444
‘‘(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
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, 1997, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
445
‘‘(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 amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1106. TREATMENT OF PERSONAL TRANSACTIONS BY
INDIVIDUALS UNDER FOREIGN CURRENCY
RULES.
(a) GENERAL RULE.—Subsection (e) of section 988
(relating to application to individuals) is amended to read
as follows:
‘‘(e) APPLICATION TO INDIVIDUALS.—
‘‘(1) IN GENERAL.—The preceding provisions of
this section shall not apply to any section 988 trans-
action entered into by an individual which is a per-
sonal transaction.
‘‘(2) EXCLUSION
FOR
CERTAIN
PERSONAL
TRANSACTIONS.—If—
‘‘(A) nonfunctional currency is disposed of
by an individual in any transaction, and
446
‘‘(B) such transaction is a personal trans-
action,
no gain shall be recognized for purposes of this sub-
title by reason of changes in exchange rates after
such currency was acquired by such individual and
before such disposition. The preceding sentence shall
not apply if the gain which would otherwise be rec-
ognized on the transaction exceeds $200.
‘‘(3) PERSONAL TRANSACTIONS.—For purposes
of this subsection, the term ‘personal transaction’
means any transaction entered into by an individual,
except that such term shall not include any trans-
action to the extent that expenses properly allocable
to such transaction meet the requirements of section
162 or 212 (other than that part of section 212
dealing with expenses incurred in connection with
taxes).’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
447
SEC. 1107. ALL NONCONTROLLED SECTION 902 CORPORA-
TIONS WHICH ARE NOT PASSIVE FOREIGN IN-
VESTMENT COMPANIES IN ONE FOREIGN TAX
LIMITATION BASKET.
(a) IN GENERAL.—Subparagraph (E) of section
904(d)(2) (relating to noncontrolled section 902 corpora-
tions) is amended by adding at the end the following new
clause:
‘‘(iv) ALL
NON-PFIC’S
TREATED
AS
ONE.—All noncontrolled section 902 cor-
porations which are not passive foreign in-
vestment companies (as defined in section
1297) shall be treated as one noncontrolled
section 902 corporation for purposes of
paragraph (1). The Secretary may pre-
scribe regulations regarding the treatment
of distributions out of earnings and profits
for periods prior to the taxpayer’s acquisi-
tion of such stock.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 2001.
448
Subtitle B—Treatment of
Controlled Foreign Corporations
SEC. 1111. 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:
‘‘(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-
tion shall be made without regard to the preceding
sentence.
449
‘‘(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.
451
other controlled foreign corporation, adjustments similar
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, 1997.
(c) 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.’’.
452
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
SEC. 1113. 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.
453
‘‘(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—
‘‘(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
454
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
(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.
455
(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
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
457
‘‘(A) which is after December 31, 1997,
and
‘‘(B) during which the shareholder is a
United States shareholder (as defined in section
951(b)) of the corporation and the corporation
is a controlled foreign corporation.
‘‘(3) NEW HOLDING PERIOD IF QUALIFIED POR-
TION ENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), if the qualified portion of a
shareholder’s holding period with respect to any
stock ends after December 31, 1997, solely for
purposes of this part, the shareholder’s holding
period with respect to such stock shall be treat-
ed as beginning as of the first day following
such period.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if such stock was, with respect
to such shareholder, stock in a passive foreign
investment company at any time before the
qualified portion of the shareholder’s holding
period with respect to such stock and no elec-
tion under section 1298(b)(1) is made.’’
458
SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK IN PASSIVE FOREIGN INVEST-
MENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chap-
ter 1 is amended by redesignating subpart C as subpart
D, by redesignating sections 1296 and 1297 as sections
1297 and 1298, respectively, and by inserting after sub-
part B the following new subpart:
‘‘Subpart C—Election of Mark to Market For
Marketable Stock
‘‘Sec. 1296. Election of mark to market for marketable stock.
‘‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign investment company which is
owned (or treated under subsection (g) as owned) by a
United States person at the close of any taxable year of
such person, at the election of such person—
‘‘(1) If the fair market value of such stock as
of the close of such taxable year exceeds its adjusted
basis, such United States person shall include in
gross income for such taxable year an amount equal
to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close
459
of such taxable year, such United States person
shall be allowed a deduction for such taxable year
equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect
to such stock.
‘‘(b) BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The adjusted basis of stock
in a passive foreign investment company—
‘‘(A) shall be increased by the amount in-
cluded in the gross income of the United States
person under subsection (a)(1) with respect to
such stock, and
‘‘(B) shall be decreased by the amount al-
lowed as a deduction to the United States per-
son under subsection (a)(2) with respect to
such stock.
‘‘(2) SPECIAL
RULE
FOR
STOCK
CONSTRUC-
TIVELY OWNED.—In the case of stock in a passive
foreign investment company which the United States
person is treated as owning under subsection (g)—
‘‘(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent treat-
460
ment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross
income under subsection (a)(1), and any gain
on the sale or other disposition of marketable
stock in a passive foreign investment company
(with respect to which an election under this
section is in effect), shall be treated as ordinary
income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction
under subsection (a)(2), and
‘‘(ii) loss on the sale or other disposi-
tion of marketable stock in a passive for-
eign investment company (with respect to
which an election under this section is in
effect) to the extent that the amount of
such loss does not exceed the unreversed
inclusions with respect to such stock,
461
shall be treated as an ordinary loss. The
amount so treated shall be treated as a deduc-
tion allowable in computing adjusted gross in-
come.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or
allowed as a deduction under subsection (a)(2)) shall
be determined in the same manner as if such
amount were gain or loss (as the case may be) from
the sale of stock in the passive foreign investment
company.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign investment com-
pany, the excess (if any) of—
‘‘(1) the amount included in gross income of
the taxpayer under subsection (a)(1) with respect to
such stock for prior taxable years, over
‘‘(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income
under subsection (a)(1) with respect to such stock for any
prior taxable year but for section 1291.
462
‘‘(e) MARKETABLE STOCK.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘marketable
stock’ means—
‘‘(A) any stock which is regularly traded
on—
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
ket system established pursuant to section
11A of the Securities and Exchange Act of
1934, or
‘‘(ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of this
part,
‘‘(B) to the extent provided in regulations,
stock in any foreign corporation which is com-
parable to a regulated investment company and
which offers for sale or has outstanding any
stock of which it is the issuer and which is re-
deemable at its net asset value, and
‘‘(C) to the extent provided in regulations,
any option on stock described in subparagraph
(A) or (B).
463
‘‘(2) SPECIAL RULE FOR REGULATED INVEST-
MENT COMPANIES.—In the case of any regulated in-
vestment company which is offering for sale or has
outstanding any stock of which it is the issuer and
which is redeemable at its net asset value, all stock
in a passive foreign investment company which it
owns directly or indirectly shall be treated as mar-
ketable stock for purposes of this section. Except as
provided in regulations, similar treatment as mar-
ketable stock shall apply in the case of any other
regulated investment company which publishes net
asset valuations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH
ARE SHAREHOLDERS
IN PASSIVE
FOREIGN INVESTMENT COMPANIES.—In the case of a for-
eign corporation which is a controlled foreign corporation
and which owns (or is treated under subsection (g) as own-
ing) stock in a passive foreign investment company—
‘‘(1) this section (other than subsection (c)(2))
shall apply to such foreign corporation in the same
manner as if such corporation were a United States
person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
464
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN
ENTITIES.—Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately
by its partners or beneficiaries. Stock considered to
be owned by a person by reason of the application
of the preceding sentence shall, for purposes of ap-
plying such sentence, be treated as actually owned
by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—
In any case in which a United States person is
treated as owning stock in a passive foreign invest-
ment company by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
465
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
shall be treated as a disposition by the United
States person of the stock in the passive foreign in-
vestment company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For
purposes of paragraphs (2) and (3) of section 851(b), any
amount included in gross income under subsection (a)
shall be treated as a dividend.
‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the
case of stock of a passive foreign investment company
which is acquired by bequest, devise, or inheritance (or
by the decedent’s estate) and with respect to which an
election under this section was in effect as of the date of
the decedent’s death, notwithstanding section 1014, the
basis of such stock in the hands of the person so acquiring
it shall be the adjusted basis of such stock in the hands
of the decedent immediately before his death (or, if lesser,
the basis which would have been determined under section
1014 without regard to this subsection).
‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST
YEAR OF ELECTION.—
466
‘‘(1) TAXPAYERS OTHER THAN REGULATED IN-
VESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—If the taxpayer elects
the application of this section with respect to
any marketable stock in a corporation after the
beginning of the taxpayer’s holding period in
such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall
apply to—
‘‘(i) any distributions with respect to,
or disposition of, such stock in the first
taxable year of the taxpayer for which such
election is made, and
‘‘(ii) any amount which, but for sec-
tion 1291, would have been included in
gross income under subsection (a) with re-
spect to such stock for such taxable year in
the same manner as if such amount were
gain on the disposition of such stock.
‘‘(B) REQUIREMENTS.—The requirements
of this subparagraph are met if, with respect to
each of such corporation’s taxable years for
which such corporation was a passive foreign
investment company and which begin after De-
cember 31, 1986, and included any portion of
467
the taxpayer’s holding period in such stock,
such corporation was treated as a qualified
electing fund under this part with respect to the
taxpayer.
‘‘(2) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN GENERAL.—If a regulated invest-
ment company elects the application of this sec-
tion with respect to any marketable stock in a
corporation after the beginning of the tax-
payer’s holding period in such stock, then, with
respect to such company’s first taxable year for
which such company elects the application of
this section with respect to such stock—
‘‘(i) section 1291 shall not apply to
such stock with respect to any distribution
or disposition during, or amount included
in gross income under this section for,
such first taxable year, but
‘‘(ii) such regulated investment com-
pany’s tax under this chapter for such first
taxable year shall be increased by the ag-
gregate amount of interest which would
have 
been 
determined 
under 
section
468
1291(c)(3) if section 1291 were applied
without regard to this subparagraph.
Clause (ii) shall not apply if for the preceding
taxable year the company elected to mark to
market the stock held by such company as of
the last day of such preceding taxable year.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
‘‘(k) ELECTION.—This section shall apply to market-
able stock in a passive foreign investment company which
is held by a United States person only if such person elects
to apply this section with respect to such stock. Such an
election shall apply to the taxable year for which made
and all subsequent taxable years unless—
‘‘(1) such stock ceases to be marketable stock,
or
‘‘(2) the Secretary consents to the revocation of
such election.
‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING
SUBJECT TO UNITED STATES TAX.—If any individual be-
comes a United States person in a taxable year beginning
after December 31, 1997, solely for purposes of this sec-
tion, the adjusted basis (before adjustments under sub-
469
section (b)) of any marketable stock in a passive foreign
investment company owned by such individual on the first
day of such taxable year shall be treated as being the
greater of its fair market value on such first day or its
adjusted basis on such first day.’’
(b) COORDINATION
WITH
INTEREST
CHARGE,
ETC.—
(1) Paragraph (1) of section 1291(d) is amend-
ed by adding at the end the following new flush sen-
tence:
‘‘Except as provided in section 1296(j), this section
also shall not apply if an election under section
1296(k) is in effect for the taxpayer’s taxable year.’’
(2) The subsection heading for subsection (d) of
section 1291 is amended by striking ‘‘SUBPART B’’
and inserting ‘‘SUBPARTS B AND C’’.
(3) Subparagraph (A) of section 1291(a)(3) is
amended to read as follows:
‘‘(A) HOLDING
PERIOD.—The taxpayer’s
holding period shall be determined under sec-
tion 1223; except that—
‘‘(i) for purposes of applying this sec-
tion to an excess distribution, such holding
period shall be treated as ending on the
date of such distribution, and
470
‘‘(ii) if section 1296 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
shall be treated as beginning on the first
day of the first taxable year beginning
after the last taxable year for which sec-
tion 1296 so applied.’’
(c) TREATMENT OF MARK-TO-MARKET GAIN UNDER
SECTION 4982.—
(1) Subsection (e) of section 4982 is amended
by adding at the end thereof the following new para-
graph:
‘‘(6) TREATMENT OF GAIN RECOGNIZED UNDER
SECTION 1296.—For purposes of determining a regu-
lated investment company’s ordinary income—
‘‘(A) notwithstanding paragraph (1)(C),
section 1296 shall be applied as if such compa-
ny’s taxable year ended on October 31, and
‘‘(B) any ordinary gain or loss from an ac-
tual disposition of stock in a passive foreign in-
vestment company during the portion of the
calendar year after October 31 shall be taken
into account in determining such regulated in-
vestment company’s ordinary income for the
following calendar year.
471
In the case of a company making an election under
paragraph (4), the preceding sentence shall be ap-
plied by substituting the last day of the company’s
taxable year for October 31.’’
(2) Subsection (b) of section 852 is amended by
adding at the end thereof the following new para-
graph:
‘‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON
STOCK
IN
PASSIVE
FOREIGN
INVESTMENT
COM-
PANY.—To the extent provided in regulations, the
taxable income of a regulated investment company
(other than a company to which an election under
section 4982(e)(4) applies) shall be computed with-
out regard to any net reduction in the value of any
stock of a passive foreign investment company with
respect to which an election under section 1296(k)
is in effect occurring after October 31 of the taxable
year, and any such reduction shall be treated as oc-
curring on the first day of the following taxable
year.’’
(3) Subsection (c) of section 852 is amended by
inserting after ‘‘October 31 of such year’’ the follow-
ing: ‘‘, without regard to any net reduction in the
value of any stock of a passive foreign investment
company with respect to which an election under
472
section 1296(k) is in effect occurring after October
31 of such year,’’.
(d) CONFORMING AMENDMENTS.—
(1) Sections 532(b)(4) and 542(c)(10) are each
amended by striking ‘‘section 1296’’ and inserting
‘‘section 1297’’.
(2) Subsection (f) of section 551 is amended by
striking ‘‘section 1297(b)(5)’’ and inserting ‘‘section
1298(b)(5)’’
(3) Subsections (a)(1) and (d) of section 1293
are each amended by striking ‘‘section 1297(a)’’ and
inserting ‘‘section 1298(a)’’.
(4) Paragraph (3) of section 1297(b), as redes-
ignated by subsection (a), is hereby repealed.
(5) The table of sections for subpart D of part
VI of subchapter P of chapter 1, as redesignated by
subsection (a), is amended to read as follows:
‘‘Sec. 1297. Passive foreign investment company.
‘‘Sec. 1298. Special rules.’’
(6) The table of subparts for part VI of sub-
chapter P of chapter 1 is amended by striking the
last item and inserting the following new items:
‘‘Subpart C. Election of mark to market for marketable stock.
‘‘Subpart D. General provisions.’’
(e) CLARIFICATION OF GAIN RECOGNITION ELEC-
TION.—The last sentence of section 1298(b)(1), as so re-
designated, is amended by inserting ‘‘(determined without
473
regard to the preceding sentence)’’ after ‘‘investment com-
pany’’.
SEC. 1123. EFFECTIVE DATE.
The amendments made by this subtitle shall apply
to—
(1) taxable years of United States persons be-
ginning after December 31, 1997, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
Subtitle D—Repeal of Excise Tax
on Transfers to Foreign Entities
SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOR-
EIGN ENTITIES; RECOGNITION OF GAIN ON
CERTAIN TRANSFERS TO FOREIGN TRUSTS
AND ESTATES.
(a) REPEAL OF EXCISE TAX.—Chapter 5 (relating
to transfers to avoid income tax) is hereby repealed.
(b) RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO FOREIGN TRUSTS AND ESTATES.—Subpart F of part
I of subchapter J of chapter 1 is amended by adding at
the end the following new section:
474
‘‘SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS
TO CERTAIN FOREIGN TRUSTS AND ESTATES.
‘‘(a) IN GENERAL.—In the case of any transfer of
property by a United States person to a foreign estate or
trust, 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) EXCEPTION.—Subsection (a) shall not apply to
a transfer to a trust by a United States person if such
person is treated as the owner of such trust under section
671.’’
(b) OTHER ANTI-AVOIDANCE PROVISIONS REPLAC-
ING REPEALED EXCISE TAX.—
(1) GAIN
RECOGNITION
ON
EXCHANGES
IN-
VOLVING
FOREIGN
PERSONS.—Section 1035 is
amended by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b) the
following new subsection:
‘‘(c) EXCHANGES INVOLVING FOREIGN PERSONS.—
To the extent provided in regulations, subsection (a) shall
476
(4) REPEAL OF U.S. SOURCE TREATMENT OF
DEEMED ROYALTIES.—Subparagraph (C) of section
367(d)(2) is amended to read as follows:
‘‘(C) AMOUNTS RECEIVED TREATED AS OR-
DINARY INCOME.—For purposes of this chapter,
any amount included in gross income by reason
of this subsection shall be treated as ordinary
income.’’
(5) TRANSFERS OF INTANGIBLES TO PARTNER-
SHIPS.—
(A) Subsection (d) of section 367 is
amended by adding at the end the following
new paragraph:
‘‘(3) REGULATIONS RELATING TO TRANSFERS
OF
INTANGIBLES
TO
PARTNERSHIPS.—The Sec-
retary may provide by regulations that the rules of
paragraph (2) also apply to the transfer of intangi-
ble property by a United States person to a partner-
ship in circumstances consistent with the purposes
of this subsection.’’
(B) Section 721 is amended by adding at
the end the following new subsection:
‘‘(d) TRANSFERS OF INTANGIBLES.—
‘‘For regulatory authority to treat intangibles
transferred to a partnership as sold, see section
367(d)(3).’’
(c) TECHNICAL AND CONFORMING AMENDMENTS.—
477
(1) Subsection (h) of section 814 is amended by
striking ‘‘or 1491’’.
(2) Section 1057 (relating to election to treat
transfer to foreign trust, etc., as taxable exchange)
is hereby repealed.
(3) Section 6422 is amended by striking para-
graph (5) and by redesignating paragraphs (6)
through (13) as paragraphs (5) through (12), re-
spectively.
(4) The table of chapters for subtitle A is
amended by striking the item relating to chapter 5.
(5) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(6) The table of sections for subpart F of part
I of subchapter J of chapter 1 is amended by adding
at the end the following new item:
‘‘Sec. 684. Recognition of gain on certain transfers to certain for-
eign trusts and estates.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
478
Subtitle E—Information Reporting
SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN
REQUIREMENT TO FOREIGN PARTNERSHIPS.
(a) IN GENERAL.—Section 6031 (relating to return
of partnership income) is amended by adding at the end
the following new subsection:
‘‘(e) FOREIGN PARTNERSHIPS.—
‘‘(1) EXCEPTION
FOR
FOREIGN
PARTNER-
SHIP.—Except as provided in paragraph (2), the
preceding provisions of this section shall not apply
to a foreign partnership.
‘‘(2) CERTAIN
FOREIGN
PARTNERSHIPS
RE-
QUIRED TO FILE RETURN.—Except as provided in
regulations prescribed by the Secretary, this section
shall apply to a foreign partnership for any taxable
year if for such year, such partnership has—
‘‘(A) gross income derived from sources
within the United States, or
‘‘(B) gross income which is effectively con-
nected with the conduct of a trade or business
within the United States.
The Secretary may provide simplified filing proce-
dures for foreign partnerships to which this section
applies.’’
479
(b) SANCTION FOR FAILURE BY FOREIGN PARTNER-
SHIP TO COMPLY WITH SECTION 6031 TO INCLUDE DE-
NIAL OF DEDUCTIONS.—Subsection (f) of section 6231 is
amended—
(1) by striking ‘‘LOSSES AND’’ in the heading
and inserting ‘‘DEDUCTIONS, LOSSES, AND’’, and
(2) by striking ‘‘loss or’’ each place it appears
and inserting ‘‘deduction, loss, or’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUB-
JECT TO INFORMATION REPORTING COM-
PARABLE TO INFORMATION REPORTING FOR
CONTROLLED FOREIGN CORPORATIONS.
(a) IN GENERAL.—So much of section 6038 (relating
to information with respect to certain foreign corpora-
tions) as precedes paragraph (2) of subsection (a) is
amended to read as follows:
‘‘SEC. 6038. INFORMATION REPORTING WITH RESPECT TO
CERTAIN 
FOREIGN 
CORPORATIONS 
AND
PARTNERSHIPS.
‘‘(a) REQUIREMENT.—
‘‘(1) IN GENERAL.—Every United States person
shall furnish, with respect to any foreign business
480
entity which such person controls, such information
as the Secretary may prescribe relating to—
‘‘(A) the name, the principal place of busi-
ness, and the nature of business of such entity,
and the country under whose laws such entity
is incorporated (or organized in the case of a
partnership);
‘‘(B) in the case of a foreign corporation,
its post-1986 undistributed earnings (as defined
in section 902(c));
‘‘(C) a balance sheet for such entity listing
assets, liabilities, and capital;
‘‘(D) transactions between such entity
and—
‘‘(i) such person,
‘‘(ii) any corporation or partnership
which such person controls, and
‘‘(iii) any United States person own-
ing, at the time the transaction takes
place—
‘‘(I) in the case of a foreign cor-
poration, 10 percent or more of the
value of any class of stock outstand-
ing of such corporation, and
481
‘‘(II) in the case of a foreign
partnership, at least a 10-percent in-
terest in such partnership; and
‘‘(E)(i) in the case of a foreign corpora-
tion, a description of the various classes of
stock outstanding, and a list showing the name
and address of, and number of shares held by,
each United States person who is a shareholder
of record owning at any time during the annual
accounting period 5 percent or more in value of
any class of stock outstanding of such foreign
corporation, and
‘‘(ii) information comparable to the infor-
mation described in clause (i) in the case of a
foreign partnership.
The Secretary may also require the furnishing of
any other information which is similar or related in
nature to that specified in the preceding sentence or
which the Secretary determines to be appropriate to
carry out the provisions of this title.’’
(b) DEFINITIONS.—
(1) IN
GENERAL.—Subsection (e) of section
6038 (relating to definitions) is amended—
(A) by redesignating paragraphs (1) and
(2) as paragraphs (2) and (4), respectively,
482
(B) by inserting before paragraph (2) (as
so redesignated) the following new paragraph:
‘‘(1) FOREIGN
BUSINESS
ENTITY.—The term
‘foreign business entity’ means a foreign corporation
and a foreign partnership.’’, and
(C) by inserting after paragraph (2) (as so
redesignated) the following new paragraph:
‘‘(3) PARTNERSHIP-RELATED DEFINITIONS.—
‘‘(A) CONTROL.—A person is in control of
a partnership if such person owns directly or in-
directly more than a 50 percent interest in such
partnership.
‘‘(B) 50-PERCENT
INTEREST.—For pur-
poses of subparagraph (A), a 50-percent inter-
est in a partnership is—
‘‘(i) an interest equal to 50 percent of
the capital interest, or 50 percent of the
profits interest, in such partnership, or
‘‘(ii) to the extent provided in regula-
tions, an interest to which 50 percent of
the deductions or losses of such partner-
ship are allocated.
For purposes of the preceding sentence, rules
similar to the rules of section 267(c) (other
than paragraph (3)) shall apply, except so as to
483
consider a United States person as owning such
an interest which is owned by a person which
is not a United States person.
‘‘(C) 10-PERCENT
INTEREST.—A 10-per-
cent interest in a partnership is an interest
which would be described in subparagraph (B)
if ‘10 percent’ were substituted for ‘50 percent’
each place it appears.’’
(2) CLERICAL
AMENDMENT.—The paragraph
heading for paragraph (2) of section 6038(e) (as so
redesignated) is amended by inserting ‘‘OF
COR-
PORATION’’ after ‘‘CONTROL’’.
(c) MODIFICATION OF SANCTIONS ON PARTNERSHIPS
AND CORPORATIONS FOR FAILURE TO FURNISH INFOR-
MATION.—
(1) IN
GENERAL.—Subsection (b) of section
6038 is amended—
(A) by striking ‘‘$1,000’’ each place it ap-
pears and inserting ‘‘$10,000’’, and
(B) by striking ‘‘$24,000’’ in paragraph
(2) and inserting ‘‘$50,000’’.
(d) REPORTING BY 10-PERCENT PARTNERS.—Sub-
section (a) of section 6038 is amended by adding at the
end the following new paragraph:
484
‘‘(5) INFORMATION
REQUIRED
FROM
10-PER-
CENT
PARTNER
OF
CONTROLLED
FOREIGN
PART-
NERSHIP.—In the case of a foreign partnership
which is controlled by United States persons holding
at least 10-percent interests (but not by any one
United States person), the Secretary may require
each United States person who holds a 10-percent
interest in such partnership to furnish information
relating to such partnership, including information
relating to such partner’s ownership interests in the
partnership and allocations to such partner of part-
nership items.’’
(e) TECHNICAL AMENDMENTS.—
(1) The following provisions of section 6038 are
each amended by striking ‘‘foreign corporation’’ each
place it appears and inserting ‘‘foreign business en-
tity’’:
(A) Paragraphs (2) and (3) of subsection
(a).
(B) Subsection (b).
(C) Subsection (c) other than paragraph
(1)(B) thereof.
(D) Subsection (d).
(E) Subsection (e)(4) (as redesignated by
subsection (b)).
485
(2) Subparagraph (B) of section 6038(c)(1) is
amended by inserting ‘‘in the case of a foreign busi-
ness entity which is a foreign corporation,’’ after
‘‘(B)’’.
(3) Paragraph (8) of section 318(b) is amended
by 
striking 
‘‘6038(d)(1)’’ 
and 
inserting
‘‘6038(d)(2)’’.
(4) Paragraph (4) of section 901(k) is amended
by striking ‘‘foreign corporation’’ and inserting ‘‘for-
eign corporation or partnership’’.
(5) The table of sections for subpart A of part
III of subchapter A of chapter 61 is amended by
striking the item relating to section 6038 and insert-
ing the following new item:
‘‘Sec. 6038. Information reporting with respect to certain foreign
corporations and partnerships.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to annual accounting periods of
foreign partnerships beginning after the date of the enact-
ment of this Act.
SEC. 1143. MODIFICATIONS RELATING TO RETURNS RE-
QUIRED 
TO 
BE 
FILED 
BY 
REASON 
OF
CHANGES IN OWNERSHIP INTERESTS IN FOR-
EIGN PARTNERSHIP.
(a) NO RETURN REQUIRED UNLESS CHANGES IN-
VOLVE 10-PERCENT INTEREST IN PARTNERSHIP.—
487
‘‘(1) IN GENERAL.—In addition to any criminal
penalty provided by law, any person required to file
a return under section 6035, 6046, or 6046A who
fails to file such return at the time provided in such
section, or who files a return which does not show
the information required pursuant to such section,
shall pay a penalty of $10,000, unless it is shown
that such failure is due to reasonable cause.
‘‘(2) INCREASE IN PENALTY WHERE FAILURE
CONTINUES
AFTER
NOTIFICATION.—If any failure
described in paragraph (1) continues for more than
90 days after the day on which the Secretary mails
notice of such failure to the United States person,
such person shall pay a penalty (in addition to the
amount required under paragraph (1)) of $10,000
for each 30-day period (or fraction thereof) during
which such failure continues after the expiration of
such 90-day period. The increase in any penalty
under this paragraph shall not exceed $50,000.
‘‘(3) REDUCED PENALTY FOR RETURNS RELAT-
ING TO FOREIGN PERSONAL HOLDING COMPANIES.—
In the case of a return required under section 6035,
paragraph (1) shall be applied by substituting
‘$1,000’ for ‘$10,000’, and paragraph (2) shall not
apply.’’
488
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers and changes after the
date of the enactment of this Act.
SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PART-
NERSHIPS SUBJECT TO INFORMATION RE-
PORTING COMPARABLE TO INFORMATION
REPORTING FOR SUCH TRANSFERS TO FOR-
EIGN CORPORATIONS.
(a) 
IN
GENERAL.—Paragraph 
(1) 
of 
section
6038B(a) (relating to notice of certain transfers to foreign
corporations) is amended to read as follows:
‘‘(1) transfers property to—
‘‘(A) a foreign corporation in an exchange
described in section 332, 351, 354, 355, 356, or
361, or
‘‘(B) a foreign partnership in a contribu-
tion described in section 721 or in any other
contribution described in regulations prescribed
by the Secretary,’’.
(b) EXCEPTIONS.—Section 6038B is amended by re-
designating subsection (b) as subsection (c) and by insert-
ing after subsection (a) the following new subsection:
‘‘(b) EXCEPTIONS
FOR CERTAIN TRANSFERS
TO
FOREIGN PARTNERSHIPS; SPECIAL RULE.—
489
‘‘(1) EXCEPTIONS.—Subsection (a)(1)(B) shall
apply to a transfer by a United States person to a
foreign partnership only if—
‘‘(A) the United States person holds (im-
mediately after the transfer) directly or indi-
rectly at least a 10-percent interest (as defined
in section 6046A(d)) in the partnership, or
‘‘(B) the value of the property transferred
(when added to the value of the property trans-
ferred by such person or any related person to
such partnership or a related partnership dur-
ing the 12-month period ending on the date of
the transfer) exceeds $100,000.
For purposes of the preceding sentence, the value of
any transferred property is its fair market value at
the time of its transfer.
‘‘(2) SPECIAL RULE.—If by reason of an ad-
justment under section 482 or otherwise, a contribu-
tion described in subsection (a)(1) is deemed to have
been made, such contribution shall be treated for
purposes of this section as having been made not
earlier than the date specified by the Secretary.’’
(c) MODIFICATION
OF PENALTY APPLICABLE
TO
FOREIGN CORPORATIONS
AND PARTNERSHIPS.—Para-
graph (1) of section 6038B(b) is amended by striking
490
‘‘equal to’’ and all that follows and inserting ‘‘equal to
10 percent of the fair market value of the property at the
time of the exchange (and, in the case of a contribution
described in subsection (a)(1)(B), such person shall recog-
nize gain as if the contributed property had been sold for
such value at the time of such contribution).’’
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to transfers made after the
date of the enactment of this Act.
(2) ELECTION OF RETROACTIVE EFFECT.—Sec-
tion 1494(c) of the Internal Revenue Code of 1986
shall not apply to any transfer after August 20,
1996, if the person otherwise required to file a re-
turn with respect to such transfer elects to apply the
amendments made by this section to transfers after
August 20, 1996. The Secretary of the Treasury or
his delegate may prescribe simplified reporting
under the preceding sentence.
SEC. 1145. EXTENSION OF STATUTE OF LIMITATION FOR
FOREIGN TRANSFERS.
(a) IN GENERAL.—Paragraph (8) of section 6501(c)
(relating to failure to notify Secretary under section
6038B) is amended to read as follows:
491
‘‘(8) FAILURE TO NOTIFY SECRETARY OF CER-
TAIN FOREIGN TRANSFERS.—In the case of any in-
formation which is required to be reported to the
Secretary under section 6038, 6038A, 6038B, 6046,
6046A, or 6048, the time for assessment of any tax
imposed by this title with respect to any event or pe-
riod to which such information relates shall not ex-
pire before the date which is 3 years after the date
on which the Secretary is furnished the information
required to be reported under such section.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to information the due date for
the reporting of which is after the date of the enactment
of this Act.
SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RE-
TURNS AS TO ORGANIZATION OF FOREIGN
CORPORATIONS 
AND 
ACQUISITIONS 
OF
STOCK IN SUCH CORPORATIONS.
(a) IN GENERAL.—Subsection (a) of section 6046
(relating to returns as to organization or reorganization
of foreign corporations and as to acquisitions of their
stock) is amended to read as follows:
‘‘(a) REQUIREMENT OF RETURN.—
492
‘‘(1) IN GENERAL.—A return complying with
the requirements of subsection (b) shall be made
by—
‘‘(A) each United States citizen or resident
who becomes an officer or director of a foreign
corporation if a United States person (as de-
fined in section 7701(a)(30)) meets the stock
ownership requirements of paragraph (2) with
respect to such corporation,
‘‘(B) each United States person—
‘‘(i) who acquires stock which, when
added to any stock owned on the date of
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation, or
‘‘(ii) who acquires stock which, with-
out regard to stock owned on the date of
such acquisition, meets the stock owner-
ship requirements of paragraph (2) with
respect to a foreign corporation,
‘‘(C) each person (not described in sub-
paragraph (B)) who is treated as a United
States shareholder under section 953(c) with
respect to a foreign corporation, and
493
‘‘(D) each person who becomes a United
States person while meeting the stock owner-
ship requirements of paragraph (2) with respect
to stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States
shareholder under section 953(c), subparagraph (A)
shall be treated as including a reference to each
United States person who is an officer or director of
such corporation.
‘‘(2) STOCK
OWNERSHIP
REQUIREMENTS.—A
person meets the stock ownership requirements of
this paragraph with respect to any corporation if
such person owns 10 percent or more of—
‘‘(A) the total combined voting power of all
classes of stock of such corporation entitled to
vote, or
‘‘(B) the total value of the stock of such
corporation.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on January 1, 1998.
494
Subtitle F—Determination of For-
eign or Domestic Status of Part-
nerships
SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC
STATUS OF PARTNERSHIPS.
(a) IN GENERAL.—Paragraph (4) of section 7701(a)
is amended by inserting before the period ‘‘unless, in the
case of a partnership, the partnership is more properly
treated as a foreign partnership under regulations pre-
scribed by the Secretary’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
the date of the enactment of this Act.
Subtitle G—Other Simplification
Provisions
SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.
(a) IN GENERAL.—Paragraph (3) of section 1907(a)
of the Small Business Job Protection Act of 1996 is
amended by adding at the end the following flush sen-
tence:
‘‘To the extent prescribed in regulations by the Sec-
retary of the Treasury or his delegate, a trust which
was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under subpart
E of part I of subchapter J of chapter 1 of the In-
495
ternal Revenue Code of 1986), and which was treat-
ed as a United States person on the day before the
date of the enactment of this Act may elect to con-
tinue to be treated as a United States person not-
withstanding section 7701(a)(30)(E) of such Code.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect as if included in the
amendments made by section 1907(a) of the Small Busi-
ness Job Protection Act of 1996.
SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HAR-
BOR REQUIREMENT THAT PRINCIPAL OFFICE
BE OUTSIDE THE UNITED STATES.
(a) IN GENERAL.—The last sentence of clause (ii) of
section 864(b)(2)(A) (relating to stock or securities) is
amended by striking ‘‘, or in the case of a corporation’’
and all that follows and inserting a period.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
Subtitle H—Other Provisions
SEC. 1171. DEFINITION OF FOREIGN PERSONAL HOLDING
COMPANY INCOME.
(a) INCOME
FROM
NOTIONAL
PRINCIPAL
CON-
TRACTS AND PAYMENTS IN LIEU OF DIVIDENDS.—
496
(1) IN
GENERAL.—Paragraph (1) of section
954(c) (defining foreign personal holding company
income) is amended by adding at the end the follow-
ing new subparagraphs:
‘‘(F) INCOME FROM NOTIONAL PRINCIPAL
CONTRACTS.—Net income from notional prin-
cipal contracts. Any item of income, gain, de-
duction, or loss from a notional principal con-
tract entered into for purposes of hedging any
item described in any preceding subparagraph
shall not be taken into account for purposes of
this subparagraph but shall be taken into ac-
count under such other subparagraph.
‘‘(G) PAYMENTS IN LIEU OF DIVIDENDS.—
Payments in lieu of dividends which are made
pursuant to an agreement to which section
1058 applies.’’
(2) CONFORMING AMENDMENT.—Subparagraph
(B) of section 954(c)(1) is amended—
(A) by striking the second sentence, and
(B) by striking ‘‘also’’ in the last sentence.
(b) EXCEPTION FOR DEALERS.—Paragraph (2) of
section 954(c) is amended by adding at the end the follow-
ing new subparagraph:
497
‘‘(C) EXCEPTION FOR DEALERS.—Except
as provided in subparagraph (A), (E), or (G) of
paragraph (1) or by regulations, in the case of
a regular dealer in property (within the mean-
ing of paragraph (1)(B)), forward contracts,
option contracts, or similar financial instru-
ments (including notional principal contracts
and all instruments referenced to commodities),
there shall not be taken into account in comput-
ing foreign personal holding income any item of
income, gain, deduction, or loss from any trans-
action (including hedging transactions) entered
into in the ordinary course of such dealer’s
trade or business as such a dealer.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 1172. PERSONAL PROPERTY USED PREDOMINANTLY
IN THE UNITED STATES TREATED AS NOT
PROPERTY OF A LIKE KIND WITH RESPECT
TO PROPERTY USED PREDOMINANTLY OUT-
SIDE THE UNITED STATES.
(a) IN GENERAL.—Subsection (h) of section 1031
(relating to exchange of property held for productive use
or investment) is amended to read as follows:
498
‘‘(h) SPECIAL RULES FOR FOREIGN REAL AND PER-
SONAL PROPERTY.—For purposes of this section—
‘‘(1) REAL PROPERTY.—Real property located
in the United States and real property located out-
side the United States are not property of a like
kind.
‘‘(2) PERSONAL PROPERTY.—
‘‘(A) IN
GENERAL.—Personal property
used predominantly within the United States
and personal property used predominantly out-
side the United States are not property of a like
kind.
‘‘(B) PREDOMINANT USE.—Except as pro-
vided in subparagraph (C) and (D), the pre-
dominant use of any property shall be deter-
mined based on—
‘‘(i) in the case of the property relin-
quished in the exchange, the 2-year period
ending on the date of such relinquishment,
and
‘‘(ii) in the case of the property ac-
quired in the exchange, the 2-year period
beginning on the date of such acquisition.
‘‘(C) PROPERTY HELD FOR LESS THAN 2
YEARS.—Except in the case of an exchange
499
which is part of a transaction (or series of
transactions) structured to avoid the purposes
of this subsection—
‘‘(i) only the periods the property was
held by the person relinquishing the prop-
erty (or any related person) shall be taken
into account under subparagraph (B)(i),
and
‘‘(ii) only the periods the property was
held by the person acquiring the property
(or any related person) shall be taken into
account under subparagraph (B)(ii).
‘‘(D) SPECIAL RULE FOR CERTAIN PROP-
ERTY.—Property described in any subpara-
graph of section 168(g)(4) shall be treated as
used predominantly in the United States.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to transfers after June 8,
1997, in taxable years ending after such date.
(2) BINDING
CONTRACTS.—The amendment
made by this section shall not apply to any transfer
pursuant to a written binding contract in effect on
June 8, 1997, and at all times thereafter before the
disposition of property. A contract shall not fail to
500
meet the requirements of the preceding sentence
solely because—
(A) it provides for a sale in lieu of an ex-
change, or
(B) the property to be acquired as replace-
ment property was not identified under such
contract before June 9, 1997.
SEC. 1173. HOLDING PERIOD REQUIREMENT FOR CERTAIN
FOREIGN TAXES.
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
‘‘(k) MINIMUM HOLDING PERIOD
FOR CERTAIN
TAXES.—
‘‘(1) WITHHOLDING TAXES.—
‘‘(A) IN GENERAL.—In no event shall a
credit be allowed under subsection (a) for any
withholding tax on a dividend with respect to
stock in a corporation if—
‘‘(i) such stock is held by the recipient
of the dividend for 15 days or less during
the 30-day period beginning on the date
which is 15 days before the date on which
such share becomes ex-dividend with re-
spect to such dividend, or
501
‘‘(ii) to the extent that the recipient of
the dividend is under an obligation (wheth-
er pursuant to a short sale or otherwise) to
make related payments with respect to po-
sitions in substantially similar or related
property.
‘‘(B) WITHHOLDING
TAX.—For purposes
of this paragraph, the term ‘withholding tax’ in-
cludes any tax determined on a gross basis; but
does not include any tax which is in the nature
of a prepayment of a tax imposed on a net
basis.
‘‘(2) DEEMED PAID TAXES.—In the case of in-
come, war profits, or excess profits taxes deemed
paid under section 853, 902, or 960 through a chain
of ownership of stock in 1 or more corporations, no
credit shall be allowed under subsection (a) for such
taxes if—
‘‘(A) any stock of any corporation in such
chain (the ownership of which is required to ob-
tain credit under subsection (a) for such taxes)
is held for less than the period described in
paragraph (1)(A)(i), or
502
‘‘(B) the corporation holding the stock is
under an obligation referred to in paragraph
(1)(A)(ii).
‘‘(3) 45-DAY RULE IN THE CASE OF CERTAIN
PREFERENCE DIVIDENDS.—In the case of stock hav-
ing preference in dividends and dividends with re-
spect to such stock which are attributable to a pe-
riod or periods aggregating in excess of 366 days,
paragraph (1)(A)(i) shall be applied—
‘‘(A) by substituting ‘45 days’ for ‘15
days’ each place it appears, and
‘‘(B) by substituting ‘90-day period’ for
‘30-day period’.
‘‘(4) EXCEPTION FOR CERTAIN TAXES PAID BY
SECURITIES DEALERS.—
‘‘(A) IN
GENERAL.—Paragraphs (1) and
(2) shall not apply to any qualified tax with re-
spect to any security held in the active conduct
in a foreign country of a securities business of
any person—
‘‘(i) who is registered as a securities
broker or dealer under section 15(a) of the
Securities Exchange Act of 1934,
503
‘‘(ii) who is registered as a Govern-
ment securities broker or dealer under sec-
tion 15C(a) of such Act, or
‘‘(iii) who is licensed or authorized in
such foreign country to conduct securities
activities in such country and is subject to
bona fide regulation by a securities regu-
lating authority of such country.
‘‘(B) QUALIFIED
TAX.—For purposes of
subparagraph (A), the term ‘qualified tax’
means a tax paid to a foreign country (other
than the foreign country referred to in subpara-
graph (A)) if—
‘‘(i) the dividend to which such tax is
attributable is subject to taxation on a net
basis by the country referred to in sub-
paragraph (A), and
‘‘(ii) such country allows a credit
against its net basis tax for the full
amount of the tax paid to such other for-
eign country.
‘‘(C) REGULATIONS.—The Secretary may
prescribe such regulations as may be appro-
priate to prevent the abuse of the exception
provided by this paragraph.
504
‘‘(5) CERTAIN RULES TO APPLY.—For purposes
of this subsection, the rules of paragraphs (3) and
(4) of section 246(c) shall apply.
‘‘(6) TREATMENT OF BONA FIDE SALES.—If a
person’s holding period is reduced by reason of the
application of the rules of section 246(c)(4) to any
contract for the bona fide sale of stock, the deter-
mination of whether such person’s holding period
meets the requirements of paragraph (2) shall be
made as of the date such contract is entered into.
‘‘(7) TAXES ALLOWED AS DEDUCTION, ETC.—
Sections 275 and 78 shall not apply to any tax
which is not allowable as a credit under subsection
(a) by reason of this subsection.’’
(b) NOTICE OF WITHHOLDING TAXES PAID BY REG-
ULATED INVESTMENT COMPANY.—Subsection (c) of sec-
tion 853 (relating to foreign tax credit allowed to share-
holders) is amended by adding at the end the following
new sentence: ‘‘Such notice shall also include the amount
of such taxes which (without regard to the election under
this section) would not be allowable as a credit under sec-
tion 901(a) to the regulated investment company by rea-
son of section 901(k).’’
505
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dividends paid or accrued more
than 30 days after the date of the enactment of this Act.
SEC. 1174. PENALTIES FOR FAILURE TO DISCLOSE POSI-
TION THAT CERTAIN INTERNATIONAL TRANS-
PORTATION INCOME IS NOT INCLUDIBLE IN
GROSS INCOME.
(a) IN GENERAL.—Section 883 is amended by adding
at the end the following new subsection:
‘‘(d) PENALTIES FOR FAILURE TO DISCLOSE POSI-
TION THAT CERTAIN INTERNATIONAL TRANSPORTATION
INCOME IS NOT INCLUDIBLE IN GROSS INCOME.—
‘‘(1) IN GENERAL.—A taxpayer who, with re-
spect to any tax imposed by this title, takes the posi-
tion that any of its gross income derived from the
international operation of 1 or more ships or aircraft
is not includible in gross income by reason of para-
graph (1) or (2) of subsection (a) or paragraph (1)
or (2) of section 872(b) (or by reason of any appli-
cable treaty) shall be entitled to such treatment only
if such position is disclosed (in such manner as the
Secretary may prescribe) on the return of tax for
such tax (or any statement attached to such return).
‘‘(2) ADDITIONAL PENALTIES FOR FAILING TO
DISCLOSE POSITION.—If a taxpayer fails to meet the
506
requirement of paragraph (1) for any taxable year
with respect to the international operation of 1 or
more ships or 1 or more aircraft—
‘‘(A) the amount of the income from the
international operation to which such failure re-
lates—
‘‘(i) which is from sources without the
United States, and
‘‘(ii) which is attributable to a fixed
place of business in the United States,
shall be treated for purposes of this title as ef-
fectively connected with the conduct of a trade
or business within the United States, and
‘‘(B) no deductions or credits shall be al-
lowed which are attributable to income from the
international operation to which the failure re-
lates.
‘‘(3) REASONABLE
CAUSE
EXCEPTION.—This
subsection shall not apply to a failure to disclose a
position if it is shown that such failure is due to rea-
sonable cause and not due to willful neglect.’’
(b) CONFORMING AMENDMENTS.—Paragraphs (1)
and (2) of section 872(b), and paragraphs (1) and (2) of
section 883(a), are each amended by striking ‘‘Gross in-
507
come’’ each place it appears and inserting ‘‘Except as pro-
vided in section 883(d), gross income’’.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1997.
(2) 
COORDINATION
WITH
TREATIES.—The
amendments made by this section shall not apply in
any case where their application would be contrary
to any treaty obligation of the United States.
(d) INFORMATION TO BE PROVIDED BY CUSTOMS
SERVICE.—The United States Custom Service shall pro-
vide the Secretary of the Treasury or his delegate with
such information as may be specified by such Secretary
in order to enable such Secretary to determine whether
ships which are not registered in the United States are
engaged in transportation to or from the United States.
SEC. 1175. DENIAL OF TREATY BENEFITS FOR CERTAIN
PAYMENTS THROUGH HYBRID ENTITIES.
A foreign person shall be entitled under any income
tax treaty of the United States with a foreign country to
any reduced rate of any withholding tax imposed by the
Internal Revenue Code of 1986 on an item of income de-
rived through any partnership or other pass-thru entity
only to the extent that such item is treated for purposes
508
of the taxation laws of such foreign country as an item
of income of such person. The preceding sentence shall
not apply if—
(1) the treaty contains a provision addressing
the applicability of the treaty in the case of an item
of income derived through a partnership, or
(2) the foreign country imposes tax on a dis-
tribution of such item of income from such partner-
ship to such person.
SEC. 1176. INTEREST ON UNDERPAYMENTS NOT REDUCED
BY FOREIGN TAX CREDIT CARRYBACKS.
(a) IN GENERAL.—Subsection (d) of section 6601 is
amended by redesignating paragraphs (2) and (3) as para-
graphs (3) and (4), respectively, and by inserting after
paragraph (1) the following new paragraph:
‘‘(2) FOREIGN
TAX
CREDIT
CARRYBACKS.—If
any credit allowed for any taxable year is increased
by reason of a carryback of tax paid or accrued to
foreign countries or possessions of the United
States, such increase shall not affect the computa-
tion of interest under this section for the period end-
ing with the filing date for the taxable year in which
such taxes were in fact paid or accrued, or, with re-
spect to any portion of such credit carryback from
a taxable year attributable to a net operating loss
509
carryback or a capital loss carryback from a subse-
quent taxable year, such increase shall not affect the
computation of interest under this section for the
period ending with the filing date for such subse-
quent taxable year.’’
(b) CONFORMING AMENDMENT
TO REFUNDS AT-
TRIBUTABLE TO FOREIGN TAX CREDIT CARRYBACKS.—
(1) IN
GENERAL.—Subsection (f) of section
6611 is amended by redesignating paragraphs (2)
and (3) as paragraphs (3) and (4), respectively, and
by inserting after paragraph (1) the following new
paragraph:
‘‘(2) FOREIGN TAX CREDIT CARRYBACKS.—For
purposes of subsection (a), if any overpayment of
tax imposed by subtitle A results from a carryback
of tax paid or accrued to foreign countries or posses-
sions of the United States, such overpayment shall
be deemed not to have been made before the filing
date for the taxable year in which such taxes were
in fact paid or accrued, or, with respect to any por-
tion of such credit carryback from a taxable year at-
tributable to a net operating loss carryback or a cap-
ital loss carryback from a subsequent taxable year,
such overpayment shall be deemed not to have been
510
made before the filing date for such subsequent tax-
able year.’’
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (4) of section 6611(f) (as
so redesignated) is amended—
(i) by striking ‘‘PARAGRAPHS (1) AND
(2)’’ and inserting ‘‘PARAGRAPHS (1), (2),
AND (3)’’, and
(ii) by striking ‘‘paragraph (1) or (2)’’
each place it appears and inserting ‘‘para-
graph (1), (2), or (3)’’.
(B) Clause (ii) of section 6611(f)(4)(B) (as
so redesignated) is amended by striking ‘‘and’’
at the end of subclause (I), by redesignating
subclause (II) as subclause (III), and by insert-
ing after subclause (I) the following new sub-
clause:
‘‘(II) in the case of a carryback
of taxes paid or accrued to foreign
countries or possessions of the United
States, the taxable year in which such
taxes were in fact paid or accrued (or,
with respect to any portion of such
carryback from a taxable year attrib-
utable 
to 
a 
net 
operating 
loss
511
carryback or a capital loss carryback
from a subsequent taxable year, such
subsequent taxable year), and’’.
(C) 
Subclause 
(III) 
of 
section
6611(f)(4)(B)(ii) (as so redesignated) is amend-
ed by inserting ‘‘(as defined in paragraph
(3)(B))’’ after ‘‘credit carryback’’ the first place
it appears.
(D) Section 6611 is amended by striking
subsection (g) and by redesignating subsections
(h) and (i) as subsections (g) and (h), respec-
tively.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to carrybacks arising in taxable
years beginning after the date of the enactment of this
Act.
SEC. 1177. CLARIFICATION OF PERIOD OF LIMITATIONS ON
CLAIM FOR CREDIT OR REFUND ATTRIB-
UTABLE 
TO 
FOREIGN 
TAX 
CREDIT
CARRYFORWARD.
(a) IN GENERAL.—Subparagraph (A) of section
6511(d)(3) is amended by striking ‘‘for the year with re-
spect to which the claim is made’’ and inserting ‘‘for the
year in which such taxes were actually paid or accrued’’.
512
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxes paid or accrued in tax-
able years beginning after the date of the enactment of
this Act.
SEC. 1178. MISCELLANEOUS CLARIFICATIONS.
(a) ATTRIBUTION OF DEEMED PAID FOREIGN TAXES
TO PRIOR DISTRIBUTIONS.—Subparagraph (B) of section
902(c)(2) is amended by striking ‘‘deemed paid with re-
spect to’’ and inserting ‘‘attributable to’’.
(b) FINANCIAL
SERVICES
INCOME
DETERMINED
WITHOUT REGARD TO HIGH-TAXED INCOME.—Subclause
(II) of section 904(d)(2)(C)(i) is amended by striking
‘‘subclause (I)’’ and inserting ‘‘subclauses (I) and (III)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
TITLE 
XII—SIMPLIFICATION
PROVISIONS RELATING TO IN-
DIVIDUALS AND BUSINESSES
Subtitle A—Provisions Relating to
Individuals
SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM
TAX EXEMPTION AMOUNT FOR CERTAIN DE-
PENDENTS.
(a) BASIC STANDARD DEDUCTION.—
513
(1) IN
GENERAL.—Paragraph (5) of section
63(c) (relating to limitation on basic standard de-
duction in the case of certain dependents) is amend-
ed by striking ‘‘shall not exceed’’ and all that follows
and inserting ‘‘shall not exceed the greater of—
‘‘(A) $500, or
‘‘(B) the sum of $250 and such individ-
ual’s earned income.’’
(2) CONFORMING AMENDMENT.—Paragraph (4)
of section 63(c) is amended—
(A) by striking ‘‘(5)(A)’’ in the material
preceding subparagraph (A) and inserting
‘‘(5)’’, and
(B) by striking ‘‘by substituting’’ and all
that follows in subparagraph (B) and inserting
‘‘by substituting for ‘calendar year 1992’ in
subparagraph (B) thereof—
‘‘(i) ‘calendar year 1987’ in the case
of the dollar amounts contained in para-
graph (2) or (5)(A) or subsection (f), and
‘‘(ii) ‘calendar year 1997’ in the case
of the dollar amount contained in para-
graph (5)(B).’’
(b) MINIMUM
TAX
EXEMPTION
AMOUNT.—Sub-
section (j) of section 59 is amended to read as follows:
514
‘‘(j) TREATMENT OF UNEARNED INCOME OF MINOR
CHILDREN.—
‘‘(1) IN GENERAL.—In the case of a child to
whom section 1(g) applies, the exemption amount
for purposes of section 55 shall not exceed the sum
of—
‘‘(A) such child’s earned income (as de-
fined in section 911(d)(2)) for the taxable year,
plus
‘‘(B) $5,000.
‘‘(2) INFLATION ADJUSTMENT.—In the case of
any taxable year beginning in a calendar year after
1998, the dollar amount in paragraph (1)(B) shall
be increased by an amount equal to the product of—
‘‘(A) such dollar amount, and
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘1997’ for ‘1992’ in sub-
paragraph (B) thereof.
If any increase determined under the preceding sen-
tence is not a multiple of $50, such increase shall
be rounded to the nearest multiple of $50.’’
515
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM
ESTIMATED TAX REQUIREMENTS.
(a) IN GENERAL.—Paragraph (1) of section 6654(e)
(relating to exception where tax is small amount) is
amended by striking ‘‘$500’’ and inserting ‘‘$1,000’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 1203. OPTIONAL METHODS FOR COMPUTING SECA TAX
COMBINED.
(a) INTERNAL REVENUE CODE.—
(1) IN
GENERAL.—Subsection (h) of section
1402 is amended to read as follows:
‘‘(h) OPTIONAL METHOD FOR COMPUTING SELF-EM-
PLOYMENT INCOME.—
‘‘(1) INDIVIDUALS.—In the case of any trade or
business which is carried on by an individual—
‘‘(A) if the gross income derived by him
from such trade or business is not more than
the upper limit for the taxable year, the net
earnings from self-employment derived by him
from such trade or business may, at his option,
516
be deemed to be 662⁄3 percent of such gross in-
come, or
‘‘(B) if the gross income derived by him
from such trade or business is more than the
upper limit for the taxable year and the net
earnings from self-employment derived by him
from such trade or business (computed under
subsection (a) without regard to this sentence)
are less than the lower limit for the taxable
year, the net earnings from self-employment de-
rived by him from such trade or business may,
at his option, be deemed to be the lower limit
for the taxable year.
‘‘(2) MEMBER OF A PARTNERSHIP.—In the case
of a member of a partnership carrying on any trade
or business—
‘‘(A) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) applies) is not more than
the upper limit for the taxable year, his dis-
tributive share of income described in section
702(a)(8) derived from such trade or business
may, at his option, be deemed to be an amount
517
equal to 662⁄3 percent of his distributive share
of such gross income (after such gross income
has been so reduced), or
‘‘(B) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) applies) is more than the
upper limit for the taxable year and his dis-
tributive share (whether or not distributed) of
income described in section 702(a)(8) derived
from such trade or business (computed under
this subsection without regard to this sentence)
is less than the lower limit for the taxable year,
his distributive share of income described in
section 702(a)(8) derived from such trade or
business may, at his option, be deemed to be
the lower limit for the taxable year.
‘‘(3) UPPER
AND
LOWER
LIMITS.—For pur-
poses of this subsection—
‘‘(A) LOWER LIMIT.—The lower limit for
any taxable year is the sum of the amounts ap-
plicable under section 213(d) of the Social Se-
curity Act for calendar quarters ending with or
within such taxable year.
518
‘‘(B) UPPER LIMIT.—The upper limit for
any taxable year is the amount equal to 150
percent of the lower limit for such taxable year.
‘‘(4) DETERMINATION OF GROSS INCOME.—For
purposes of this subsection, the term ‘gross income’
means—
‘‘(A) in the case of any such trade or busi-
ness in which the income is computed under a
cash receipts and disbursements method, the
gross receipts from such trade or business re-
duced by the cost or other basis of property
which was purchased and sold in carrying on
such trade or business, adjusted (after such re-
duction) in accordance with the provisions of
paragraphs (1) through (7) and paragraph (9)
of subsection (a), and
‘‘(B) in the case of any such trade or busi-
ness in which the income is computed under an
accrual method, the gross income from such
trade or business, adjusted in accordance with
the provisions of paragraphs (1) through (7)
and paragraph (9) of subsection (a).
‘‘(5) INCOME
DERIVED
FROM
MORE
THAN
TRADE
OR
BUSINESS.—For purposes of this sub-
section, if an individual (including a member of a
519
partnership) derives gross income from more than 1
such trade or business, such gross income (including
his distributive share of the gross income of any
partnership derived from any such trade or busi-
ness) shall be deemed to have been derived from one
trade or business.
‘‘(6) ELECTION.—The option under
this subsection shall be allowed for any
taxable year only if elected on the first re-
turn filed for such taxable year.’’
(2) CONFORMING AMENDMENT.—Subsection (a)
of section 1402 is amended by striking all that fol-
lows the first sentence following paragraph (15) and
inserting ‘‘For optional method of determining net
earnings from self-employment, see subsection (h).’’
(b) SOCIAL SECURITY ACT.—Subsection (g) of sec-
tion 211 of the Social Security Act is amended to read
as follows:
‘‘(g) OPTIONAL METHOD FOR COMPUTING SELF-EM-
PLOYMENT INCOME.—
‘‘(1) INDIVIDUALS.—In the case of any trade or
business which is carried on by an individual—
‘‘(A) if the gross income derived by him
from such trade or business is not more than
the upper limit for the taxable year, the net
520
earnings from self-employment derived by him
from such trade or business may, at his option,
be deemed to be 662⁄3 percent of such gross in-
come, or
‘‘(B) if the gross income derived by him
from such trade or business is more than the
upper limit for the taxable year and the net
earnings from self-employment derived by him
from such trade or business (computed under
subsection (a) without regard to this sentence)
are less than the lower limit for the taxable
year, the net earnings from self-employment de-
rived by him from such trade or business may,
at his option, be deemed to be the lower limit
for the taxable year.
‘‘(2) MEMBER OF A PARTNERSHIP.—In the case
of a member of a partnership carrying on any trade
or business—
‘‘(A) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) of the Internal Revenue
Code of 1986 applies) is not more than the
upper limit for the taxable year, his distributive
521
share of income described in section 702(a)(8)
of such Code derived from such trade or busi-
ness may, at his option, be deemed to be an
amount equal to 662⁄3 percent of his distributive
share of such gross income (after such gross in-
come has been so reduced), or
‘‘(B) if his distributive share of the gross
income of the partnership derived from such
trade or business (after such gross income has
been reduced by the sum of all payments to
which section 707(c) of such Code applies) is
more than the upper limit for the taxable year
and his distributive share (whether or not dis-
tributed) 
of 
income 
described 
in 
section
702(a)(8) of such Code derived from such trade
or business (computed under this subsection
without regard to this sentence) is less than the
lower limit for the taxable year, his distributive
share of income described in section 702(a)(8)
of such Code derived from such trade or busi-
ness may, at his option, be deemed to be the
lower limit for the taxable year.
‘‘(3) UPPER
AND
LOWER
LIMITS.—For pur-
poses of this subsection—
522
‘‘(A) LOWER LIMIT.—The lower limit for
any taxable year is the sum of the amounts ap-
plicable under section 213(d) for calendar quar-
ters ending with or within such taxable year.
‘‘(B) UPPER LIMIT.—The upper limit for
any taxable year is the amount equal to 150
percent of the lower limit for such taxable year.
‘‘(4) DETERMINATION OF GROSS INCOME.—For
purposes of this subsection, the term ‘gross income
’means—
‘‘(A) in the case of any such trade or busi-
ness in which the income is computed under a
cash receipts and disbursements method, the
gross receipts from such trade or business re-
duced by the cost or other basis of property
which was purchased and sold in carrying on
such trade or business, adjusted (after such re-
duction) in accordance with the provisions of
paragraphs (1) through (6) and paragraph (8)
of subsection (a), and
‘‘(B) in the case of any such trade or busi-
ness in which the income is computed under an
accrual method, the gross income from such
trade or business, adjusted in accordance with
523
the provisions of paragraphs (1) through (6)
and paragraph (8) of subsection (a).
‘‘(5) INCOME
DERIVED
FROM
MORE
THAN
TRADE
OR
BUSINESS.—For purposes of this sub-
section, if an individual (including a member of a
partnership) derives gross income from more than 1
such trade or business, such gross income (including
his distributive share of the gross income of any
partnership derived from any such trade or busi-
ness) shall be deemed to have been derived from one
trade or business.
‘‘(6) ELECTION.—The option under
this subsection shall be allowed for any
taxable year only if elected on the first re-
turn filed for such taxable year.’’
(2) CONFORMING AMENDMENT.—Subsection (a)
of section 211 of the Social Security Act is amended
by striking all that follows the first sentence follow-
ing paragraph (15) and inserting ‘‘For optional
method of determining net earnings from self-em-
ployment, see subsection (g).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
524
SEC. 1204. TREATMENT OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.
(a) IN GENERAL.—Section 162 (relating to trade or
business expenses) is amended by redesignating subsection
(o) as subsection (p) and by inserting after subsection (n)
the following new subsection:
‘‘(o) TREATMENT
OF CERTAIN REIMBURSED EX-
PENSES OF RURAL MAIL CARRIERS.—
‘‘(1) GENERAL RULE.—In the case of any em-
ployee of the United States Postal Service who per-
forms services involving the collection and delivery of
mail on a rural route and who receives qualified re-
imbursements for the expenses incurred by such em-
ployee for the use of a vehicle in performing such
services—
‘‘(A) the amount allowable as a deduction
under this chapter for the use of a vehicle in
performing such services shall be equal to the
amount of such qualified reimbursements; and
‘‘(B) such qualified reimbursements shall
be treated as paid under a reimbursement or
other expense allowance arrangement for pur-
poses of section 62(a)(2)(A) (and section 62(c)
shall not apply to such qualified reimburse-
ments).
525
‘‘(2) DEFINITION OF QUALIFIED REIMBURSE-
MENTS.—For purposes of this subsection, the term
‘qualified reimbursements’ means the amounts paid
by the United States Postal Service to employees as
an equipment maintenance allowance under the
1991 collective bargaining agreement between the
United States Postal Service and the National Rural
Letter Carriers’ Association. Amounts paid as an
equipment maintenance allowance by such Postal
Service under later collective bargaining agreements
that supersede the 1991 agreement shall be consid-
ered qualified reimbursements if such amounts do
not exceed the amounts that would have been paid
under the 1991 agreement, adjusted for changes in
the Consumer Price Index (as defined in section
1(f)(5)) since 1991.’’
(b) TECHNICAL AMENDMENT.—Section 6008 of the
Technical and Miscellaneous Revenue Act of 1988 is here-
by repealed.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
526
SEC. 1205. TREATMENT OF TRAVELING EXPENSES OF CER-
TAIN FEDERAL EMPLOYEES ENGAGED IN
CRIMINAL INVESTIGATIONS.
(a) IN GENERAL.—Subsection (a) of section 162 is
amended by adding at the end the following new sentence:
‘‘The preceding sentence shall not apply to any Federal
employee during any period for which such employee is
certified by the Attorney General (or the designee thereof)
as traveling on behalf of the United States in temporary
duty status to investigate, or provide support services for
the investigation of, a Federal crime.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts paid or incurred
with respect to taxable years ending after the date of the
enactment of this Act.
SEC. 1206. PAYMENT OF TAX BY COMMERCIALLY ACCEPT-
ABLE MEANS.
(a) GENERAL RULE.—Section 6311 is amended to
read as follows:
‘‘SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPT-
ABLE MEANS.
‘‘(a) AUTHORITY TO RECEIVE.—It shall be lawful for
the Secretary to receive for internal revenue taxes (or in
payment for internal revenue stamps) any commercially
acceptable means that the Secretary deems appropriate to
527
the extent and under the conditions provided in regula-
tions prescribed by the Secretary.
‘‘(b) ULTIMATE
LIABILITY.—If a check, money
order, or other method of payment, including payment by
credit card, debit card, or charge card so received is not
duly paid, or is paid and subsequently charged back to
the Secretary, the person by whom such check, or money
order, or other method of payment has been tendered shall
remain liable for the payment of the tax or for the stamps,
and for all legal penalties and additions, to the same ex-
tent as if such check, money order, or other method of
payment had not been tendered.
‘‘(c) LIABILITY OF BANKS AND OTHERS.—If any cer-
tified, treasurer’s, or cashier’s check (or other guaranteed
draft), or any money order, or any other means of pay-
ment that has been guaranteed by a financial institution
(such as a credit card, debit card, or charge card trans-
action which has been guaranteed expressly by a financial
institution) so received is not duly paid, the United States
shall, in addition to its right to exact payment from the
party originally indebted therefor, have a lien for—
‘‘(1) the amount of such check (or draft) upon
all assets of the financial institution on which
drawn,
528
‘‘(2) the amount of such money order upon all
the assets of the issuer thereof, or
‘‘(3) the guaranteed amount of any other trans-
action upon all the assets of the institution making
such guarantee,
and such amount shall be paid out of such assets in pref-
erence to any other claims whatsoever against such finan-
cial institution, issuer, or guaranteeing institution, except
the necessary costs and expenses of administration and
the reimbursement of the United States for the amount
expended in the redemption of the circulating notes of
such financial institution.
‘‘(d) PAYMENT BY OTHER MEANS.—
‘‘(1) AUTHORITY
TO
PRESCRIBE
REGULA-
TIONS.—The Secretary shall prescribe such regula-
tions as the Secretary deems necessary to receive
payment by commercially acceptable means, includ-
ing regulations that—
‘‘(A) specify which methods of payment by
commercially acceptable means will be accept-
able,
‘‘(B) specify when payment by such means
will be considered received,
‘‘(C) identify types of nontax matters re-
lated to payment by such means that are to be
529
resolved by persons ultimately liable for pay-
ment and financial intermediaries, without the
involvement of the Secretary, and
‘‘(D) ensure that tax matters will be re-
solved by the Secretary, without the involve-
ment of financial intermediaries.
‘‘(2) 
AUTHORITY
TO
ENTER
INTO
CON-
TRACTS.—Notwithstanding section 3718(f) of title
31, United States Code, the Secretary is authorized
to enter into contracts to obtain services related to
receiving payment by other means where cost bene-
ficial to the Government.
‘‘(3) SPECIAL PROVISIONS FOR USE OF CREDIT
CARDS.—If use of credit cards is accepted as a
method of payment of taxes pursuant to subsection
(a)—
‘‘(A) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by
a person by use of a credit card shall not be
subject to section 161 of the Truth-in-Lending
Act (15 U.S.C. 1666), or to any similar provi-
sions of State law, if the error alleged by the
person is an error relating to the underlying tax
liability, rather than an error relating to the
credit card account such as a computational
530
error or numerical transposition in the credit
card transaction or an issue as to whether the
person authorized payment by use of the credit
card,
‘‘(B) a payment of internal revenue taxes
(or a payment for internal revenue stamps)
shall not be subject to section 170 of the Truth-
in-Lending Act (15 U.S.C. 1666i), or to any
similar provisions of State law,
‘‘(C) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by
a person by use of a debit card shall not be
subject to section 908 of the Electronic Fund
Transfer Act (15 U.S.C. 1693f), or to any simi-
lar provisions of State law, if the error alleged
by the person is an error relating to the under-
lying tax liability, rather than an error relating
to the debit card account such as a computa-
tional error or numerical transposition in the
debit card transaction or an issue as to whether
the person authorized payment by use of the
debit card,
‘‘(D) the term ‘creditor’ under section
103(f) of the Truth-in-Lending Act (15 U.S.C.
1602(f)) shall not include the Secretary with re-
531
spect to credit card transactions in payment of
internal revenue taxes (or payment for internal
revenue stamps), and
‘‘(E) notwithstanding any other provision
of law to the contrary, in the case of payment
made by credit card or debit card transaction of
an amount owed to a person as the result of the
correction of an error under section 161 of the
Truth-in-Lending Act (15 U.S.C. 1666) or sec-
tion 908 of the Electronic Fund Transfer Act
(15 U.S.C. 1693f), the Secretary is authorized
to provide such amount to such person as a
credit to that person’s credit card or debit card
account through the applicable credit card or
debit card system.
‘‘(e) CONFIDENTIALITY OF INFORMATION.—
‘‘(1) IN
GENERAL.—Except as otherwise au-
thorized by this subsection, no person may use or
disclose any information relating to credit or debit
card transactions obtained pursuant to section
6103(k)(8) other than for purposes directly related
to the processing of such transactions, or the billing
or collection of amounts charged or debited pursuant
thereto.
‘‘(2) EXCEPTIONS.—
532
‘‘(A) Debit or credit card issuers or others
acting on behalf of such issuers may also use
and disclose such information for purposes di-
rectly related to servicing an issuer’s accounts.
‘‘(B) Debit or credit card issuers or others
directly involved in the processing of credit or
debit card transactions or the billing or collec-
tion of amounts charged or debited thereto may
also use and disclose such information for pur-
poses directly related to—
‘‘(i) statistical risk and profitability
assessment;
‘‘(ii) 
transferring 
receivables, 
ac-
counts, or interest therein;
‘‘(iii) auditing the account informa-
tion;
‘‘(iv) complying with Federal, State,
or local law; and
‘‘(v) properly authorized civil, crimi-
nal, or regulatory investigation by Federal,
State, or local authorities.
‘‘(3) PROCEDURES.—Use and disclosure of in-
formation under this paragraph shall be made only
to the extent authorized by written procedures pro-
mulgated by the Secretary.
533
‘‘(4) CROSS REFERENCE.—
‘‘For provision providing for civil damages for vio-
lation of paragraph (1), see section 7431.’’
(b) SEPARATE APPROPRIATION REQUIRED FOR PAY-
MENT OF CREDIT CARD FEES.—No amount may be paid
by the United States to a credit card issuer for the right
to receive payments of internal revenue taxes by credit
card without a separate appropriation therefor.
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter B of chapter 64 is amended by striking
the item relating to section 6311 and inserting the follow-
ing:
‘‘Sec. 6311. Payment of tax by commercially acceptable means.’’
(d) AMENDMENTS
TO SECTIONS 6103 AND 7431
WITH RESPECT TO DISCLOSURE AUTHORIZATION.—
(1) Subsection (k) of section 6103 (relating to
confidentiality and disclosure of returns and return
information) is amended by adding at the end the
following new paragraph:
‘‘(8) DISCLOSURE OF INFORMATION TO ADMIN-
ISTER SECTION 6311.—The Secretary may disclose
returns or return information to financial institu-
tions and others to the extent the Secretary deems
necessary for the administration of section 6311.
Disclosures of information for purposes other than
to accept payments by checks or money orders shall
534
be made only to the extent authorized by written
procedures promulgated by the Secretary.’’
(2) Section 7431 (relating to civil damages for
unauthorized disclosure of returns and return infor-
mation) is amended by adding at the end the follow-
ing new subsection:
‘‘(g) SPECIAL RULE FOR INFORMATION OBTAINED
UNDER SECTION 6103(k)(8).—For purposes of this sec-
tion, any reference to section 6103 shall be treated as in-
cluding a reference to section 6311(e).’’
(3) Section 6103(p)(3)(A) is amended by strik-
ing ‘‘or (6)’’ and inserting ‘‘(6), or (8)’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the day 9 months after
the date of the enactment of this Act.
Subtitle B—Provisions Relating to
Businesses Generally
SEC. 1211. 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 the following new paragraph:
‘‘(6) ELECTION TO HAVE LOOK-BACK METHOD
NOT APPLY IN DE MINIMIS CASES.—
535
‘‘(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)).
‘‘(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.
536
‘‘(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
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-
537
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 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
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.
538
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.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to contracts completed in taxable years
ending after the date of the enactment of this Act.
(2) SUBSECTION (b).—The amendments made
by subsection (b) shall apply for purposes of section
167(g) of the Internal Revenue Code of 1986 to
property placed in service after September 13, 1995.
SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROP-
ERTY AND CASUALTY INSURANCE COMPA-
NIES.
(a) IN GENERAL.—Clause (i) of section 56(g)(4)(B)
(relating to inclusion of items included for purposes of
computing earnings and profits) is amended by adding at
the end the following new sentence: ‘‘In the case of any
insurance company taxable under section 831(b), this
clause shall not apply to any amount not described in sec-
tion 834(b).’’
539
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Simplification Relating
to Electing Large Partnerships
PART I—GENERAL PROVISIONS
SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING
LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subchapter K (relating to
partners and partnerships) is amended by adding at the
end the following new part:
‘‘PART IV—SPECIAL RULES FOR ELECTING
LARGE PARTNERSHIPS
‘‘Sec. 771. Application of subchapter to electing large partner-
ships.
‘‘Sec. 772. Simplified flow-through.
‘‘Sec. 773. Computations at partnership level.
‘‘Sec. 774. Other modifications.
‘‘Sec. 775. Electing large partnership defined.
‘‘Sec. 776. Special rules for partnerships holding oil and gas prop-
erties.
‘‘Sec. 777. Regulations.
‘‘SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING
LARGE PARTNERSHIPS.
‘‘The preceding provisions of this subchapter to the
extent inconsistent with the provisions of this part shall
not apply to an electing large partnership and its partners.
540
‘‘SEC. 772. SIMPLIFIED FLOW-THROUGH.
‘‘(a) GENERAL RULE.—In determining the income
tax of a partner of an electing large partnership, such
partner shall take into account separately such partner’s
distributive share of the partnership’s—
‘‘(1) taxable income or loss from passive loss
limitation activities,
‘‘(2) taxable income or loss from other activi-
ties,
‘‘(3) net capital gain (or net capital loss)—
‘‘(A) to the extent allocable to passive loss
limitation activities, and
‘‘(B) to the extent allocable to other activi-
ties,
‘‘(4) tax-exempt interest,
‘‘(5) applicable net AMT adjustment separately
computed for—
‘‘(A) passive loss limitation activities, and
‘‘(B) other activities,
‘‘(6) general credits,
‘‘(7) low-income housing credit determined
under section 42,
‘‘(8) rehabilitation credit determined under sec-
tion 47,
‘‘(9) foreign income taxes,
‘‘(10) the credit allowable under section 29, and
541
‘‘(11) other items to the extent that the Sec-
retary determines that the separate treatment of
such items is appropriate.
‘‘(b) SEPARATE COMPUTATIONS.—In determining
the amounts required under subsection (a) to be sepa-
rately taken into account by any partner, this section and
section 773 shall be applied separately with respect to
such partner by taking into account such partner’s dis-
tributive share of the items of income, gain, loss, deduc-
tion, or credit of the partnership.
‘‘(c) TREATMENT AT PARTNER LEVEL.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, rules similar to the rules of section
702(b) shall apply to any partner’s distributive share
of the amounts referred to in subsection (a).
‘‘(2) INCOME OR LOSS FROM PASSIVE LOSS LIM-
ITATION ACTIVITIES.—For purposes of this chapter,
any partner’s distributive share of any income or
loss described in subsection (a)(1) shall be treated as
an item of income or loss (as the case may be) from
the conduct of a trade or business which is a single
passive activity (as defined in section 469). A similar
rule shall apply to a partner’s distributive share of
amounts referred to in paragraphs (3)(A) and
(5)(A) of subsection (a).
542
‘‘(3) INCOME OR LOSS FROM OTHER ACTIVI-
TIES.—
‘‘(A) IN GENERAL.—For purposes of this
chapter, any partner’s distributive share of any
income or loss described in subsection (a)(2)
shall be treated as an item of income or expense
(as the case may be) with respect to property
held for investment.
‘‘(B) DEDUCTIONS
FOR
LOSS
NOT
SUB-
JECT
TO
SECTION
67.—The deduction under
section 212 for any loss described in subpara-
graph (A) shall not be treated as a miscellane-
ous itemized deduction for purposes of section
67.
‘‘(4) TREATMENT
OF
NET
CAPITAL
GAIN
OR
LOSS.—For purposes of this chapter, any partner’s
distributive share of any gain or loss described in
subsection (a)(3) shall be treated as a long-term
capital gain or loss, as the case may be.
‘‘(5) MINIMUM TAX TREATMENT.—In determin-
ing the alternative minimum taxable income of any
partner, such partner’s distributive share of any ap-
plicable net AMT adjustment shall be taken into ac-
count in lieu of making the separate adjustments
provided in sections 56, 57, and 58 with respect to
543
the items of the partnership. Except as provided in
regulations, the applicable net AMT adjustment
shall be treated, for purposes of section 53, as an
adjustment or item of tax preference not specified in
section 53(d)(1)(B)(ii).
‘‘(6) GENERAL CREDITS.—A partner’s distribu-
tive share of the amount referred to in paragraph
(6) of subsection (a) shall be taken into account as
a current year business credit.
‘‘(d) OPERATING RULES.—For purposes of this sec-
tion—
‘‘(1) PASSIVE
LOSS
LIMITATION
ACTIVITY.—
The term ‘passive loss limitation activity’ means—
‘‘(A) any activity which involves the con-
duct of a trade or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term
‘trade or business’ includes any activity treated as a
trade or business under paragraph (5) or (6) of sec-
tion 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-
exempt interest’ means interest excludable from
gross income under section 103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
544
‘‘(A) IN
GENERAL.—The applicable net
AMT adjustment is—
‘‘(i) with respect to taxpayers other
than corporations, the net adjustment de-
termined by using the adjustments applica-
ble to individuals, and
‘‘(ii) with respect to corporations, the
net adjustment determined by using the
adjustments applicable to corporations.
‘‘(B) NET ADJUSTMENT.—The term ‘net
adjustment’ means the net adjustment in the
items attributable to passive loss activities or
other activities (as the case may be) which
would result if such items were determined with
the adjustments of sections 56, 57, and 58.
‘‘(4) TREATMENT
OF
CERTAIN
SEPARATELY
STATED ITEMS.—
‘‘(A) EXCLUSION
FOR
CERTAIN
PUR-
POSES.—In determining the amounts referred
to in paragraphs (1) and (2) of subsection (a),
any net capital gain or net capital loss (as the
case may be), and any item referred to in sub-
section (a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net cap-
ital gain shall be treated—
545
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
gain does not exceed the net capital gain
determined by only taking into account
gains and losses from sales and exchanges
of property used in connection with such
activities, and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount
allocated under clause (i).
A similar rule shall apply for purposes of allo-
cating any net capital loss.
‘‘(C) NET CAPITAL LOSS.—The term ‘net
capital loss’ means the excess of the losses from
sales or exchanges of capital assets over the
gains from sales or exchange of capital assets.
‘‘(5) GENERAL
CREDITS.—The term ‘general
credits’ means any credit other than the low-income
housing credit, the rehabilitation credit, the foreign
tax credit, and the credit allowable under section 29.
‘‘(6) FOREIGN INCOME TAXES.—The term ‘for-
eign income taxes’ means taxes described in section
901 which are paid or accrued to foreign countries
and to possessions of the United States.
546
‘‘(e) SPECIAL RULE
FOR UNRELATED BUSINESS
TAX.—In the case of a partner which is an organization
subject to tax under section 511, such partner’s distribu-
tive share of any items shall be taken into account sepa-
rately to the extent necessary to comply with the provi-
sions of section 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in an elect-
ing large partnership other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
‘‘(2) such partner’s distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
an electing large partnership shall be computed in
the same manner as in the case of an individual ex-
cept that—
547
‘‘(A) the items described in section 772(a)
shall be separately stated, and
‘‘(B) the modifications of subsection (b)
shall apply.
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of an electing
large partnership or the computation of any credit
of an electing large partnership shall be made by the
partnership; except that the election under section
901, and any election under section 108, shall be
made by each partner separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), all limitations and other pro-
visions affecting the computation of the taxable
income of an electing large partnership or the
computation of any credit of an electing large
partnership shall be applied at the partnership
level (and not at the partner level).
‘‘(B) CERTAIN LIMITATIONS APPLIED AT
PARTNER
LEVEL.—The following provisions
shall be applied at the partner level (and not at
the partnership level):
‘‘(i) Section 68 (relating to overall
limitation on itemized deductions).
548
‘‘(ii) Sections 49 and 465 (relating to
at risk limitations).
‘‘(iii) Section 469 (relating to limita-
tion on passive activity losses and credits).
‘‘(iv) Any other provision specified in
regulations.
‘‘(4) COORDINATION
WITH
OTHER
PROVI-
SIONS.—Paragraphs (2) and (3) shall apply notwith-
standing any other provision of this chapter other
than this part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAX-
ABLE INCOME.—In determining the taxable income of an
electing large partnership—
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.—
The following deductions shall not be allowed:
‘‘(A) The deduction for personal exemp-
tions provided in section 151.
‘‘(B) The net operating loss deduction pro-
vided in section 172.
‘‘(C) The additional itemized deductions
for individuals provided in part VII of sub-
chapter B (other than section 212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determin-
ing the amount allowable under section 170, the lim-
itation of section 170(b)(2) shall apply.
549
‘‘(3) COORDINATION WITH SECTION 67.—In lieu
of applying section 67, 70 percent of the amount of
the miscellaneous itemized deductions shall be dis-
allowed.
‘‘(c) SPECIAL RULES FOR INCOME FROM DISCHARGE
OF INDEBTEDNESS.—If an electing large partnership has
income from the discharge of any indebtedness—
‘‘(1) such income shall be excluded in determin-
ing the amounts referred to in section 772(a), and
‘‘(2) in determining the income tax of any part-
ner of such partnership—
‘‘(A) such income shall be treated as an
item required to be separately taken into ac-
count under section 772(a), and
‘‘(B) the provisions of section 108 shall be
applied without regard to this part.
‘‘SEC. 774. OTHER MODIFICATIONS.
‘‘(a) TREATMENT OF CERTAIN OPTIONAL ADJUST-
MENTS, ETC.—In the case of an electing large partner-
ship—
‘‘(1) computations under section 773 shall be
made without regard to any adjustment under sec-
tion 743(b) or 108(b), but
‘‘(2) a partner’s distributive share of any
amount referred to in section 772(a) shall be appro-
550
priately adjusted to take into account any adjust-
ment under section 743(b) or 108(b) with respect to
such partner.
‘‘(b) CREDIT RECAPTURE DETERMINED AT PART-
NERSHIP LEVEL.—
‘‘(1) IN GENERAL.—In the case of an electing
large partnership—
‘‘(A) any credit recapture shall be taken
into account by the partnership, and
‘‘(B) the amount of such recapture shall be
determined as if the credit with respect to
which the recapture is made had been fully uti-
lized to reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO AC-
COUNT.—An electing large partnership shall take
into account a credit recapture by reducing the
amount of the appropriate current year credit to the
extent thereof, and if such recapture exceeds the
amount of such current year credit, the partnership
shall be liable to pay such excess.
‘‘(3) DISPOSITIONS NOT TO TRIGGER RECAP-
TURE.—No credit recapture shall be required by rea-
son of any transfer of an interest in an electing
large partnership.
551
‘‘(4) CREDIT
RECAPTURE.—For purposes of
this subsection, the term ‘credit recapture’ means
any increase in tax under section 42(j) or 50(a).
‘‘(c) PARTNERSHIP NOT TERMINATED BY REASON
OF CHANGE IN OWNERSHIP.—Subparagraph (B) of sec-
tion 708(b)(1) shall not apply to an electing large partner-
ship.
‘‘(d) PARTNERSHIP ENTITLED TO CERTAIN CRED-
ITS.—The following shall be allowed to an electing large
partnership and shall not be taken into account by the
partners of such partnership:
‘‘(1) The credit provided by section 34.
‘‘(2) Any credit or refund under section
852(b)(3)(D).
‘‘(e) TREATMENT OF REMIC RESIDUALS.—For pur-
poses of applying section 860E(e)(6) to any electing large
partnership—
‘‘(1) all interests in such partnership shall be
treated as held by disqualified organizations,
‘‘(2) in lieu of applying subparagraph (C) of
section 860E(e)(6), the amount subject to tax under
section 860E(e)(6) shall be excluded from the gross
income of such partnership, and
‘‘(3) subparagraph (D) of section 860E(e)(6)
shall not apply.
552
‘‘(f) SPECIAL RULES FOR APPLYING CERTAIN IN-
STALLMENT SALE RULES.—In the case of an electing
large partnership—
‘‘(1) the provisions of sections 453(l)(3) and
453A shall be applied at the partnership level, and
‘‘(2) in determining the amount of interest pay-
able under such sections, such partnership shall be
treated as subject to tax under this chapter at the
highest rate of tax in effect under section 1 or 11.
‘‘SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN
GENERAL.—The term ‘electing large
partnership’ means, with respect to any partnership
taxable year, any partnership if—
‘‘(A) the number of persons who were part-
ners in such partnership in the preceding part-
nership taxable year equaled or exceeded 100,
and
‘‘(B) such partnership elects the applica-
tion of this part.
To the extent provided in regulations, a partnership
shall cease to be treated as an electing large part-
nership for any partnership taxable year if in such
taxable year fewer than 100 persons were partners
in such partnership.
553
‘‘(2) ELECTION.—The election under this sub-
section shall apply to the taxable year for which
made and all subsequent taxable years unless re-
voked with the consent of the Secretary.
‘‘(b) SPECIAL RULES FOR CERTAIN SERVICE PART-
NERSHIPS.—
‘‘(1) CERTAIN PARTNERS NOT COUNTED.—For
purposes of this section, the term ‘partner’ does not
include any individual performing substantial serv-
ices in connection with the activities of the partner-
ship and holding an interest in such partnership, or
an individual who formerly performed substantial
services in connection with such activities and who
held an interest in such partnership at the time the
individual performed such services.
‘‘(2) EXCLUSION.—For purposes of this part,
an election under subsection (a) shall not be effec-
tive with respect to any partnership if substantially
all the partners of such partnership—
‘‘(A) are individuals performing substantial
services in connection with the activities of such
partnership or are personal service corporations
(as defined in section 269A(b)) the owner-em-
ployees (as defined in section 269A(b)) of which
perform such substantial services,
554
‘‘(B) are retired partners who had per-
formed such substantial services, or
‘‘(C) are spouses of partners who are per-
forming (or had previously performed) such
substantial services.
‘‘(3) SPECIAL RULE FOR LOWER TIER PART-
NERSHIPS.—For purposes of this subsection, the ac-
tivities of a partnership shall include the activities of
any other partnership in which the partnership owns
directly an interest in the capital and profits of at
least 80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For pur-
poses of this part, an election under subsection (a) shall
not be effective with respect to any partnership the prin-
cipal activity of which is the buying and selling of com-
modities (not described in section 1221(1)), or options, fu-
tures, or forwards with respect to such commodities.
‘‘(d) SECRETARY MAY RELY ON TREATMENT ON RE-
TURN.—If, on the partnership return of any partnership,
such partnership is treated as an electing large partner-
ship, such treatment shall be binding on such partnership
and all partners of such partnership but not on the Sec-
retary.
555
‘‘SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING
OIL AND GAS PROPERTIES.
‘‘(a) COMPUTATION OF PERCENTAGE DEPLETION.—
In the case of an electing large partnership, except as pro-
vided in subsection (b)—
‘‘(1) the allowance for depletion under section
611 with respect to any partnership oil or gas prop-
erty shall be computed at the partnership level with-
out regard to any provision of section 613A requir-
ing such allowance to be computed separately by
each partner,
‘‘(2) such allowance shall be determined without
regard to the provisions of section 613A(c) limiting
the amount of production for which percentage de-
pletion is allowable and without regard to paragraph
(1) of section 613A(d), and
‘‘(3) paragraph (3) of section 705(a) shall not
apply.
‘‘(b) TREATMENT OF CERTAIN PARTNERS.—
‘‘(1) IN GENERAL.—In the case of a disquali-
fied person, the treatment under this chapter of
such person’s distributive share of any item of in-
come, gain, loss, deduction, or credit attributable to
any partnership oil or gas property shall be deter-
mined without regard to this part. Such person’s
distributive share of any such items shall be ex-
556
cluded for purposes of making determinations under
sections 772 and 773.
‘‘(2) DISQUALIFIED PERSON.—For purposes of
paragraph (1), the term ‘disqualified person’ means,
with respect to any partnership taxable year—
‘‘(A) any person referred to in paragraph
(2) or (4) of section 613A(d) for such person’s
taxable year in which such partnership taxable
year ends, and
‘‘(B) any other person if such person’s av-
erage daily production of domestic crude oil and
natural gas for such person’s taxable year in
which such partnership taxable year ends ex-
ceeds 500 barrels.
‘‘(3) AVERAGE DAILY PRODUCTION.—For pur-
poses of paragraph (2), a person’s average daily pro-
duction of domestic crude oil and natural gas for
any taxable year shall be computed as provided in
section 613A(c)(2)—
‘‘(A) by taking into account all production
of domestic crude oil and natural gas (including
such person’s proportionate share of any pro-
duction of a partnership),
‘‘(B) by treating 6,000 cubic feet of natu-
ral gas as a barrel of crude oil, and
557
‘‘(C) by treating as 1 person all persons
treated as 1 taxpayer under section 613A(c)(8)
or among whom allocations are required under
such section.
‘‘SEC. 777. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as
may be appropriate to carry out the purposes of this
part.’’
(b) CLERICAL AMENDMENT.—The table of parts for
subchapter K of chapter 1 is amended by adding at the
end the following new item:
‘‘Part IV. Special rules for electing large partnerships.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years begin-
ning after December 31, 1997.
SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING
LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Chapter 63 is amended by
adding at the end thereof the following new subchapter:
‘‘Subchapter D—Treatment of electing large
partnerships
‘‘Part I. Treatment of partnership items and adjustments.
‘‘Part II. Partnership level adjustments.
‘‘Part III. Definitions and special rules.
558
‘‘PART I—TREATMENT OF PARTNERSHIP ITEMS
AND ADJUSTMENTS
‘‘Sec. 6240. Application of subchapter.
‘‘Sec. 6241. Partner’s return must be consistent with partnership
return.
‘‘Sec. 6242. Procedures for taking partnership adjustments into
account.
‘‘SEC. 6240. APPLICATION OF SUBCHAPTER.
‘‘(a) GENERAL RULE.—This subchapter shall only
apply to electing large partnerships and partners in such
partnerships.
‘‘(b) COORDINATION WITH OTHER PARTNERSHIP
AUDIT PROCEDURES.—
‘‘(1) IN GENERAL.—Subchapter C of this chap-
ter shall not apply to any electing large partnership
other than in its capacity as a partner in another
partnership which is not an electing large partner-
ship.
‘‘(2) TREATMENT WHERE PARTNER IN OTHER
PARTNERSHIP.—If an electing large partnership is a
partner in another partnership which is not an elect-
ing large partnership—
‘‘(A) subchapter C of this chapter shall
apply to items of such electing large partner-
ship which are partnership items with respect
to such other partnership, but
559
‘‘(B) any adjustment under such sub-
chapter C shall be taken into account in the
manner provided by section 6242.
‘‘SEC. 6241. PARTNER’S RETURN MUST BE CONSISTENT
WITH PARTNERSHIP RETURN.
‘‘(a) GENERAL RULE.—A partner of any electing
large partnership shall, on the partner’s return, treat each
partnership item attributable to such partnership in a
manner which is consistent with the treatment of such
partnership item on the partnership return.
‘‘(b) UNDERPAYMENT
DUE
TO
INCONSISTENT
TREATMENT ASSESSED AS MATH ERROR.—Any under-
payment of tax by a partner by reason of failing to comply
with the requirements of subsection (a) shall be assessed
and collected in the same manner as if such underpayment
were on account of a mathematical or clerical error ap-
pearing on the partner’s return. Paragraph (2) of section
6213(b) shall not apply to any assessment of an underpay-
ment referred to in the preceding sentence.
‘‘(c) ADJUSTMENTS NOT TO AFFECT PRIOR YEAR
OF PARTNERS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a) and (b) shall apply with-
out regard to any adjustment to the partnership
item under part II.
560
‘‘(2) CERTAIN
CHANGES
IN
DISTRIBUTIVE
SHARE TAKEN INTO ACCOUNT BY PARTNER.—
‘‘(A) IN
GENERAL.—To the extent that
any adjustment under part II involves a change
under section 704 in a partner’s distributive
share of the amount of any partnership item
shown on the partnership return, such adjust-
ment shall be taken into account in applying
this title to such partner for the partner’s tax-
able year for which such item was required to
be taken into account.
‘‘(B) COORDINATION
WITH
DEFICIENCY
PROCEDURES.—
‘‘(i) IN
GENERAL.—Subchapter B
shall not apply to the assessment or collec-
tion of any underpayment of tax attrib-
utable to an adjustment referred to in sub-
paragraph (A).
‘‘(ii) 
ADJUSTMENT
NOT
PRE-
CLUDED.—Notwithstanding any other law
or rule of law, nothing in subchapter B (or
in any proceeding under subchapter B)
shall preclude the assessment or collection
of any underpayment of tax (or the allow-
ance of any credit or refund of any over-
561
payment of tax) attributable to an adjust-
ment referred to in subparagraph (A) and
such assessment or collection or allowance
(or any notice thereof) shall not preclude
any notice, proceeding, or determination
under subchapter B.
‘‘(C) PERIOD OF LIMITATIONS.—The pe-
riod for—
‘‘(i) assessing any underpayment of
tax, or
‘‘(ii) filing a claim for credit or refund
of any overpayment of tax,
attributable to an adjustment referred to in
subparagraph (A) shall not expire before the
close of the period prescribed by section 6248
for making adjustments with respect to the
partnership taxable year involved.
‘‘(D) TIERED STRUCTURES.—If the part-
ner referred to in subparagraph (A) is another
partnership or an S corporation, the rules of
this paragraph shall also apply to persons hold-
ing interests in such partnership or S corpora-
tion (as the case may be); except that, if such
partner is an electing large partnership, the ad-
justment referred to in subparagraph (A) shall
563
‘‘(A) a partnership elects under this para-
graph to not take an adjustment into account
under paragraph (1),
‘‘(B) a partnership does not make such an
election but in filing its return for any partner-
ship taxable year fails to take fully into account
any partnership adjustment as required under
paragraph (1), or
‘‘(C) any partnership adjustment involves a
reduction in a credit which exceeds the
amount of such credit determined for the
partnership taxable year in which the adjust-
ment takes effect,
the partnership shall pay to the Secretary an
amount determined by applying the rules of sub-
section (b)(4) to the adjustments not so taken into
account and any excess referred to in subparagraph
(C).
‘‘(3) OFFSETTING ADJUSTMENTS TAKEN INTO
ACCOUNT.—If a partnership adjustment requires an-
other adjustment in a taxable year after the ad-
justed year and before the partnership taxable year
in which such partnership adjustment takes effect,
such other adjustment shall be taken into account
under this subsection for the partnership taxable
564
year in which such partnership adjustment takes ef-
fect.
‘‘(4) COORDINATION WITH PART II.—Amounts
taken into account under this subsection for any
partnership taxable year shall continue to be treated
as adjustments for the adjusted year for purposes of
determining whether such amounts may be read-
justed under part II.
‘‘(b) PARTNERSHIP LIABLE
FOR INTEREST
AND
PENALTIES.—
‘‘(1) IN
GENERAL.—If a partnership adjust-
ment takes effect during any partnership taxable
year and such adjustment results in an imputed
underpayment for the adjusted year, the partner-
ship—
‘‘(A) shall pay to the Secretary interest
computed under paragraph (2), and
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in
paragraph (3).
‘‘(2) DETERMINATION OF AMOUNT OF INTER-
EST.—The interest computed under this paragraph
with respect to any partnership adjustment is the in-
terest which would be determined under chapter
67—
565
‘‘(A) on the imputed underpayment deter-
mined under paragraph (4) with respect to such
adjustment,
‘‘(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the part-
nership taxable year in which such adjustment
takes effect (or, if earlier, in the case of any ad-
justment to which subsection (a)(2) applies, the
date on which the payment under subsection
(a)(2) is made).
Proper adjustments in the amount determined under
the preceding sentence shall be made for adjust-
ments required for partnership taxable years after
the adjusted year and before the year in which the
partnership adjustment takes effect by reason of
such partnership adjustment.
‘‘(3) PENALTIES.—A partnership shall be liable
for any penalty, addition to tax, or additional
amount for which it would have been liable if such
partnership had been an individual subject to tax
under chapter 1 for the adjusted year and the im-
puted underpayment determined under paragraph
(4) were an actual underpayment (or understate-
ment) for such year.
566
‘‘(4) IMPUTED UNDERPAYMENT.—For purposes
of this subsection, the imputed underpayment deter-
mined under this paragraph with respect to any
partnership adjustment is the underpayment (if any)
which would result—
‘‘(A) by netting all adjustments to items of
income, gain, loss, or deduction and by treating
any net increase in income as an underpayment
equal to the amount of such net increase multi-
plied by the highest rate of tax in effect under
section 1 or 11 for the adjusted year, and
‘‘(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net de-
crease in a loss shall be treated as an increase in in-
come and a similar rule shall apply to a net increase
in a loss.
‘‘(c) ADMINISTRATIVE PROVISIONS.—
‘‘(1) IN GENERAL.—Any payment required by
subsection (a)(2) or (b)(1)(A)—
‘‘(A) shall be assessed and collected in the
same manner as if it were a tax imposed by
subtitle C, and
567
‘‘(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
‘‘(2) INTEREST.—For purposes of determining
interest, any payment required by subsection (a)(2)
or (b)(1)(A) shall be treated as an underpayment
of tax.
‘‘(3) PENALTIES.—
‘‘(A) IN
GENERAL.—In the case of any
failure by any partnership to pay on the date
prescribed therefor any amount required by
subsection (a)(2) or (b)(1)(A), there is hereby
imposed on such partnership a penalty of 10
percent of the underpayment. For purposes of
the preceding sentence, the term ‘underpay-
ment’ means the excess of any payment re-
quired under this section over the amount (if
any) paid on or before the date prescribed
therefor.
‘‘(B) ACCURACY-RELATED
AND
FRAUD
PENALTIES MADE APPLICABLE.—For purposes
of part II of subchapter A of chapter 68, any
payment required by subsection (a)(2) shall be
treated as an underpayment of tax.
568
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) PARTNERSHIP
ADJUSTMENT.—The term
‘partnership adjustment’ means any adjustment in
the amount of any partnership item of an electing
large partnership.
‘‘(2) WHEN ADJUSTMENT TAKES EFFECT.—A
partnership adjustment takes effect—
‘‘(A) in the case of an adjustment pursu-
ant to the decision of a court in a proceeding
brought under part II, when such decision be-
comes final,
‘‘(B) in the case of an adjustment pursu-
ant to any administrative adjustment request
under section 6251, when such adjustment is
allowed by the Secretary, or
‘‘(C) in any other case, when such adjust-
ment is made.
‘‘(3) ADJUSTED
YEAR.—The term ‘adjusted
year’ means the partnership taxable year to which
the item being adjusted relates.
‘‘(4) RETURN
DUE
DATE.—The term ‘return
due date’ means, with respect to any taxable year,
the date prescribed for filing the partnership return
569
for such taxable year (determined without regard to
extensions).
‘‘(5) ADJUSTMENTS
INVOLVING
CHANGES
IN
CHARACTER.—Under regulations, appropriate ad-
justments in the application of this section shall be
made for purposes of taking into account partner-
ship adjustments which involve a change in the char-
acter of any item of income, gain, loss, or deduction.
‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction
shall be allowed under subtitle A for any payment required
to be made by an electing large partnership under this
section.
‘‘PART II—PARTNERSHIP LEVEL ADJUSTMENTS
‘‘Subpart A. Adjustments by Secretary.
‘‘Subpart B. Claims for adjustments by partnership.
‘‘Subpart A—Adjustments by Secretary
‘‘Sec. 6245. Secretarial authority.
‘‘Sec. 6246. Restrictions on partnership adjustments.
‘‘Sec. 6247. Judicial review of partnership adjustment.
‘‘Sec. 6248. Period of limitations for making adjustments.
‘‘SEC. 6245. SECRETARIAL AUTHORITY.
‘‘(a) GENERAL RULE.—The Secretary is authorized
and directed to make adjustments at the partnership level
in any partnership item to the extent necessary to have
such item be treated in the manner required.
‘‘(b) NOTICE OF PARTNERSHIP ADJUSTMENT.—
‘‘(1) IN GENERAL.—If the Secretary determines
that a partnership adjustment is required, the Sec-
570
retary is authorized to send notice of such adjust-
ment to the partnership by certified mail or reg-
istered mail. Such notice shall be sufficient if mailed
to the partnership at its last known address even if
the partnership has terminated its existence.
‘‘(2) FURTHER NOTICES RESTRICTED.—If the
Secretary mails a notice of a partnership adjustment
to any partnership for any partnership taxable year
and the partnership files a petition under section
6247 with respect to such notice, in the absence of
a showing of fraud, malfeasance, or misrepresenta-
tion of a material fact, the Secretary shall not mail
another such notice to such partnership with respect
to such taxable year.
‘‘(3) AUTHORITY
TO
RESCIND
NOTICE
WITH
PARTNERSHIP CONSENT.—The Secretary may, with
the consent of the partnership, rescind any notice of
a partnership adjustment mailed to such partner-
ship. Any notice so rescinded shall not be treated as
a notice of a partnership adjustment, for purposes of
this section, section 6246, and section 6247, and the
taxpayer shall have no right to bring a proceeding
under section 6247 with respect to such notice.
Nothing in this subsection shall affect any suspen-
sion of the running of any period of limitations dur-
571
ing any period during which the rescinded notice
was outstanding.
‘‘SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this chapter, no adjustment to any partnership item
may be made (and no levy or proceeding in any court for
the collection of any amount resulting from such adjust-
ment may be made, begun or prosecuted) before—
‘‘(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was
mailed to the partnership, and
‘‘(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
‘‘(b) PREMATURE ACTION MAY BE ENJOINED.—
Notwithstanding section 7421(a), any action which vio-
lates subsection (a) may be enjoined in the proper court,
including the Tax Court. The Tax Court shall have no ju-
risdiction to enjoin any action under this subsection unless
a timely petition has been filed under section 6247 and
then only in respect of the adjustments that are the sub-
ject of such petition.
‘‘(c) EXCEPTIONS
TO RESTRICTIONS
ON ADJUST-
MENTS.—
572
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR
CLERICAL ERRORS.—
‘‘(A) IN GENERAL.—If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
quired, rules similar to the rules of paragraphs
(1) and (2) of section 6213(b) shall apply to
such adjustment.
‘‘(B) SPECIAL RULE.—If an electing large
partnership is a partner in another electing
large partnership, any adjustment on account of
such partnership’s failure to comply with the
requirements of section 6241(a) with respect to
its interest in such other partnership shall be
treated as an adjustment referred to in sub-
paragraph (A), except that paragraph (2) of
section 6213(b) shall not apply to such adjust-
ment.
‘‘(2) 
PARTNERSHIP
MAY
WAIVE
RESTRIC-
TIONS.—The partnership shall at any time (whether
or not a notice of partnership adjustment has been
issued) have the right, by a signed notice in writing
filed with the Secretary, to waive the restrictions
573
provided in subsection (a) on the making of any
partnership adjustment.
‘‘(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no
proceeding under section 6247 is begun with respect to
any notice of a partnership adjustment during the 90-day
period described in subsection (a), the amount for which
the partnership is liable under section 6242 (and any in-
crease in any partner’s liability for tax under chapter 1
by reason of any adjustment under section 6242(a)) shall
not exceed the amount determined in accordance with such
notice.
‘‘SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT.
‘‘(a) GENERAL RULE.—Within 90 days after the date
on which a notice of a partnership adjustment is mailed
to the partnership with respect to any partnership taxable
year, the partnership may file a petition for a readjust-
ment of the partnership items for such taxable year with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the partnership’s principal place
of business is located, or
‘‘(3) the Claims Court.
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING
ACTION IN DISTRICT COURT OR CLAIMS COURT.—
574
‘‘(1) IN
GENERAL.—A readjustment petition
under this section may be filed in a district court of
the United States or the Claims Court only if the
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the
amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing
of the petition) if the partnership items were ad-
justed as provided by the notice of partnership ad-
justment. The court may by order provide that the
jurisdictional requirements of this paragraph are
satisfied where there has been a good faith attempt
to satisfy such requirement and any shortfall of the
amount required to be deposited is timely corrected.
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not
be treated as a payment of tax for purposes of this
title (other than chapter 67).
‘‘(c) SCOPE OF JUDICIAL REVIEW.—A court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items
of the partnership for the partnership taxable year to
which the notice of partnership adjustment relates and the
proper allocation of such items among the partners (and
the applicability of any penalty, addition to tax, or addi-
575
tional amount for which the partnership may be liable
under section 6242(b)).
‘‘(d) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this section shall have
the force and effect of a decision of the Tax Court or a
final judgment or decree of the district court or the Claims
Court, as the case may be, and shall be reviewable as such.
The date of any such determination shall be treated as
being the date of the court’s order entering the decision.
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If
an action brought under this section is dismissed other
than by reason of a rescission under section 6245(b)(3),
the decision of the court dismissing the action shall be con-
sidered as its decision that the notice of partnership ad-
justment is correct, and an appropriate order shall be en-
tered in the records of the court.
‘‘SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, no adjustment under this subpart to any
partnership item for any partnership taxable year may be
made after the date which is 3 years after the later of—
‘‘(1) the date on which the partnership return
for such taxable year was filed, or
576
‘‘(2) the last day for filing such return for such
year (determined without regard to extensions).
‘‘(b) EXTENSION BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period
under this subsection) may be extended by an agreement
entered into by the Secretary and the partnership before
the expiration of such period.
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.—
‘‘(1) FALSE RETURN.—In the case of a false or
fraudulent partnership return with intent to evade
tax, the adjustment may be made at any time.
‘‘(2) SUBSTANTIAL OMISSION OF INCOME.—If
any partnership omits from gross income an amount
properly includible therein which is in excess of 25
percent of the amount of gross income stated in its
return, subsection (a) shall be applied by substitut-
ing ‘6 years’ for ‘3 years’.
‘‘(3) NO RETURN.—In the case of a failure by
a partnership to file a return for any taxable year,
the adjustment may be made at any time.
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on be-
half of the partnership shall not be treated as a re-
turn of the partnership.
577
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE
OF ADJUSTMENT.—If notice of a partnership adjustment
with respect to any taxable year is mailed to the partner-
ship, the running of the period specified in subsection (a)
(as modified by the other provisions of this section) shall
be suspended—
‘‘(1) for the period during which an action may
be brought under section 6247 (and, if a petition is
filed under section 6247 with respect to such notice,
until the decision of the court becomes final), and
‘‘(2) for 1 year thereafter.
‘‘Subpart B—Claims for Adjustments by Partnership
‘‘Sec. 6251. Administrative adjustment requests.
‘‘Sec. 6252. Judicial review where administrative adjustment re-
quest is not allowed in full.
‘‘SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
‘‘(a) GENERAL RULE.—A partnership may file a re-
quest for an administrative adjustment of partnership
items for any partnership taxable year at any time which
is—
‘‘(1) within 3 years after the later of—
‘‘(A) the date on which the partnership re-
turn for such year is filed, or
‘‘(B) the last day for filing the partnership
return for such year (determined without re-
gard to extensions), and
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‘‘(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to
such taxable year.
‘‘(b) SECRETARIAL ACTION.—If a partnership files
an administrative adjustment request under subsection
(a), the Secretary may allow any part of the requested
adjustments.
‘‘(c) SPECIAL RULE IN CASE OF EXTENSION UNDER
SECTION
6248.—If the period described in section
6248(a) is extended pursuant to an agreement under sec-
tion 6248(b), the period prescribed by subsection (a)(1)
shall not expire before the date 6 months after the expira-
tion of the extension under section 6248(b).
‘‘SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE
ADJUSTMENT REQUEST IS NOT ALLOWED IN
FULL.
‘‘(a) IN GENERAL.—If any part of an administrative
adjustment request filed under section 6251 is not allowed
by the Secretary, the partnership may file a petition for
an adjustment with respect to the partnership items to
which such part of the request relates with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
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‘‘(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.’’
(b) CLAIMS FOR REFUND.—Subsection (c) of section
6230 is amended by adding at the end the following new
paragraph:
‘‘(5) RULES FOR SEEKING INNOCENT SPOUSE
RELIEF.—
‘‘(A) IN GENERAL.—The spouse of a part-
ner may file a claim for refund on the ground
that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is at-
tributable to an adjustment to a partnership
item.
‘‘(B) TIME FOR FILING CLAIM.—Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the Secretary
mails to the spouse the notice of computational
adjustment referred to in subsection (a)(3)(A).
‘‘(C) SUIT IF CLAIM NOT ALLOWED.—If
the claim under subparagraph (B) is not al-
lowed, the spouse may bring suit with respect
to the claim within the period specified in para-
graph (3).
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‘‘(D) PRIOR DETERMINATIONS ARE BIND-
ING.—For purposes of any claim or suit under
this paragraph, the treatment of partnership
items under the settlement, the final partner-
ship administrative adjustment, or the decision
of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.’’
(c) TECHNICAL AMENDMENTS.—
(1) Paragraph (1) of section 6230(a) is amend-
ed by striking ‘‘paragraph (2)’’ and inserting ‘‘para-
graph (2) or (3)’’.
(2) Subsection (a) of section 6503 is amended
by striking ‘‘section 6230(a)(2)(A)’’ and inserting
‘‘paragraph (2)(A) or (3) of section 6230(a)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 1238. DETERMINATION OF PENALTIES AT PARTNER-
SHIP LEVEL.
(a) IN GENERAL.—Section 6221 (relating to tax
treatment determined at partnership level) is amended by
striking ‘‘item’’ and inserting ‘‘item (and the applicability