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Such a health plan issuer shall be prohibited from
offering coverage after a cessation in offering cov-
erage under this paragraph for a 6-month period or
until the health plan issuer can demonstrate to the
applicable certifying authority (as defined in section
142(d)) that the health plan issuer has adequate ca-
pacity, whichever is later.
(2) FIRST-COME-FIRST-SERVED.—A health plan
issuer offering coverage to individuals under an indi-
vidual health plan is only eligible to exercise the lim-
itations provided for in paragraph (1) if the health
plan issuer provides for enrollment of individuals
under such plan on a first-come-first-served basis or
other basis established by a State to ensure a fair
opportunity to enroll in the plan and avoid risk se-
lection.
(d) MARKET REQUIREMENT.—
(1) IN GENERAL.—The provisions of subsection
(a) shall not be construed to require that a health
plan issuer offering group health plans to group pur-
chasers offer individual health plans to individuals.
(2) CONVERSION POLICIES.—A health plan is-
suer offering group health plans to group purchasers
under this title shall not be deemed to be a health
plan issuer offering an individual health plan solely
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because such health plan issuer offers a conversion
policy.
(3) MARKETING
OF
PLANS.—Nothing in this
section shall be construed to prevent a State from
requiring health plan issuers offering coverage to in-
dividuals under an individual health plan to actively
market such plan.
SEC. 111. GUARANTEED RENEWABILITY OF INDIVIDUAL
HEALTH COVERAGE.
(a) IN GENERAL.—Subject to subsections (b) and (c),
coverage for individuals under an individual health plan
shall be renewed or continued in force by a health plan
issuer at the option of the individual, except that the re-
quirement of this subsection shall not apply in the case
of—
(1) the nonpayment of premiums or contribu-
tions by the individual in accordance with the terms
of the individual health plan or where the health
plan issuer has not received timely premium pay-
ments;
(2) fraud or misrepresentation of material fact
on the part of the individual; or
(3) the termination of the individual health plan
in accordance with subsection (b).
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(b) 
TERMINATION
OF
INDIVIDUAL
HEALTH
PLANS.—
(1) PARTICULAR TYPE OF INDIVIDUAL HEALTH
PLAN NOT OFFERED.—In any case in which a health
plan issuer decides to discontinue offering a particu-
lar type of individual health plan to individuals, an
individual health plan may be discontinued by the
health plan issuer only if—
(A) the health plan issuer provides notice
to each individual covered under the plan of
such discontinuation at least 90 days prior to
the date of the expiration of the plan.
(B) the health plan issuer offers to each
individual covered under the plan the option to
purchase any other individual health plan cur-
rently being offered by the health plan issuer to
individuals; and
(C) in exercising the option to discontinue
the individual health plan and in offering one or
more replacement plans, the health plan issuer
acts uniformly without regard to the health sta-
tus of particular individuals.
(2) DISCONTINUANCE
OF
ALL
INDIVIDUAL
HEALTH PLANS.—In any case in which a health plan
issuer elects to discontinue all individual health
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plans in a State, an individual health plan may be
discontinued by the health plan issuer only if—
(A) the health plan issuer provides notice
to the applicable certifying authority (as defined
in section 142(d)) and to each individual cov-
ered under the plan of such discontinuation at
least 180 days prior to the date of the dis-
continuation of the plan; and
(B) all individual health plans issued or
delivered for issuance in the State are discon-
tinued and coverage under such plans is not re-
newed.
(3) PROHIBITION
ON
MARKET
REENTRY.—In
the case of a discontinuation under paragraph (2),
the health plan issuer may not provide for the issu-
ance of any individual health plan in the State in-
volved during the 5-year period beginning on the
date of the discontinuation of the last plan not so
renewed.
(c) TREATMENT OF NETWORK PLANS.—
(1) GEOGRAPHIC LIMITATIONS.—A health plan
issuer which offers a network plan (as defined in
paragraph (2)) may deny continued participation
under the plan to individuals who neither live, re-
side, nor work in an area in which the individual
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health plan is offered, but only if such denial is ap-
plied uniformly, without regard to health status of
particular individuals.
(2) NETWORK
PLAY.—As used in paragraph
(1), the term ‘‘network plan’’ means an individual
health plan that arranges for the financing and de-
livery of health care services to individuals covered
under such health plan, in whole or in part, through
arrangements with providers.
SEC. 112. STATE FLEXIBILITY IN INDIVIDUAL MARKET RE-
FORMS.
(a) IN GENERAL.—With respect to any State law
with respect to which the Governor of the State notifies
the Secretary of Health and Human Services that such
State law will achieve the goals of sections 110 and 111,
and that is in effect on, or enacted after, the date of enact-
ment of this Act (such as laws providing for guaranteed
issue, open enrollment by one or more health plan issuers,
high-risk pools, or mandatory conversion policies), such
State law shall apply in lieu of the standards described
in sections 110 and 111 unless the Secretary of Health
and Human Services determines, after considering the cri-
teria described in subsection (b)(1), in consultation with
the Governor and Insurance Commissioner or chief insur-
ance regulatory official of the State, that such State law
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does not achieve the goals of providing access to affordable
health care coverage for those individuals described in sec-
tions 110 and 111.
(b) DETERMINATION.—
(1) IN GENERAL.—In making a determination
under subsection (a), the Secretary of Health and
Human Services shall only—
(A) evaluate whether the State law or pro-
gram provides guaranteed access to affordable
coverage to individuals described in sections
110 and 111;
(B) evaluate whether the State law or pro-
gram provides coverage for preexisting condi-
tions (as defined in section 103(e)) that were
covered under the individuals’ previous group
health plan or employee health benefit plan for
individuals described in sections 110 and 111.
(C) evaluate whether the State law or pro-
gram provides individuals described in sections
110 and 111 with a choice of health plans or
a health plan providing comprehensive coverage,
and
(D) evaluate whether the application of the
standards described in sections 110 and 111
will have an adverse impact on the number of
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individuals in such State having access to af-
fordable coverage.
(2) NOTICE OF INTENT.—If, within 6 months
after the date of enactment of this Act, the Governor
of a State notifies the Secretary of Health and
Human Services that the State intends to enact a
law, or modify an existing law, described in sub-
section (a), the Secretary of Health and Human
Services may not make a determination under such
subsection until the expiration of the 12-month pe-
riod beginning on the date on which such notifica-
tion is made, or until January 1, 1998, whichever is
later. With respect to a State that provides notice
under this paragraph and that has a legislature that
does not meet within the 12-month period beginning
on the date of enactment of this Act, the Secretary
shall not make a determination under subsection (a)
prior to January 1, 1998.
(3) NOTICE
TO
STATE.—If the Secretary of
Health and Human Services determines that a State
law or program does not achieve the goals described
in subsection (a), the Secretary of Health and
Human Services shall provide the State with ade-
quate notice and reasonable opportunity to modify
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such law or program to achieve such goals prior to
making a final determination under subsection (a).
(c) ADOPTION OF NAIC MODEL.—If, not later than
9 months after the date of enactment of this Act—
(1) the National Association of Insurance Com-
missioners (hereafter referred to as the ‘‘NAIC’’),
through a process which the Secretary of Health and
Human Services determines has included consulta-
tion with representatives of the insurance industry
and consumer groups, adopts a model standard or
standards for reform of the individual health insur-
ance market, and
(2) the Secretary of Health and Human Serv-
ices determines, within 30 days of the adoption of
such NAIC standard or standards, that such stand-
ards comply with the goals of sections 110 and 111
a State that elects to adopt such model standards or sub-
stantially adopt such model standards shall be deemed to
have met the requirements of sections 110 and 111 and
shall be subject to a determination under subsection (a).
SEC. 113. DEFINITION.
(a) IN GENERAL.—As used this title, the term ‘‘indi-
vidual health plan’’ means any contract, policy, certificate
or other arrangement offered to individuals by a health
plan issuer that provides or pays for health benefits (such
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as provider and hospital benefits) and that is not a group
health plan under section 2(6).
(b) ARRANGEMENTS NOT INCLUDED.—Such term
does not include the following, or any combination thereof:
(1) Coverage only for accident, or disability in-
come insurance, or any combination thereof.
(2) Medicare supplemental health insurance (as
defined under section 1882(g)(1) of the Social Secu-
rity Act).
(3) Coverage issued as a supplement to liability
insurance.
(4) Liability insurance, including general liabil-
ity insurance and automobile liability insurance.
(5) Workers’ compensation or similar insurance.
(6) Automobile medical payment insurance.
(7) Coverage for a specified disease or illness.
(8) Hospital of fixed indemnity insurance.
(9) Short-term limited duration insurance.
(10) Credit-only, dental-only, or vision-only in-
surance.
(11) A health insurance policy providing
benefits only for long-term care, nursing home
care, home health care, community-based care,
or any combination thereof.
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Subtitle C—COBRA Clarifications
SEC. 121. COBRA CLARIFICATIONS.
(a) PUBLIC HEALTH SERVICE ACT.—
(1) PERIOD OF COVERAGE.—Section 2202(2) of
the Public Health Service Act (42 U.S.C. 300bb–
2(2)) is amended—
(A) in subparagraph (A)—
(i) by transferring the sentence imme-
diately preceding clause (iv) so as to ap-
pear immediately following such clause
(iv); and
(ii) in the last sentence (as so trans-
ferred)—
(I) by inserting ‘‘, or a bene-
ficiary-family member of the individ-
ual,’’ after ‘‘an individual’’; and
(II) by striking ‘‘at the time of a
qualifying event described in section
2203(2)’’ and inserting ‘‘at any time
during the initial 18-month period of
continuing coverage under this title’’;
(B) in subparagraph (D)(i), by inserting
before ‘‘, or’’ the following: ‘‘, except that the
exclusion or limitation contained in this clause
shall not be considered to apply to a plan under
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which a preexisting condition or exclusion does
not apply to an individual otherwise eligible for
continuation coverage under this section be-
cause of the provision of the Health Insurance
Reform Act of 1996’’, and
(C) in subparagraph (E), by striking ‘‘at
the time of a qualifying event described in sec-
tion 2203(2)’’ and inserting ‘‘at any time dur-
ing the initial 18-month period of continuing
coverage under this title’’,
(2) ELECTION.—Section 2205(1)(C) of the
Public Health Service Act (42 U.S.C. 300bb–
5(1)(C)) is amended—
(A) in clause (i), by striking ‘‘or’’ at the
end thereof.
(B) in clause (ii), by striking the period
and inserting ‘‘, or’’, and
(C) by adding at the end thereof the fol-
lowing new clause:
‘‘(iii) in the case of an individual de-
scribed in the last sentence of section
2202(2)(A), or a beneficiary-family mem-
ber of the individual, the date such individ-
ual is determined to have been disabled.’’.
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(3) NOTICES.—Section 2206(3) of the Public
Health Service Act (42 U.S.C. 300bb–6(3)) is
amended by striking ‘‘at the time of a qualifying
event described in section 2203(2)’’ and inserting
‘‘at any time during the initial 18-month period of
continuing coverage under this title’’.
(4) BIRTH OR ADOPTION OF A CHILD.—Section
2208(3)(A) of the Public Health Service Act (42
U.S.C. 300bb–8(3)(A)) is amended by adding at the
end thereof the following new flush sentence:
‘‘Such term shall also include a child who is born to or
placed for adoption with the covered employee during the
period of continued coverage under this title.’’.
(b) EMPLOYEE RETIREMENT INCOME SECURITY ACT
OF 1974.—
(1) PERIOD OF COVERAGE.—Section 602(2) of
the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1162(2)) is amended—
(A) in the last sentence of subparagraph
(A)—
(i) by inserting ‘‘, or a beneficiary-
family member of the individual.’’ after
‘‘an individual’’; and
(ii) by striking ‘‘at the time of a
qualifying 
event 
described 
in 
section
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603(2)’’ and inserting ‘‘at any time during
the initial 18-month period of continuing
coverage under this part’’,
(B) in subparagraph (D)(i), by inserting
before, ‘‘, or’’ the following ‘‘, except that the
exclusion or limitation contained in this clause
shall not be considered to apply to a plan under
which a preexisting condition or exclusion does
not apply to an individual otherwise eligible for
continuation coverage under this section be-
cause of the provision of the Health Insurance
Reform Act of 1996’’; and
(C) in subparagraph (E), by striking ‘‘at
the time of a qualifying event described in sec-
tion 603(2)’’ and inserting ‘‘at any time during
the initial 18-month period of continuing cov-
erage under this part’’.
(2) ELECTION.—Section 605(1)(C) of the Em-
ployee Retirement Income Security Act of 1974 (29
U.S.C. 1165(1)(C)) is amended—
(A) in clause (i), by striking ‘‘or’’ at the
end thereof;
(B) in clause (ii), by striking the period
and inserting ‘‘, or’’; and
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(C) by adding at the end thereof the fol-
lowing new clause:
‘‘(iii) in the case of an individual de-
scribed in the last sentence of section
602(2)(A), or a beneficiary-family member
of the individual, the date such individual
is determined to have been disabled.’’.
(3) NOTICES.—Section 606(3) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1166(3)) is amended by striking ‘‘at the time of a
qualifying event described in section 603(2)’’ and in-
serting ‘‘at any time during the initial 18-month pe-
riod of continuing coverage under this part’’.
(4) BIRTH OR ADOPTION OF A CHILD.—Section
607(3)(A) of the Employee Retirement Income Secu-
rity Act of 1974 (29 U.S.C. 1167(3)) is amended by
adding at the end thereof the following new flush
sentence:
‘‘Such term shall also include a child who is born to or
placed for adoption with the covered employee during the
period of continued coverage under this part.’’.
(c) INTERNAL REVENUE CODE OF 1986.—
(1) 
PERIOD
OF
COVERAGE.—Section
4980B(f)(2)(B) of the Internal Revenue Code of
1986 is amended—
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(A) in the last sentence of clause (i) by
striking ‘‘at the time of a qualifying event de-
scribed in paragraph (3)(B)’’ and inserting ‘‘at
any time during the initial 18-month period of
continuing coverage under this section’’.
(B) in clause (iv)(I), by inserting before ‘‘,
or’’ the following: ‘‘, except that the exclusion
or limitation contained in this subclause shall
not be considered to apply to a plan under
which a preexisting condition or exclusion does
not apply to an individual otherwise eligible for
continuation coverage under this subsection be-
cause of the provision of the Health Insurance
Reform Act of 1996’’; and
(C) in clause (v), by striking ‘‘at the time
of a qualifying event described in paragraph
(3)(B)’’ and inserting ‘‘at any time during the
initial 18-month period of continuing coverage
under this section’’.
(2) ELECTION.—Section 4980B(f)(5)(A)(ii) of
the Internal Revenue Code of 1986 is amended—
(A) in subclause (I), by striking ‘‘or’’ at
the end thereof;
(B) in subclause (II), by striking the pe-
riod and inserting ‘‘, or’’, and
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(C) by adding at the end thereof the fol-
lowing new subclause:
‘‘(III) in the case of an qualified
beneficiary described in the last sen-
tence of paragraph (2)(B)(i), the date
such individual is determined to have
been disabled.’’.
(3) NOTICES.—Section 4980B(f)(6)(C) of the
Internal Revenue Code of 1986 is amended by strik-
ing ‘‘at the time of a qualifying event described in
paragraph (3)(B)’’ and inserting ‘‘at any time dur-
ing the initial 18-month period of continuing cov-
erage under this section’’.
(4) BIRTH OR ADOPTION OF A CHILD.—Section
4980B(g)(1)(A) of the Internal Revenue Code of
1986 is amended by adding at the end thereof the
following new flush sentence:
‘‘Such term shall also include a child who is born to or
placed for adoption with the covered employee during the
period of continued coverage under this section.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to qualifying events occurring on
or after the date of enactment of this Act for plan years
beginning after December 31, 1997.
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(e) NOTIFICATION OF CHANGES.—Not later than 60
days prior to the date on which this section becomes effec-
tive, each group health plan (covered under title XXII of
the Public Health Service Act, part 6 of subtitle B of title
I of the Employee Retirement Income Security Act of
1974, and section 4980B(f) of the Internal Revenue Code
of 1986) shall notify each qualified beneficiary who has
elected continuation coverage under such title, part or sec-
tion of the amendments made by this section.
Subtitle D—Private Health Plan Purchasing
Cooperatives
SEC. 131. PRIVATE HEALTH PLAN PURCHASING COOPERA-
TIVES.
(a) DEFINITION.—As used in this title, the term
‘‘health plan purchasing cooperative’’ means a group of
individuals or employers that, on a voluntary basis and
in accordance with this section, form a cooperative for the
purpose of purchasing individual health plans or group
health plans offered by health plan issuers. A health plan
issuer, agent, broker or any other individual or entity en-
gaged in the sale of insurance may not underwrite a coop-
erative.
(b) CERTIFICATION.—
(1) IN GENERAL.—If a group described in sub-
section (a) desires to form a health plan purchasing
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cooperative in accordance with this section and such
group appropriately notifies the State and the Sec-
retary of such desire, the State, upon a determina-
tion that such group meets the requirements of this
section, shall certify the group as a health plan pur-
chasing cooperative. The State shall make a deter-
mination of whether such group meets the require-
ments of this section in a timely fashion. Each such
cooperative shall also be registered with the Sec-
retary.
(2) STATE REFUSAL TO CERTIFY.—If a State
fails to implement a program for certifying health
plan purchasing cooperatives in accordance with the
standards under this title, the Secretary shall certify
and oversee the operations of such cooperative in
such State.
(3) INTERSTATE COOPERATIVES.—For purposes
of this section a health plan purchasing cooperative
operating in more than one State shall be certified
by the State in which the cooperative is domiciled.
States may enter into cooperative agreements for the
purpose of certifying and overseeing the operation of
such cooperatives. For purposes of this subsection, a
cooperative shall be considered to be domiciled in the
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State in which most of the members of the coopera-
tive reside.
(c) BOARD OF DIRECTORS.—
(1) IN GENERAL.—Each health plan purchasing
cooperative shall be governed by a Board of Direc-
tors that shall be responsible for ensuring the per-
formance of the duties of the cooperative under this
section. The Board shall be composed of a board
cross-section of representatives of employers, em-
ployees, and individuals participating in the coopera-
tive. A health plan issuer, agent, broker or any other
individual or entity engaged in the sale of individual
health plans or group health plans may not hold or
control any right to vote with respect to a coopera-
tive.
(2) LIMITATION ON COMPENSATION.—A health
plan purchasing cooperative may not provide com-
pensation to members of the Board of Directors.
The cooperative may provide reimbursements to
such members for the reasonable and necessary ex-
penses incurred by the members in the performance
of their duties as members of the Board.
(3) CONFLICT OF INTEREST.—No member of
the Board of Directors (or family members of such
members) nor any management personnel of the co-
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operative may be employed by, be a consultant of, be
a member of the board of directors or, be affiliated
with an agent of, or otherwise be a representative of
any health plan issuer, health care provider, or agent
or broker. Nothing in the preceding sentence shall
limit a member of the Board from purchasing cov-
erage offered through the cooperative.
(d) MEMBERSHIP AND MARKETING AREA.—
(1) MEMBERSHIP.—A health plan purchasing
cooperative may establish limits on the maximum
size of employers who may become members of the
cooperative, and may determine whether to permit
individuals to become members. Upon the establish-
ment of such membership requirements, the coopera-
tive shall, except as provided in subparagraph (B),
accept all employers (or individuals) residing within
the area served by the cooperative who meet such re-
quirements as members on a first-come, first-served
basis, or on another basis established by the State
to ensure equitable access to the cooperative.
(2) MARKETING AREA.—A State may establish
rules regarding the geographic area that must be
served by a health plan purchasing cooperative. With
respect to a State that has not established such
rules, a health plan purchasing cooperative operating
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in the State shall define the boundaries of the area
to be served by the cooperative, except that such
boundaries may not be established on the basis of
health status of the populations that reside in the
area.
(e) DUTIES AND RESPONSIBILITIES.—
(1) IN GENERAL.—A health plan purchasing co-
operative shall—
(A) enter into agreements with multiple,
unaffiliated health plan issuers, except that the
requirement of this subparagraph shall not
apply in regions (such as remote or frontier
areas) in which compliance with such require-
ment is not possible.
(B) enter into agreements with employers
and individuals who become members of the co-
operative;
(C) participate in any program of risk-ad-
justment or reinsurance, or any similar pro-
gram, that is established by the State.
(D) prepare and disseminate comparative
health plan materials (including information
about cost, quality, benefits, and other informa-
tion concerning group health plans and individ-
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ual health plans offered through the coopera-
tive);
(E) actively market to all eligible employ-
ers and individuals residing within the service
area; and
(F) act as an ombudsman for group health
plan or individual health plan enrollees.
(2) PERMISSIBLE ACTIVITIES.—A health plan
purchasing cooperative may perform such other
functions as necessary to further the purposes of
this title, including—
(A) collecting and distributing premiums
and performing other administrative functions;
(B) collecting and analyzing surveys of en-
rollee satisfaction;
(C) charging membership fee to enrollees
(such fees may not be based on health status)
and charging participation fees to health plan
issuers;
(D) cooperating with (or accepting as
members) employers who provide health bene-
fits directly to participants and beneficiaries
only for the purpose of negotiating with provid-
ers, and
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(E) negotiating with health care providers
and health plan issuers.
(f) LIMITATIONS ON COOPERATIVE ACTIVITIES.—A
health plan purchasing cooperative shall not—
(1) perform any activity relating to the licens-
ing of health plan issuers.
(2) assume financial risk directly or indirectly
on behalf of members of a health plan purchasing
cooperative relating to any group health plan or in-
dividual health plan;
(3) establish eligibility, continuation of eligi-
bility, enrollment, or premium contribution require-
ments for participants, beneficiaries, or individuals
based on health status;
(4) operate on a for-profit or other basis where
the legal structure of the cooperative permits profits
to be made and not returned to the members of the
cooperative, except that a for-profit health plan pur-
chasing cooperative may be formed by a nonprofit
organization—
(A) in which membership in such organiza-
tion is not based on health status; and
(B) that accepts as members all employers
or individuals on a first-come, first-served basis,
subject to any established limit on the maxi-
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mum size of and employer that may become a
member; or
(5) perform any other activities that conflict or
are inconsistent with the performance of its duties
under this title.
(g) LIMITED PREEMPTIONS
OF CERTAIN STATE
LAWS.—
(1) IN
GENERAL.—With respect to a health
plan purchasing cooperative that meets the require-
ments of this section, State fictitious group laws
shall be preempted.
(2) HEALTH PLAN ISSUERS.—
(A) RATING.—With respect to a health
plan issuer offering a group health plan or indi-
vidual health plan through a health plan pur-
chasing cooperative that meets the requirements
of this section. State premium rating require-
ment laws, except to the extent provided under
subparagraph (B), shall be preempted unless
such laws permit premium rates negotiated by
the cooperative to be less than rates that would
otherwise be permitted under State law, if such
rating differential is not based on differences in
health status or demographic factors.
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(B) EXCEPTION.—State laws referred to in
subparagraph (A) shall not be preempted if
such laws—
(i) prohibit the variance of premium
rates among employers, plan sponsors, or
individuals that are members of health
plan purchasing cooperative in excess of
the amount of such variations that would
be permitted under such State rating laws
among employers, plan sponsors, and indi-
viduals that are not members of the coop-
erative; and
(ii) prohibit a percentage increase in
premium rates for a new rating period that
is in excess of that which would be per-
mitted under State rating laws.
(C) BENEFITS.—Except as provided in
subparagraph (D), a health plan issuer offering
a group health plan or individual health plan
through a health plan purchasing cooperative
shall comply with all State mandated benefit
laws that require the offering of any services,
category or care, or services of any class or type
of provider.
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(D) EXCEPTION.—In those states that
have enacted laws authorizing the issuance of
alternative benefit plans to small employers,
health plan issuers may offer such alternative
benefit plans through a health plan purchasing
cooperative that meets the requirements of this
section.
(h) RULES OF CONSTRUCTION.—Nothing in this sec-
tion shall be construed to—
(1) require that a State organize, operate, or
otherwise create health plan purchasing cooperatives;
(2) otherwise require the establishment of
health plan purchasing cooperatives.
(3) require individuals, plan sponsors, or em-
ployers to purchase group health plans or individual
health plans through a health plan purchasing coop-
erative;
(4) require that a health plan purchasing coop-
erative be the only type of purchasing arrangement
permitted to operate in a State.
(5) confer authority upon a State that the State
would not otherwise have to regulate health plan is-
suers or employee health benefits plans, or
(6) confer authority up a State (or the Federal
Government) that the State (or Federal Govern-
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ment) would not otherwise have to regulate group
purchasing arrangements, coalitions, or other similar
entities that do not desire to become a health plan
purchasing cooperative in accordance with this sec-
tion.
(i) APPLICATION OF ERISA.—For purposes of en-
forcement only, the requirements of parts 4 and 5 of sub-
title B of title I of the Employee Retirement Income Secu-
rity Act of 1974 (29 U.S.C. 1101) shall apply to a health
pan purchasing cooperative as if such plan were an em-
ployee welfare benefit plan.
Subtitle E—Application and Enforcement of
Standards
SEC. 141. APPLICABILITY.
(a) CONSTRUCTION.—
(1) ENFORCEMENT.—
(A) IN
GENERAL.—A requirement or
standard imposed under this title on a group
health plan or individual health plan offered by
a health plan issuer shall be deemed to be a re-
quirement or standard imposed on the health
plan issuer. Such requirements or standards
shall be enforced by the State insurance com-
missioner for the State involved or the official
or officials designated by the State to enforce
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ments, that are consistent with, and are not in
direct conflict with, this title and provide great-
er protection or benefit to participants, bene-
ficiaries or individuals.
(b) RULE OF CONSTRUCTION.—Nothing in this title
shall be construed to affect or modify the provisions of
section 514 of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1144).
(c) CONTINUATION.—Nothing in this title shall be
construed as requiring a group health plan or an employee
health benefit plan to provide benefits to a particular par-
ticipant or beneficiary in excess of those provided under
the terms of such plan.
SEC. 202. ENFORCEMENT OF STANDARDS.
(a) HEALTH PLAN ISSUERS.—Each State shall re-
quire that each group health plan and individual health
plan issued, sold, renewed, offered for sale or operated in
such State by a health plan issuer meet the standards es-
tablished under this title pursuant to an enforcement plan
filed by the State with the Secretary. A State shall submit
such information as required by the Secretary demonstrat-
ing effective implementation of the State enforcement law.
(b) EMPLOYEE HEALTH BENEFIT PLANS.—With re-
spect to employee health benefit plans, the Secretary shall
enforce the reform standards established under this title
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in the same manner as provided for under sections 502,
504, 506, and 510 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1132, 1134, 1136, and
1140). The civil penalties contained in paragraphs (1) and
(2) of section 502(c) of such Act (29 U.S.C. 1132(c) (1)
and (2)) shall apply to any information required by the
Secretary to be disclosed and reported under this section.
(c) FAILURE TO IMPLEMENT PLAN.—In the case of
the failure of a State to substantially enforce the stand-
ards and requirements set forth in this title with respect
to group health plans and individual health plans as pro-
vided for under the State enforcement plan filed under
subsection (a), the Secretary, in consultation with the Sec-
retary of Health and Human Services, shall implement an
enforcement plan meeting the standards of this title in
such State. In the case of a State that fails to substan-
tially enforce the standards and requirements set forth in
this title, each health plan issuer operating in such State
shall be subject to civil enforcement as provided for under
sections 502, 504, 506, and 510 of the Employee Retire-
ment Income Security Act of 1974 (29 U.S.C. 1132, 1134,
1136, and 1140). The civil penalties contained in para-
graphs (1) and (2) of section 502(c) of such Act (29
U.S.C. 1132(c) (1) and (2)) shall apply to any information
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required by the Secretary to be disclosed and reported
under this section.
(d) APPLICABLE CERTIFYING AUTHORITY.—As used
in 
this 
title, 
the 
term 
‘‘applicable 
certifying
authority’’means, with respect to—
(1) health plan issuers, the State insurance
commissioner or official or officials designated by
the State to enforce the requirements of this title for
the State involved; and
(2) an employee health benefit, plan, the Sec-
retary.
(e) REGULATIONS.—The Secretary may promulgate
such regulations as may be necessary or appropriate to
carry out this title.
(f) TECHNICAL AMENDMENT.—Section 508 of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1138) is amended by inserting ‘‘and under the
Health Insurance Reform Act of 1996’’ before the period.
Subtitle F—Miscellaneous Provisions
SEC. 191. HEALTH COVERAGE AVAILABILITY STUDY.
(a) IN GENERAL.—The Secretary of Health and
Human Services, in consultation with the Secretary, rep-
resentatives of State officials, consumers, and other rep-
resentatives of individuals and entities that have expertise
in health insurance and employee benefits, shall conclude
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a two-part study, and prepare and submit reports, in ac-
cordance with this section.
(b) EVALUATION OF AVAILABILITY.—Not later than
January 1, 1998, the Secretary of Health and Human
Services shall prepare and submit to the appropriate com-
mittees of Congress a report, concerning—
(1) an evaluation, based on the experience of
States, expert opinions, and such additional data as
may be available, of the various mechanisms used to
ensure the availability of reasonably priced health
coverage to employers purchasing group coverage
and to individuals purchasing coverage on a non-
group basis; and
(2) whether standards that limit the variation
in premiums will further the purposes of this Act.
(c) EVALUATION
OF EFFECTIVENESS.—Not later
than January 1, 1999, the Secretary of Health and
Human Services shall prepare and submit to the appro-
priate committees of Congress a report, concerning the ef-
fectiveness of the provisions of this Act and the various
State laws, in ensuring the availability of reasonably
priced health coverage to employers purchasing group cov-
erage and individuals purchasing coverage on a nongroup
basis.
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SEC. 192. EFFECTIVE DATE.
Except as otherwise provided for in this title, the pro-
visions of this title shall apply as follows:
(1) With respect to group health plans and in-
dividual health plans, such provisions shall apply to
plans offered, sold, issued, renewed, in effect, or op-
erated on or after January 1, 1997, and
(2) With respect to employee health benefit
plans, on the first day of the first plan year begin-
ning on or after January 1, 1997.
SEC. 193. SEVERABILITY.
If any provision of this title or the application of such
provision to any person or circumstance is held to be un-
constitutional, the remainder of this title and the applica-
tion of the provisions of such to any person or cir-
cumstance shall not be affected thereby.
TITLE II—INCREASE IN DEDUCTION FOR
HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS
TABLE OF CONTENTS OF TITLE
TITLE II—INCREASE IN DEDUCTION FOR HEALTH INSURANCE
COSTS OF SELF-EMPLOYED INDIVIDUALS
Sec. 200. Amendment of 1986 Code.
Subtitle A—Increase in Deduction For Health Insurance Costs of Self-
Employed Individuals
Sec. 201. Increase in deduction for health insurance costs of self-employed indi-
viduals.
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SUBTITLE B—REVENUE OFFSETS
CHAPTER 1—TREATMENT OF INDIVIDUALS WHO EXPATRIATE
Sec. 211. Revision of tax rules on expatriation.
Sec. 212. Information on individuals expatriating.
CHAPTER 2—FOREIGN TRUST TAX COMPLIANCE
Sec. 221. Improved information reporting on foreign trusts.
Sec. 222. Modifications of rules relating to foreign trusts having one or more
United States beneficiary.
Sec. 223. Foreign persons not to be treated as owners under grantor trust rules.
Sec. 224. Information reporting regarding foreign gifts.
Sec. 225. Modification of rules relating to foreign trusts which are not grantor
trusts.
Sec. 226. Residence of estates and trusts, etc.
CHAPTER 3—REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT
SAVINGS ASSOCIATIONS
Sec. 231. Repeal of bad debt reserve method for thrift savings associations.
SEC. 200. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in
this title an amendment or repeal is expressed in terms
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code
of 1986.
Subtitle A—Increase in Deduction For Health
Insurance Costs of Self-Employed Individuals
SEC. 201. INCREASE IN DEDUCTION FOR HEALTH INSUR-
ANCE COSTS OF SELF-EMPLOYED INDIVID-
UALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l)
is amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—
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‘‘(A) IN GENERAL.—In the case of an indi-
vidual who is an employee within the meaning
of section 401(c)(1), there shall be allowed as
a deduction under this section an amount equal
to the applicable percentage of the amount paid
during the taxable year for insurance which
constitutes medical care for the taxpayer, his
spouse, and dependents.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of subparagraph (A), the applicable
percentage shall be determined under the fol-
lowing table:
‘‘For taxable years beginning
in calendar year—
The applicable percentage is—
After 1996 and before 2002 ..........
50 percent.
2002 or thereafter .........................
80 percent.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1996.
Subtitle B—Revenue Offsets
CHAPTER 1—TREATMENT OF
INDIVIDUALS WHO EXPATRIATE
SEC. 211. REVISION OF TAX RULES ON EXPATRIATION.
(a) IN GENERAL.—Subpart A of part II of sub-
chapter N of chapter 1 is amended by inserting after sec-
tion 877 the following new section:
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‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
‘‘(a) GENERAL RULES.—For purposes of this sub-
title—
‘‘(1) MARK TO MARKET.—Except as provided in
subsection (f), all property of a covered expatriate to
which this section applies shall be treated as sold on
the expatriation date for its fair market value.
‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the
case of any sale under paragraph (1)—
‘‘(A) notwithstanding any other provision
of this title, any gain arising from such sale
shall be taken into account for the taxable year
of the sale unless such gain is excluded from
gross income under part III of subchapter B,
and
‘‘(B) any loss arising from such sale shall
be taken into account for the taxable year of
the sale to the extent otherwise provided by this
title, except that section 1091 shall not apply
(and section 1092 shall apply) to any such loss.
‘‘(3) EXCLUSION
FOR
CERTAIN
GAIN.—The
amount which would (but for this paragraph) be in-
cludible in the gross income of any individual by rea-
son of this section shall be reduced (but not below
zero) by $600,000. For purposes of this paragraph,
allocable expatriation gain taken into account under
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subsection (f)(2) shall be treated in the same man-
ner as an amount required to be includible in gross
income.
‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS
UNITED STATES CITIZEN.—
‘‘(A) IN GENERAL.—If an expatriate elects
the application of this paragraph—
‘‘(i) this section (other than this para-
graph) shall not apply to the expatriate,
but
‘‘(ii) the expatriate shall be subject to
tax under this title, with respect to prop-
erty to which this section would apply but
for such election, in the same manner as if
the individual were a United States citizen.
‘‘(B) LIMITATION ON AMOUNT OF ESTATE,
GIFT, AND
GENERATION-SKIPPING
TRANSFER
TAXES.—The aggregate amount of taxes im-
posed under subtitle B with respect to any
transfer of property by reason of an election
under subparagraph (A) shall not exceed the
amount of income tax which would be due if the
property were sold for its fair market value im-
mediately before the time of the transfer or
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death (taking into account the rules of para-
graph (2)).
‘‘(C) REQUIREMENTS.—Subparagraph (A)
shall not apply to an individual unless the indi-
vidual—
‘‘(i) provides security for payment of
tax in such form and manner, and in such
amount, as the Secretary may require,
‘‘(ii) consents to the waiver of any
right of the individual under any treaty of
the United States which would preclude as-
sessment or collection of any tax which
may be imposed by reason of this para-
graph, and
‘‘(iii) complies with such other re-
quirements as the Secretary may prescribe.
‘‘(D) ELECTION.—An election under sub-
paragraph (A) shall apply to all property to
which this section would apply but for the elec-
tion and, once made, shall be irrevocable. Such
election shall also apply to property the basis of
which is determined in whole or in part by ref-
erence to the property with respect to which the
election was made.
‘‘(b) ELECTION TO DEFER TAX.—
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‘‘(1) IN GENERAL.—If the taxpayer elects the
application of this subsection with respect to any
property—
‘‘(A) no amount shall be required to be in-
cluded in gross income under subsection (a)(1)
with respect to the gain for such property for
the taxable year of the sale, but
‘‘(B) the taxpayer’s tax for the taxable
year in which such property is disposed of shall
be increased by the deferred tax amount with
respect to the property.
Except to the extent provided in regulations, sub-
paragraph (B) shall apply to a disposition whether
or not gain or loss is recognized in whole or in part
on the disposition.
‘‘(2) DEFERRED TAX AMOUNT.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘deferred tax amount’
means, with respect to any property, an amount
equal to the sum of—
‘‘(i) 
the 
difference 
between 
the
amount of tax paid for the taxable year de-
scribed in paragraph (1)(A) and the
amount which would have been paid for
such taxable year if the election under
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paragraph (1) had not applied to such
property, plus
‘‘(ii) an amount of interest on the
amount described in clause (i) determined
for the period—
‘‘(I) beginning on the 91st day
after the expatriation date, and
‘‘(II) ending on the due date for
the taxable year described in para-
graph (1)(B),
by using the rates and method applicable
under section 6621 for underpayments of
tax for such period.
For purposes of clause (ii), the due date is the
date prescribed by law (determined without re-
gard to extension) for filing the return of the
tax imposed by this chapter for the taxable
year.
‘‘(B) ALLOCATION OF LOSSES.—For pur-
poses of subparagraph (A), any losses described
in subsection (a)(2)(B) shall be allocated rat-
ably among the gains described in subsection
(a)(2)(A).
‘‘(3) SECURITY.—
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‘‘(A) IN GENERAL.—No election may be
made under paragraph (1) with respect to any
property unless adequate security is provided
with respect to such property.
‘‘(B) ADEQUATE SECURITY.—For purposes
of subparagraph (A), security with respect to
any property shall be treated as adequate secu-
rity if—
‘‘(i) it is a bond in an amount equal
to the deferred tax amount under para-
graph (2)(A) for the property, or
‘‘(ii) the taxpayer otherwise estab-
lishes to the satisfaction of the Secretary
that the security is adequate.
‘‘(4) WAIVER OF CERTAIN RIGHTS.—No elec-
tion may be made under paragraph (1) unless the
taxpayer consents to the waiver of any right under
any treaty of the United States which would pre-
clude assessment or collection of any tax imposed by
reason of this section.
‘‘(5) DISPOSITIONS.—For purposes of this sub-
section, a taxpayer making an election under this
subsection with respect to any property shall be
treated as having disposed of such property—
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‘‘(A) immediately before death if such
property is held at such time, and
‘‘(B) at any time the security provided
with respect to the property fails to meet the
requirements of paragraph (3) and the taxpayer
does not correct such failure within the time
specified by the Secretary.
‘‘(6) ELECTIONS.—An election under
paragraph (1) shall only apply to property
described in the election and, once made, is
irrevocable. An election may be under
paragraph (1) with respect to an interest
in a trust with respect to which gain is re-
quired to be recognized under subsection
(f)(1).
‘‘(c) COVERED EXPATRIATE.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘covered expatri-
ate’ means an expatriate—
‘‘(A) whose average annual net income tax
(as defined in section 38(c)(1)) for the period
of 5 taxable years ending before the expatria-
tion date is greater than $100,000, or
‘‘(B) whose net worth as of such date is
$500,000 or more.
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If the expatriation date is after 1996, such
$100,000 and $500,000 amounts shall be increased
by an amount equal to such dollar amount multi-
plied by the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by sub-
stituting ‘1995’ for ‘1992’ in subparagraph (B)
thereof. Any increase under the preceding sentence
shall be rounded to the nearest multiple of $1,000.
‘‘(2) EXCEPTIONS.—An individual shall not be
treated as a covered expatriate if—
‘‘(A) the individual—
‘‘(i) became at birth a citizen of the
United States and a citizen of another
country and, as of the expatriation date,
continues to be a citizen of, and is taxed
as a resident of, such other country, and
‘‘(ii) has been a resident of the United
Stats 
(as 
defined 
in 
section
7701(b)(1)(A)(ii)) for not more than 8 tax-
able years during the 15-taxable year pe-
riod ending with the taxable year during
which the expatriation date occurs, or
‘‘(B)(i) the individual’s relinquishment of
United States citizenship occurs before such in-
dividual attains age 181⁄2, and
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‘‘(ii) the individual has been a resident of
the United States (as so defined) for not more
than 5 taxable years before the date of relin-
quishment.
‘‘(d) PROPERTY TO WHICH SECTION APPLIES.—For
purposes of this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided by the Secretary, this section shall apply to—
‘‘(A) any interest in property held by a
covered expatriate on the expatriation date the
gain from which would be included in the gross
income of the expatriate if such interest had
been sold for its fair market value on such data
in a transaction in which gain is recognized in
whole or in part, and
‘‘(B) any other interest in a trust to which
subsection (f) applies.
‘‘(2) EXCEPTIONS.—This section shall not
apply to the following property:
‘‘(A) UNITED STATES REAL PROPERTY IN-
TERESTS.—Any United States real property in-
terest (as defined in section 897(c)(1)), other
than stock of a United States real property
holding corporation which does not, on the ex-
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patriation date, meet the requirements of sec-
tion 897(c)(2).
‘‘(B) INTEREST IN CERTAIN RETIREMENT
PLANS.—
‘‘(i) IN GENERAL.—Any interest in a
qualified retirement plan (as defined in
section 4974(c)), other than any interest
attributable to contributions which are in
excess of any limitation or which violate
any condition for tax-favored treatment.
‘‘(ii) FOREIGN PENSION PLANS.—
‘‘(I) IN GENERAL.—Under regu-
lations prescribed by the Secretary,
interests in foreign pension plans or
similar retirement arrangements or
programs.
‘‘(II) LIMITATION.—The value of
property which is treated as not sold
by reason of this subparagraph shall
not exceed $500,000.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) 
EXPATRIATE.—The 
term 
‘expatriate’
means—
‘‘(A) any United States citizen who relin-
quishes his citizenship, or
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‘‘(B) any long-term resident of the United
States who—
‘‘(i) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
‘‘(ii) commences to be treated as a
resident of a foreign country under the
provisions of a tax treaty between the
United States and the foreign country and
who does not waive the benefits of such
treaty applicable to residents of the foreign
country.
‘‘(2) EXPATRIATION
DATE.—The term ‘expa-
triation date’ means—
‘‘(A) the date an individual relinquishes
United States citizenship, or
‘‘(B) in the case of a long-term resident of
the United States, the date of the event de-
scribed in clause (i) or (ii) of paragraph (1)(B).
‘‘(3) RELINQUISHMENT
OF
CITIZENSHIP.—A
citizen shall be treated as relinquishing his United
States citizenship on the earliest of—
‘‘(A) the date the individual renounces his
United States nationality before a diplomatic or
consular officer of the United States pursuant
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to paragraph (5) of section 349(a) of the Immi-
gration 
and 
Nationality 
Act 
(8 
U.S.C.
1481(a)(5)).
‘‘(B) the date the individual furnishes to
the United States Department of State a signed
statement of voluntary relinquishment of Unit-
ed States nationality confirming the perform-
ance of an act of expatriation specified in para-
graph (1), (2), (3), or (4) of section 349(a) of
the Immigration and Nationality Act (8 U.S.C.
1481(a)(1)–(4)).
‘‘(C) the date the United States Depart-
ment of State issues to the individual a certifi-
cate of loss of nationality, or
‘‘(D) the date a court of the United States
cancels a naturalized citizen’s certificate of nat-
uralization.
Subparagraph (A) or (B) shall not apply to any indi-
vidual unless the renunciation or voluntary relin-
quishment is subsequently approved by the issuance
to the individual of a certificate of loss of nationality
by the United States Department of State.
‘‘(4) LONG-TERM RESIDENT.—
‘‘(A) IN GENERAL.—The term ‘long-term
resident’ means any individual (other than a
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citizen of the United States) who is a lawful
permanent resident of the United States in at
least 8 taxable years during the period of 15
taxable years ending with the taxable year dur-
ing which the expatriation date occurs. For pur-
poses of the preceding sentence, an individual
shall not be treated as a lawful permanent resi-
dent for any taxable year if such individual is
treated as a resident of a foreign country for
the taxable year under the provisions of a tax
treaty between the United States and the for-
eign country and does not waive the benefits of
such treaty applicable to residents of the for-
eign country.
‘‘(B) SPECIAL
RULE.—For purposes of
subparagraph (A), there shall not be taken into
account—
‘‘(i) any taxable year during which
any prior sale is treated under subsection
(a)(1) as occurring, or
‘‘(ii) any taxable year prior to the tax-
able year referred to in clause (i).
‘‘(f) SPECIAL
RULES
APPLICABLE
TO
BENE-
FICIARIES’ INTERESTS IN TRUST.—
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‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if an individual is determined under para-
graph (3) to hold an interest in a trust—
‘‘(A) the individual shall not be treated as
having sold such interest,
‘‘(B) such interest shall be treated as a
separate share in the trust, and
‘‘(C)(i) such separate share shall be treat-
ed as a separate trust consisting of the assets
allocable to such share,
‘‘(ii) the separate trust shall be treated as
having sold its assets immediately before the ex-
patriation date for their fair market value and
as having distributed all of its assets to the in-
dividual as of such time, and
‘‘(iii) the individual shall be treated as hav-
ing recontributed the assets to the separate
trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution de-
scribed in subparagraph (C)(ii).
‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI-
FIED TRUSTS.—
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‘‘(A) IN GENERAL.—If the trust interest
described in paragraph (1) is an interest in a
qualified trust—
‘‘(i) paragraph (1) and subsection (a)
shall not apply, and
‘‘(ii) in addition to any other tax im-
posed by this title, there is hereby imposed
on each distribution with respect to such
interest a tax in the amount determined
under subparagraph (B).
‘‘(B) AMOUNT OF TAX.—The amount of
tax under subparagraph (A)(ii) shall be equal to
the lesser of—
‘‘(i) the highest rate of tax imposed by
section 1(e) for the taxable year in which
the expatriation date occurs, multiplied by
the amount of the distribution, or
‘‘(ii) the balance in the deferred tax
account immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th
day preceding the distribution.
‘‘(C) DEFERRED TAX ACCOUNT.—For pur-
poses of subparagraph (B)(ii)—
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‘‘(i) OPENING BALANCE.—The open-
ing balance in a deferred tax account with
respect to any trust interest in an amount
equal to the tax which would have been im-
posed on the allocable expatriation gain
with respect to the trust interest if such
gain had been included in gross income
under subsection (a).
‘‘(ii) INCREASE FOR INTEREST.—The
balance in the deferred tax account shall
be increased by the amount of interest de-
termined (on the balance in the account at
the time the interest accrues), for periods
after the 90th day after the expatriation
date, by using the rates and method appli-
cable under section 6621 for underpay-
ments of tax for such periods.
‘‘(iii) DECREASE
FOR
TAXES
PRE-
VIOUSLY PAID.—The balance in the tax de-
ferred account shall be reduced—
‘‘(I) by the amount of taxes im-
posed by subparagraph (A) on any
distribution to the person holding the
trust interest, and
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‘‘(II) in the case of a person
holding a nonvested interest, to the
extent provided in regulations, by the
amount of taxes imposed by subpara-
graph (A) on distributions from the
trust with respect to nonvested inter-
ests not held by such person.
‘‘(D) ALLOCABLE EXPATRIATION GAIN.—
For purposes of this paragraph, the allocable
expatriation gain with respect to any bene-
ficiary’s interest in a trust in the amount of
gain which would be allocable to such bene-
ficiary’s vested and nonvested interests in the
trust if the beneficiary held directly all assets
allocable to such interests.
‘‘(E) TAX DEDUCTED AND WITHHELD.—
‘‘(i) IN GENERAL.—The tax imposed
by subparagraph (A)(ii) shall be deducted
and withheld by the trustees from the dis-
tribution to which it relates.
‘‘(ii) EXCEPTION WHERE FAILURE TO
WAIVE
TREATY
RIGHTS.—If an amount
may not be deducted and withheld under
clause (i) by reason of the distributee fail-
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ing to waive any treaty right with respect
to such distribution—
‘‘(I) the tax imposed by subpara-
graph (A)(ii) shall be imposed on the
trust and each trustee shall be person-
ally liable for the amount of such tax,
and
‘‘(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
‘‘(F) DISPOSITION.—If a trust ceases to be
a qualified trust at any time, a covered expatri-
ate disposes of an interest in a qualified trust,
or a covered expatriate holding an interest in a
qualified trust dies, then, in lieu of the tax im-
posed by subparagraph (A)(ii), there is hereby
imposed a tax equal to the lesser of—
‘‘(i) the tax determined under para-
graph (1) as if the expatriation date were
the date of such cessation, disposition, or
death, whichever is applicable, or
‘‘(ii) the balance in the tax deferred
account immediately before such date.
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Such tax shall be imposed on the trust and
each trustee shall be personally liable for the
amount of such tax and any other beneficiary
of the trust shall be entitled to recover from the
covered expatriate or the estate the amount of
such tax imposed on the other beneficiary.
‘‘(G) DEFINITIONS AND SPECIAL RULE.—
For purposes of this paragraph—
‘‘(i) QUALIFIED
TRUST.—The term
‘qualified trust’ means a trust—
‘‘(I) which is organized under,
and governed by, the laws of the Unit-
ed States or a State, and
‘‘(II) with respect to which the
trust instrument requires that at least
1 trustee of the trust be an individual
citizen of the United States or a do-
mestic corporation.
‘‘(ii) VESTED
INTEREST.—The term
‘vested interest’ means any interest which,
as of the expatriation date, is vested in the
beneficiary.
‘‘(iii) NONVESTED
INTEREST.—The
term ‘nonvested interest’ means, with re-
spect to any beneficiary, any interest in a
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trust which is not a vested interest. Such
interest shall be determined by assuming
the maximum exercise of discretion in
favor of the beneficiary and the occurrence
of all contingencies in favor of the bene-
ficiary.
‘‘(iv) ADJUSTMENTS.—The Secretary
may provide for such adjustments to the
bases of assets in a trust or a deferred tax
account, and the timing of such adjust-
ments, in order to ensure that gain is
taxed only once.
‘‘(3) DETERMINATION OF BENEFICIARIES’ IN-
TEREST IN TRUST.—
‘‘(A) 
DETERMINATIONS
UNDER
PARA-
GRAPH (1)—For purposes of paragraph (1), a
beneficiary’s interest in a trust shall be based
upon all relevant facts and circumstances, in-
cluding the terms of the trust instrument and
any letter of wishes or similar document, histor-
ical patterns of trust distributions, and the ex-
istence of and functions performed by a trust
protector or any similar advisor.
‘‘(B) OTHER DETERMINATIONS.—For pur-
poses of this section—
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‘‘(i) CONSTRUCTIVE
OWNERSHIP.—If
a beneficiary of a trust is a corporation,
partnership, trust, or estate, the sharehold-
ers, partners, or beneficiaries shall be
deemed to be the trust beneficiaries for
purposes of this section.
‘‘(ii) TAXPAYER RETURN POSITION.—
A taxpayer shall clearly indicate on its in-
come tax return—
‘‘(I) the methodology used to de-
termine that taxpayer’s trust interest
under this section, and
‘‘(II) if the taxpayer knows (or
has reason to know) that any other
beneficiary of such trust is using a
different methodology to determine
such beneficiary’s trust interest under
this section.
‘‘(g) TERMINATION OF DEFERRALS, ETC.—On the
date any property held by an individual is treated as sold
under subsection (a), notwithstanding any other provision
of this title—
‘‘(1) any period during which recognition of in-
come or gain is deferred shall terminate, and
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‘‘(2) any extension of time for payment of tax
shall cease to apply and the unpaid portion of such
tax shall be due and payable at the time and in the
manner prescribed by the Secretary.
‘‘(h) IMPOSITION OF TENTATIVE TAX.—
‘‘(1) IN GENERAL.—If an individual is required
to include any amount in gross income under sub-
section (a) for any taxable year, there is hereby im-
posed, immediately before the expatriation date, a
tax in an amount equal to the amount of tax which
would be imposed if the taxable year were a short
taxable year ending on the expatriation date.
‘‘(2) DUE DATE.—The due date for any tax im-
posed by paragraph (1) shall be the 90th day after
the expatriation date.
‘‘(3) TREATMENT OF TAX.—Any tax paid under
paragraph (1) shall be treated as a payment of the
tax imposed by this chapter for the taxable year to
which subsection (a) applies.
‘‘(4) DEFERRAL
OF
TAX.—The provisions of
subsection (b) shall apply to the tax imposed by this
subsection to the extent attributable to gain includ-
ible in gross income by reason of this section.
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‘‘(i) COORDINATION
WITH
ESTATE
AND
GIFT
TAXES.—If subsection (a) applies to property held by an
individual for any taxable year and—
‘‘(1) such property is includible in the gross es-
tate of such individual solely by reason of section
2107, or
‘‘(2) section 2501 applies to a transfer of such
property by such individual solely by reason of sec-
tion 2501(a)(3).
then there shall be allowed as a credit against the addi-
tional tax imposed by section 2101 or 2501, whichever is
applicable, solely by reason of section 2107 or 2501(a)(3)
an amount equal to the increase in the tax imposed by
this chapter for such taxable year by reason of this sec-
tion.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section, including regula-
tions—
‘‘(1) to prevent double taxation by ensuring
that—
‘‘(A) appropriate adjustments are made to
basis to reflect gain recognized by reason of
subsection (a) and the exclusion provided by
subsection (a)(3), and
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‘‘(B) any gain by reason of a deemed sale
under subsection (a) of an interest in a corpora-
tion, partnership, trust, or estate is reduced to
reflect that portion of such gain which is attrib-
utable to an interest in a trust which a share-
holder, partner, or beneficiary is treated as
holding directly under subsection (f)(3)(B)(i),
and
‘‘(2) which provide for the proper allocation of
the exclusion under subsection (a)(3) to property to
which this section applies.
‘‘(k) CROSS REFERENCE.—
‘‘For income tax treatment of individuals who ter-
minate 
United 
States 
citizenship, 
see 
section
7701(a)(47).’’.
(b) INCLUSION IN INCOME OF GIFTS AND INHERIT-
ANCES FROM COVERED EXPATRIATES.—Section 102 (re-
lating to gifts, etc. not included in gross income) is amend-
ed by adding at the end the following new subsection:
‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX-
PATRIATES.—Subsection (a) shall not exclude from gross
income the value of any property acquired by gift, bequest,
devise, or inheritance from a covered expatriate after the
expatristion date. For purposes of this subsection, any
term used in this subsection which is also used in section
877A shall have the same meaning as when used in section
877A.’’.
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(c) DEFINITION
OF
TERMINATION
OF
UNITED
STATES CITIZENSHIP.—Section 7701(a) is amended by
adding at the end the following new paragraph:
‘‘(47) TERMINATION OF UNITED STATES CITI-
ZENSHIP.—An individual shall not cease to be treat-
ed as a United States citizen before the date on
which the individual’s citizenship is treated as relin-
quished under section 877A(e)(3).’’.
(d) CONFORMING AMENDMENTS.—
(1) Section 877 is amended by adding at the
end the following new subsection:
‘‘(f) APPLICATION.—This section shall not apply to
any individual who relinquishes (within the meaning of
section 877A(e)(3)) United States citizenship on or after
February 6, 1995.’’.
(2) Section 2107(c) is amended by adding at
the end the following new paragraph:
‘‘(3) CROSS
REFERENCE.—For credit against
the tax imposed by subsection (a) for expatriation
tax, see section 877A(i).’’.
(3) Section 2501(a)(3) is amended by adding at
the end the following new flush sentence: ‘‘For cred-
it against the tax imposed under this section by rea-
son of this paragraph, see section 877A(i).’’.
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(4) Paragraph (10) of section 7701(b) is
amended by adding at the end the following new
sentence: ‘‘This paragraph shall not apply to any
long-term resident of the United States who is an
expatriate (as defined in section 877A(e)(1)).’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part II of subchapter N of chapter 1
is amended by inserting after the item relating to section
877 the following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in this
subsection, the amendments made by this section
shall apply to expatriates (within the meaning of
section 877A(e) of the Internal Revenue Code of
1986, as added by this section) whose expatriation
date (as so defined) occurs on or after February 6,
1995.
(2) GIFTS AND BEQUESTS.—Section 102(d) of
the Internal Revenue Code of 1986 (as added by
subsection (b)) shall apply to amounts received from
expatriates (as so defined) whose expatriation date
(as so defined) occurs on and after February 6,
1995.
(3) SPECIAL
RULES
RELATING
TO
CERTAIN
ACTS OCCURRING BEFORE FEBRUARY 6, 1995.—In
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the case of an individual who took an act of expa-
triation specified in paragraph (1), (2), (3), or (4)
of section 349(a) of the Immigration and Nationality
Act (8 U.S.C. 1481(a) (1)–(4)) before February 6,
1995, but whose expatriation date (as so defined)
occurs after February 6, 1995—
(A) the amendment made by subsection (c)
shall not apply,
(B) the amendment made by subsection
(d)(1) shall not apply for any period prior to
the expatriation date, and
(C) the other amendments made by this
section shall apply as of the expatriation date.
(4) DUE DATE FOR TENTATIVE TAX.—The due
date under section 877A(h)(2) of such Code shall in
no event occur before the 90th day after the date of
the enactment of this Act.
SEC. 212. INFORMATION ON INDIVIDUALS EXPATRIATING.
(a) IN GENERAL.—Subpart A of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6039E the following new section:
‘‘SEC. 6039F. INFORMATION ON INDIVIDUALS EXPATRIAT-
ING.
‘‘(a) REQUIREMENT.—
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‘‘(1) IN GENERAL.—Notwithstanding any other
provision of law, any expatriate (within the meaning
of section 877A(e)(1)) shall provide a statement
which includes the information described in sub-
section (b).
‘‘(2) TIMING.—
‘‘(A) CITIZENS.—In the case of an expatri-
ate described in section 877(e)(1)(A), such
statement shall be—
‘‘(i) provided not later than the expa-
triation date (within the meaning of sec-
tion 877A(e)(2)), and
‘‘(ii) provided to the person or court
referred to in section 877A(e)(3).
‘‘(B) NONCITIZENS.—In the case of an ex-
patriate described in section 877A(e)(1)(B),
such statement shall be provided to the Sec-
retary with the return of tax imposed by chap-
ter 1 for the taxable year during which the
event described in such section occurs.
‘‘(b) INFORMATION TO BE PROVIDED.—Information
required under subsection (a) shall include—
‘‘(1) the taxpayer’s TIN,
‘‘(2) the mailing address of such individual’s
principal foreign residence,
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‘‘(3) the foreign country in which such individ-
ual is residing,
‘‘(4) the foreign country of which such individ-
ual is a citizen,
‘‘(5) in the case of an individual having a net
worth of at lease the dollar amount applicable under
section 877A(c)(1)(B), information detailing the as-
sets and liabilities of such individual, and
‘‘(6) such other information as the Secretary
may prescribe.
‘‘(c) PENALTY.—Any individual failing to provide a
statement required under subsection (a) shall be subject
to a penalty for each year during any portion of which
such failure continues in an amount equal to the greater
of—
‘‘(1) 5 percent of the additional tax required to
be paid under section 877A for such year, or
‘‘(2) $1,000, unless it is shown that such fail-
ure is due to reasonable cause and not to willful ne-
glect.
‘‘(d) INFORMATION TO BE PROVIDED
TO SEC-
RETARY.—Notwithstanding any other provision of law—
‘‘(1) any Federal agency or court which collects
(or is required to collect) the statement under sub-
section (a) shall provide to the Secretary—
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‘‘(A) a copy of any such statement, and
‘‘(B) the name (and any other identifying
information) of any individual refusing to com-
ply with the provisions of subsection (a),
‘‘(2) the Secretary of State shall provide to the
Secretary a copy of each certificate as to the loss of
American nationality under section 358 of the Immi-
gration and Nationality Act which is approved by
the Secretary of State, and
‘‘(3) the Federal agency primarily responsible
for administering the immigration laws shall provide
to the Secretary the name of each lawful permanent
resident of the United States (within the meaning of
section 7701(b)(6)) whose status as such has been
revoked or has been administratively or judicially de-
termined to have been abandoned.
Notwithstanding any other provision of law, not later than
30 days after the close of each calendar quarter, the Sec-
retary shall publish in the Federal Register the name of
each individual relinquishing United States citizenship
(within the meaning of section 877A(e)(3)) with respect
to whom the Secretary receives information under the pre-
ceding sentence during such quarter.
‘‘(e) EXEMPTION.—The Secretary may by regulations
exempt any class of individuals from the requirements of
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this section if the Secretary determines that applying this
section to such individuals is not necessary to carry out
the purposes of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for such subpart A is amended by inserting after the item
relating to section 6039E the following new item:
‘‘Sec. 6039F. Information on individuals expatriating.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to individuals to whom section
877A of the Internal Revenue Code of 1986 applies and
whose expatriation date (as defined in section 877A(e)(2))
occurs on or after February 6, 1995, except that no state-
ment shall be required by such amendments before the
90th day after the date of the enactment of this Act.
CHAPTER 2—FOREIGN TRUST TAX
COMPLIANCE
SEC. 221. IMPROVED INFORMATION REPORTING ON FOR-
EIGN TRUSTS.
(a) IN GENERAL.—Section 6048 (relating to returns
as to certain foreign trusts) is amended to read as follows:
‘‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN
FOREIGN TRUSTS.
‘‘(a) NOTICE OF CERTAIN EVENTS.—
‘‘(1) GENERAL RULE.—On or before the 90th
day (or such later day as the Secretary may pre-
scribe) after any reportable event, the responsible
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party shall provide written notice of such event to
the Secretary in accordance with paragraph (2).
‘‘(2) CONTENTS
OF
NOTICE.—The notice re-
quired by paragraph (1) shall contain such informa-
tion as the Secretary may prescribe, including—
‘‘(A) the amount of money or other prop-
erty (if any) transferred to the trust in connec-
tion with the reportable event, and
‘‘(B) the identify of the trust and of each
trustee and beneficiary or class of beneficiaries)
of the trust.
‘‘(3) REPORTABLE
EVENT.—For purposes of
this subsection—
‘‘(A) IN GENERAL.—The term ‘reportable
event’ means—
‘‘(i) the creation of any foreign trust
by a United States person,
‘‘(ii) the transfer of any money or
property (directly or indirectly) to a for-
eign trust by a United States person, in-
cluding a transfer by reason of death, and
‘‘(iii) the death of a citizen or resident
of the United States if—
‘‘(I) the decedent was treated as
the owner of any portion of a foreign
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trust under the rules of subpart E of
part I of subchapter J of chapter 1,
or
‘‘(II) any portion of a foreign
trust was included in the gross estate
of the decedent.
‘‘(B) EXCEPTIONS.—
‘‘(i) FAIR
MARKET
VALUE
SALES.—
Subparagraph (A)(ii) shall not apply to
any transfer of property to a trust in ex-
change for consideration of at least the fair
market value of the transferred property.
For purposes of the preceding sentence,
consideration other than cash shall be
taken into account at its fair market value
and the rules of section 679(a)(3) shall
apply.
‘‘(ii) DEFERRED COMPENSATION AND
CHARITABLE TRUSTS.—Subparagraph (A)
shall not apply with respect to a trust
which is—
‘‘(I) described in section 402(b),
404(a)(4), or 404A, or
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‘‘(II) determined by the Sec-
retary to be described in section
501(c)(3).
‘‘(4) RESPONSIBLE
PARTY.—For purposes of
this 
subsection, 
the 
term 
‘responsible 
party’
means—
‘‘(A) the grantor in the case of the cre-
ation of an inter vivos trust.
‘‘(B) the transferor in the case of a report-
able event described in paragraph (3)(A)(ii)
other than a transfer by reason of death, and
‘‘(C) the executor of the decedent’s estate
in any other case.
‘‘(b) UNITED
STATES
GRANTOR
OF
FOREIGN
TRUST.—
‘‘(1) IN GENERAL.—If, at any time during any
taxable year of a United States person, such person
is treated as the owner of any portion of a foreign
trust under the rules of subpart E of part I of sub-
chapter J of chapter 1, such person shall be respon-
sible to ensure that
‘‘(A) such trust makes a return for such
year which sets forth a full and complete ac-
counting of all trust activities and operations
for the year, the name of the United States
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agent for such trust, and such other informa-
tion as the Secretary may prescribe, and
‘‘(B) such trust furnishes such information
as the Secretary may prescribe to each United
States person (i) who is treated as the owner of
any portion of such trust or (ii) who receives
(directly or indirectly) any distribution from the
trust.
‘‘(2) TRUSTS
NOT
HAVING
UNITED
STATES
AGENT.—
‘‘(A) IN
GENERAL.—If the rules of this
paragraph apply to any foreign trust, the deter-
mination of amounts required to be taken into
account with respect to such trust by a United
States person under the rules of subpart E of
part I of subchapter J of chapter 1 shall be de-
termined by the Secretary.
‘‘(B) 
UNITED
STATES
AGENT
RE-
QUIRED.—The rules of this paragraph shall
apply to any foreign trust to which paragraph
(1) applies unless such trust agrees (in such
manner, subject to such conditions, and at such
time as the Secretary shall prescribe) to author-
ize a United States person to act as such
trust’s limited agent solely for purposes of ap-
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plying sections 7602, 7603, and 7604 with re-
spect to—
‘‘(i) any request by the Secretary to
examine records or produce testimony re-
lated to the proper treatment of amounts
required to be taken into account under
the rules referred to in subparagraph (A),
or
‘‘(ii) any summons by the Secretary
for such records or testimony.
The appearance of persons or production of
records by reason of a United States person
being such an agent shall not subject such per-
sons or records to legal process for any purpose
other than determining the correct treatment
under this title of the amounts required to be
taken into account under the rules referred to
in subparagraph (A). A foreign trust which ap-
points an agent described in this subparagraph
shall not be considered to have an office or a
permanent establishment in the United States,
or to be engaged in a trade or business in the
United States, solely because of the activities of
such agent pursuant to this subsection.
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‘‘(C) OTHER
RULES
TO
APPLY.—Rules
similar to the rules of paragraphs (2) and (4)
of section 6038A(e) shall apply for purposes of
this paragraph.
‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES
OF FOREIGN TRUSTS.—
‘‘(1) IN GENERAL.—If any United States per-
son receives (directly or indirectly) during any tax-
able year of such person any distribution from a for-
eign trust, such person shall make a return with re-
spect to such trust for such year which includes—
‘‘(A) the name of such trust,
‘‘(B) the aggregate amount of the distribu-
tions so received from such trust during such
taxable year, and
‘‘(C) such other information as the Sec-
retary may prescribe.
‘‘(2) INCLUSION IN INCOME IF RECORDS NOT
PROVIDED.—
‘‘(A) IN GENERAL.—If applicable records
are not provided to the Secretary to determine
the proper treatment of any distribution from a
foreign trust, such distribution shall be treated
as an accumulation distribution includable in
the gross income of the distributee under chap-
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ter 1. To the extent provided in regulations, the
preceeding sentence shall not apply if the for-
eign trust elects to be subject to rules similar
to the rules of subsection (b)(2)(B).
‘‘(B) APPLICATION
OF
ACCUMULATION
DISTRIBUTION RULES.—For purposes of apply-
ing section 668 in a case to which subpara-
graph (A) applies, the applicable number of
years for purposes of section 668(a) shall be 1⁄2
of the number of years the trust has been in ex-
istence.
‘‘(d) SPECIAL RULES.—
‘‘(1) DETERMINATION
OF
WHETHER
UNITED
STATES
PERSON
RECEIVES
DISTRIBUTION.—For
purposes of this section, in determining whether a
United States person receives a distribution from a
foreign trust, the fact that a portion of such trust
is treated as owned by another person under the
rules of subpart E of part I of subchapter J of chap-
ter 1 shall be disregarded.
‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI-
TIES.—To the extent provided in regulations, a trust
which is a United States person shall be treated as
a foreign trust for purposes of this section and sec-
tion 6677 if such trust has substantial activities, or
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holds substantial property, outside the United
States.
‘‘(3) TIME AND MANNER OF FILING INFORMA-
TION.—Any notice or return required under this sec-
tion shall be made at such time and in such manner
as the Secretary shall prescribe.
‘‘(4) MODIFICATION
OF
RETURN
REQUIRE-
MENTS.—The Secretary is authorized to suspend or
modify any requirement of this section if the Sec-
retary determines that the United States has no sig-
nificant tax interest in obtaining the required infor-
mation.’’.
(b) INCREASED PENALTIES.—Section 6677 (relating
to failure to file information returns with respect to cer-
tain foreign trusts) is amended to read as follows:
‘‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT
TO CERTAIN FOREIGN TRUSTS.
‘‘(a) CIVIL PENALTY.—In addition to any criminal
penalty provided by law, if any notice or return required
to be filed by section 6048—
‘‘(1) is not filed on or before the time provided
in such section, or
‘‘(2) does not include all the information re-
quired pursuant to such section or includes incorrect
information.
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the person required to file such notice or return shall pay
a penalty equal to 35 percent of the gross reportable
amount. If any failure described in the preceding sentence
continues for more than 90 days after the day on which
the Secretary mails notice of such failure to the person
required to pay such penalty, such person shall pay a pen-
alty (in addition to the amount determined under the pre-
ceding sentence) of $10,000 for each 30-day period (or
fraction thereof) during which such failure continues after
the expiration of such 90-day period. In no event shall the
penalty under this subsection with respect to any failure
exceed the gross reportable amount.
‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC-
TION 6048(b).—In the case of a return required under
section 6048(b)—
‘‘(1) the United States person referred to in
such section shall be liable for the penalty imposed
by subsection (a), and
‘‘(2) subsection (a) shall be applied by sub-
stituting ‘5 percent’ for ‘35 percent’.
‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes
of subsection (a), the term ‘gross reportable amount’
means—
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‘‘(1) the gross value of the property involved in
the event (determined as of the date of the event)
in the case of a failure relating to section 6048(a),
‘‘(2) the gross value of the portion of the trust’s
assets at the close of the year treated as owned by
the United States person in the case of a failure re-
lating to section 6048(b)(1), and
‘‘(3) the gross amount of the distributions in
the case of a failure relating to section 6048(c).
‘‘(d) REASONABLE CAUSE EXCEPTION.—No penalty
shall be imposed by this section on any failure which is
shown to be due to reasonable cause and not due to willful
neglect. The fact that a foreign jurisdiction would impose
a civil or criminal penalty on the taxpayer (or any other
person) for disclosing the required information is not rea-
sonable cause.
‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—
Subchapter B of chapter 63 (relating to deficiency proce-
dures for income, estate, gift, and certain excise taxes)
shall not apply in respect of the assessment or collection
of any penalty imposed by subsection (a).’’.
(c) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 6724(d), as
amended by sections 11004 and 11045, is amended
by striking ‘‘or’’ at the end of subparagraph (U), by
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striking the period at the end of subparagraph (V)
and inserting ‘‘,or’’, and by inserting after subpara-
graph (V) the following new subparagraph:
‘‘(W) section 6048(b)(1)(B) (relating to
foreign trust reporting requirements).’’.
(2) The table of sections for subpart B of part
III of subchapter A of chapter 61 is amended by
striking the item relating to section 6048 and insert-
ing the following new item:
‘‘Sec. 604 Information with respect to certain foreign trusts.’’.
(3) The table of sections for part I of sub-
chapter B of chapter 68 is amended by striking the
item relating to section 6677 and inserting the fol-
lowing new item:
‘‘Sec. 6677. Failure to file information with respect to certain foreign trusts’’
(d) EFFECTIVE DATES.—
(1) REPORTABLE EVENTS.—To the extent re-
lated to subsection (a) of section 6048 of the Inter-
nal Revenue Code of 1986, as amended by this sec-
tion, the amendments made by this section shall
apply to reportable events (as defined in such section
6048) occurring after the date of the enactment of
this Act.
(2) GRANTOR TRUST REPORTING.—To the ex-
tent related to subsection (b) of such section 6048,
the amendments made by this section shall apply to
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taxable years of United States persons beginning
after the date of the enactment of this Act.
(3) REPORTING
BY
UNITED
STATES
BENE-
FICIARIES.—To the extent related to subsection (c)
of such section 6048, the amendments made by this
section shall apply to distributions received after the
date of the enactment of this Act.
SEC. 222. MODIFICATIONS OF RULES RELATING TO FOR-
EIGN TRUSTS HAVING ONE OR MORE UNITED
STATES BENEFICIARIES.
(a) TREATMENT OF TRUST OBLIGATIONS, ETC.—
(1) Paragraph (2) of section 679(a) is amended
by striking subparagraph (B) and inserting the fol-
lowing:
‘‘(B) 
TRANSFERS
AT
FAIR
MARKET
VALUE.—To any transfer of property to a trust
in exchange for consideration of at least the fair
market value of the transferred property. For
purposes of the preceding sentence, consider-
ation other than cash shall be taken into ac-
count at its fair market value.’’.
(2) Subsection (a) of section 679 (relating to
foreign trusts having one or more United States
beneficiaries) is amended by adding at the end the
following new paragraph:
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‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO
ACCOUNT
UNDER
FAIR
MARKET
VALUE
EXCEP-
TIONS.—
‘‘(A) IN GENERAL.—In determining wheth-
er paragraph (2)(B) applies to any transfer by
a person described in clause (ii) or (iii) of sub-
paragraph (C), there shall not be taken into ac-
count—
‘‘(i) except as provided in regulations,
any obligation of a person described in
subparagraph (C), and
‘‘(ii) to the extent provided in regula-
tions, any obligation which is guaranteed
by a person described in subparagraph (C).
‘‘(B) TREATMENT
OF
PRINCIPAL
PAY-
MENTS
ON
OBLIGATION.—Principal payments
by the trust on any obligation referred to in
subparagraph (A) shall be taken into account
on and after the date of the payment in deter-
mining the portion of the trust attributable to
the property transferred.
‘‘(C) PERSONS DESCRIBED.—The persons
described in this subparagraph are—
‘‘(i) the trust,
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‘‘(ii) any grantor or beneficiary of the
trust, and
‘‘(iii) any person who is related (with-
in the meaning of section 643(i)(2)(B)) to
any grantor or beneficiary of the trust.’’.
(b) EXEMPTION
OF TRANSFERS
TO CHARITABLE
TRUSTS.—Subsection (a) of section 679 is amended by
striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘sec-
tion 6048(a)*(3)(B)(ii)’’.
(c) OTHER MODIFICATIONS.—Subsection (a) of sec-
tion 679 is amended by adding at the end the following
new paragraphs:
‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN
GRANTOR WHO LATER BECOMES A UNITED STATES
PERSON.—
‘‘(A) IN GENERAL.—If a nonresident alien
individual has a residency starting date within
5 years after directly or indirectly transferring
property to a foreign trust, this section and sec-
tion 6048 shall be applied as if such individual
transferred to such trust on the residency start-
ing date an amount equal to the portion of such
trust attributable to the property transferred by
such individual to such trust in such transfer.
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‘‘(B) TREATMENT OF UNDISTRIBUTED IN-
COME.—For purposes of this section, undistrib-
uted net income for periods before such individ-
ual’s residency starting date shall be taken into
account in determining the portion of the trust
which is attributable to property transferred by
such individual to such trust but shall not oth-
erwise be taken into account.
‘‘(C) RESIDENCY
STARTING
DATE.—For
purposes of this paragraph, an individual’s resi-
dency starting date is the residency starting
date determined under section 7701(b)(2)(A).
‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—
‘‘(A) an individual who is a citizen or resi-
dent of the United States transferred property
to a trust which was not a foreign trust, and
‘‘(B) such trust becomes a foreign trust
while such individual is alive,
then this section and section 6048 shall be applied
as if such individual transferred to such trust on the
date such trust becomes a foreign trust an amount
equal to the portion of such trust attributable to the
property previously transferred by such individual to
such trust. A rule similar to the rule of paragraph
(4)(B) shall apply for purposes of this paragraph.’’.
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(d) MODIFICATION RELATING TO WHETHER TRUST
HAS UNITED STATES BENEFICIARIES.—Subsection (c) of
section 679 is amended by adding at the end the following
new paragraph:
‘‘(3) CERTAIN UNITED STATES BENEFICIARIES
DISREGARDED.—A beneficiary shall not be treated
as a United States person in applying this section
with respect to any transfer of property to foreign
trust if such beneficiary first became a United
States person more than 5 years after the date of
such transfer.’’.
(e) TECHNICAL AMENDMENT.—Subparagraph (A) of
section 679(c)(2) is amended to read as follows:
‘‘(A) in the case of a foreign corporation,
such corporation is a controlled foreign corpora-
tion (as defined in section 957(a)),’’.
(f) REGULATIONS.—Section 679 is amended by add-
ing at the end the following new subsection:
‘‘(d) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(g) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers of property after Feb-
ruary 6, 1995.
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SEC. 233. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) GENERAL RULE.—
(1) Subsection (f) of section 672 (relating to
special rule where grantor is foreign person) is
amended to read as follows:
‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER-
SHIP.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of this subpart, this subpart shall apply
only to the extent such application results in an
amount being currently taken into account (directly
or through 1 or more entities) under this chapter in
computing the income of a citizen or resident of the
United States or a domestic corporation.
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN
REVOCABLE
AND
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not
apply to any trust if—
‘‘(i) the power to revest absolutely in
the grantor title to the trust property is
exercisable solely by the grantor without
the approval or consent of any other per-
son or with the consent of a related or sub-
ordinate party who is subservient to the
grantor, or
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‘‘(ii) the only amounts distributable
from such trust (whether income or cor-
pus) during the lifetime of the grantor are
amounts distributable to the grantor or the
spouse of the grantor.
‘‘(B) COMPENSATORY TRUSTS.—Except as
provided in regulations, paragraph (1) shall not
apply to any portion of a trust distributions
from which are taxable as compensation for
services rendered.
‘‘(3) SPECIAL
RULES.—Except as otherwise
provided in regulations prescribed by the Sec-
retary—
‘‘(A) a controlled foreign corporation (as
defined in section 957) shall be treated as a do-
mestic corporation for purposes of paragraph
(1), and
‘‘(B) paragraph (1) shall not apply for
purposes of applying section 1296.
‘‘(4) RECHARACTERIZATION
OF
PURPORTED
GIFTS.—In the case of any transfer directly or indi-
rectly from a partnership or foreign corporation
which the transferee treats as a gift or bequest, the
Secretary may recharacterize such transfer in such
circumstances as the Secretary determines to be ap-
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propriate to prevent the avoidance of the purposes of
this subsection.
‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR-
EIGN PERSON.—If—
‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any por-
tion of a trust, and
‘‘(B) such trust has a beneficiary who is a
United States person,
such beneficiary shall be treated as the grantor of
such portion to the extent such beneficiary has made
transfers of property by gift (directly or indirectly)
to such foreign person. For purposes of the preced-
ing sentence, any gift shall not be taken into account
to the extent such gift would be excluded from tax-
able gifts under section 2503(b).
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations providing that para-
graph (1) shall not apply in appropriate cases.’’.
(2) The last sentence of subsection (c) of sec-
tion 672 of such Code is amended by inserting ‘‘sub-
section (f) and’’ before ‘‘sections 674’’.
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(b) CREDIT FOR CERTAIN TAXES.—Paragraph (2) of
section 665(d) is amended by adding at the end the follow-
ing new sentence: ‘‘Under rules or regulations prescribed
by the Secretary, in the case of any foreign trust of which
the settlor or another person would be treated as owner
of any portion of the trust under subpart E but for section
672(f), the term ‘taxes imposed on the trust’ includes the
allocable amount of any income, war profits, and excess
profits taxes imposed by any foreign country or possession
of the United States on the settlor or such other person
in respect of trust gross income.’’.
(c) DISTRIBUTION BY CERTAIN FOREIGN TRUSTS
THROUGH NOMINEES.—
(1) Section 643 is amended by adding at the
end the following new subsection:
‘‘(h) DISTRIBUTION BY CERTAIN FOREIGN TRUSTS
THROUGH NOMINEES.—For purposes of this part, any
amount paid to a United States person which is derived
directly or indirectly from a foreign trust of which the
payor is not the grantor shall be deemed in the year of
payment to have been directly paid by the foreign trust
to such United States person.’’.
(2) Section 665 is amended by striking sub-
section (c).
(d) EFFECTIVE DATE.—
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(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section
shall take effort on the date of the enactment of this
Act.
(2) EXCEPTION
FOR
CERTAIN
TRUSTS.—The
amendments made by this section shall not apply to
any trust—
(A) which is treated as owned by the
grantor or another person under section 676 or
677 (other than subsection (a)(3) thereof) of
the Internal Revenue Code of 1986, and
(B) which is in existence on September 19,
1995.
The preceding sentence shall not apply to the por-
tion of any such trust attributable to any transfer to
such trust after September 19, 1995.
(e) TRANSITIONAL RULE.—If—
(1) by reason of the amendments made by this
section, any person other than a United States per-
son ceases to be treated as the owner of a portion
of a domestic trust, and
(2) before January 1, 1997, such trust becomes
a foreign trust, or the assets of such trust are trans-
ferred to a foreign trust,
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no tax shall be imposed by section 1491 of the Internal
Revenue Code of 1986 by reason of such trust becoming
a foreign trust or the assets of such trust being trans-
ferred to a foreign trust.
SEC. 224. INFORMATION REPORTING REGARDING FOREIGN
GIFTS.
(a) IN GENERAL.—Subpart A of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6039F the following new section:
‘‘SEC. 6039G. NOTICE OF GIFTS RECEIVED FROM FOREIGN
PERSONS.
‘‘(a) IN GENERAL.—If the value of the aggregate for-
eign gifts received by a United States person (other than
an organization described in section 501(c) and exempt
from tax under section 501(a)) during any taxable year
exceeds $10,000, such United States person shall furnish
(at such time and in such manner as the Secretary shall
prescribe) such information as the Secretary may pre-
scribe regarding each foreign gift received during such
year.
‘‘(b) FOREIGN GIFT.—For purposes of this section,
the term ‘foreign gift’ means any amount received from
a person other than a United States person which the re-
cipient treats as a gift or bequest. Such term shall not
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include any qualified transfer (within the meaning of sec-
tion 2503(e)(2)).
‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA-
TION.—
‘‘(1) IN GENERAL.—If a United States person
fails to furnish the information required by sub-
section (a) with respect to any foreign gift within
the time prescribed therefor (including extensions)—
‘‘(A) the tax consequences of the receipt of
such gift shall be determined by the Secretary
in the Secretary’s sole discretion from the Sec-
retary’s own knowledge or from such informa-
tion as the Secretary may obtain through testi-
mony or otherwise, and
‘‘(B) such United States person shall pay
(upon notice and demand by the Secretary and
in the same manner as tax) an amount equal to
5 percent of the amount of such foreign gift for
each month for which the failure continues (not
to exceed 25 percent of such amount in the ag-
gregate).
‘‘(2) REASONABLE CAUSE EXCEPTION.—Para-
graph (1) shall not apply to any failure to report a
foreign gift if the United States person shows that
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the failure is due to reasonable cause and not due
to willful neglect.
‘‘(d) COST-OF-LIVING ADJUSTMENT.—In the case of
any taxable year beginning after December 31, 1996, the
$10,000 amount under subsection (a) shall be increased
by an amount equal to the product of such amount and
the cost-of-living adjustment for such taxable year under
section 1(f)(3), except that subparagraph (B) thereof shall
be applied by substituting ‘1995’ for ‘1992’.
‘‘(e) 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 such subpart is amended by inserting after the item
relating to section 6039F the following new item:
‘‘Sec. 6039G. Notice of large gifts received from foreign persons.’’.
‘‘(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received after the date
of the enactment of this Act in taxable years ending after
such date.
SEC. 225. MODIFICATION OF RULES RELATING TO FOREIGN
TRUSTS WHICH ARE NOT GRANTOR TRUSTS.
‘‘(a) MODIFICATION OF INTEREST CHARGE ON ACCU-
MULATION DISTRIBUTIONS.—Subsection (a) of section
668 (relating to interest charge on accumulation distribu-
tions from foreign trusts) is amended to read as follows:
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‘‘(a) GENERAL RULE.—For purposes of the tax de-
termined under section 667(a)—
‘‘(1) 
INTEREST
DETERMINED
USING
UNDERPAYMENT RATES.—The interest charge deter-
mined under this section with respect to any dis-
tribution is the amount of interest which would be
determined on the partial tax computed under sec-
tion 667(b) for the period described in paragraph
(2) using the rates and the method under section
6621 applicable to underpayments of tax.
‘‘(2) PERIOD.—For purposes of paragraph (1),
the period described in this paragraph is the period
which begins on the date which is the applicable
number of years before the date of the distribution
and which ends on the date of the distribution.
‘‘(3) APPLICABLE
NUMBER
OF
YEARS.—For
purposes of paragraph (2)—
‘‘(A) IN GENERAL.—The applicable num-
ber of years with respect to a distribution is the
number determined by dividing—
‘‘(i) the sum of the products described
in subparagraph (B) with respect to each
undistributed income year, by
‘‘(ii) the aggregate undistributed net
income.
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The quotient determined under the preceding
sentence shall be rounded under procedures
prescribed by the Secretary.
‘‘(B) PRODUCT
DESCRIBED.—For pur-
poses of subparagraph (A), the product de-
scribed in this subparagraph with respect to
any undistributed income year is the product
of—
‘‘(i) the undistributed net income for
such year, and
‘‘(ii) the sum of the number of taxable
years between such year and the taxable
year of the distribution (counting in each
case the undistributed income year but not
counting the taxable year of the distribu-
tion).
‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur-
poses of this subsection, the term ‘undistributed in-
come year’ means any prior taxable year of the trust
for which there is undistributed net income, other
than a taxable year during all of which the bene-
ficiary receiving the distribution was not a citizen or
resident of the United States.
‘‘(5) DETERMINATION OF UNDISTRIBUTED NET
INCOME.—Notwithstanding section 666, for pur-
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poses of this subsection, an accumulation distribu-
tion from the trust shall be treated as reducing pro-
portionately the undistributed net income for undis-
tributed income years.
‘‘(6) PERIODS BEFORE 1996.—Interest for the
portion of the period described in paragraph (2)
which occurs before January 1, 1996, shall be deter-
mined—
‘‘(A) by using an interest rate of 6 percent,
and
‘‘(B) without compounding until January
1, 1996.’’.
(b) ABUSIVE TRANSACTIONS.—Section 643(a) is
amended by inserting after paragraph (6) the following
new paragraph:
‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary
shall prescribe such regulations as may be necessary
or appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such
purposes.’’.
(c) TREATMENT OF LOANS FROM TRUSTS.—
(1) IN
GENERAL.—Section 643 (relating to
definitions applicable to subparts A, B, C, and D)
is amended by adding at the end the following new
subsection:
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‘‘(i) LOANS FROM FOREIGN TRUSTS.—For purposes
of subparts B, C, and D—
‘‘(1) GENERAL RULE.—Except as provided in
regulations, if a foreign trust makes a loan of cash
or marketable securities directly or indirectly to—
‘‘(A) any grantor or beneficiary of such
trust who is a United States person, or
‘‘(B) any United States person not de-
scribed in subparagraph (A) who is related to
such grantor or beneficiary,
the amount of such loan shall be treated as a dis-
tribution by such trust to such grantor or bene-
ficiary (as the case may be).
‘‘(2) DEFINITIONS AND SPECIAL RULES.—For
purposes of this subsection—
‘‘(A) CASH.—The term ‘cash’ includes for-
eign currencies and cash equivalents.
‘‘(B) RELATED PERSON.—
‘‘(i) IN GENERAL.—A person is relat-
ed to another person if the relationship be-
tween such persons would result in a dis-
allowance of losses under section 267 or
707(b). In applying section 267 for pur-
poses of the preceding sentence, section
267(c)(4) shall be applied as if the family
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of an individual includes the spouses of the
members of the family.
‘‘(ii) ALLOCATION.—If any person de-
scribed in paragraph (1)(B) is related to
more than one person, the grantor or bene-
ficiary to whom the treatment under this
subsection applies shall be determined
under regulations prescribed by the Sec-
retary.
‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The
term ‘United States person’ does not include
any entity exempt from tax under this chapter.
‘‘(D) TRUST
NOT
TREATED
AS
SIMPLE
TRUST.—Any trust which is treated under this
subsection as making a distribution shall be
treated as not described in section 651.
‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING
LOAN PRINCIPAL.—If any loan is taken into account
under paragraph (1), any subsequent transaction be-
tween the trust and the original borrower regarding
the principal of the loan (by way of complete or par-
tial repayment, satisfaction, cancellation, discharge,
or otherwise) shall be disregarded for purposes of
this title.’’
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(2) TECHNICAL AMENDMENT.—Paragraph (8)
of section 7872(f) is amended by inserting ‘‘,
643(i).’’ before ‘‘or 1274’’ each place it appears.
(d) EFFECTIVE DATES.—
(1) INTEREST CHARGE.—The amendment made
by subsection (a) shall apply to distributions after
the date of the enactment of this Act.
(2) ABUSIVE TRANSACTIONS.—The amendment
made by subsection (b) shall take effect on the date
of the enactment of this Act.
(3) LOANS
FROM
TRUSTS.—The amendment
made by subsection (c) shall apply to loans of cash
or marketable securities after September 19, 1995.
SEC. 226. RESIDENCE OF ESTATES AND TRUSTS, ETC.
(a) TREATMENT AS UNITED STATES PERSON.—
(1) IN GENERAL.—Paragraph (30) of section
7701(a) is amended by striking subparagraph (D)
and by inserting after subparagraph (C) the follow-
ing:
‘‘(D) any estate or trust if—
‘‘(i) a court within the United States
is able to exercise primary supervision over
the administration of the estate or trust,
and
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‘‘(ii) in the case of a trust, one or
more United States fiduciaries have the
authority to control all substantial deci-
sions of the trust.’’.
(2) 
CONFORMING
AMENDMENT.—Paragraph
(31) of section 7701(a) is amended to read as fol-
lows:
‘‘(31) FOREIGN ESTATE OR TRUST.—The term
‘foreign estate’ or ‘foreign trust’ means any estate or
trust other than an estate or trust described in sec-
tion 7701(a)(30)(D).’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply—
(A) to taxable years beginning after De-
cember 31, 1996, or
(B) at the election of the trustee of a
trust, to taxable years ending after the date of
the enactment of this Act.
Such an election, once made, shall be irrevocable.
(b) DOMETIC TRUSTS WHICH BECOME FOREIGN
TRUSTS.—
(1) IN
GENERAL.—Section 1491 (relating to
imposition of tax on transfers to avoid income tax)
is amended by adding at the end the following new
flush sentence:
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‘‘If a trust which is not a foreign trust becomes a foreign
trust, such trust shall be treated for purposes of this sec-
tion as having transferred, immediately before becoming
a foreign trust, all of its assets to a foreign trust.’’.
(2) PENALTY.—Section 1494 is amended by
adding at the end the following new subsection:
‘‘(c) PENALTY.—In the case of any failure to file a
return required by the Secretary with respect to any trans-
fer described in section 1491 with respect to a trust, the
person required to file such return shall be liable for the
penalties provided in section 6677 in the same manner as
if such failure were a failure to file a return under section
6048(a).’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall take effect on the date of the
enactment of this Act.
CHAPTER 3—REPEAL OF BAD DEBT RE-
SERVE METHOD FOR THRIFT SAVINGS
ASSOCIATIONS
SEC. 231. REPEAL OF BAD DEBT RESERVE METHOD FOR
THRIFT SAVINGS ASSOCIATIONS.
(a) IN GENERAL.—Section 593 (relating to reserves
for losses on loans) is amended by adding at the end the
following new subsections:
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‘‘(f) TERMINATION
OF RESERVE METHOD.—Sub-
sections (a), (b), (c), and (d) shall not apply to any taxable
year beginning after December 31, 1995.
‘‘(g) 6-YEAR SPREAD OF ADJUSTMENTS.—
‘‘(1) IN GENERAL.—In the case of any taxpayer
who is required by reason of subsection (f) to change
its method of computing reserves for bad debts—
‘‘(A) such change shall be treated as a
change in a method of accounting,
‘‘(B) such change shall be treated as initi-
ated by the taxpayer and as having been made
with the consent of the Secretary, and
‘‘(C) the net amount of the adjustments
required to be taken into account by the tax-
payer under section 481(a)—
‘‘(i) shall be determined by taking into
account only applicable excess reserves,
and
‘‘(ii) as so determined, shall be taken
into account ratably over the 6-taxable
year period beginning with the first taxable
year beginning after December 31, 1995.
‘‘(2) APPLICABLE EXCESS RESERVES.—
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‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘applicable excess reserves’
means the excess (if any) of—
‘‘(i) the balance of the reserves de-
scribed in subsection (c)(1) (other than the
supplemental reserve) as of the close of the
taxpayer’s last taxable year beginning be-
fore December 31, 1995, over
‘‘(ii) the lesser of—
‘‘(I) the balance of such reserves
as of the close of the taxpayer’s last
taxable year beginning before January
1, 1988, or
‘‘(II) the balance of the reserves
described in subclause (I), reduced in
the same manner as under section
585(b)(2)(B)(ii) on the basis of the
taxable years described in clause (i)
and this clause.
‘‘(B) SPECIAL RULE FOR THRIFTS WHICH
BECOME SMALL BANKS.—In the case of a bank
(as defined in section 581) which was not a
large bank (as defined in section 585(c)(2)) for
its first taxable year beginning after December
31, 1995—
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‘‘(i) the balance taken into account
under subparagraph (A)(ii) shall not be
less than the amount which would be the
balance of such reserves as of the close of
its last taxable year beginning before such
date if the additions to such reserves for
all taxable years had been determined
under section 585(b)(2)(A), and
‘‘(ii) the opening balance of the re-
serve for bad debts as of the beginning of
such first taxable year shall be the balance
taken into account under subparagraph
(A)(ii) (determined after the application of
clause (i) of this subparagraph).
The preceding sentence shall not apply for pur-
poses of paragraphs (5) and (6) or subsection
(e)(1).
‘‘(3) RECAPTURE
OF
PRE–1988
RESERVES
WHERE TAXPAYER CEASES TO BE BANK.—If, during
any taxable year beginning after December 31,
1995, a taxpayer to which paragraph (1) applied is
not a bank (as defined in section 581), paragraph
(1) shall apply to the reserves described in para-
graph (2)(A)(ii) and the supplemental reserve: ex-
cept that such reserves shall be taken into account
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ratably over the 6-taxable year period beginning with
such taxable year.
‘‘(4) SUSPENSION OF RECAPTURE IF RESIDEN-
TIAL LOAN REQUIREMENT MET.—
‘‘(A) IN GENERAL.— In the case of a bank
which meets the residential loan requirement of
subparagraph (B) for the first taxable year be-
ginning after December 31, 1995, or for the
following taxable year—
‘‘(i) no adjustment shall be taken into
account under paragraph (1) for such tax-
able year, and
‘‘(ii) such taxable year shall be dis-
regarded in determining—
‘‘(I) whether any other taxable
year is a taxable year for which an
adjustment is required to be taken
into account under paragraph (1), and
‘‘(II) the amount of such adjust-
ment.
‘‘(B) 
RESIDENTIAL
LOAN
REQUIRE-
MENT.—A taxpayer meets the residential loan
requirement of this subparagraph for any tax-
able year if the principal amount of the residen-
tial loans made by the taxpayer during such
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year is not less than the base amount for such
year.
‘‘(C) RESIDENTIAL
LOAN.—For purposes
of this paragraph, the term ‘residential loan’
means any loan described in clause (v) of sec-
tion 7701(a)(19)(C) but only if such loan is in-
curred in acquiring, constructing, or improving
the property described in such clause.
‘‘(D) BASE
AMOUNT.—For purposes of
subparagraph (B), the base amount is the aver-
age of the principal amounts of the residential
loans made by the taxpayer during the 6 most
recent taxable years beginning on or before De-
cember 31, 1995. At the election of the tax-
payer who made such loans during each of such
6 taxable years, the preceding sentence shall be
applied without regard to the taxable year in
which such principal amount was the highest
and the taxable year in such principal amount
was the lowest. Such an election may be made
only for the first taxable year beginning after
such date, and, if made for such taxable year,
shall apply to the succeeding taxable year un-
less revoked with the consent of the Secretary.
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‘‘(E) CONTROLLED GROUPS.—In the case
of a taxpayer which is a member of any con-
trolled group of corporations described in sec-
tion 1563(a)(1), subparagraph (B) shall be ap-
plied with respect to such group.
‘‘(5) CONTINUED
APPLICATION
OF
FRESH
START UNDER SECTION 585 TRANSITIONAL RULES.—
In the case of a taxpayer to which paragraph (1) ap-
plied and which was not a large bank (as defined in
section 585(c)(2)) for its first taxable year beginning
after December 31, 1995.
‘‘(A) IN GENERAL.—For purposes of deter-
mining the net amount of adjustments referred
to in section 585(c)(3)(A)(iii), there shall be
taken into account only the excess (if any) of
the reserve for bad debts as of the close of the
last taxable year before the disqualification year
over the balance taken into account by such
taxpayer under paragraph (2)(A)(ii) of this sub-
section.
‘‘(B) TREATMENT UNDER ELECTIVE CUT-
OFF METHOD.—For purposes of applying sec-
tion 585(c)(4)—
‘‘(i) the balance of the reserve taken
into account under subparagraph (B)
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thereof shall be reduced by the balance
taken into account by such taxpayer under
paragraph (2)(A)(ii) of this subsection,
and
‘‘(ii) no amount shall be includable in
gross income by reason of such reduction.
‘‘(6) SUSPENDED RESERVE INCLUDED AS SEC-
TION 381(C) ITEMS.—The balance taken into account
by a taxpayer under paragraph (2)(A)(ii) of this
subsection and the supplemental reserve shall be
treated as items described in section 381(c).
‘‘(7) CONVERSIONS TO CREDIT UNIONS.—In the
case of a taxpayer to which paragraph (1) applied
which becomes a credit union described in section
501(c) and exempt from taxation under section
501(a)—
‘‘(A) any amount required to be included
in the gross income of the credit union by rea-
son of this subsection shall be treated as de-
rived from an unrelated trade or business (as
defined in section 513), and
‘‘(B) for purposes of paragraph (3), the
credit union shall not be treated as if it were
a bank.
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‘‘(8) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry
out this subsection and subsection (e), including reg-
ulations providing for the application of such sub-
sections in the case of acquisitions, mergers, spin-
offs, and other reorganizations.’’
(b) CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 50 is amended by
adding at the end the following new sentence:
‘‘Paragraphs (1)(A), (2)(A), and (4) of the section 46(e)
referred to in paragraph (1) of this subsection shall not
apply to any taxable year beginning after December 31,
1995.’’
(2) Subsection (e) of section 52 is amended by
striking paragraph (1) and by redesignating para-
graph (2) and (3) as paragraphs (1) and (2), respec-
tively.
(3) Subsection (a) of section 57 is amended by
striking paragraph (4).
(4) Section 246 is amended by striking sub-
section (f).
(5) Clause (i) of section 291(e)(1)(B) is amend-
ed by striking ‘‘or to which section 593 applies’’.
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(6) Subparagraph (A) of section 585(a)(2) is
amended by striking ‘‘other than an organization to
which section 593 applies’’.
(7)(A) The material preceding subparagraph
(A) of section 593(e)(1) is amended by striking ‘‘by
a domestic building and loan association or an insti-
tution that is treated as a mutual savings bank
under section 591(b)’’ and inserting ‘‘by a taxpayer
having 
a 
balance 
described 
in 
subsection
(g)(2)(A)(ii)’’.
(B) Subparagraph (B) of section 593(e)(1) is amend-
ed to read as follows:
(B) then out of the balance taken into account
under subsection (g)(2)(A)(ii) (properly adjusted for
amounts charged against such reserves for taxable
years beginning after December 31, 1987).’’.
(C) Paragraph (1) of section 593(e) is amended by
adding at the end the following new sentence: ‘‘This para-
graph shall not apply to any distribution of all of the stock
of a bank (as defined in section 581 to another corporation
if, immediately after the distribution, such bank and such
other corporation are members of the same affiliated
group (as defined in section 1504) and the provisions of
section 5(e) of the Federal Deposit Insurance Act (as in