting under the 2nd sentence of para-
graph (2).
‘‘(D) CONTRACTS TO WHICH PARAGRAPH
APPLIES.—This paragraph shall only apply if
the taxpayer makes an election under this sub-
paragraph. Unless revoked with the consent of
the Secretary, such an election shall apply to all
long-term contracts completed during the tax-
able year for which election is made or during
any subsequent taxable year.’’
(b) MODIFICATION OF INTEREST RATE.—
(1) IN GENERAL.—Subparagraph (C) of section
460(b)(2) is amended by striking ‘‘the overpayment
rate established by section 6621’’ and inserting ‘‘the
adjusted overpayment rate (as defined in paragraph
(7))’’.
(2) ADJUSTED
OVERPAYMENT
RATE.—Sub-
section (b) of section 460 is amended by adding at
the end thereof the following new paragraph:
‘‘(7) ADJUSTED OVERPAYMENT RATE.—
‘‘(A) IN GENERAL.—The adjusted overpay-
ment rate for any interest accrual period is the
overpayment rate in effect under section 6621
271
for the calendar quarter in which such interest
accrual period begins.
‘‘(B) INTEREST
ACCRUAL
PERIOD.—For
purposes of subparagraph (A), the term ‘inter-
est accrual period’ means the period—
‘‘(i) beginning on the day after the re-
turn due date for any taxable year of the
taxpayer, and
‘‘(ii) ending on the return due date
for the following taxable year.
For purposes of the preceding sentence, the
term ‘return due date’ means the date pre-
scribed for filing the return of the tax imposed
by this chapter (determined without regard to
extensions).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to contracts completed in taxable
years ending after the date of the enactment of this Act.
Subtitle C—Provisions Relating To
Regulated Investment Companies
SEC. 521. REPEAL OF 30-PERCENT GROSS INCOME LIMITA-
TION.
(a) GENERAL RULE.—Subsection (b) of section 851
(relating to limitations) is amended by striking paragraph
272
(3), by adding ‘‘and’’ at the end of paragraph (2), and
by redesignating paragraph (4) as paragraph (3).
(b) TECHNICAL AMENDMENTS.—
(1) The material following paragraph (3) of sec-
tion 851 (as redesignated by subsection (a)) is
amended—
(A) by striking out ‘‘paragraphs (2) and
(3)’’ and inserting ‘‘paragraph (2)’’, and
(B) by striking out the last sentence there-
of.
(2) Subsection (c) of section 851 is amended by
striking ‘‘subsection (b)(4)’’ each place it appears
(including the heading) and inserting ‘‘subsection
(b)(3)’’.
(3) Subsection (d) of section 851 is amended by
striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
(4) Paragraph (1) of section 851(e) is amended
by striking ‘‘subsection (b)(4)’’ and inserting ‘‘sub-
section (b)(3)’’.
(5) Paragraph (4) of section 851(e) is amended
by striking ‘‘subsections (b)(4)’’ and inserting ‘‘sub-
sections (b)(3)’’.
274
‘‘(1) IN GENERAL.—If any person is required
under subsection (a) to make a return regarding the
gross proceeds from any disposition of stock in an
open-end regulated investment company, such return
shall include—
‘‘(A) the basis of the stock disposed of (de-
termined by reference to the average basis of all
of the stock in the account from which the dis-
position was made immediately before the dis-
position), and
‘‘(B) the portion of such basis and such
gross proceeds attributable to stock held for
more than 1 year and the portion not so attrib-
utable.
Determinations under subparagraph (B) shall be
made on a first-in, first-out, basis and determina-
tions of basis and holding period shall be made in
such manner as the Secretary may prescribe.
‘‘(2) OPEN-END REGULATED INVESTMENT COM-
PANY.—For purposes of this subsection, the term
‘open-end regulated investment company’ means any
regulated investment company which is offering for
sale or has outstanding any redeemable security (as
defined in section 2(a)(32) of the Investment Com-
pany Act of 1940) of which it is the issuer.
275
‘‘(3) INFORMATION TRANSFERS.—To the extent
provided in regulations, there shall be such ex-
changes of information between brokers as such reg-
ulations may require for purposes of enabling bro-
kers to meet the requirements of this subsection.
‘‘(4) APPLICATION OF SUBSECTION.—This sub-
section shall not apply with respect to stock in any
account—
‘‘(A) which was established before January
1, 1995, or
‘‘(B) which includes any stock not acquired
by purchase.’’
(b) BASIS FOR INCOME TAX PURPOSES.—Section
1012 of such Code is amended—
(1) by striking ‘‘The basis’’ and inserting ‘‘(a)
GENERAL RULE.—The basis’’, and
(2) by adding at the end thereof the following
new subsection:
‘‘(b) SPECIAL RULES FOR STOCK IN OPEN-END REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—In the case of any disposi-
tion of stock from a covered account—
‘‘(A) the basis of such stock shall be deter-
mined by reference to the average basis of all
276
of the stock in such account immediately before
such disposition, and
‘‘(B) the determination of which stock in
such account is so disposed of shall be made on
a first-in, first-out, basis.
‘‘(2) COVERED ACCOUNT.—For purposes of this
subsection—
‘‘(A) IN GENERAL.—The term ‘covered ac-
count’ means any account of stock in an open-
end regulated investment company if section
6045(f) applies to such account.
‘‘(B) ELECTION OUT.—The term ‘covered
account’ shall not include any account if, on the
taxpayer’s return for his first taxable year in
which a disposition from such account occurs,
the taxpayer elects to have this subsection not
apply to such account.’’
(c) COORDINATION WITH WASH SALE RULES.—Sec-
tion 1091 is amended by adding at the end thereof the
following new subsection:
‘‘(f) SPECIAL RULES FOR CERTAIN ACCOUNTS IN
OPEN-END REGULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—In applying this section to
a disposition during December of any calendar year
of stock from a covered account, any acquisition of
277
stock after January 15 of the following calendar
year shall be disregarded if such acquisition is a re-
sult of a dividend reinvestment pursuant to a divi-
dend reinvestment program established at the time
such account was opened or, if later, at least 6
months before the date of such disposition.
‘‘(2) DE MINIMIS EXCEPTION.—If
‘‘(A) but for this paragraph, losses from
dispositions during December of any calendar
year of stock from a covered account would
have been disallowed under this section by rea-
son of acquisitions during January of the fol-
lowing calendar year, and
‘‘(B) the amount of such losses which
would have been so disallowed does not exceed
$25,
nothing in this section shall disallow such losses.
‘‘(3) COVERED ACCOUNT.—For purposes of this
subsection, the term ‘covered account’ means any ac-
count of stock in an open-end regulated investment
company if section 6045(f) applies to such account.’’
(d) MODIFICATION OF LOAD BASIS DEFERRAL RULE
FOR CERTAIN ACQUISITIONS OCCURRING AFTER JANU-
ARY 15 DECEMBER 31.—
278
(1) Paragraph (1) of section 852(f) is amended
by striking ‘‘subparagraph (C)) shall not’’ and all
that follows and inserting ‘‘subparagraph (C)) shall
be recaptured as provided in paragraph (2). To the
extent such charge is recaptured under paragraph
(2), such charge shall be treated as incurred in con-
nection with the acquisition referred to in subpara-
graph (C) (including for purposes of reapplying this
paragraph).’’
(2) Subsection (f) of section 852 is amended by
redesignating paragraph (2) as paragraph (3) and
by inserting after paragraph (1) the following new
paragraph:
‘‘(2) RECAPTURE.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), any load charge required by
paragraph (1) to be recaptured shall not be
taken into account in determining the amount
of gain or loss on the disposition referred to in
paragraph (1)(B).
‘‘(B) SUBSEQUENT ACQUISITIONS OCCUR-
RING AFTER DECEMBER 31.—If—
‘‘(i) the acquisition referred to in
paragraph (1)(A) occurs in a calendar
year, and
279
‘‘(ii) the subsequent acquisition re-
ferred to in paragraph (1)(C) occurs after
December 31 of such calendar year,
subparagraph (A) shall not apply and the
amount of the load charge required by para-
graph (1) to be recaptured shall be included in
gross income as short-term capital gain for the
taxable year in which the subsequent acquisi-
tion referred to in paragraph (1)(C) occurs.’’
(e) TECHNICAL AMENDMENT.—Section 6724 of such
Code is amended by adding at the end thereof the follow-
ing new subsection:
‘‘(e) (f) SPECIAL RULE
FOR CERTAIN REPORTS
WITH RESPECT TO STOCK IN OPEN END REGULATED IN-
VESTMENT
COMPANIES.—For 
purposes 
of 
sections
6721(e)(2)(B) and 6722(c)(1)(B), the amount required to
be reported under section 6045 shall be determined with-
out regard to subsection (f) thereof.’’
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to returns and statements required for
calendar year 1995 and subsequent calendar years.
280
(2) SUBSECTIONS (b).—The amendments made
by subsections (b), (c), and (d) shall apply to dis-
positions after December 31, 1994.
SEC. 523. NONRECOGNITION TREATMENT FOR CERTAIN
TRANSFERS BY COMMON TRUST FUNDS TO
REGULATED INVESTMENT COMPANIES.
(a) GENERAL RULE.—Section 584 (relating to com-
mon trust funds) is amended by redesignating subsection
(h) as subsection (i) and by inserting after subsection (g)
the following new subsection:
‘‘(h) NONRECOGNITION TREATMENT FOR CERTAIN
TRANSFERS TO REGULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a common trust fund transfers sub-
stantially all of its assets to a regulated invest-
ment company in exchange solely for stock in
such company, and
‘‘(B) such stock is distributed by such
common trust fund to participants in such com-
mon trust fund in exchange solely for their in-
terests in such common trust fund,
no gain or loss shall be recognized by such common
trust fund by reason of such transfer or distribution,
and no gain or loss shall be recognized by any par-
281
ticipant in such common trust fund by reason of
such exchange.
‘‘(2) BASIS RULES.—
‘‘(A) 
REGULATED
INVESTMENT
COM-
PANY.—The basis of any asset received by a
regulated investment company in a transfer re-
ferred to in paragraph (1)(A) shall be the same
as it would be in the hands of the common
trust fund.
‘‘(B) PARTICIPANTS.—The basis of any
stock in a regulated investment company which
is received in an exchange referred to in para-
graph (1)(B) shall be the same as that of the
property exchanged.
‘‘(3) TREATMENT OF ASSUMPTIONS OF LIABIL-
ITY.—
‘‘(A) IN GENERAL.—In determining wheth-
er the transfer referred to in paragraph (1)(A)
is in exchange solely for stock in the regulated
investment company, the assumption by such
company of a liability of the common trust
fund, and the fact that any property trans-
ferred by the common trust fund is subject to
a liability, shall be disregarded.
282
‘‘(B) SPECIAL RULE WHERE ASSUMED LI-
ABILITIES EXCEED BASIS.—
‘‘(i) IN GENERAL.—If in any transfer
referred to in paragraph (1)(A) the as-
sumed liabilities exceed the aggregate ad-
justed bases (in the hands of the common
trust fund) of the assets transferred to the
regulated investment company—
‘‘(I) notwithstanding paragraph
(1), gain shall be recognized to the
common trust fund on such transfer
in an amount equal to such excess,
‘‘(II) the basis of the assets re-
ceived by the regulated investment
company in such transfer shall be in-
creased by the amount so recognized,
and
‘‘(III) any adjustment to the
basis of a participant’s interest in the
common trust fund as a result of the
gain so recognized shall be treated as
occurring immediately before the ex-
change referred to in paragraph
(1)(B).
283
‘‘(ii) 
ASSUMED
LIABILITIES.—For
purposes of clause (i), the term ‘assumed
liabilities’ means the aggregate of—
‘‘(I) any liability of the common
trust fund assumed by the regulated
investment company in connection
with the transfer referred to in para-
graph (1)(A), and
‘‘(II) any liability to which prop-
erty so transferred is subject.
‘‘(4) COMMON TRUST FUND MUST MEET DIVER-
SIFICATION RULES.—This subsection shall not apply
to any common trust fund which would not meet the
requirements of section 368(a)(2)(F)(ii) if it were a
corporation. For purposes of the preceding sentence,
Government securities shall not be treated as securi-
ties of an issuer in applying the 25-percent and 50-
percent test and such securities shall not be excluded
for purposes of determining total assets under clause
(iv) of section 368(a)(2)(F).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after the date of
the enactment of this Act.
284
Subtitle D—Tax-Exempt Bond
Provisions
SEC. 531. REPEAL OF $100,000 LIMITATION ON UNSPENT
PROCEEDS UNDER 1-YEAR EXCEPTION FROM
REBATE.
Subclause (I) of section 148(f)(4)(B)(ii) (relating to
additional period for certain bonds) is amended by striking
‘‘the lesser of 5 percent of the proceeds of the issue or
$100,000’’ and inserting ‘‘5 percent of the proceeds of the
issue’’.
SEC. 532. EXCEPTION FROM REBATE FOR EARNINGS ON
BONA FIDE DEBT SERVICE FUND UNDER
CONSTRUCTION BOND RULES.
Subparagraph (C) of section 148(f)(4) is amended by
adding at the end thereof the following new clause:
‘‘(xvii) TREATMENT
OF
BONA
FIDE
DEBT
SERVICE
FUNDS.—If the spending
requirements of clause (ii) are met with re-
spect to the available construction proceeds
of a construction issue, then paragraph (2)
shall not apply to earnings on a bona fide
debt service fund for such issue.’’
285
SEC. 533. REPEAL OF DEBT SERVICE-BASED LIMITATION
ON INVESTMENT IN CERTAIN NONPURPOSE
INVESTMENTS.
Subsection (d) of section 148 (relating to special
rules for reasonably required reserve or replacement fund)
is amended by striking paragraph (3).
SEC. 534. REPEAL OF EXPIRED PROVISIONS.
(a) Paragraph (2) of section 148(c) is amended by
striking subparagraph (B) and by redesignating subpara-
graphs (C), (D), and (E) as subparagraph (B), (C), and
(D), respectively.
(b) Paragraph (4) of section 148(f) is amended by
striking subparagraph (E).
SEC. 535. CLARIFICATION OF INVESTMENT–TYPE PROP-
ERTY.
Subparagraph (D) of section 148(b)(2) is amended
to read as follows:
‘‘(D) any investment-type property, or’’.
SEC. 536. EFFECTIVE DATES.
(a) IN GENERAL.—Except as provided in subsection
(b), the amendments made by this subtitle shall apply to
bonds issued after the date of the enactment of this Act.
(b) INVESTMENT-TYPE
PROPERTY.—The amend-
ment made by section 535 shall take effect as if included
in the amendments made by section 1301 of the Tax Re-
form Act of 1986.
286
Subtitle E—Insurance Provisions
SEC. 541. TREATMENT 
OF 
CERTAIN 
INSURANCE 
CON-
TRACTS ON RETIRED LIVES.
(a) GENERAL RULE.—
(1) Paragraph (2) of section 817(d) (defining
variable contract) is amended by striking ‘‘or’’ at the
end of subparagraph (A), by striking ‘‘and’’ at the
end of subparagraph (B) and inserting ‘‘or’’, and by
inserting after subparagraph (B) the following new
subparagraph:
‘‘(C) provides for funding of insurance on
retired lives as described in section 807(c)(6),
and’’.
(2) Paragraph (3) of section 817(d) is amended
by striking ‘‘or’’ at the end of subparagraph (A), by
striking the period at the end of subparagraph (B)
and inserting ‘‘, or’’, and by inserting after subpara-
graph (B) the following new subparagraph:
‘‘(C) in the case of funds held under a con-
tract described in paragraph (2)(C), the
amounts paid in, or the amounts paid out, re-
flect the investment return and the market
value of the segregated asset account.’’
287
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1992.
SEC. 542. TREATMENT OF MODIFIED GUARANTEED CON-
TRACTS.
(a) GENERAL RULE.—Subpart E of part I of sub-
chapter L of chapter 1 (relating to definitions and special
rules) is amended by inserting after section 817 the follow-
ing new section:
‘‘SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED
CONTRACTS.
‘‘(a) COMPUTATION OF RESERVES.—In the case of
a modified guaranteed contract, clause (ii) of section
807(e)(1)(A) shall not apply.
‘‘(b) SEGREGATED ASSETS UNDER MODIFIED GUAR-
ANTEED CONTRACTS MARKED TO MARKET.—
‘‘(1) IN GENERAL.—In the case of any life in-
surance company, for purposes of this subtitle—
‘‘(A) Any gain or loss with respect to a
segregated asset shall be treated as ordinary in-
come or loss, as the case may be.
‘‘(B) If any segregated asset is held by
such company as of the close of any taxable
year—
288
‘‘(i) such company shall recognize
gain or loss as if such asset were sold for
its fair market value on the last business
day of such taxable year, and
‘‘(ii) any such gain or loss shall be
taken into account for such taxable year.
Proper adjustment shall be made in the amount
of any gain or loss subsequently realized for
gain or loss taken into account under the pre-
ceding sentence. The Secretary may provide by
regulations for the application of this subpara-
graph at times other than the times provided in
this subparagraph.
‘‘(2) SEGREGATED
ASSET.—For purposes of
paragraph (1), the term ‘segregated asset’ means
any asset held as part of a segregated account re-
ferred to in subsection (d)(1) under a modified guar-
anteed contract.
‘‘(c) SPECIAL RULE IN COMPUTING LIFE INSURANCE
RESERVES.—For 
purposes 
of 
applying 
section
816(b)(1)(A) to any modified guaranteed contract, an as-
sumed rate of interest shall include a rate of interest de-
termined, from time to time, with reference to a market
rate of interest.
289
‘‘(d) MODIFIED
GUARANTEED
CONTRACT
DE-
FINED.—For purposes of this section, the term ‘modified
guaranteed contract’ means a contract not described in
section 817—
‘‘(1) all or part of the amounts received under
which are allocated to an account which, pursuant to
State law or regulation, is segregated from the gen-
eral asset accounts of the company and is valued
from time to time with reference to market values,
‘‘(2) which—
‘‘(A) provides for the payment of annuities,
‘‘(B) is a life insurance contract, or
‘‘(C) is a pension plan contract which is
not a life, accident, or health, property, cas-
ualty, or liability contract,
‘‘(3) for which reserves are valued at market for
annual statement purposes, and
‘‘(4) which provides for a net surrender value or
a policyholder’s fund (as defined in section
807(e)(1)).
‘‘(e) REGULATIONS.—The Secretary may prescribe
regulations—
‘‘(1) to provide for the treatment of market
value adjustments under sections 72, 7702, 7702A,
and 807(e)(1)(B),
290
‘‘(2) to determine the interest rates applicable
under sections 807(c)(3), 807(d)(2)(B), and 812
with respect to a modified guaranteed contract an-
nually, in a manner appropriate for modified guar-
anteed contracts and, to the extent appropriate for
such a contract, to modify or waive the applicability
of section 811(d),
‘‘(3) to provide rules to limit ordinary gain or
loss treatment to assets constituting reserves for
modified guaranteed contracts (and not other assets)
of the company,
‘‘(4) to provide appropriate treatment of trans-
fers of assets to and from the segregated account,
and
‘‘(5) as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for subpart E of part I of subchapter L of chapter 1 is
amended by inserting after the item relating to section
817 the following new item:
‘‘Sec. 817A. Special rules for modified guaranteed contracts.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1992.
291
(2) TREATMENT
OF
NET
ADJUSTMENTS.—In
the case of any taxpayer required by the amend-
ments made by this section to change its calculation
of reserves to take into account market value adjust-
ments and to mark segregated assets to market for
any taxable year—
(A) such changes shall be treated as a
change in method of accounting initiated by the
taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary, and
(C) the adjustments required by reason of
section 481 of the Internal Revenue Code of
1986 shall be taken into account as ordinary in-
come or loss by the taxpayer for the taxpayer’s
first taxable year beginning after December 31,
1992.
Subtitle F—Other Provisions
SEC. 551. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH
RESPECT TO DECEASED PARTNER, ETC.
(a) GENERAL RULE.—Subparagraph (A) of section
706(c)(2) (relating to disposition of entire interest) is
amended to read as follows:
‘‘(A) DISPOSITION
OF
ENTIRE
INTER-
EST.—The taxable year of a partnership shall
292
close with respect to a partner whose entire in-
terest in the partnership terminates (whether
by reason of death, liquidation, or otherwise).’’
(b) CLERICAL AMENDMENT.—The paragraph head-
ing for paragraph (2) of section 706(c) is amended to read
as follows:
‘‘(2) TREATMENT OF DISPOSITIONS.—’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years begin-
ning after December 31, 1993.
SEC. 552. MODIFICATION OF CREDIT FOR PRODUCING
FUEL FROM A NONCONVENTIONAL SOURCE.
(a) IN GENERAL.—Subparagraph (A) of section
29(c)(2) (relating to gas from geopressured brine, etc.) is
amended by adding at the end the following new sentence:
‘‘If the Federal Energy Regulatory Commission ceases to
make the determinations described in the preceding sen-
tence, the Secretary shall make such determinations in ac-
cordance with section 503 of such Act.’’
(b) 
CONFORMING
AMENDMENT.—Section
29(c)(2)(A) is amended by inserting ‘‘(as in effect before
its repeal by the Natural Gas Wellhead Decontrol Act of
1989)’’ after ‘‘Natural Gas Policy Act of 1978’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1993.
293
TITLE VI—ESTATE AND GIFT TAX
PROVISIONS
SEC. 601. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS
OF RECOVERY.
(a) AMENDMENT TO SECTION 2207A.—Paragraph
(2) of section 2207A(a) (relating to right of recovery in
the case of certain marital deduction property) is amended
to read as follows:
‘‘(2) DECEDENT
MAY
OTHERWISE
DIRECT.—
Paragraph (1) shall not apply with respect to any
property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent
to waive any right of recovery under this subchapter
with respect to such property.’’
(b) AMENDMENT TO SECTION 2207B.—Paragraph
(2) of section 2207B(a) (relating to right of recovery
where decedent retained interest) is amended to read as
follows:
‘‘(2) DECEDENT
MAY
OTHERWISE
DIRECT.—
Paragraph (1) shall not apply with respect to any
property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent
to waive any right of recovery under this subchapter
with respect to such property.’’
294
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to the estates of dece-
dents dying after the date of the enactment of this Act.
SEC. 602. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF
DECEDENT’S DEATH.
(a) GENERAL RULE.—Section 2035 is amended to
read as follows:
‘‘SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE
WITHIN 3 YEARS OF DECEDENT’S DEATH.
‘‘(a) INCLUSION OF CERTAIN PROPERTY IN GROSS
ESTATE.—If—
‘‘(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or relin-
quished a power with respect to any property, during
the 3-year period ending on the date of the dece-
dent’s death, and
‘‘(2) the value of such property (or an interest
therein) would have been included in the decedent’s
gross estate under section 2036, 2037, 2038, or
2042 if such transferred interest or relinquished
power had been retained by the decedent on the date
of his death,
the value of the gross estate shall include the value of any
property (or interest therein) which would have been so
included.
295
‘‘(b) INCLUSION OF GIFT TAX ON GIFTS MADE DUR-
ING
3 YEARS
BEFORE
DECEDENT’S
DEATH.—The
amount of the gross estate (determined without regard to
this subsection) shall be increased by the amount of any
tax paid under chapter 12 by the decedent or his estate
on any gift made by the decedent or his spouse during
the 3-year period ending on the date of the decedent’s
death.
‘‘(c) OTHER
RULES
RELATING
TO
TRANSFERS
WITHIN 3 YEARS OF DEATH.—
‘‘(1) IN GENERAL.—For purposes of—
‘‘(A) section 303(b) (relating to distribu-
tions in redemption of stock to pay death
taxes),
‘‘(B) section 2032A (relating to special
valuation of certain farms, etc., real property),
and
‘‘(C) subchapter C of chapter 64 (relating
to lien for taxes),
the value of the gross estate shall include the value
of all property to the extent of any interest therein
of which the decedent has at any time made a trans-
fer, by trust or otherwise, during the 3-year period
ending on the date of the decedent’s death.
296
‘‘(2) COORDINATION WITH SECTION 6166.—An
estate shall be treated as meeting the 35 percent of
adjusted 
gross 
estate 
requirement 
of 
section
6166(a)(1) only if the estate meets such requirement
both with and without the application of paragraph
(1).
‘‘(3) SMALL TRANSFERS.—Paragraph (1) shall
not apply to any transfer (other than a transfer with
respect to a life insurance policy) made during a cal-
endar year to any donee if the decedent was not re-
quired by section 6019 (other than by reason of sec-
tion 6019(a)(2)) to file any gift tax return for such
year with respect to transfers to such donee.
‘‘(d) EXCEPTION.—Subsection (a) shall not apply to
any bona fide sale for an adequate and full consideration
in money or money’s worth.
‘‘(e) TREATMENT OF CERTAIN TRANSFERS FROM
REVOCABLE TRUSTS.—For purposes of this section and
section 2038, any transfer from any portion of a trust with
respect to which the decedent was the grantor during any
period when the decedent held the power to revest in the
decedent title to such portion shall be treated as a transfer
made directly by the decedent.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter A of chapter 11 is amended
297
by striking ‘‘gifts’’ in the item relating to section 2035
and inserting ‘‘certain gifts’’.
(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. 603. CLARIFICATION OF QUALIFIED TERMINABLE IN-
TEREST RULES.
(a) GENERAL RULE.—
(1) ESTATE TAX.—Subparagraph (B) of section
2056(b)(7) (defining qualified terminable interest
property) is amended by adding at the end thereof
the following new clause:
‘‘(v)(i) (vi) TREATMENT OF CERTAIN
INCOME
DISTRIBUTIONS.—An income in-
terest shall not fail to qualify as a qualified
income interest for life solely because in-
come for the period after the last distribu-
tion date and on or before the date of the
surviving spouse’s death is not required to
be distributed to the surviving spouse or to
the estate of the surviving spouse.’’
(2) GIFT
TAX.—Paragraph (3) of section
2523(f) is amended by striking ‘‘and (iv)’’ and in-
serting ‘‘(iv), and (vi)’’.
298
(b) CLARIFICATION OF SUBSEQUENT INCLUSIONS.—
Section 2044 is amended by adding at the end thereof the
following new subsection:
‘‘(d) CLARIFICATION OF INCLUSION OF CERTAIN IN-
COME.—The amount included in the gross estate under
subsection (a) shall include the amount of any income
from the property to which this section applies for the pe-
riod after the last distribution date and on or before the
date of the decedent’s death if such income is not other-
wise included in the decedent’s gross estate.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply with respect to the estates of
decedents dying, and gifts made, after the date of
the enactment of this Act.
(2) APPLICATION OF SECTION 2044 TO TRANS-
FERS BEFORE DATE OF ENACTMENT.—In the case
of the estate of any decedent dying after the date of
the enactment of this Act, if there was a transfer of
property on or before such date—
(A) such property shall not be included in
the gross estate of the decedent under section
2044 of the Internal Revenue Code of 1986 if
no prior marital deduction was allowed with re-
299
spect to such a transfer of such property to the
decedent, but
(B) such property shall be so included if
such a deduction was allowed.
SEC. 604. TRANSITIONAL RULE UNDER SECTION 2056A.
(a) GENERAL RULE.—In the case of any trust cre-
ated under an instrument executed before the date of the
enactment of the Revenue Reconciliation Act of 1990,
such trust shall be treated as meeting the requirements
of paragraph (1) of section 2056A(a) of the Internal Reve-
nue Code of 1986 if the trust instrument requires that
all trustees of the trust be individual citizens of the United
States or domestic corporations.
(b) EFFECTIVE DATE.—The provisions of subsection
(a) shall take effect as if included in the provisions of sec-
tion 11702(g) of the Revenue Reconciliation Act of 1990.
SEC. 605. OPPORTUNITY TO CORRECT CERTAIN FAILURES
UNDER SECTION 2032A.
(a) GENERAL RULE.—Paragraph (3) of section
2032A(d) (relating to modification of election and agree-
ment to be permitted) is amended to read as follows:
‘‘(3) MODIFICATION OF ELECTION AND AGREE-
MENT TO BE PERMITTED.—The Secretary shall pre-
scribe procedures which provide that in any case in
which the executor makes an election under para-
300
graph (1) (and submits the agreement referred to in
paragraph (2)) within the time prescribed therefor,
but—
‘‘(A) the notice of election, as filed, does
not contain all required information, or
‘‘(B) signatures of 1 or more persons re-
quired to enter into the agreement described in
paragraph (2) are not included on the agree-
ment as filed, or the agreement does not con-
tain all required information,
the executor will have a reasonable period of time
(not exceeding 90 days) after notification of such
failures to provide such information or signatures.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to the estates of decedents dying
after the date of the enactment of this Act.
TITLE VII—EXCISE TAX
SIMPLIFICATION
Subtitle A—Provisions Related to
Distilled Spirits, Wines, and Beer
SEC. 701. CREDIT OR REFUND FOR IMPORTED BOTTLED
DISTILLED 
SPIRITS 
RETURNED 
TO 
DIS-
TILLED SPIRITS PLANT.
(a) IN GENERAL.—Paragraph (1) of section 5008(c)
(relating to distilled spirits returned to bonded premises)
301
is amended by striking ‘‘withdrawn from bonded premises
on payment or determination of tax’’ and inserting ‘‘on
which tax has been determined or paid’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 702. AUTHORITY TO CANCEL OR CREDIT EXPORT
BONDS WITHOUT SUBMISSION OF RECORDS.
(a) IN GENERAL.—Subsection (c) of section 5175
(relating to export bonds) is amended by striking ‘‘on the
submission of’’ and all that follows and inserting ‘‘if there
is such proof of exportation as the Secretary may by regu-
lations require.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect at the beginning of the first
calendar quarter beginning more than 180 days after the
date of the enactment of this Act.
SEC. 703. REPEAL 
OF 
REQUIRED 
MAINTENANCE 
OF
RECORDS ON PREMISES OF DISTILLED SPIR-
ITS PLANT.
(a) IN GENERAL.—Subsection (c) of section 5207
(relating to records and reports) is amended by striking
‘‘shall be kept on the premises where the operations cov-
ered by the record are carried on and’’.