years’ were substituted for ‘3 consecutive years’ and
‘5 years’ were substituted for ‘3 years’.
‘‘(c) Nothing in this section shall be considered to
apply with respect to any annuity or survivor annuity eligi-
bility for which is based on a separation occurring before
January 1, 1996.
‘‘(d) The Office of Personnel Management shall pre-
scribe such regulations as may be necessary to carry out
this section.’’.
(2) TECHNICAL AMENDMENTS.—
(A) Section 8401(3) is amended by strik-
ing ‘‘effect;’’ and inserting ‘‘effect, subject to
section 8461a;’’.
(B) The table of sections for chapter 84 is
amended by inserting after the item relating to
section 8461 the following:
‘‘8461a. Special rules relating to average pay.’’.
(c) REGULATIONS.—The Office of Personnel Man-
agement shall prescribe such regulations as may be nec-
essary to carry out the purposes of this section, including
regulations to provide that section 302(a)(6) of the Fed-
eral Employees’ Retirement System Act of 1986 (5 U.S.C.
8331 note) shall be carried out in a manner consistent
with the amendments made by this section.
SEC. 4005. ACCRUAL RATES.
(a) CSRS.—
(1) MEMBERS.—
(A) IN
GENERAL.—Section 8339(c) is
amended by striking all that follows ‘‘with re-
spect to—’’ and inserting the following:
‘‘(1) so much of his service as a Member as is
or was performed before January 1, 1996;
‘‘(2) so much of his military service as—
‘‘(A) is creditable for the purpose of this
subsection; and
‘‘(B) is or was performed before January
1, 1996; and
‘‘(3) so much of his Congressional employee
service as is or was performed before January 1,
1996;
by multiplying 21⁄2 percent of his average pay by the years
of that service.’’.
(B) 
TECHNICAL
AMENDMENT.—Section
8332(d) is amended by striking ‘‘section
8339(c)(1)’’ and inserting ‘‘section 8339(c)’’.
(2) 
CONGRESSIONAL
EMPLOYEES.—Section
8339(b) is amended—
(A) by inserting ‘‘so much of’’ after ‘‘is
computed with respect to’’; and
(B) by inserting ‘‘as is or was performed
before January 1, 1996,’’ before ‘‘by multiply-
ing’’.
(b) FERS.—
(1) MEMBERS.—Section 8415(b) is amended by
striking ‘‘shall’’ and inserting ‘‘shall, to the extent
that such service is or was performed before Janu-
ary 1, 1996,’’.
(2) 
CONGRESSIONAL
EMPLOYEES.—Section
8415(c) is amended by striking ‘‘shall’’ and inserting
‘‘shall, to the extent that such service is or was per-
formed before January 1, 1996,’’.
(3) PROVISIONS
RELATING
TO
THE
1.1
PER-
CENT ACCRUAL RATE.—Section 8415(g) is amend-
ed—
(A) in paragraph (1) by striking ‘‘an em-
ployee under paragraph (2),’’ and inserting ‘‘an
employee or Member under paragraph (2),’’;
(B) in paragraph (2) by inserting ‘‘or
Member’’ after ‘‘in the case of an employee’’
and by striking ‘‘Congressional employee,’’; and
(C) by adding at the end the following:
‘‘(3) Notwithstanding any other provision of this sub-
section—
‘‘(A) this subsection shall not apply in the case
of a Member or Congressional employee whose sepa-
ration (on which entitlement to annuity is based) oc-
curs before January 1, 1996; and
‘‘(B) in the case of a Member or Congressional
employee to whom this subsection applies, the 1.1
percent accrual rate shall apply only with respect to
any period of service other than a period with re-
spect to which the 1.7 percent accrual rate applies
under subsection (b) or (c).’’.
SEC. 4006. ELIMINATION OF MEMBERS’ OPTION TO ELECT
NOT TO PARTICIPATE IN FERS.
(a) IN GENERAL.—Section 8401(20) is amended by
striking ‘‘2106,’’ and all that follows through the semi-
colon and inserting ‘‘2106;’’.
(b) EFFECTIVE DATE; SAVINGS PROVISION.—
(1) EFFECTIVE
DATE.—Subsection (a) shall
take effect on January 1, 1996.
(2) 
SAVINGS
PROVISION.—The 
amendment
made by subsection (a) shall not affect any election
made before such subsection takes effect.
TITLE V—MEDICARE SAVINGS
EXTENSIONS
SEC. 5001. SHORT TITLE.
This title may be cited as the ‘‘Medicare Presidential
Budget Savings Extension Act of 1995’’.
Subtitle A—Provisions Relating to
Part A of the Medicare Program
SEC. 5101. MAINTAINING SAVINGS RESULTING FROM TEM-
PORARY FREEZE ON PAYMENT INCREASES
FOR SKILLED NURSING FACILITY SERVICES.
(a) BASING UPDATES TO PER DIEM COST LIMITS ON
LIMITS FOR FISCAL YEAR 1993.—
(1) IN GENERAL.—The last sentence of section
1888(a) of the Social Security Act (42 U.S.C.
1395yy(a)) is amended by adding at the end the fol-
lowing: ‘‘(except that such updates may not take
into account any changes in the routine service costs
of skilled nursing facilities occurring during cost re-
porting periods which began during fiscal year 1994
or fiscal year 1995).’’.
(2) NO
EXCEPTIONS
PERMITTED
BASED
ON
AMENDMENT.—The Secretary of Health and Human
Services shall not consider the amendment made by
paragraph (1) in making any adjustments pursuant
to section 1888(c) of the Social Security Act.
(b) PAYMENTS
DETERMINED
ON
PROSPECTIVE
BASIS.—Any change made by the Secretary of Health and
Human Services in the amount of any prospective pay-
ment paid to a skilled nursing facility under section
1888(d) of the Social Security Act for cost reporting peri-
ods beginning on or after October 1, 1995, may not take
into account any changes in the costs of services occurring
during cost reporting periods which began during fiscal
year 1994 or fiscal year 1995.
Subtitle B—Provisions Relating to
Part B of the Medicare Program
SEC. 5201. SETTING THE PART B PREMIUM AT 25 PERCENT
OF 
PROGRAM 
EXPENDITURES 
PERMA-
NENTLY.
(a) IN GENERAL.—Section 1839(a)(3) of the Social
Security Act (42 U.S.C. 1395r(a)(3)) is amended by strik-
ing ‘‘The monthly premium’’ and all that follows through
‘‘November 1.’’ and inserting the following: ‘‘The monthly
premium shall be equal to 50 percent of the monthly actu-
arial rate for enrollees age 65 and over, as determined ac-
cording to paragraph (1), for that succeeding calendar
year.’’.
(b) CONFORMING AMENDMENTS.—Section 1839 of
such Act (42 U.S.C. 1395r) is amended—
(1) in subsection (a)(2), by striking ‘‘(b) and
(e)’’ and inserting ‘‘(b), (c), (e), and (f)’’;
(2) in the last sentence of subsection (a)(3), by
striking ‘‘and the derivation of the dollar amounts
specified in this paragraph’’; and
(3) in subsection (e)—
(A) by striking ‘‘(1)(A) Notwithstanding’’
and all that follows through ‘‘(B)’’,
(B) by striking paragraph (2), and
(C) by redesignating clauses (i) through
(v) as paragraphs (1) through (5).
Subtitle C—Provisions Relating to
Parts A and B of the Medicare
Program
SEC. 5301. PERMANENT EXTENSION OF CERTAIN SECOND-
ARY PAYER PROVISIONS.
(a) DATA MATCH.—
(1) Section 1862(b)(5)(C) of the Social Security
Act (42 U.S.C. 1395y(b)(5)(C)) is amended by strik-
ing clause (iii).
(2) Section 6103(l)(12) of the Internal Revenue
Code of 1986 is amended by striking subparagraph
(F).
(b) APPLICATION
TO DISABLED INDIVIDUALS
IN
LARGE GROUP HEALTH PLANS.—
(1) IN
GENERAL.—Section 1862(b)(1)(B) of
the Social Security Act (42 U.S.C. 1395y(b)(1)(B))
is amended—
(A) in clause (i), by striking ‘‘clause (iv)’’
and inserting ‘‘clause (iii)’’,
(B) by striking clause (iii), and
(C) by redesignating clause (iv) as clause
(iii).
(2) CONFORMING
AMENDMENTS.—Paragraphs
(1) through (3) of section 1837(i) of such Act (42
U.S.C. 1395p(i)) and the second sentence of section
1839(b) of such Act (42 U.S.C. 1395r(b)) are each
amended by striking ‘‘1862(b)(1)(B)(iv)’’ each place
it appears and inserting ‘‘1862(b)(1)(B)(iii)’’.
(c) PERIOD OF APPLICATION TO INDIVIDUALS WITH
END STAGE RENAL DISEASE.—Section 1862(b)(1)(C) of
the Social Security Act (42 U.S.C. 1395y(b)(1)(C)) is
amended—
(1) in the first sentence, by striking ‘‘12-
month’’ each place it appears and inserting ‘‘18-
month’’, and
(2) by striking the second sentence.
SEC. 5302. MAINTAINING SAVINGS RESULTING FROM TEM-
PORARY FREEZE ON PAYMENT INCREASES
FOR HOME HEALTH SERVICES.
(a) BASING UPDATES TO PER VISIT COST LIMITS ON
LIMITS
FOR
FISCAL
YEAR
1993.—Section
1861(v)(1)(L)(iii) of the Social Security Act (42 U.S.C.
1395x(v)(1)(L)(iii)) is amended by adding at the end the
following sentence: ‘‘In establishing limits under this sub-
paragraph, the Secretary may not take into account any
changes in the costs of the provision of services furnished
by home health agencies with respect to cost reporting pe-
riods which began on or after July 1, 1994, and before
July 1, 1996.’’.
(b) NO EXCEPTIONS PERMITTED BASED ON AMEND-
MENT.—The Secretary of Health and Human Services
shall not consider the amendment made by subsection (a)
in making any exemptions and exceptions pursuant to sec-
tion 1861(v)(1)(L)(ii) of the Social Security Act.
TITLE 
VI—CONTRACT 
WITH
AMERICA TAX RELIEF ACT OF
1995
SEC. 6001. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This title may be cited as the
‘‘Contract With America Tax Relief Act of 1995’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this title an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
TITLE V—CONTRACT WITH AMERICA TAX RELIEF ACT OF 1995
Sec. 6001. Short title; amendment of 1986 Code.
Subtitle A—American Dream Restoration
Sec. 6101. Family tax credit.
Sec. 6102. Credit to reduce marriage penalty.
Sec. 6103. Establishment of American Dream Savings Accounts.
Sec. 6104. Spousal IRA computed on basis of compensation of both spouses.
Subtitle B—Senior Citizens’ Equity
PART I—REPEAL OF INCREASE IN TAX ON SOCIAL SECURITY BENEFITS
Sec. 6201. Repeal of increase in tax on social security benefits.
PART II—TREATMENT OF LONG-TERM CARE INSURANCE AND SERVICES
Sec. 6211. Treatment of long-term care insurance.
Sec. 6212. Qualified long-term care services treated as medical care.
Sec. 6213. Certain exchanges of life insurance contracts for long-term care in-
surance contracts not taxable.
Sec. 6214. Exclusion from gross income for amounts withdrawn from certain
retirement plans for long-term care insurance.
PART III—TREATMENT OF ACCELERATED DEATH BENEFITS
Sec. 6221. Treatment of accelerated death benefits by recipient.
Sec. 6222. Tax treatment of companies issuing qualified accelerated death ben-
efit riders.
PART IV—INCLUSION IN GROSS INCOME OF EXCESS LONG-TERM CARE
BENEFITS
Sec. 6231. Inclusion in income of excess long-term care benefits.
Sec. 6232. Reporting requirements.
Subtitle C—Job Creation and Wage Enhancement
PART I—CAPITAL GAINS REFORM
SUBPART A—CAPITAL GAINS REDUCTION FOR TAXPAYERS OTHER THAN
CORPORATIONS
Sec. 6301. Capital gains deduction.
Sec. 6302. Indexing of certain assets acquired after December 31, 1994, for
purposes of determining gain.
SUBPART B—CAPITAL GAINS REDUCTION FOR CORPORATIONS
Sec. 6311. Reduction of alternative capital gain tax for corporations.
SUBPART C—CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE
OR EXCHANGE OF PRINCIPAL RESIDENCE
Sec. 6316. Capital loss deduction allowed with respect to sale or exchange of
principal residence.
PART II—COST RECOVERY PROVISIONS
Sec. 6321. Depreciation adjustment for certain property placed in service after
December 31, 1994.
Sec. 6322. Treatment of abandonment of lessor improvements at termination of
lease.
PART III—ALTERNATIVE MINIMUM TAX RELIEF
Sec. 6331. Phaseout of application of alternative minimum tax to corporations.
PART IV—TAXPAYER DEBT BUY-DOWN
Sec. 6341. Designation of amounts for reduction of public debt.
Sec. 6342. Public debt reduction trust fund.
Sec. 6343. Taxpayer-generated sequestration of Federal spending to reduce the
public debt.
PART V—SMALL BUSINESS INCENTIVES
Sec. 6351. Cost-of-living adjustments relating to estate and gift tax provisions.
Sec. 6352. Increase in expense treatment for small businesses.
Sec. 6353. Clarification of treatment of home office use for administrative and
management activities.
Sec. 6354. Treatment of storage of product samples.
Subtitle D—Family Reinforcement
Sec. 6401. Credit for adoption expenses.
Sec. 6402. Credit for taxpayers with certain persons requiring custodial care in
their households.
Subtitle E—Social Security Earnings Test
Sec. 6501. Adjustments in monthly exempt amount for purposes of the social
security earnings test.
Subtitle F—Technical Corrections
Sec. 6601. Coordination with other subtitles.
Sec. 6602. Amendments related to Revenue Reconciliation Act of 1990.
Sec. 6603. Amendments related to Revenue Reconciliation Act of 1993.
Sec. 6604. Miscellaneous provisions.
Subtitle A—American Dream
Restoration
SEC. 6101. FAMILY TAX CREDIT.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 is amended by inserting after sec-
tion 22 the following new section:
‘‘SEC. 23. FAMILY TAX CREDIT.
‘‘(a) ALLOWANCE OF CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter
for the taxable year an amount equal to $500 multiplied
by the number of qualifying children of the taxpayer.
‘‘(b) LIMITATION.—The amount of credit which
would (but for this subsection) be allowed by subsection
(a) shall be reduced (but not below zero) by an amount
which bears the same ratio to such amount of credit as—
‘‘(1) the excess (if any) of the taxpayer’s ad-
justed gross income (determined without regard to
sections 911, 931, and 933) over $200,000, bears to
‘‘(2) an amount equal to 100 times the dollar
amount in effect under subsection (a) for the taxable
year.
‘‘(c) QUALIFYING CHILD.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualifying child’
means any individual if—
‘‘(A) the taxpayer is allowed a deduction
under section 151 with respect to such individ-
ual for such taxable year,
‘‘(B) such individual has not attained the
age of 18 as of the close of the calendar year
in which the taxable year of the taxpayer be-
gins, and
‘‘(C) such individual bears a relationship to
the taxpayer described in section 32(c)(3)(B)
(determined without regard to clause (ii) there-
of).
‘‘(2) EXCEPTION FOR CERTAIN NONCITIZENS.—
The term ‘qualifying child’ shall not include any in-
dividual who would not be a dependent if the first
sentence of section 152(b)(3) were applied without
regard to all that follows ‘resident of the United
States’.
‘‘(d) INFLATION ADJUSTMENTS.—
‘‘(1) IN GENERAL.—In the case of a taxable
year beginning in a calendar year after 1996, the
$500 and $200,000 amounts contained in sub-
sections (a) and (b) shall each be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 1995’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
‘‘(2) ROUNDING.—If any amount as adjusted
under paragraph (1) is not a multiple of $50, such
amount shall be rounded to the nearest multiple of
$50.
‘‘(e) CERTAIN OTHER RULES APPLY.—Rules similar
to the rules of subsections (d) and (e) of section 32 shall
apply for purposes of this section.’’
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subpart A of part IV of subchapter A of chapter
1 is amended by inserting after the item relating to section
22 the following new item:
‘‘Sec. 23. Family tax credit.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 6102. CREDIT TO REDUCE MARRIAGE PENALTY.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 is amended by inserting after sec-
tion 23 the following new section:
‘‘SEC. 24. CREDIT TO REDUCE MARRIAGE PENALTY.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of a joint
return for the taxable year, there shall be allowed as a
credit against the tax imposed by this chapter for such
taxable year an amount equal to the marriage penalty re-
duction credit.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount of
credit allowed by subsection (a) for the taxable year
shall not exceed $145.
‘‘(2) CREDIT
DISALLOWED
FOR
INDIVIDUALS
CLAIMING SECTION 911, ETC.—No credit shall be al-
lowed under this section for any taxable year if ei-
ther spouse claims the benefits of section 911, 931,
or 933 for such taxable year.
‘‘(c) MARRIAGE PENALTY REDUCTION CREDIT.—For
purposes of this section—
‘‘(1) IN GENERAL.—The marriage penalty re-
duction credit is an amount equal to the excess (if
any) of—
‘‘(A) the joint tax amount of the taxpayer,
over
‘‘(B) the sum of the unmarried tax
amounts for each spouse.
‘‘(2) UNMARRIED TAX AMOUNT.—For purposes
of paragraph (1), the unmarried tax amount, with
respect to an individual, is the amount of tax which
would be imposed by section 1(c) if such individual’s
taxable income were equal to the excess (if any) of—
‘‘(A) such individual’s qualified earned in-
come for the taxable year, over
‘‘(B) the sum of—
‘‘(i) an amount equal to the basic
standard 
deduction 
under 
section
63(c)(2)(C) for the taxable year, plus
‘‘(ii) the exemption amount (as de-
fined in section 151(d)) for such taxable
year.
‘‘(3) JOINT
TAX
AMOUNT.—For purposes of
paragraph (1), the joint tax amount is the amount
of tax which would be imposed by section 1(a) if the
taxpayer’s taxable income were equal to the excess
(if any) of—
‘‘(A) the taxpayer’s qualified earned in-
come for the taxable year, over
‘‘(B) the sum of—
‘‘(i) an amount equal to the basic
standard 
deduction 
under 
section
63(c)(2)(A) for the taxable year, plus
‘‘(ii) an amount equal to twice the ex-
emption amount (as so defined) for such
taxable year.
‘‘(d) QUALIFIED EARNED INCOME.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘qualified earned
income’ means an amount equal to the excess (if
any) of—
‘‘(A) the earned income for the taxable
year, over
‘‘(B) an amount equal to the sum of the
deductions described in paragraphs (1), (2),
(6), (7), and (12) of section 62(a) to the extent
that such deductions are properly allocable to
or chargeable against earned income for such
taxable year.
The amount of qualified earned income shall be de-
termined without regard to any community property
laws.
‘‘(2) EARNED INCOME.—For purposes of para-
graph (1)—
‘‘(A) IN GENERAL.—The term ‘earned in-
come’ means income which is earned income
within the meaning of section 401(c)(2)(C) or
911(d)(2) (determined without regard to the
phrase ‘not in excess of 30 percent of his share
of the net profits of such trade or business’ in
subparagraph (B) thereof).
‘‘(B) EXCEPTION.—Such term shall not in-
clude any amount—
‘‘(i) not includible in gross income,
‘‘(ii) received as a pension or annuity,
‘‘(iii) paid or distributed out of an in-
dividual retirement plan (within the mean-
ing of section 7701(a)(37)),
‘‘(iv) received as deferred compensa-
tion, or
‘‘(v) received for services performed
by an individual in the employ of his
spouse (within the meaning of section
3121(b)(3)(B)).
‘‘(e) AMOUNT
OF CREDIT TO BE DETERMINED
UNDER TABLES.—
‘‘(1) IN GENERAL.—The amount of the credit
allowed by this section shall be determined under ta-
bles prescribed by the Secretary.
‘‘(2) REQUIREMENTS FOR TABLES.—The tables
prescribed under paragraph (1) shall reflect the pro-
visions of subsection (c) and shall round to the near-
est $25 any amount of credit which is less than the
maximum credit under subsection (b)(1).’’
(b) CLERICAL AMENDMENT.—The table of sections
for subpart A of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
23 the following new item:
‘‘Sec. 24. Credit to reduce marriage penalty.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 6103. ESTABLISHMENT OF AMERICAN DREAM SAVINGS
ACCOUNTS.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 (relating to pension, profit-sharing, stock
bonus plans, etc.) is amended by inserting after section
408 the following new section:
‘‘SEC. 408A. AMERICAN DREAM SAVINGS ACCOUNTS.
‘‘(a) GENERAL RULE.—Except as provided in this
section, an American Dream Savings Account shall be
treated for purposes of this title in the same manner as
an individual retirement plan.
‘‘(b) AMERICAN DREAM SAVINGS ACCOUNT.—For
purposes of this title, the term ‘American Dream Savings
Account’ or ‘ADS account’ means an individual retirement
plan which is designated at the time of the establishment
of the plan as an American Dream Savings Account. Such
designation shall be made in such manner as the Secretary
may prescribe.
‘‘(c) CONTRIBUTION RULES.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed under section 219 for a contribution
to an ADS account.
‘‘(2) CONTRIBUTION LIMIT.—
‘‘(A) 
IN
GENERAL.—The 
aggregate
amount of contributions (other than rollover
contributions) for any taxable year to all ADS
accounts maintained for the benefit of an indi-
vidual shall not exceed the lesser of—
‘‘(i) $2,000, or
‘‘(ii) an amount equal to the com-
pensation includible in the individual’s
gross income for such taxable year.
‘‘(B) $4,000 LIMITATION FOR CERTAIN AD-
DITIONAL MARRIED INDIVIDUALS.—
‘‘(i) IN GENERAL.—In the case of an
individual to whom this subparagraph ap-
plies for the taxable year, the limitation of
subparagraph (A)(ii) shall be equal to the
sum of—
‘‘(I) the compensation includible
in such individual’s gross income for
the taxable year, plus
‘‘(II) the compensation includible
in the gross income of such individ-
ual’s spouse for the taxable year re-
duced by the amount of the limitation
under subparagraph (A) applicable to
such spouse for such taxable year.
‘‘(ii) INDIVIDUALS TO WHOM CLAUSE
(i) APPLIES.—Clause (i) shall apply to any
individual if—
‘‘(I) such individual files a joint
return for the taxable year, and
‘‘(II) the amount of compensa-
tion (if any) includible in such individ-
ual’s gross income for the taxable year
is less than the compensation includ-
ible in the gross income of such indi-
vidual’s spouse for the taxable year.
‘‘(C) ADJUSTMENT FOR INFLATION.—
‘‘(i) IN GENERAL.—In the case of a
taxable year beginning in a calendar year
after 1996, the $2,000 amount contained
in subparagraph (A) shall be increased by
an amount equal to—
‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjust-
ment under section 1(f)(3) for the cal-
endar year in which the taxable year
begins, determined by substituting
‘calendar year 1995’ for ‘calendar
year 1992’ in subparagraph (B) there-
of.
‘‘(ii) ROUNDING.—If any amount as
adjusted under clause (i) is not a multiple
of $50, such amount shall be rounded to
the nearest multiple of $50.
‘‘(D) TAX ON EXCESS CONTRIBUTIONS.—
Section 4973 shall be applied separately with
respect to individual retirement plans which are
ADS accounts and individual retirement plans
which are not ADS accounts; except that, for
purposes of applying such section with respect
to individual retirement plans which are ADS
accounts, excess contributions shall be consid-
ered to be any amounts in excess of the limita-
tion under subsection (c)(2)(A).
‘‘(3) CONTRIBUTIONS PERMITTED AFTER AGE
701⁄2.—Contributions to an ADS account may be
made even after the individual for whom the account
is maintained has attained age 701⁄2.
‘‘(4) MANDATORY
DISTRIBUTION
RULES
NOT
TO APPLY, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), subsections (a)(6) and (b)(3)
of section 408 (relating to required distribu-
tions) and section 4974 (relating to excise tax
on certain accumulations in qualified retirement
plans) shall not apply to any ADS account.
‘‘(B) POST-DEATH DISTRIBUTIONS.—Rules
similar to the rules of section 401(a)(9) (other
than subparagraph (A) thereof) shall apply for
purposes of this section.
‘‘(5) LIMITATIONS
ON
ROLLOVER
CONTRIBU-
TIONS.—No rollover contribution may be made to an
ADS account unless—
‘‘(A) such contribution is from another
ADS account, or
‘‘(B) such contribution is from an individ-
ual retirement plan (other than an ADS ac-
count) and is made before January 1, 1998.
‘‘(d) DISTRIBUTION RULES.—For purposes of this
title—
‘‘(1) GENERAL RULES.—
‘‘(A) EXCLUSION FROM GROSS INCOME.—
No portion of a qualified distribution from an
ADS account shall be includible in gross in-
come.
‘‘(B) EXCEPTION FROM PENALTY TAX.—
Section 72(t) shall not apply to—
‘‘(i) any qualified distribution from an
ADS account, and
‘‘(ii) any qualified special purpose dis-
tribution (whether or not a qualified dis-
tribution) from an ADS account.
‘‘(2) QUALIFIED DISTRIBUTION.—For purposes
of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
distribution’ means any payment or distribu-
tion—
‘‘(i) made on or after the date on
which the individual attains age 591⁄2,
‘‘(ii) made to a beneficiary (or to the
estate of the individual) on or after the
death of the individual,
‘‘(iii) attributable to the individual’s
being disabled (within the meaning of sec-
tion 72(m)(7)), or
‘‘(iv) which is a qualified special pur-
pose distribution.
‘‘(B) DISTRIBUTIONS WITHIN 5 YEARS.—
No payment or distribution shall be treated as
a qualified distribution if—
‘‘(i) it is made within the 5-taxable
year period beginning with the 1st taxable
year for which the individual made a con-
tribution to an ADS account (or such indi-
vidual’s spouse made a contribution to an
ADS account) established for such individ-
ual, or
‘‘(ii) in the case of a payment or dis-
tribution properly allocable to a rollover
contribution (or income allocable thereto),
it is made within 5 years after the date on
which such rollover contribution was made,
as determined under regulations prescribed
by the Secretary.
Clause (ii) shall not apply to a rollover con-
tribution from an ADS account.
‘‘(3) INCOME INCLUSION FOR ROLLOVERS FROM
NON-ADS ACCOUNTS.—In the case of any amount
paid or distributed out of an individual retirement
plan (other than an ADS account) which is paid into
an ADS account (established for the benefit of the
payee or distributee, as the case may be) before the
close of the 60th day after the day on which the
payment or distribution is received—
‘‘(A) sections 72(t) and 408(d)(3) shall not
apply, and
‘‘(B) any amount required to be included
in gross income by reason of this paragraph
shall be so included ratably over the 4-taxable
year period beginning with the taxable year in
which the payment or distribution is made.
‘‘(e) QUALIFIED
SPECIAL
PURPOSE
DISTRIBU-
TION.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified special purpose distribution’
means any payments or distributions from an ADS
account to the individual for whose benefit such ac-
count is established—
‘‘(A) if such payments or distributions are
qualified first-time homebuyer distributions, or
‘‘(B) to the extent such payments or dis-
tributions do not exceed—
‘‘(i) the qualified higher education ex-
penses of the taxpayer for the taxable year
in which received, and
‘‘(ii) the qualified medical expenses of
the taxpayer for the taxable year in which
received.
‘‘(2) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ‘qualified first-time home-
buyer distribution’ means any payment or dis-
tribution received by an individual to the extent
such payment or distribution is used by the in-
dividual before the close of the 60th day after
the day on which such payment or distribution
is received to pay qualified acquisition costs
with respect to a principal residence for such
individual as a first-time homebuyer.
‘‘(B) QUALIFIED
ACQUISITION
COSTS.—
For purposes of this paragraph, the term
‘qualified acquisition costs’ means the costs of
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(C) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual if such individual (and, if married,
such individual’s spouse) had no present
ownership interest in a principal residence
during the 3-year period ending on the
date of acquisition of the principal resi-
dence to which this paragraph applies.
‘‘(ii) 
PRINCIPAL
RESIDENCE.—The
term ‘principal residence’ has the same
meaning as when used in section 1034.
‘‘(iii) DATE
OF
ACQUISITION.—The
term ‘date of acquisition’ means the date—
‘‘(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is en-
tered into, or
‘‘(II) on which a binding contract
to construct or reconstruct such a
principal residence is entered into.
‘‘(D) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—If any payment or distribution out
of an ADS account fails to meet the require-
ments of subparagraph (A) solely by reason of
a delay or cancellation of the purchase, con-
struction, or reconstruction of the residence, the
amount of the payment or distribution may be
contributed to an ADS account as provided in
subsection (d)(3)(A)(i) of section 408 (deter-
mined by substituting ‘120th day’ for ‘60th
day’ in such subsection), except that—
‘‘(i) subsection (d)(3)(B) of such sec-
tion shall not be applied to such contribu-
tion, and
‘‘(ii) such amount shall not be taken
into account in determining whether sub-
section (d)(3)(A)(i) of such section applies
to any other amount.
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means tuition, fees,
books, supplies, and equipment required for the
enrollment or attendance of—
‘‘(i) the taxpayer,
in section 7702B(b)) for coverage of the tax-
payer or his spouse.
‘‘(f) OTHER DEFINITIONS.—For purposes of this sec-
tion—
‘‘(1) ROLLOVER
CONTRIBUTIONS.—The term
‘rollover contributions’ means contributions de-
scribed in sections 402(c), 403(a)(4), 403(b)(8), or
408(d)(3).
‘‘(2) COMPENSATION.—The term ‘compensa-
tion’ has the meaning given such term by section
219(f).’’
(b) TERMINATION OF NONDEDUCTIBLE IRA CON-
TRIBUTIONS.—
(1) Section 408(o) is amended by adding at the
end the following new paragraph:
‘‘(5) TERMINATION.—This subsection shall not
apply to any designated nondeductible contribution
for any taxable year beginning after December 31,
1995.’’
(2) Section 219(f) of is amended by striking
paragraph (7).
(c) EXCESS DISTRIBUTIONS TAX NOT TO APPLY.—
Subparagraph (B) of section 4980A(e)(1) is amended by
inserting ‘‘other than an ADS account (as defined in sec-
tion 408A(b))’’ after ‘‘retirement plan’’.
(d) CLERICAL AMENDMENT.—The table of sections
for subpart A of part I of subchapter D of chapter 1 is
amended by inserting after the item relating to section
408 the following new item:
‘‘Sec. 408A. American Dream Savings Accounts.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 6104. SPOUSAL IRA COMPUTED ON BASIS OF COM-
PENSATION OF BOTH SPOUSES.
(a) IN GENERAL.—Subsection (c) of section 219 (re-
lating to special rules for certain married individuals) is
amended to read as follows:
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDI-
VIDUALS.—
‘‘(1) IN GENERAL.—In the case of an individual
to whom this paragraph applies for the taxable year,
the limitation of subsection (b)(1) shall be equal to
the lesser of—
‘‘(A) $2,000, or
‘‘(B) the sum of—
‘‘(i) the compensation includible in
such individual’s gross income for the tax-
able year, plus
‘‘(ii) the compensation includible in
the gross income of such individual’s
spouse for the taxable year reduced by the
amount allowable as a deduction under
subsection (a) to such spouse for such tax-
able year.
‘‘(2) INDIVIDUALS
TO
WHOM
PARAGRAPH
(1)
APPLIES.—Paragraph (1) shall apply to any individ-
ual if—
‘‘(A) such individual files a joint return for
the taxable year, and
‘‘(B) the amount of compensation (if any)
includible in such individual’s gross income for
the taxable year is less than the compensation
includible in the gross income of such individ-
ual’s spouse for the taxable year.’’
(b) TECHNICAL AMENDMENT.—Paragraph (2) of
section 219(f) (relating to other definitions and special
rules) is amended by striking ‘‘subsections (b) and (c)’’
and inserting ‘‘subsection (b)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
(1) Paragraph (3) of section 871(a) is amend-
ed—
(A) by striking ‘‘85 percent’’ in subpara-
graph (A) and inserting ‘‘50 percent’’, and
(B) by inserting before the last sentence
the following new flush sentence:
‘‘In the case of any taxable year beginning in a cal-
endar year after 1995 and before 2000, subpara-
graph (A) shall be applied by substituting the per-
centage determined for such calendar year under
section 86(a)(3) for ‘50 percent’.’’
(2)(A) Subparagraph (A) of section 121(e)(1)
of the Social Security Amendments of 1983 (Public
Law 98–21) is amended—
(i) by striking ‘‘(A) There’’ and inserting
‘‘There’’;
(ii) by striking ‘‘(i)’’ immediately following
‘‘amounts equivalent to’’; and
(iii) by striking ‘‘, less (ii)’’ and all that
follows and inserting a period.
(B) Paragraph (1) of section 121(e) of such Act
is amended by striking subparagraph (B).
(C) Paragraph (3) of section 121(e) of such Act
is amended by striking subparagraph (B) and by re-
designating subparagraph (C) as subparagraph (B).
(D) Paragraph (2) of section 121(e) of such
Act is amended in the first sentence by striking
‘‘paragraph (1)(A)’’ and inserting ‘‘paragraph (1)’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 1995.
(2) SUBSECTION
(c)(2).—The amendments
made by subsection (c)(2) shall apply to tax liabil-
ities for taxable years beginning after December 31,
1995.
PART II—TREATMENT OF LONG-TERM CARE
INSURANCE AND SERVICES
SEC. 6211. TREATMENT OF LONG-TERM CARE INSURANCE.
(a) GENERAL RULE.—Chapter 79 (relating to defini-
tions) is amended by inserting after section 7702A the fol-
lowing new section:
‘‘SEC. 7702B. TREATMENT OF LONG-TERM CARE INSUR-
ANCE.
‘‘(a) IN GENERAL.—For purposes of this title—
‘‘(1) a long-term care insurance contract shall
be treated as an accident and health insurance con-
tract,
‘‘(2) amounts (other than policyholder divi-
dends, as defined in section 808, or premium re-
funds) received under a long-term care insurance
contract shall be treated as amounts received for
personal injuries and sickness and shall be treated
as reimbursement for expenses actually incurred for
medical care (as defined in section 213(d)),
‘‘(3) any plan of an employer providing cov-
erage under a long-term care insurance contract
shall be treated as an accident and health plan with
respect to such coverage,
‘‘(4) except as provided in subsection (d)(3),
amounts paid for a long-term care insurance con-
tract providing the benefits described in subsection
(b)(2)(A) shall be treated as payments made for in-
surance for purposes of section 213(d)(1)(D), and
‘‘(5) a long-term care insurance contract shall
be treated as a guaranteed renewable contract sub-
ject to the rules of section 816(e).
‘‘(b) LONG-TERM CARE INSURANCE CONTRACT.—
For purposes of this title—
‘‘(1) IN GENERAL.—The term ‘long-term care
insurance contract’ means any insurance contract
if—
‘‘(A) the only insurance protection pro-
vided under such contract is coverage of quali-
fied long-term care services,
‘‘(B) such contract does not pay or reim-
burse expenses incurred for services or items to
the extent that such expenses are reimbursable
under title XVIII of the Social Security Act or
would be so reimbursable but for the applica-
tion of a deductible or coinsurance amount,
‘‘(C) such contract is guaranteed renew-
able,
‘‘(D) such contract does not provide for a
cash surrender value or other money that can
be—
‘‘(i) paid, assigned, or pledged as col-
lateral for a loan, or
‘‘(ii) borrowed,
other than as provided in subparagraph (E) or
paragraph (2)(C), and
‘‘(E) all refunds of premiums, and all pol-
icyholder dividends or similar amounts, under
such contract are to be applied as a reduction
in future premiums or to increase future bene-
fits.
‘‘(2) SPECIAL RULES.—
‘‘(A) PER
DIEM, ETC. PAYMENTS
PER-
MITTED.—A contract shall not fail to be de-
scribed in subparagraph (A) or (B) of para-
graph (1) by reason of payments being made on
a per diem or other periodic basis without re-
gard to the expenses incurred during the period
to which the payments relate.
‘‘(B) SPECIAL RULES RELATING TO MEDI-
CARE.—
‘‘(i) Paragraph (1)(B) shall not apply
to expenses which are reimbursable under
title XVIII of the Social Security Act only
as a secondary payor.
‘‘(ii) No provision of law shall be con-
strued or applied so as to prohibit the of-
fering of a long-term care insurance con-
tract on the basis that the contract coordi-
nates its benefits with those provided
under such title.
‘‘(C) REFUNDS OF PREMIUMS.—Paragraph
(1)(E) shall not apply to any refund on the
death of the insured, or on a complete surren-
der or cancellation of the contract, which can-
not exceed the aggregate premiums paid under
the contract. Any refund on a complete surren-
der or cancellation of the contract shall be in-
cludible in gross income to the extent that any
deduction or exclusion was allowable with re-
spect to the premiums.
‘‘(c) QUALIFIED LONG-TERM CARE SERVICES.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified long-
term care services’ means necessary diagnostic, pre-
ventive, therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal
care services, which—
‘‘(A) are required by a chronically ill indi-
vidual, and
‘‘(B) are provided pursuant to a plan of
care prescribed by a licensed health care practi-
tioner.
‘‘(2) CHRONICALLY ILL INDIVIDUAL.—
‘‘(A) IN GENERAL.—The term ‘chronically
ill individual’ means any individual who has
been certified by a licensed health care practi-
tioner as—
‘‘(i) being unable to perform (without
substantial assistance from another indi-
vidual) at least 2 activities of daily living
for a period of at least 90 days due to a
loss of functional capacity or to cognitive
impairment, or
‘‘(ii) having a level of disability simi-
lar (as determined by the Secretary in con-
sultation with the Secretary of Health and
Human Services) to the level of disability
described in clause (i).
Such term shall not include any individual oth-
erwise meeting the requirements of the preced-
ing sentence unless within the preceding 12-
month period a licensed health care practitioner
has certified that such individual meets such re-
quirements.
‘‘(B) ACTIVITIES OF DAILY LIVING.—For
purposes of subparagraph (A), each of the fol-
lowing is an activity of daily living:
‘‘(i) Eating.
‘‘(ii) Toileting.
‘‘(iii) Transferring.
‘‘(iv) Bathing.
‘‘(v) Dressing.
‘‘(vi) Continence.
Nothing in this section shall be construed to re-
quire a contract to take into account all of the
preceding activities of daily living.
‘‘(3) MAINTENANCE OR PERSONAL CARE SERV-
ICES.—The term ‘maintenance or personal care serv-
ices’ means any care the primary purpose of which
is the provision of needed assistance with any of the
disabilities as a result of which the individual is a
chronically ill individual (including the protection
from threats to health and safety due to severe cog-
nitive impairment).
‘‘(4) 
LICENSED
HEALTH
CARE
PRACTI-
TIONER.—The term ‘licensed health care practi-
tioner’ means any physician (as defined in section
1861(r)(1) of the Social Security Act) and any reg-
istered professional nurse, licensed social worker, or
other individual who meets such requirements as
may be prescribed by the Secretary.
‘‘(d) TREATMENT OF COVERAGE PROVIDED AS PART
OF A LIFE INSURANCE CONTRACT.—Except as otherwise
provided in regulations prescribed by the Secretary, in the
case of any long-term care insurance coverage (whether
or not qualified) provided by a rider on a life insurance
contract—
‘‘(1) IN GENERAL.—This section shall apply as
if the portion of the contract providing such cov-
erage is a separate contract.
‘‘(2) 
APPLICATION
OF
7702.—Section
7702(c)(2) (relating to the guideline premium limi-
tation) shall be applied by increasing the guideline
premium limitation with respect to a life insurance
contract, as of any date—
‘‘(A) by the sum of any charges (but not
premium payments) against the life insurance
contract’s cash surrender value (within the
meaning of section 7702(f)(2)(A)) for such cov-
erage made to that date under the contract, less
‘‘(B) any such charges the imposition of
which reduces the premiums paid for the con-
tract 
(within 
the 
meaning 
of 
section
7702(f)(1)).
‘‘(3) APPLICATION OF SECTION 213.—No deduc-
tion shall be allowed under section 213(a) for
charges against the life insurance contract’s cash
surrender value described in paragraph (2), unless
such charges are includible in income as a result of
the application of section 72(e)(10) and the rider is
a long-term care insurance contract under sub-
section (b).
‘‘(4) PORTION DEFINED.—For purposes of this
subsection, the term ‘portion’ means only the terms
and benefits under a life insurance contract that are
in addition to the terms and benefits under the con-
tract without regard to the coverage under a long-
term care insurance contract.’’
(b) RESERVE
METHOD.—Clause (iii) of section
807(d)(3)(A) is amended by inserting ‘‘(other than a long-
term care insurance contract, as defined in section
7702B(b))’’ after ‘‘insurance contract’’.
(c) LONG-TERM CARE INSURANCE NOT PERMITTED
UNDER CAFETERIA PLANS OR FLEXIBLE SPENDING AR-
RANGEMENTS.—
(1) CAFETERIA
PLANS.—Section 125(f) is
amended by adding at the end the following new
sentence: ‘‘Such term shall not include any long-
term care insurance contract (as defined in section
7702B(b)).’’
(2) FLEXIBLE
SPENDING
ARRANGEMENTS.—
The text of section 106 (relating to contributions by
employer to accident and health plans) is amended
to read as follows:
‘‘(a) GENERAL RULE.—Except as provided in sub-
section (b), gross income of an employee does not include
employer-provided coverage under an accident or health
plan.
‘‘(b) INCLUSION OF LONG-TERM CARE BENEFITS
PROVIDED THROUGH FLEXIBLE SPENDING ARRANGE-
MENTS.—
‘‘(1) IN GENERAL.—Effective on and after Jan-
uary 1, 1996, gross income of an employee shall in-
clude employer-provided coverage for qualified long-
term care services (as defined in section 7702B(c))
to the extent that such coverage is provided through
a flexible spending or similar arrangement.
‘‘(2) FLEXIBLE
SPENDING
ARRANGEMENT.—
For purposes of this subsection, a flexible spending
arrangement is a benefit program which provides
employees with coverage under which—
‘‘(A) specified incurred expenses may be
reimbursed (subject to reimbursement maxi-
mums and other reasonable conditions), and
‘‘(B) the maximum amount of reimburse-
ment which is reasonably available to a partici-
pant for such coverage is less than 500 percent
of the value of such coverage.
In the case of an insured plan, the maximum
amount reasonably available shall be determined on
the basis of the underlying coverage.’’
(d) CONTINUATION COVERAGE EXCISE TAX NOT TO
APPLY.—Subsection (f) of section 4980B is amended by
adding at the end the following new paragraph:
‘‘(9) CONTINUATION OF LONG-TERM CARE COV-
ERAGE NOT REQUIRED.—A group health plan shall
not be treated as failing to meet the requirements of
this subsection solely by reason of failing to provide
coverage under any long-term care insurance con-
tract (as defined in section 7702B(b)).’’
(e) AMOUNTS PAID TO RELATIVES TREATED AS NOT
PAID FOR MEDICAL CARE.—Section 213(d) is amended
by adding at the end the following new paragraph:
‘‘(10) CERTAIN
PAYMENTS
TO
RELATIVES
TREATED AS NOT PAID FOR MEDICAL CARE.—An
amount paid for a qualified long-term care service
(as defined in section 7702B(c)) provided to an indi-
vidual shall be treated as not paid for medical care
if such service is provided—
‘‘(A) by a relative (directly or through a
partnership, corporation, or other entity) unless
the relative is a licensed professional with re-
spect to such services, or
‘‘(B) by a corporation or partnership which
is related (within the meaning of section 267(b)
or 707(b)) to the individual.
For purposes of this paragraph, the term ‘relative’
means an individual bearing a relationship to the in-
dividual which is described in any of paragraphs (1)
through (8) of section 152(a). This paragraph shall
not apply for purposes of section 105(b) with respect
to reimbursements through insurance.’’
(f) CLERICAL AMENDMENT.—The table of sections
for chapter 79 is amended by inserting after the item re-
lating to section 7702A the following new item:
‘‘Sec. 7702B. Treatment of long-term care insurance.’’.
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to contracts issued after De-
cember 31, 1995.
(2) CONTINUATION OF EXISTING POLICIES.—In
the case of any contract issued before January 1,
1996, which met the long-term care insurance re-
quirements of the State in which the contract was
sitused at the time the contract was issued—
(A) such contract shall be treated for pur-
poses of the Internal Revenue Code of 1986 as
a long-term care insurance contract (as defined
in section 7702B(b) of such Code), and
(B) services provided under, or reimbursed
by, such contract shall be treated for such pur-
poses as qualified long-term care services (as
defined in section 7702B(c) of such Code).
(3) EXCHANGES
OF
EXISTING
POLICIES.—If,
after the date of enactment of this Act and before
January 1, 1996, a contract providing for long-term
care insurance coverage is exchanged solely for a
long-term care insurance contract (as defined in sec-
tion 7702B(b) of such Code), no gain or loss shall
be recognized on the exchange. If, in addition to a
long-term care insurance contract, money or other
property is received in the exchange, then any gain
shall be recognized to the extent of the sum of the
money and the fair market value of the other prop-
erty received. For purposes of this paragraph, the
cancellation of a contract providing for long-term
care insurance coverage and reinvestment of the can-
cellation proceeds in a long-term care insurance con-
tract within 60 days thereafter shall be treated as
an exchange.
(4) ISSUANCE
OF
CERTAIN
RIDERS
PER-
MITTED.—For purposes of applying sections 101(f),
7702, and 7702A of the Internal Revenue Code of
1986 to any contract—
(A) the issuance of a rider which is treated
as a long-term care insurance contract under
section 7702B, and
(B) the addition of any provision required
to conform any other long-term care rider to be
so treated,
shall not be treated as a modification or material
change of such contract.
SEC. 6212. QUALIFIED LONG-TERM CARE SERVICES TREAT-
ED AS MEDICAL CARE.
(a) GENERAL RULE.—Paragraph (1) of section
213(d) (defining medical care) is amended by striking
‘‘or’’ at the end of subparagraph (B), by redesignating
subparagraph (C) as subparagraph (D), and by inserting
after subparagraph (B) the following new subparagraph:
‘‘(C) for qualified long-term care services
(as defined in section 7702B(c)), or’’.
(b) TECHNICAL AMENDMENTS.—
(1) Subparagraph (D) of section 213(d)(1) (as
redesignated by subsection (a)) is amended by strik-
ing ‘‘subparagraphs (A) and (B)’’ and inserting
‘‘subparagraphs (A), (B), and (C)’’.
(2)(A) Paragraph (1) of section 213(d) is
amended by adding at the end the following new
flush sentence:
‘‘In the case of a long-term care insurance contract
(as defined in section 7702B(b)), only eligible long-
term care premiums (as defined in paragraph (11))
shall be taken into account under subparagraph
(D).’’
(B) Subsection (d) of section 213 is amended
by adding at the end the following new paragraph:
‘‘(11) 
ELIGIBLE
LONG-TERM
CARE
PRE-
MIUMS.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘eligible long-term care pre-
miums’ means the amount paid during a tax-
able year for any long-term care insurance con-
tract (as defined in section 7702B(b)) covering
an individual, to the extent such amount does
not exceed the limitation determined under the
following table:
‘‘In the case of an individual
with an attained age before the
The limitation
close of the taxable year of:
is:
40 or less ...................................................
$200
More than 40 but not more than 50 .........
375
More than 50 but not more than 60 .........
750
More than 60 but not more than 70 .........
2,000
More than 70 .............................................
2,500.
‘‘(B) INDEXING.—
‘‘(i) IN GENERAL.—In the case of any
taxable year beginning in a calendar year
after 1996, each dollar amount contained
in subparagraph (A) shall be increased by
the medical care cost adjustment of such
amount for such calendar year. If any in-
crease determined under the preceding sen-
tence is not a multiple of $10, such in-
crease shall be rounded to the nearest mul-
tiple of $10.
‘‘(ii) MEDICAL
CARE
COST
ADJUST-
MENT.—For purposes of clause (i), the
medical care cost adjustment for any cal-
endar year is the percentage (if any) by
which—
‘‘(I) the medical care component
of the Consumer Price Index (as de-
fined in section 1(f)(5)) for August of
the preceding calendar year, exceeds
‘‘(II) such component for August
of 1995.
The Secretary shall, in consultation with
the Secretary of Health and Human Serv-
ices, prescribe an adjustment which the
Secretary determines is more appropriate
for purposes of this paragraph than the
adjustment described in the preceding sen-
tence, and the adjustment so prescribed
shall apply in lieu of the adjustment de-
scribed in the preceding sentence.’’
(3) Paragraph (6) of section 213(d) is amend-
ed—
(A) by striking ‘‘subparagraphs (A) and
(B)’’ and inserting ‘‘subparagraphs (A), (B),
and (C)’’, and
(B) by striking ‘‘paragraph (1)(C)’’ in sub-
paragraph 
(A) 
and 
inserting 
‘‘paragraph
(1)(D)’’.
(4) Paragraph (7) of section 213(d) is amended
by striking ‘‘subparagraphs (A) and (B)’’ and insert-
ing ‘‘subparagraphs (A), (B), and (C)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 6213. CERTAIN EXCHANGES OF LIFE INSURANCE CON-
TRACTS FOR LONG-TERM CARE INSURANCE
CONTRACTS NOT TAXABLE.
(a) IN GENERAL.—Subsection (a) of section 1035
(relating to certain exchanges of insurance contracts) is
amended by striking the period at the end of paragraph
(3) and inserting ‘‘; or’’, and by adding at the end the
following new paragraph:
‘‘(4) a contract of life insurance or an endow-
ment or annuity contract for a long-term care insur-
ance contract (as defined in section 7702B(b)).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 
6214. 
EXCLUSION 
FROM 
GROSS 
INCOME 
FOR
AMOUNTS WITHDRAWN FROM CERTAIN RE-
TIREMENT PLANS FOR LONG-TERM CARE IN-
SURANCE.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to items specifically excluded from gross
income) is amended by redesignating section 137 as sec-
tion 138 and by inserting after section 136 the following
new section:
‘‘SEC. 137. DISTRIBUTIONS FROM CERTAIN RETIREMENT
PLANS FOR LONG-TERM CARE INSURANCE.
‘‘(a) GENERAL RULE.—The amount which would
(but for this section) be includible in the gross income of
an individual for the taxable year by reason of eligible dis-
tributions during the taxable year shall be reduced (but
not below zero) by the aggregate premiums paid by such
individual during such taxable year for any long-term care
insurance contract (as defined in section 7702B(b)) for
coverage of such individual or the spouse of such individ-
ual.
‘‘(b) ELIGIBLE DISTRIBUTION.—For purposes of this
section, the term ‘eligible distribution’ means any distribu-
tion or payment to an individual from—
‘‘(1) an individual retirement plan of such indi-
vidual,
‘‘(2) amounts attributable to employer contribu-
tions made pursuant to elective deferrals described
in subparagraph (A) or (C) of section 402(g)(3) or
section 501(c)(18)(D)(iii), or
‘‘(3) amounts deferred under section 457(a).’’
(b) CONFORMING AMENDMENTS.—
(1) Section 401(k)(2)(B)(i) is amended by
striking ‘‘or’’ at the end of subclause (III), by strik-
ing ‘‘and’’ at the end of subclause (IV) and inserting
‘‘or’’, and by inserting after subclause (IV) the fol-
lowing new subclause:
‘‘(V) the date distributions for
premiums for a long-term care insur-
ance contract (as defined in section
7702B(b)) for coverage of such indi-
vidual or the spouse of such individual
are made, and’’.
100
(2) Section 403(b)(11) is amended by striking
‘‘or’’ at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and inserting
‘‘, or’’, and by inserting after subparagraph (B) the
following new subparagraph:
‘‘(C) for the payment of premiums for a
long-term care insurance contract (as defined in
section 7702B(b)) for coverage of the employee
or the spouse of the employee.’’
(3) Subparagraph (A) of section 457(d)(1) is
amended by striking ‘‘or’’ at the end of clause (ii),
by striking ‘‘and’’ at the end of clause (iii) and in-
serting ‘‘or’’, and by inserting after clause (iii) the
following new clause:
‘‘(iv) the date distributions for pre-
miums for a long-term care insurance con-
tract (as defined in section 7702B(b)) for
coverage of such individual or the spouse
of such individual are made, and’’.
(4) The table of sections for part III of sub-
chapter B of chapter 1 is amended by striking the
last item and inserting the following new items:
‘‘Sec. 137. Distributions from certain retirement plans for long-
term care insurance.
‘‘Sec. 138. Cross references to other Acts.’’
101
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments and distributions after
December 31, 1995.
PART III—TREATMENT OF ACCELERATED DEATH
BENEFITS
SEC. 6221. TREATMENT OF ACCELERATED DEATH BENE-
FITS BY RECIPIENT.
(a) IN GENERAL.—Section 101 (relating to certain
death benefits) is amended by adding at the end the fol-
lowing new subsection:
‘‘(g) TREATMENT
OF
CERTAIN
ACCELERATED
DEATH BENEFITS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the following amounts shall be treated as an
amount paid by reason of the death of an insured:
‘‘(A) Any amount received under a life in-
surance contract on the life of an insured who
is a terminally ill individual.
‘‘(B) Any amount received under a life in-
surance contract on the life of an insured who
is a chronically ill individual (as defined in sec-
tion 7702B(c)(2)) but only if such amount is
received under a rider or other provision of
such contract which is treated as a long-term
care insurance contract under section 7702B.
102
‘‘(2) 
TREATMENT
OF
VIATICAL
SETTLE-
MENTS.—
‘‘(A) IN GENERAL.—In the case of a life
insurance contract on the life of an insured de-
scribed in paragraph (1), if—
‘‘(i) any portion of such contract is
sold to any viatical settlement provider, or
‘‘(ii) any portion of the death benefit
is assigned to such a provider,
the amount paid for such sale or assignment
shall be treated as an amount paid under the
life insurance contract by reason of the death of
such insured.
‘‘(B) VIATICAL SETTLEMENT PROVIDER.—
The term ‘viatical settlement provider’ means
any person regularly engaged in the trade or
business of purchasing, or taking assignments
of, life insurance contracts on the lives of
insureds described in paragraph (1) if—
‘‘(i) such person is licensed for such
purposes in the State in which the insured
resides, or
‘‘(ii) in the case of an insured who re-
sides in a State not requiring the licensing
of such persons for such purposes, such
103
person meets the requirements of sections
8 and 9 of the Viatical Settlements Model
Act of the National Association of Insur-
ance Commissioners.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) TERMINALLY ILL INDIVIDUAL.—The
term ‘terminally ill individual’ means an indi-
vidual who has been certified by a physician as
having an illness or physical condition which
can reasonably be expected to result in death in
24 months or less after the date of the certifi-
cation.
‘‘(B) PHYSICIAN.—The term ‘physician’
has the meaning given to such term by section
1861(r)(1) of the Social Security Act (42
U.S.C. 1395x(r)(1)).
‘‘(4) EXCEPTION FOR BUSINESS-RELATED POLI-
CIES.—This subsection shall not apply in the case of
any amount paid to any taxpayer other than the in-
sured if such taxpayer has an insurable interest with
respect to the life of the insured by reason of the in-
sured being a director, officer, or employee of the
taxpayer or by reason of the insured being finan-
104
cially interested in any trade or business carried on
by the taxpayer.
‘‘(5) CROSS REFERENCE.—
‘‘For inclusion in gross income of excess benefits,
see section 91.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts received after De-
cember 31, 1995.
SEC. 6222. TAX TREATMENT OF COMPANIES ISSUING
QUALIFIED ACCELERATED DEATH BENEFIT
RIDERS.
(a) QUALIFIED ACCELERATED DEATH BENEFIT RID-
ERS TREATED AS LIFE INSURANCE.—Section 818 (relat-
ing to other definitions and special rules) is amended by
adding at the end the following new subsection:
‘‘(g) QUALIFIED ACCELERATED DEATH BENEFIT
RIDERS TREATED AS LIFE INSURANCE.—For purposes of
this part—
‘‘(1) IN GENERAL.—Any reference to a life in-
surance contract shall be treated as including a ref-
erence to a qualified accelerated death benefit rider
on such contract.
‘‘(2) QUALIFIED ACCELERATED DEATH BENE-
FIT RIDERS.—For purposes of this subsection, the
term ‘qualified accelerated death benefit rider’
means any rider on a life insurance contract if the
105
only payments under the rider are payments meeting
the requirements of section 101(g).
‘‘(3) EXCEPTION FOR LONG-TERM CARE RID-
ERS.—Paragraph (1) shall not apply to any rider
which is treated as a long-term care insurance con-
tract under section 7702B.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall take effect on January 1, 1996.
(2) ISSUANCE OF RIDER NOT TREATED AS MA-
TERIAL CHANGE.—For purposes of applying sections
101(f), 7702, and 7702A of the Internal Revenue
Code of 1986 to any contract—
(A) the issuance of a qualified accelerated
death benefit rider (as defined in section 818(g)
of such Code (as added by this Act)), and
(B) the addition of any provision required
to conform an accelerated death benefit rider to
the requirements of such section 818(g),
shall not be treated as a modification or material
change of such contract.
107
‘‘(B) the exclusion amount applicable to
such benefits.
‘‘(2) LONG-TERM CARE BENEFITS.—The term
‘long-term care benefits’ means—
‘‘(A) payments and other benefits under
long-term care insurance contracts (as defined
in section 7702B(b)) to the extent excludable
from gross income by reason of section
7702B(a)(2), and
‘‘(B) payments which are excludable from
gross income by reason of section 101(g).
‘‘(3) EXCLUSION AMOUNT.—
‘‘(A) IN GENERAL.—In the case of long-
term care benefits received by the taxpayer dur-
ing the taxable year by reason of the taxpayer
being a chronically ill individual, the term ‘ex-
clusion amount’ means the aggregate of $200
for each day during such year on which the in-
dividual is a chronically ill individual. In the
case of individuals who are married to each
other and who are both chronically ill individ-
uals, the preceding sentence shall be applied
separately with respect to each spouse.
‘‘(B) OTHER TAXPAYERS.—In the case of
long-term care benefits received during the tax-
108
able year by a taxpayer by reason of another in-
dividual being a chronically ill individual, the
term ‘exclusion amount’ means so much of such
other individual’s exclusion amount (for such
other individual’s taxable year which begins in
the calendar year in which the taxpayer’s tax-
able year begins) as is allocated by such other
individual to the taxpayer. Such an allocation
shall be made at the time and in the manner
prescribed by the Secretary; and once made,
shall be irrevocable.
‘‘(d) CHRONICALLY ILL INDIVIDUAL.—For purposes
of this section, the term ‘chronically ill individual’ has the
meaning given to such term by section 7702B(c)(2).
‘‘(e) INFLATION ADJUSTMENT
OF $200 BENEFIT
LIMIT.—In the case of a calendar year after 1996, the
$200 amount contained in subsection (c)(3)(A) shall be
increased at the same time and in the same manner as
amounts are increased pursuant to section 213(d)(11).’’
(b) CLERICAL AMENDMENT.—The table of sections
for such part II is amended by adding at the end the fol-
lowing new item:
‘‘Sec. 91. Excess long-term care benefits.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
109
SEC. 6232. REPORTING REQUIREMENTS.
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 is amended by adding at the end
the following new section:
‘‘SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.
‘‘(a) REQUIREMENT
OF REPORTING.—Any person
who pays long-term care benefits shall make a return, ac-
cording to the forms or regulations prescribed by the Sec-
retary, setting forth—
‘‘(1) the aggregate amount of such benefits
paid by such person to any individual during any
calendar year, and
‘‘(2) the name, address, and TIN of such indi-
vidual.
‘‘(b) STATEMENTS TO BE FURNISHED TO PERSONS
WITH RESPECT TO WHOM INFORMATION IS REQUIRED.—
Every person required to make a return under subsection
(a) shall furnish to each individual whose name is required
to be set forth in such return a written statement show-
ing—
‘‘(1) the name of the person making the pay-
ments, and
‘‘(2) the aggregate amount of long-term care
benefits paid to the individual which are required to
be shown on such return.
110
The written statement required under the preceding sen-
tence shall be furnished to the individual on or before Jan-
uary 31 of the year following the calendar year for which
the return under subsection (a) was required to be made.
‘‘(c) LONG-TERM CARE BENEFITS.—For purposes of
this section, the term ‘long-term care benefit’ has the
meaning given such term by section 91(c).’’
(b) PENALTIES.—
(1) Subparagraph (B) of section 6724(d)(1) is
amended by redesignating clauses (ix) through (xiv)
as clauses (x) through (xv), respectively, and by in-
serting after clause (viii) the following new clause:
‘‘(ix) section 6050Q (relating to cer-
tain long-term care benefits),’’.
(2) Paragraph (2) of section 6724(d) is amend-
ed by redesignating subparagraphs (Q) through (T)
as subparagraphs (R) through (U), respectively, and
by inserting after subparagraph (P) the following
new subparagraph:
‘‘(Q) section 6050Q(b) (relating to certain
long-term care benefits),’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart B of part III of subchapter A of chapter 61
is amended by adding at the end the following new item:
‘‘Sec. 6050Q. Certain long-term care benefits.’’
111
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to benefits paid after December
31, 1995.
Subtitle C—Job Creation and Wage
Enhancement
PART I—CAPITAL GAINS REFORM
Subpart A—Capital Gains Reduction for Taxpayers
Other Than Corporations
SEC. 6301. CAPITAL GAINS DEDUCTION.
(a) IN GENERAL.—Part I of subchapter P of chapter
1 (relating to treatment of capital gains), as amended by
subsection (d)(1), is amended by inserting after section
1201 the following new section:
‘‘SEC. 1202. CAPITAL GAINS DEDUCTION.
‘‘(a) GENERAL RULE.—If for any taxable year a tax-
payer other than a corporation has a net capital gain, 50
percent of such gain shall be a deduction from gross
income.
‘‘(b) ESTATES AND TRUSTS.—In the case of an es-
tate or trust, the deduction shall be computed by excluding
the portion (if any) of the gains for the taxable year from
sales or exchanges of capital assets which, under sections
652 and 662 (relating to inclusions of amounts in gross
income of beneficiaries of trusts), is includible by the in-
112
come beneficiaries as gain derived from the sale or ex-
change of capital assets.
‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL
GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—
For purposes of this section, the net capital gain for any
taxable year shall be reduced (but not below zero) by the
amount which the taxpayer takes into account as invest-
ment income under section 163(d)(4)(B)(iii).
‘‘(d) SPECIAL RULE FOR COLLECTIBLES.—
‘‘(1) IN GENERAL.—At the election of the tax-
payer, the rate of tax imposed by section 1 on the
excess of—
‘‘(A) the amount which would be the net
capital gain for the taxable year without regard
to the application of section 1222(12) to collect-
ibles specified in such election, over
‘‘(B) the net capital gain for such year,
shall not exceed 28 percent.
‘‘(2) ELECTION.—Any election under this sub-
section, and any specification therein, once made,
shall be irrevocable.
‘‘(3) COORDINATION WITH INDEXING.—Any col-
lectible specified in such an election shall be treated
as not being an indexed asset for purposes of section
1022.
114
‘‘(ii) a real estate investment trust,
‘‘(iii) an S corporation,
‘‘(iv) a partnership,
‘‘(v) an estate or trust, and
‘‘(vi) a common trust fund.’’
(b) DEDUCTION ALLOWABLE
IN COMPUTING AD-
JUSTED GROSS INCOME.—Subsection (a) of section 62 is
amended by inserting after paragraph (15) the following
new paragraph:
‘‘(16) LONG-TERM
CAPITAL
GAINS.—The de-
duction allowed by section 1202.’’
(c) TREATMENT OF COLLECTIBLES.—
(1) IN GENERAL.—Section 1222 is amended by
inserting after paragraph (11) the following new
paragraph:
‘‘(12) SPECIAL RULE FOR COLLECTIBLES.—
‘‘(A) IN GENERAL.—Any gain or loss from
the sale or exchange of a collectible shall be
treated as a short-term capital gain or loss (as
the case may be), without regard to the period
such asset was held. The preceding sentence
shall apply only to the extent the gain or loss
is taken into account in computing taxable in-
come.
115
‘‘(B) TREATMENT OF CERTAIN SALES OF
INTEREST
IN
PARTNERSHIP, ETC.—For pur-
poses of subparagraph (A), any gain from the
sale or exchange of an interest in a partnership,
S corporation, or trust which is attributable to
unrealized appreciation in the value of collect-
ibles held by such entity shall be treated as gain
from the sale or exchange of a collectible. Rules
similar to the rules of section 751(f) shall apply
for purposes of the preceding sentence.
‘‘(C) COLLECTIBLE.—For purposes of this
paragraph, the term ‘collectible’ means any cap-
ital asset which is a collectible (as defined in
section 408(m) without regard to paragraph (3)
thereof).’’
(2) 
CHARITABLE
DEDUCTION
NOT
AF-
FECTED.—
(A) Paragraph (1) of section 170(e) is
amended by adding at the end the following
new sentence: ‘‘For purposes of this paragraph,
section 1222 shall be applied without regard to
paragraph (12) thereof (relating to special rule
for collectibles).’’
(B) Clause (iv) of section 170(b)(1)(C) is
amended by inserting before the period at the
116
end the following: ‘‘and section 1222 shall be
applied without regard to paragraph (12) there-
of (relating to special rule for collectibles)’’.
(d) TECHNICAL AND CONFORMING CHANGES.—
(1)(A) Section 13113 of the Revenue Reconcili-
ation Act of 1993 (relating to 50-percent exclusion
for gain from certain small business stock), and the
amendments made by such section, are hereby re-
pealed; and the Internal Revenue Code of 1986 shall
be applied as if such section (and amendments) had
never been enacted.
(B) At the election of a taxpayer who holds
qualified small business stock (as defined in section
1202 of such Code, as in effect on the day before
the date of the enactment of this Act) as of such
date of enactment—
(i) the provisions repealed by subparagraph
(A) shall continue to apply to any disposition by
such taxpayer of such stock held on such date,
and
(ii) the amendments made by this section
and section 6302 shall not apply to such stock;
except that losses from the sale or exchange of
such stock shall be taken into account as pro-
117
vided in the amendments made by paragraph
(13) of this subsection.
Such an election may be made only during the 1-
year period beginning on the date of the enactment
of this Act and, once made, shall be irrevocable.
(2) Section 1 is amended by striking subsection
(h).
(3) Paragraph (1) of section 170(e) is amended
by striking ‘‘the amount of gain’’ in the material fol-
lowing subparagraph (B)(ii) and inserting ‘‘50 per-
cent (25⁄35 in the case of a corporation) of the
amount of gain’’.
(4)(A) Paragraph (2) of section 172(d) is
amended to read as follows:
‘‘(2) CAPITAL GAINS AND LOSSES.—
‘‘(A) LOSSES OF TAXPAYERS OTHER THAN
CORPORATIONS.—In the case of a taxpayer
other than a corporation, the amount deductible
on account of losses from sales or exchanges of
capital assets shall not exceed the amount in-
cludible on account of gains from sales or ex-
changes of capital assets.
‘‘(B) DEDUCTION UNDER SECTION 1202.—
The deduction under section 1202 shall not be
allowed.’’
118
(B) Subparagraph (B) of section 172(d)(4) is
amended by striking ‘‘paragraphs (1) and (3)’’ and
inserting ‘‘paragraphs (1), (2)(B), and (3)’’.
(5) The last sentence of section 453A(c)(3) is
amended by striking all that follows ‘‘long-term cap-
ital gain,’’ and inserting ‘‘the maximum rate on net
capital gain under section 1201 or the deduction
under section 1202 (whichever is appropriate) shall
be taken into account.’’
(6) Paragraph (4) of section 642(c) is amended
to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain from the sale or ex-
change of capital assets held for more than 1 year,
proper adjustment shall be made for any deduction
allowable to the estate or trust under section 1202
(relating to deduction for excess of capital gains over
capital losses). In the case of a trust, the deduction
allowed by this subsection shall be subject to section
681 (relating to unrelated business income).’’
(7) Paragraph (3) of section 643(a) is amended
by adding at the end thereof the following new sen-
tence: ‘‘The deduction under section 1202 (relating
119
to deduction of excess of capital gains over capital
losses) shall not be taken into account.’’
(8) Subparagraph (C) of section 643(a)(6) is
amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and
by inserting before the period ‘‘, and (ii) the deduc-
tion under section 1202 (relating to capital gains de-
duction) shall not be taken into account’’.
(9) Paragraph (4) of section 691(c) is amended
by striking ‘‘sections 1(h), 1201, and 1211’’ and in-
serting ‘‘sections 1201, 1202, and 1211’’.
(10) The second sentence of section 871(a)(2)
is amended by inserting ‘‘such gains and losses shall
be determined without regard to section 1202 (relat-
ing to deduction for capital gains) and’’ after ‘‘ex-
cept that’’.
(11)(A) Paragraph (2) of section 904(b) is
amended by striking subparagraph (A), by redesig-
nating subparagraph (B) as subparagraph (A), and
by inserting after subparagraph (A) (as so redesig-
nated) the following new subparagraph:
‘‘(B) OTHER TAXPAYERS.—In the case of
a taxpayer other than a corporation, taxable in-
come from sources outside the United States
shall include gain from the sale or exchange of
120
capital assets only to the extent of foreign
source capital gain net income.’’
(B) Subparagraph (A) of section 904(b)(2), as
so redesignated, is amended—
(i) by striking all that precedes clause (i)
and inserting the following:
‘‘(A) CORPORATIONS.—In the case of a
corporation—’’, and
(ii) by striking in clause (i) ‘‘in lieu of ap-
plying subparagraph (A),’’.
(C) Paragraph (3) of section 904(b) is amended
by striking subparagraphs (D) and (E) and inserting
the following new subparagraph:
‘‘(D) RATE DIFFERENTIAL PORTION.—The
rate differential portion of foreign source net
capital gain, net capital gain, or the excess of
net capital gain from sources within the United
States over net capital gain, as the case may
be, is the same proportion of such amount as
the excess of the highest rate of tax specified in
section 11(b) over the alternative rate of tax
under section 1201(a) bears to the alternative
rate of tax under section 1201(a).’’
(12) Subsection (d) of section 1044 is amended
by striking the last sentence.
121
(13)(A) Paragraph (2) of section 1211(b) is
amended to read as follows:
‘‘(2) the sum of—
‘‘(A) the excess of the net short-term cap-
ital loss over the net long-term capital gain, and
‘‘(B) one-half of the excess of the net long-
term capital loss over the net short-term capital
gain.’’
(B) So much of paragraph (2) of section
1212(b) as precedes subparagraph (B) thereof is
amended to read as follows:
‘‘(2) SPECIAL RULES.—
‘‘(A) ADJUSTMENTS.—
‘‘(i) For purposes of determining the
excess referred to in paragraph (1)(A),
there shall be treated as short-term capital
gain in the taxable year an amount equal
to the lesser of—
‘‘(I) the amount allowed for the
taxable year under paragraph (1) or
(2) of section 1211(b), or
‘‘(II) the adjusted taxable income
for such taxable year.
‘‘(ii) For purposes of determining the
excess referred to in paragraph (1)(B),
122
there shall be treated as short-term capital
gain in the taxable year an amount equal
to the sum of—
‘‘(I) the amount allowed for the
taxable year under paragraph (1) or
(2) of section 1211(b) or the adjusted
taxable income for such taxable year,
whichever is the least, plus
‘‘(II) the excess of the amount
described in subclause (I) over the net
short-term capital loss (determined
without regard to this subsection) for
such year.’’
(C) Subsection (b) of section 1212 is
amended by adding at the end the following
new paragraph:
‘‘(3) TRANSITIONAL RULE.—In the case of any
amount which, under paragraph (1) and section
1211(b) (as in effect for taxable years beginning be-
fore January 1, 1996), is treated as a capital loss
in the first taxable year beginning after December
31, 1995, paragraph (1) and section 1211(b) (as so
in effect) shall apply (and paragraph (1) and section
1211(b) as in effect for taxable years beginning
after December 31, 1995, shall not apply) to the ex-
123
tent such amount exceeds the total of any net cap-
ital gains (determined without regard to this sub-
section) of taxable years beginning after December
31, 1995.’’
(14) Paragraph (1) of section 1402(i) is amend-
ed by inserting ‘‘, and the deduction provided by sec-
tion 1202 shall not apply’’ before the period at the
end thereof.
(15) Subsection (e) of section 1445 is amend-
ed—
(A) in paragraph (1) by striking ‘‘35 per-
cent (or, to the extent provided in regulations,
28 percent)’’ and inserting ‘‘25 percent (or, to
the extent provided in regulations, 19.8 per-
cent)’’, and
(B) in paragraph (2) by striking ‘‘35 per-
cent’’ and inserting ‘‘25 percent’’.
(16)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) applies’’, and
(ii) by striking ‘‘28 percent (34 percent’’
and inserting ‘‘19.8 percent (25 percent’’.
124
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936 is
amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) of such Code ap-
plies’’, and
(ii) by striking ‘‘28 percent (34 percent’’
and inserting ‘‘19.8 percent (25 percent’’.
(e) CLERICAL AMENDMENT.—The table of sections
for part I of subchapter P of chapter 1 is amended by
inserting after the item relating to section 1201 the follow-
ing new item:
‘‘Sec. 1202. Capital gains deduction.’’
(f) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years ending after
December 31, 1994.
(2) CONTRIBUTIONS.—The amendment made
by subsection (d)(3) shall apply to contributions on
or after January 1, 1995.
(3) USE OF LONG-TERM LOSSES.—The amend-
ments made by subsection (d)(13) shall apply to tax-
able years beginning after December 31, 1995.
125
(4) WITHHOLDING.—The amendment made by
subsection (d)(15) shall apply only to amounts paid
after the date of the enactment of this Act.
SEC. 6302. INDEXING OF CERTAIN ASSETS ACQUIRED
AFTER DECEMBER 31, 1994, FOR PURPOSES
OF DETERMINING GAIN.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 (relating to basis rules of general application) is
amended by inserting after section 1021 the following new
section:
‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED
AFTER DECEMBER 31, 1994, FOR PURPOSES
OF DETERMINING GAIN.
‘‘(a) GENERAL RULE.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED BASIS.—Solely for purposes of determining
gain on the sale or other disposition by a taxpayer
(other than a corporation) of an indexed asset which
has been held for more than 3 years, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deductions for depreciation, depletion, and am-
ortization shall be determined without regard to the
126
application of paragraph (1) to the taxpayer or any
other person.
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) common stock in a C corporation
(other than a foreign corporation), and
‘‘(B) tangible property,
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)).
‘‘(2) STOCK
IN
CERTAIN
FOREIGN
CORPORA-
TIONS INCLUDED.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘indexed
asset’ includes common stock in a foreign cor-
poration which is regularly traded on an estab-
lished securities market.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to—
‘‘(i) stock of a foreign investment
company (within the meaning of section
1246(b)),
‘‘(ii) stock in a passive foreign invest-
ment company (as defined in section
1296),
127
‘‘(iii) stock in a foreign corporation
held by a United States person who meets
the requirements of section 1248(a)(2),
and
‘‘(iv) stock in a foreign personal hold-
ing company (as defined in section 552).
‘‘(C) TREATMENT OF AMERICAN DEPOSI-
TORY RECEIPTS.—An American depository re-
ceipt for common stock in a foreign corporation
shall be treated as common stock in such cor-
poration.
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) GENERAL RULE.—The indexed basis for
any asset is—
‘‘(A) the adjusted basis of the asset, in-
creased by
‘‘(B) the applicable inflation adjustment.
‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—
The applicable inflation adjustment for any asset is
an amount equal to—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the percentage (if any) by which—
128
‘‘(i) 
the 
gross 
domestic 
product
deflator for the last calendar quarter end-
ing before the asset is disposed of, exceeds
‘‘(ii) the gross domestic product
deflator for the last calendar quarter end-
ing before the asset was acquired by the
taxpayer.
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percentage point.
‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—
The gross domestic product deflator for any cal-
endar quarter is the implicit price deflator for the
gross domestic product for such quarter (as shown
in the last revision thereof released by the Secretary
of Commerce before the close of the following cal-
endar quarter).
‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI-
MINISHED
RISK
OF
LOSS; TREATMENT
OF
SHORT
SALES.—
‘‘(1) IN GENERAL.—If the taxpayer (or a relat-
ed person) enters into any transaction which sub-
stantially reduces the risk of loss from holding any
asset, such asset shall not be treated as an indexed
asset for the period of such reduced risk.
‘‘(2) SHORT SALES.—
129
‘‘(A) IN GENERAL.—In the case of a short
sale of an indexed asset with a short sale period
in excess of 3 years, for purposes of this title,
the amount realized shall be an amount equal
to the amount realized (determined without re-
gard to this paragraph) increased by the appli-
cable inflation adjustment. In applying sub-
section (c)(2) for purposes of the preceding sen-
tence, the date on which the property is sold
short shall be treated as the date of acquisition
and the closing date for the sale shall be treat-
ed as the date of disposition.
‘‘(B) SHORT SALE PERIOD.—For purposes
of subparagraph (A), the short sale period be-
gins on the day that the property is sold and
ends on the closing date for the sale.
‘‘(e) TREATMENT
OF
REGULATED
INVESTMENT
COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this paragraph, the adjustment
under subsection (a) shall be allowed to any
qualified investment entity (including for pur-
poses of determining the earnings and profits of
such entity).
130
‘‘(B) EXCEPTION FOR CORPORATE SHARE-
HOLDERS.—Under regulations—
‘‘(i) in the case of a distribution by a
qualified investment entity (directly or in-
directly) to a corporation—
‘‘(I) the determination of whether
such distribution is a dividend shall be
made without regard to this section,
and
‘‘(II) the amount treated as gain
by reason of the receipt of any capital
gain dividend shall be increased by the
percentage by which the entity’s net
capital gain for the taxable year (de-
termined without regard to this sec-
tion) exceeds the entity’s net capital
gain for such year determined with re-
gard to this section, and
‘‘(ii) there shall be other appropriate
adjustments (including deemed distribu-
tions) so as to ensure that the benefits of
this section are not allowed (directly or in-
directly) to corporate shareholders of quali-
fied investment entities.
131
For purposes of the preceding sentence, any
amount includible in gross income under section
852(b)(3)(D) shall be treated as a capital gain
dividend and an S corporation shall not be
treated as a corporation.
‘‘(C) 
EXCEPTION
FOR
QUALIFICATION
PURPOSES.—This section shall not apply for
purposes of sections 851(b) and 856(c).
‘‘(D) EXCEPTION FOR CERTAIN TAXES IM-
POSED AT ENTITY LEVEL.—
‘‘(i) TAX ON FAILURE TO DISTRIBUTE
ENTIRE GAIN.—If any amount is subject to
tax under section 852(b)(3)(A) for any
taxable year, the amount on which tax is
imposed under such section shall be in-
creased by the percentage determined
under subparagraph (B)(i)(II). A similar
rule shall apply in the case of any amount
subject to tax under paragraph (2) or (3)
of section 857(b) to the extent attributable
to the excess of the net capital gain over
the deduction for dividends paid deter-
mined with reference to capital gain divi-
dends only. The first sentence of this
clause shall not apply to so much of the
132
amount subject to tax under section
852(b)(3)(A) as is designated by the com-
pany under section 852(b)(3)(D).
‘‘(ii) OTHER
TAXES.—This section
shall not apply for purposes of determining
the amount of any tax imposed by para-
graph (4), (5), or (6) of section 857(b).
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN
ENTITY.—
‘‘(A) REGULATED
INVESTMENT
COMPA-
NIES.—Stock in a regulated investment com-
pany (within the meaning of section 851) shall
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the average of the fair market
values of the indexed assets held by such
company at the close of each month during
such quarter, bears to
‘‘(ii) the average of the fair market
values of all assets held by such company
at the close of each such month.
‘‘(B) 
REAL
ESTATE
INVESTMENT
TRUSTS.—Stock in a real estate investment
trust (within the meaning of section 856) shall
133
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the fair market value of the in-
dexed assets held by such trust at the close
of such quarter, bears to
‘‘(ii) the fair market value of all as-
sets held by such trust at the close of such
quarter.
‘‘(C) RATIO OF 80 PERCENT OR MORE.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 80 percent or more, such
ratio for such quarter shall be 100 percent.
‘‘(D) RATIO OF 20 PERCENT OR LESS.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 20 percent or less, such
ratio for such quarter shall be zero.
‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For
purposes of this paragraph, a qualified invest-
ment entity which holds a partnership interest
shall be treated (in lieu of holding a partnership
interest) as holding its proportionate share of
the assets held by the partnership.
134
‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS-
TRIBUTIONS.—Except as otherwise provided by the
Secretary, a distribution with respect to stock in a
qualified investment entity which is not a dividend
and which results in a reduction in the adjusted
basis of such stock shall be treated as allocable to
stock acquired by the taxpayer in the order in which
such stock was acquired.
‘‘(4) QUALIFIED
INVESTMENT
ENTITY.—For
purposes of this subsection, the term ‘qualified in-
vestment entity’ means—
‘‘(A) a regulated investment company
(within the meaning of section 851), and
‘‘(B) a real estate investment trust (within
the meaning of section 856).
‘‘(f) OTHER PASS-THRU ENTITIES.—
‘‘(1) PARTNERSHIPS.—
‘‘(A) IN GENERAL.—In the case of a part-
nership, the adjustment made under subsection
(a) at the partnership level shall be passed
through to the partners.
‘‘(B) SPECIAL RULE IN THE CASE OF SEC-
TION 754 ELECTIONS.—In the case of a transfer
of an interest in a partnership with respect to
135
which the election provided in section 754 is in
effect—
‘‘(i) the adjustment under section
743(b)(1) shall, with respect to the trans-
feror partner, be treated as a sale of the
partnership assets for purposes of applying
this section, and
‘‘(ii) with respect to the transferee
partner, the partnership’s holding period
for purposes of this section in such assets
shall be treated as beginning on the date
of such adjustment.
‘‘(2) S CORPORATIONS.—In the case of an S
corporation, the adjustment made under subsection
(a) at the corporate level shall be passed through to
the shareholders. This section shall not apply for
purposes of determining the amount of any tax im-
posed by section 1374 or 1375.
‘‘(3) COMMON TRUST FUNDS.—In the case of a
common trust fund, the adjustment made under sub-
section (a) at the trust level shall be passed through
to the participants.
‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN
DETERMINING LOSS ON SALE OF INTEREST IN EN-
TITY.—Notwithstanding the preceding provisions of
136
this subsection, for purposes of determining the
amount of any loss on a sale or exchange of an in-
terest in a partnership, S corporation, or common
trust fund, the adjustment made under subsection
(a) shall not be taken into account in determining
the adjusted basis of such interest.
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to any sale or other disposition of property between
related persons except to the extent that the basis
of such property in the hands of the transferee is a
substituted basis.
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’
means—
‘‘(A) persons bearing a relationship set
forth in section 267(b), and
‘‘(B) persons treated as single employer
under subsection (b) or (c) of section 414.
‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST-
MENT.—If any person transfers cash, debt, or any other
property to another person and the principal purpose of
such transfer is to secure or increase an adjustment under
subsection (a), the Secretary may disallow part or all of
such adjustment or increase.
137
‘‘(i) SPECIAL RULES.—For purposes of this section—
‘‘(1) TREATMENT OF IMPROVEMENTS, ETC.—If
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to
such property or a contribution to capital of such
corporation—
‘‘(A) such addition shall never be taken
into account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
‘‘(B) such addition shall be treated as a
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is ap-
propriate to carry out the purposes of this section.
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation ratio shall be appropriately reduced for peri-
ods during which the asset was not an indexed asset.
138
‘‘(3) TREATMENT
OF
CERTAIN
DISTRIBU-
TIONS.—A distribution with respect to stock in a
corporation which is not a dividend shall be treated
as a disposition.
‘‘(4) ACQUISITION
DATE
WHERE
THERE
HAS
BEEN
PRIOR
APPLICATION
OF
SUBSECTION
(a)(1)
WITH RESPECT TO THE TAXPAYER.—If there has
been a prior application of subsection (a)(1) to an
asset while such asset was held by the taxpayer, the
date of acquisition of such asset by the taxpayer
shall be treated as not earlier than the date of the
most recent such prior application.
‘‘(5) COLLAPSIBLE CORPORATIONS.—The appli-
cation of section 341(a) (relating to collapsible cor-
porations) shall be determined without regard to this
section.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter O of chapter 1 is amended by
inserting after the item relating to section 1021 the follow-
ing new item:
‘‘Sec. 1022. Indexing of certain assets acquired after December
31, 1994, for purposes of determining gain.’’
(c) EFFECTIVE DATE.—
139
(1) IN GENERAL.—The amendments made by
this section shall apply to the disposition of any
property the holding period of which begins after
December 31, 1994.
(2) CERTAIN TRANSACTIONS BETWEEN RELAT-
ED PERSONS.—The amendments made by this sec-
tion shall not apply to the disposition of any prop-
erty acquired after December 31, 1994, from a re-
lated person (as defined in section 1022(g)(2) of the
Internal Revenue Code of 1986, as added by this
section) if—
(A) such property was so acquired for a
price less than the property’s fair market value,
and
(B) the amendments made by this section
did not apply to such property in the hands of
such related person.
(d) ELECTION TO RECOGNIZE GAIN
ON ASSETS
HELD ON JANUARY 1, 1995.—For purposes of the Inter-
nal Revenue Code of 1986—
(1) IN GENERAL.—A taxpayer other than a cor-
poration may elect to treat—
(A) any readily tradable stock (which is an
indexed asset) held by such taxpayer on Janu-
ary 1, 1995, and not sold before the next busi-
140
ness day after such date, as having been sold
on such next business day for an amount equal
to its closing market price on such next busi-
ness day (and as having been reacquired on
such next business day for an amount equal to
such closing market price), and
(B) any other indexed asset held by the
taxpayer on January 1, 1995, as having been
sold on such date for an amount equal to its
fair market value on such date (and as having
been reacquired on such date for an amount
equal to such fair market value).
(2) TREATMENT OF GAIN OR LOSS.—
(A) Any gain resulting from an election
under paragraph (1) shall be treated as received
or accrued on the date the asset is treated as
sold under paragraph (1) and shall be recog-
nized notwithstanding any provision of the In-
ternal Revenue Code of 1986.
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
(3) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
may prescribe and shall specify the assets for which
141
such election is made. Such an election, once made
with respect to any asset, shall be irrevocable.
(4) READILY TRADABLE STOCK.—For purposes
of this subsection, the term ‘‘readily tradable stock’’
means any stock which, as of January 1, 1995, is
readily tradable on an established securities market
or otherwise.
(e) TREATMENT OF PRINCIPAL RESIDENCES.—Prop-
erty held and used by the taxpayer on January 1, 1995,
as his principal residence (within the meaning of section
1034 of the Internal Revenue Code of 1986) shall be
treated—
(1) for purposes of subsection (c)(1) of this sec-
tion and section 1022 of such Code, as having a
holding period which begins on January 1, 1995,
and
(2) for purposes of section 1022(c)(2)(B)(ii) of
such Code, as having been acquired on January 1,
1995.
Subsection (d) shall not apply to property to which this
subsection applies.
142
Subpart B—Capital Gains Reduction for
Corporations
SEC. 6311. REDUCTION OF ALTERNATIVE CAPITAL GAIN
TAX FOR CORPORATIONS.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has a net capital gain, then, in lieu of the tax
imposed by sections 11, 511, and 831 (a) and (b) (which-
ever is applicable), there is hereby imposed a tax (if such
tax is less than the tax imposed by such sections) which
shall consist of the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the amount of the net capital gain, at the
rates and in the manner as if this subsection had
not been enacted, plus
‘‘(2) a tax of 25 percent of the net capital gain.
‘‘(b) TRANSITIONAL RULE.—
‘‘(1) IN GENERAL.—In the case of any taxable
year ending after December 31, 1994, and beginning
before January 1, 1996, subsection (a)(2) shall be
applied as if it read as follows:
‘‘ ‘(2)(A) a tax of 25 percent of the lesser of—
‘‘ ‘(i) the net capital gain for the taxable
year, or
143
‘‘ ‘(ii) the net capital gain taking into ac-
count only gain or loss properly taken into ac-
count for the portion of the taxable year after
December 31, 1994, plus
‘‘ ‘(B) a tax of 35 percent of the excess (if any)
of—
‘‘ ‘(i) the net capital gain for the taxable
year, over
‘‘ ‘(ii) the amount of net capital gain taken
into account under subparagraph (A).’
‘‘(2) SPECIAL
RULE
FOR
PASS-THRU
ENTI-
TIES.—Section 1202(e)(2) shall apply for purposes
of paragraph (1).
‘‘(c) CROSS REFERENCES.—
‘‘For computation of the alternative tax—
‘‘(1) in the case of life insurance companies, see
section 801(a)(2),
‘‘(2) in the case of regulated investment compa-
nies and their shareholders, see section 852(b)(3)(A)
and (D), and
‘‘(3) in the case of real estate investment trusts,
see section 857(b)(3)(A).’’
(b) TECHNICAL AMENDMENT.—Clause (iii) of section
852(b)(3)(D) is amended by striking ‘‘65 percent’’ and in-
serting ‘‘75 percent’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after De-
cember 31, 1994.
144
Subpart C—Capital Loss Deduction Allowed With
Respect to Sale or Exchange of Principal Residence
SEC. 6316. CAPITAL LOSS DEDUCTION ALLOWED WITH RE-
SPECT TO SALE OR EXCHANGE OF PRINCIPAL
RESIDENCE.
(a) IN GENERAL.—Subsection (c) of section 165 (re-
lating to limitation on losses of individuals) is amended
by striking ‘‘and’’ at the end of paragraph (2), by striking
the period at the end of paragraph (3) and inserting ‘‘;
and’’, and by adding at the end the following new para-
graph:
‘‘(4) losses arising from the sale or exchange of
the principal residence (within the meaning of sec-
tion 1034) of the taxpayer.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to sales and exchanges after De-
cember 31, 1994, in taxable years ending after such date.
PART II—COST RECOVERY PROVISIONS
SEC. 6321. DEPRECIATION ADJUSTMENT FOR CERTAIN
PROPERTY PLACED IN SERVICE AFTER DE-
CEMBER 31, 1994.
(a) IN GENERAL.—Section 168 (relating to acceler-
ated cost recovery system) is amended by adding at the
end thereof the following new subsection:
145
‘‘(k) DEDUCTION ADJUSTMENT TO ALLOW EQUIVA-
LENT OF EXPENSING FOR CERTAIN PROPERTY PLACED
IN SERVICE AFTER DECEMBER 31, 1994.—
‘‘(1) IN
GENERAL.—In the case of tangible
property placed in service after December 31, 1994,
the deduction under this section with respect to such
property—
‘‘(A) shall be determined by substituting
‘150 percent’ for ‘200 percent’ in subsection
(b)(1) in the case of property to which the 200
percent declining balance method would other-
wise apply, and
‘‘(B) for any taxable year after the taxable
year during which the property is placed in
service shall be—
‘‘(i) the amount determined under this
section for such taxable year without re-
gard to this subparagraph, multiplied by
‘‘(ii) the applicable neutral cost recov-
ery ratio for such taxable year.
‘‘(2) APPLICABLE
NEUTRAL
COST
RECOVERY
RATIO.—For purposes of paragraph (1)—
‘‘(A) IN GENERAL.—The applicable neutral
cost recovery ratio for the property for any tax-
able year is the number determined by—
146
‘‘(i) dividing—
‘‘(I) the gross domestic product
deflator for the calendar quarter
which includes the mid-point of the
taxable year, by
‘‘(II) the gross domestic product
deflator for the calendar quarter
which includes the mid-point of the
taxable year in which the property
was placed in service by the taxpayer,
and
‘‘(ii) then multiplying the number de-
termined under clause (i) by the number
equal to 1.035 to the nth power where ‘n’
is the number of full years (as of the close
of the taxable year referred to in clause
(i)(I)) after the date such property was
placed in service.
The applicable neutral cost recovery ratio shall
never be less than 1. The applicable neutral
cost recovery ratio shall be rounded to the near-
est 1⁄1000.
‘‘(B) SPECIAL RULE FOR CERTAIN PROP-
ERTY.—In the case of property described in
paragraph (2) or (3) of subsection (b) or in
147
subsection (g), the applicable neutral cost recov-
ery ratio shall be determined without regard to
subparagraph (A)(ii).
‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—
For purposes of paragraph (2), the gross domestic
product deflator for any calendar quarter is the im-
plicit price deflator for the gross domestic product
for such quarter (as shown in the last revision there-
of released by the Secretary of Commerce before the
close of the following calendar quarter).
‘‘(4) COORDINATION WITH INDEXING OF BASIS
FOR
PURPOSES
OF
DETERMINING
GAIN.—Section
1022 shall not apply to any property to which this
subsection applies.
‘‘(5) ELECTION
NOT
TO
HAVE
SUBSECTION
APPLY.—This subsection shall not apply to any
property if the taxpayer elects not to have this sub-
section apply to such property. Such an election,
once made, shall be irrevocable.
‘‘(6) CHURNING
TRANSACTIONS.—This sub-
section shall not apply to any property if this section
would not apply to such property were—
‘‘(A) subsection (f)(5)(A)(ii) applied by
substituting ‘1995’ for ‘1987’ and ‘1994’ for
‘1986’, and
148
‘‘(B) subsection (f)(5)(B) not applied.
‘‘(7) ADDITIONAL DEDUCTION NOT TO AFFECT
BASIS OR RECAPTURE.—The additional amount de-
termined under this section by reason of this sub-
section shall not be taken into account in determin-
ing the adjusted basis of any property or of any in-
terest in a pass-thru entity (as defined in section
1202(e)(2)) which holds such property and shall not
be treated as a deduction for depreciation for pur-
poses of sections 1245 and 1250.’’
(b) MINIMUM TAX TREATMENT.—
(1) Paragraph (1) of section 56(a) is amended
by adding at the end thereof the following new sub-
paragraph:
‘‘(E) USE OF NEUTRAL COST RECOVERY
RATIO.—This paragraph shall not apply to
property to which section 168(k) applies.’’
(2) Clause (i) of section 56(g)(4)(A) is amended
by striking ‘‘(a)(1)(A)’’ and inserting ‘‘(a)(1)’’.
(3) Subparagraph (C) of section 56(g)(4) is
amended by adding at the end the following new
clause:
‘‘(v) NEUTRAL COST RECOVERY DE-
DUCTION.—Clause (i) shall not apply to
149
the additional deduction allowable by rea-
son of section 168(k).’’
(c) TECHNICAL AMENDMENTS.—
(1) Clause (i) of section 280F(a)(1)(B) is
amended by adding at the end the following new
sentence: ‘‘For purposes of this clause, the unre-
covered basis of any passenger automobile shall be
treated as including the additional amount deter-
mined under section 168 by reason of subsection (k)
thereof to the extent not allowed as a deduction by
reason of this paragraph for any taxable year in the
recovery period.’’
(2) Subparagraph (B) of section 382(h)(2) is
amended by adding at the end the following new
sentence: ‘‘The amount of the net unrealized built-
in loss shall be increased by the amount of the addi-
tional deduction allowable by reason of section
168(k) which is treated under the preceding sen-
tence as a recognized built-in loss.’’
(3) Subsection (a) of section 465 is amended by
adding at the end the following new paragraph:
‘‘(4) TREATMENT OF NEUTRAL COST RECOVERY
DEDUCTION.—
‘‘(A) IN GENERAL.—None of the additional
deduction allowable by reason of section 168(k)
150
for the taxable year shall be disallowed under
paragraph (1) unless there is a disallowed non-
NCR loss for such year.
‘‘(B) PROPORTIONATE DISALLOWANCE.—
‘‘(i) IN GENERAL.—If there is a dis-
allowed non-NCR loss for the taxable year,
only the disallowed portion of the addi-
tional deduction allowable by reason of sec-
tion 168(k) shall not be allowed under
paragraph (1).
‘‘(ii) 
DISALLOWED
PORTION.—For
purposes of clause (i), the disallowed por-
tion is the percentage which the disallowed
non-NCR loss’s allocable share of non-
NCR depreciation is of total non-NCR de-
preciation.
‘‘(iii) ALLOCABLE SHARE.—For pur-
poses of clause (ii), a disallowed non-NCR
loss’s allocable share of non-NCR deprecia-
tion is the amount which bears the same
ratio to the amount of the loss as the
amount of non-NCR depreciation for the
taxable year bears to the total amount of
deductions for such taxable year.
151
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) DISALLOWED
NON-NCR
LOSS.—
The 
term 
‘disallowed 
non-NCR 
loss’
means, for any taxable year, the amount of
the loss from the activity which would be
disallowed under paragraph (1) if such loss
were determined without regard to the ad-
ditional deduction allowable by reason of
section 168(k).
‘‘(ii) NON-NCR
DEPRECIATION.—The
term ‘non-NCR depreciation’ means the
amount allowable as a deduction under
section 168 without regard to subsection
(k) thereof.’’
(4) Subparagraph (A) of section 1503(e)(1) is
amended by inserting before the comma ‘‘and shall
be determined without regard to section 168(k)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after De-
cember 31, 1994.
SEC. 6322. TREATMENT OF ABANDONMENT OF LESSOR IM-
PROVEMENTS AT TERMINATION OF LEASE.
(a) IN GENERAL.—Paragraph (8) of section 168(i)
is amended to read as follows:
152
‘‘(8) TREATMENT
OF
LEASEHOLD
IMPROVE-
MENTS.—
‘‘(A) IN
GENERAL.—In the case of any
building erected (or improvements made) on
leased property, if such building or improve-
ment is property to which this section applies,
the depreciation deduction shall be determined
under the provisions of this section.
‘‘(B) TREATMENT
OF
LESSOR
IMPROVE-
MENTS
WHICH
ARE
ABANDONED
AT
TERMI-
NATION OF LEASE.—An improvement—
‘‘(i) which is made by the lessor of
leased property for the lessee of such prop-
erty, and
‘‘(ii) which is irrevocably disposed of
or abandoned by the lessor at the termi-
nation of the lease by such lessee,
shall be treated for purposes of determining
gain or loss under this title as disposed of by
the lessor when so disposed of or abandoned.’’
(b) EFFECTIVE DATE.—Subparagraph (B) of section
168(i)(8) of the Internal Revenue Code of 1986, as added
by the amendment made by subsection (a), shall apply to
improvements disposed of or abandoned after March 13,
1995.
153
PART III—ALTERNATIVE MINIMUM TAX RELIEF
SEC. 6331. PHASEOUT OF APPLICATION OF ALTERNATIVE
MINIMUM TAX TO CORPORATIONS.
(a) TERMINATION.—Subsection (a) of section 55 is
amended by adding at the end the following new flush
sentence:
‘‘In the case of a corporation, the tentative minimum tax
for any taxable year beginning after December 31, 2000,
shall be zero.’’
(b) EARLIER TERMINATION OF CERTAIN ADJUST-
MENTS FOR ALL TAXPAYERS.—
(1) DEPRECIATION.—Clause (i) of section
56(a)(1)(A) is amended by inserting ‘‘and before
March 14, 1995,’’ after ‘‘December 31, 1986,’’.
(2) MINING EXPLORATION AND DEVELOPMENT
COSTS.—Paragraph (2) of section 56(a) is amended
by inserting ‘‘and before January 1, 1996,’’ after
‘‘December 31, 1986,’’.
(3) LONG-TERM CONTRACTS.—Paragraph (3) of
section 56(a) is amended by inserting ‘‘and before
January 1, 1996,’’ after ‘‘March 1, 1986,’’.
(4) POLLUTION
CONTROL
FACILITIES.—Para-
graph (5) of section 56(a) is amended by inserting
‘‘and before January 1, 1996,’’ after ‘‘December 31,
1986,’’.
155
the following new sentence: ‘‘This paragraph shall
not apply to any taxable year beginning after De-
cember 31, 1995.’’
(3) CERTAIN EARNINGS AND PROFITS ITEMS.—
(A) Subparagraph (B) of section 56(g)(4)
is amended by adding at the end the following
new clause:
‘‘(iii) TERMINATION.—This subpara-
graph shall not apply to any taxable year
beginning after December 31, 1995.’’
(B) Subparagraph (C) of section 56(g)(4)
is amended by adding at the end the following
new clause:
‘‘(vi) TERMINATION.—This subpara-
graph shall not apply to any taxable year
beginning after December 31, 1995.’’
(4) INTANGIBLE DRILLING COSTS.—Clause (i)
of section 56(g)(4)(D) is amended by adding at the
end the following new sentence: ‘‘This clause shall
not apply to any taxable year beginning after De-
cember 31, 1995.’’
(5) CERTAIN
AMORTIZATION
PROVISIONS.—
Clause (ii) of section 56(g)(4)(D) is amended by
adding at the end the following new sentence: ‘‘This
156
clause shall not apply to any expenditure paid or in-
curred after December 31, 1995.’’
(6) LIFO INVENTORY ADJUSTMENTS.—Clause
(iii) of section 56(g)(4)(D) is amended by adding at
the end the following new sentence: ‘‘This clause
shall not apply to any adjustment arising in a tax-
able year beginning after December 31, 1995.’’
(7) INSTALLMENT SALES.—Clause (iv) of sec-
tion 56(g)(4)(D) is amended by adding at the end
the following new sentence: ‘‘This clause shall not
apply to any disposition after December 31, 1995.’’
(8) DEBT POOLS.—Subparagraph (E) of section
56(g)(4) is amended by adding at the end the follow-
ing new sentence: ‘‘This subparagraph shall not
apply to any exchange after December 31, 1995.’’
(9) DEPLETION.—Subparagraph (F) of section
56(g)(4) is amended by adding at the end the follow-
ing new clause:
‘‘(iii) TERMINATION.—This subpara-
graph shall not apply to any deduction for
depletion for any taxable year beginning
after December 31, 1995.’’
(10) 
OWNERSHIP
CHANGES.—Subparagraph
(G) of section 56(g)(4) is amended by adding at the
end the following new sentence: ‘‘This subparagraph
157
shall not apply to any ownership change after De-
cember 31, 1995.’’
(e) EARLIER TERMINATION OF ITEMS OF TAX PREF-
ERENCE.—
(1) DEPLETION.—Paragraph (1) of section
57(a) is amended by adding at the end the following
new sentence: ‘‘This paragraph shall not apply to
any taxable year beginning after December 31,
1995.’’
(2) INTANGIBLE DRILLING COSTS.—Paragraph
(2) of section 57(a) is amended by adding at the end
the following new subparagraph:
‘‘(F) TERMINATION.—This paragraph shall
not apply to any taxable year beginning after
December 31, 1995.’’
(3) RESERVES FOR LOSSES ON BAD DEBTS.—
Paragraph (4) of section 57(a) is amended by add-
ing at the end the following new sentence: ‘‘This
paragraph shall not apply to any taxable year begin-
ning after December 31, 1995.’’
(4) TAX-EXEMPT INTEREST.—Paragraph (5) of
section 57(a) is amended by adding at the end the
following new subparagraph:
‘‘(D) TERMINATION FOR CORPORATIONS.—
In the case of a corporation (other than a cor-
158
poration referred to in section 56(g)(6)), this
paragraph shall not apply to interest accruing
for periods after December 31, 1995.’’
(f) NET OPERATING LOSS DEDUCTION.—Paragraph
(1) of section 56(d) is amended by inserting ‘‘(100 percent
in the case of taxable years beginning after December 31,
1995)’’ after ‘‘90 percent’’ each place it appears.
(g) LOSSES.—
(1) Section 58 is amended by adding at the end
the following new subsection:
‘‘(d) TERMINATION.—This section shall not apply to
any loss incurred for any taxable year beginning after De-
cember 31, 1995.’’
(2) Subsection (h) of section 59 is amended by
inserting ‘‘469,’’ after ‘‘465,’’.
(h) FOREIGN TAX CREDIT.—Paragraph (2) of section
59(a) is amended by adding at the end the following new
subparagraph:
‘‘(D) 
TERMINATION.—This 
paragraph
shall not apply to any taxable year beginning
after December 31, 1995.’’
(i) LIMITATION ON USE OF CREDIT FOR PRIOR YEAR
MINIMUM TAX LIABILITY.—
(1) IN GENERAL.—Subsection (c) of section 53
is amended to read as follows: