H. R. 2491—592
foreign country and does not waive the benefits of such treaty
applicable to residents of the foreign country.
‘‘(3) SPECIAL RULES.—
‘‘(A) EXCEPTIONS NOT TO APPLY.—Subsection (c) shall
not apply to an individual who is treated as provided
in paragraph (1).
‘‘(B) STEP-UP IN BASIS.—Solely for purposes of deter-
mining any tax imposed by reason of this subsection, prop-
erty which was held by the long-term resident on the
date the individual first became a resident of the United
States shall be treated as having a basis on such date
of not less than the fair market value of such property
on such date. The preceding sentence shall not apply if
the individual elects not to have such sentence apply. Such
an election, once made, shall be irrevocable.
‘‘(4) AUTHORITY TO EXEMPT INDIVIDUALS.—This subsection
shall not apply to an individual who is described in a category
of individuals prescribed by regulation by the Secretary.
‘‘(5) REGULATIONS.—The Secretary shall prescribe such
regulations as may be appropriate to carry out this subsection,
including regulations providing for the application of this sub-
section in cases where an alien individual becomes a resident
of the United States during the 10-year period after being
treated as provided in paragraph (1).’’
(2) CONFORMING AMENDMENTS.—
(A) Section 2107 is amended by striking subsection
(d), by redesignating subsection (e) as subsection (d), and
by inserting after subsection (d) (as so redesignated) the
following new subsection:
‘‘(e) CROSS REFERENCE.—
‘‘For comparable treatment of long-term lawful permanent resi-
dents who ceased to be taxed as residents, see section 877(e).’’
(B) Paragraph (3) of section 2501(a) (as amended by
subsection (e)) is amended by adding at the end the follow-
ing new subparagraph:
‘‘(E) CROSS REFERENCE.—
‘‘For comparable treatment of long-term lawful permanent resi-
dents who ceased to be taxed as residents, see section 877(e).’’
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by this section
shall apply to—
(A) individuals losing United States citizenship (within
the meaning of section 877 of the Internal Revenue Code
of 1986) on or after February 6, 1995, and
(B) long-term residents of the United States with
respect to whom an event described in subparagraph (A)
or (B) of section 877(e)(1) of such Code occurs on or after
February 6, 1995.
(2) SPECIAL RULE.—
(A) IN GENERAL.—In the case of an individual who
performed an act of expatriation 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 Feb-
ruary 6, 1995, but who did not, on or before such date,
furnish to the United States Department of State a signed
statement of voluntary relinquishment of United States
nationality confirming the performance of such act, the
H. R. 2491—593
amendments made by this section and section 11349 shall
apply to such individual except that—
(i) the 10-year period described in section 877(a)
of such Code shall not expire before the end of the
10-year period beginning on the date such statement
is so furnished, and
(ii) the 1-year period referred to in section 877(c)
of such Code, as amended by this section, shall not
expire before the date which is 1 year after the date
of the enactment of this Act.
(B) EXCEPTION.—Subparagraph (A) shall not apply if
the individual establishes to the satisfaction of the Sec-
retary of the Treasury that such loss of United States
citizenship occurred before February 6, 1994.
SEC. 11349. INFORMATION ON INDIVIDUALS LOSING UNITED STATES
CITIZENSHIP.
(a) IN GENERAL.—Subpart A of part III of subchapter A of
chapter 61, as amended by section 11344, is amended by inserting
after section 6039F the following new section:
‘‘SEC. 6039G. INFORMATION ON INDIVIDUALS LOSING UNITED STATES
CITIZENSHIP.
‘‘(a) IN GENERAL.—Notwithstanding any other provision of law,
any individual who loses United States citizenship (within the
meaning of section 877(a)) shall provide a statement which includes
the information described in subsection (b). Such statement shall
be—
‘‘(1) provided not later than the earliest date of any act
referred to in subsection (c), and
‘‘(2) provided to the person or court referred to in subsection
(c) with respect to such act.
‘‘(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 for-
eign residence,
‘‘(3) the foreign country in which such individual is residing,
‘‘(4) the foreign country of which such individual is a citizen,
‘‘(5) in the case of an individual having a net worth of
at least the dollar amount applicable under section 877(a)(2)(B),
information detailing the assets and liabilities of such individ-
ual, and
‘‘(6) such other information as the Secretary may prescribe.
‘‘(c) ACTS DESCRIBED.—For purposes of this section, the acts
referred to in this subsection are—
‘‘(1) the individual’s renunciation of his United States
nationality before a diplomatic or consular officer of the United
States pursuant to paragraph (5) of section 349(a) of the
Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
‘‘(2) the individual’s furnishing to the United States Depart-
ment of State a signed statement of voluntary relinquishment
of United States nationality confirming the performance of
an act of expatriation 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)),
‘‘(3) the issuance by the United States Department of State
of a certificate of loss of nationality to the individual, or
H. R. 2491—594
‘‘(4) the cancellation by a court of the United States of
a naturalized citizen’s certificate of naturalization.
‘‘(d) PENALTY.—Any individual failing to provide a statement
required under subsection (a) shall be subject to a penalty for
each year (of the 10-year period beginning on the date of loss
of United States citizenship) during any portion of which such
failure continues in an amount equal to the greater of—
‘‘(1) 5 percent of the tax required to be paid under section
877 for the taxable year ending during such year, or
‘‘(2) $1,000,
unless it is shown that such failure is due to reasonable cause
and not to willful neglect.
‘‘(e) INFORMATION TO BE PROVIDED TO SECRETARY.—Notwith-
standing any other provision of law—
‘‘(1) any Federal agency or court which collects (or is
required to collect) the statement under subsection (a) shall
provide to the Secretary—
‘‘(A) a copy of any such statement, and
‘‘(B) the name (and any other identifying information)
of any individual refusing to comply 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 Immigration and Nationality Act which
is approved by the Secretary of State, and
‘‘(3) the Federal agency primarily responsible for admin-
istering 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 determined to have been abandoned.
‘‘(f) REPORTING BY LONG-TERM LAWFUL PERMANENT RESIDENTS
WHO CEASE TO BE TAXED AS RESIDENTS.—In lieu of applying the
last sentence of subsection (a), any individual who is required
to provide a statement under this section by reason of section
877(e)(1) shall provide such statement with the return of tax
imposed by chapter 1 for the taxable year during which the event
described in such section occurs.
‘‘(g) EXEMPTION.—The Secretary may by regulations exempt
any class of individuals from the requirements of this section if
he 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 sub-
part A is amended by inserting after the item relating to section
6039F the following new item:
‘‘Sec. 6039G. Information on individuals losing United States citizenship.’’
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to—
(1) individuals losing United States citizenship (within the
meaning of section 877 of the Internal Revenue Code of 1986)
on or after February 6, 1995, and
(2) long-term residents of the United States with respect
to whom an event described in subparagraph (A) or (B) of
section 877(e)(1) of such Code occurs on or after such date.
In no event shall any statement required by such amendments
be due before the 90th day after the date of the enactment of
this Act.
H. R. 2491—595
CHAPTER 7—FINANCIAL ASSET SECURITIZATION
INVESTMENTS
SEC. 11351. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS.
(a) IN GENERAL.—Subchapter M of chapter 1 is amended by
adding at the end the following new part:
‘‘PART V—FINANCIAL ASSET SECURITIZATION
INVESTMENT TRUSTS
‘‘Sec. 860H. Taxation of a FASIT; other general rules.
‘‘Sec. 860I. Gain recognition on contributions to and distributions from a
FASIT and in other cases.
‘‘Sec. 860J. Non-FASIT losses not to offset certain FASIT inclusions.
‘‘Sec. 860K. Treatment of transfers of high-yield interests to disqualified
holders.
‘‘Sec. 860L. Definitions and other special rules.
‘‘SEC. 860H. TAXATION OF A FASIT; OTHER GENERAL RULES.
‘‘(a) TAXATION OF FASIT.—A FASIT as such shall not be subject
to taxation under this subtitle (and shall not be treated as a
trust, partnership, corporation, or taxable mortgage pool).
‘‘(b) TAXATION OF HOLDER OF OWNERSHIP INTEREST.—In deter-
mining the taxable income of the holder of the ownership interest
in a FASIT—
‘‘(1) all assets, liabilities, and items of income, gain, deduc-
tion, loss, and credit of a FASIT shall be treated as assets,
liabilities, and such items (as the case may be) of such holder,
‘‘(2) the constant yield method (including the rules of sec-
tion 1272(a)(6)) shall be applied under an accrual method of
accounting in determining all interest, acquisition discount,
original issue discount, and market discount and all premium
deductions or adjustments with respect to all debt instruments
of the FASIT,
‘‘(3) the amount of the tax imposed by section 860L(e)
(relating to tax on income from foreclosure property) shall be
allowed as a deduction,
‘‘(4) there shall not be taken into account any item of
income, gain, loss, or deduction allocable to prohibited income,
and
‘‘(5) interest accrued by the FASIT which is exempt from
tax imposed by this subtitle shall, when taken into account
by such holder, be treated as ordinary income.
For purposes of this subtitle, securities treated as held by such
holder under paragraph (1) shall be treated as held for investment.
‘‘(c) TREATMENT OF REGULAR INTERESTS.—For purposes of this
title—
‘‘(1) a regular interest in a FASIT, if not otherwise a
debt instrument, shall be treated as a debt instrument,
‘‘(2) section 163(e)(5) shall not apply to such an interest,
and
‘‘(3) amounts includible in gross income with respect to
such an interest shall be determined under an accrual method
of accounting.
‘‘SEC. 860I. GAIN RECOGNITION ON CONTRIBUTIONS TO AND DISTRIBU-
TIONS FROM A FASIT AND IN OTHER CASES.
‘‘(a) CONTRIBUTIONS TO FASIT.—
H. R. 2491—596
‘‘(1) IN GENERAL.—If property is contributed to a FASIT
by the holder of the ownership interest in such FASIT, gain
(if any) shall be recognized to such holder in an amount equal
to the excess (if any) of such property’s value under subsection
(e) on the date of such contribution over its adjusted basis
on such date.
‘‘(2) DEBT INSTRUMENTS ACQUIRED OTHER THAN BY CON-
TRIBUTION BY HOLDER OF OWNERSHIP INTEREST.—For purposes
of this part, any debt instrument which is acquired by a FASIT
other than in a contribution by the holder of the ownership
interest in the FASIT shall be treated—
‘‘(A) as having been acquired by such holder at its
fair market value on the date of its acquisition by the
FASIT, and
‘‘(B) as having been contributed by such holder to
the FASIT at its value under subsection (e) on such date.
‘‘(3) DEFERRAL OF GAIN RECOGNITION.—The Secretary may
prescribe regulations which—
‘‘(A) provide that gain otherwise recognized under para-
graph (1) shall not be recognized before the earliest date
on which such property supports any regular interest in
such FASIT or any indebtedness of the holder of the owner-
ship interest (or of any person related to such holder),
and
‘‘(B) provide such adjustments to the other provisions
of this part to the extent appropriate in the context of
the treatment provided under subparagraph (A).
‘‘(b) CERTAIN DISTRIBUTIONS.—If a FASIT makes a distribution
of property with respect to the ownership interest in the FASIT,
gain (if any) shall be recognized to such FASIT on the distribution
in the same manner as if the FASIT had sold such property to
the distributee at its value under subsection (e) on the date of
such distribution.
‘‘(c) GAIN RECOGNITION ON PROPERTY OUTSIDE FASIT WHICH
SUPPORTS REGULAR INTERESTS.—If property held by the holder
of the ownership interest in a FASIT (or by any person related
to such holder) supports any regular interest in such FASIT—
‘‘(1) gain shall be recognized to such holder in the same
manner as if such holder had sold such property at its value
under subsection (e) on the earliest date such property supports
such an interest, and
‘‘(2) such property shall be treated as held by such FASIT
for purposes of this part.
‘‘(d) GAIN RECOGNITION ON RETAINED INTERESTS.—If—
‘‘(1) any interest in a debt instrument is contributed to
a FASIT, and
‘‘(2) the contributor (or any person related to such contribu-
tor) retains any interest in such instrument (including a right
to receive excessive servicing fees with respect to such
instrument),
then gain shall be recognized to such contributor (or person) in
the same manner as if the contributor (or person) had sold the
retained interest at its value under subsection (e) on the date
of such contribution.
‘‘(e) VALUATION.—For purposes of this section—
‘‘(1) IN GENERAL.—The value of any property under this
subsection shall be—
H. R. 2491—597
‘‘(A) in the case of property other than a debt
instrument, its fair market value, and
‘‘(B) in the case of a debt instrument, the sum of
the present values of the reasonably expected payments
under such instrument determined (in the manner provided
by regulations prescribed by the Secretary)—
‘‘(i) as of the date of the event resulting in the
gain recognition under this section, and
‘‘(ii) by using a discount rate equal to 120 percent
of the applicable Federal rate (as defined in section
1274(d)), or such other discount rate specified in such
regulations, compounded semiannually.
‘‘(2) SPECIAL RULE FOR REVOLVING LOAN ACCOUNTS.—For
purposes of paragraph (1)—
‘‘(A) each extension of credit (other than the accrual
of interest) on a revolving loan account shall be treated
as a separate debt instrument, and
‘‘(B) payments on such extensions of credit having
substantially the same terms shall be applied to such exten-
sions beginning with the earliest such extension.
‘‘(f) SPECIAL RULES.—
‘‘(1) NONRECOGNITION RULES NOT TO APPLY.—Gain required
to be recognized under this section shall be recognized notwith-
standing any other provision of this subtitle.
‘‘(2) BASIS ADJUSTMENTS.—The basis of any property on
which gain is recognized under this section shall be increased
by the amount of gain so recognized.
‘‘SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT INCLU-
SIONS.
‘‘(a) IN GENERAL.—The taxable income of the holder of the
ownership interest or any high-yield interest in a FASIT for any
taxable year shall in no event be less than such holder’s taxable
income determined solely with respect to such interests.
‘‘(b) COORDINATION WITH SECTION 172.—Any increase in the
taxable income of any holder of the ownership interest or a high-
yield interest in a FASIT for any taxable year by reason of sub-
section (a) shall be disregarded—
‘‘(1) in determining under section 172 the amount of any
net operating loss for such taxable year, and
‘‘(2) in determining taxable income for such taxable year
for purposes of the 2nd sentence of section 172(b)(2).
‘‘(c) COORDINATION WITH MINIMUM TAX.—For purposes of part
VI of subchapter A of this chapter—
‘‘(1) the reference in section 55(b)(2) to taxable income
shall be treated as a reference to taxable income determined
without regard to this section,
‘‘(2) the alternative minimum taxable income of any holder
of the ownership interest or a high-yield interest in a FASIT
for any taxable year shall in no event be less than such holder’s
taxable income determined solely with respect to such interests,
and
‘‘(3) any increase in taxable income under this section shall
be disregarded for purposes of computing the alternative tax
net operating loss deduction.
H. R. 2491—598
‘‘SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS
TO DISQUALIFIED HOLDERS.
‘‘(a) GENERAL RULE.—If any high-yield interest is held by a
disqualified holder, this chapter shall be applied as if the transferor
of such interest to such holder had not transferred such interest.
‘‘(b) EXCEPTIONS.—Rules similar to the rules of paragraphs
(4) and (7) of section 860E(e) shall apply to the tax imposed by
reason of subsection (a).
‘‘(c) DISQUALIFIED HOLDER.—For purposes of this section, the
term ‘disqualified holder’ means any holder other than an eligible
corporation (as defined in section 860L(a)(2)).
‘‘(d) TREATMENT OF INTERESTS HELD BY SECURITIES DEALERS.—
‘‘(1) IN GENERAL.—Subsection (a) shall not apply to any
high-yield interest held by a disqualified holder if such holder
is a dealer in securities who acquired such interest exclusively
for sale to customers in the ordinary course of business (and
not for investment).
‘‘(2) CHANGE IN DEALER STATUS.—
‘‘(A) IN GENERAL.—In the case of a dealer in securities
which is not an eligible corporation (as defined in section
860L(a)(2)), if—
‘‘(i) such dealer ceases to be a dealer in securities,
or
‘‘(ii) such dealer commences holding the high-yield
interest for investment,
there is hereby imposed (in addition to other taxes) an
excise tax equal to the product of the highest rate of tax
specified in section 11(b)(1) and the income of such dealer
attributable to such interest for periods after the date
of such cessation or commencement.
‘‘(B) HOLDING
FOR
DAYS
OR
LESS.—For purposes
of subparagraph (A)(ii), a dealer shall not be treated as
holding an interest for investment before the 32d day after
the date such dealer acquired such interest unless such
interest is so held as part of a plan to avoid the purposes
of this paragraph.
‘‘(C) 
ADMINISTRATIVE
PROVISIONS.—The 
deficiency
procedures of subtitle F shall apply to the tax imposed
by this paragraph.
‘‘(e) TREATMENT OF HIGH-YIELD INTERESTS IN PASS-THRU ENTI-
TIES.—If a pass-thru entity (as defined in section 860E(e)(6)) issues
a debt or equity interest—
‘‘(1) which is supported by any regular interest in a FASIT,
and
‘‘(2) which has an original yield to maturity which is greater
than each of—
‘‘(A) the sum determined under clauses (i) and (ii)
of section 163(i)(1)(B) with respect to such debt or equity
interest, and
‘‘(B) the yield to maturity on such regular interest,
there is hereby imposed on the pass-thru entity a tax (in
addition to other taxes) equal to the product of the highest
rate of tax specified in section 11(b)(1) and the income of
the holder of such debt or equity interest which is properly
attributable to such regular interest. For purposes of the preced-
ing sentence, the yield to maturity of any equity interest shall
be determined under regulations prescribed by the Secretary.
H. R. 2491—599
‘‘SEC. 860L. DEFINITIONS AND OTHER SPECIAL RULES.
‘‘(a) FASIT.—
‘‘(1) IN
GENERAL.—For purposes of this title, the terms
‘financial asset securitization investment trust’ and ‘FASIT’
mean any entity—
‘‘(A) for which an election to be treated as a FASIT
applies for the taxable year,
‘‘(B) all of the interests in which are regular interests
or the ownership interest,
‘‘(C) which has only 1 ownership interest and such
ownership interest is held directly by an eligible corpora-
tion,
‘‘(D) as of the close of the 3rd month beginning after
the day of its formation and at all times thereafter, substan-
tially all of the assets of which (including assets treated
as held by the entity under section 860I(c)(2)) consist of
permitted assets, and
‘‘(E) which is not described in section 851(a).
A rule similar to the rule of the last sentence of section 860D(a)
shall apply for purposes of this paragraph.
‘‘(2) ELIGIBLE CORPORATION.—For purposes of paragraph
(1)(C), the term ‘eligible corporation’ means any domestic C
corporation other than—
‘‘(A) a corporation which is exempt from, or is not
subject to, tax under this chapter,
‘‘(B) an entity described in section 851(a) or 856(a),
‘‘(C) a REMIC, and
‘‘(D) an organization to which part I of subchapter
T applies.
‘‘(3) ELECTION.—
‘‘(A) IN GENERAL.—An entity (otherwise meeting the
requirements of paragraph (1)) may elect to be treated
as a FASIT. Except as provided in paragraph (5), such
an election shall apply to the taxable year for which made
and all subsequent taxable years unless revoked with the
consent of the Secretary.
‘‘(B) ELECTIONS
MADE
AFTER
1ST
TAXABLE
YEAR
OF
ENTITY.—If the election under subparagraph (A) is made
after the first taxable year of the entity, all property held
(or treated as held under section 860I(c)(2)) by such entity
as of the first day of the first taxable year for which
such election is made shall be treated as contributed to
such entity on such first day by the holder of the ownership
interest in such entity.
‘‘(4) TERMINATION.—If any entity ceases to be a FASIT
at any time during the taxable year, such entity shall not
be treated as a FASIT for such taxable year or any succeeding
taxable year.
‘‘(5) INADVERTENT
TERMINATIONS, ETC.—Rules similar to
the rules of section 860D(b)(2)(B) shall apply to inadvertent
failures to qualify or remain qualified as a FASIT.
‘‘(b) INTERESTS IN FASIT.—For purposes of this part—
‘‘(1) REGULAR INTEREST.—
‘‘(A) IN GENERAL.—The term ‘regular interest’ means
any interest which is issued by a FASIT with fixed terms
and which is designated as a regular interest if—
H. R. 2491—600
‘‘(i) such interest unconditionally entitles the
holder to receive a specified principal amount (or other
similar amount),
‘‘(ii) except as otherwise provided by the Sec-
retary—
‘‘(I) in the case of a FASIT which would be
treated as a REMIC if an election under section
860D(b) had been made, interest payments (or
other similar amounts), if any, with respect to
such interest at or before maturity meet the
requirements applicable under clause (i) or (ii) of
section 860G(a)(1)(B), or
‘‘(II) in the case of any other FASIT, interest
payments (or other similar amounts), if any, with
respect to such interest are determined using a
current rate which is reasonably expected to meas-
ure contemporaneous variations in the cost of
newly borrowed funds in the currency in which
the regular interest is denominated,
‘‘(iii) such interest does not have a stated maturity
(including options to renew) greater than 30 years
(or such longer period as may be permitted by regula-
tions),
‘‘(iv) the issue price of such interest does not exceed
125 percent of its stated principal amount, and
‘‘(v) the yield to maturity on such interest is less
than the sum determined under section 163(i)(1)(B)
with respect to such interest.
Interest shall not fail to meet the requirements of clause
(i) merely because the timing (but not the amount) of
the principal payments (or other similar amounts) may
be contingent on the extent that payments on debt
instruments held by the FASIT are made in advance of
anticipated payments and on the amount of income from
permitted assets.
‘‘(B) HIGH-YIELD INTERESTS.—
‘‘(i) IN
GENERAL.—The term ‘regular interest’
includes any high-yield interest.
‘‘(ii) HIGH-YIELD INTEREST.—The term ‘high-yield
interest’ means any interest which would be described
in subparagraph (A) but for failing to meet the require-
ments of one or more of clauses (i), (iv), or (v) thereof.
‘‘(2) OWNERSHIP INTEREST.—The term ‘ownership interest’
means the interest issued by a FASIT which is designated
as an ownership interest and which is not a regular interest.
‘‘(c) PERMITTED ASSETS.—For purposes of this part—
‘‘(1) IN GENERAL.—The term ‘permitted asset’ means—
‘‘(A) cash or cash equivalents,
‘‘(B) any debt instrument (as defined in section
1275(a)(1)) under which interest payments (or other similar
amounts), if any, at or before maturity meet the require-
ments applicable under clause (i) or (ii) of section
860G(a)(1)(B),
‘‘(C) foreclosure property,
‘‘(D) any asset—
‘‘(i) which is an interest rate or foreign currency
notional principal contract, letter of credit, insurance,
H. R. 2491—601
guarantee against payment defaults, or other similar
instrument, permitted by the Secretary, and
‘‘(ii) which is reasonably required to guarantee or
hedge against the FASIT’s risks associated with being
the obligor on interests issued by the FASIT, and
‘‘(E) contract rights to acquire debt instruments
described in subparagraph (B) or assets described in
subparagraph (D).
‘‘(2) DEBT ISSUED BY HOLDER OF OWNERSHIP INTEREST NOT
PERMITTED ASSET.—The term ‘permitted asset’ shall not include
any debt instrument issued by the holder of the ownership
interest in the FASIT or by any person related to such holder
or any direct or indirect interest in such a debt instrument.
The preceding sentence shall not apply to cash equivalents
and to any other investment specified in regulations prescribed
by the Secretary.
‘‘(3) FORECLOSURE PROPERTY.—The term ‘foreclosure prop-
erty’ means property—
‘‘(A) which would be foreclosure property under section
856(e) (determined without regard to paragraph (5) thereof)
if acquired by a real estate investment trust, and
‘‘(B) which is acquired in connection with the default
or imminent default of a debt instrument held by the
FASIT unless the security interest in such property was
created for the principal purpose of permitting the FASIT
to invest in such property.
Solely for purposes of subsection (a)(1), the determination of
whether any property is foreclosure property shall be made
without regard to section 856(e)(4).
‘‘(d) TAX ON PROHIBITED TRANSACTIONS.—
‘‘(1) IN GENERAL.—There is hereby imposed for each taxable
year of a FASIT a tax equal to 100 percent of the net income
derived from prohibited transactions.
‘‘(2) PROHIBITED TRANSACTIONS.—For purposes of this part,
the term ‘prohibited transaction’ means—
‘‘(A) the receipt of any income derived from any asset
that is not a permitted asset,
‘‘(B) except as provided in paragraph (3), the disposition
of any permitted asset,
‘‘(C) the receipt of any income derived from any loan
originated by the FASIT, and
‘‘(D) the receipt of any income representing a fee or
other compensation for services (other than any fee received
as compensation for a waiver, amendment, or consent under
permitted assets (other than foreclosure property) held by
the FASIT).
‘‘(3) EXCEPTION FOR INCOME FROM CERTAIN DISPOSITIONS.—
‘‘(A) IN GENERAL.—Paragraph (2)(B) shall not apply
to a disposition which would not be a prohibited transaction
(as defined in section 860F(a)(2)) by reason of—
‘‘(i) clause (ii), (iii), or (iv) of section 860F(a)(2)(A),
or
‘‘(ii) section 860F(a)(5),
if the FASIT were treated as a REMIC and debt
instruments described in subsection (c)(1)(B) were treated
as qualified mortgages.
H. R. 2491—602
‘‘(B) SUBSTITUTION OF DEBT INSTRUMENTS; REDUCTION
OF OVER-COLLATERALIZATION.—Paragraph (2)(B) shall not
apply to—
‘‘(i) the substitution of a debt instrument described
in subsection (c)(1)(B) for another debt instrument
which is a permitted asset, or
‘‘(ii) the distribution of a debt instrument contrib-
uted by the holder of the ownership interest to such
holder in order to reduce over-collateralization of the
FASIT,
but only if a principal purpose of acquiring the debt
instrument which is disposed of was not the recognition
of gain (or the reduction of a loss) as a result of an increase
in the market value of the debt instrument after its acquisi-
tion by the FASIT.
‘‘(C) LIQUIDATION OF CLASS OF REGULAR INTERESTS.—
Paragraph (2)(B) shall not apply to the complete liquidation
of any class of regular interests.
‘‘(4) NET
INCOME.—For purposes of this subsection, net
income shall be determined in accordance with section
860F(a)(3).
‘‘(e) TAX ON INCOME FROM FORECLOSURE PROPERTY.—
‘‘(1) IN GENERAL.—A tax is hereby imposed for each taxable
year on the net income from foreclosure property of each FASIT.
Such tax shall be computed by multiplying the net income
from foreclosure property by the highest rate of tax specified
in section 11(b).
‘‘(2) NET INCOME FROM FORECLOSURE PROPERTY.—For pur-
poses of this part, the term ‘net income from foreclosure prop-
erty’ means the amount which would be the FASIT’s net income
from foreclosure property under section 857(b)(4)(B) if the
FASIT were a real estate investment trust.
‘‘(f) COORDINATION WITH WASH SALES RULES.—Rules similar
to the rules of section 860F(d) shall apply to the ownership interest
in a FASIT.
‘‘(g) RELATED PERSON.—For purposes of this part, a person
(hereinafter in this subsection referred to as the ‘related person’)
is related to any person if—
‘‘(1) the related person bears a relationship to such person
specified in section 267(b) or section 707(b)(1), or
‘‘(2) the related person and such person are engaged in
trades or businesses under common control (within the meaning
of subsections (a) and (b) of section 52).
For purposes of paragraph (1), in applying section 267(b) or
707(b)(1), ‘20 percent’ shall be substituted for ‘50 percent’.
‘‘(h) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes
of this part, including regulations to prevent the abuse of the
purposes of this part through transactions which are not primarily
related to securitization of debt instruments by a FASIT.’’.
(b) TECHNICAL AMENDMENTS.—
(1) Paragraph (2) of section 26(b) is amended by striking
‘‘and’’ at the end of subparagraph (M), by striking the period
at the end of subparagraph (N) and inserting ‘‘, and’’, and
by adding at the end the following new subparagraph:
‘‘(O) section 860K (relating to treatment of transfers
of high-yield interests to disqualified holders).’’.
H. R. 2491—603
(2) Paragraph (6) of section 56(g) is amended by striking
‘‘or REMIC’’ and inserting ‘‘REMIC, or FASIT’’.
(3) Clause (ii) of section 382(l)(4)(B) is amended by striking
‘‘or a REMIC to which part IV of subchapter M applies’’ and
inserting ‘‘a REMIC to which part IV of subchapter M applies,
or a FASIT to which part V of subchapter M applies’’.
(4) Paragraph (1) of section 582(c) is amended by inserting
‘‘, and any regular or ownership interest in a FASIT,’’ after
‘‘REMIC’’.
(5) Subparagraph (E) of section 856(c)(6) is amended by
adding at the end the following new sentence: ‘‘References
in the preceding provisions of this subparagraph to a REMIC
shall be treated as including a reference to a FASIT.’’.
(6) Subparagraph (C) of section 1202(e)(4) is amended by
striking ‘‘or REMIC’’ and inserting ‘‘REMIC, or FASIT’’.
(7) Clause (xi) of section 7701(a)(19)(C) is amended to read
as follows:
‘‘(xi) any regular or residual interest in a REMIC,
and any regular or ownership interest in a FASIT,
but only in the proportion which the assets of such
REMIC or FASIT consist of property described in any
of the preceding clauses of this subparagraph; except
that if 95 percent or more of the assets of such REMIC
or FASIT are assets described in clauses (i) through
(x), the entire interest in the REMIC or FASIT shall
qualify.’’.
(8) Subparagraph (A) of section 7701(i)(2) is amended by
inserting ‘‘or a FASIT’’ after ‘‘a REMIC’’.
(c) CLERICAL AMENDMENT.—The table of parts for subchapter
M of chapter 1 is amended by adding at the end the following
new item:
‘‘Part V. Financial asset securitization investment trusts.’’.
(d) EFFECTIVE DATE.—The amendments made by this section
shall take effect on the date of the enactment of this Act.
CHAPTER 8—DEPRECIATION PROVISIONS
SEC. 11361. TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUC-
TION.
(a) TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION.—
(1) IN GENERAL.—Section 118 (relating to contributions to
the capital of a corporation) is amended—
(A) by redesignating subsection (c) as subsection (e),
and
(B) by inserting after subsection (b) the following new
subsections:
‘‘(c) SPECIAL RULES FOR WATER AND SEWERAGE DISPOSAL UTILI-
TIES.—
‘‘(1) GENERAL RULE.—For purposes of this section, the term
‘contribution to the capital of the taxpayer’ includes any amount
of money or other property received from any person (whether
or not a shareholder) by a regulated public utility which pro-
vides water or sewerage disposal services if—
‘‘(A) such amount is a contribution in aid of construc-
tion,
H. R. 2491—604
‘‘(B) in the case of contribution of property other than
water or sewerage disposal facilities, such amount meets
the requirements of the expenditure rule of paragraph (2),
and
‘‘(C) such amount (or any property acquired or con-
structed with such amount) is not included in the taxpayer’s
rate base for ratemaking purposes.
‘‘(2) EXPENDITURE RULE.—An amount meets the require-
ments of this paragraph if—
‘‘(A) an amount equal to such amount is expended
for the acquisition or construction of tangible property
described in section 1231(b)—
‘‘(i) which is the property for which the contribution
was made or is of the same type as such property,
and
‘‘(ii) which is used predominantly in the trade or
business of furnishing water or sewerage disposal serv-
ices,
‘‘(B) the expenditure referred to in subparagraph (A)
occurs before the end of the second taxable year after
the year in which such amount was received, and
‘‘(C) accurate records are kept of the amounts contrib-
uted and expenditures made, the expenditures to which
contributions are allocated, and the year in which the
contributions and expenditures are received and made.
‘‘(3) DEFINITIONS.—For purposes of this subsection—
‘‘(A) CONTRIBUTION
IN
AID
OF
CONSTRUCTION.—The
term ‘contribution in aid of construction’ shall be defined
by regulations prescribed by the Secretary, except that
such term shall not include amounts paid as service charges
for starting or stopping services.
‘‘(B) 
PREDOMINANTLY.—The 
term 
‘predominantly’
means 80 percent or more.
‘‘(C) REGULATED PUBLIC UTILITY.—The term ‘regulated
public utility’ has the meaning given such term by section
7701(a)(33), except that such term shall not include any
utility which is not required to provide water or sewerage
disposal services to members of the general public in its
service area.
‘‘(4) DISALLOWANCE OF DEDUCTIONS AND CREDITS; ADJUSTED
BASIS.—Notwithstanding any other provision of this subtitle,
no deduction or credit shall be allowed for, or by reason of,
any expenditure which constitutes a contribution in aid of
construction to which this subsection applies. The adjusted
basis of any property acquired with contributions in aid of
construction to which this subsection applies shall be zero.
‘‘(d) STATUTE OF LIMITATIONS.—If the taxpayer for any taxable
year treats an amount as a contribution to the capital of the
taxpayer described in subsection (c), then—
‘‘(1) the statutory period for the assessment of any defi-
ciency attributable to any part of such amount shall not expire
before the expiration of 3 years from the date the Secretary
is notified by the taxpayer (in such manner as the Secretary
may prescribe) of—
‘‘(A) the amount of the expenditure referred to in
subparagraph (A) of subsection (c)(2),
H. R. 2491—605
‘‘(B) the taxpayer’s intention not to make the expendi-
tures referred to in such subparagraph, or
‘‘(C) a failure to make such expenditure within the
period described in subparagraph (B) of subsection (c)(2);
and
‘‘(2) such deficiency may be assessed before the expiration
of such 3-year period notwithstanding the provisions of any
other law or rule of law which would otherwise prevent such
assessment.’’.
(2) CONFORMING AMENDMENT.—Section 118(b) is amended
by inserting ‘‘except as provided in subsection (c),’’ before ‘‘the
term’’.
(3) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to amounts received after the date of the
enactment of this Act.
(b) RECOVERY METHOD AND PERIOD FOR WATER UTILITY PROP-
ERTY.—
(1) REQUIREMENT TO USE STRAIGHT LINE METHOD.—Section
168(b)(3) is amended by adding at the end the following new
subparagraph:
‘‘(F) Water utility property described in subsection
(e)(5).’’.
(2) 25-YEAR RECOVERY PERIOD.—The table contained in sec-
tion 168(c)(1) is amended by inserting the following item after
the item relating to 20-year property:
‘‘Water utility property ....................................................................
25 years’’.
(3) WATER UTILITY PROPERTY.—
(A) IN GENERAL.—Section 168(e) is amended by adding
at the end the following new paragraph:
‘‘(5) WATER
UTILITY
PROPERTY.—The term ‘water utility
property’ means property—
‘‘(A) which is an integral part of the gathering, treat-
ment, or commercial distribution of water, and which, with-
out regard to this paragraph, would be 20-year property,
and
‘‘(B) any municipal sewer.’’.
(B) 
CONFORMING
AMENDMENTS.—Section 
168 
is
amended—
(i) by striking subparagraph (F) of subsection
(e)(3), and
(ii) by striking the item relating to subparagraph
(F) in the table in subsection (g)(3).
(4) 
ALTERNATIVE
SYSTEM.—Clause 
(iv) 
of 
section
168(g)(2)(C) is amended by inserting ‘‘or water utility property’’
after ‘‘tunnel bore’’.
(5) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to property placed in service after the date
of the enactment of this Act, other than property placed in
service pursuant to a binding contract in effect on such date
and at all times thereafter before the property is placed in
service.
SEC. 11362. DEDUCTION FOR CERTAIN OPERATING AUTHORITY.
(a) GENERAL RULE.—For purpose of chapter 1 of the Internal
Revenue Code of 1986, in computing the taxable income of a tax-
payer who, on January 1, 1995, held one or more operating authori-
H. R. 2491—606
ties preempted by section 601 of the Federal Aviation Administra-
tion Authorization Act of 1994, the taxpayer shall be entitled to
deduct ratably over the 36-month period beginning with January
1995 an amount equal to the aggregate adjusted bases of such
operating authorities held by the taxpayer on January 1, 1995.
(b) TREATMENT AS DEPRECIATION.—Any deduction under sub-
section (a) shall be treated as a deduction for depreciation for
purposes of the Internal Revenue Code of 1986.
(c) EFFECTIVE DATE.—The provisions of this section shall apply
to taxable years ending after December 31, 1994.
SEC. 11363. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND
SIMILAR STRUCTURES.
(a) IN GENERAL.—Section 168(e)(3)(E) (classifying certain prop-
erty as 15-year property) is amended by striking ‘‘and’’ at the
end of clause (i), by striking the period at the end of clause (ii)
and inserting ‘‘, and’’, and by adding at the end the following
new clause:
‘‘(iii) any section 1250 property which is a retail
motor fuels outlet (whether or not food or other conven-
ience items are sold at the outlet).’’.
(b) CONFORMING AMENDMENT.—Subparagraph (B) of section
168(g)(3) is amended by inserting after the item relating to subpara-
graph (E)(ii) in the table contained therein the following new item:
‘‘(E)(iii) . . . . . . . . . . . . . . . . . 20’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to property which is placed in service on or after
the date of the enactment of this Act and to which section 168
of the Internal Revenue Code of 1986 applies after the amendment
made by section 201 of the Tax Reform Act of 1986. A taxpayer
may elect to have such amendments apply with respect to any
property placed in service before such date and to which such
section so applies.
CHAPTER 9—OTHER PROVISIONS
SEC. 11371. APPLICATION OF FAILURE-TO-PAY PENALTY TO SUB-
STITUTE RETURNS.
(a) GENERAL RULE.—Section 6651 (relating to failure to file
tax return or to pay tax) is amended by adding at the end the
following new subsection:
‘‘(g) TREATMENT OF RETURNS PREPARED BY SECRETARY UNDER
SECTION 6020(b).—In the case of any return made by the Secretary
under section 6020(b)—
‘‘(1) such return shall be disregarded for purposes of deter-
mining the amount of the addition under paragraph (1) of
subsection (a), but
‘‘(2) such return shall be treated as the return filed by
the taxpayer for purposes of determining the amount of the
addition under paragraphs (2) and (3) of subsection (a).’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply in the case of any return the due date for which
(determined without regard to extensions) is after the date of the
enactment of this Act.
H. R. 2491—607
SEC. 11372. EXTENSION OF WITHHOLDING TO CERTAIN GAMBLING
WINNINGS.
(a) REPEAL OF EXEMPTION FOR BINGO AND KENO.—Paragraph
(5) of section 3402(q) is amended to read as follows:
‘‘(5) EXEMPTION
FOR
SLOT
MACHINES.—The tax imposed
under paragraph (1) shall not apply to winnings from a slot
machine.’’.
(b) THRESHOLD AMOUNT.—Paragraph (3) of section 3402(q) is
amended—
(1) by striking ‘‘(B) and (C)’’ in subparagraph (A) and insert-
ing ‘‘(B), (C), and (D)’’, and
(2) by adding at the end the following new subparagraph:
‘‘(D) BINGO AND KENO.—Proceeds of more than $5,000
from a wager placed in a bingo or keno game.’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall take effect on January 1, 1996.
SEC. 11373. LOSSES FROM FORECLOSURE PROPERTY.
(a) IN GENERAL.—Section 818(b) is amended by adding at the
end the following new paragraph:
‘‘(2) LOSSES FROM FORECLOSURE PROPERTY.—
‘‘(A) IN GENERAL.—The amortizable portion of any loss
arising from the sale or exchange of foreclosure property
which (without regard to this paragraph) is treated as
a capital loss shall be treated as a loss from the sale
or exchange of real property used in carrying on an insur-
ance business which is recognized ratably over the 10-
taxable year period beginning with the taxable year follow-
ing the taxable year in which the sale or exchange of
the foreclosure property occurred.
‘‘(B) AMORTIZABLE PORTION.—For purposes of this para-
graph—
‘‘(i) IN
GENERAL.—The amortizable portion of a
loss referred to in subparagraph (A) is the percentage
(not greater than 20 percent) of such loss to which
the taxpayer elects to have this paragraph apply.
‘‘(ii) SUBSEQUENT MODIFICATIONS OF AMOUNT.—The
taxpayer may elect for any of the taxable years in
the change period to change (subject to the limitation
under clause (i)) the percentage of a loss referred to
in subparagraph (A) which is treated as the amortiz-
able portion of such loss. If the taxpayer so elects,
each such changed percentage shall be treated as if
it were the percentage specified in the election made
under clause (i), and proper adjustments shall be made
for all taxable years to reflect each such change.
‘‘(iii) STATUTE OF LIMITATIONS.— For purposes of
section 6501(h) and 6511(d)(2), any change by reason
of an election under clause (ii) shall be treated as
a capital loss carryback from the year such change
is made.
‘‘(iv) CHANGE PERIOD.—For purposes of clause (ii),
the change period is the 3-taxable year period following
the taxable year in which the sale or exchange of
the foreclosure property occurred.
‘‘(C) ELECTION
TO
TREAT
UNAMORTIZED
ORDINARY
LOSSES AS CAPITAL LOSSES.—
H. R. 2491—608
‘‘(i) IN GENERAL.—The taxpayer may elect to treat
any unused amount of any ordinary loss described
in subparagraph (A) as a capital loss arising in the
taxable year for which the election under this subpara-
graph is made.
‘‘(ii) LIMITATION ON ELECTION.—An election may
be made under clause (i) with respect to any loss
only for any taxable year in the 5-taxable year period
following the taxable year referred to in subparagraph
(A).
‘‘(iii) UNUSED
AMOUNT
OF
ORDINARY
LOSS.—For
purposes of clause (i), the unused amount of an ordi-
nary loss is the amount of the amortizable portion
of any loss which has not been recognized as of the
close of the preceding taxable year.
‘‘(iv) ORDERING RULE.—Any unused amount of an
ordinary loss with respect to which an election was
made under clause (i) shall be treated as coming first
from the last taxable year in the 10-taxable year period
referred to in subparagraph (A) and then from each
preceding taxable year in reverse chronological order.
‘‘(D) FORECLOSURE
PROPERTY.—For purposes of this
paragraph, the term ‘foreclosure property’ means any real
property used in a trade or businesses (as defined in section
1231(b) without regard to this subsection) which is acquired
by a life insurance company as the result of—
‘‘(i) such company having bid on such property
at foreclosure, or
‘‘(ii) such company having otherwise reduced such
property to ownership or possession by agreement or
process of law, after there was a default (or default
was imminent) on indebtedness which such property
secured.
‘‘(E) TIME FOR MAKING ELECTIONS.—Any election under
this paragraph for any taxable year shall be made on
or before the due date (including extensions) for the return
of tax for such taxable year.’’
(b) CONFORMING AMENDMENTS.—Section 818(b) is amended—
(1) by striking ‘‘In the’’ and inserting:
‘‘(1) IN GENERAL.—In the ’’, and
(2) by redesignating paragraphs (1) and (2) and subpara-
graphs (A) and (B) of paragraph (1) as subparagraphs (A)
and (B) and clauses (i) and (ii) of subparagraph (A), respectively.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1994.
SEC. 11374. NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS
BY COMMON TRUST FUNDS TO REGULATED INVESTMENT
COMPANIES.
(a) GENERAL RULE.—Section 584 (relating to common trust
funds) is amended by redesignating subsection (h) as subsection
(i) and by inserting after subsection (g) the following new subsection:
‘‘(h) NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS TO
REGULATED INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) pursuant to a single plan, a common trust fund
transfers substantially all of its assets to one or more
H. R. 2491—609
regulated investment companies in exchange solely for
stock in the company or companies to which such assets
are so transferred, and
‘‘(B) such stock is distributed by such common trust
fund to participants in such common trust fund in exchange
solely for their interests in such common trust fund,
no gain or loss shall be recognized by such common trust
fund by reason of such transfer or distribution, and no gain
or loss shall be recognized by any participant in such common
trust fund by reason of such exchange.
‘‘(2) BASIS RULES.—
‘‘(A) REGULATED INVESTMENT COMPANY.—The basis of
any asset received by a regulated investment company
in a transfer referred to in paragraph (1)(A) shall be the
same as it would be in the hands of the common trust
fund.
‘‘(B) PARTICIPANTS.—The basis of the stock which is
received in an exchange referred to in paragraph (1)(B)
shall be the same as that of the property exchanged. If
stock in more than one regulated investment company is
received in such exchange, the basis determined under
the preceding sentence shall be allocated among the stock
in each such company on the basis of respective fair market
values.
‘‘(3) TREATMENT OF ASSUMPTIONS OF LIABILITY.—
‘‘(A) IN GENERAL.—In determining whether the transfer
referred to in paragraph (1)(A) is in exchange solely for
stock in one or more regulated investment companies, the
assumption by any such company of a liability of the com-
mon trust fund, and the fact that any property transferred
by the common trust fund is subject to a liability, shall
be disregarded.
‘‘(B) SPECIAL RULE WHERE ASSUMED LIABILITIES EXCEED
BASIS.—
‘‘(i) IN GENERAL.—If, in any transfer referred to
in paragraph (1)(A), the assumed liabilities exceed the
aggregate adjusted bases (in the hands of the common
trust fund) of the assets transferred to the regulated
investment company or companies—
‘‘(I) notwithstanding paragraph (1), gain shall
be recognized to the common trust fund on such
transfer in an amount equal to such excess,
‘‘(II) the basis of the assets received by the
regulated investment company or companies in
such transfer shall be increased by the amount
so recognized, and
‘‘(III) any adjustment to the basis of a partici-
pant’s interest in the common trust fund as a
result of the gain so recognized shall be treated
as occurring immediately before the exchange
referred to in paragraph (1)(B).
If the transfer referred to in paragraph (1)(A) is to
two or more regulated investment companies, the basis
increase under subclause (II) shall be allocated among
such companies on the basis of the respective fair
market values of the assets received by each of such
companies.
H. R. 2491—610
‘‘(ii) ASSUMED LIABILITIES.—For purposes of clause
(i), the term ‘assumed liabilities’ means the aggregate
of—
‘‘(I) any liability of the common trust fund
assumed by any regulated investment company
in connection with the transfer referred to in para-
graph (1)(A), and
‘‘(II) any liability to which property so trans-
ferred is subject.
‘‘(4) COMMON
TRUST
FUND
MUST
MEET
DIVERSIFICATION
RULES.—This subsection shall not apply to any common trust
fund which would not meet the requirements of section
368(a)(2)(F)(ii) if it were a corporation. For purposes of the
preceding sentence, Government securities shall not be treated
as securities of an issuer in applying the 25-percent and 50-
percent test and such securities shall not be excluded for pur-
poses of determining total assets under clause (iv) of section
368(a)(2)(F).’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to transfers after December 31, 1995.
SEC. 11375. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIM-
ITED TO SUBSIDIES WITH RESPECT TO DWELLING UNITS.
(a) IN GENERAL.—Paragraph (1) of section 136(c) (defining
energy conservation measure) is amended by striking ‘‘energy
demand—’’ and all that follows and inserting ‘‘energy demand with
respect to a dwelling unit.’’
(b) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 136 is amended to read as
follows:
‘‘(a) EXCLUSION.—Gross income shall not include the value of
any subsidy provided (directly or indirectly) by a public utility
to a customer for the purchase or installation of any energy con-
servation measure.’’
(2) Paragraph (2) of section 136(c) is amended—
(A) by striking subparagraph (A) and by redesignating
subparagraphs (B) and (C) as subparagraphs (A) and (B),
respectively, and
(B) by striking ‘‘AND SPECIAL RULES’’ in the paragraph
heading.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to amounts received after December 31, 1995, unless
received pursuant to a written binding contract in effect on Septem-
ber 13, 1995, and at all times thereafter.
SEC. 11376. ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP
FUNDING CORPORATION.
(a) IN GENERAL.—Subsection (d) of section 150 (relating to
definitions and special rules) is amended by adding at the end
thereof the following new paragraph:
‘‘(3) ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP
FUNDING CORPORATION.—
‘‘(A) IN GENERAL.—Any qualified scholarship funding
bond, and qualified student loan bond, outstanding on the
date of the issuer’s election under this paragraph (and
any bond (or series of bonds) issued to refund such a
bond) shall not fail to be a tax-exempt bond solely because
the issuer ceases to be described in subparagraphs (A)
H. R. 2491—611
and (B) of paragraph (2) if the issuer meets the require-
ments of subparagraphs (B) and (C) of this paragraph.
‘‘(B) ASSETS AND LIABILITIES OF ISSUER TRANSFERRED
TO
TAXABLE
SUBSIDIARY.—The 
requirements 
of 
this
subparagraph are met by an issuer if—
‘‘(i) all of the student loan notes of the issuer
and other assets pledged to secure the repayment of
qualified scholarship funding bond indebtedness of the
issuer are transferred to another corporation within
a reasonable period after the election is made under
this paragraph;
‘‘(ii) such transferee corporation assumes or other-
wise provides for the payment of all of the qualified
scholarship funding bond indebtedness of the issuer
within a reasonable period after the election is made
under this paragraph;
‘‘(iii) to the extent permitted by law, such trans-
feree corporation assumes all of the responsibilities,
and succeeds to all of the rights, of the issuer under
the issuer’s agreements with the Secretary of Edu-
cation in respect of student loans;
‘‘(iv) immediately after such transfer, the issuer,
together with any other issuer which has made an
election under this paragraph in respect of such trans-
feree, hold all of the senior stock in such transferee
corporation; and
‘‘(v) such transferee corporation is not exempt from
tax under this chapter.
‘‘(C) ISSUER TO OPERATE AS INDEPENDENT ORGANIZA-
TION
DESCRIBED
IN
SECTION
501(C)(3).—The requirements
of this subparagraph are met by an issuer if, within a
reasonable period after the transfer referred to in subpara-
graph (B)—
‘‘(i) the issuer is described in section 501(c)(3) and
exempt from tax under section 501(a);
‘‘(ii) the issuer no longer is described in subpara-
graphs (A) and (B) of paragraph (2); and
‘‘(iii) at least 80 percent of the members of the
board of directors of the issuer are independent mem-
bers.
‘‘(D) SENIOR STOCK.—For purposes of this paragraph,
the term ‘senior stock’ means stock—
‘‘(i) which participates pro rata and fully in the
equity value of the corporation with all other common
stock of the corporation but which has the right to
payment of liquidation proceeds prior to payment of
liquidation proceeds in respect of other common stock
of the corporation;
‘‘(ii) which has a fixed right upon liquidation and
upon redemption to an amount equal to the greater
of—
‘‘(I) the fair market value of such stock on
the date of liquidation or redemption (whichever
is applicable); or
‘‘(II) the fair market value of all assets trans-
ferred in exchange for such stock and reduced
by the amount of all liabilities of the corporation
H. R. 2491—612
which has made an election under this paragraph
assumed by the transferee corporation in such
transfer;
‘‘(iii) the holder of which has the right to require
the transferee corporation to redeem on a date that
is not later than 10 years after the date on which
an election under this paragraph was made and pursu-
ant to such election such stock was issued; and
‘‘(iv) in respect of which, during the time such
stock is outstanding, there is not outstanding any
equity interest in the corporation having any liquida-
tion, redemption or dividend rights in the corporation
which are superior to those of such stock.
‘‘(E) INDEPENDENT
MEMBER.—The term ‘independent
member’ means a member of the board of directors of
the issuer who (except for services as a member of such
board) receives no compensation directly or indirectly—
‘‘(i) for services performed in connection with such
transferee corporation, or
‘‘(ii) for services as a member of the board of direc-
tors or as an officer of such transferee corporation.
For purposes of clause (ii), the term ‘officer’ includes any
individual having powers or responsibilities similar to those
of officers.
‘‘(F) COORDINATION WITH CERTAIN PRIVATE FOUNDATION
TAXES.—For purposes of sections 4942 (relating to the
excise tax on a failure to distribute income) and 4943
(relating to the excise tax on excess business holdings),
the transferee corporation referred to in subparagraph (B)
shall be treated as a functionally related business (within
the meaning of section 4942(j)(4)) with respect to the issuer
during the period commencing with the date on which
an election is made under this paragraph and ending on
the date that is the earlier of—
‘‘(i) the last day of the last taxable year for which
more than 50 percent of the gross income of such
transferee corporation is derived from, or more than
50 percent of the assets (by value) of such transferee
corporation consists of, student loan notes incurred
under the Higher Education Act of 1965; or
‘‘(ii) the last day of the taxable year of the issuer
during which occurs the date which is 10 years after
the date on which the election under this paragraph
is made.
‘‘(G) ELECTION.—An election under this paragraph may
be revoked only with the consent of the Secretary.’’
(b) EFFECTIVE DATE.—The amendment made by this section
shall take effect on the date of the enactment of this Act.
SEC. 11377. CERTAIN AMOUNTS DERIVED FROM FOREIGN CORPORA-
TIONS TREATED AS UNRELATED BUSINESS TAXABLE
INCOME.
(a) GENERAL RULE.—Subsection (b) of section 512 (relating
to modifications) is amended by adding at the end thereof the
following new paragraph:
‘‘(18) TREATMENT OF CERTAIN AMOUNTS DERIVED FROM FOR-
EIGN CORPORATIONS.—
H. R. 2491—613
‘‘(A) IN GENERAL.—Notwithstanding paragraph (1), any
amount included in gross income under section 951(a)(1)(A)
shall be included as an item of gross income derived from
an unrelated trade or business to the extent the amount
so included is attributable to insurance income (as defined
in section 953) which, if derived directly by the organiza-
tion, would be treated as gross income from an unrelated
trade or business. There shall be allowed all deductions
directly connected with amounts included in gross income
under the preceding sentence.
‘‘(B) EXCEPTION.—Subparagraph (A) shall not apply
to income attributable to a policy of insurance or reinsur-
ance with respect to which the person (directly or indirectly)
insured is—
‘‘(i) such organization,
‘‘(ii) an affiliate of such organization which is
exempt from tax under section 501(a), or
‘‘(iii) a director or officer of, or an individual who
performs services for, such organization or affiliate
but only if the insurance covers primarily risks associ-
ated with the performance of services for the benefit
of such organization or affiliate.
For purposes of this subparagraph, the determination as
to whether an entity is an affiliate of an organization
shall be made under rules similar to the rules of section
168(h)(4)(B).
‘‘(C) REGULATIONS.—The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this paragraph, including regulations
for the application of this paragraph in the case of income
paid through 1 or more entities or between 2 or more
chains of entities.’’
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to amounts included in gross income in any taxable
year beginning after December 31, 1995.
SEC. 11378. REPEAL OF FINANCIAL INSTITUTION TRANSITION RULE
TO INTEREST ALLOCATION RULES.
(a) IN GENERAL.—Paragraph (5) of section 1215(c) of the Tax
Reform Act of 1986 (Public Law 99–514, 100 Stat. 2548) is hereby
repealed.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1995.
SEC. 11379. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT
SAVINGS ASSOCIATIONS.
(a) IN GENERAL.—Section 593 (relating to reserves for losses
on loans) is hereby repealed.
(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 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 paragraphs (2) and (3)
as paragraphs (1) and (2), respectively.
H. R. 2491—614
(3) Subsection (a) of section 57 is amended by striking
paragraph (4).
(4) Section 246 is amended by striking subsection (f).
(5) Clause (i) of section 291(e)(1)(B) is amended by striking
‘‘or to which section 593 applies’’.
(6) Subparagraph (A) of section 585(a)(2) is amended by
striking ‘‘other than an organization to which section 593
applies’’.
(7) Sections 595 and 596 are hereby repealed.
(8) Subsection (a) of section 860E is amended—
(A) by striking ‘‘Except as provided in paragraph (2),
the’’ in paragraph (1) and inserting ‘‘The’’,
(B) by striking paragraphs (2) and (4) and redesignat-
ing paragraphs (3) and (5) as paragraphs (2) and (3), respec-
tively, and
(C) by striking in paragraph (2) (as so redesignated)
all that follows ‘‘subsection’’ and inserting a period.
(9) Paragraph (3) of section 992(d) is amended by striking
‘‘or 593’’.
(10) Section 1038 is amended by striking subsection (f).
(11) Clause (ii) of section 1042(c)(4)(B) is amended by strik-
ing ‘‘or 593’’.
(12) Subsection (c) of section 1277 is amended by striking
‘‘or to which section 593 applies’’.
(13) Subparagraph (B) of section 1361(b)(2) is amended
by striking ‘‘or to which section 593 applies’’.
(14) The table of sections for part II of subchapter H
of chapter 1 is amended by striking the items relating to
sections 593, 595, and 596.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 1995.
(2) REPEAL
OF
SECTION
595.—The repeal of section 595
under subsection (b)(7) shall apply to property acquired in
taxable years beginning after December 31, 1995.
(d) 6-YEAR SPREAD OF ADJUSTMENTS.—
(1) IN
GENERAL.—In the case of any taxpayer who is
required by reason of the amendments made by this section
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 initiated 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 taxpayer 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.—
H. R. 2491—615
(A) IN GENERAL.—For purposes of paragraph (1), the
term ‘applicable excess reserves’ means the excess (if any)
of—
(i) the balance of the reserves described in section
593(c)(1) of such Code (as in effect on the day before
the date of the enactment of this Act) as of the close
of the taxpayer’s last taxable year beginning before
January 1, 1996, 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), reduce by an amount determined
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
of such Code) which is not a large bank (as defined in
section 585(c)(2) of such Code) for its first taxable year
beginning after December 31, 1995—
(i) the balance taken into account under subpara-
graph (A)(ii) shall not be less than the amount which
would be the balance of such reserve as of the close
of its last taxable year beginning before January 1,
1996, if the additions to such reserve for all taxable
years had been determined under section 585(b)(2)(A),
and
(ii) the opening balance of the reserve for bad
debts as of the beginning of such first taxable year
shall be the balance taken into account under subpara-
graph (A)(ii) (determined after the application of clause
(i) of this subparagraph).
The preceding sentence shall not apply for purposes of
paragraphs (5), (6), and (7).
(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 subparagraph (A)(ii)
except that such reserves shall be taken into account ratably
over the 6-taxable year period beginning with such taxable
year.
(4) SUSPENSION
OF
RECAPTURE
IF
RESIDENTIAL
LOAN
REQUIREMENT MET.—
(A) IN GENERAL.—In the case of a bank which meets
the residential loan requirement of subparagraph (B) for
a taxable year beginning after December 31, 1995, and
before January 1, 1998—
(i) no adjustment shall be taken into account under
paragraph (1) for such taxable year, and
(ii) such taxable year shall be disregarded in deter-
mining—
(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
H. R. 2491—616
(II) the amount of such adjustment.
(B) RESIDENTIAL
LOAN
REQUIREMENT.—A taxpayer
meets the residential loan requirement of this subpara-
graph for any taxable year if the principal amount of the
residential loans made by the taxpayer during such year
is not less than the base amount for such year.
(C) RESIDENTIAL
LOAN.—For purposes of this para-
graph, the term ‘‘residential loan’’ means any loan described
in clause (v) of section 7701(a)(19)(C) of such Code but
only if such loan is incurred in acquiring, constructing,
or improving the property described in such clause.
(D) BASE AMOUNT.—For purposes of subparagraph (B),
the base amount is the average of the principal amounts
of the residential loans made by the taxpayer during the
6 most recent taxable years beginning before January 1,
1996. At the election of the taxpayer 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 December 31, 1995, and, if made
for such taxable year, shall apply to the succeeding taxable
year unless revoked with the consent of the Secretary
of the Treasury or his delegate.
(E) CONTROLLED GROUPS.—In the case of a taxpayer
which is a member of any controlled group of corporations
described in section 1563(a)(1) of such Code, subparagraph
(B) shall be applied with respect to such group.
(5) CONTINUED APPLICATION OF FRESH START UNDER SEC-
TION 585 TRANSITIONAL RULES.—In the case of a taxpayer to
which paragraph (1) applied and which was not a large bank
(as defined in section 585(c)(2) of such Code) for its first taxable
year beginning after December 31, 1995:
(A) IN GENERAL.—For purposes of determining the net
amount 
of 
adjustments 
referred 
to 
in 
section
585(c)(3)(A)(iii) of such Code, there shall be taken into
account only the excess of the reserve for bad debts as
of the close of the last taxable year before the disqualifica-
tion year over the balance taken into account by such
taxpayer under paragraph (2)(A)(ii) of this subsection.
(B) TREATMENT UNDER ELECTIVE CUT-OFF METHOD.—
For purposes of applying section 585(c)(4) of such Code—
(i) the balance of the reserve taken into account
under subparagraph (B) 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 includible in gross income
by reason of such reduction.
(6) CONTINUED APPLICATION OF SECTION 593(e).—Notwith-
standing the amendments made by this section, in the case
of a taxpayer to which paragraph (1) of this subsection applies,
section 593(e) of such Code (as in effect on the day before
the date of the enactment of this Act) shall continue to apply
to such taxpayer as if such taxpayer were a domestic building
and loan association but the amount of the reserves taken
into account under subparagraphs (B) and (C) of section
H. R. 2491—617
593(e)(1) (as so in effect) shall be the balance taken into account
by such taxpayer under paragraph (2)(A)(ii) of this subsection.
(7) CERTAIN ITEMS INCLUDED AS SECTION 381(c) ITEMS.—
The balance of the applicable excess reserves, and the balance
taken into account by a taxpayer under paragraph (2)(A)(ii)
of this subsection, shall be treated as items described in section
381(c) of such Code.
(8) CONVERSIONS TO CREDIT UNIONS.—In the case of a tax-
payer to which paragraph (1) applied which becomes a credit
union described in section 501(c)(14)(A)—
(A) any amount required to be included in the gross
income of the credit union by reason of this subsection
shall be treated as derived 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.
(9) REGULATIONS.—The Secretary of the Treasury or his
delegate shall prescribe such regulations as may be necessary
to carry out this subsection, including regulations providing
for the application of paragraphs (4) and (6) in the case of
acquisitions, mergers, spin-offs, and other reorganizations.
SEC. 11380. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.
(a) IN GENERAL.—Section 3508(b)(2)(A) is amended by striking
‘‘or’’ at the end of clause (i), by inserting ‘‘or’’ at the end of clause
(ii), and by inserting after clause (ii) the following new clause:
‘‘(iii) is engaged in the trade or business of the
delivering or distribution of newspapers or shopping
news (including any services directly related to such
trade or business),’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to services performed after December 31, 1995.
Subtitle J—Tax Simplification
CHAPTER 1—PROVISIONS RELATING TO INDIVIDUALS
Subchapter A—Provisions Relating to Rollover of Gain on
Sale of Principal Residence
SEC. 11401. MULTIPLE SALES WITHIN ROLLOVER PERIOD.
(a) GENERAL RULE.—
(1) Section 1034(d) (relating to limitation on rollover of
gain on sale of principal residence), as amended by sections
11321 and 11322, is amended by striking paragraphs (1) and
(2) and by redesignating paragraphs (3) and (4) as paragraphs
(1) and (2), respectively.
(2) Paragraph (4) of section 1034(c) is amended to read
as follows:
‘‘(4) If the taxpayer, during the period described in sub-
section (a), purchases more than 1 residence which is used
by him as his principal residence at some time within 2 years
after the date of the sale of the old residence, only the first
of such residences so used by him after the date of such sale
shall constitute the new residence.’’
H. R. 2491—618
(3) Subsections (h)(1) and (k) of section 1034 are each
amended by striking ‘‘(other than the 2 years referred to in
subsection (c)(4))’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to sales of old residences (within the meaning of section
1034 of the Internal Revenue Code of 1986) after the date of
the enactment of this Act.
SEC. 11402. SPECIAL RULES IN CASE OF DIVORCE.
(a) IN GENERAL.—Subsection (c) of section 1034 is amended
by adding at the end the following new paragraph:
‘‘(5) If—
‘‘(A) a residence is sold by an individual pursuant
to a divorce or marital separation, and
‘‘(B) the taxpayer used such residence as his principal
residence at any time during the 2-year period ending
on the date of such sale,
for purposes of this section, such residence shall be treated
as the taxpayer’s principal residence at the time of such sale.’’
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to sales of old residences (within the meaning of section
1034 of the Internal Revenue Code of 1986) after the date of
the enactment of this Act.
SEC. 11403. ONE-TIME EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE FOR CERTAIN SPOUSES.
(a) IN GENERAL.—Paragraph (2) of section 121(b) (relating to
one-time exclusion of gain from sale of principal residence by
individual who has attained age 55) is amended by adding at
the end the following new sentence: ‘‘For purposes of applying
the preceding sentence to individuals who are married to each
other, an election by one individual with respect to a sale or
exchange occurring before the marriage shall be disregarded for
purposes of permitting an election with respect to property owned
and used by the other individual as his principal residence through-
out the 3-year period ending on the date of the marriage.’’
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply for purposes of determining whether an election may
be made under section 121 of the Internal Revenue Code of 1986
with respect to a sale or exchange occurring after September 13,
1995.
Subchapter B—Other Provisions
SEC. 11411. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF
RURAL MAIL CARRIERS.
(a) IN GENERAL.—Section 162 (relating to trade or business
expenses) is amended by redesignating subsection (o) as subsection
(p) and by inserting after subsection (n) the following new sub-
section:
‘‘(o) TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL
MAIL CARRIERS.—
‘‘(1) GENERAL RULE.—In the case of any employee of the
United States Postal Service who performs services involving
the collection and delivery of mail on a rural route and who
receives qualified reimbursements for the expenses incurred
by such employee for the use of a vehicle in performing such
services—
H. R. 2491—619
‘‘(A) the amount allowable as a deduction under this
chapter for the use of a vehicle in performing such services
shall be equal to the amount of such qualified reimburse-
ments; and
‘‘(B) such qualified reimbursements shall be treated
as paid under a reimbursement or other expense allowance
arrangement for purposes of section 62(a)(2)(A) (and section
62(c) shall not apply to such qualified reimbursements).
‘‘(2) DEFINITION OF QUALIFIED REIMBURSEMENTS.—For pur-
poses of this subsection, the term ‘qualified reimbursements’
means the amounts paid by the United States Postal Service
to employees as an equipment maintenance allowance under
the 1991 collective bargaining agreement between the United
States Postal Service and the National Rural Letter Carriers’
Association. Amounts paid as an equipment maintenance allow-
ance by such Postal Service under later collective bargaining
agreements that supersede the 1991 agreement shall be consid-
ered qualified reimbursements if such amounts do not exceed
the amounts that would have been paid under the 1991 agree-
ment, adjusted for changes in the Consumer Price Index (as
defined in section 1(f)(5)) since 1991.’’
(b) TECHNICAL AMENDMENT.—Section 6008 of the Technical
and Miscellaneous Revenue Act of 1988 is hereby repealed.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1995.
SEC. 11412. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FED-
ERAL EMPLOYEES ENGAGED IN CRIMINAL INVESTIGA-
TIONS.
(a) IN GENERAL.—Subsection (a) of section 162 is amended
by adding at the end the following new sentence: ‘‘The preceding
sentence shall not apply to any Federal employee during any period
for which such employee is certified by the Attorney General (or
the designee thereof) as traveling on behalf of the United States
in temporary duty status to investigate, or provide support services
for the investigation of, a Federal crime.’’
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to taxable years ending after the date of the enactment
of this Act.
CHAPTER 2—PENSION SIMPLIFICATION
Subchapter A—Simplified Distribution Rules
SEC. 11421. REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM
DISTRIBUTIONS.
(a) IN GENERAL.—Subsection (d) of section 402 (relating to
taxability of beneficiary of employees’ trust) is amended to read
as follows:
‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOREIGN SITUS
TRUSTS.—For purposes of subsections (a), (b), and (c), a stock bonus,
pension, or profit-sharing trust which would qualify for exemption
from tax under section 501(a) except for the fact that it is a
trust created or organized outside the United States shall be treated
as if it were a trust exempt from tax under section 501(a).’’.
(b) CONFORMING AMENDMENTS.—
H. R. 2491—620
(1) Subparagraph (D) of section 402(e)(4) (relating to other
rules applicable to exempt trusts) is amended to read as follows:
‘‘(D) LUMP-SUM
DISTRIBUTION.—For purposes of this
paragraph—
‘‘(i) IN GENERAL.—The term ‘lump sum distribution’
means the distribution or payment within one taxable
year of the recipient of the balance to the credit of
an employee which becomes payable to the recipient—
‘‘(I) on account of the employee’s death,
‘‘(II) after the employee attains age 591⁄2,
‘‘(III) on account of the employee’s separation
from service, or
‘‘(IV) after the employee has become disabled
(within the meaning of section 72(m)(7)),
from a trust which forms a part of a plan described
in section 401(a) and which is exempt from tax under
section 501 or from a plan described in section 403(a).
Subclause (III) of this clause shall be applied only
with respect to an individual who is an employee with-
out regard to section 401(c)(1), and subclause (IV) shall
be applied only with respect to an employee within
the meaning of section 401(c)(1). For purposes of this
clause, a distribution to two or more trusts shall be
treated as a distribution to one recipient. For purposes
of this paragraph, the balance to the credit of the
employee does not include the accumulated deductible
employee contributions under the plan (within the
meaning of section 72(o)(5)).
‘‘(ii) 
AGGREGATION
OF
CERTAIN
TRUSTS
AND
PLANS.—For purposes of determining the balance to
the credit of an employee under clause (i)—
‘‘(I) all trusts which are part of a plan shall
be treated as a single trust, all pension plans
maintained by the employer shall be treated as
a single plan, all profit-sharing plans maintained
by the employer shall be treated as a single plan,
and all stock bonus plans maintained by the
employer shall be treated as a single plan, and
‘‘(II) trusts which are not qualified trusts
under section 401(a) and annuity contracts which
do not satisfy the requirements of section 404(a)(2)
shall not be taken into account.
‘‘(iii) COMMUNITY PROPERTY LAWS.—The provisions
of this paragraph shall be applied without regard to
community property laws.
‘‘(iv) AMOUNTS SUBJECT TO PENALTY.—This para-
graph shall not apply to amounts described in subpara-
graph (A) of section 72(m)(5) to the extent that section
72(m)(5) applies to such amounts.
‘‘(v) BALANCE
TO
CREDIT
OF
EMPLOYEE
NOT
TO
INCLUDE AMOUNTS PAYABLE UNDER QUALIFIED DOMES-
TIC RELATIONS ORDER.—For purposes of this paragraph,
the balance to the credit of an employee shall not
include any amount payable to an alternate payee
under a qualified domestic relations order (within the
meaning of section 414(p)).
H. R. 2491—621
‘‘(vi) TRANSFERS TO COST-OF-LIVING ARRANGEMENT
NOT TREATED AS DISTRIBUTION.—For purposes of this
paragraph, the balance to the credit of an employee
under a defined contribution plan shall not include
any amount transferred from such defined contribution
plan to a qualified cost-of-living arrangement (within
the meaning of section 415(k)(2)) under a defined bene-
fit plan.
‘‘(vii) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAY-
EES.—If any distribution or payment of the balance
to the credit of an employee would be treated as a
lump-sum distribution, then, for purposes of this para-
graph, the payment under a qualified domestic rela-
tions order (within the meaning of section 414(p)) of
the balance to the credit of an alternate payee who
is the spouse or former spouse of the employee shall
be treated as a lump-sum distribution. For purposes
of this clause, the balance to the credit of the alternate
payee shall not include any amount payable to the
employee.’’.
(2) Section 402(c) (relating to rules applicable to rollovers
from exempt trusts) is amended by striking paragraph (10).
(3) Paragraph (1) of section 55(c) (defining regular tax)
is amended by striking ‘‘shall not include any tax imposed
by section 402(d) and’’.
(4) Paragraph (8) of section 62(a) (relating to certain portion
of lump-sum distributions from pension plans taxed under sec-
tion 402(d)) is hereby repealed.
(5) Section 401(a)(28)(B) (relating to coordination with dis-
tribution rules) is amended by striking clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10) (relating to
distributions that must be lump-sum distributions) is amended
to read as follows:
‘‘(ii) LUMP-SUM
DISTRIBUTION.—For purposes of this
subparagraph, the term ‘lump-sum distribution’ means any
distribution of the balance to the credit of an employee
immediately before the distribution.’’.
(7) Section 406(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(8) Section 407(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(9) Section 691(c) (relating to deduction for estate tax)
is amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to imposition
of tax) is amended by striking ‘‘section 1, 55, or 402(d)(1)’’
and inserting ‘‘section 1 or 55’’.
(11) Subsection (b) of section 877 (relating to alternative
tax) is amended by striking ‘‘section 1, 55, or 402(d)(1)’’ and
inserting ‘‘section 1 or 55’’.
(12) Section 4980A(c)(4) is amended—
(A) by striking ‘‘to which an election under section
402(d)(4)(B) applies’’ and inserting ‘‘(as defined in section
402(e)(4)(D)) with respect to which the individual elects
to have this paragraph apply’’,
H. R. 2491—622
(B) by adding at the end the following new flush sen-
tence:
‘‘An individual may elect to have this paragraph apply to only
one lump-sum distribution.’’, and
(C) by striking the heading and inserting:
‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.
(13) Section 402(e) is amended by striking paragraph (5).
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1998.
(2) RETENTION OF CERTAIN TRANSITION RULES.—Notwith-
standing any other provision of this section, the amendments
made by this section shall not apply to any distribution for
which the taxpayer elects the benefits of section 1122(h)(3)
or (h)(5) of the Tax Reform Act of 1986. For purposes of the
preceding sentence, the rules of sections 402(c)(10) and 402(d)
of the Internal Revenue Code of 1986 (as in effect before the
amendments made by this Act) shall apply.
SEC. 11422. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES’ DEATH
BENEFITS.
(a) IN GENERAL.—Subsection (b) of section 101 is hereby
repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 101 is amended by striking
‘‘subsection (a) or (b)’’ and inserting ‘‘subsection (a)’’.
(2) Sections 406(e) and 407(e) are each amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(3) Section 7701(a)(20) is amended by striking ‘‘, for the
purposes of applying the provisions of section 101(b) with
respect to employees’ death benefits’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1995.
SEC. 11423. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBU-
TIONS UNDER CERTAIN EMPLOYER PLANS.
(a) GENERAL RULE.—Subsection (d) of section 72 (relating to
annuities; certain proceeds of endowment and life insurance con-
tracts) is amended to read as follows:
‘‘(d) SPECIAL RULES
FOR QUALIFIED EMPLOYER RETIREMENT
PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY PAYMENTS.—
‘‘(A) IN GENERAL.—In the case of any amount received
as an annuity under a qualified employer retirement plan—
‘‘(i) subsection (b) shall not apply, and
‘‘(ii) the investment in the contract shall be recov-
ered as provided in this paragraph.
‘‘(B) METHOD
OF
RECOVERING
INVESTMENT
IN
CON-
TRACT.—
‘‘(i) IN GENERAL.—Gross income shall not include
so much of any monthly annuity payment under a
qualified employer retirement plan as does not exceed
the amount obtained by dividing—
‘‘(I) the investment in the contract (as of the
annuity starting date), by
‘‘(II) the number of anticipated payments
determined under the table contained in clause
H. R. 2491—623
(iii) (or, in the case of a contract to which sub-
section (c)(3)(B) applies, the number of monthly
annuity payments under such contract).
‘‘(ii) CERTAIN
RULES
MADE
APPLICABLE.—Rules
similar to the rules of paragraphs (2) and (3) of sub-
section (b) shall apply for purposes of this paragraph.
‘‘(iii) NUMBER OF ANTICIPATED PAYMENTS.—
‘‘If the age of the
primary annuitant on
The number
the annuity starting
of anticipated
date is:
payments is:
Not more than 55 ................................................
360
More than 55 but not more than 60 ..................
310
More than 60 but not more than 65 ..................
260
More than 65 but not more than 70 ..................
210
More than 70 .......................................................
160.
‘‘(C) 
ADJUSTMENT
FOR
REFUND
FEATURE
NOT
APPLICABLE.—For purposes of this paragraph, investment
in the contract shall be determined under subsection (c)(1)
without regard to subsection (c)(2).
‘‘(D) SPECIAL RULE WHERE LUMP SUM PAID IN CONNEC-
TION WITH COMMENCEMENT OF ANNUITY PAYMENTS.—If, in
connection with the commencement of annuity payments
under any qualified employer retirement plan, the taxpayer
receives a lump sum payment—
‘‘(i) such payment shall be taxable under sub-
section (e) as if received before the annuity starting
date, and
‘‘(ii) the investment in the contract for purposes
of this paragraph shall be determined as if such pay-
ment had been so received.
‘‘(E) EXCEPTION.—This paragraph shall not apply in
any case where the primary annuitant has attained age
75 on the annuity starting date unless there are fewer
than 5 years of guaranteed payments under the annuity.
‘‘(F) ADJUSTMENT WHERE ANNUITY PAYMENTS NOT ON
MONTHLY BASIS.—In any case where the annuity payments
are not made on a monthly basis, appropriate adjustments
in the application of this paragraph shall be made to take
into account the period on the basis of which such payments
are made.
‘‘(G) QUALIFIED EMPLOYER RETIREMENT PLAN.—For pur-
poses of this paragraph, the term ‘qualified employer retire-
ment plan’ means any plan or contract described in para-
graph (1), (2), or (3) of section 4974(c).
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBUTIONS
UNDER
DEFINED CONTRIBUTION PLANS.—For purposes of this section,
employee contributions (and any income allocable thereto)
under a defined contribution plan may be treated as a separate
contract.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply in cases where the annuity starting date is after Decem-
ber 31, 1995.
SEC. 11424. REQUIRED DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C) (defining required begin-
ning date) is amended to read as follows:
H. R. 2491—624
‘‘(C) REQUIRED BEGINNING DATE.—For purposes of this
paragraph—
‘‘(i) IN
GENERAL.—The term ‘required beginning
date’ means April 1 of the calendar year following
the later of—
‘‘(I) the calendar year in which the employee
attains age 701⁄2, or
‘‘(II) the calendar year in which the employee
retires.
‘‘(ii) EXCEPTION.—Subclause (II) of clause (i) shall
not apply—
‘‘(I) except as provided in section 409(d), in
the case of an employee who is a 5-percent owner
(as defined in section 416) with respect to the
plan year ending in the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) for purposes of section 408(a)(6) or (b)(3).
‘‘(iii) ACTUARIAL ADJUSTMENT.—In the case of an
employee to whom clause (i)(II) applies who retires
in a calendar year after the calendar year in which
the employee attains age 701⁄2, the employee’s accrued
benefit shall be actuarially increased to take into
account the period after age 701⁄2
in which the
employee was not receiving any benefits under the
plan.
‘‘(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH
PLANS.—Clauses (ii) and (iii) shall not apply in the
case of a governmental plan or church plan. For pur-
poses of this clause, the term ‘church plan’ means
a plan maintained by a church for church employees,
and the term ‘church’ means any church (as defined
in section 3121(w)(3)(A)) or qualified church-controlled
organization (as defined in section 3121(w)(3)(B)).’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to years beginning after December 31, 1995.
Subchapter B—Increased Access to Pension Plans
SEC. 11431. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER SECTION
401(k).
(a) IN GENERAL.—Subparagraph (B) of section 401(k)(4) is
amended to read as follows:
‘‘(B) ELIGIBILITY OF STATE AND LOCAL GOVERNMENTS
AND TAX-EXEMPT ORGANIZATIONS.—
‘‘(i) GOVERNMENTS INELIGIBLE.—A cash or deferred
arrangement shall not be treated as a qualified cash
or deferred arrangement if it is part of a plan main-
tained by a State or local government or political sub-
division thereof, or any agency or instrumentality
thereof. This clause shall not apply to a rural coopera-
tive plan.
‘‘(ii) TAX-EXEMPTS ELIGIBLE.—
‘‘(I) IN
GENERAL.—Any organization exempt
from tax under this subtitle may include a quali-
fied cash or deferred arrangement as part of a
plan maintained by it.
H. R. 2491—625
‘‘(II) TREATMENT OF INDIAN TRIBAL GOVERN-
MENTS.—An employer which is an Indian tribal
government (as defined in section 7701(a)(40)), a
subdivision of an Indian tribal government (deter-
mined in accordance with section 7871(d)), an
agency or instrumentality of an Indian tribal
government or subdivision thereof, or a corporation
chartered under Federal, State, or tribal law which
is owned in whole or in part by any of the foregoing
shall be treated as an organization exempt from
tax under this subtitle for purposes of subclause
(I).’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to plan years beginning after December 31, 1996, but
shall not apply to any cash or deferred arrangement to which
clause (i) of section 1116(f)(2)(B) of the Tax Reform Act of 1986
applies.
Subchapter C—Nondiscrimination Provisions
SEC. 11441. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES;
REPEAL OF FAMILY AGGREGATION.
(a) IN GENERAL.—Paragraph (1) of section 414(q) (defining
highly compensated employee) is amended to read as follows:
‘‘(1) IN GENERAL.—The term ‘highly compensated employee’
means any employee who—
‘‘(A) was a 5-percent owner at any time during the
year or the preceding year, or
‘‘(B) for the preceding year had compensation from
the employer in excess of $80,000 and was in the top-
paid group of the employer.
The Secretary shall adjust the $80,000 amount under subpara-
graph (B) at the same time and in the same manner as under
section 415(d), except that the base period shall be the calendar
quarter ending September 30, 1996.’’.
(b) REPEAL OF FAMILY AGGREGATION RULES.—
(1) IN GENERAL.—Paragraph (6) of section 414(q) is hereby
repealed.
(2) COMPENSATION
LIMIT.—Paragraph (17)(A) of section
401(a) is amended by striking the last sentence.
(3) DEDUCTION.—Subsection (l) of section 404 is amended
by striking the last sentence.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subsection (q) of section 414 is amended by striking
paragraphs (2), (5), (8), and (12) and by redesignating para-
graphs (3), (4), (7), (9), (10), and (11) as paragraphs (2) through
(7), respectively.
(B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii), 408(k)(2)(C), and
416(i)(1)(D) are each amended by striking ‘‘section 414(q)(7)’’
and inserting ‘‘section 414(q)(4)’’.
(C) Section 416(i)(1)(A) is amended by striking ‘‘section
414(q)(8)’’ and inserting ‘‘section 414(r)(9)’’.
(2)(A) Section 414(r) is amended by adding at the end
the following new paragraph:
‘‘(9) EXCLUDED
EMPLOYEES.—For purposes of this sub-
section, the following employees shall be excluded:
H. R. 2491—626
‘‘(A) Employees who have not completed 6 months of
service.
‘‘(B) Employees who normally work less than 171⁄2
hours per week.
‘‘(C) Employees who normally work not more than 6
months during any year.
‘‘(D) Employees who have not attained the age of 21.
‘‘(E) Except to the extent provided in regulations,
employees who are included in a unit of employees covered
by an agreement which the Secretary of Labor finds to
be a collective bargaining agreement between employee
representatives and the employer.
Except as provided by the Secretary, the employer may elect
to apply subparagraph (A), (B), (C), or (D) by substituting
a shorter period of service, smaller number of hours or months,
or lower age for the period of service, number of hours or
months, or age (as the case may be) specified in such subpara-
graph.’’.
(B) Subparagraph (A) of section 414(r)(2) is amended by
striking ‘‘subsection (q)(8)’’ and inserting ‘‘paragraph (9)’’.
(3) Section 1114(c)(4) of the Tax Reform Act of 1986 is
amended by adding at the end the following new sentence:
‘‘Any reference in this paragraph to section 414(q) shall be
treated as a reference to such section as in effect on the day
before the date of the enactment of the Revenue Reconciliation
Act of 1995.’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by this section
shall apply to years beginning after December 31, 1995, except
that in determining whether an employee is a highly com-
pensated employee for years beginning in 1996, such amend-
ments shall be treated as having been in effect for years begin-
ning in 1995.
(2) FAMILY AGGREGATION.—The amendments made by sub-
section (b) shall apply to years beginning after December 31,
1995.
SEC. 11442. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIRE-
MENTS.
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating to addi-
tional participation requirements) is amended to read as follows:
‘‘(A) IN GENERAL.—In the case of a trust which is a part
of a defined benefit plan, such trust shall not constitute a
qualified trust under this subsection unless on each day of
the plan year such trust benefits at least the lesser of—
‘‘(i) 50 employees of the employer, or
‘‘(ii) the greater of—
‘‘(I) 40 percent of all employees of the employer,
or
‘‘(II) 2 employees (or if there is only 1 employee,
such employee).’’.
(b) SEPARATE LINE OF BUSINESS TEST.—Section 401(a)(26)(G)
(relating to separate line of business) is amended by striking ‘‘para-
graph (7)’’ and inserting ‘‘paragraph (2)(A) or (7)’’.
(c) EFFECTIVE DATE.—The amendment made by this section
shall apply to years beginning after December 31, 1995.
H. R. 2491—630
(2) Subparagraph (C) of section 401(m)(6) (relating to
method of distributing excess aggregate contributions) is
amended by striking ‘‘on the basis of the respective portions
of such amounts attributable to each of such employees’’ and
inserting ‘‘on the basis of the amount of contributions on behalf
of, or by, each such employee’’.
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by this section
shall apply to years beginning after December 31, 1998.
(2) EXCESS
CONTRIBUTIONS.—The amendments made by
subsection (e) shall apply to years beginning after December
31, 1995.
SEC. 11444. DEFINITION OF COMPENSATION FOR SECTION 415 PUR-
POSES.
(a) GENERAL RULE.—Section 415(c)(3) (defining participant’s
compensation) is amended by adding at the end the following new
subparagraph:
‘‘(D) CERTAIN DEFERRALS INCLUDED.—The term ‘partici-
pant’s compensation’ shall include—
‘‘(i) any elective deferral (as defined in section
402(g)(3)), and
‘‘(ii) any amount which is contributed by the
employer at the election of the employee and which
is not includible in the gross income of the employee
under section 125 or 457.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 414(q)(4), as redesignated by section 11441,
is amended to read as follows:
‘‘(7) COMPENSATION.—For purposes of this subsection, the
term ‘compensation’ has the meaning given such term by section
415(c)(3).’’.
(2) Section 414(s)(2) is amended by inserting ‘‘not’’ after
‘‘elect’’ in the text and heading thereof.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to years beginning after December 31, 1997.
Subchapter D—Miscellaneous Provisions
SEC. 11451. PLANS COVERING SELF-EMPLOYED INDIVIDUALS.
(a) AGGREGATION RULES.—Section 401(d) (relating to additional
requirements for qualification of trusts and plans benefiting owner-
employees) is amended to read as follows:
‘‘(d) CONTRIBUTION
LIMIT
ON
OWNER-EMPLOYEES.—A trust
forming part of a pension or profit-sharing plan which provides
contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this section
only if, in addition to meeting the requirements of subsection (a),
the plan provides that contributions on behalf of any owner-
employee may be made only with respect to the earned income
of such owner-employee which is derived from the trade or business
with respect to which such plan is established.’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to years beginning after December 31, 1995.
H. R. 2491—631
SEC. 11452. ELIMINATION OF SPECIAL VESTING RULE FOR MULTIEM-
PLOYER PLANS.
(a) IN GENERAL.—Paragraph (2) of section 411(a) (relating to
minimum vesting standards) is amended—
(1) by striking ‘‘subparagraph (A), (B), or (C)’’ and inserting
‘‘subparagraph (A) or (B)’’; and
(2) by striking subparagraph (C).
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to plan years beginning on or after the earlier of—
(1) the later of—
(A) January 1, 1996, or
(B) the date on which the last of the collective bargain-
ing agreements pursuant to which the plan is maintained
terminates (determined without regard to any extension
thereof after the date of the enactment of this Act), or
(2) January 1, 1998.
Such amendments shall not apply to any individual who does not
have more than 1 hour of service under the plan on or after
the 1st day of the 1st plan year to which such amendments apply.
SEC. 11453. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS.
(a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A CERTAIN AGE.—
Section 401(k)(7) is amended by adding at the end the following
new subparagraph:
‘‘(C) SPECIAL
RULE
FOR
CERTAIN
DISTRIBUTIONS.—A
rural cooperative plan which includes a qualified cash or
deferred arrangement shall not be treated as violating the
requirements of section 401(a) or of paragraph (2) merely
by reason of a hardship distribution or a distribution to
a participant after attainment of age 591⁄2. For purposes
of this section, the term ‘hardship distribution’ means a
distribution described in paragraph (2)(B)(i)(IV) (without
regard to the limitation of its application to profit-sharing
or stock bonus plans).’’.
(b) PUBLIC UTILITY DISTRICTS.—Clause (i) of section 401(k)(7)(B)
(defining rural cooperative) is amended to read as follows:
‘‘(i) any organization which—
‘‘(I) is engaged primarily in providing electric
service on a mutual or cooperative basis, or
‘‘(II) is engaged primarily in providing electric
service to the public in its area of service and
which is exempt from tax under this subtitle or
which is a State or local government (or an agency
or instrumentality thereof), other than a munici-
pality (or an agency or instrumentality thereof).’’
(c) EFFECTIVE DATES.—
(1) DISTRIBUTIONS.—The amendments made by subsection
(a) shall apply to distributions after the date of the enactment
of this Act.
(2) RURAL COOPERATIVE.—The amendments made by sub-
section (b) shall apply to plan years beginning after December
31, 1994.
H. R. 2491—632
SEC. 11454. TREATMENT OF GOVERNMENTAL PLANS UNDER SECTION
415.
(a) COMPENSATION LIMIT.—Subsection (b) of section 415 is
amended by adding immediately after paragraph (10) the following
new paragraph:
‘‘(11) SPECIAL
LIMITATION
RULE
FOR
GOVERNMENTAL
PLANS.—In the case of a governmental plan (as defined in
section 414(d)), subparagraph (B) of paragraph (1) shall not
apply.’’
(b) TREATMENT OF CERTAIN EXCESS BENEFIT PLANS.—
(1) IN GENERAL.—Section 415 is amended by adding at
the end the following new subsection:
‘‘(m) TREATMENT OF QUALIFIED GOVERNMENTAL EXCESS BENE-
FIT ARRANGEMENTS.—
‘‘(1) GOVERNMENTAL PLAN NOT AFFECTED.—In determining
whether a governmental plan (as defined in section 414(d))
meets the requirements of this section, benefits provided under
a qualified governmental excess benefit arrangement shall not
be taken into account. Income accruing to a governmental plan
(or to a trust that is maintained solely for the purpose of
providing benefits under a qualified governmental excess bene-
fit arrangement) in respect of a qualified governmental excess
benefit arrangement shall constitute income derived from the
exercise of an essential governmental function upon which such
governmental plan (or trust) shall be exempt from tax under
section 115.
‘‘(2) TAXATION OF PARTICIPANT.—For purposes of this chap-
ter—
‘‘(A) the taxable year or years for which amounts in
respect of a qualified governmental excess benefit arrange-
ment are includible in gross income by a participant, and
‘‘(B) the treatment of such amounts when so includible
by the participant,
shall be determined as if such qualified governmental excess
benefit arrangement were treated as a plan for the deferral
of compensation which is maintained by a corporation not
exempt from tax under this chapter and which does not meet
the requirements for qualification under section 401.
‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGE-
MENT.—For purposes of this subsection, the term ‘qualified
governmental excess benefit arrangement’ means a portion of
a governmental plan if—
‘‘(A) such portion is maintained solely for the purpose
of providing to participants in the plan that part of the
participant’s annual benefit otherwise payable under the
terms of the plan that exceeds the limitations on benefits
imposed by this section,
‘‘(B) under such portion no election is provided at any
time to the participant (directly or indirectly) to defer com-
pensation, and
‘‘(C) benefits described in subparagraph (A) are not
paid from a trust forming a part of such governmental
plan unless such trust is maintained solely for the purpose
of providing such benefits.’’
(2) COORDINATION WITH SECTION 457.—Subsection (e) of sec-
tion 457 is amended by adding at the end the following new
paragraph:
H. R. 2491—633
‘‘(15) TREATMENT
OF
QUALIFIED
GOVERNMENTAL
EXCESS
BENEFIT
ARRANGEMENTS.—Subsections (b)(2) and (c)(1) shall
not apply to any qualified governmental excess benefit arrange-
ment (as defined in section 415(m)(3)), and benefits provided
under such an arrangement shall not be taken into account
in determining whether any other plan is an eligible deferred
compensation plan.’’
(3) CONFORMING
AMENDMENT.—Paragraph (2) of section
457(f) is amended by striking ‘‘and’’ at the end of subparagraph
(C), by striking the period at the end of subparagraph (D)
and inserting ‘‘, and’’, and by inserting immediately thereafter
the following new subparagraph:
‘‘(E) a qualified governmental excess benefit arrange-
ment described in section 415(m).’’
(c) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS.—Para-
graph (2) of section 415(b) is amended by adding at the end the
following new subparagraph:
‘‘(I) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS
PROVIDED
UNDER
GOVERNMENTAL
PLANS.—Subparagraph
(B) of paragraph (1), subparagraph (C) of this paragraph,
and paragraph (5) shall not apply to—
‘‘(i) income received from a governmental plan (as
defined in section 414(d)) as a pension, annuity, or
similar allowance as the result of the recipient becom-
ing disabled by reason of personal injuries or sickness,
or
‘‘(ii) amounts received from a governmental plan
by the beneficiaries, survivors, or the estate of an
employee as the result of the death of the employee.’’
(d) REVOCATION OF GRANDFATHER ELECTION.—
(1) IN GENERAL.—Subparagraph (C) of section 415(b)(10)
is amended by adding at the end the following new clause:
‘‘(ii) REVOCATION OF ELECTION.—An election under
clause (i) may be revoked not later than the last day
of the third plan year beginning after the date of
the enactment of this clause. The revocation shall apply
to all plan years to which the election applied and
to all subsequent plan years. Any amount paid by
a plan in a taxable year ending after the revocation
shall be includible in income in such taxable year
under the rules of this chapter in effect for such taxable
year, except that, for purposes of applying the limita-
tions imposed by this section, any portion of such
amount which is attributable to any taxable year dur-
ing which the election was in effect shall be treated
as received in such taxable year.’’
(2) CONFORMING AMENDMENT.—Subparagraph (C) of section
415(b)(10) is amended by striking ‘‘This’’ and inserting:
‘‘(i) IN GENERAL.—This’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by subsections
(a), (b), and (c) shall apply to years beginning after December
31, 1994. The amendments made by subsection (d) shall apply
with respect to revocations adopted after the date of the enact-
ment of this Act.
(2) TREATMENT
FOR
YEARS
BEGINNING
BEFORE
DATE
OF
ENACTMENT.—Nothing in the amendments made by this section
H. R. 2491—634
shall be construed to infer that a governmental plan (as defined
in section 414(d) of the Internal Revenue Code of 1986) fails
to satisfy the requirements of section 415 of such Code for
any taxable year beginning before the date of the enactment
of this Act.
SEC. 11455. UNIFORM RETIREMENT AGE.
(a) DISCRIMINATION TESTING.—Paragraph (5) of section 401(a)
(relating to special rules relating to nondiscrimination require-
ments) is amended by adding at the end the following new subpara-
graph:
‘‘(F) SOCIAL SECURITY RETIREMENT AGE.—For purposes
of testing for discrimination under paragraph (4)—
‘‘(i) the social security retirement age (as defined
in section 415(b)(8)) shall be treated as a uniform
retirement age, and
‘‘(ii) subsidized early retirement benefits and joint
and survivor annuities shall not be treated as being
unavailable to employees on the same terms merely
because such benefits or annuities are based in whole
or in part on an employee’s social security retirement
age (as so defined).’’
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to years beginning after December 31, 1995.
SEC. 11456. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES.
(a) ALL DISABLED PARTICIPANTS RECEIVING CONTRIBUTIONS.—
Section 415(c)(3)(C) is amended by adding at the end the following:
‘‘If a defined contribution plan provides for the continuation of
contributions on behalf of all participants described in clause (i)
for a fixed or determinable period, this subparagraph shall be
applied without regard to clauses (ii) and (iii).’’
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to years beginning after December 31, 1995.
SEC. 11457. TREATMENT OF DEFERRED COMPENSATION PLANS OF
STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS.
(a) SPECIAL RULES FOR PLAN DISTRIBUTIONS.—Paragraph (9)
of section 457(e) (relating to other definitions and special rules)
is amended to read as follows:
‘‘(9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON
OF CERTAIN ELECTIONS, ETC.—
‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500 OR LESS.—The
total amount payable to a participant under the plan shall
not be treated as made available merely because the partici-
pant may elect to receive such amount (or the plan may
distribute such amount without the participant’s consent)
if—
‘‘(i) such amount does not exceed $3,500, and
‘‘(ii) such amount may be distributed only if—
‘‘(I) no amount has been deferred under the
plan with respect to such participant during the
2-year period ending on the date of the distribu-
tion, and
‘‘(II) there has been no prior distribution under
the plan to such participant to which this subpara-
graph applied.
H. R. 2491—635
A plan shall not be treated as failing to meet the distribu-
tion requirements of subsection (d) by reason of a distribu-
tion to which this subparagraph applies.
‘‘(B) ELECTION TO DEFER COMMENCEMENT OF DISTRIBU-
TIONS.—The total amount payable to a participant under
the plan shall not be treated as made available merely
because the participant may elect to defer commencement
of distributions under the plan if—
‘‘(i) such election is made after amounts may be
available under the plan in accordance with subsection
(d)(1)(A) and before commencement of such distribu-
tions, and
‘‘(ii) the participant may make only 1 such elec-
tion.’’.
(b) COST-OF-LIVING
ADJUSTMENT
OF
MAXIMUM
DEFERRAL
AMOUNT.—Subsection (e) of section 457, as amended by section
11454(b)(2) (relating to governmental plans), is amended by adding
at the end the following new paragraph:
‘‘(16) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL
AMOUNT.—The Secretary shall adjust the $7,500 amount speci-
fied in subsections (b)(2) and (c)(1) at the same time and in
the same manner as under section 415(d), except that the
base period shall be the calendar quarter ending September
30, 1994, and any increase under this paragraph which is
not a multiple of $500 shall be rounded to the next lowest
multiple of $500.’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1995.
SEC. 11458. TRUST REQUIREMENT FOR DEFERRED COMPENSATION
PLANS OF STATE AND LOCAL GOVERNMENTS.
(a) IN GENERAL.—Section 457 is amended by adding at the
end the following new subsection:
‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET ASIDES FOR
EXCLUSIVE BENEFIT OF PARTICIPANTS.—
‘‘(1) IN
GENERAL.—A plan maintained by an eligible
employer described in subsection (e)(1)(A) shall not be treated
as an eligible deferred compensation plan unless all assets
and income of the plan described in subsection (b)(6) are held
in trust for the exclusive benefit of participants and their
beneficiaries.
‘‘(2) TAXABILITY OF TRUSTS AND PARTICIPANTS.—For pur-
poses of this title—
‘‘(A) a trust described in paragraph (1) shall be treated
as an organization exempt from taxation under section
501(a), and
‘‘(B) notwithstanding any other provision of this title,
amounts in the trust shall be includible in the gross income
of participants and beneficiaries only to the extent, and
at the time, provided in this section.
‘‘(3) CUSTODIAL ACCOUNTS AND CONTRACTS.—For purposes
of this subsection, custodial accounts and contracts described
in section 401(f) shall be treated as trusts under rules similar
to the rules under section 401(f).’’
(b) CONFORMING AMENDMENT.—Paragraph (6) of section 457(b)
is amended by inserting ‘‘except as provided in subsection (g),’’
before ‘‘which provides that’’.
H. R. 2491—636
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to assets and
income described in section 457(b)(6) of the Internal Revenue
Code of 1986 held by a plan on and after the date of the
enactment of this Act.
(2) TRANSITION RULE.—In the case of assets and income
described in paragraph (1) held by a plan before the first
day of the first calendar quarter beginning after the close
of the first regular session of the State legislature of the State
in which the governmental entity maintaining the plan is
located beginning after the date of the enactment of this Act,
a trust need not be established by reason of the amendments
made by this section before such first day. For purposes of
the preceding sentence, in the case of a State that has a
2-year legislative session, each year of such session shall be
deemed to be a separate regular session of the State legislature.
SEC. 11459. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS
UNDER SECTION 415 LIMITATIONS.
(a) IN GENERAL.—Subparagraph (A) of section 767(d)(3) of the
Uruguay Round Agreements Act is amended to read as follows:
‘‘(A) EXCEPTION.—A plan that was adopted and in effect
before December 8, 1994, shall not be required to apply
the amendments made by subsection (b) with respect to
benefits accrued before the earlier of—
‘‘(i) the later of the date a plan amendment apply-
ing such amendment is adopted or made effective, or
‘‘(ii) the first day of the first limitation year begin-
ning after December 31, 1999.
Determinations under section 415(b)(2)(E) of the Internal
Revenue Code of 1986 shall be made with respect to such
benefits on the basis of such section as in effect on Decem-
ber 7, 1994 (except that the modification made by sub-
section (b) shall be taken into account), and the provisions
of the plan as in effect on December 7, 1994, but only
if such provisions of the plan meet the requirements of
such section (as so in effect).’’
(b) MODIFICATION OF CERTAIN ASSUMPTIONS FOR ADJUSTING
BENEFITS
OF DEFINED BENEFIT PLANS
FOR EARLY RETIREES.—
Subparagraph (E) of section 415(b)(2) (relating to limitation on
certain assumptions) is amended—
(1) by striking ‘‘Except as provided in clause (ii), for pur-
poses of adjusting any benefit or limitation under subparagraph
(B) or (C),’’ in clause (i) and inserting ‘‘For purposes of adjusting
any limitation under subparagraph (C) and, except as provided
in clause (ii), for purposes of adjusting any benefit under
subparagraph (B),’’, and
(2) by striking ‘‘For purposes of adjusting the benefit or
limitation of any form of benefit subject to section 417(e)(3),’’
in clause (ii) and inserting ‘‘For purposes of adjusting any
benefit under subparagraph (B) for any form of benefit subject
to section 417(e)(3),’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall take effect as if included in the provisions of section 767
of the Uruguay Round Agreements Act.
H. R. 2491—637
(d) TRANSITIONAL RULE.—In the case of a plan that was adopted
and in effect before December 8, 1994, if—
(1) a plan amendment was adopted or made effective on
or before the date of the enactment of this Act applying the
amendments made by section 767(b) of the Uruguay Round
Agreements Act, and
(2) within 1 year after the date of the enactment of this
Act, a plan amendment is adopted which repeals the amend-
ment referred to in paragraph (1),
the amendment referred to in paragraph (1) shall not be taken
into account in applying section 767(d)(3)(A) of the Uruguay Round
Agreements Act, as amended by subsection (a).
SEC. 11460. MODIFICATIONS OF SECTION 403(b).
(a) MULTIPLE SALARY REDUCTION AGREEMENTS PERMITTED.—
(1) GENERAL RULE.—For purposes of section 403(b) of the
Internal Revenue Code of 1986, the frequency that an employee
is permitted to enter into a salary reduction agreement, the
salary to which such an agreement may apply, and the ability
to revoke such an agreement shall be determined under the
rules applicable to cash or deferred elections under section
401(k) of such Code.
(2) EFFECTIVE DATE.—This subsection shall apply to taxable
years beginning after December 31, 1995.
(b) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.—
(1) IN GENERAL.—In the case of any contract purchased
in a plan year beginning before January 1, 1995, section 403(b)
of the Internal Revenue Code of 1986 shall be applied as
if any reference to an employer described in section 501(c)(3)
of the Internal Revenue Code of 1986 which is exempt from
tax under section 501 of such Code included a reference to
an employer which is an Indian tribal government (as defined
by section 7701(a)(40) of such Code), a subdivision of an Indian
tribal government (determined in accordance with section
7871(d) of such Code), an agency or instrumentality of an
Indian tribal government or subdivision thereof, or a corpora-
tion chartered under Federal, State, or tribal law which is
owned in whole or in part by any of the foregoing.
(2) ROLLOVERS.—Solely for purposes of applying section
403(b)(8) of such Code to a contract to which paragraph (1)
applies, a qualified cash or deferred arrangement under section
401(k) of such Code shall be treated as if it were a plan
or contract described in clause (ii) of section 403(b)(8)(A) of
such Code.
(c) ELECTIVE DEFERRALS.—
(1) IN
GENERAL.—Subparagraph (E) of section 403(b)(1)
is amended to read as follows:
‘‘(E) in the case of a contract purchased under a salary
reduction agreement, the contract meets the requirements
of section 401(a)(30),’’.
(2) EFFECTIVE DATE.—The amendment made by this sub-
section shall apply to years beginning after December 31, 1995.
SEC. 11461. WAIVER OF MINIMUM PERIOD FOR JOINT AND SURVIVOR
ANNUITY EXPLANATION BEFORE ANNUITY STARTING
DATE.
(a) GENERAL RULE.—For purposes of section 417(a)(3)(A) of
the Internal Revenue Code of 1986 (relating to plan to provide
H. R. 2491—638
written explanations), the minimum period prescribed by the Sec-
retary of the Treasury between the date that the explanation
referred to in such section is provided and the annuity starting
date shall not apply if waived by the participant and, if applicable,
the participant’s spouse.
(b) EFFECTIVE DATE.—Subsection (a) shall apply to plan years
beginning after December 31, 1995.
SEC. 11462. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT
PLAN AND DEFINED CONTRIBUTION PLAN FOR SAME
EMPLOYEE; EXCESS DISTRIBUTIONS.
(a) IN GENERAL.—Section 415(e) is repealed.
(b) EXCESS DISTRIBUTIONS.—Section 4980A is amended by add-
ing at the end the following new subsection:
‘‘(g) LIMITATION ON APPLICATION.—This section shall not apply
to distributions during years beginning after December 31, 1995,
and before January 1, 1999, and such distributions shall be treated
as made first from amounts not described in subsection (f).’’
(c) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 415(b)(5) is amended by
striking ‘‘and subsection (e)’’.
(2) Paragraph (1) of section 415(f) is amended by striking
‘‘subsections (b), (c), and (e)’’ and inserting ‘‘subsections (b)
and (c)’’.
(3) Subsection (g) of section 415 is amended by striking
‘‘subsections (e) and (f)’’ in the last sentence and inserting
‘‘subsection (f)’’.
(4) Clause (i) of section 415(k)(2)(A) is amended to read
as follows:
‘‘(i) any contribution made directly by an employee
under such an arrangement shall not be treated as
an annual addition for purposes of subsection (c), and’’.
(5) Clause (ii) of section 415(k)(2)(A) is amended by striking
‘‘subsections (c) and (e)’’ and inserting ‘‘subsection (c)’’.
(6) Section 416 is amended by striking subsection (h).
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to limitation
years beginning after December 31, 1998.
(2) EXCESS DISTRIBUTIONS.—The amendment made by sub-
section (b) shall apply to years beginning after December 31,
1995.
SEC. 11463. TAX ON PROHIBITED TRANSACTIONS.
(a) IN GENERAL.—Section 4975(a) is amended by striking ‘‘5
percent’’ and inserting ‘‘10 percent’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to prohibited transactions occurring after December
31, 1995.
SEC. 11464. TREATMENT OF LEASED EMPLOYEES.
(a) GENERAL RULE.—Subparagraph (C) of section 414(n)(2)
(defining leased employee) is amended to read as follows:
‘‘(C) such services are performed under primary direc-
tion or control by the recipient.’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to years beginning after December 31, 1995, but shall
not apply to any relationship determined under an Internal Revenue
H. R. 2491—639
Service ruling issued before the date of the enactment of this
Act pursuant to section 414(n)(2)(C) of the Internal Revenue Code
of 1986 (as in effect on the day before such date) not to involve
a leased employee.
CHAPTER 3—TREATMENT OF LARGE PARTNERSHIPS
SEC. 11471. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PART-
NERSHIPS.
(a) GENERAL RULE.—Subchapter K (relating to partners and
partnerships) is amended by adding at the end the following new
part:
‘‘PART IV—SPECIAL RULES FOR ELECTING
LARGE PARTNERSHIPS
‘‘Sec. 771. Application of subchapter to electing large partnerships.
‘‘Sec. 772. Simplified flow-through.
‘‘Sec. 773. Computations at partnership level.
‘‘Sec. 774. Other modifications.
‘‘Sec. 775. Electing large partnership defined.
‘‘Sec. 776. Special rules for partnerships holding oil and gas properties.
‘‘Sec. 777. Regulations.
‘‘SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PART-
NERSHIPS.
‘‘The preceding provisions of this subchapter to the extent
inconsistent with the provisions of this part shall not apply to
an electing large partnership and its partners.
‘‘SEC. 772. SIMPLIFIED FLOW-THROUGH.
‘‘(a) GENERAL RULE.—In determining the income tax of a part-
ner of an electing large partnership, such partner shall take into
account separately such partner’s distributive share of the partner-
ship’s—
‘‘(1) taxable income or loss from passive loss limitation
activities,
‘‘(2) taxable income or loss from other activities,
‘‘(3) net capital gain (or net capital loss)—
‘‘(A) to the extent allocable to passive loss limitation
activities, and
‘‘(B) to the extent allocable to other activities,
‘‘(4) tax-exempt interest,
‘‘(5) applicable net AMT adjustment separately computed
for—
‘‘(A) passive loss limitation activities, and
‘‘(B) other activities,
‘‘(6) general credits,
‘‘(7) low-income housing credit determined under section
42,
‘‘(8) rehabilitation credit determined under section 47,
‘‘(9) foreign income taxes,
‘‘(10) the credit allowable under section 29, and
‘‘(11) other items to the extent that the Secretary deter-
mines that the separate treatment of such items is appropriate.
‘‘(b) SEPARATE COMPUTATIONS.—In determining the amounts
required under subsection (a) to be separately taken into account
by any partner, this section and section 773 shall be applied sepa-
rately with respect to such partner by taking into account such
H. R. 2491—640
partner’s distributive share of the items of income, gain, loss, deduc-
tion, or credit of the partnership.
‘‘(c) TREATMENT AT PARTNER LEVEL.—
‘‘(1) IN GENERAL.—Except as provided in this subsection,
rules similar to the rules of section 702(b) shall apply to any
partner’s distributive share of the amounts referred to in sub-
section (a).
‘‘(2) INCOME OR LOSS FROM PASSIVE LOSS LIMITATION ACTIVI-
TIES.—For purposes of this chapter, any partner’s distributive
share of any income or loss described in subsection (a)(1) shall
be treated as an item of income or loss (as the case may
be) from the conduct of a trade or business which is a single
passive activity (as defined in section 469). A similar rule
shall apply to a partner’s distributive share of amounts referred
to in paragraphs (3)(A) and (5)(A) of subsection (a).
‘‘(3) INCOME OR LOSS FROM OTHER ACTIVITIES.—
‘‘(A) IN GENERAL.—For purposes of this chapter, any
partner’s distributive share of any income or loss described
in subsection (a)(2) shall be treated as an item of income
or expense (as the case may be) with respect to property
held for investment.
‘‘(B) DEDUCTIONS FOR LOSS NOT SUBJECT TO SECTION
67.—The deduction under section 212 for any loss described
in subparagraph (A) shall not be treated as a miscellaneous
itemized deduction for purposes of section 67.
‘‘(4) TREATMENT OF NET CAPITAL GAIN OR LOSS.—For pur-
poses of this chapter, any partner’s distributive share of any
gain or loss described in subsection (a)(3) shall be treated
as a long-term capital gain or loss, as the case may be.
‘‘(5) MINIMUM TAX TREATMENT.—In determining the alter-
native minimum taxable income of any partner, such partner’s
distributive share of any applicable net AMT adjustment shall
be taken into account in lieu of making the separate adjust-
ments provided in sections 56, 57, and 58 with respect to
the items of the partnership. Except as provided in regulations,
the applicable net AMT adjustment shall be treated, for pur-
poses of section 53, as an adjustment or item of tax preference
not specified in section 53(d)(1)(B)(ii).
‘‘(6) GENERAL CREDITS.—A partner’s distributive share of
the amount referred to in paragraph (6) of subsection (a) shall
be taken into account as a current year business credit.
‘‘(d) OPERATING RULES.—For purposes of this section—
‘‘(1) PASSIVE LOSS LIMITATION ACTIVITY.—The term ‘passive
loss limitation activity’ means—
‘‘(A) any activity which involves the conduct of a trade
or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term ‘trade or
business’ includes any activity treated as a trade or business
under paragraph (5) or (6) of section 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-exempt interest’
means interest excludable from gross income under section
103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
‘‘(A) IN GENERAL.—The applicable net AMT adjustment
is—
H. R. 2491—641
‘‘(i) with respect to taxpayers other than corpora-
tions, the net adjustment determined by using the
adjustments applicable to individuals, and
‘‘(ii) with respect to corporations, the net adjust-
ment determined by using the adjustments applicable
to corporations.
‘‘(B) NET
ADJUSTMENT.—The term ‘net adjustment’
means the net adjustment in the items attributable to
passive loss activities or other activities (as the case may
be) which would result if such items were determined with
the adjustments of sections 56, 57, and 58.
‘‘(4) TREATMENT OF CERTAIN SEPARATELY STATED ITEMS.—
‘‘(A) EXCLUSION FOR CERTAIN PURPOSES.—In determin-
ing the amounts referred to in paragraphs (1) and (2)
of subsection (a), any net capital gain or net capital loss
(as the case may be), and any item referred to in subsection
(a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net capital gain shall
be treated—
‘‘(i) as allocable to passive loss limitation activities
to the extent the net capital gain does not exceed
the net capital gain determined by only taking into
account gains and losses from sales and exchanges
of property used in connection with such activities,
and
‘‘(ii) as allocable to other activities to the extent
such gain exceeds the amount allocated under clause
(i).
A similar rule shall apply for purposes of allocating any
net capital loss.
‘‘(C) NET CAPITAL LOSS.—The term ‘net capital loss’
means the excess of the losses from sales or exchanges
of capital assets over the gains from sales or exchange
of capital assets.
‘‘(5) GENERAL CREDITS.—The term ‘general credits’ means
any credit other than the low-income housing credit, the
rehabilitation credit, the foreign tax credit, and the credit allow-
able under section 29.
‘‘(6) FOREIGN
INCOME
TAXES.—The term ‘foreign income
taxes’ means taxes described in section 901 which are paid
or accrued to foreign countries and to possessions of the United
States.
‘‘(e) SPECIAL RULE FOR UNRELATED BUSINESS TAX.—In the case
of a partner which is an organization subject to tax under section
511, such partner’s distributive share of any items shall be taken
into account separately to the extent necessary to comply with
the provisions of section 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS LIMITATIONS.—
If any person holds an interest in an electing large partnership
other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not apply to such
partner, and
‘‘(2) such partner’s distributive share of the partnership
items allocable to passive loss limitation activities shall be
taken into account separately to the extent necessary to comply
with the provisions of section 469.
H. R. 2491—642
The preceding sentence shall not apply to any items allocable to
an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of an electing
large partnership shall be computed in the same manner as
in the case of an individual except that—
‘‘(A) the items described in section 772(a) shall be
separately stated, and
‘‘(B) the modifications of subsection (b) shall apply.
‘‘(2) ELECTIONS.—All elections affecting the computation
of the taxable income of an electing large partnership or the
computation of any credit of an electing large partnership shall
be made by the partnership; except that the election under
section 901, and any election under section 108, shall be made
by each partner separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), all limitations and other provisions affecting the com-
putation of the taxable income of an electing large partner-
ship or the computation of any credit of an electing large
partnership shall be applied at the partnership level (and
not at the partner level).
‘‘(B) 
CERTAIN
LIMITATIONS
APPLIED
AT
PARTNER
LEVEL.—The following provisions shall be applied at the
partner level (and not at the partnership level):
‘‘(i) Section 68 (relating to overall limitation on
itemized deductions).
‘‘(ii) Sections 49 and 465 (relating to at risk limita-
tions).
‘‘(iii) Section 469 (relating to limitation on passive
activity losses and credits).
‘‘(iv) Any other provision specified in regulations.
‘‘(4) COORDINATION WITH OTHER PROVISIONS.—Paragraphs
(2) and (3) shall apply notwithstanding any other provision
of this chapter other than this part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAXABLE INCOME.—
In determining the taxable income of an electing large partnership—
‘‘(1) CERTAIN
DEDUCTIONS
NOT
ALLOWED.—The following
deductions shall not be allowed:
‘‘(A) The deduction for personal exemptions provided
in section 151.
‘‘(B) The net operating loss deduction provided in sec-
tion 172.
‘‘(C) The additional itemized deductions for individuals
provided in part VII of subchapter B (other than section
212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determining the amount
allowable under section 170, the limitation of section 170(b)(2)
shall apply.
‘‘(3) COORDINATION WITH SECTION 67.—In lieu of applying
section 67, 70 percent of the amount of the miscellaneous
itemized deductions shall be disallowed.
‘‘(c) SPECIAL RULES FOR INCOME FROM DISCHARGE OF INDEBTED-
NESS.—If an electing large partnership has income from the dis-
charge of any indebtedness—
H. R. 2491—643
‘‘(1) such income shall be excluded in determining the
amounts referred to in section 772(a), and
‘‘(2) in determining the income tax of any partner of such
partnership—
‘‘(A) such income shall be treated as an item required
to be separately taken into account under section 772(a),
and
‘‘(B) the provisions of section 108 shall be applied with-
out regard to this part.
‘‘SEC. 774. OTHER MODIFICATIONS.
‘‘(a) TREATMENT OF CERTAIN OPTIONAL ADJUSTMENTS, ETC.—
In the case of an electing large partnership—
‘‘(1) computations under section 773 shall be made without
regard to any adjustment under section 743(b) or 108(b), but
‘‘(2) a partner’s distributive share of any amount referred
to in section 772(a) shall be appropriately adjusted to take
into account any adjustment under section 743(b) or 108(b)
with respect to such partner.
‘‘(b) CREDIT RECAPTURE DETERMINED AT PARTNERSHIP LEVEL.—
‘‘(1) IN GENERAL.—In the case of an electing large partner-
ship—
‘‘(A) any credit recapture shall be taken into account
by the partnership, and
‘‘(B) the amount of such recapture shall be determined
as if the credit with respect to which the recapture is
made had been fully utilized to reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO ACCOUNT.—An
electing large partnership shall take into account a credit recap-
ture by reducing the amount of the appropriate current year
credit to the extent thereof, and if such recapture exceeds
the amount of such current year credit, the partnership shall
be liable to pay such excess.
‘‘(3) DISPOSITIONS NOT TO TRIGGER RECAPTURE.—No credit
recapture shall be required by reason of any transfer of an
interest in an electing large partnership.
‘‘(4) CREDIT RECAPTURE.—For purposes of this subsection,
the term ‘credit recapture’ means any increase in tax under
section 42(j) or 50(a).
‘‘(c) PARTNERSHIP NOT TERMINATED
BY REASON
OF CHANGE
IN OWNERSHIP.—Subparagraph (B) of section 708(b)(1) shall not
apply to an electing large partnership.
‘‘(d) PARTNERSHIP ENTITLED TO CERTAIN CREDITS.—The follow-
ing shall be allowed to an electing large partnership and shall
not be taken into account by the partners of such partnership:
‘‘(1) The credit provided by section 34.
‘‘(2) Any credit or refund under section 852(b)(3)(D).
‘‘(e) TREATMENT OF REMIC RESIDUALS.—For purposes of apply-
ing section 860E(e)(6) to any electing large partnership—
‘‘(1) all interests in such partnership shall be treated as
held by disqualified organizations,
‘‘(2) in lieu of applying subparagraph (C) of section
860E(e)(6), the amount subject to tax under section 860E(e)(6)
shall be excluded from the gross income of such partnership,
and
‘‘(3) subparagraph (D) of section 860E(e)(6) shall not apply.
H. R. 2491—644
‘‘(f) SPECIAL RULES FOR APPLYING CERTAIN INSTALLMENT SALE
RULES.—In the case of an electing large partnership—
‘‘(1) the provisions of sections 453(l)(3) and 453A shall
be applied at the partnership level, and
‘‘(2) in determining the amount of interest payable under
such sections, such partnership shall be treated as subject
to tax under this chapter at the highest rate of tax in effect
under section 1 or 11.
‘‘SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN
GENERAL.—The term ‘electing large partnership’
means, with respect to any partnership taxable year, any part-
nership if—
‘‘(A) the number of persons who were partners in such
partnership in the preceding partnership taxable year
equaled or exceeded 100, and
‘‘(B) such partnership elects the application of this
part.
To the extent provided in regulations, a partnership shall cease
to be treated as an electing large partnership for any partner-
ship taxable year if in such taxable year fewer than 100 persons
were partners in such partnership.
‘‘(2) ELECTION.—The election under this subsection shall
apply to the taxable year for which made and all subsequent
taxable years unless revoked with the consent of the Secretary.
‘‘(b) SPECIAL RULES
FOR CERTAIN SERVICE PARTNERSHIPS.—
‘‘(1) CERTAIN
PARTNERS
NOT
COUNTED.—For purposes of
this section, the term ‘partner’ does not include any individual
performing substantial services in connection with the activities
of the partnership and holding an interest in such partnership,
or an individual who formerly performed substantial services
in connection with such activities and who held an interest
in such partnership at the time the individual performed such
services.
‘‘(2) EXCLUSION.—For purposes of this part, an election
under subsection (a) shall not be effective with respect to any
partnership if substantially all the partners of such partner-
ship—
‘‘(A) are individuals performing substantial services
in connection with the activities of such partnership or
are personal service corporations (as defined in section
269A(b)) the owner-employees (as defined in section
269A(b)) of which perform such substantial services,
‘‘(B) are retired partners who had performed such
substantial services, or
‘‘(C) are spouses of partners who are performing (or
had previously performed) such substantial services.
‘‘(3) SPECIAL
RULE
FOR
LOWER
TIER
PARTNERSHIPS.—For
purposes of this subsection, the activities of a partnership shall
include the activities of any other partnership in which the
partnership owns directly an interest in the capital and profits
of at least 80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For purposes of this
part, an election under subsection (a) shall not be effective with
respect to any partnership the principal activity of which is the
H. R. 2491—645
buying and selling of commodities (not described in section 1221(1)),
or options, futures, or forwards with respect to such commodities.
‘‘(d) SECRETARY MAY RELY
ON TREATMENT
ON RETURN.—If,
on the partnership return of any partnership, such partnership
is treated as an electing large partnership, such treatment shall
be binding on such partnership and all partners of such partnership
but not on the Secretary.
‘‘SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND
GAS PROPERTIES.
‘‘(a) EXCEPTION FOR PARTNERSHIPS HOLDING SIGNIFICANT OIL
AND GAS PROPERTIES.—
‘‘(1) IN GENERAL.—For purposes of this part, an election
under section 775(a) shall not be effective with respect to any
partnership if the average percentage of assets (by value) held
by such partnership during the taxable year which are oil
or gas properties is at least 25 percent. For purposes of the
preceding sentence, any interest held by a partnership in
another partnership shall be disregarded, except that the part-
nership shall be treated as holding its proportionate share
of the assets of such other partnership.
‘‘(2) ELECTION TO WAIVE EXCEPTION.—Any partnership may
elect to have paragraph (1) not apply. Such an election shall
apply to the partnership taxable year for which made and
all subsequent partnership taxable years unless revoked with
the consent of the Secretary.
‘‘(b) SPECIAL RULES WHERE PART APPLIES.—
‘‘(1) COMPUTATION OF PERCENTAGE DEPLETION.—In the case
of an electing large partnership, except as provided in para-
graph (2)—
‘‘(A) the allowance for depletion under section 611 with
respect to any partnership oil or gas property shall be
computed at the partnership level without regard to any
provision of section 613A requiring such allowance to be
computed separately by each partner,
‘‘(B) such allowance shall be determined without regard
to the provisions of section 613A(c) limiting the amount
of production for which percentage depletion is allowable
and without regard to paragraph (1) of section 613A(d),
and
‘‘(C) paragraph (3) of section 705(a) shall not apply.
‘‘(2) TREATMENT OF CERTAIN PARTNERS.—
‘‘(A) IN GENERAL.—In the case of a disqualified person,
the treatment under this chapter of such person’s distribu-
tive share of any item of income, gain, loss, deduction,
or credit attributable to any partnership oil or gas property
shall be determined without regard to this part. Such per-
son’s distributive share of any such items shall be excluded
for purposes of making determinations under sections 772
and 773.
‘‘(B) DISQUALIFIED PERSON.—For purposes of subpara-
graph (A), the term ‘disqualified person’ means, with
respect to any partnership taxable year—
‘‘(i) any person referred to in paragraph (2) or
(4) of section 613A(d) for such person’s taxable year
in which such partnership taxable year ends, and
H. R. 2491—646
‘‘(ii) any other person if such person’s average daily
production of domestic crude oil and natural gas for
such person’s taxable year in which such partnership
taxable year ends exceeds 500 barrels.
‘‘(C) AVERAGE
DAILY
PRODUCTION.—For purposes of
subparagraph (B), a person’s average daily production of
domestic crude oil and natural gas for any taxable year
shall be computed as provided in section 613A(c)(2)—
‘‘(i) by taking into account all production of domes-
tic crude oil and natural gas (including such person’s
proportionate share of any production of a partnership),
‘‘(ii) by treating 6,000 cubic feet of natural gas
as a barrel of crude oil, and
‘‘(iii) by treating as 1 person all persons treated
as 1 taxpayer under section 613A(c)(8) or among whom
allocations are required under such section.
‘‘SEC. 777. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as may be
appropriate to carry out the purposes of this part.’’
(b) CLERICAL AMENDMENT.—The table of parts for subchapter
K of chapter 1 is amended by adding at the end the following
new item:
‘‘Part IV. Special rules for electing large partnerships.’’
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to partnership taxable years beginning after December
31, 1995.
SEC. 11472. RETURNS MAY BE REQUIRED ON MAGNETIC MEDIA.
(a) IN GENERAL.—Paragraph (2) of section 6011(e) (relating
to returns on magnetic media) is amended by adding at the end
the following new sentence:
‘‘Notwithstanding the preceding sentence, the Secretary shall
require partnerships having more than 100 partners to file
returns on magnetic media.’’
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to partnership taxable years beginning after December
31, 1995.
CHAPTER 4—FOREIGN PROVISIONS
Subchapter A—Modifications to Treatment of Passive
Foreign Investment Companies
SEC. 11481. UNITED STATES SHAREHOLDERS OF CONTROLLED FOR-
EIGN CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the following
new subsection:
‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLDERS OF CON-
TROLLED FOREIGN CORPORATIONS.—
‘‘(1) IN GENERAL.—For purposes of this part, a corporation
shall not be treated with respect to a shareholder as a passive
foreign investment company during the qualified portion of
such shareholder’s holding period with respect to stock in such
corporation.
H. R. 2491—647
‘‘(2) QUALIFIED PORTION.—For purposes of this subsection,
the term ‘qualified portion’ means the portion of the sharehold-
er’s holding period—
‘‘(A) which is after December 31, 1995, and
‘‘(B) during which the shareholder is a United States
shareholder (as defined in section 951(b)) of the corporation
and the corporation is a controlled foreign corporation.
‘‘(3) NEW HOLDING PERIOD IF QUALIFIED PORTION ENDS.—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), if the qualified portion of a shareholder’s holding period
with respect to any stock ends after December 31, 1995,
solely for purposes of this part, the shareholder’s holding
period with respect to such stock shall be treated as begin-
ning as of the first day following such period.
‘‘(B) EXCEPTION.—Subparagraph (A) shall not apply
if such stock was, with respect to such shareholder, stock
in a passive foreign investment company at any time before
the qualified portion of the shareholder’s holding period
with respect to such stock and no election under section
1298(b)(1) is made.’’
SEC. 11482. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK
IN PASSIVE FOREIGN INVESTMENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chapter 1 is
amended by redesignating subpart C as subpart D, by redesignating
sections 1296 and 1297 as sections 1297 and 1298, respectively,
and by inserting after subpart B the following new subpart:
‘‘Subpart C—Election of Mark to Market For
Marketable Stock
‘‘Sec. 1296. Election of mark to market for marketable stock.
‘‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.
‘‘(a) GENERAL RULE.—In the case of marketable stock in a
passive foreign investment company which is owned (or treated
under subsection (g) as owned) by a United States person at the
close of any taxable year of such person, at the election of such
person—
‘‘(1) If the fair market value of such stock as of the close
of such taxable year exceeds its adjusted basis, such United
States person shall include in gross income for such taxable
year an amount equal to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds the fair
market value of such stock as of the close of such taxable
year, such United States person shall be allowed a deduction
for such taxable year equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect to such
stock.
‘‘(b) BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The adjusted basis of stock in a passive
foreign investment company—
‘‘(A) shall be increased by the amount included in
the gross income of the United States person under sub-
section (a)(1) with respect to such stock, and
H. R. 2491—648
‘‘(B) shall be decreased by the amount allowed as a
deduction to the United States person under subsection
(a)(2) with respect to such stock.
‘‘(2) SPECIAL RULE FOR STOCK CONSTRUCTIVELY OWNED.—
In the case of stock in a passive foreign investment company
which the United States person is treated as owning under
subsection (g)—
‘‘(A) the adjustments under paragraph (1) shall apply
to such stock in the hands of the person actually holding
such stock but only for purposes of determining the subse-
quent treatment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to the adjusted
basis of the property by reason of which the United States
person is treated as owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross income
under subsection (a)(1), and any gain on the sale or other
disposition of marketable stock in a passive foreign invest-
ment company (with respect to which an election under
this section is in effect), shall be treated as ordinary income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction under sub-
section (a)(2), and
‘‘(ii) loss on the sale or other disposition of market-
able stock in a passive foreign investment company
(with respect to which an election under this section
is in effect) to the extent that the amount of such
loss does not exceed the unreversed inclusions with
respect to such stock,
shall be treated as an ordinary loss. The amount so treated
shall be treated as a deduction allowable in computing
adjusted gross income.
‘‘(2) SOURCE.—The source of any amount included in gross
income under subsection (a)(1) (or allowed as a deduction under
subsection (a)(2)) shall be determined in the same manner
as if such amount were gain or loss (as the case may be)
from the sale of stock in the passive foreign investment com-
pany.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of this section,
the term ‘unreversed inclusions’ means, with respect to any stock
in a passive foreign investment company, the excess (if any) of—
‘‘(1) the amount included in gross income of the taxpayer
under subsection (a)(1) with respect to such stock for prior
taxable years, over
‘‘(2) the amount allowed as a deduction under subsection
(a)(2) with respect to such stock for prior taxable years.
The amount referred to in paragraph (1) shall include any amount
which would have been included in gross income under subsection
(a)(1) with respect to such stock for any prior taxable year but
for section 1291.
‘‘(e) MARKETABLE STOCK.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘marketable stock’ means—
‘‘(A) any stock which is regularly traded on—
‘‘(i) a national securities exchange which is reg-
istered with the Securities and Exchange Commission
H. R. 2491—649
or the national market system established pursuant
to section 11A of the Securities and Exchange Act
of 1934, or
‘‘(ii) any exchange or other market which the Sec-
retary determines has rules adequate to carry out the
purposes of this part,
‘‘(B) to the extent provided in regulations, stock in
any foreign corporation which is comparable to a regulated
investment company and which offers for sale or has
outstanding any stock of which it is the issuer and which
is redeemable at its net asset value, and
‘‘(C) to the extent provided in regulations, any option
on stock described in subparagraph (A) or (B).
‘‘(2) SPECIAL
RULE
FOR
REGULATED
INVESTMENT
COMPA-
NIES.—In the case of any regulated investment company which
is offering for sale or has outstanding any stock of which
it is the issuer and which is redeemable at its net asset value,
all stock in a passive foreign investment company which it
owns directly or indirectly shall be treated as marketable stock
for purposes of this section. Except as provided in regulations,
similar treatment as marketable stock shall apply in the case
of any other regulated investment company which publishes
net asset valuations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN CORPORATIONS WHICH
ARE SHAREHOLDERS IN PASSIVE FOREIGN INVESTMENT COMPANIES.—
In the case of a foreign corporation which is a controlled foreign
corporation and which owns (or is treated under subsection (g)
as owning) stock in a passive foreign investment company—
‘‘(1) this section (other than subsection (c)(2)) shall apply
to such foreign corporation in the same manner as if such
corporation were a United States person, and
‘‘(2) for purposes of subpart F of part III of subchapter
N—
‘‘(A) any amount included in gross income under sub-
section (a)(1) shall be treated as foreign personal holding
company income described in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction under sub-
section (a)(2) shall be treated as a deduction allocable to
foreign personal holding company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN ENTITIES.—
Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this section, stock owned,
directly or indirectly, by or for a foreign partnership or foreign
trust or foreign estate shall be considered as being owned
proportionately by its partners or beneficiaries. Stock consid-
ered to be owned by a person by reason of the application
of the preceding sentence shall, for purposes of applying such
sentence, be treated as actually owned by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—In any case
in which a United States person is treated as owning stock
in a passive foreign investment company by reason of paragraph
(1)—
‘‘(A) any disposition by the United States person or
by any other person which results in the United States
person being treated as no longer owning such stock, and
‘‘(B) any disposition by the person owning such stock,
H. R. 2491—650
shall be treated as a disposition by the United States person
of the stock in the passive foreign investment company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For purposes of
paragraphs (2) and (3) of section 851(b), any amount included
in gross income under subsection (a) shall be treated as a dividend.
‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the case of stock
of a passive foreign investment company which is acquired by
bequest, devise, or inheritance (or by the decedent’s estate) and
with respect to which an election under this section was in effect
as of the date of the decedent’s death, notwithstanding section
1014, the basis of such stock in the hands of the person so acquiring
it shall be the adjusted basis of such stock in the hands of the
decedent immediately before his death (or, if lesser, the basis which
would have been determined under section 1014 without regard
to this subsection).
‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST YEAR
OF
ELECTION.—
‘‘(1) TAXPAYERS
OTHER
THAN
REGULATED
INVESTMENT
COMPANIES.—
‘‘(A) IN GENERAL.—If the taxpayer elects the application
of this section with respect to any marketable stock in
a corporation after the beginning of the taxpayer’s holding
period in such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall apply to—
‘‘(i) any distributions with respect to, or disposition
of, such stock in the first taxable year of the taxpayer
for which such election is made, and
‘‘(ii) any amount which, but for section 1291, would
have been included in gross income under subsection
(a) with respect to such stock for such taxable year
in the same manner as if such amount were gain
on the disposition of such stock.
‘‘(B) 
REQUIREMENTS.—The 
requirements 
of 
this
subparagraph are met if, with respect to each of such
corporation’s taxable years for which such corporation was
a passive foreign investment company and which begin
after December 31, 1986, and included any portion of the
taxpayer’s holding period in such stock, such corporation
was treated as a qualified electing fund under this part
with respect to the taxpayer.
‘‘(2) SPECIAL RULES FOR REGULATED INVESTMENT COMPA-
NIES.—
‘‘(A) IN GENERAL.—If a regulated investment company
elects the application of this section with respect to any
marketable stock in a corporation after the beginning of
the taxpayer’s holding period in such stock, then, with
respect to such company’s first taxable year for which
such company elects the application of this section with
respect to such stock—
‘‘(i) section 1291 shall not apply to such stock
with respect to any distribution or disposition during,
or amount included in gross income under this section
for, such first taxable year, but
‘‘(ii) such regulated investment company’s tax
under this chapter for such first taxable year shall
be increased by the aggregate amount of interest which
would have been determined under section 1291(c)(3)
H. R. 2491—651
if section 1291 were applied without regard to this
subparagraph.
Clause (ii) shall not apply if for the preceding taxable
year the company elected to mark to market the stock
held by such company as of the last day of such preceding
taxable year.
‘‘(B) DISALLOWANCE
OF
DEDUCTION.—No deduction
shall be allowed to any regulated investment company
for the increase in tax under subparagraph (A)(ii).
‘‘(k) ELECTION.—This section shall apply to marketable stock
in a passive foreign investment company which is held by a United
States person only if such person elects to apply this section with
respect to such stock. Such an election shall apply to the taxable
year for which made and all subsequent taxable years unless—
‘‘(1) such stock ceases to be marketable stock, or
‘‘(2) the Secretary consents to the revocation of such elec-
tion.
‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING SUBJECT TO
UNITED STATES TAX.—If any individual becomes a United States
person in a taxable year beginning after December 31, 1995, solely
for purposes of this section, the adjusted basis (before adjustments
under subsection (b)) of any marketable stock in a passive foreign
investment company owned by such individual on the first day
of such taxable year shall be treated as being the greater of its
fair market value on such first day or its adjusted basis on such
first day.’’
(b) COORDINATION WITH INTEREST CHARGE, ETC.—
(1) Paragraph (1) of section 1291(d) is amended by adding
at the end the following new flush sentence:
‘‘Except as provided in section 1296(j), this section also shall
not apply if an election under section 1296(k) is in effect for
the taxpayer’s taxable year.’’
(2) The subsection heading for subsection (d) of section
1291 is amended by striking ‘‘SUBPART B’’ and inserting ‘‘SUB-
PARTS B AND C’’.
(3) Subparagraph (A) of section 1291(a)(3) is amended to
read as follows:
‘‘(A) HOLDING PERIOD.—The taxpayer’s holding period
shall be determined under section 1223; except that—
‘‘(i) for purposes of applying this section to an
excess distribution, such holding period shall be treated
as ending on the date of such distribution, and
‘‘(ii) if section 1296 applied to such stock with
respect to the taxpayer for any prior taxable year,
such holding period shall be treated as beginning on
the first day of the first taxable year beginning after
the last taxable year for which section 1296 so applied.’’
(c) CONFORMING AMENDMENTS.—
(1) Sections 532(b)(4) and 542(c)(10) are each amended
by striking ‘‘section 1296’’ and inserting ‘‘section 1297’’.
(2) Subsection (f) of section 551 is amended by striking
‘‘section 1297(b)(5)’’ and inserting ‘‘section 1298(b)(5)’’
(3) Subsections (a)(1) and (d) of section 1293 are each
amended by striking ‘‘section 1297(a)’’ and inserting ‘‘section
1298(a)’’.
(4) Paragraph (3) of section 1297(b), as redesignated by
subsection (a), is hereby repealed.
H. R. 2491—652
(5) The table of sections for subpart D of part VI of sub-
chapter P of chapter 1, as redesignated by subsection (a), is
amended to read as follows:
‘‘Sec. 1297. Passive foreign investment company.
‘‘Sec. 1298. Special rules.’’
(6) The table of subparts for part VI of subchapter P
of chapter 1 is amended by striking the last item and inserting
the following new items:
‘‘Subpart C. Election of mark to market for marketable stock.
‘‘Subpart D. General provisions.’’
(d) CLARIFICATION OF GAIN RECOGNITION ELECTION.—The last
sentence of section 1298(b)(1), as so redesignated, is amended by
inserting ‘‘(determined without regard to the preceding sentence)’’
after ‘‘investment company’’.
SEC. 11483. MODIFICATIONS TO DEFINITION OF PASSIVE INCOME.
(a) EXCEPTION FOR SAME COUNTRY INCOME NOT TO APPLY.—
Paragraph (1) of section 1297(b) (defining passive income), as
redesignated by section 11482, is amended by inserting before the
period ‘‘without regard to paragraph (3) thereof’’.
(b) PASSIVE INCOME NOT TO INCLUDE FSC INCOME.—Paragraph
(2) of section 1297(b), as so redesignated, is amended by striking
‘‘or’’ at the end of subparagraph (B), by striking the period at
the end of subparagraph (C) and inserting ‘‘, or’’, and by inserting
after subparagraph (C) the following new subparagraph:
‘‘(D) any foreign trade income of a FSC.’’
SEC. 11484. EFFECTIVE DATE.
The amendments made by this subchapter shall apply to—
(1) taxable years of United States persons beginning after
December 31, 1995, and
(2) taxable years of foreign corporations ending with or
within such taxable years of United States persons.
Subchapter B—Treatment of Controlled Foreign
Corporations
SEC. 11486. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOR-
EIGN CORPORATIONS TREATED AS DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to miscellaneous
provisions) is amended by adding at the end the following new
subsection:
‘‘(e) GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN
CORPORATIONS TREATED AS DIVIDENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign corporation sells
or exchanges stock in any other foreign corporation, gain recog-
nized on such sale or exchange shall be included in the gross
income of such controlled foreign corporation as a dividend
to the same extent that it would have been so included under
section 1248(a) if such controlled foreign corporation were a
United States person. For purposes of determining the amount
which would have been so includible, the determination of
whether such other foreign corporation was a controlled foreign
H. R. 2491—653
corporation shall be made without regard to the preceding
sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICABLE.—Clause
(i) of section 954(c)(3)(A) shall not apply to any amount treated
as a dividend by reason of paragraph (1).
‘‘(3) CLARIFICATION
OF
DEEMED
SALES.—For purposes of
this subsection, a controlled foreign corporation shall be treated
as having sold or exchanged any stock if, under any provision
of this subtitle, such controlled foreign corporation is treated
as having gain from the sale or exchange of such stock.’’
(b) AMENDMENT
OF SECTION 904(d).—Clause (i) of section
904(d)(2)(E) is amended by striking ‘‘and except as provided in
regulations, the taxpayer was a United States shareholder in such
corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a) shall apply
to gain recognized on transactions occurring after the date
of the enactment of this Act.
(2) The amendment made by subsection (b) shall apply
to distributions after the date of the enactment of this Act.
SEC. 11487. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN DETERMINING
PRO RATA SHARE.—
(1) IN GENERAL.—Paragraph (2) of section 951(a) (defining
pro rata share of subpart F income) is amended by adding
at the end the following new sentence: ‘‘For purposes of
subparagraph (B), any gain included in the gross income of
any person as a dividend under section 1248 shall be treated
as a distribution received by such person with respect to the
stock involved.’’
(2) EFFECTIVE DATE.—The amendment made by paragraph
(1) shall apply to dispositions after the date of the enactment
of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORA-
TION.—
(1) IN GENERAL.—Section 961 (relating to adjustments to
basis of stock in controlled foreign corporations and of other
property) is amended by adding at the end the following new
subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORA-
TION.—Under regulations prescribed by the Secretary, if a United
States shareholder is treated under section 958(a)(2) as owning
any stock in a controlled foreign corporation which is actually
owned by another controlled foreign corporation, adjustments simi-
lar to the adjustments provided by subsections (a) and (b) shall
be made to the basis of such stock in the hands of such other
controlled foreign corporation, but only for the purposes of determin-
ing the amount included under section 951 in the gross income
of such United States shareholder (or any other United States
shareholder who acquires from any person any portion of the
interest of such United States shareholder by reason of which
such shareholder was treated as owning such stock, but only to
the extent of such portion, and subject to such proof of identity
of such interest as the Secretary may prescribe by regulations).’’
(2) EFFECTIVE DATE.—The amendment made by paragraph
(1) shall apply for purposes of determining inclusions for taxable
H. R. 2491—654
years 
of 
United 
States 
shareholders 
beginning 
after
December 31, 1995.
(c) DETERMINATION OF PREVIOUSLY TAXED INCOME IN SECTION
304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to exclusion from
gross income of previously taxed earnings and profits) is
amended by adding at the end the following new subsection:
‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—If by reason
of—
‘‘(1) a transaction to which section 304 applies,
‘‘(2) the structure of a United States shareholder’s holdings
in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income (or
an inclusion or exclusion without an appropriate basis adjustment)
by reason of this subpart, the Secretary may prescribe regulations
providing such modifications in the application of this subpart as
may be necessary to eliminate such multiple inclusion or provide
such basis adjustment, as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made by paragraph
(1) shall take effect on the date of the enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX EXEMPTIONS
OR REDUCTIONS.—
(1) IN GENERAL.—Subsection (b) of section 952 is amended
by adding at the end the following new sentence: ‘‘For purposes
of this subsection, any exemption (or reduction) with respect
to the tax imposed by section 884 shall not be taken into
account.’’.
(2) EFFECTIVE DATE.—The amendment made by paragraph
(1) shall apply to taxable years beginning after December 31,
1986.
SEC. 11488. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN
LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN GENERAL.—Subsection (b) of section 902 (relating
to deemed taxes increased in case of certain 2nd and 3rd
tier foreign corporations) is amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CERTAIN LOWER
TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member of a qualified
group, and
‘‘(B) such foreign corporation owns 10 percent or more
of the voting stock of another member of such group from
which it receives dividends in any taxable year,
such foreign corporation shall be deemed to have paid the
same proportion of such other member’s post-1986 foreign
income taxes as would be determined under subsection (a)
if such foreign corporation were a domestic corporation.
‘‘(2) QUALIFIED GROUP.—For purposes of paragraph (1), the
term ‘qualified group’ means—
‘‘(A) the foreign corporation described in subsection
(a), and
‘‘(B) any other foreign corporation if—
‘‘(i) the domestic corporation owns at least 5 per-
cent of the voting stock of such other foreign corpora-
H. R. 2491—655
tion indirectly through a chain of foreign corporations
connected through stock ownership of at least 10 per-
cent of their voting stock,
‘‘(ii) the foreign corporation described in subsection
(a) is the first tier corporation in such chain, and
‘‘(iii) such other corporation is not below the sixth
tier in such chain.
The term ‘qualified group’ shall not include any foreign corpora-
tion below the third tier in the chain referred to in clause
(i) unless such foreign corporation is a controlled foreign cor-
poration (as defined in section 957) and the domestic corpora-
tion is a United States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall apply to those
taxes paid by a member of the qualified group below the third
tier only with respect to periods during which it was a controlled
foreign corporation.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3) is amended
by adding ‘‘or’’ at the end of clause (i) and by striking
clauses (ii) and (iii) and inserting the following new clause:
‘‘(ii) the requirements of subsection (b)(2) are met
with respect to such foreign corporation.’’
(B) Subparagraph (B) of section 902(c)(4) is amended
by striking ‘‘3rd foreign corporation’’ and inserting ‘‘sixth
tier foreign corporation’’.
(C) The heading for paragraph (3) of section 902(c)
is amended by striking ‘‘WHERE DOMESTIC CORPORATION
ACQUIRES 10 PERCENT OF FOREIGN CORPORATION’’ and insert-
ing ‘‘WHERE FOREIGN CORPORATION FIRST QUALIFIES’’.
(D) Paragraph (3) of section 902(c) is amended by strik-
ing ‘‘ownership’’ each place it appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section 960(a) (relat-
ing to special rules for foreign tax credits) is amended to read
as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of subpart A of
this part, if there is included under section 951(a) in the gross
income of a domestic corporation any amount attributable to
earnings and profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b)) with respect
to the domestic corporation, then, except to the extent provided
in regulations, section 902 shall be applied as if the amount
so included were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accordance with sec-
tion 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by this section
shall apply to taxes of foreign corporations for taxable years
of such corporations beginning after the date of enactment
of this Act.
(2) SPECIAL RULE.—In the case of any chain of foreign
corporations described in clauses (i) and (ii) of section
902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended
by this section), no liquidation, reorganization, or similar trans-
action in a taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting taxes
to be taken into account under section 902 of the Internal
H. R. 2491—656
Revenue Code of 1986 which could not have been taken into
account under such section but for such transaction.
SEC. 11489. REPEAL OF INCLUSION OF CERTAIN EARNINGS INVESTED
IN EXCESS PASSIVE ASSETS.
(a) IN GENERAL.—
(1) REPEAL OF INCLUSION.—Paragraph (1) of section 951(a)
(relating to amounts included in gross income of United States
shareholders) is amended by striking subparagraph (C), by
striking ‘‘; and’’ at the end of subparagraph (B) and inserting
a period, and by adding ‘‘and’’ at the end of subparagraph
(A).
(2) REPEAL OF INCLUSION AMOUNT.—Section 956A (relating
to earnings invested in excess passive assets) is repealed.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 956(b) is amended to read
as follows:
‘‘(1) APPLICABLE EARNINGS.—For purposes of this section,
the term ‘applicable earnings’ means, with respect to any con-
trolled foreign corporation, the sum of—
‘‘(A) the amount (not including a deficit) referred to
in section 316(a)(1), and
‘‘(B) the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year.’’
(2) Paragraph (3) of section 956(b) is amended to read
as follows:
‘‘(3) SPECIAL RULE WHERE CORPORATION CEASES TO BE A
CONTROLLED FOREIGN CORPORATION.—If any foreign corporation
ceases to be a controlled foreign corporation during any taxable
year—
‘‘(A) the determination of any United States sharehold-
er’s pro rata share shall be made on the basis of stock
owned (within the meaning of section 958(a)) by such share-
holder on the last day during the taxable year on which
the foreign corporation is a controlled foreign corporation,
‘‘(B) the average referred to in subsection (a)(1)(A) for
such taxable year shall be determined by only taking into
account quarters ending on or before such last day, and
‘‘(C) in determining applicable earnings, the amount
taken into account by reason of being described in para-
graph (2) of section 316(a) shall be the portion of the
amount so described which is allocable (on a pro rata
basis) to the part of such year during which the corporation
is a controlled foreign corporation.’’
(3) Subsection (a) of section 959 (relating to exclusion from
gross income of previously taxed earnings and profits) is
amended by adding ‘‘or’’ at the end of paragraph (1), by striking
‘‘or’’ at the end of paragraph (2), and by striking paragraph
(3).
(4) Subsection (a) of section 959 is amended by striking
‘‘paragraphs (2) and (3)’’ in the last sentence and inserting
‘‘paragraph (2)’’.
(5) Subsection (c) of section 959 is amended by adding
at the end the following flush sentence:
‘‘References in this subsection to section 951(a)(1)(C) and subsection
(a)(3) shall be treated as references to such provisions as in effect
H. R. 2491—657
on the day before the date of the enactment of the Revenue Rec-
onciliation Act of 1995.’’
(6) Paragraph (1) of section 959(f) is amended to read
as follows:
‘‘(1) IN GENERAL.—For purposes of this section, amounts
that would be included under subparagraph (B) of section
951(a)(1) (determined without regard to this section) shall be
treated as attributable first to earnings described in subsection
(c)(2), and then to earnings described in subsection (c)(3).’’
(7) Paragraph (2) of section 959(f) is amended by striking
‘‘subparagraphs (B) and (C) of section 951(a)(1)’’ and inserting
‘‘section 951(a)(1)(B)’’.
(8) Subsection (b) of section 989 is amended by striking
‘‘subparagraph (B) or (C) of section 951(a)(1)’’ and inserting
‘‘section 951(a)(1)(B)’’.
(9) Paragraph (9) of section 1298(b), as redesignated by
section 11482, is amended by striking ‘‘subparagraph (B) or
(C) of section 951(a)(1)’’ and inserting ‘‘section 951(a)(1)(B)’’.
(10) Subsections (d)(3)(B) and (e)(2)(B)(ii) of section 1298,
as redesignated by section 11482, are each amended by striking
‘‘or section 956A’’.
(c) CLERICAL AMENDMENT.—The table of sections for subpart
F of part III of subchapter N of chapter 1 is amended by striking
the item relating to section 956A.
(d) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years of foreign corporations beginning after
September 30, 1995, and to taxable years of United States share-
holders within which or with which such taxable years of foreign
corporations end.
CHAPTER 5—OTHER INCOME TAX PROVISIONS
Subchapter A—Provisions Relating to S Corporations
SEC. 11501. S CORPORATIONS PERMITTED TO HAVE 75 SHAREHOLD-
ERS.
Subparagraph (A) of section 1361(b)(1) (defining small business
corporation) is amended by striking ‘‘35 shareholders’’ and inserting
‘‘75 shareholders’’.
SEC. 11502. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section 1361(c)(2)
(relating to certain trusts permitted as shareholders) is amended
by inserting after clause (iv) the following new clause:
‘‘(v) An electing small business trust.’’
(b) CURRENT BENEFICIARIES TREATED
AS SHAREHOLDERS.—
Subparagraph (B) of section 1361(c)(2) is amended by adding at
the end the following new clause:
‘‘(v) In the case of a trust described in clause
(v) of subparagraph (A), each potential current bene-
ficiary of such trust shall be treated as a shareholder;
except that, if for any period there is no potential
current beneficiary of such trust, such trust shall be
treated as the shareholder during such period.’’
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—Section 1361
(defining S corporation) is amended by adding at the end the
following new subsection:
H. R. 2491—658
‘‘(e) ELECTING SMALL BUSINESS TRUST DEFINED.—
‘‘(1) ELECTING
SMALL
BUSINESS
TRUST.—For purposes of
this section—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), the term ‘electing small business trust’ means any
trust if—
‘‘(i) such trust does not have as a beneficiary any
person other than (I) an individual, (II) an estate,
or (III) an organization described in paragraph (2),
(3), (4), or (5) of section 170(c) which holds a contingent
interest and is not a potential current beneficiary,
‘‘(ii) no interest in such trust was acquired by
purchase, and
‘‘(iii) an election under this subsection applies to
such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—The term ‘electing
small business trust’ shall not include—
‘‘(i) any qualified subchapter S trust (as defined
in subsection (d)(3)) if an election under subsection
(d)(2) applies to any corporation the stock of which
is held by such trust, and
‘‘(ii) any trust exempt from tax under this subtitle.
‘‘(C) PURCHASE.—For purposes of subparagraph (A),
the term ‘purchase’ means any acquisition if the basis
of the property acquired is determined under section 1012.
‘‘(2) POTENTIAL
CURRENT
BENEFICIARY.—For purposes of
this section, the term ‘potential current beneficiary’ means,
with respect to any period, any person who at any time during
such period is entitled to, or at the discretion of any person
may receive, a distribution from the principal or income of
the trust. If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such corporation,
the term ‘potential current beneficiary’ does not include any
person who first met the requirements of the preceding sentence
during the 60-day period ending on the date of such disposition.
‘‘(3) ELECTION.—An election under this subsection shall
be made by the trustee. Any such election shall apply to the
taxable year of the trust for which made and all subsequent
taxable years of such trust unless revoked with the consent
of the Secretary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business trusts, see sec-
tion 641(d).’’
(d) TAXATION OF ELECTING SMALL BUSINESS TRUSTS.—Section
641 (relating to imposition of tax on trusts) is amended by adding
at the end the following new subsection:
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING SMALL BUSI-
NESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chapter—
‘‘(A) the portion of any electing small business trust
which consists of stock in 1 or more S corporations shall
be treated as a separate trust, and
‘‘(B) the amount of the tax imposed by this chapter
on such separate trust shall be determined with the modi-
fications of paragraph (2).
‘‘(2) MODIFICATIONS.—For purposes of paragraph (1), the
modifications of this paragraph are the following:
H. R. 2491—659
‘‘(A) Except as provided in section 1(h), the amount
of the tax imposed by section 1(e) shall be determined
by using the highest rate of tax set forth in section 1(e).
‘‘(B) The exemption amount under section 55(d) shall
be zero.
‘‘(C) The only items of income, loss, deduction, or credit
to be taken into account are the following:
‘‘(i) The items required to be taken into account
under section 1366.
‘‘(ii) Any gain or loss from the disposition of stock
in an S corporation.
‘‘(iii) To the extent provided in regulations, State
or local income taxes or administrative expenses to
the extent allocable to items described in clauses (i)
and (ii).
No deduction or credit shall be allowed for any amount
not described in this paragraph, and no item described
in this paragraph shall be apportioned to any beneficiary.
‘‘(D) No amount shall be allowed under paragraph (1)
or (2) of section 1211(b).
‘‘(3) TREATMENT OF REMAINDER OF TRUST AND DISTRIBU-
TIONS.—For purposes of determining—
‘‘(A) the amount of the tax imposed by this chapter
on the portion of any electing small business trust not
treated as a separate trust under paragraph (1), and
‘‘(B) the distributable net income of the entire trust,
the items referred to in paragraph (2)(C) shall be excluded.
Except as provided in the preceding sentence, this subsection
shall not affect the taxation of any distribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE
TERMI-
NATION OF SEPARATE TRUST.—If a portion of an electing small
business trust ceases to be treated as a separate trust under
paragraph (1), any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be taken
into account by the entire trust.
‘‘(5) ELECTING
SMALL
BUSINESS
TRUST.—For purposes of
this subsection, the term ‘electing small business trust’ has
the meaning given such term by section 1361(e)(1).’’
(e) TECHNICAL AMENDMENT.—Paragraph (1) of section 1366(a)
is amended by inserting ‘‘, or of a trust or estate which terminates,’’
after ‘‘who dies’’.
SEC. 11503. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN
TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to certain trusts
permitted as shareholders) is amended—
(1) by striking ‘‘60-day period’’ each place it appears in
clauses (ii) and (iii) and inserting ‘‘2-year period’’, and
(2) by striking the last sentence in clause (ii).
SEC. 11504. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE HAR-
BOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining straight debt) is
amended by striking ‘‘or a trust described in paragraph (2)’’ and
inserting ‘‘a trust described in paragraph (2), or a person which
is actively and regularly engaged in the business of lending money.’’
H. R. 2491—661
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For 
purposes 
of
subparagraph (A), the term ‘affected shareholders’ means
the shareholder whose interest is terminated and all share-
holders to whom such shareholder has transferred shares
during the taxable year. If such shareholder has transferred
shares to the corporation, the term ‘affected shareholders’
shall include all persons who are shareholders during the
taxable year.’’
SEC. 11507. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b) (relating
to post-termination transition period) is amended by striking ‘‘and’’
at the end of subparagraph (A), by redesignating subparagraph
(B) as subparagraph (C), and by inserting after subparagraph (A)
the following new subparagraph:
‘‘(B) the 120-day period beginning on the date of any
determination pursuant to an audit of the taxpayer which
follows the termination of the corporation’s election and
which adjusts a subchapter S item of income, loss, or
deduction of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of section 1377(b)
is amended by striking subparagraphs (A) and (B), by redesignating
subparagraph (C) as subparagraph (B), and by inserting before
subparagraph (B) (as so redesignated) the following new subpara-
graph:
‘‘(A) a determination as defined in section 1313(a),
or’’.
(c) REPEAL
OF SPECIAL AUDIT PROVISIONS
FOR SUBCHAPTER
S ITEMS.—
(1) GENERAL RULE.—Subchapter D of chapter 63 (relating
to tax treatment of subchapter S items) is hereby repealed.
(2) CONSISTENT
TREATMENT
REQUIRED.—Section 6037
(relating to return of S corporation) is amended by adding
at the end the following new subsection:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT WITH COR-
PORATE RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.—
‘‘(1) IN GENERAL.—A shareholder of an S corporation shall,
on such shareholder’s return, treat a subchapter S item in
a manner which is consistent with the treatment of such item
on the corporate return.
‘‘(2) NOTIFICATION OF INCONSISTENT TREATMENT.—
‘‘(A) IN GENERAL.—In the case of any subchapter S
item, if—
‘‘(i)(I) the corporation has filed a return but the
shareholder’s treatment on his return is (or may be)
inconsistent with the treatment of the item on the
corporate return, or
‘‘(II) the corporation has not filed a return, and
‘‘(ii) the shareholder files with the Secretary a
statement identifying the inconsistency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER
RECEIVING
INCORRECT
INFORMA-
TION.—A shareholder shall be treated as having complied
with clause (ii) of subparagraph (A) with respect to a sub-
chapter S item if the shareholder—
H. R. 2491—662
‘‘(i) demonstrates to the satisfaction of the Sec-
retary that the treatment of the subchapter S item
on the shareholder’s return is consistent with the treat-
ment of the item on the schedule furnished to the
shareholder by the corporation, and
‘‘(ii) elects to have this paragraph apply with
respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any case—
‘‘(A) described in subparagraph (A)(i)(I) of paragraph
(2), and
‘‘(B) in which the shareholder does not comply with
subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items
by such shareholder consistent with the treatment of the items
on the corporate return shall be treated as arising out of
mathematical or clerical errors and assessed according to sec-
tion 6213(b)(1). Paragraph (2) of section 6213(b) shall not apply
to any assessment referred to in the preceding sentence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of this subsection,
the term ‘subchapter S item’ means any item of an S corporation
to the extent that regulations prescribed by the Secretary pro-
vide that, for purposes of this subtitle, such item is more
appropriately determined at the corporation level than at the
shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SEC-
TION.—
‘‘For addition to tax in the case of a shareholder’s negligence in
connection with, or disregard of, the requirements of this section,
see part II of subchapter A of chapter 68.’’
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking subsection
(g).
(B) Subsection (b) of section 6233 is amended to read
as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a partnership return
is filed for any taxable year but it is determined that there is
no entity for such taxable year, to the extent provided in regulations,
rules similar to the rules of subsection (a) shall apply.’’
(C) The table of subchapters for chapter 63 is amended
by striking the item relating to subchapter D.
SEC. 11508. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b) (defining
ineligible corporation) is amended by striking subparagraph (A)
and by redesignating subparagraphs (B), (C), (D), and (E) as sub-
paragraphs (A), (B), (C), and (D), respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S CORPORATION
SUBSIDIARIES.—Section 1361(b) (defining small business corpora-
tion) is amended by adding at the end the following new paragraph:
‘‘(3) TREATMENT
OF
CERTAIN
WHOLLY
OWNED
SUBSIDI-
ARIES.—
‘‘(A) IN GENERAL.—For purposes of this title—
‘‘(i) a corporation which is a qualified subchapter
S subsidiary shall not be treated as a separate corpora-
tion, and
‘‘(ii) all assets, liabilities, and items of income,
deduction, and credit of a qualified subchapter S
H. R. 2491—663
subsidiary shall be treated as assets, liabilities, and
such items (as the case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDIARY.—For pur-
poses of this paragraph, the term ‘qualified subchapter
S subsidiary’ means any domestic corporation which is
not an ineligible corporation (as defined in paragraph (2)),
if—
‘‘(i) 100 percent of the stock of such corporation
is held by the S corporation, and
‘‘(ii) the S corporation elects to treat such corpora-
tion as a qualified subchapter S subsidiary.
‘‘(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUB-
CHAPTER S SUBSIDIARY STATUS.—For purposes of this title,
if any corporation which was a qualified subchapter S
subsidiary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as a new
corporation acquiring all of its assets (and assuming all
of its liabilities) immediately before such cessation from
the S corporation in exchange for its stock.’’
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE INVESTMENT
INCOME.—Paragraph (3) of section 1362(d) is amended by adding
at the end the following new subparagraph:
‘‘(F) TREATMENT OF CERTAIN DIVIDENDS.—If an S cor-
poration holds stock in a C corporation meeting the require-
ments of section 1504(a)(2), the term ‘passive investment
income’ shall not include dividends from such C corporation
to the extent such dividends are attributable to the earn-
ings and profits of such C corporation derived from the
active conduct of a trade or business.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended by striking
paragraph (6).
(2) Subsection (b) of section 1504 (defining includible cor-
poration) is amended by adding at the end the following new
paragraph:
‘‘(8) An S corporation.’’
SEC. 11509. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.
(a) ADJUSTMENTS
FOR DISTRIBUTIONS TAKEN INTO ACCOUNT
BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1) (relating to losses
and deductions cannot exceed shareholder’s basis in stock and
debt) is amended by striking ‘‘paragraph (1)’’ and inserting
‘‘paragraphs (1) and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to certain adjust-
ments taken into account) is amended by adding at the end
the following new sentence:
‘‘In the case of any distribution made during any taxable year,
the adjusted basis of the stock shall be determined with regard
to the adjustments provided in paragraph (1) of section 1367(a)
for the taxable year.’’
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Paragraph (1) of
section 1368(e) (relating to accumulated adjustments account) is
amended by adding at the end the following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section to distribu-
tions made during any taxable year, the amount in the
H. R. 2491—664
accumulated adjustments account as of the close of such
taxable year shall be determined without regard to any
net negative adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For purposes of
clause (i), the term ‘net negative adjustment’ means, with
respect to any taxable year, the excess (if any) of—
‘‘(I) the reductions in the account for the taxable
year (other than for distributions), over
‘‘(II) the increases in such account for such taxable
year.’’
(c) CONFORMING AMENDMENTS.—Subparagraph (A) of section
1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph (B)’’ and
inserting ‘‘as otherwise provided in this paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and inserting ‘‘section
1367(a)(2)’’.
SEC. 11510. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER
C.
Subsection (a) of section 1371 (relating to application of sub-
chapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Except as other-
wise provided in this title, and except to the extent inconsistent
with this subchapter, subchapter C shall apply to an S corporation
and its shareholders.’’
SEC. 11511. ELIMINATION OF CERTAIN EARNINGS AND PROFITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business corporation
under subchapter S of chapter 1 of the Internal Revenue Code
of 1986 for any taxable year beginning before January 1, 1983,
and
(2) such corporation is an S corporation under subchapter
S of chapter 1 of such Code for its first taxable year beginning
after December 31, 1995,
the amount of such corporation’s accumulated earnings and profits
(as of the beginning of such first taxable year) shall be reduced
by an amount equal to the portion (if any) of such accumulated
earnings and profits which were accumulated in any taxable year
beginning before January 1, 1983, for which such corporation was
an electing small business corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1362(d) is amended—
(A) by striking ‘‘SUBCHAPTER C’’ in the paragraph head-
ing and inserting ‘‘ACCUMULATED’’,
(B) by striking ‘‘subchapter C’’ in subparagraph (A)(i)(I)
and inserting ‘‘accumulated’’, and
(C) by striking subparagraph (B) and redesignating
the following subparagraphs accordingly.
(2)(A) Subsection (a) of section 1375 is amended by striking
‘‘subchapter C’’ in paragraph (1) and inserting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amended to read
as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The terms ‘passive
investment income’ and ‘gross receipts’ have the same respec-
tive meanings as when used in paragraph (3) of section
1362(d).’’