IB
Union Calendar No. 136
106TH CONGRESS
1ST SESSION
H. R. 2488
[Report No. 106–238]
To amend the Internal Revenue Code of 1986 to reduce individual income
tax rates, to provide marriage penalty relief, to reduce taxes on savings
and investments, to provide estate and gift tax relief, to provide incen-
tives for education savings and health care, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JULY 13, 1999
Mr. ARCHER introduced the following bill; which was referred to the
Committee on Ways and Means
JULY 16, 1999
Additional sponsors: Mr. CRANE, Mr. ENGLISH, Mr. MCINNIS, Mr. HILL of
Montana, Mr. THOMAS, Mr. ISAKSON, Mr. SMITH of Texas, and Mr. FOLEY
JULY 16, 1999
Reported with amendments, committed to the Committee of the Whole House
on the State of the Union, and ordered to be printed
[Strike out all after the enacting clause and insert the part printed in italic]
[For text of introduced bill, see copy of bill as introduced on July 13, 1999]
A BILL
To amend the Internal Revenue Code of 1986 to reduce
individual income tax rates, to provide marriage penalty
relief, to reduce taxes on savings and investments, to
provide estate and gift tax relief, to provide incentives
for education savings and health care, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) SHORT TITLE.—This Act may be cited as the ‘‘Fi-
nancial Freedom Act of 1999’’.
(b) AMENDMENT OF 1986 CODE.—Except as otherwise
expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
(c) SECTION 15 NOT TO APPLY.—No amendment
made by this Act shall be treated as a change in a rate
of tax for purposes of section 15 of the Internal Revenue
Code of 1986.
(d) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; etc.
TITLE I—BROAD-BASED TAX RELIEF
Subtitle A—10-Percent Reduction in Individual Income Tax Rates
Sec. 101. 10-percent reduction in individual income tax rates.
Subtitle B—Marriage Penalty Tax Relief
Sec. 111. Elimination of marriage penalty in standard deduction.
Sec. 112. Elimination of marriage penalty in deduction for interest on education
loans.
Sec. 113. Rollover from regular IRA to Roth IRA.
Subtitle C—Repeal of Alternative Minimum Tax on Individuals
Sec. 121. Repeal of alternative minimum tax on individuals.
TITLE II—RELIEF FROM TAXATION ON SAVINGS AND INVESTMENTS
Sec. 201. Exemption of certain interest and dividend income from tax.
Sec. 202. Reduction in individual capital gain tax rates.
Sec. 203. Capital gains tax rates applied to capital gains of designated settlement
funds.
Sec. 204. Special rule for members of uniformed services and foreign service, and
other employees, in determining exclusion of gain from sale of
principal residence.
Sec. 205. Treatment of certain dealer derivative financial instruments, hedging
transactions, and supplies as ordinary assets.
Sec. 206. Worthless securities of financial institutions.
TITLE III—INCENTIVES FOR BUSINESS INVESTMENT AND JOB
CREATION
Sec. 301. Reduction in corporate capital gain tax rate.
Sec. 302. Repeal of alternative minimum tax on corporations.
TITLE IV—EDUCATION SAVINGS INCENTIVES
Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.
Sec. 403. Exclusion of certain amounts received under the National Health Serv-
ice Corps scholarship program, the F. Edward Hebert Armed
Forces Health Professions Scholarship and Financial Assistance
Program, and certain other programs.
Sec. 404. Additional increase in arbitrage rebate exception for governmental
bonds used to finance educational facilities.
Sec. 405. Modification of arbitrage rebate rules applicable to public school con-
struction bonds.
Sec. 406. Repeal of 60-month limitation on deduction for interest on education
loans.
TITLE V—HEALTH CARE PROVISIONS
Sec. 501. Deduction for health and long-term care insurance costs of individuals
not participating in employer-subsidized health plans.
Sec. 502. Long-term care insurance permitted to be offered under cafeteria plans
and flexible spending arrangements.
Sec. 503. Expansion of availability of medical savings accounts.
Sec. 504. Additional personal exemption for taxpayer caring for elderly family
member in taxpayer’s home.
Sec. 505. Expanded human clinical trials qualifying for orphan drug credit.
Sec. 506. Inclusion of certain vaccines against streptococcus pneumoniae to list
of taxable vaccines.
Sec. 507. Above-the-line deduction for prescription drug insurance coverage of
medicare beneficiaries if certain medicare and low-income assist-
ance provisions in effect.
TITLE VI—ESTATE TAX RELIEF
Subtitle A—Repeal of Estate, Gift, and Generation-Skipping Taxes; Repeal of
Step Up in Basis At Death
Sec. 601. Repeal of estate, gift, and generation-skipping taxes.
Sec. 602. Termination of step up in basis at death.
Sec. 603. Carryover basis at death.
Subtitle B—Reductions of Estate and Gift Tax Rates Prior to Repeal
Sec. 611. Additional reductions of estate and gift tax rates.
Subtitle C—Unified Credit Replaced With Unified Exemption Amount
Sec. 621. Unified credit against estate and gift taxes replaced with unified ex-
emption amount.
Subtitle D—Modifications of Generation-Skipping Transfer Tax
Sec. 631. Deemed allocation of GST exemption to lifetime transfers to trusts; ret-
roactive allocations.
Sec. 632. Severing of trusts.
Sec. 633. Modification of certain valuation rules.
Sec. 634. Relief provisions.
TITLE VII—TAX RELIEF FOR DISTRESSED COMMUNITIES AND
INDUSTRIES
Subtitle A—American Community Renewal Act of 1999
Sec. 701. Short title.
Sec. 702. Designation of and tax incentives for renewal communities.
Sec. 703. Extension of expensing of environmental remediation costs to renewal
communities.
Sec. 704. Extension of work opportunity tax credit for renewal communities
Sec. 705. Conforming and clerical amendments.
Sec. 706. Evaluation and reporting requirements.
Subtitle B—Farming Incentive
Sec. 711. Production flexibility contract payments.
Subtitle C—Oil and Gas Incentives
Sec. 721. 5-year net operating loss carryback for losses attributable to operating
mineral interests of independent oil and gas producers.
Sec. 722. Deduction for delay rental payments.
Sec. 723. Election to expense geological and geophysical expenditures.
Sec. 724. Temporary suspension of limitation based on 65 percent of taxable in-
come.
Sec. 725. Determination of small refiner exception to oil depletion deduction.
Subtitle D—Timber Incentives
Sec. 731. Temporary suspension of maximum amount of amortizable reforestation
expenditures.
Sec. 732. Capital gain treatment under section 631(b) to apply to outright sales
by land owner.
Subtitle E—Steel Industry Incentive
Sec. 741. Minimum tax relief for steel industry.
TITLE VIII—RELIEF FOR SMALL BUSINESSES
Sec. 801. Deduction for 100 percent of health insurance costs of self-employed in-
dividuals.
Sec. 802. Increase in expense treatment for small businesses.
Sec. 803. Repeal of Federal unemployment surtax.
Sec. 804. Restoration of 80 percent deduction for meal expenses.
TITLE IX—INTERNATIONAL TAX RELIEF
Sec. 901. Interest allocation rules.
Sec. 902. Look-thru rules to apply to dividends from noncontrolled section 902
corporations.
Sec. 903. Clarification of treatment of pipeline transportation income.
Sec. 904. Subpart F treatment of income from transmission of high voltage elec-
tricity.
Sec. 905. Recharacterization of overall domestic loss.
Sec. 906. Treatment of military property of foreign sales corporations.
Sec. 907. Treatment of certain dividends of regulated investment companies.
Sec. 908. Repeal of special rules for applying foreign tax credit in case of foreign
oil and gas income.
Sec. 909. Study of proper treatment of European Union under same country ex-
ceptions.
Sec. 910. Application of denial of foreign tax credit with respect to certain for-
eign countries.
Sec. 911. Advance pricing agreements treated as confidential taxpayer informa-
tion.
Sec. 912. Increase in dollar limitation on section 911 exclusion.
TITLE X—PROVISIONS RELATING TO TAX-EXEMPT ORGANIZATIONS
Sec. 1001. Exemption from income tax for State-created organizations providing
property and casualty insurance for property for which such
coverage is otherwise unavailable.
Sec. 1002. Modification of special arbitrage rule for certain funds.
Sec. 1003. Charitable split-dollar life insurance, annuity, and endowment con-
tracts.
Sec. 1004. Exemption procedure from taxes on self-dealing.
Sec. 1005. Expansion of declaratory judgment remedy to tax-exempt organiza-
tions.
Sec. 1006. Modifications to section 512(b)(13).
TITLE XI—REAL ESTATE PROVISIONS
Subtitle A—Provisions Relating to Real Estate Investment Trusts
PART I—TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT
SUBSIDIARIES
Sec. 1101. Modifications to asset diversification test.
Sec. 1102. Treatment of income and services provided by taxable REIT subsidi-
aries.
Sec. 1103. Taxable REIT subsidiary.
Sec. 1104. Limitation on earnings stripping.
Sec. 1105. 100 percent tax on improperly allocated amounts.
Sec. 1106. Effective date.
PART II—HEALTH CARE REITS
Sec. 1111. Health care REITs.
PART III—CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES
Sec. 1121. Conformity with regulated investment company rules.
PART IV—CLARIFICATION OF EXCEPTION FROM IMPERMISSIBLE TENANT
SERVICE INCOME
Sec. 1131. Clarification of exception for independent operators.
PART V—MODIFICATION OF EARNINGS AND PROFITS RULES
Sec. 1141. Modification of earnings and profits rules.
PART VI—STUDY RELATING TO TAXABLE REIT SUBSIDIARIES
Sec. 1151. Study relating to taxable REIT subsidiaries.
Subtitle B—Modification of At-Risk Rules for Publicly Traded Nonrecourse
Debt
Sec. 1161. Treatment under at-risk rules of publicly traded nonrecourse debt.
Subtitle C—Treatment of Construction Allowances and Certain Contributions to
Capital of Retailers
Sec. 1171. Exclusion from gross income of qualified lessee construction allowances
not limited for certain retailers to short-term leases.
Sec. 1172. Exclusion from gross income for certain contributions to the capital
of certain retailers.
TITLE XII—PROVISIONS RELATING TO PENSIONS
Subtitle A—Expanding Coverage
Sec. 1201. Increase in benefit and contribution limits.
Sec. 1202. Plan loans for subchapter S owners, partners, and sole proprietors.
Sec. 1203. Modification of top-heavy rules.
Sec. 1204. Elective deferrals not taken into account for purposes of deduction lim-
its.
Sec. 1205. Reduced PBGC premium for new plans of small employers.
Sec. 1206. Reduction of additional PBGC premium for new and small plans.
Sec. 1207. Repeal of coordination requirements for deferred compensation plans
of State and local governments and tax-exempt organizations.
Sec. 1208. Elimination of user fee for requests to IRS regarding pension plans.
Sec. 1209. Deduction limits.
Sec. 1210. Option to treat elective deferrals as after-tax contributions.
Sec. 1211. Increase in minimum defined benefit limit under section 415.
Subtitle B—Enhancing Fairness for Women
Sec. 1221. Additional salary reduction catch-up contributions.
Sec. 1222. Equitable treatment for contributions of employees to defined contribu-
tion plans.
Sec. 1223. Faster vesting of certain employer matching contributions.
Sec. 1224. Simplify and update the minimum distribution rules.
Sec. 1225. Clarification of tax treatment of division of section 457 plan benefits
upon divorce.
Subtitle C—Increasing Portability for Participants
Sec. 1231. Rollovers allowed among various types of plans.
Sec. 1232. Rollovers of IRAs into workplace retirement plans.
Sec. 1233. Rollovers of after-tax contributions.
Sec. 1234. Hardship exception to 60-day rule.
Sec. 1235. Treatment of forms of distribution.
Sec. 1236. Rationalization of restrictions on distributions.
Sec. 1237. Purchase of service credit in governmental defined benefit plans.
Sec. 1238. Employers may disregard rollovers for purposes of cash-out amounts.
Sec. 1239. Minimum distribution and inclusion requirements for section 457
plans.
Subtitle D—Strengthening Pension Security and Enforcement
Sec. 1241. Repeal of 150 percent of current liability funding limit.
Sec. 1242. Maximum contribution deduction rules modified and applied to all de-
fined benefit plans.
Sec. 1243. Missing participants.
Sec. 1244. Excise tax relief for sound pension funding.
Sec. 1245. Excise tax on failure to provide notice by defined benefit plans signifi-
cantly reducing future benefit accruals.
Subtitle E—Reducing Regulatory Burdens
Sec. 1251. Repeal of the multiple use test.
Sec. 1252. Modification of timing of plan valuations.
Sec. 1253. Flexibility and nondiscrimination and line of business rules.
Sec. 1254. Substantial owner benefits in terminated plans.
Sec. 1255. ESOP dividends may be reinvested without loss of dividend deduction.
Sec. 1256. Notice and consent period regarding distributions.
Sec. 1257. Repeal of transition rule relating to certain highly compensated em-
ployees.
Sec. 1258. Employees of tax-exempt entities.
Sec. 1259. Clarification of treatment of employer-provided retirement advice.
Sec. 1260. Provisions relating to plan amendments.
Sec. 1261. Model plans for small businesses.
Sec. 1262. Simplified annual filing requirement for plans with fewer than 25 em-
ployees.
Sec. 1263. Improvement of Employee Plans Compliance Resolution System.
TITLE XIII—MISCELLANEOUS PROVISIONS
Subtitle A—Provisions Primarily Affecting Individuals
Sec. 1301. Exclusion for foster care payments to apply to payments by qualified
placement agencies.
Sec. 1302. Mileage reimbursements to charitable volunteers excluded from gross
income.
Sec. 1303. W–2 to include employer social security taxes.
Sec. 1304. Consistent treatment of survivor benefits for public safety officers killed
in the line of duty.
Subtitle B—Provisions Primarily Affecting Businesses
Sec. 1311. Distributions from publicly traded partnerships treated as qualifying
income of regulated investment companies.
Sec. 1312. Special passive activity rule for publicly traded partnerships to apply
to regulated investment companies.
Sec. 1313. Large electric trucks, vans, and buses eligible for deduction for clean-
fuel vehicles in lieu of credit.
Sec. 1314. Modifications to special rules for nuclear decommissioning costs.
Sec. 1315. Consolidation of life insurance companies with other corporations.
Subtitle C—Provisions Relating to Excise Taxes
Sec. 1321. Consolidation of Hazardous Substance Superfund and Leaking Under-
ground Storage Tank Trust Fund.
Sec. 1322. Repeal of certain motor fuel excise taxes on fuel used by railroads and
on inland waterway transportation.
Sec. 1323. Repeal of excise tax on fishing tackle boxes.
Sec. 1324. Clarification of excise tax imposed on arrow components.
Subtitle D—Improvements in Low-Income Housing Credit
Sec. 1331. Increase in State ceiling on low-income housing credit.
Sec. 1332. Modification of criteria for allocating housing credits among projects.
Sec. 1333. Additional responsibilities of housing credit agencies.
Sec. 1334. Modifications to rules relating to basis of building which is eligible for
credit.
Sec. 1335. Other modifications.
Sec. 1336. Carryforward rules.
Sec. 1337. Effective date.
Subtitle E—Entrepreneurial Equity Capital Formation
PART I—TAX-FREE CONVERSIONS OF SPECIALIZED SMALL BUSINESS
INVESTMENT COMPANIES INTO PASS-THRU ENTITIES
Sec. 1341. Modifications to provisions relating to regulated investment compa-
nies.
Sec. 1342. Tax-free reorganization of specialized small business investment com-
pany as a partnership.
PART II—ADDITIONAL INCENTIVES RELATED TO INVESTING IN SPECIALIZED
SMALL BUSINESS INVESTMENT COMPANIES
Sec. 1346. Expansion of nonrecognition treatment for securities gain rolled over
into specialized small business investment companies.
Sec. 1347. Modifications to exclusion for gain from qualified small business stock.
Subtitle F—Other Provisions
Sec. 1351. Increase in volume cap on private activity bonds.
Sec. 1352. Tax treatment of Alaska Native Settlement Trusts.
Sec. 1353. Increase in threshold for Joint Committee reports on refunds and cred-
its.
Sec. 1354. Clarification of depreciation study.
Subtitle G—Tax Court Provisions
Sec. 1361. Tax Court filing fee in all cases commenced by filing petition.
Sec. 1362. Expanded use of Tax Court practice fee.
Sec. 1363. Confirmation of authority of Tax Court to apply doctrine of equitable
recoupment.
Subtitle H—Tax-Free Transfer of Bottled Distilled Spirits to Bonded Dealers
Sec. 1371. Tax-free transfer of bottled distilled spirits from distilled spirits plant
to bonded dealer.
Sec. 1372. Establishment of distilled spirits plant.
Sec. 1373. Distilled spirits plants.
Sec. 1374. Bonded dealers.
Sec. 1375. Time for collecting tax on distilled spirits.
Sec. 1376. Exemption from occupational tax not applicable.
Sec. 1377. Technical, conforming, and clerical amendments.
Sec. 1378. Cooperative agreements.
Sec. 1379. Effective date.
Sec. 1380. Study.
TITLE XIV—EXTENSIONS OF EXPIRING PROVISIONS
Sec. 1401. Research credit.
Sec. 1402. Subpart F exemption for active financing income.
Sec. 1403. Taxable income limit on percentage depletion for marginal production.
Sec. 1404. Work opportunity credit and welfare-to-work credit.
TITLE XV—REVENUE OFFSETS
Sec. 1501. Returns relating to cancellations of indebtedness by organizations lend-
ing money.
Sec. 1502. Extension of Internal Revenue Service user fees.
Sec. 1503. Limitations on welfare benefit funds of 10 or more employer plans.
Sec. 1504. Increase in elective withholding rate for nonperiodic distributions from
deferred compensation plans.
Sec. 1505. Controlled entities ineligible for REIT status.
Sec. 1506. Treatment of gain from constructive ownership transactions.
Sec. 1507. Transfer of excess defined benefit plan assets for retiree health benefits.
Sec. 1508. Modification of installment method and repeal of installment method
for accrual method taxpayers.
Sec. 1509. Limitation on use of nonaccrual experience method of accounting.
Sec. 1510. Exclusion of like-kind exchange property from nonrecognition treat-
ment on the sale of a principal residence.
TITLE XVI—TECHNICAL CORRECTIONS
Sec. 1601. Amendments related to Tax and Trade Relief Extension Act of 1998.
Sec. 1602. Amendments related to Internal Revenue Service Restructuring and
Reform Act of 1998.
Sec. 1603. Amendments related to Taxpayer Relief Act of 1997.
Sec. 1604. Other technical corrections.
Sec. 1605. Clerical changes.
TITLE I—BROAD-BASED TAX
RELIEF
Subtitle A—10-Percent Reduction in
Individual Income Tax Rates
SEC. 101. 10-PERCENT REDUCTION IN INDIVIDUAL INCOME
TAX RATES.
(a) REGULAR INCOME TAX RATES.—
(1) IN GENERAL.—Subsection (f) of section 1 is
amended by adding at the end the following new
paragraph:
‘‘(8) RATE REDUCTIONS.—In prescribing the ta-
bles under paragraph (1) which apply with respect to
taxable years beginning in a calendar year after
2000, each rate in such tables (without regard to this
paragraph) shall be reduced by the number of percent-
age points (rounded to the next lowest tenth) equal to
the applicable percentage (determined in accordance
with the following table) of such rate:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2001 through 2004 ............................................................
2.5
2005 through 2007 ............................................................
5.0
2008 ....................................................................................
7.5
2009 and thereafter ...........................................................
10.0.’’
(2) TECHNICAL AMENDMENTS.—
(A) Subparagraph (B) of section 1(f)(2) is
amended by inserting ‘‘except as provided in
paragraph (8),’’ before ‘‘by not changing’’.
(B) Subparagraph (C) of section 1(f)(2) is
amended by inserting ‘‘and the reductions under
paragraph (8) in the rates of tax’’ before the pe-
riod.
(C) The heading for subsection (f) of section
1 is amended by inserting ‘‘RATE REDUCTIONS;’’
before ‘‘ADJUSTMENTS’’.
(D) Section 1(g)(7)(B)(ii)(II) is amended
by striking ‘‘15 percent’’ and inserting ‘‘the per-
centage applicable to the lowest income bracket
in subsection (c)’’.
(E) Subparagraphs (A)(ii)(I) and (B)(i) of
section 1(h)(1) are each amended by striking ‘‘28
percent’’ and inserting ‘‘25.2 percent’’.
(F) Section 531 is amended by striking
‘‘39.6 percent of the accumulated taxable in-
come’’ and inserting ‘‘the product of the accumu-
lated taxable income and the percentage applica-
ble to the highest income bracket in section 1(c)’’.
(G) Section 541 is amended by striking
‘‘39.6 percent of the undistributed personal hold-
ing company income’’ and inserting ‘‘the prod-
uct of the undistributed personal holding com-
pany income and the percentage applicable to
the highest income bracket in section 1(c)’’.
(H) Section 3402(p)(1)(B) is amended by
striking ‘‘specified is 7, 15, 28, or 31 percent’’
and all that follows and inserting ‘‘specified is—
‘‘(i) 7 percent,
‘‘(ii) a percentage applicable to 1 of
the 3 lowest income brackets in section 1(c),
or
‘‘(iii) such other percentage as is per-
mitted under regulations prescribed by the
Secretary.’’
(I) Section 3402(p)(2) is amended by strik-
ing ‘‘15 percent of such payment’’ and inserting
‘‘the product of such payment and the percentage
applicable to the lowest income bracket in section
1(c)’’.
(J) Section 3402(q)(1) is amended by strik-
ing ‘‘28 percent of such payment’’ and inserting
‘‘the product of such payment and the percentage
applicable to the next to the lowest income brack-
et in section 1(c)’’.
(K) Section 3402(r)(3) is amended by strik-
ing ‘‘31 percent’’ and inserting ‘‘the rate appli-
cable to the third income bracket in such sec-
tion’’.
(L) Section 3406(a)(1) is amended by strik-
ing ‘‘31 percent of such payment’’ and inserting
‘‘the product of such payment and the percentage
applicable to the third income bracket in section
1(c)’’.
(b) MINIMUM TAX RATES.—Subparagraph (A) of sec-
tion 55(b)(1) is amended by adding at the end the following
new clause:
‘‘(iv) RATE REDUCTION.—In the case
of taxable years beginning after 2000, each
rate in clause (i) (without regard to this
clause) shall be reduced by the number of
percentage points (rounded to the next low-
est tenth) equal to the applicable percentage
(determined in accordance with section
1(f)(8)) of such rate.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
Subtitle B—Marriage Penalty Tax
Relief
SEC. 111. ELIMINATION OF MARRIAGE PENALTY IN STAND-
ARD DEDUCTION.
(a) IN GENERAL.—Paragraph (2) of section 63(c) (re-
lating to standard deduction) is amended—
(1) by striking ‘‘$5,000’’ in subparagraph (A)
and inserting ‘‘twice the dollar amount in effect
under subparagraph (C) for the taxable year’’,
(2) by adding ‘‘or’’ at the end of subparagraph
(B),
(3) by striking ‘‘in the case of’’ and all that fol-
lows in subparagraph (C) and inserting ‘‘in any
other case.’’, and
(4) by striking subparagraph (D).
(b) PHASE-IN.—Subsection (c) of section 63 is amend-
ed by adding at the end the following new paragraph:
‘‘(7) PHASE-IN OF INCREASE IN BASIC STANDARD
DEDUCTION.—In the case of taxable years beginning
before January 1, 2003—
‘‘(A) paragraph (2)(A) shall be applied by
substituting for ‘twice’—
‘‘(i) ‘1.778 times’ in the case of taxable
years beginning during 2001, and
‘‘(ii) ‘1.889 times’ in the case of tax-
able years beginning during 2002, and
‘‘(B) the basic standard deduction for a
married individual filing a separate return shall
be one-half of the amount applicable under para-
graph (2)(A).
If any amount determined under subparagraph (A) is
not a multiple of $50, such amount shall be rounded
to the next lowest multiple of $50.’’.
(c) TECHNICAL AMENDMENTS.—
(1) Subparagraph (B) of section 1(f)(6) is
amended by striking ‘‘(other than with’’ and all that
follows through ‘‘shall be applied’’ and inserting
‘‘(other than with respect to sections 63(c)(4) and
151(d)(4)(A)) shall be applied’’.
(2) Paragraph (4) of section 63(c) is amended by
adding at the end the following flush sentence:
‘‘The preceding sentence shall not apply to the
amount referred to in paragraph (2)(A).’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 112. ELIMINATION OF MARRIAGE PENALTY IN DEDUC-
TION FOR INTEREST ON EDUCATION LOANS.
(a) IN
GENERAL.—Subparagraph (B) of section
221(b)(2) (relating to limitation based on modified adjusted
gross income) is amended—
(1) by striking ‘‘$60,000’’ in clause (i)(II) and
inserting ‘‘twice such amount’’, and
(2) by inserting ‘‘($30,000 in the case of a joint
return)’’ after ‘‘$15,000’’ in clause (ii).
(b) CONFORMING AMENDMENT.—Paragraph (1) of sec-
tion 221(g) is amended by striking ‘‘and $60,000 amounts
in subsection (b)(2) shall each’’ and inserting ‘‘amount in
subsection (b)(2) shall’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
SEC. 113. ROLLOVER FROM REGULAR IRA TO ROTH IRA.
(a) IN GENERAL.—Clause (i) of section 408A(c)(3)(B)
is amended by inserting ‘‘($160,000 in the case of a joint
return)’’ after ‘‘$100,000’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
Subtitle C—Repeal of Alternative
Minimum Tax on Individuals
SEC. 121. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDI-
VIDUALS.
(a) IN GENERAL.—Subsection (a) of section 55 is
amended by adding at the end the following new flush sen-
tence:
‘‘For purposes of this title, the tentative minimum tax on
any taxpayer other than a corporation for any taxable year
beginning after December 31, 2007, shall be zero.’’
(b) REDUCTION OF TAX ON INDIVIDUALS PRIOR TO
REPEAL.—Section 55 is amended by adding at the end the
following new subsection:
‘‘(f) PHASEOUT OF TAX ON INDIVIDUALS.—
‘‘(1) IN GENERAL.—The tax imposed by this sec-
tion on a taxpayer other than a corporation for any
taxable year beginning after December 31, 2002, and
before January 1, 2008, shall be the applicable per-
centage of the tax which would be imposed but for this
subsection.
‘‘(2) APPLICABLE
PERCENTAGE.—For purposes
of paragraph (1), the applicable percentage shall be
determined in accordance with the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2003 ............................................................................................
2004 ............................................................................................
2005 ............................................................................................
2006 or 2007 ..............................................................................
50.’’
(c) NONREFUNDABLE PERSONAL CREDITS FULLY AL-
LOWED AGAINST REGULAR TAX LIABILITY.—
(1) IN GENERAL.—Subsection (a) of section 26
(relating to limitation based on amount of tax) is
amended to read as follows:
‘‘(a) LIMITATION BASED ON AMOUNT OF TAX.—The
aggregate amount of credits allowed by this subpart for the
taxable year shall not exceed the taxpayer’s regular tax li-
ability for the taxable year.’’
(2) CHILD CREDIT.—Subsection (d) of section 24
is amended by striking paragraph (2) and by redesig-
nating paragraph (3) as paragraph (2).
(d) LIMITATION ON USE OF CREDIT FOR PRIOR YEAR
MINIMUM TAX LIABILITY.—Subsection (c) of section 53 is
amended to read as follows:
‘‘(c) LIMITATION.—
‘‘(1) IN GENERAL.—Except as otherwise provided
in this subsection, the credit allowable under sub-
section (a) for any taxable year shall not exceed the
excess (if any) of—
‘‘(A) the regular tax liability of the tax-
payer for such taxable year reduced by the sum
of the credits allowable under subparts A, B, D,
E, and F of this part, over
‘‘(B) the tentative minimum tax for the tax-
able year.
‘‘(2) TAXABLE YEARS BEGINNING AFTER 2007.—
In the case of any taxable year beginning after 2007,
the credit allowable under subsection (a) to a tax-
payer other than a corporation for any taxable year
shall not exceed 90 percent of the excess (if any) of—
‘‘(A) regular tax liability of the taxpayer
for such taxable year, over
‘‘(B) the sum of the credits allowable under
subparts A, B, D, E, and F of this part.’’
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
TITLE 
II—RELIEF 
FROM 
TAX-
ATION ON SAVINGS AND IN-
VESTMENTS
SEC. 201. EXEMPTION OF CERTAIN INTEREST AND DIVI-
DEND INCOME FROM TAX.
(a) IN GENERAL.—Part III of subchapter B of chapter
1 (relating to amounts specifically excluded from gross in-
come) is amended by inserting after section 115 the fol-
lowing new section:
‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER-
EST RECEIVED BY INDIVIDUALS.
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include dividends and interest otherwise in-
cludible in gross income which are received during the tax-
able year by an individual.
‘‘(b) LIMITATIONS.—
‘‘(1) MAXIMUM AMOUNT.—The aggregate amount
excluded under subsection (a) for any taxable year
shall not exceed—
‘‘(A) in the case of any taxable year begin-
ning in 2001 or 2002, $100 ($200 in the case of
a joint return), and
‘‘(B) in the case of any taxable year begin-
ning after 2002, $200 ($400 in the case of a
joint return).
‘‘(2) CERTAIN
DIVIDENDS
EXCLUDED.—Sub-
section (a) shall not apply to any dividend from a
corporation which for the taxable year of the corpora-
tion in which the distribution is made is a corpora-
tion exempt from tax under section 521 (relating to
farmers’ cooperative associations).
‘‘(c) SPECIAL RULES.—For purposes of this section—
‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL GAIN
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPA-
NIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘For treatment of capital gain dividends, see sec-
tions 854(a) and 857(c).
‘‘(2) CERTAIN NONRESIDENT ALIENS INELIGIBLE
FOR EXCLUSION.—In the case of a nonresident alien
individual, subsection (a) shall apply only in deter-
mining the taxes imposed for the taxable year pursu-
ant to sections 871(b)(1) and 877(b).
‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWNER-
SHIP PLANS.—Subsection (a) shall not apply to any
dividend described in section 404(k).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 32(c)(5) is
amended by striking ‘‘or’’ at the end of clause (i), by
striking the period at the end of clause (ii) and in-
serting ‘‘; or’’, and by inserting after clause (ii) the
following new clause:
‘‘(iii) interest and dividends received
during the taxable year which are excluded
from gross income under section 116.’’.
(2) Subparagraph (A) of section 32(i)(2) is
amended by inserting ‘‘(determined without regard to
section 116)’’ before the comma.
(3) Subparagraph (B) of section 86(b)(2) is
amended to read as follows:
‘‘(B) increased by the sum of—
‘‘(i) the amount of interest received or
accrued by the taxpayer during the taxable
year which is exempt from tax, and
‘‘(ii) the amount of interest and divi-
dends received during the taxable year
which are excluded from gross income under
section 116.’’.
(4) Subsection (d) of section 135 is amended by
redesignating paragraph (4) as paragraph (5) and by
inserting after paragraph (3) the following new para-
graph:
‘‘(4) COORDINATION
WITH
SECTION
116.—This
section shall be applied before section 116.’’.
(5) Paragraph (2) of section 265(a) is amended
by inserting before the period ‘‘, or to purchase or
carry obligations or shares, or to make deposits, to the
extent the interest thereon is excludable from gross in-
come under section 116’’.
(6) Subsection (c) of section 584 is amended by
adding at the end the following new flush sentence:
‘‘The proportionate share of each participant in the amount
of dividends or interest received by the common trust fund
and to which section 116 applies shall be considered for
purposes of such section as having been received by such
participant.’’.
(7) Subsection (a) of section 643 is amended by
redesignating paragraph (7) as paragraph (8) and by
inserting after paragraph (6) the following new para-
graph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’.
(8) Section 854(a) is amended by inserting ‘‘sec-
tion 116 (relating to partial exclusion of dividends
and interest received by individuals) and’’ after ‘‘For
purposes of’’.
(9) Section 857(c) is amended to read as follows:
‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) TREATMENT FOR SECTION 116.—For pur-
poses of section 116 (relating to partial exclusion of
dividends and interest received by individuals), a
capital gain dividend (as defined in subsection
(b)(3)(C)) received from a real estate investment trust
which meets the requirements of this part shall not be
considered as a dividend.
‘‘(2) TREATMENT FOR SECTION 243.—For pur-
poses of section 243 (relating to deductions for divi-
dends received by corporations), a dividend received
from a real estate investment trust which meets the
requirements of this part shall not be considered as a
dividend.’’.
(10) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting after
the item relating to section 115 the following new
item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 202. REDUCTION IN INDIVIDUAL CAPITAL GAIN TAX
RATES.
(a) IN GENERAL.—
(1) Sections 1(h)(1)(B) and 55(b)(3)(B) are each
amended by striking ‘‘10 percent’’ and inserting ‘‘7.5
percent’’.
(2) The following sections are each amended by
striking ‘‘20 percent’’ and inserting ‘‘15 percent’’:
(A) Section 1(h)(1)(C).
(B) Section 55(b)(3)(C).
(C) Section 1445(e)(1).
(D) 
The 
second 
sentence 
of 
section
7518(g)(6)(A).
(E) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936.
(3) Sections 1(h)(1)(D) and 55(b)(3)(D) are each
amended by striking ‘‘25 percent’’ and inserting ‘‘20
percent’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 311 of the Taxpayer Relief Act of
1997 is amended by striking subsection (e).
(2) Section 1(h) is amended—
(A) by striking paragraphs (2), (9), and
(13),
(B) 
by 
redesignating 
paragraphs 
(3)
through (8) as paragraphs (2) through (7), re-
spectively, and
(C) by redesignating paragraphs (10), (11),
and (12) as paragraphs (8), (9), and (10), re-
spectively.
(3) Paragraph (3) of section 55(b) is amended by
striking ‘‘In the case of taxable years beginning after
December 31, 2000, rules similar to the rules of sec-
tion 1(h)(2) shall apply for purposes of subpara-
graphs (B) and (C).’’.
(4) Paragraph (7) of section 57(a) is amended—
(A) by striking ‘‘42 percent’’ and inserting
‘‘6 percent’’, and
(B) by striking the last sentence.
(c) TRANSITIONAL
RULES
FOR
TAXABLE
YEARS
WHICH INCLUDE JULY 1, 1999.—For purposes of applying
section 1(h) of the Internal Revenue Code of 1986 in the
case of a taxable year which includes July 1, 1999—
(1) The amount of tax determined under sub-
paragraph (B) of section 1(h)(1) of such Code shall be
the sum of—
(A) 7.5 percent of the lesser of—
(i) the net capital gain taking into ac-
count only gain or loss properly taken into
account for the portion of the taxable year
on or after such date (determined without
regard to collectibles gain or loss, gain de-
scribed in section (1)(h)(6)(A)(i) of such
Code, and section 1202 gain), or
(ii) the amount on which a tax is de-
termined under such subparagraph (without
regard to this subsection), plus
(B) 10 percent of the excess (if any) of—
(i) the amount on which a tax is deter-
mined under such subparagraph (without
regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A).
(2) The amount of tax determined under sub-
paragraph (C) of section (1)(h)(1) of such Code shall
be the sum of—
(A) 15 percent of the lesser of—
(i) the excess (if any) of the amount of
net capital gain determined under subpara-
graph (A)(i) of paragraph (1) of this sub-
section over the amount on which a tax is
determined under subparagraph (A) of
paragraph (1) of this subsection, or
(ii) the amount on which a tax is de-
termined under such subparagraph (C)
(without regard to this subsection), plus
(B) 20 percent of the excess (if any) of—
(i) the amount on which a tax is deter-
mined under such subparagraph (C) (with-
out regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A) of this
paragraph.
(3) The amount of tax determined under sub-
paragraph (D) of section (1)(h)(1) of such Code shall
be the sum of—
(A) 20 percent of the lesser of—
(i) the amount which would be deter-
mined under section 1(h)(6)(A)(i) of such
Code taking into account only gain prop-
erly taken into account for the portion of
the taxable year on or after such date, or
(ii) the amount on which a tax is de-
termined under such subparagraph (D)
(without regard to this subsection), plus
(B) 25 percent of the excess (if any) of—
(i) the amount on which a tax is deter-
mined under such subparagraph (D) (with-
out regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A) of this
paragraph.
(4) For purposes of applying section 55(b)(3) of
such Code, rules similar to the rules of paragraphs
(1), (2), and (3) of this subsection shall apply.
(5) In applying this subsection with respect to
any pass-thru entity, the determination of when gains
and loss are properly taken into account shall be
made at the entity level.
(6) Terms used in this subsection which are also
used in section 1(h) of such Code shall have the re-
spective meanings that such terms have in such sec-
tion.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as otherwise provided
by this subsection, the amendments made by this sec-
tion shall apply to taxable years ending after June
30, 1999.
(2) WITHHOLDING.—The amendment made by
subsection (a)(2)(C) shall apply to amounts paid
after the date of the enactment of this Act.
(3) SMALL BUSINESS STOCK.—The amendments
made by subsection (b)(4) shall apply to dispositions
on or after July 1, 1999.
SEC. 203. CAPITAL GAINS TAX RATES APPLIED TO CAPITAL
GAINS OF DESIGNATED SETTLEMENT FUNDS.
(a) IN GENERAL.—Paragraph (1) of section 468B(b)
(relating to taxation of designated settlement funds) is
amended by inserting ‘‘(subject to section 1(h))’’ after
‘‘maximum rate’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
SEC. 204. SPECIAL RULE FOR MEMBERS OF UNIFORMED
SERVICES 
AND 
FOREIGN 
SERVICE, 
AND
OTHER EMPLOYEES, IN DETERMINING EXCLU-
SION OF GAIN FROM SALE OF PRINCIPAL RES-
IDENCE.
(a) IN GENERAL.—Subsection (d) of section 121 (relat-
ing to exclusion of gain from sale of principal residence)
is amended by adding at the end the following new para-
graphs:
‘‘(9) MEMBERS OF UNIFORMED SERVICES AND
FOREIGN SERVICE.—
‘‘(A) IN GENERAL.—The running of the 5-
year period described in subsection (a) shall be
suspended with respect to an individual during
any time that such individual or such individ-
ual’s spouse is serving on qualified official ex-
tended duty as a member of the uniformed serv-
ices or of the Foreign Service.
‘‘(B) 
QUALIFIED
OFFICIAL
EXTENDED
DUTY.—For purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘qualified
official extended duty’ means any period of
extended duty as a member of the uniformed
services or a member of the Foreign Service
during which the member serves at a duty
station which is at least 50 miles from such
property or is under Government orders to
reside in Government quarters.
‘‘(ii) 
UNIFORMED
SERVICES.—The
term ‘uniformed services’ has the meaning
given such term by section 101(a)(5) of title
10, United States Code, as in effect on the
date of the enactment of the Financial Free-
dom Act of 1999.
‘‘(iii) FOREIGN
SERVICE
OF
THE
UNITED STATES.—The term ‘member of the
Foreign Service’ has the meaning given the
term ‘member of the Service’ by paragraph
(1), (2), (3), (4), or (5) of section 103 of the
Foreign Service Act of 1980, as in effect on
the date of the enactment of the Financial
Freedom Act of 1999.
‘‘(iv) EXTENDED DUTY.—The term ‘ex-
tended duty’ means any period of active
duty pursuant to a call or order to such
duty for a period in excess of 90 days or for
an indefinite period.
‘‘(10) OTHER EMPLOYEES.—
‘‘(A) IN GENERAL.—The running of the 5-
year period described in subsection (a) shall be
suspended with respect to an individual during
any time that such individual or such individ-
ual’s spouse is serving as an employee for a pe-
riod in excess of 90 days in an assignment by
the such employee’s employer outside the United
States.
‘‘(B) LIMITATIONS AND SPECIAL RULES.—
‘‘(i) MAXIMUM
PERIOD
OF
SUSPEN-
SION.—The suspension under subparagraph
(A) with respect to a principal residence
shall not exceed (in the aggregate) 5 years.
‘‘(ii) MEMBERS OF UNIFORMED SERV-
ICES
AND
FOREIGN
SERVICE.—Subpara-
graph (A) shall not apply to an individual
to whom paragraph (9) applies.
‘‘(iii) 
SELF-EMPLOYED
INDIVIDUAL
NOT CONSIDERED AN EMPLOYEE.—For pur-
poses of this paragraph, the term ‘employee’
does not include an individual who is an
employee within the meaning of section
401(c)(1) (relating to self-employed individ-
uals).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to sales and exchanges after the date
of the enactment of this Act.
SEC. 205. TREATMENT OF CERTAIN DEALER DERIVATIVE FI-
NANCIAL INSTRUMENTS, HEDGING TRANS-
ACTIONS, AND SUPPLIES AS ORDINARY AS-
SETS.
(a) IN GENERAL.—Section 1221 (defining capital as-
sets) is amended—
(1) by striking ‘‘For purposes’’ and inserting the
following:
‘‘(a) IN GENERAL.—For purposes’’,
(2) by striking the period at the end of para-
graph (5) and inserting a semicolon, and
(3) by adding at the end the following:
‘‘(6) any commodities derivative financial in-
strument held by a commodities derivatives dealer,
unless—
‘‘(A) it is established to the satisfaction of
the Secretary that such instrument has no con-
nection to the activities of such dealer as a deal-
er, and
‘‘(B) such instrument is clearly identified
in such dealer’s records as being described in
subparagraph (A) before the close of the day on
which it was acquired, originated, or entered
into (or such other time as the Secretary may by
regulations prescribe);
‘‘(7) any hedging transaction which is clearly
identified as such before the close of the day on which
it was acquired, originated, or entered into (or such
other time as the Secretary may by regulations pre-
scribe); or
‘‘(8) supplies of a type regularly used or con-
sumed by the taxpayer in the ordinary course of a
trade or business of the taxpayer.
‘‘(b) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMMODITIES
DERIVATIVE
FINANCIAL
IN-
STRUMENTS.—For purposes of subsection (a)(6)—
‘‘(A) COMMODITIES
DERIVATIVES
DEAL-
ER.—The term ‘commodities derivatives dealer’
means a person which regularly offers to enter
into, assume, offset, assign, or terminate posi-
tions in commodities derivative financial instru-
ments with customers in the ordinary course of
a trade or business.
‘‘(B) COMMODITIES DERIVATIVE FINANCIAL
INSTRUMENT.—
‘‘(i) IN GENERAL.—The term ‘commod-
ities derivative financial instrument’ means
any contract or financial instrument with
respect to commodities (other than a share
of stock in a corporation, a beneficial inter-
est in a partnership or trust, a note, bond,
debenture, or other evidence of indebtedness,
or a section 1256 contract (as defined in
section 1256(b)) the value or settlement
price of which is calculated by or deter-
mined by reference to a specified index.
‘‘(ii) SPECIFIED
INDEX.—The term
‘specified index’ means any one or more or
any combination of—
‘‘(I) a fixed rate, price, or
amount, or
‘‘(II) a variable rate, price, or
amount,
which is based on any current, objectively
determinable financial or economic infor-
mation with respect to commodities which
is not within the control of any of the par-
ties to the contract or instrument and is not
unique to any of the parties’ circumstances.
‘‘(2) HEDGING TRANSACTION.—
‘‘(A) IN
GENERAL.—For purposes of this
section, the term ‘hedging transaction’ means
any transaction entered into by the taxpayer in
the normal course of the taxpayer’s trade or busi-
ness primarily—
‘‘(i) to manage risk of price changes or
currency fluctuations with respect to ordi-
nary property which is held or to be held by
the taxpayer, or
‘‘(ii) to manage risk of interest rate or
price changes or currency fluctuations with
respect to borrowings made or to be made,
or ordinary obligations incurred or to be
incurred, by the taxpayer.
‘‘(B) TREATMENT
OF
NONIDENTIFICATION
OR
IMPROPER
IDENTIFICATION
OF
HEDGING
TRANSACTIONS.—Notwithstanding 
subsection
(a)(7), the Secretary shall prescribe regulations
to properly characterize of any income, gain, ex-
pense, or loss arising from a transaction—
‘‘(i) which is a hedging transaction but
which was not identified as such in accord-
ance with subsection (a)(7), or
‘‘(ii) which was so identified but is not
a hedging transaction.
‘‘(3) REGULATIONS.—The Secretary shall pre-
scribe such regulations as are appropriate to carry
out the purposes of paragraph (6) and (7) of sub-
section (a) in the case of transactions involving re-
lated parties.’’.
(b) MANAGEMENT OF RISK.—
(1) Section 475(c)(3) is amended by striking ‘‘re-
duces’’ and inserting ‘‘manages’’.
(2) Section 871(h)(4)(C)(iv) is amended by strik-
ing ‘‘to reduce’’ and inserting ‘‘to manage’’.
(3) Clauses (i) and (ii) of section 988(d)(2)(A)
are each amended by striking ‘‘to reduce’’ and insert-
ing ‘‘to manage’’.
(4) Paragraph (2) of section 1256(e) is amended
to read as follows:
‘‘(2) DEFINITION OF HEDGING TRANSACTION.—
For purposes of this subsection, the term ‘hedging
transaction’ means any hedging transaction (as de-
fined in section 1221(b)(2)(A)) if, before the close of
the day on which such transaction was entered into
(or such earlier time as the Secretary may prescribe
by regulations), the taxpayer clearly identifies such
transaction as being a hedging transaction.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to any instrument held, acquired, or en-
tered into, any transaction entered into, and supplies held
or acquired on or after the date of enactment of this Act.
SEC. 206. WORTHLESS SECURITIES OF FINANCIAL INSTITU-
TIONS.
(a) IN GENERAL.—The first sentence following section
165(g)(3)(B) (relating to securities of affiliated corpora-
tion) is amended to read as follows: ‘‘In computing gross
receipts for purposes of the preceding sentence, (i) gross re-
ceipts from sales or exchanges of stocks and securities shall
be taken into account only to the extent of gains therefrom,
and (ii) gross receipts from royalties, rents, dividends, in-
terest, annuities, and gains from sales or exchanges of stocks
and securities derived from (or directly related to) the con-
duct of an active trade or business of an insurance company
subject to tax under subchapter L or a qualified financial
institution (as defined in subsection (l)(3)) shall be treated
as from such sources other than royalties, rents, dividends,
interest, annuities, and gains.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to securities which become worthless
in taxable years beginning after December 31, 1999.
TITLE 
III—INCENTIVES 
FOR
BUSINESS INVESTMENT AND
JOB CREATION
SEC. 301. REDUCTION IN CORPORATE CAPITAL GAIN TAX
RATE.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has a net capital gain, then, in lieu of the tax
imposed by sections 11, 511, or 831(a) or (b), there is hereby
imposed a tax (if such tax is less than the tax imposed by
such sections) which shall consist of the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the net capital gain, at the rates and in the
manner as if this subsection had not been enacted,
plus
‘‘(2) the applicable percentage of the net capital
gain (or, if less, taxable income).
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of sub-
section (a), the applicable percentage shall be determined
in accordance with the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2000 .....................................................................................................
34.1
2001 .....................................................................................................
33.9
2002 .....................................................................................................
32.7
2003 .....................................................................................................
31.7
2004 .....................................................................................................
30.8
2005 .....................................................................................................
29.8
2006 .....................................................................................................
29.2
2007 .....................................................................................................
28.0
2008 .....................................................................................................
27.4
2009 .....................................................................................................
26.2
2010 and thereafter ............................................................................
25.0.
‘‘(c) CROSS REFERENCES.—For computation of the al-
ternative tax—
‘‘(1) in the case of life insurance companies, see
section 801(a)(2),
‘‘(2) in the case of regulated investment compa-
nies and their shareholders, see section 852(b)(3)(A)
and (D), and
‘‘(3) in the case of real estate investment trusts,
see section 857(b)(3)(A).’’
(b) TECHNICAL AMENDMENTS.—
(1) Paragraphs (1) and (2) of section 1445(e)
are each amended by striking ‘‘35 percent’’ and in-
serting ‘‘the applicable percentage determined under
section 1201(b) for the calendar year in which the
payment is made’’.
(2)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended by striking ‘‘34 percent’’
and inserting ‘‘the applicable percentage (within the
meaning of section 1201(b))’’.
(B) The second sentence of section 607(h)(6)(A)
of the Merchant Marine Act, 1936, is amended by
striking ‘‘34 percent’’ and inserting ‘‘the applicable
percentage (within the meaning of section 1201(b) of
the Internal Revenue Code of 1986)’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years beginning after December 31,
1999.
(2) WITHHOLDING.—The amendment made by
subsection (b)(1) shall apply to amounts paid after
December 31, 1999.
SEC. 302. REPEAL OF ALTERNATIVE MINIMUM TAX ON COR-
PORATIONS.
(a) IN GENERAL.—The last sentence of section 55(a),
as amended by section 121, is amended by striking ‘‘on any
taxpayer other than a corporation’’.
(b) REPEAL OF 90 PERCENT LIMITATION ON FOREIGN
TAX CREDIT.—
(1) IN GENERAL.—Section 59(a) (relating to al-
ternative minimum tax foreign tax credit) is amend-
ed by striking paragraph (2) and by redesignating
paragraphs (3) and (4) as paragraphs (2) and (3),
respectively.
(2) 
CONFORMING
AMENDMENT.—Section
53(d)(1)(B)(i)(II) is amended by striking ‘‘and if sec-
tion 59(a)(2) did not apply’’.
(c) LIMITATION ON USE OF CREDIT FOR PRIOR YEAR
MINIMUM TAX LIABILITY.—
(1) IN GENERAL.—Subsection (c) of section 53,
as amended by section 121, is amended by redesig-
nating paragraph (2) as paragraph (3) and by in-
serting after paragraph (1) the following new para-
graph:
‘‘(2) CORPORATIONS FOR TAXABLE YEARS BEGIN-
NING AFTER 2002.—In the case of corporation for any
taxable year beginning after 2002 and before 2008,
the limitation under paragraph (1) shall be increased
by the applicable percentage (determined in accord-
ance with the following table) of the tentative min-
imum tax for the taxable year.
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2003 ............................................................................................
2004 ............................................................................................
2005 ............................................................................................
2006 or 2007 ..............................................................................
50.
In no event shall the limitation determined under this
paragraph be greater than the sum of the tax imposed
by section 55 and the regular tax reduced by the sum
of the credits allowed under subparts A, B, D, E, and
F of this part.’’
(2) CONFORMING AMENDMENTS.—
(A) Section 55(e) is amended by striking
paragraph (5).
(B) Paragraph (3) of section 53(c), as re-
designated by paragraph (1), is amended by
striking ‘‘to a taxpayer other than a corpora-
tion’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amendments made by this sec-
tion shall apply to taxable years beginning after De-
cember 31, 2002.
(2) REPEAL OF 90 PERCENT LIMITATION ON FOR-
EIGN TAX CREDIT.—The amendments made by sub-
section (b) shall apply to taxable years beginning
after December 31, 2001.
(3) 
SUBSECTION
(c)(2)(A).—The 
amendment
made by subsection (c)(2)(A) shall apply to taxable
years beginning after December 31, 2007.
TITLE IV—EDUCATION SAVINGS
INCENTIVES
SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RE-
TIREMENT ACCOUNTS.
(a) MAXIMUM ANNUAL CONTRIBUTIONS.—
(1) IN GENERAL.—Section 530(b)(1)(A)(iii) (de-
fining education individual retirement account) is
amended by striking ‘‘$500’’ and inserting ‘‘$2,000’’.
(2) 
CONFORMING
AMENDMENT.—Section
4973(e)(1)(A) is amended by striking ‘‘$500’’ and in-
serting ‘‘$2,000’’.
(b) TAX-FREE EXPENDITURES FOR ELEMENTARY AND
SECONDARY SCHOOL EXPENSES.—
(1) IN
GENERAL.—Section 530(b)(2) (defining
qualified higher education expenses) is amended to
read as follows:
‘‘(2) QUALIFIED EDUCATION EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
education expenses’ means—
‘‘(i) qualified higher education ex-
penses (as defined in section 529(e)(3)), and
‘‘(ii) qualified elementary and sec-
ondary education expenses (as defined in
paragraph (4)).
‘‘(B) QUALIFIED
STATE
TUITION
PRO-
GRAMS.—Such term shall include any contribu-
tion to a qualified State tuition program (as de-
fined in section 529(b)) on behalf of the des-
ignated beneficiary (as defined in section
529(e)(1)); but there shall be no increase in the
investment in the contract for purposes of apply-
ing section 72 by reason of any portion of such
contribution which is not includible in gross in-
come by reason of subsection (d)(2).’’
(2) QUALIFIED
ELEMENTARY
AND
SECONDARY
EDUCATION EXPENSES.—Section 530(b) (relating to
definitions and special rules) is amended by adding
at the end the following new paragraph:
‘‘(4) QUALIFIED ELEMENTARY AND SECONDARY
EDUCATION EXPENSES.—
‘‘(A) IN GENERAL.—The term ‘qualified ele-
mentary and secondary education expenses’
means—
‘‘(i) expenses for tuition, fees, academic
tutoring, special needs services, books, sup-
plies, computer equipment (including re-
lated software and services), and other
equipment which are incurred in connection
with the enrollment or attendance of the
designated beneficiary of the trust as an ele-
mentary or secondary school student at a
public, private, or religious school, and
‘‘(ii) expenses for room and board, uni-
forms, transportation, and supplementary
items and services (including extended day
programs) which are required or provided
by a public, private, or religious school in
connection with such enrollment or attend-
ance.
‘‘(B) 
SPECIAL
RULE
FOR
HOMESCHOOLING.—Such term shall include ex-
penses described in subparagraph (A)(i) in con-
nection 
with 
education 
provided 
by
homeschooling if the requirements of any appli-
cable State or local law are met with respect to
such education.
‘‘(C) SCHOOL.—The term ‘school’ means
any school which provides elementary education
or secondary education (kindergarten through
grade 12), as determined under State law.’’
(3) CONFORMING AMENDMENTS.—Section 530 is
amended—
(A) by striking ‘‘higher’’ each place it ap-
pears in subsections (b)(1) and (d)(2), and
(B) by striking ‘‘HIGHER’’ in the heading
for subsection (d)(2).
(c) WAIVER
OF AGE LIMITATIONS
FOR CHILDREN
WITH SPECIAL NEEDS.—Section 530(b)(1) (defining edu-
cation individual retirement account) is amended by add-
ing at the end the following flush sentence:
‘‘The age limitations in subparagraphs (A)(ii) and
(E) and paragraphs (5) and (6) of subsection (d)
shall not apply to any designated beneficiary with
special needs (as determined under regulations pre-
scribed by the Secretary).’’
(d) ENTITIES PERMITTED TO CONTRIBUTE TO AC-
COUNTS.—Section 530(c)(1) (relating to reduction in per-
mitted contributions based on adjusted gross income) is
amended by striking ‘‘The maximum amount which a con-
tributor’’ and inserting ‘‘In the case of a contributor who
is an individual, the maximum amount the contributor’’.
(e) TIME WHEN CONTRIBUTIONS DEEMED MADE.—
(1) IN
GENERAL.—Section 530(b) (relating to
definitions and special rules), as amended by sub-
section (b)(2), is amended by adding at the end the
following new paragraph:
‘‘(5) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—An individual shall be deemed to have made
a contribution to an education individual retirement
account on the last day of the preceding taxable year
if the contribution is made on account of such taxable
year and is made not later than the time prescribed
by law for filing the return for such taxable year (not
including extensions thereof).’’
(2) EXTENSION
OF
TIME
TO
RETURN
EXCESS
CONTRIBUTIONS.—Subparagraph 
(C) 
of 
section
530(d)(4) (relating to additional tax for distributions
not used for educational expenses) is amended—
(A) by striking clause (i) and inserting the
following new clause:
‘‘(i) such distribution is made before
the 1st day of the 6th month of the taxable
year following the taxable year, and’’, and
(B) by striking ‘‘DUE DATE OF RETURN’’ in
the heading and inserting ‘‘CERTAIN DATE’’.
(f) COORDINATION WITH HOPE AND LIFETIME LEARN-
ING CREDITS AND QUALIFIED TUITION PROGRAMS.—
(1) 
IN
GENERAL.—Section 
530(d)(2)(C) 
is
amended to read as follows:
‘‘(C) COORDINATION WITH HOPE AND LIFE-
TIME LEARNING CREDITS AND QUALIFIED TUI-
TION PROGRAMS.—For purposes of subparagraph
(A)—
‘‘(i) 
CREDIT
COORDINATION.—The
total amount of qualified higher education
expenses with respect to an individual for
the taxable year shall be reduced—
‘‘(I) 
as 
provided 
in 
section
25A(g)(2), and
‘‘(II) by the amount of such ex-
penses which were taken into account
in determining the credit allowed to
the taxpayer or any other person under
section 25A.
‘‘(ii) COORDINATION WITH QUALIFIED
TUITION PROGRAMS.—If, with respect to an
individual for any taxable year—
‘‘(I) the aggregate distributions
during such year to which subpara-
graph (A) and section 529(c)(3)(B)
apply, exceed
‘‘(II) the total amount of qualified
education expenses (after the applica-
tion of clause (i)) for such year,
the taxpayer shall allocate such expenses
among such distributions for purposes of de-
termining the amount of the exclusion
under 
subparagraph 
(A) 
and 
section
529(c)(3)(B).’’
(2) CONFORMING AMENDMENTS.—
(A) Subsection (e) of section 25A is amend-
ed to read as follows:
‘‘(e) ELECTION NOT TO HAVE SECTION APPLY.—A
taxpayer may elect not to have this section apply with re-
spect to the qualified tuition and related expenses of an in-
dividual for any taxable year.’’
(B) Section 135(d)(2)(A) is amended by
striking ‘‘allowable’’ and inserting ‘‘allowed’’.
(C) Section 530(d)(2)(D) is amended—
(i) by striking ‘‘or credit’’, and
(ii) by striking ‘‘CREDIT OR’’ in the
heading.
(D) Section 4973(e)(1) is amended by add-
ing ‘‘and’’ at the end of subparagraph (A), by
striking subparagraph (B), and by redesignating
subparagraph (C) as subparagraph (B).
(g) RENAMING EDUCATION INDIVIDUAL RETIREMENT
ACCOUNTS AS EDUCATION SAVINGS ACCOUNTS.—
(1) IN GENERAL.—
(A) Section 530 (as amended by the pre-
ceding provisions of this section) is amended by
striking ‘‘education individual retirement ac-
count’’ each place it appears and inserting ‘‘edu-
cation savings account’’.
(B) The heading for paragraph (1) of sec-
tion 530(b) is amended by striking ‘‘EDUCATION
INDIVIDUAL RETIREMENT ACCOUNT’’ and insert-
ing ‘‘EDUCATION SAVINGS ACCOUNT’’.
(C) The heading for section 530 is amended
to read as follows:
‘‘SEC. 530. EDUCATION SAVINGS ACCOUNTS.’’.
(D) The item in the table of contents for
part VII of subchapter F of chapter 1 relating to
section 530 is amended to read as follows:
‘‘Sec. 530. Education savings accounts.’’.
(2) CONFORMING AMENDMENTS.—
(A) The following provisions are each
amended by striking ‘‘education individual re-
tirement’’ each place it appears and inserting
‘‘education savings’’:
(i) Section 25A(e)(2).
(ii) Section 26(b)(2)(E).
(iii) Section 72(e)(9).
(iv) Section 135(c)(2)(C).
(v) Subsections (a) and (e) of section
4973.
(vi) Subsections (c) and (e) of section
4975.
(vii) Section 6693(a)(2)(D).
(B) The headings for each of the following
provisions are amended by striking ‘‘EDUCATION
INDIVIDUAL RETIREMENT ACCOUNTS’’ each place
it appears and inserting ‘‘EDUCATION SAVINGS
ACCOUNTS’’.
(i) Section 72(e)(9).
(ii) Section 135(c)(2)(C).
(iii) Section 4973(e).
(iv) Section 4975(c)(5).
(h) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years beginning after December 31,
2000.
(2) SUBSECTION (g).—The amendments made by
subsection (g) shall take effect on the date of the en-
actment of this Act.
SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PRO-
GRAMS.
(a) ELIGIBLE
EDUCATIONAL
INSTITUTIONS
PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
(1) IN
GENERAL.—Section 529(b)(1) (defining
qualified State tuition program) is amended by in-
serting ‘‘or by 1 or more eligible educational institu-
tions’’ after ‘‘maintained by a State or agency or in-
strumentality thereof ’’.
(2) PRIVATE QUALIFIED TUITION PROGRAMS LIM-
ITED
TO
BENEFIT
PLANS.—Clause (ii) of section
529(b)(1)(A) is amended by inserting ‘‘in the case of
a program established and maintained by a State or
agency or instrumentality thereof,’’ before ‘‘may
make’’.
(3) CONFORMING AMENDMENTS.—
(A) 
Sections 
72(e)(9), 
135(c)(2)(C),
135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and
6693(a)(2)(C) are each amended by striking
‘‘qualified State tuition’’ each place it appears
and inserting ‘‘qualified tuition’’.
(B) The headings for sections 72(e)(9) and
135(c)(2)(C) are each amended by striking
‘‘QUALIFIED
STATE
TUITION’’ and inserting
‘‘QUALIFIED TUITION’’.
(C) The headings for sections 529(b) and
530(b)(2)(B) are each amended by striking
‘‘QUALIFIED
STATE
TUITION’’ and inserting
‘‘QUALIFIED TUITION’’.
(D) The heading for section 529 is amended
by striking ‘‘STATE’’.
(E) The item relating to section 529 in the
table of sections for part VIII of subchapter F of
chapter 1 is amended by striking ‘‘State’’.
(b) EXCLUSION FROM GROSS INCOME OF EDUCATION
DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS.—
(1) IN GENERAL.—Section 529(c)(3)(B) (relating
to distributions) is amended to read as follows:
‘‘(B) DISTRIBUTIONS FOR QUALIFIED HIGH-
ER EDUCATION EXPENSES.—
‘‘(i) IN
GENERAL.—For purposes of
this paragraph—
‘‘(I) no amount shall be includible
in gross income under subparagraph
(A) by reason of a distribution which
consists of providing a benefit to the
distributee which, if paid for by the
distributee, would constitute payment
of a qualified higher education expense,
and
‘‘(II) in the case of distributions
not described in subclause (I), the
amount otherwise includible in gross
income under subparagraph (A) shall
be reduced by an amount which bears
the same ratio to the otherwise includ-
ible amount as the qualified higher
education expenses (other than expenses
paid by distributions described in sub-
clause (I)) bear to the aggregate of such
distributions.
‘‘(ii) EXCEPTION
FOR
INSTITUTIONAL
PROGRAMS.—In the case of any taxable
year beginning before January 1, 2004,
clause (i) shall not apply with respect to
any distribution during such taxable year
under a qualified tuition program estab-
lished and maintained by 1 or more eligible
educational institutions.
‘‘(iii) IN-KIND
DISTRIBUTIONS.—Any
benefit furnished to a designated beneficiary
under a qualified tuition program shall be
treated as a distribution to the beneficiary
for purposes of this paragraph.
‘‘(iv) COORDINATION WITH HOPE AND
LIFETIME
LEARNING
CREDITS.—The total
amount of qualified higher education ex-
penses with respect to an individual for the
taxable year shall be reduced—
‘‘(I) 
as 
provided 
in 
section
25A(g)(2), and
‘‘(II) by the amount of such ex-
penses which were taken into account
in determining the credit allowed to
the taxpayer or any other person under
section 25A.
‘‘(v) COORDINATION WITH EDUCATION
SAVINGS ACCOUNTS.—If, with respect to an
individual for any taxable year—
‘‘(I) the aggregate distributions to
which 
clause 
(i) 
and 
section
530(d)(2)(A) apply, exceed
‘‘(II) the total amount of qualified
higher education expenses otherwise
taken into account under clause (i)
(after the application of clause (iv)) for
such year,
the taxpayer shall allocate such expenses
among such distributions for purposes of de-
termining the amount of the exclusion
under clause (i) and section 530(d)(2)(A).’’
(2) CONFORMING AMENDMENTS.—
(A) Section 135(d)(2)(B) is amended by
striking ‘‘the exclusion under section 530(d)(2)’’
and inserting ‘‘the exclusions under sections
529(c)(3)(B)(i) and 530(d)(2)’’.
(B) Section 221(e)(2)(A) is amended by in-
serting ‘‘529,’’ after ‘‘135,’’.
(c) ROLLOVER TO DIFFERENT PROGRAM FOR BENEFIT
OF
SAME
DESIGNATED
BENEFICIARY.—Section
529(c)(3)(C) (relating to change in beneficiaries) is
amended—
(1) by striking ‘‘transferred to the credit’’ in
clause (i) and inserting ‘‘transferred—
‘‘(I) to another qualified tuition
program for the benefit of the des-
ignated beneficiary, or
‘‘(II) to the credit’’,
(2) by adding at the end the following new
clause:
‘‘(iii) LIMITATION ON CERTAIN ROLL-
OVERS.—Clause (i)(I) shall not apply to
any amount transferred with respect to a
designated beneficiary if, at any time dur-
ing the 1-year period ending on the day of
such transfer, any other amount was trans-
ferred which was not includible in gross in-
come by reason of clause (i)(I).’’, and
(3) by inserting ‘‘OR PROGRAMS’’ after ‘‘BENE-
FICIARIES’’ in the heading.
(d) MEMBER OF FAMILY INCLUDES FIRST COUSIN.—
Section 529(e)(2) (defining member of family) is amended
by striking ‘‘and’’ at the end of subparagraph (B), by strik-
ing the period at the end of subparagraph (C) and by in-
serting ‘‘; and’’, and by adding at the end the following
new subparagraph:
‘‘(D) any first cousin of such beneficiary.’’
(e) DEFINITION OF QUALIFIED HIGHER EDUCATION
EXPENSES.—
(1) IN GENERAL.—Subparagraph (A) of section
529(e)(3) (relating to definition of qualified higher
education expenses) is amended to read as follows:
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means—
‘‘(i) tuition and fees required for the
enrollment or attendance of a designated
beneficiary at an eligible educational insti-
tution for courses of instruction of such ben-
eficiary at such institution, and
‘‘(ii) expenses for books, supplies, and
equipment which are incurred in connection
with such enrollment or attendance, but not
to exceed the allowance for books and sup-
plies included in the cost of attendance (as
defined in section 472 of the Higher Edu-
cation Act of 1965 (20 U.S.C. 1087ll), as in
effect on the date of enactment of the Finan-
cial Freedom Act of 1999) as determined by
the eligible educational institution.’’.
(2) EXCEPTION
FOR
EDUCATION
INVOLVING
SPORTS, ETC..—Paragraph (3) of section 529(e) (re-
lating to qualified higher education expenses) is
amended by adding at the end the following new sub-
paragraph:
‘‘(C) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC..—The term ‘qualified higher
education expenses’ shall not include expenses
with respect to any course or other education in-
volving sports, games, or hobbies unless such
course or other education is part of the bene-
ficiary’s degree program or is taken to acquire or
improve job skills of the beneficiary.’’.
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years beginning after December 31,
2000.
(2) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The amendments made by subsection (e)
shall apply to amounts paid for education furnished
after December 31, 1999.
SEC. 403. EXCLUSION OF CERTAIN AMOUNTS RECEIVED
UNDER THE NATIONAL HEALTH SERVICE
CORPS SCHOLARSHIP PROGRAM, THE F. ED-
WARD HEBERT ARMED FORCES HEALTH PRO-
FESSIONS SCHOLARSHIP AND FINANCIAL AS-
SISTANCE PROGRAM, AND CERTAIN OTHER
PROGRAMS.
(a) IN GENERAL.—Section 117(c) (relating to the ex-
clusion from gross income amounts received as a qualified
scholarship) is amended—
(1) by striking ‘‘Subsections (a)’’ and inserting
the following:
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a)’’, and
(2) by adding at the end the following new para-
graph:
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply to any amount received by an individual
under—
‘‘(A) the National Health Service Corps
Scholarship 
program 
under 
section
338A(g)(1)(A) of the Public Health Service Act,
‘‘(B) the Armed Forces Health Professions
Scholarship and Financial Assistance program
under subchapter I of chapter 105 of title 10,
United States Code,
‘‘(C) the National Institutes of Health Un-
dergraduate Scholarship program under section
487D of the Public Health Service Act, or
‘‘(D) any State program determined by the
Secretary to have substantially similar objectives
as such programs.’’
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by subsection (a)
shall apply to amounts received in taxable years be-
ginning after December 31, 1993.
(2) STATE PROGRAMS.—Section 117(c)(2)(D) of
the Internal Revenue Code of 1986 (as added by the
amendments made by subsection (a)) shall apply to
amounts received in taxable years beginning after De-
cember 31, 1999.
SEC. 404. ADDITIONAL INCREASE IN ARBITRAGE REBATE
EXCEPTION 
FOR 
GOVERNMENTAL 
BONDS
USED TO FINANCE EDUCATIONAL FACILITIES.
(a) IN GENERAL.—Section 148(f)(4)(D)(vii) (relating
to increase in exception for bonds financing public school
capital expenditures) is amended by striking ‘‘$5,000,000’’
the second place it appears and inserting ‘‘$10,000,000’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to obligations issued in calendar
years beginning after December 31, 1999.
SEC. 405. MODIFICATION OF ARBITRAGE REBATE RULES AP-
PLICABLE TO PUBLIC SCHOOL CONSTRUC-
TION BONDS.
(a) IN
GENERAL.—Subparagraph (C) of section
148(f)(4) is amended by adding at the end the following
new clause:
‘‘(xviii) 4-YEAR
SPENDING
REQUIRE-
MENT FOR PUBLIC SCHOOL CONSTRUCTION
ISSUE.—
‘‘(I) IN GENERAL.—In the case of
a public school construction issue, the
spending requirements of clause (ii)
shall be treated as met if at least 10
percent of the available construction
proceeds of the construction issue are
spent for the governmental purposes of
the issue within the 1-year period be-
ginning on the date the bonds are
issued, 30 percent of such proceeds are
spent for such purposes within the 2-
year period beginning on such date, 60
percent of such proceeds are spent for
such purposes within the 3-year period
beginning on such date, and 100 per-
cent of such proceeds are spent for such
purposes within the 4-year period be-
ginning on such date.
‘‘(II) PUBLIC SCHOOL CONSTRUC-
TION
ISSUE.—For purposes of this
clause, the term ‘public school construc-
tion issue’ means any construction
issue if no bond which is part of such
issue is a private activity bond and all
of the available construction proceeds
of such issue are to be used for the con-
struction (as defined in clause (iv)) of
public school facilities to provide edu-
cation or training below the postsec-
ondary level or for the acquisition of
land that is functionally related and
subordinate to such facilities.
‘‘(III) OTHER RULES TO APPLY.—
Rules similar to the rules of the pre-
ceding provisions of this subparagraph
which apply to clause (ii) also apply
to this clause.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to obligations issued after December 31,
1999.
SEC. 406. REPEAL OF 60-MONTH LIMITATION ON DEDUC-
TION FOR INTEREST ON EDUCATION LOANS.
(a) IN GENERAL.—Section 221 (relating to interest on
education loans) is amended by striking subsection (d) and
by redesignating subsections (e), (f), and (g) as subsections
(d), (e), and (f), respectively.
(b) CONFORMING AMENDMENT.—Subsection (e) of sec-
tion 6050S is amended by striking ‘‘section 221(e)(1)’’ and
inserting ‘‘section 221(d)(1)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to loan interest payments made after
December 31, 1999, in taxable years ending after such date.
TITLE V—HEALTH CARE
PROVISIONS
SEC. 501. DEDUCTION FOR HEALTH AND LONG-TERM CARE
INSURANCE COSTS OF INDIVIDUALS NOT
PARTICIPATING 
IN 
EMPLOYER-SUBSIDIZED
HEALTH PLANS.
(a) IN GENERAL.—Part VII of subchapter B of chapter
1 is amended by redesignating section 222 as section 223
and by inserting after section 221 the following new section:
‘‘SEC. 222. HEALTH AND LONG-TERM CARE INSURANCE
COSTS.
‘‘(a) IN GENERAL.—In the case of an individual, there
shall be allowed as a deduction an amount equal to the ap-
plicable percentage of the amount paid during the taxable
year for insurance which constitutes medical care for the
taxpayer, the taxpayer’s spouse, and dependents.
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of sub-
section (a), the applicable percentage shall be determined
in accordance with the following table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
2001 .....................................................................................................
2002 .....................................................................................................
2003, 2004, 2005, and 2006 ..............................................................
2007 .....................................................................................................
2008 and thereafter ............................................................................
100.
‘‘(c) LIMITATION BASED ON OTHER COVERAGE.—
‘‘(1) COVERAGE
UNDER
CERTAIN
SUBSIDIZED
EMPLOYER PLANS.—
‘‘(A) IN GENERAL.—Subsection (a) shall not
apply to any taxpayer for any calendar month
for which the taxpayer participates in any
health plan maintained by any employer of the
taxpayer or of the spouse of the taxpayer if 50
percent or more of the cost of coverage under
such plan (determined under section 4980B) is
paid or incurred by the employer.
‘‘(B) EMPLOYER CONTRIBUTIONS TO CAFE-
TERIA
PLANS, FLEXIBLE
SPENDING
ARRANGE-
MENTS, AND MEDICAL SAVINGS ACCOUNTS.—Em-
ployer contributions to a cafeteria plan, a flexi-
ble spending or similar arrangement, or a med-
ical savings account which are excluded from
gross income under section 106 shall be treated
for purposes of subparagraph (A) as paid by the
employer.
‘‘(C) AGGREGATION
OF
PLANS
OF
EM-
PLOYER.—A health plan which is not otherwise
described in subparagraph (A) shall be treated as
described in such subparagraph if such plan
would be so described if all health plans of per-
sons treated as a single employer under sub-
sections (b), (c), (m), or (o) of section 414 were
treated as one health plan.
‘‘(D) SEPARATE APPLICATION TO HEALTH
INSURANCE AND LONG-TERM CARE INSURANCE.—
Subparagraphs (A) and (C) shall be applied sep-
arately with respect to—
‘‘(i) plans which include primarily
coverage for qualified long-term care serv-
ices or are qualified long-term care insur-
ance contracts, and
‘‘(ii) plans which do not include such
coverage and are not such contracts.
‘‘(2) COVERAGE UNDER CERTAIN FEDERAL PRO-
GRAMS.—
‘‘(A) IN GENERAL.—Subsection (a) shall not
apply to any amount paid for any coverage for
an individual for any calendar month if, as of
the first day of such month, the individual is
covered under any medical care program de-
scribed in—
‘‘(i) title XVIII, XIX, or XXI of the So-
cial Security Act,
‘‘(ii) chapter 55 of title 10, United
States Code,
‘‘(iii) chapter 17 of title 38, United
States Code,
‘‘(iv) chapter 89 of title 5, United
States Code, or
‘‘(v) the Indian Health Care Improve-
ment Act.
‘‘(B) EXCEPTIONS.—
‘‘(i) QUALIFIED
LONG-TERM
CARE.—
Subparagraph (A) shall not apply to
amounts paid for coverage under a qualified
long-term care insurance contract.
‘‘(ii) CONTINUATION
COVERAGE
OF
FEHBP.—Subparagraph (A)(iv) shall not
apply to coverage which is comparable to
continuation coverage under section 4980B.
‘‘(d) LONG-TERM CARE DEDUCTION LIMITED
TO
QUALIFIED LONG-TERM CARE INSURANCE CONTRACTS.—
In the case of a qualified long-term care insurance contract,
only eligible long-term care premiums (as defined in section
213(d)(10)) may be taken into account under subsection (a).
‘‘(e) SPECIAL RULES.—
‘‘(1) COORDINATION
WITH
DEDUCTION
FOR
HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDI-
VIDUALS.—The amount taken into account by the tax-
payer in computing the deduction under section
162(l) shall not be taken into account under this sec-
tion.
‘‘(2) COORDINATION
WITH
MEDICAL
EXPENSE
DEDUCTION.—The amount taken into account by the
taxpayer in computing the deduction under this sec-
tion shall not be taken into account under section
213.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out this
section, including regulations requiring employers to report
to their employees and the Secretary such information as
the Secretary determines to be appropriate.’’
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of
section 62 is amended by inserting after paragraph (17)
the following new item:
‘‘(18) HEALTH
AND
LONG-TERM
CARE
INSUR-
ANCE COSTS.—The deduction allowed by section 222.’’
(c) CLERICAL AMENDMENT.—The table of sections for
part VII of subchapter B of chapter 1 is amended by strik-
ing the last item and inserting the following new items:
‘‘Sec. 222. Health and long-term care insurance costs.
‘‘Sec. 223. Cross reference.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 502. LONG-TERM CARE INSURANCE PERMITTED TO BE
OFFERED UNDER CAFETERIA PLANS AND
FLEXIBLE SPENDING ARRANGEMENTS.
(a) CAFETERIA PLANS.—Subsection (f) of section 125
(defining qualified benefits) is amended by inserting before
the period at the end ‘‘unless such product is a qualified
long-term care insurance contract (as defined in section
7702B)’’.
(b) FLEXIBLE SPENDING ARRANGEMENTS.—Section
106 (relating to contributions by employer to accident and
health plans) is amended by striking subsection (c).
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 503. EXPANSION OF AVAILABILITY OF MEDICAL SAV-
INGS ACCOUNTS.
(a) REPEAL OF LIMITATIONS ON NUMBER OF MEDICAL
SAVINGS ACCOUNTS.—
(1) IN GENERAL.—Subsections (i) and (j) of sec-
tion 220 are hereby repealed.
(2) CONFORMING AMENDMENT.—Paragraph (1)
of section 220(c) is amended by striking subpara-
graph (D).
(b) ALL EMPLOYERS MAY OFFER MEDICAL SAVINGS
ACCOUNTS.—
(1) IN
GENERAL.—Subclause (I) of section
220(c)(1)(A)(iii) (defining eligible individual) is
amended by striking ‘‘and such employer is a small
employer’’.
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (1) of section 220(c) is
amended by striking subparagraph (C).
(B) Subsection (c) of section 220 is amend-
ed by striking paragraph (4) and by redesig-
nating paragraph (5) as paragraph (4).
(c) INCREASE IN AMOUNT OF DEDUCTION ALLOWED
FOR CONTRIBUTIONS TO MEDICAL SAVINGS ACCOUNTS.—
(1) IN
GENERAL.—Paragraph (2) of section
220(b) is amended to read as follows:
‘‘(2) MONTHLY LIMITATION.—The monthly limi-
tation for any month is the amount equal to 1⁄12 of
the annual deductible (as of the first day of such
month) of the individual’s coverage under the high de-
ductible health plan.’’.
(2) CONFORMING
AMENDMENT.—Clause (ii) of
section 220(d)(1)(A) is amended by striking ‘‘75 per-
cent of’’.
(d) BOTH EMPLOYERS AND EMPLOYEES MAY CON-
TRIBUTE
TO MEDICAL SAVINGS ACCOUNTS.—Paragraph
(5) of section 220(b) is amended to read as follows:
‘‘(5) COORDINATION WITH EXCLUSION FOR EM-
PLOYER
CONTRIBUTIONS.—The 
limitation 
which
would (but for this paragraph) apply under this sub-
section to the taxpayer for any taxable year shall be
reduced (but not below zero) by the amount which
would (but for section 106(b)) be includible in the
taxpayer’s gross income for such taxable year.’’.
(e) REDUCTION OF PERMITTED DEDUCTIBLES UNDER
HIGH DEDUCTIBLE HEALTH PLANS.—
(1) IN GENERAL.—Subparagraph (A) of section
220(c)(2) (defining high deductible health plan) is
amended—
(A) by striking ‘‘$1,500’’ in clause (i) and
inserting ‘‘$1,000’’, and
(B) by striking ‘‘$3,000’’ in clause (ii) and
inserting ‘‘$2,000’’.
(2) CONFORMING
AMENDMENT.—Subsection (g)
of section 220 is amended to read as follows:
‘‘(g) COST-OF-LIVING ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1998, each
dollar amount in subsection (c)(2) shall be increased
by an amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar year
in which such taxable year begins by sub-
stituting ‘calendar year 1997’ for ‘calendar year
1992’ in subparagraph (B) thereof.
‘‘(2) SPECIAL RULES.—In the case of the $1,000
amount in subsection (c)(2)(A)(i) and the $2,000
amount in subsection (c)(2)(A)(ii), paragraph (1)(B)
shall be applied by substituting ‘calendar year 1999’
for ‘calendar year 1997’.
‘‘(3) ROUNDING.—If any increase under para-
graph (1) or (2) is not a multiple of $50, such in-
crease shall be rounded to the nearest multiple of $50.
(f) MEDICAL SAVINGS ACCOUNTS MAY BE OFFERED
UNDER CAFETERIA PLANS.—Subsection (f) of section 125
is amended by striking ‘‘106(b),’’.
(g) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2000.
SEC. 504. ADDITIONAL PERSONAL EXEMPTION FOR TAX-
PAYER CARING FOR ELDERLY FAMILY MEM-
BER IN TAXPAYER’S HOME.
(a) IN GENERAL.—Section 151 (relating to allowance
of deductions for personal exemptions) is amended by add-
ing at the end redesignating subsection (e) as subsection (f)
and by inserting after subsection (d) the following new sub-
section:
‘‘(e) ADDITIONAL EXEMPTION FOR CERTAIN ELDERLY
FAMILY MEMBERS RESIDING WITH TAXPAYER.—
‘‘(1) IN GENERAL.—An exemption of the exemp-
tion amount for each qualified family member of the
taxpayer.
‘‘(2) QUALIFIED FAMILY MEMBER.—For purposes
of this subsection, the term ‘qualified family member’
means, with respect to any taxable year, any
individual—
‘‘(A) who is an ancestor of the taxpayer or
of the taxpayer’s spouse or who is the spouse of
any such ancestor,
‘‘(B) who is a member for the entire taxable
year of a household maintained by the taxpayer,
and
‘‘(C) who has been certified, before the due
date for filing the return of tax for the taxable
year (without extensions), by a physician (as de-
fined in section 1861(r)(1) of the Social Security
Act) as being an individual with long-term care
needs described in paragraph (3) for a period—
‘‘(i) which is at least 180 consecutive
days, and
‘‘(ii) a portion of which occurs within
the taxable year.
Such term shall not include any individual otherwise
meeting the requirements of the preceding sentence
unless within the 391⁄2 month period ending on such
due date (or such other period as the Secretary pre-
scribes) a physician (as so defined) has certified that
such individual meets such requirements.
‘‘(3) 
INDIVIDUALS
WITH
LONG-TERM
CARE
NEEDS.—An individual is described in this para-
graph if the individual—
‘‘(A) is unable to perform (without substan-
tial assistance from another individual) at least
2 activities of daily living (as defined in section
7702B(c)(2)(B)) due to a loss of functional ca-
pacity, or
‘‘(B) requires substantial supervision to
protect such individual from threats to health
and safety due to severe cognitive impairment
and is unable to perform, without reminding or
cuing assistance, at least 1 activity of at least 1
activity of daily living (as so defined) or to the
extent provided in regulations prescribed by the
Secretary (in consultation with the Secretary of
Health and Human Services), is unable to en-
gage in age appropriate activities.
‘‘(4) SPECIAL RULES.—Rules similar to the rules
of paragraphs (1), (2), (3), (4), and (5) of section
21(e) shall apply for purposes of this subsection.’’
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
SEC. 505. EXPANDED HUMAN CLINICAL TRIALS QUALIFYING
FOR ORPHAN DRUG CREDIT.
(a) 
IN
GENERAL.—Subclause 
(I) 
of 
section
45C(b)(2)(A)(ii) is amended to read as follows:
‘‘(I) after the date that the appli-
cation is filed for designation under
such section 526, and’’.
(b) CONFORMING AMENDMENT.—Clause (i) of section
45C(b)(2)(A) is amended by inserting ‘‘which is’’ before
‘‘being’’ and by inserting before the comma at the end ‘‘and
which is designated under section 526 of such Act’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred after De-
cember 31, 1999.
SEC. 506. INCLUSION OF CERTAIN VACCINES AGAINST
STREPTOCOCCUS PNEUMONIAE TO LIST OF
TAXABLE VACCINES.
(a) IN GENERAL.—Section 4132(a)(1) (defining tax-
able vaccine) is amended by adding at the end the following
new subparagraph:
‘‘(L) Any conjugate vaccine against strepto-
coccus pneumoniae.’’
(b) EFFECTIVE DATE.—
(1) SALES.—The amendment made by this sec-
tion shall apply to vaccine sales beginning on the day
after the date on which the Centers for Disease Con-
trol makes a final recommendation for routine ad-
ministration to children of any conjugate vaccine
against streptococcus pneumoniae.
(2) DELIVERIES.—For purposes of paragraph
(1), in the case of sales on or before the date described
in such paragraph for which delivery is made after
such date, the delivery date shall be considered the
sale date.
(c) REPORT.—Not later than December 31, 1999, the
Comptroller General of the United States shall prepare and
submit a report to the Committee on Ways and Means of
the House of Representatives and the Committee on Finance
of the Senate on the operation of the Vaccine Injury Com-
pensation Trust Fund and on the adequacy of such Fund
to meet future claims made under the Vaccine Injury Com-
pensation Program.
SEC. 507. ABOVE-THE-LINE DEDUCTION FOR PRESCRIPTION
DRUG INSURANCE COVERAGE OF MEDICARE
BENEFICIARIES IF CERTAIN MEDICARE AND
LOW-INCOME ASSISTANCE PROVISIONS IN EF-
FECT.
(a) IN GENERAL.—Subsection (a) of section 213 is
amended by adding at the end the following new sentence:
‘‘The 7.5 percent adjusted gross income threshold in the pre-
ceding sentence shall not apply to the expenses paid during
the taxable year for prescription drug insurance coverage
of a medicare beneficiary who is the taxpayer, the tax-
payer’s spouse, or a dependent (as defined in section 152)
if—
‘‘(1) the Secretary certifies that, throughout such
taxable year, the conditions specified in subsection (e)
are met, and
‘‘(2) the amount paid for such coverage is either
separately stated in the contract or furnished to the
policyholder by the insurance company in a separate
statement.
Expenses to which the preceding sentence applies shall not
be taken into account in applying such threshold to other
expenses. For purposes of this subsection, the term ‘medicare
beneficiary’ means an individual who is entitled to benefits
under part A, B, or C of title XVIII of the Social Security
Act.’’
(b) CONDITIONS.—Section 213 is amended by redesig-
nating subsection (e) as subsection (f) and by inserting after
subsection (d) the following new subsection:
‘‘(e) CONDITIONS
FOR SEPARATE DEDUCTION
FOR
PRESCRIPTION DRUG INSURANCE COVERAGE.—For pur-
poses of subsection (a), the conditions specified in this sub-
section are met if all of the following are in effect:
‘‘(1) ASSISTANCE FOR PRESCRIPTION DRUGS FOR
LOW-INCOME MEDICARE BENEFICIARIES.—
‘‘(A) Low-income assistance to enable the
purchase of coverage of prescription drugs as de-
scribed in paragraph (2) or (3) for medicare
beneficiaries with incomes under 135 percent of
the applicable Federal poverty level, with such
assistance phasing out for beneficiaries with in-
comes between 135 percent and 150 percent of
such level.
‘‘(B) The Federal Government provides
funding for the costs of such assistance.
‘‘(2) SUPPLEMENTAL
COVERAGE
OF
PRESCRIP-
TION DRUGS.—All policies supplemental to Medicare
include coverage for costs of prescription drugs.
‘‘(3) STRUCTURAL
MEDICARE
REFORM.—Cov-
erage for outpatient prescription drugs for medicare
beneficiaries is provided only through integrated com-
prehensive health plans which offer current Medicare
covered services and maximum limitations on out-of-
pocket spending and such comprehensive plans spon-
sored by the Health Care Financing Administration
compete on the same basis as private plans.’’
(c) DEDUCTION FOR PRESCRIPTION DRUG INSURANCE
COVERAGE
ALLOWED
WHETHER
OR
NOT
TAXPAYER
ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of section
62 (defining adjusted gross income) is amended by inserting
after paragraph (18) the following new paragraph:
‘‘(19) PRESCRIPTION
DRUG
INSURANCE
COV-
ERAGE.—The deduction allowed by section 213(a) to
the extent of the expenses described in the second sen-
tence thereof.’’
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
TITLE VI—ESTATE TAX RELIEF
Subtitle A—Repeal of Estate, Gift,
and Generation-Skipping Taxes;
Repeal of Step Up in Basis At
Death
SEC. 601. REPEAL OF ESTATE, GIFT, AND GENERATION-
SKIPPING TAXES.
(a) IN GENERAL.—Subtitle B is hereby repealed.
(b) EFFECTIVE DATE.—The repeal made by subsection
(a) shall apply to the estates of decedents dying, and gifts
and generation-skipping transfers made, after December 31,
2008.
SEC. 602. TERMINATION OF STEP UP IN BASIS AT DEATH.
(a) TERMINATION
OF
APPLICATION
OF
SECTION
1014.—Section 1014 (relating to basis of property acquired
from a decedent) is amended by adding at the end the fol-
lowing:
‘‘(f) TERMINATION.—In the case of a decedent dying
after December 31, 2008, this section shall not apply to
property for which basis is provided by section 1022.’’
(b) CONFORMING AMENDMENT.—Subsection (a) of sec-
tion 1016 (relating to adjustments to basis) is amended by
striking ‘‘and’’ at the end of paragraph (26), by striking
the period at the end of paragraph (27) and inserting ‘‘;
and’’, and by adding at the end the following:
‘‘(28) to the extent provided in section 1022 (re-
lating to basis for certain property acquired from a
decedent dying after December 31, 2008).’’
SEC. 603. CARRYOVER BASIS AT DEATH.
(a) GENERAL RULE.—Part II of subchapter O of chap-
ter 1 (relating to basis rules of general application) is
amended by inserting after section 1021 the following:
‘‘SEC. 1022. CARRYOVER BASIS FOR CERTAIN PROPERTY AC-
QUIRED FROM A DECEDENT DYING AFTER DE-
CEMBER 31, 2008.
‘‘(a) CARRYOVER BASIS.—Except as otherwise pro-
vided in this section, the basis of carryover basis property
in the hands of a person acquiring such property from a
decedent shall be determined under section 1015.
‘‘(b) CARRYOVER BASIS PROPERTY DEFINED.—
‘‘(1) IN GENERAL.—For purposes of this section,
the term ‘carryover basis property’ means any
property—
‘‘(A) which is acquired from or passed from
a decedent who died after December 31, 2008,
and
‘‘(B) which is not excluded pursuant to
paragraph (2).
The property taken into account under subparagraph
(A) shall be determined under section 1014(b) without
regard to subparagraph (A) of the last sentence of
paragraph (9) thereof.
‘‘(2) CERTAIN PROPERTY NOT CARRYOVER BASIS
PROPERTY.—The term ‘carryover basis property’ does
not include—
‘‘(A) any item of gross income in respect of
a decedent described in section 691,
‘‘(B) property which was acquired from the
decedent by the surviving spouse of the decedent,
the value of which would have been deductible
from the value of the taxable estate of the dece-
dent under section 2056, as in effect on the day
before the date of enactment of the Financial
Freedom Act of 1999, and
‘‘(C) any includible property of the decedent
if the aggregate adjusted fair market value of
such property does not exceed $2,000,000.
For purposes of this paragraph and paragraph (3),
the term ‘adjusted fair market value’ means, with re-
spect to any property, fair market value reduced by
any indebtedness secured by such property.
‘‘(3) PHASEIN OF CARRYOVER BASIS IF INCLUD-
IBLE PROPERTY EXCEEDS $1,300,000.—
‘‘(A) IN
GENERAL.—If the adjusted fair
market value of the includible property of the de-
cedent exceeds $1,300,000, but does not exceed
$2,000,000, the amount of the increase in the
basis of such property which would (but for this
paragraph) result under section 1014 shall be re-
duced by the amount which bears the same ratio
to such increase as such excess bears to $700,000.
‘‘(B) ALLOCATION OF REDUCTION.—The re-
duction under subparagraph (A) shall be allo-
cated among only the includible property having
net appreciation and shall be allocated in pro-
portion to the respective amounts of such net ap-
preciation. For purposes of the preceding sen-
tence, the term ‘net appreciation’ means the ex-
cess of the adjusted fair market value over the de-
cedent’s adjusted basis immediately before such
decedent’s death.
‘‘(4) INCLUDIBLE PROPERTY.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the term ‘includible property’ means
property which would be included in the gross
estate of the decedent under any of the following
provisions as in effect on the day before the date
of the enactment of the Financial Freedom Act
of 1999:
‘‘(i) Section 2033.
‘‘(ii) Section 2038.
‘‘(iii) Section 2040.
‘‘(iv) Section 2041.
‘‘(v) Section 2042(a)(1).
‘‘(B) EXCLUSION OF PROPERTY ACQUIRED
BY SPOUSE.—Such term shall not include prop-
erty described in paragraph (2)(B).
‘‘(c) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pur-
poses of this section.’’
(b) MISCELLANEOUS AMENDMENTS RELATED TO CAR-
RYOVER BASIS.—
(1) CAPITAL GAIN TREATMENT FOR INHERITED
ART WORK OR SIMILAR PROPERTY.—
(A) IN
GENERAL.—Subparagraph (C) of
section 1221(3) (defining capital asset) is
amended by inserting ‘‘(other than by reason of
section 1022)’’ after ‘‘is determined’’.
(B) COORDINATION
WITH
SECTION
170.—
Paragraph (1) of section 170(e) (relating to cer-
tain contributions of ordinary income and cap-
ital gain property) is amended by adding at the
end the following: ‘‘For purposes of this para-
graph, the determination of whether property is
a capital asset shall be made without regard to
the exception contained in section 1221(3)(C) for
basis determined under section 1022.’’
(2) DEFINITION OF EXECUTOR.—Section 7701(a)
(relating to definitions) is amended by adding at the
end the following:
‘‘(47) EXECUTOR.—The term ‘executor’ means
the executor or administrator of the decedent, or, if
there is no executor or administrator appointed,
qualified, and acting within the United States, then
any person in actual or constructive possession of any
property of the decedent.’’
(3) CLERICAL AMENDMENT.—The table of sec-
tions for part II of subchapter O of chapter 1 is
amended by adding at the end the following new item:
‘‘Sec. 1022. Carryover basis for certain property acquired from a
decedent dying after December 31, 2008.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to estates of decedents dying after De-
cember 31, 2008.
Subtitle B—Reductions of Estate
and Gift Tax Rates Prior to Repeal
SEC. 611. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT
TAX RATES.
(a) MAXIMUM RATE OF TAX REDUCED TO 50 PER-
CENT.—The table contained in section 2001(c)(1) is amend-
ed by striking the 2 highest brackets and inserting the fol-
lowing:
Over $2,500,000 ................................
$1,025,800, plus 50% of the excess over
$2,500,000.’’
(b) REPEAL OF PHASEOUT OF GRADUATED RATES.—
Subsection (c) of section 2001 is amended by striking para-
graph (2).
(c) ADDITIONAL REDUCTIONS OF RATES OF TAX.—
Subsection (c) of section 2001, as amended by subsection
(b), is amended by adding at the end the following new
paragraph:
‘‘(2) PHASEDOWN OF TAX.—In the case of estates
of decedents dying, and gifts made, during any cal-
endar year after 2001 and before 2009—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (C), the tentative tax under this
subsection shall be determined by using a table
prescribed by the Secretary (in lieu of using the
table contained in paragraph (1)) which is the
same as such table; except that—
‘‘(i) each of the rates of tax shall be re-
duced by the number of percentage points
determined under subparagraph (B), and
‘‘(ii) the amounts setting forth the tax
shall be adjusted to the extent necessary to
reflect the adjustments under clause (i).
‘‘(B) PERCENTAGE
POINTS
OF
REDUC-
TION.—
The number of
‘‘For calendar year:
percentage points is:
2002 ....................................................................................
2003 ....................................................................................
2004 ....................................................................................
2005 ....................................................................................
2006 ....................................................................................
2007 ....................................................................................
2008 ....................................................................................
11.
‘‘(C) COORDINATION
WITH
INCOME
TAX
RATES.—The reductions under subparagraph
(A)—
‘‘(i) shall not reduce any rate under
paragraph (1) below the lowest rate in sec-
tion 1(c), and
‘‘(ii) shall not reduce the highest rate
under paragraph (1) below the highest rate
in section 1(c).
‘‘(D) COORDINATION
WITH
CREDIT
FOR
STATE DEATH TAXES.—Rules similar to the rules
of subparagraph (A) shall apply to the table con-
tained in section 2011(b) except that the Sec-
retary shall prescribe percentage point reductions
which maintain the proportionate relationship
(as in effect before any reduction under this
paragraph) between the credit under section
2011 and the tax rates under subsection (c).’’
(d) EFFECTIVE DATES.—
(1) SUBSECTIONS (a) AND (b).—The amendments
made by subsections (a) and (b) shall apply to estates
of decedents dying, and gifts made, after December
31, 2000.
(2) SUBSECTION (c).—The amendment made by
subsection (c) shall apply to estates of decedents
dying, and gifts made, after December 31, 2001.
Subtitle 
C—Unified 
Credit 
Re-
placed With Unified Exemption
Amount
SEC. 621. UNIFIED CREDIT AGAINST ESTATE AND GIFT
TAXES REPLACED WITH UNIFIED EXEMPTION
AMOUNT.
(a) IN GENERAL.—
(1) ESTATE TAX.—Part IV of subchapter A of
chapter 11 is amended by inserting after section 2051
the following new section:
‘‘SEC. 2052. EXEMPTION.
‘‘(a) IN GENERAL.—For purposes of the tax imposed
by section 2001, the value of the taxable estate shall be deter-
mined by deducting from the value of the gross estate an
amount equal to the excess (if any) of—
‘‘(1) the exemption amount for the calendar year
in which the decedent died, over
‘‘(2) the sum of—
‘‘(A) the aggregate amount allowed as an
exemption under section 2521 with respect to
gifts made by the decedent after December 31,
2000, and
‘‘(B) the aggregate amount of gifts made by
the decedent for which credit was allowed by sec-
tion 2505 (as in effect on the day before the date
of the enactment of the Financial Freedom Act
of 1999).
Gifts which are includible in the gross estate of the decedent
shall not be taken into account in determining the amounts
under paragraph (2).
‘‘(b) EXEMPTION AMOUNT.—For purposes of sub-
section (a), the term ‘exemption amount’ means the amount
determined in accordance with the following table:
‘‘In the case of
The exemption
calendar year:
amount is:
2001 ............................................................................
$675,000
2002 and 2003 ...........................................................
$700,000
2004 ............................................................................
$850,000
2005 ............................................................................
$950,000
2006 or thereafter .......................................................
$1,000,000.’’
(2) GIFT TAX.—Subchapter C of chapter 12 (re-
lating to deductions) is amended by inserting before
section 2522 the following new section:
‘‘SEC. 2521. EXEMPTION.
‘‘(a) IN GENERAL.—In computing taxable gifts for any
calendar year, there shall be allowed as a deduction in the
case of a citizen or resident of the United States an amount
equal to the excess of—
‘‘(1) the exemption amount determined under
section 2052 for such calendar year, over
‘‘(2) the sum of—
‘‘(A) the aggregate amount allowed as an
exemption under this section for all preceding
calendar years after 2000, and
‘‘(B) the aggregate amount of gifts for which
credit was allowed by section 2505 (as in effect
on the day before the date of the enactment of the
Financial Freedom Act of 1999).’’
(b) REPEAL OF UNIFIED CREDITS.—
(1) Section 2010 (relating to unified credit
against estate tax) is hereby repealed.
(2) Section 2505 (relating to unified credit
against gift tax) is hereby repealed.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subparagraph (B) of section 2001(b)(1) is
amended by inserting before the comma ‘‘reduced by
the amount of described in section 2052(a)(2)’’.
(B) Subsection (b) of section 2001 is amended by
adding at the end the following new sentence: ‘‘For
purposes of paragraph (2), the amount of the tax pay-
able under chapter 12 shall be determined without re-
gard to the credit provided by section 2505 (as in ef-
fect on the day before the date of the enactment of the
Financial Freedom Act of 1999).’’
(2) Subsection (f) of section 2011 is amended by
striking ‘‘, reduced by the amount of the unified cred-
it provided by section 2010’’.
(3) Subsection (a) of section 2012 is amended by
striking ‘‘and the unified credit provided by section
2010’’.
(4) Subsection (b) of section 2013 is amended by
inserting before the period at the end of the first sen-
tence ‘‘and increased by the exemption allowed under
section 2052 or 2106(a)(4) (or the corresponding pro-
visions of prior law) in determining the taxable estate
of the transferor for purposes of the estate tax’’.
(5) Subparagraph (A) of section 2013(c)(1) is
amended by striking ‘‘2010,’’.
(6) Paragraph (2) of section 2014(b) is amended
by striking ‘‘2010,’’.
(7) Clause (ii) of section 2056A(b)(12)(C) is
amended to read as follows:
‘‘(ii) to treat any reduction in the tax
imposed by paragraph (1)(A) by reason of
the credit allowable under section 2010 (as
in effect on the day before the date of the en-
actment of the Financial Freedom Act of
1999) or the exemption allowable under sec-
tion 2052 with respect to the decedent as
such a credit or exemption (as the case may
be) allowable to such surviving spouse for
purposes of determining the amount of the
exemption allowable under section 2521
with respect to taxable gifts made by the
surviving spouse during the year in which
the spouse becomes a citizen or any subse-
quent year,’’.
(8) Section 2102 is amended by striking sub-
section (c).
(9) Subsection (a) of section 2106 is amended by
adding at the end the following new paragraph:
‘‘(4) EXEMPTION.—
‘‘(A) 
IN
GENERAL.—An 
exemption 
of
$60,000.
‘‘(B) RESIDENTS OF POSSESSIONS OF THE
UNITED STATES.—In the case of a decedent who
is considered to be a nonresident not a citizen of
the United States under section 2209, the exemp-
tion under this paragraph shall be the greater
of—
‘‘(i) $60,000, or
‘‘(ii) that proportion of $175,000
which the value of that part of the dece-
dent’s gross estate which at the time of his
death is situated in the United States bears
to the value of his entire gross estate wher-
ever situated.
‘‘(C) SPECIAL RULES.—
‘‘(i) COORDINATION WITH TREATIES.—
To the extent required under any treaty ob-
ligation of the United States, the exemption
allowed under this paragraph shall be equal
to the amount which bears the same ratio to
the exemption amount under section 2052
(for the calendar year in which the decedent
died) as the value of the part of the dece-
dent’s gross estate which at the time of his
death is situated in the United States bears
to the value of his entire gross estate wher-
ever situated. For purposes of the preceding
sentence, property shall not be treated as
situated in the United States if such prop-
erty is exempt from the tax imposed by this
subchapter under any treaty obligation of
the United States.
‘‘(ii) COORDINATION
WITH
GIFT
TAX
EXEMPTION
AND
UNIFIED
CREDIT.—If an
exemption has been allowed under section
2521 (or a credit has been allowed under
section 2505 as in effect on the day before
the date of the enactment of the Financial
Freedom Act of 1999) with respect to any
gift made by the decedent, each dollar
amount contained in subparagraph (A) or
(B) or the exemption amount applicable
under clause (i) of this subparagraph
(whichever applies) shall be reduced by the
exemption so allowed under 2521 (or, in the
case of such a credit, by the amount of the
gift for which the credit was so allowed).’’
(10) Subsection (c) of section 2107 is amended—
(A) by striking paragraph (1) and by redes-
ignating paragraphs (2) and (3) as paragraphs
(1) and (2), respectively, and
(B) by striking the second sentence of para-
graph (2) (as so redesignated).
(11) Section 2206 is amended by striking ‘‘the
taxable estate’’ in the first sentence and inserting ‘‘the
sum of the taxable estate and the amount of the ex-
emption allowed under section 2052 or 2106(a)(4) in
computing the taxable estate’’.
(12) Section 2207 is amended by striking ‘‘the
taxable estate’’ in the first sentence and inserting ‘‘the
sum of the taxable estate and the amount of the ex-
emption allowed under section 2052 or 2106(a)(4) in
computing the taxable estate’’.
(13) Subparagraph (B) of section 2207B(a)(1) is
amended to read as follows:
‘‘(B) the sum of the taxable estate and the
amount of the exemption allowed under section
2052 or 2106(a)(4) in computing the taxable es-
tate.’’
(14) Subsection (a) of section 2503 is amended
by striking ‘‘section 2522’’ and inserting ‘‘section
2521’’.
(15) Paragraph (1) of section 6018(a) is amend-
ed by striking ‘‘$600,000’’ and inserting ‘‘the exemp-
tion amount under section 2052 for the calendar year
which includes the date of death’’.
(16) Subparagraph (A) of section 6601(j)(2) is
amended to read as follows:
‘‘(A) the amount of the tax which would be
imposed by chapter 11 on an amount of taxable
estate equal to the excess of $1,000,000 over the
exemption amount allowable under section 2052,
or’’.
(17) The table of sections for part II of sub-
chapter A of chapter 11 is amended by striking the
item relating to section 2010.
(18) The table of sections for subchapter A of
chapter 12 is amended by striking the item relating
to section 2505.
(d) EFFECTIVE DATE.—The amendments made by this
section—
(1) insofar as they relate to the tax imposed by
chapter 11 of the Internal Revenue Code of 1986, shall
apply to estates of decedents dying after December 31,
2000, and
(2) insofar as they relate to the tax imposed by
chapter 12 of such Code, shall apply to gifts made
after December 31, 2000.
Subtitle D—Modifications of
Generation-Skipping Transfer Tax
SEC. 631. DEEMED ALLOCATION OF GST EXEMPTION TO
LIFETIME TRANSFERS TO TRUSTS; RETRO-
ACTIVE ALLOCATIONS.
(a) IN GENERAL.—Section 2632 (relating to special
rules for allocation of GST exemption) is amended by redes-
ignating subsection (c) as subsection (e) and by inserting
after subsection (b) the following new subsections:
‘‘(c) DEEMED ALLOCATION
TO CERTAIN LIFETIME
TRANSFERS TO GST TRUSTS.—
‘‘(1) IN GENERAL.—If any individual makes an
indirect skip during such individual’s lifetime, any
unused portion of such individual’s GST exemption
shall be allocated to the property transferred to the ex-
tent necessary to make the inclusion ratio for such
property zero. If the amount of the indirect skip ex-
ceeds such unused portion, the entire unused portion
shall be allocated to the property transferred.
‘‘(2) UNUSED PORTION.—For purposes of para-
graph (1), the unused portion of an individual’s GST
exemption is that portion of such exemption which
has not previously been—
‘‘(A) allocated by such individual,
‘‘(B) treated as allocated under subsection
(b) with respect to a direct skip occurring during
or before the calendar year in which the indirect
skip is made, or
‘‘(C) treated as allocated under paragraph
(1) with respect to a prior indirect skip.
‘‘(3) DEFINITIONS.—
‘‘(A) INDIRECT SKIP.—For purposes of this
subsection, the term ‘indirect skip’ means any
transfer of property (other than a direct skip)
subject to the tax imposed by chapter 12 made
to a GST trust.
‘‘(B) GST TRUST.—The term ‘GST trust’
means a trust that could have a generation-skip-
ping transfer with respect to the transferor
unless—
‘‘(i) the trust instrument provides that
more than 25 percent of the trust corpus
must be distributed to or may be withdrawn
by 1 or more individuals who are non-skip
persons—
‘‘(I) before the date that the indi-
vidual attains age 46,
‘‘(II) on or before 1 or more dates
specified in the trust instrument that
will occur before the date that such in-
dividual attains age 46, or
‘‘(III) upon the occurrence of an
event that, in accordance with regula-
tions prescribed by the Secretary, may
reasonably be expected to occur before
the date that such individual attains
age 46;
‘‘(ii) the trust instrument provides that
more than 25 percent of the trust corpus
must be distributed to or may be withdrawn
by 1 or more individuals who are non-skip
persons and who are living on the date of
death of another person identified in the in-
strument (by name or by class) who is more
than 10 years older than such individuals;
‘‘(iii) the trust instrument provides
that, if 1 or more individuals who are non-
skip persons die on or before a date or event
described in clause (i) or (ii), more than 25
percent of the trust corpus either must be
distributed to the estate or estates of 1 or
more of such individuals or is subject to a
general power of appointment exercisable by
1 or more of such individuals;
‘‘(iv) the trust is a trust any portion
of which would be included in the gross es-
tate of a non-skip person (other than the
transferor) if such person died immediately
after the transfer;
100
‘‘(v) the trust is a charitable lead an-
nuity trust (within the meaning of section
2642(e)(3)(A)) or a charitable remainder
annuity trust or a charitable remainder
unitrust (within the meaning of section
664(d)); or
‘‘(vi) the trust is a trust with respect
to which a deduction was allowed under sec-
tion 2522 for the amount of an interest in
the form of the right to receive annual pay-
ments of a fixed percentage of the net fair
market value of the trust property (deter-
mined yearly) and which is required to pay
principal to a non-skip person if such per-
son is alive when the yearly payments for
which the deduction was allowed terminate.
For purposes of this subparagraph, the value of
transferred property shall not be considered to be
includible in the gross estate of a non-skip per-
son or subject to a right of withdrawal by reason
of such person holding a right to withdraw so
much of such property as does not exceed the
amount referred to in section 2503(b) with re-
spect to any transferor, and it shall be assumed
101
that powers of appointment held by non-skip
persons will not be exercised.
‘‘(4) AUTOMATIC ALLOCATIONS TO CERTAIN GST
TRUSTS.—For purposes of this subsection, an indirect
skip to which section 2642(f) applies shall be deemed
to have been made only at the close of the estate tax
inclusion period. The fair market value of such trans-
fer shall be the fair market value of the trust property
at the close of the estate tax inclusion period.
‘‘(5) APPLICABILITY AND EFFECT.—
‘‘(A) IN GENERAL.—An individual—
‘‘(i) may elect to have this subsection
not apply to—
‘‘(I) an indirect skip, or
‘‘(II) any or all transfers made by
such individual to a particular trust,
and
‘‘(ii) may elect to treat any trust as a
GST trust for purposes of this subsection
with respect to any or all transfers made by
such individual to such trust.
‘‘(B) ELECTIONS.—
‘‘(i) ELECTIONS WITH RESPECT TO IN-
DIRECT SKIPS.—An election under subpara-
graph (A)(i)(I) shall be deemed to be timely
102
if filed on a timely filed gift tax return for
the calendar year in which the transfer was
made or deemed to have been made pursu-
ant to paragraph (4) or on such later date
or dates as may be prescribed by the Sec-
retary.
‘‘(ii) OTHER ELECTIONS.—An election
under clause (i)(II) or (ii) of subparagraph
(A) may be made on a timely filed gift tax
return for the calendar year for which the
election is to become effective.
‘‘(d) RETROACTIVE ALLOCATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a non-skip person has an interest or a
future interest in a trust to which any transfer
has been made,
‘‘(B) such person—
‘‘(i) is a lineal descendant of a grand-
parent of the transferor or of a grandparent
of the transferor’s spouse or former spouse,
and
‘‘(ii) is assigned to a generation below
the generation assignment of the transferor,
and
‘‘(C) such person predeceases the transferor,
103
then the transferor may make an allocation of any of
such transferor’s unused GST exemption to any pre-
vious transfer or transfers to the trust on a chrono-
logical basis.
‘‘(2) SPECIAL RULES.—If the allocation under
paragraph (1) by the transferor is made on a gift tax
return filed on or before the date prescribed by section
6075(b) for gifts made within the calendar year with-
in which the non-skip person’s death occurred—
‘‘(A) the value of such transfer or transfers
for purposes of section 2642(a) shall be deter-
mined as if such allocation had been made on a
timely filed gift tax return for each calendar
year within which each transfer was made,
‘‘(B) such allocation shall be effective imme-
diately before such death, and
‘‘(C) the amount of the transferor’s unused
GST exemption available to be allocated shall be
determined immediately before such death.
‘‘(3) FUTURE INTEREST.—For purposes of this
subsection, a person has a future interest in a trust
if the trust may permit income or corpus to be paid
to such person on a date or dates in the future.’’.
104
(b) CONFORMING AMENDMENT.—Paragraph (2) of sec-
tion 2632(b) is amended by striking ‘‘with respect to a di-
rect skip’’ and inserting ‘‘or subsection (c)(1)’’.
(c) EFFECTIVE DATES.—
(1) DEEMED ALLOCATION.—Section 2632(c) of
the Internal Revenue Code of 1986 (as added by sub-
section (a)), and the amendment made by subsection
(b), shall apply to transfers subject to chapter 11 or
12 made after December 31, 1999, and to estate tax
inclusion periods ending after December 31, 1999.
(2) 
RETROACTIVE
ALLOCATIONS.—Section
2632(d) of the Internal Revenue Code of 1986 (as
added by subsection (a)) shall apply to deaths of non-
skip persons occurring after the date of the enactment
of this Act.
SEC. 632. SEVERING OF TRUSTS.
(a) IN GENERAL.—Subsection (a) of section 2642 (re-
lating to inclusion ratio) is amended by adding at the end
the following new paragraph:
‘‘(3) SEVERING OF TRUSTS.—
‘‘(A) IN GENERAL.—If a trust is severed in
a qualified severance, the trusts resulting from
such severance shall be treated as separate trusts
thereafter for purposes of this chapter.
105
‘‘(B) QUALIFIED
SEVERANCE.—For pur-
poses of subparagraph (A)—
‘‘(i) IN GENERAL.—The term ‘qualified
severance’ means the division of a single
trust and the creation (by any means avail-
able under the governing instrument or
under local law) of 2 or more trusts if—
‘‘(I) the single trust was divided
on a fractional basis, and
‘‘(II) the terms of the new trusts,
in the aggregate, provide for the same
succession of interests of beneficiaries
as are provided in the original trust.
‘‘(ii) TRUSTS WITH INCLUSION RATIO
GREATER THAN ZERO.—If a trust has an
inclusion ratio of greater than zero and less
than 1, a severance is a qualified severance
only if the single trust is divided into 2
trusts, one of which receives a fractional
share of the total value of all trust assets
equal to the applicable fraction of the single
trust immediately before the severance. In
such case, the trust receiving such fractional
share shall have an inclusion ratio of zero
106
and the other trust shall have an inclusion
ratio of 1.
‘‘(iii) 
REGULATIONS.—The 
term
‘qualified severance’ includes any other sev-
erance permitted under regulations pre-
scribed by the Secretary.
‘‘(C) 
TIMING
AND
MANNER
OF
SEVERANCES.—A severance pursuant to this
paragraph may be made at any time. The Sec-
retary shall prescribe by forms or regulations the
manner in which the qualified severance shall be
reported to the Secretary.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to severances after the date of the enact-
ment of this Act.
SEC. 633. MODIFICATION OF CERTAIN VALUATION RULES.
(a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR
DEEMED ALLOCATION MADE.—Paragraph (1) of section
2642(b) (relating to valuation rules, etc.) is amended to
read as follows:
‘‘(1) GIFTS FOR WHICH GIFT TAX RETURN FILED
OR DEEMED ALLOCATION MADE.—If the allocation of
the GST exemption to any transfers of property is
made on a gift tax return filed on or before the date
prescribed by section 6075(b) for such transfer or is
107
deemed to be made under section 2632 (b)(1) or
(c)(1)—
‘‘(A) the value of such property for purposes
of subsection (a) shall be its value as finally de-
termined for purposes of chapter 12 (within the
meaning of section 2001(f)(2)), or, in the case of
an allocation deemed to have been made at the
close of an estate tax inclusion period, its value
at the time of the close of the estate tax inclusion
period, and
‘‘(B) such allocation shall be effective on
and after the date of such transfer, or, in the
case of an allocation deemed to have been made
at the close of an estate tax inclusion period, on
and after the close of such estate tax inclusion
period.’’.
(b) TRANSFERS AT DEATH.—Subparagraph (A) of sec-
tion 2642(b)(2) is amended to read as follows:
‘‘(A) TRANSFERS AT DEATH.—If property is
transferred as a result of the death of the trans-
feror, the value of such property for purposes of
subsection (a) shall be its value as finally deter-
mined for purposes of chapter 11; except that, if
the requirements prescribed by the Secretary re-
specting allocation of post-death changes in value
108
are not met, the value of such property shall be
determined as of the time of the distribution con-
cerned.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall take effect as if included in the amendments
made by section 1431 of the Tax Reform Act of 1986.
SEC. 634. RELIEF PROVISIONS.
(a) IN GENERAL.—Section 2642 is amended by adding
at the end the following new subsection:
‘‘(g) RELIEF PROVISIONS.—
‘‘(1) RELIEF FOR LATE ELECTIONS.—
‘‘(A) IN GENERAL.—The Secretary shall by
regulation prescribe such circumstances and pro-
cedures under which extensions of time will be
granted to make—
‘‘(i) an allocation of GST exemption
described in paragraph (1) or (2) of sub-
section (b), and
‘‘(ii) an election under subsection
(b)(3) or (c)(5) of section 2632.
Such regulations shall include procedures for re-
questing comparable relief with respect to trans-
fers made before the date of enactment of this
paragraph.
109
‘‘(B) BASIS FOR DETERMINATIONS.—In de-
termining whether to grant relief under this
paragraph, the Secretary shall take into account
all relevant circumstances, including evidence of
intent contained in the trust instrument or in-
strument of transfer and such other factors as the
Secretary deems relevant. For purposes of deter-
mining whether to grant relief under this para-
graph, the time for making the allocation (or
election) shall be treated as if not expressly pre-
scribed by statute.
‘‘(2) SUBSTANTIAL COMPLIANCE.—An allocation
of GST exemption under section 2632 that dem-
onstrates an intent to have the lowest possible inclu-
sion ratio with respect to a transfer or a trust shall
be deemed to be an allocation of so much of the trans-
feror’s unused GST exemption as produces the lowest
possible inclusion ratio. In determining whether there
has been substantial compliance, all relevant cir-
cumstances shall be taken into account, including evi-
dence of intent contained in the trust instrument or
instrument of transfer and such other factors as the
Secretary deems relevant.’’.
(b) EFFECTIVE DATES.—
110
(1) RELIEF
FOR
LATE
ELECTIONS.—Section
2642(g)(1) of the Internal Revenue Code of 1986 (as
added by subsection (a)) shall apply to requests pend-
ing on, or filed after, the date of the enactment of this
Act.
(2) 
SUBSTANTIAL
COMPLIANCE.—Section
2642(g)(2) of such Code (as so added) shall take effect
on the date of the enactment of this Act and shall
apply to allocations made prior to such date for pur-
poses of determining the tax consequences of genera-
tion-skipping transfers with respect to which the pe-
riod of time for filing claims for refund has not ex-
pired. No negative implication is intended with re-
spect to the availability of relief for late elections or
the application of a rule of substantial compliance
prior to the enactment of this amendment.
TITLE VII—TAX RELIEF FOR DIS-
TRESSED COMMUNITIES AND
INDUSTRIES
Subtitle A—American Community
Renewal Act of 1999
SEC. 701. SHORT TITLE.
This subtitle may be cited as the ‘‘American Commu-
nity Renewal Act of 1999’’.
111
SEC. 702. DESIGNATION OF AND TAX INCENTIVES FOR RE-
NEWAL COMMUNITIES.
(a) IN GENERAL.—Chapter 1 is amended by adding
at the end the following new subchapter:
‘‘Subchapter X—Renewal Communities
‘‘Part I.
Designation.
‘‘Part II.
Renewal community capital gain; renewal community
business.
‘‘Part III. Family development accounts.
‘‘Part IV.
Additional incentives.
‘‘PART I—DESIGNATION
‘‘Sec. 1400E. Designation of renewal communities.
‘‘SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.
‘‘(a) DESIGNATION.—
‘‘(1) DEFINITIONS.—For purposes of this title,
the term ‘renewal community’ means any area—
‘‘(A) which is nominated by one or more
local governments and the State or States in
which it is located for designation as a renewal
community (hereinafter in this section referred
to as a ‘nominated area’); and
‘‘(B) which the Secretary of Housing and
Urban Development designates as a renewal
community, after consultation with—
‘‘(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury; the
Director of the Office of Management and
112
Budget; and the Administrator of the Small
Business Administration; and
‘‘(ii) in the case of an area on an In-
dian reservation, the Secretary of the Inte-
rior.
‘‘(2) NUMBER OF DESIGNATIONS.—
‘‘(A) IN GENERAL.—The Secretary of Hous-
ing and Urban Development may designate not
more than 20 nominated areas as renewal com-
munities.
‘‘(B) MINIMUM
DESIGNATION
IN
RURAL
AREAS.—Of the areas designated under para-
graph (1), at least 4 must be areas—
‘‘(i) which are within a local govern-
ment jurisdiction or jurisdictions with a
population of less than 50,000,
‘‘(ii) which are outside of a metropoli-
tan statistical area (within the meaning of
section 143(k)(2)(B)), or
‘‘(iii) which are determined by the Sec-
retary of Housing and Urban Development,
after consultation with the Secretary of
Commerce, to be rural areas.
‘‘(3) AREAS DESIGNATED BASED ON DEGREE OF
POVERTY, ETC.—
113
‘‘(A) IN
GENERAL.—Except as otherwise
provided in this section, the nominated areas
designated as renewal communities under this
subsection shall be those nominated areas with
the highest average ranking with respect to the
criteria described in subparagraphs (B), (C),
and (D) of subsection (c)(3). For purposes of the
preceding sentence, an area shall be ranked with-
in each such criterion on the basis of the amount
by which the area exceeds such criterion, with
the area which exceeds such criterion by the
greatest amount given the highest ranking.
‘‘(B) 
EXCEPTION
WHERE
INADEQUATE
COURSE OF ACTION, ETC.—An area shall not be
designated under subparagraph (A) if the Sec-
retary of Housing and Urban Development de-
termines that the course of action described in
subsection (d)(2) with respect to such area is in-
adequate.
‘‘(C) PRIORITY FOR EMPOWERMENT ZONES
AND ENTERPRISE COMMUNITIES WITH RESPECT
TO FIRST HALF OF DESIGNATIONS.—With respect
to the first 10 designations made under this
section—
114
‘‘(i) all shall be chosen from nominated
areas which are empowerment zones or en-
terprise communities (and are otherwise eli-
gible for designation under this section);
and
‘‘(ii) 2 shall be areas described in
paragraph (2)(B).
‘‘(4) LIMITATION ON DESIGNATIONS.—
‘‘(A) PUBLICATION OF REGULATIONS.—The
Secretary of Housing and Urban Development
shall prescribe by regulation no later than 4
months after the date of the enactment of this
section, after consultation with the officials de-
scribed in paragraph (1)(B)—
‘‘(i) the procedures for nominating an
area under paragraph (1)(A);
‘‘(ii) the parameters relating to the size
and population characteristics of a renewal
community; and
‘‘(iii) the manner in which nominated
areas will be evaluated based on the criteria
specified in subsection (d).
‘‘(B) TIME LIMITATIONS.—The Secretary of
Housing and Urban Development may designate
nominated areas as renewal communities only
115
during the 24-month period beginning on the
first day of the first month following the month
in which the regulations described in subpara-
graph (A) are prescribed.
‘‘(C) PROCEDURAL RULES.—The Secretary
of Housing and Urban Development shall not
make any designation of a nominated area as a
renewal 
community 
under 
paragraph 
(2)
unless—
‘‘(i) the local governments and the
States in which the nominated area is lo-
cated have the authority—
‘‘(I) to nominate such area for
designation as a renewal community;
‘‘(II) to make the State and local
commitments described in subsection
(d); and
‘‘(III) to provide assurances satis-
factory to the Secretary of Housing
and Urban Development that such
commitments will be fulfilled,
‘‘(ii) a nomination regarding such
area is submitted in such a manner and in
such form, and contains such information,
116
as the Secretary of Housing and Urban De-
velopment shall by regulation prescribe; and
‘‘(iii) the Secretary of Housing and
Urban Development determines that any in-
formation furnished is reasonably accurate.
‘‘(5) NOMINATION
PROCESS
FOR
INDIAN
RES-
ERVATIONS.—For purposes of this subchapter, in the
case of a nominated area on an Indian reservation,
the reservation governing body (as determined by the
Secretary of the Interior) shall be treated as being
both the State and local governments with respect to
such area.
‘‘(b) PERIOD FOR WHICH DESIGNATION IS IN EF-
FECT.—
‘‘(1) IN GENERAL.—Any designation of an area
as a renewal community shall remain in effect during
the period beginning on the date of the designation
and ending on the earliest of—
‘‘(A) December 31, 2007,
‘‘(B) the termination date designated by the
State and local governments in their nomina-
tion, or
‘‘(C) the date the Secretary of Housing and
Urban Development revokes such designation.
117
‘‘(2) REVOCATION OF DESIGNATION.—The Sec-
retary of Housing and Urban Development may re-
voke the designation under this section of an area if
such Secretary determines that the local government
or the State in which the area is located—
‘‘(A) has modified the boundaries of the
area, or
‘‘(B) is not complying substantially with, or
fails to make progress in achieving, the State or
local commitments, respectively, described in
subsection (d).
‘‘(c) AREA AND ELIGIBILITY REQUIREMENTS.—
‘‘(1) IN GENERAL.—The Secretary of Housing
and Urban Development may designate a nominated
area as a renewal community under subsection (a)
only if the area meets the requirements of paragraphs
(2) and (3) of this subsection.
‘‘(2) AREA REQUIREMENTS.—A nominated area
meets the requirements of this paragraph if—
‘‘(A) the area is within the jurisdiction of
one or more local governments;
‘‘(B) the boundary of the area is contin-
uous; and
‘‘(C) the area—
‘‘(i) has a population, of at least—
118
‘‘(I) 4,000 if any portion of such
area (other than a rural area described
in subsection (a)(2)(B)(i)) is located
within a metropolitan statistical area
(within 
the 
meaning 
of 
section
143(k)(2)(B)) which has a population
of 50,000 or greater; or
‘‘(II) 1,000 in any other case; or
‘‘(ii) is entirely within an Indian res-
ervation (as determined by the Secretary of
the Interior).
‘‘(3) ELIGIBILITY
REQUIREMENTS.—A nomi-
nated area meets the requirements of this paragraph
if the State and the local governments in which it is
located certify (and the Secretary of Housing and
Urban Development, after such review of supporting
data as he deems appropriate, accepts such certifi-
cation) that—
‘‘(A) the area is one of pervasive poverty,
unemployment, and general distress;
‘‘(B) the unemployment rate in the area, as
determined by the most recent available data,
was at least 11⁄2 times the national unemploy-
ment rate for the period to which such data re-
late;
119
‘‘(C) the poverty rate for each population
census tract within the nominated area is at
least 20 percent; and
‘‘(D) in the case of an urban area, at least
70 percent of the households living in the area
have incomes below 80 percent of the median in-
come of households within the jurisdiction of the
local government (determined in the same man-
ner as under section 119(b)(2) of the Housing
and Community Development Act of 1974).
‘‘(4) CONSIDERATION
OF
HIGH
INCIDENCE
OF
CRIME.—The Secretary of Housing and Urban Devel-
opment shall take into account, in selecting nomi-
nated areas for designation as renewal communities
under this section, the extent to which such areas have
a high incidence of crime.
‘‘(5) CONSIDERATION OF COMMUNITIES IDENTI-
FIED IN GAO STUDY.—The Secretary of Housing and
Urban Development shall take into account, in select-
ing nominated areas for designation as renewal com-
munities under this section, if the area has census
tracts identified in the May 12, 1998, report of the
Government Accounting Office regarding the identi-
fication of economically distressed areas.
‘‘(d) REQUIRED STATE AND LOCAL COMMITMENTS.—
120
‘‘(1) IN GENERAL.—The Secretary of Housing
and Urban Development may designate any nomi-
nated area as a renewal community under subsection
(a) only if—
‘‘(A) the local government and the State in
which the area is located agree in writing that,
during any period during which the area is a re-
newal community, such governments will follow
a specified course of action which meets the re-
quirements of paragraph (2) and is designed to
reduce the various burdens borne by employers or
employees in such area; and
‘‘(B) the economic growth promotion re-
quirements of paragraph (3) are met.
‘‘(2) COURSE OF ACTION.—
‘‘(A) IN
GENERAL.—A course of action
meets the requirements of this paragraph if such
course of action is a written document, signed by
a State (or local government) and neighborhood
organizations, which evidences a partnership be-
tween such State or government and community-
based organizations and which commits each sig-
natory to specific and measurable goals, actions,
and timetables. Such course of action shall in-
clude at least five of the following:
121
‘‘(i) A reduction of tax rates or fees ap-
plying within the renewal community.
‘‘(ii) An increase in the level of effi-
ciency of local services within the renewal
community.
‘‘(iii) Crime reduction strategies, such
as crime prevention (including the provi-
sion of such services by nongovernmental
entities).
‘‘(iv) Actions to reduce, remove, sim-
plify, or streamline governmental require-
ments applying within the renewal commu-
nity.
‘‘(v) Involvement in the program by
private entities, organizations, neighborhood
organizations, and community groups, par-
ticularly those in the renewal community,
including a commitment from such private
entities to provide jobs and job training for,
and technical, financial, or other assistance
to, employers, employees, and residents from
the renewal community.
‘‘(vi) State or local income tax benefits
for fees paid for services performed by a
122
nongovernmental entity which were for-
merly performed by a governmental entity.
‘‘(vii) The gift (or sale at below fair
market value) of surplus real property (such
as land, homes, and commercial or indus-
trial structures) in the renewal community
to neighborhood organizations, community
development corporations, or private com-
panies.
‘‘(B) RECOGNITION OF PAST EFFORTS.—For
purposes of this section, in evaluating the course
of action agreed to by any State or local govern-
ment, the Secretary of Housing and Urban De-
velopment shall take into account the past efforts
of such State or local government in reducing the
various burdens borne by employers and employ-
ees in the area involved.
‘‘(3) ECONOMIC GROWTH PROMOTION REQUIRE-
MENTS.—The economic growth promotion require-
ments of this paragraph are met with respect to a
nominated area if the local government and the State
in which such area is located certify in writing that
such government and State, respectively, have re-
pealed or otherwise will not enforce within the area,
if such area is designated as a renewal community—
123
‘‘(A) licensing requirements for occupations
that do not ordinarily require a professional de-
gree;
‘‘(B) zoning restrictions on home-based
businesses which do not create a public nuisance;
‘‘(C) permit requirements for street vendors
who do not create a public nuisance;
‘‘(D) zoning or other restrictions that im-
pede the formation of schools or child care cen-
ters; and
‘‘(E) franchises or other restrictions on com-
petition for businesses providing public services,
including but not limited to taxicabs, jitneys,
cable television, or trash hauling,
except to the extent that such regulation of businesses
and occupations is necessary for and well-tailored to
the protection of health and safety.
‘‘(e) COORDINATION WITH TREATMENT OF EMPOWER-
MENT ZONES AND ENTERPRISE COMMUNITIES.—For pur-
poses of this title, if there are in effect with respect to the
same area both—
‘‘(1) a designation as a renewal community; and
‘‘(2) a designation as an empowerment zone or
enterprise community,
124
both of such designations shall be given full effect with re-
spect to such area.
‘‘(f) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this subchapter—
‘‘(1) GOVERNMENTS.—If more than one govern-
ment seeks to nominate an area as a renewal commu-
nity, any reference to, or requirement of, this section
shall apply to all such governments.
‘‘(2) STATE.—The term ‘State’ includes Puerto
Rico, the Virgin Islands of the United States, Guam,
American Samoa, the Northern Mariana Islands, and
any other possession of the United States.
‘‘(3) LOCAL GOVERNMENT.—The term ‘local gov-
ernment’ means—
‘‘(A) any county, city, town, township, par-
ish, village, or other general purpose political
subdivision of a State;
‘‘(B) any combination of political subdivi-
sions described in subparagraph (A) recognized
by the Secretary of Housing and Urban Develop-
ment; and
‘‘(C) the District of Columbia.
‘‘(4) APPLICATION OF RULES RELATING TO CEN-
SUS TRACTS AND CENSUS DATA.—The rules of sections
1392(b)(4) and 1393(a)(9) shall apply.
125
‘‘PART II—RENEWAL COMMUNITY CAPITAL GAIN;
RENEWAL COMMUNITY BUSINESS
‘‘Sec. 1400F. Renewal community capital gain.
‘‘Sec. 1400G. Renewal community business defined.
‘‘SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.
‘‘(a) GENERAL RULE.—Gross income does not include
any qualified capital gain recognized on the sale or ex-
change of a qualified community asset held for more than
5 years.
‘‘(b) QUALIFIED COMMUNITY ASSET.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘qualified commu-
nity asset’ means—
‘‘(A) any qualified community stock;
‘‘(B) any qualified community partnership
interest; and
‘‘(C) any qualified community business
property.
‘‘(2) QUALIFIED COMMUNITY STOCK.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘qualified commu-
nity stock’ means any stock in a domestic cor-
poration if—
‘‘(i) such stock is acquired by the tax-
payer after December 31, 2000, and before
January 1, 2008, at its original issue (di-
127
ship, such partnership was being organized for
purposes of being a renewal community busi-
ness); and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as a renewal community
business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
‘‘(4) QUALIFIED
COMMUNITY
BUSINESS
PROP-
ERTY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
community business property’ means tangible
property if—
‘‘(i) such property was acquired by the
taxpayer by purchase (as defined in section
179(d)(2)) after December 31, 2000, and be-
fore January 1, 2008;
‘‘(ii) the original use of such property
in the renewal community commences with
the taxpayer; and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such property,
substantially all of the use of such property
128
was in a renewal community business of the
taxpayer.
‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM-
PROVEMENTS.—The requirements of clauses (i)
and (ii) of subparagraph (A) shall be treated as
satisfied with respect to—
‘‘(i) property which is substantially
improved (within the meaning of section
1400B(b)(4)(B)(ii)) by the taxpayer before
January 1, 2008; and
‘‘(ii) any land on which such property
is located.
‘‘(c) CERTAIN RULES TO APPLY.—Rules similar to the
rules of paragraphs (5), (6), and (7) of subsection (b), and
subsections (e), (f), and (g), of section 1400B shall apply
for purposes of this section.
‘‘SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.
‘‘For purposes of this part, the term ‘renewal commu-
nity business’ means any entity or proprietorship which
would be a qualified business entity or qualified proprietor-
ship under section 1397B if—
‘‘(1) references to renewal communities were sub-
stituted for references to empowerment zones in such
section; and
129
‘‘(2) ‘80 percent’ were substituted for ‘50 percent’
in subsections (b)(2) and (c)(1) of such section.
‘‘PART III—FAMILY DEVELOPMENT ACCOUNTS
‘‘Sec. 1400H. Family development accounts for renewal community
EITC recipients.
‘‘Sec. 1400I. Demonstration program to provide matching contribu-
tions to family development accounts in certain re-
newal communities.
‘‘Sec. 1400J. Designation of earned income tax credit payments for
deposit to family development account.
‘‘SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RE-
NEWAL COMMUNITY EITC RECIPIENTS.
‘‘(a) ALLOWANCE OF DEDUCTION.—
‘‘(1) IN GENERAL.—There shall be allowed as a
deduction—
‘‘(A) in the case of a qualified individual,
the amount paid in cash for the taxable year by
such individual to any family development ac-
count for such individual’s benefit; and
‘‘(B) in the case of any person other than
a qualified individual, the amount paid in cash
for the taxable year by such person to any fam-
ily development account for the benefit of a
qualified individual but only if the amount so
paid is designated for purposes of this section by
such individual.
No deduction shall be allowed under this paragraph
for any amount deposited in a family development
account under section 1400I (relating to demonstra-
130
tion program to provide matching amounts in re-
newal communities).
‘‘(2) LIMITATION.—
‘‘(A) IN GENERAL.—The amount allowable
as a deduction to any individual for any taxable
year by reason of paragraph (1)(A) shall not ex-
ceed the lesser of—
‘‘(i) $2,000, or
‘‘(ii) an amount equal to the com-
pensation includible in the individual’s
gross income for such taxable year.
‘‘(B) PERSONS DONATING TO FAMILY DE-
VELOPMENT
ACCOUNTS
OF
OTHERS.—The
amount which may be designated under para-
graph (1)(B) by any qualified individual for
any taxable year of such individual shall not ex-
ceed $1,000.
‘‘(3) SPECIAL RULES FOR CERTAIN MARRIED IN-
DIVIDUALS.—Rules similar to rules of section 219(c)
shall apply to the limitation in paragraph (2)(A).
‘‘(4) COORDINATION WITH IRAS.—No deduction
shall be allowed under this section for any taxable
year to any person by reason of a payment to an ac-
count for the benefit of a qualified individual if any
amount is paid for such taxable year into an indi-
131
vidual retirement account (including a Roth IRA) for
the benefit of such individual.
‘‘(5) ROLLOVERS.—No deduction shall be allowed
under this section with respect to any rollover con-
tribution.
‘‘(b) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) INCLUSION
OF
AMOUNTS
IN
GROSS
IN-
COME.—Except as otherwise provided in this sub-
section, any amount paid or distributed out of a fam-
ily development account shall be included in gross in-
come by the payee or distributee, as the case may be.
‘‘(2) EXCLUSION OF QUALIFIED FAMILY DEVEL-
OPMENT
DISTRIBUTIONS.—Paragraph (1) shall not
apply to any qualified family development distribu-
tion.
‘‘(c) QUALIFIED FAMILY DEVELOPMENT DISTRIBU-
TION.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified family
development distribution’ means any amount paid or
distributed out of a family development account
which would otherwise be includible in gross income,
to the extent that such payment or distribution is
used exclusively to pay qualified family development
expenses for the holder of the account or the spouse or
dependent (as defined in section 152) of such holder.
132
‘‘(2) QUALIFIED
FAMILY
DEVELOPMENT
EX-
PENSES.—The term ‘qualified family development ex-
penses’ means any of the following:
‘‘(A) Qualified higher education expenses.
‘‘(B) Qualified first-time homebuyer costs.
‘‘(C) Qualified business capitalization costs.
‘‘(D) Qualified medical expenses.
‘‘(E) Qualified rollovers.
‘‘(3) 
QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ has the meaning given
such term by section 72(t)(7), determined by
treating postsecondary vocational educational
schools as eligible educational institutions.
‘‘(B) POSTSECONDARY
VOCATIONAL
EDU-
CATION SCHOOL.—The term ‘postsecondary voca-
tional educational school’ means an area voca-
tional education school (as defined in subpara-
graph (C) or (D) of section 521(4) of the Carl D.
Perkins Vocational and Applied Technology
Education Act (20 U.S.C. 2471(4))) which is in
any State (as defined in section 521(33) of such
Act), as such sections are in effect on the date of
the enactment of this section.
133
‘‘(C) COORDINATION
WITH
OTHER
BENE-
FITS.—The amount of qualified higher education
expenses for any taxable year shall be reduced as
provided in section 25A(g)(2).
‘‘(4) 
QUALIFIED
FIRST-TIME
HOMEBUYER
COSTS.—The term ‘qualified first-time homebuyer
costs’ means qualified acquisition costs (as defined in
section 72(t)(8) without regard to subparagraph (B)
thereof) with respect to a principal residence (within
the meaning of section 121) for a qualified first-time
homebuyer (as defined in section 72(t)(8)).
‘‘(5) 
QUALIFIED
BUSINESS
CAPITALIZATION
COSTS.—
‘‘(A) IN
GENERAL.—The term ‘qualified
business capitalization costs’ means qualified ex-
penditures for the capitalization of a qualified
business pursuant to a qualified plan.
‘‘(B) 
QUALIFIED
EXPENDITURES.—The
term ‘qualified expenditures’ means expenditures
included in a qualified plan, including capital,
plant, equipment, working capital, and inven-
tory expenses.
‘‘(C) 
QUALIFIED
BUSINESS.—The 
term
‘qualified business’ means any trade or business
other than any trade or business—
134
‘‘(i) which consists of the operation of
any 
facility 
described 
in 
section
144(c)(6)(B), or
‘‘(ii) which contravenes any law.
‘‘(D) QUALIFIED PLAN.—The term ‘quali-
fied plan’ means a business plan which meets
such requirements as the Secretary may specify.
‘‘(6) QUALIFIED MEDICAL EXPENSES.—The term
‘qualified medical expenses’ means any amount paid
during the taxable year, not compensated for by in-
surance or otherwise, for medical care (as defined in
section 213(d)) of the taxpayer, his spouse, or his de-
pendent (as defined in section 152).
‘‘(7) QUALIFIED ROLLOVERS.—The term ‘quali-
fied rollover’ means any amount paid from a family
development account of a taxpayer into another such
account established for the benefit of—
‘‘(A) such taxpayer, or
‘‘(B) any qualified individual who is—
‘‘(i) the spouse of such taxpayer, or
‘‘(ii) any dependent (as defined in sec-
tion 152) of the taxpayer.
Rules similar to the rules of section 408(d)(3) shall
apply for purposes of this paragraph.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—
135
‘‘(1) IN GENERAL.—Any family development ac-
count is exempt from taxation under this subtitle un-
less such account has ceased to be a family develop-
ment account by reason of paragraph (2). Notwith-
standing the preceding sentence, any such account is
subject to the taxes imposed by section 511 (relating
to imposition of tax on unrelated business income of
charitable, etc., organizations). Notwithstanding any
other provision of this title (including chapters 11
and 12), the basis of any person in such an account
is zero.
‘‘(2) LOSS OF EXEMPTION IN CASE OF PROHIB-
ITED TRANSACTIONS.—For purposes of this section,
rules similar to the rules of section 408(e) shall apply.
‘‘(3) OTHER RULES TO APPLY.—Rules similar to
the rules of paragraphs (4), (5), and (6) of section
408(d) shall apply for purposes of this section.
‘‘(e) FAMILY DEVELOPMENT ACCOUNT.—For purposes
of this title, the term ‘family development account’ means
a trust created or organized in the United States for the
exclusive benefit of a qualified individual or his bene-
ficiaries, but only if the written governing instrument cre-
ating the trust meets the following requirements:
‘‘(1) Except in the case of a qualified rollover (as
defined in subsection (c)(7))—
136
‘‘(A) no contribution will be accepted unless
it is in cash; and
‘‘(B) contributions will not be accepted for
the taxable year in excess of $3,000 (determined
without regard to any contribution made under
section 1400I (relating to demonstration pro-
gram to provide matching amounts in renewal
communities)).
‘‘(2) The requirements of paragraphs (2) through
(6) of section 408(a) are met.
‘‘(f) QUALIFIED INDIVIDUAL.—For purposes of this
section, the term ‘qualified individual’ means, for any tax-
able year, an individual—
‘‘(1) who is a bona fide resident of a renewal
community throughout the taxable year; and
‘‘(2) to whom a credit was allowed under section
32 for the preceding taxable year.
‘‘(g) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMPENSATION.—The term ‘compensation’
has the meaning given such term by section 219(f)(1).
‘‘(2) MARRIED INDIVIDUALS.—The maximum de-
duction under subsection (a) shall be computed sepa-
rately for each individual, and this section shall be
applied without regard to any community property
laws.
137
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—For purposes of this section, a taxpayer shall
be deemed to have made a contribution to a family
development account on the last day of the preceding
taxable year if the contribution is made on account
of such taxable year and is made not later than the
time prescribed by law for filing the return for such
taxable year (not including extensions thereof).
‘‘(4) EMPLOYER
PAYMENTS; 
CUSTODIAL
AC-
COUNTS.—Rules similar to the rules of sections
219(f)(5) and 408(h) shall apply for purposes of this
section.
‘‘(5) REPORTS.—The trustee of a family develop-
ment account shall make such reports regarding such
account to the Secretary and to the individual for
whom the account is maintained with respect to con-
tributions (and the years to which they relate), dis-
tributions, and such other matters as the Secretary
may require under regulations. The reports required
by this paragraph—
‘‘(A) shall be filed at such time and in such
manner as the Secretary prescribes in such regu-
lations; and
‘‘(B) shall be furnished to individuals—
138
‘‘(i) not later than January 31 of the
calendar year following the calendar year to
which such reports relate; and
‘‘(ii) in such manner as the Secretary
prescribes in such regulations.
‘‘(6) INVESTMENT IN COLLECTIBLES TREATED AS
DISTRIBUTIONS.—Rules similar to the rules of section
408(m) shall apply for purposes of this section.
‘‘(h) PENALTY FOR DISTRIBUTIONS NOT USED FOR
QUALIFIED FAMILY DEVELOPMENT EXPENSES.—
‘‘(1) IN GENERAL.—If any amount is distributed
from a family development account and is not used
exclusively to pay qualified family development ex-
penses for the holder of the account or the spouse or
dependent (as defined in section 152) of such holder,
the tax imposed by this chapter for the taxable year
of such distribution shall be increased by the sum
of—
‘‘(A) 100 percent of the portion of such
amount which is includible in gross income and
is attributable to amounts contributed under sec-
tion 1400I (relating to demonstration program
to provide matching amounts in renewal com-
munities); and
139
‘‘(B) 10 percent of the portion of such
amount which is includible in gross income and
is not described in subparagraph (A).
For purposes of this subsection, distributions which
are includable in gross income shall be treated as at-
tributable to amounts contributed under section 1400I
to the extent thereof. For purposes of the preceding
sentence, all family development accounts of an indi-
vidual shall be treated as one account.
‘‘(2) EXCEPTION FOR CERTAIN DISTRIBUTIONS.—
Paragraph (1) shall not apply to distributions which
are—
‘‘(A) made on or after the date on which the
account holder attains age 591⁄2,
‘‘(B) made to a beneficiary (or the estate of
the account holder) on or after the death of the
account holder, or
‘‘(C) attributable to the account holder’s
being disabled within the meaning of section
72(m)(7).
‘‘(i) APPLICATION OF SECTION.—This section shall
apply to amounts paid to a family development account
for any taxable year beginning after December 31, 2000,
and before January 1, 2008.
140
‘‘SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE
MATCHING CONTRIBUTIONS TO FAMILY DE-
VELOPMENT 
ACCOUNTS 
IN 
CERTAIN 
RE-
NEWAL COMMUNITIES.
‘‘(a) DESIGNATION.—
‘‘(1) DEFINITIONS.—For purposes of this section,
the term ‘FDA matching demonstration area’ means
any renewal community—
‘‘(A) which is nominated under this section
by each of the local governments and States
which nominated such community for designa-
tion as a renewal community under section
1400E(a)(1)(A); and
‘‘(B) which the Secretary of Housing and
Urban Development designates as an FDA
matching demonstration area after consultation
with—
‘‘(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury, the
Director of the Office of Management and
Budget, and the Administrator of the Small
Business Administration; and
‘‘(ii) in the case of a community on an
Indian reservation, the Secretary of the In-
terior.
‘‘(2) NUMBER OF DESIGNATIONS.—
141
‘‘(A) IN GENERAL.—The Secretary of Hous-
ing and Urban Development may designate not
more than 5 renewal communities as FDA
matching demonstration areas.
‘‘(B) MINIMUM
DESIGNATION
IN
RURAL
AREAS.—Of the areas designated under subpara-
graph (A), at least 2 must be areas described in
section 1400E(a)(2)(B).
‘‘(3) LIMITATIONS ON DESIGNATIONS.—
‘‘(A) PUBLICATION OF REGULATIONS.—The
Secretary of Housing and Urban Development
shall prescribe by regulation no later than 4
months after the date of the enactment of this
section, after consultation with the officials de-
scribed in paragraph (1)(B)—
‘‘(i) the procedures for nominating a
renewal 
community 
under 
paragraph
(1)(A) (including procedures for coordi-
nating such nomination with the nomina-
tion of an area for designation as a renewal
community under section 1400E); and
‘‘(ii) the manner in which nominated
renewal communities will be evaluated for
purposes of this section.
142
‘‘(B) TIME LIMITATIONS.—The Secretary of
Housing and Urban Development may designate
renewal communities as FDA matching dem-
onstration areas only during the 24-month pe-
riod beginning on the first day of the first month
following the month in which the regulations de-
scribed in subparagraph (A) are prescribed.
‘‘(4) DESIGNATION BASED ON DEGREE OF POV-
ERTY, ETC.—The rules of section 1400E(a)(3) shall
apply for purposes of designations of FDA matching
demonstration areas under this section.
‘‘(b) PERIOD FOR WHICH DESIGNATION IS IN EF-
FECT.—Any designation of a renewal community as an
FDA matching demonstration area shall remain in effect
during the period beginning on the date of such designation
and ending on the date on which such area ceases to be
a renewal community.
‘‘(c) MATCHING CONTRIBUTIONS TO FAMILY DEVELOP-
MENT ACCOUNTS.—
‘‘(1) IN GENERAL.—Not less than once each tax-
able year, the Secretary shall deposit (to the extent
provided in appropriation Acts) into a family devel-
opment account of each qualified individual (as de-
fined in section 1400H(f))—
143
‘‘(A) who is a resident throughout the tax-
able year of an FDA matching demonstration
area; and
‘‘(B) who requests (in such form and man-
ner as the Secretary prescribes) such deposit for
the taxable year,
an amount equal to the sum of the amounts deposited
into all of the family development accounts of such
individual during such taxable year (determined
without regard to any amount contributed under this
section).
‘‘(2) LIMITATIONS.—
‘‘(A) ANNUAL LIMIT.—The Secretary shall
not deposit more than $1000 under paragraph
(1) with respect to any individual for any tax-
able year.
‘‘(B) AGGREGATE
LIMIT.—The Secretary
shall not deposit more than $2000 under para-
graph (1) with respect to any individual for all
taxable years.
‘‘(3) EXCLUSION FROM INCOME.—Except as pro-
vided in section 1400H, gross income shall not in-
clude any amount deposited into a family develop-
ment account under paragraph (1).
144
‘‘(d) NOTICE OF PROGRAM.—The Secretary shall pro-
vide appropriate notice to residents of FDA matching dem-
onstration areas of the availability of the benefits under this
section.
‘‘(e) TERMINATION.—No amount may be deposited
under this section for any taxable year beginning after De-
cember 31, 2007.
‘‘SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CRED-
IT PAYMENTS FOR DEPOSIT TO FAMILY DE-
VELOPMENT ACCOUNT.
‘‘(a) IN GENERAL.—With respect to the return of any
qualified individual (as defined in section 1400H(f)) for the
taxable year of the tax imposed by this chapter, such indi-
vidual may designate that a specified portion (not less than
$1) of any overpayment of tax for such taxable year which
is attributable to the earned income tax credit shall be de-
posited by the Secretary into a family development account
of such individual. The Secretary shall so deposit such por-
tion designated under this subsection.
‘‘(b) MANNER AND TIME OF DESIGNATION.—A des-
ignation under subsection (a) may be made with respect
to any taxable year—
‘‘(1) at the time of filing the return of the tax
imposed by this chapter for such taxable year, or
145
‘‘(2) at any other time (after the time of filing
the return of the tax imposed by this chapter for such
taxable year) specified in regulations prescribed by
the Secretary.
Such designation shall be made in such manner as the Sec-
retary prescribes by regulations.
‘‘(c) PORTION ATTRIBUTABLE
TO EARNED INCOME
TAX CREDIT.—For purposes of subsection (a), an overpay-
ment for any taxable year shall be treated as attributable
to the earned income tax credit to the extent that such over-
payment does not exceed the credit allowed to the taxpayer
under section 32 for such taxable year.
‘‘(d) OVERPAYMENTS TREATED AS REFUNDED.—For
purposes of this title, any portion of an overpayment of tax
designated under subsection (a) shall be treated as being
refunded to the taxpayer as of the last date prescribed for
filing the return of tax imposed by this chapter (determined
without regard to extensions) or, if later, the date the return
is filed.
‘‘(e) TERMINATION.—This section shall not apply to
any taxable year beginning after December 31, 2007.
‘‘PART IV—ADDITIONAL INCENTIVES
‘‘Sec. 1400K. Commercial revitalization deduction.
‘‘Sec. 1400L. Increase in expensing under section 179.
146
‘‘SEC. 1400K. COMMERCIAL REVITALIZATION DEDUCTION.
‘‘(a) GENERAL RULE.—At the election of the taxpayer,
either—
‘‘(1) one-half of any qualified revitalization ex-
penditures chargeable to capital account with respect
to any qualified revitalization building shall be allow-
able as a deduction for the taxable year in which the
building is placed in service, or
‘‘(2) a deduction for all such expenditures shall
be allowable ratably over the 120-month period begin-
ning with the month in which the building is placed
in service.
The deduction provided by this section with respect to such
expenditure shall be in lieu of any depreciation deduction
otherwise allowable on account of such expenditure.
‘‘(b) QUALIFIED REVITALIZATION BUILDINGS AND EX-
PENDITURES.—For purposes of this section—
‘‘(1) QUALIFIED
REVITALIZATION
BUILDING.—
The term ‘qualified revitalization building’ means
any building (and its structural components) if—
‘‘(A) such building is located in a renewal
community and is placed in service after Decem-
ber 31, 2000;
‘‘(B) a commercial revitalization deduction
amount is allocated to the building under sub-
section (d); and
147
‘‘(C) depreciation (or amortization in lieu
of depreciation) is allowable with respect to the
building (without regard to this section).
‘‘(2) 
QUALIFIED
REVITALIZATION
EXPENDI-
TURE.—
‘‘(A) IN GENERAL.—The term ‘qualified re-
vitalization expenditure’ means any amount
properly chargeable to capital account—
‘‘(i) for property for which deprecia-
tion is allowable under section 168 (without
regard to this section) and which is—
‘‘(I) nonresidential real property;
or
‘‘(II) an addition or improvement
to property described in subclause (I);
‘‘(ii) in connection with the construc-
tion of any qualified revitalization building
which was not previously placed in service
or in connection with the substantial reha-
bilitation (within the meaning of section
47(c)(1)(C)) of a building which was placed
in service before the beginning of such reha-
bilitation; and
148
‘‘(iii) for land (including land which
is functionally related to such property and
subordinate thereto).
‘‘(B) DOLLAR LIMITATION.—The aggregate
amount which may be treated as qualified revi-
talization expenditures with respect to any
qualified revitalization building for any taxable
year shall not exceed the excess of—
‘‘(i) $10,000,000, reduced by
‘‘(ii) any such expenditures with re-
spect to the building taken into account by
the taxpayer or any predecessor in deter-
mining the amount of the deduction under
this section for all preceding taxable years.
‘‘(C) CERTAIN
EXPENDITURES
NOT
IN-
CLUDED.—The term ‘qualified revitalization ex-
penditure’ does not include—
‘‘(i) ACQUISITION COSTS.—The costs of
acquiring any building or interest therein
and any land in connection with such
building to the extent that such costs exceed
30 percent of the qualified revitalization ex-
penditures determined without regard to
this clause.
149
‘‘(ii) 
CREDITS.—Any 
expenditure
which the taxpayer may take into account
in computing any credit allowable under
this title unless the taxpayer elects to take
the expenditure into account only for pur-
poses of this section.
‘‘(c) WHEN EXPENDITURES TAKEN INTO ACCOUNT.—
Qualified revitalization expenditures with respect to any
qualified revitalization building shall be taken into account
for the taxable year in which the qualified revitalization
building is placed in service. For purposes of the preceding
sentence, a substantial rehabilitation of a building shall be
treated as a separate building.
‘‘(d) LIMITATION ON AGGREGATE DEDUCTIONS AL-
LOWABLE WITH RESPECT TO BUILDINGS LOCATED IN A
STATE.—
‘‘(1) IN GENERAL.—The amount of the deduction
determined under this section for any taxable year
with respect to any building shall not exceed the com-
mercial revitalization deduction amount (in the case
of an amount determined under subsection (a)(2), the
present value of such amount as determined under the
rules of section 42(b)(2)(C) by substituting ‘100 per-
cent’ for ‘72 percent’ in clause (ii) thereof) allocated
to such building under this subsection by the commer-
150
cial revitalization agency. Such allocation shall be
made at the same time and in the same manner as
under paragraphs (1) and (7) of section 42(h).
‘‘(2) COMMERCIAL REVITALIZATION DEDUCTION
AMOUNT FOR AGENCIES.—
‘‘(A) IN GENERAL.—The aggregate commer-
cial revitalization deduction amount which a
commercial revitalization agency may allocate
for any calendar year is the amount of the State
commercial revitalization deduction ceiling de-
termined under this paragraph for such calendar
year for such agency.
‘‘(B) STATE COMMERCIAL REVITALIZATION
DEDUCTION CEILING.—The State commercial re-
vitalization deduction ceiling applicable to any
State—
‘‘(i) for each calendar year after 2000
and before 2008 is $6,000,000 for each re-
newal community in the State; and
‘‘(ii) zero for each calendar year there-
after.
‘‘(C) COMMERCIAL REVITALIZATION AGEN-
CY.—For purposes of this section, the term ‘com-
mercial revitalization agency’ means any agency
authorized by a State to carry out this section.
151
‘‘(e) RESPONSIBILITIES OF COMMERCIAL REVITALIZA-
TION AGENCIES.—
‘‘(1) PLANS FOR ALLOCATION.—Notwithstanding
any other provision of this section, the commercial re-
vitalization deduction amount with respect to any
building shall be zero unless—
‘‘(A) such amount was allocated pursuant
to a qualified allocation plan of the commercial
revitalization agency which is approved (in ac-
cordance with rules similar to the rules of section
147(f)(2) (other than subparagraph (B)(ii) there-
of)) by the governmental unit of which such
agency is a part; and
‘‘(B) such agency notifies the chief executive
officer (or its equivalent) of the local jurisdiction
within which the building is located of such allo-
cation and provides such individual a reasonable
opportunity to comment on the allocation.
‘‘(2) QUALIFIED ALLOCATION PLAN.—For pur-
poses of this subsection, the term ‘qualified allocation
plan’ means any plan—
‘‘(A) which sets forth selection criteria to be
used to determine priorities of the commercial
revitalization agency which are appropriate to
local conditions;
152
‘‘(B) which considers—
‘‘(i) the degree to which a project con-
tributes to the implementation of a strategic
plan that is devised for a renewal commu-
nity through a citizen participation process;
‘‘(ii) the amount of any increase in
permanent, full-time employment by reason
of any project; and
‘‘(iii) the active involvement of resi-
dents and nonprofit groups within the re-
newal community; and
‘‘(C) which provides a procedure that the
agency (or its agent) will follow in monitoring
compliance with this section.
‘‘(f) REGULATIONS.—For purposes of this section, the
Secretary shall, by regulations, provide for the application
of rules similar to the rules of section 49 and subsections
(a) and (b) of section 50.
‘‘(g) TERMINATION.—This section shall not apply to
any building placed in service after December 31, 2007.
‘‘SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.
‘‘(a) GENERAL RULE.—In the case of a renewal com-
munity business (as defined in section 1400G), for purposes
of section 179—
153
‘‘(1) the limitation under section 179(b)(1) shall
be increased by the lesser of—
‘‘(A) $35,000; or
‘‘(B) the cost of section 179 property which
is qualified renewal property placed in service
during the taxable year; and
‘‘(2) the amount taken into account under sec-
tion 179(b)(2) with respect to any section 179 prop-
erty which is qualified renewal property shall be 50
percent of the cost thereof.
‘‘(b) RECAPTURE.—Rules similar to the rules under
section 179(d)(10) shall apply with respect to any qualified
renewal property which ceases to be used in a renewal com-
munity by a renewal community business.
‘‘(c) QUALIFIED RENEWAL PROPERTY.—For purposes
of this section—
‘‘(1) IN GENERAL.—The term ‘qualified renewal
property’ means any property to which section 168
applies (or would apply but for section 179) if—
‘‘(A) such property was acquired by the tax-
payer by purchase (as defined in section
179(d)(2)) after December 31, 2000, and before
January 1, 2008; and
‘‘(B) such property would be qualified zone
property (as defined in section 1397C) if ref-
154
erences to renewal communities were substituted
for references to empowerment zones in section
1397C.
‘‘(2) CERTAIN RULES TO APPLY.—The rules of
subsections (a)(2) and (b) of section 1397C shall
apply for purposes of this section.’’.
SEC. 703. EXTENSION OF EXPENSING OF ENVIRONMENTAL
REMEDIATION COSTS TO RENEWAL COMMU-
NITIES.
(a) EXTENSION.—Paragraph (2) of section 198(c) (de-
fining targeted area) is amended by redesignating subpara-
graph (C) as subparagraph (D) and by inserting after sub-
paragraph (B) the following new subparagraph:
‘‘(C) RENEWAL COMMUNITIES INCLUDED.—
Except as provided in subparagraph (B), such
term shall include a renewal community (as de-
fined in section 1400E) with respect to expendi-
tures paid or incurred after December 31,
2000.’’.
(b) EXTENSION OF TERMINATION DATE FOR RENEWAL
COMMUNITIES.—Subsection (h) of section 198 is amended
by inserting before the period ‘‘(December 31, 2007, in the
case of a renewal community, as defined in section
1400E).’’.
155
SEC. 704. EXTENSION OF WORK OPPORTUNITY TAX CREDIT
FOR RENEWAL COMMUNITIES
(a) EXTENSION.—Subsection (c) of section 51 (relating
to termination) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(5) EXTENSION OF CREDIT FOR RENEWAL COM-
MUNITIES.—
‘‘(A) IN GENERAL.—In the case of an indi-
vidual who begins work for the employer after
the date contained in paragraph (4)(B), for pur-
poses of section 38—
‘‘(i) in lieu of applying subsection (a),
the amount of the work opportunity credit
determined under this section for the tax-
able year shall be equal to—
‘‘(I) 15 percent of the qualified
first-year wages for such year; and
‘‘(II) 30 percent of the qualified
second-year wages for such year;
‘‘(ii) subsection (b)(3) shall be applied
by substituting ‘$10,000’ for ‘$6,000’;
‘‘(iii) paragraph (4)(B) shall be ap-
plied by substituting for the date contained
therein the last day for which the designa-
tion under section 1400E of the renewal
156
community referred to in subparagraph
(B)(i) is in effect; and
‘‘(iv) rules similar to the rules of sec-
tion 51A(b)(5)(C) shall apply.
‘‘(B) QUALIFIED FIRST- AND SECOND-YEAR
WAGES.—For purposes of subparagraph (A)—
‘‘(i) IN GENERAL.—The term ‘qualified
wages’ means, with respect to each 1-year
period referred to in clause (ii) or (iii), as
the case may be, the wages paid or incurred
by the employer during the taxable year to
any individual but only if—
‘‘(I) the employer is engaged in a
trade or business in a renewal commu-
nity throughout such 1-year period;
‘‘(II) the principal place of abode
of such individual is in such renewal
community throughout such 1-year pe-
riod; and
‘‘(III) substantially all of the serv-
ices which such individual performs for
the employer during such 1-year period
are performed in such renewal commu-
nity.
157
‘‘(ii) QUALIFIED FIRST-YEAR WAGES.—
The term ‘qualified first-year wages’ means,
with respect to any individual, qualified
wages attributable to service rendered dur-
ing the 1-year period beginning with the
day the individual begins work for the em-
ployer.
‘‘(iii) 
QUALIFIED
SECOND-YEAR
WAGES.—The term ‘qualified second-year
wages’ means, with respect to any indi-
vidual, qualified wages attributable to serv-
ice rendered during the 1-year period begin-
ning on the day after the last day of the 1-
year period with respect to such individual
determined under clause (ii).’’.
(b) CONGRUENT TREATMENT OF RENEWAL COMMU-
NITIES AND ENTERPRISE ZONES FOR PURPOSES OF YOUTH
RESIDENCE REQUIREMENTS.—
(1) HIGH-RISK YOUTH.—Subparagraphs (A)(ii)
and (B) of section 51(d)(5) are each amended by
striking ‘‘empowerment zone or enterprise commu-
nity’’ and inserting ‘‘empowerment zone, enterprise
community, or renewal community’’.
(2) QUALIFIED
SUMMER
YOUTH
EMPLOYEE.—
Clause (iv) of section 51(d)(7)(A) is amended by
158
striking ‘‘empowerment zone or enterprise commu-
nity’’ and inserting ‘‘empowerment zone, enterprise
community, or renewal community’’.
(3) HEADINGS.—Paragraphs (5)(B) and (7)(C)
of section 51(d) are each amended by inserting ‘‘OR
COMMUNITY’’ in the heading after ‘‘ZONE’’.
(4) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to individuals who
begin work for the employer after December 31, 2000.
SEC. 705. CONFORMING AND CLERICAL AMENDMENTS.
(a) DEDUCTION FOR CONTRIBUTIONS TO FAMILY DE-
VELOPMENT ACCOUNTS ALLOWABLE WHETHER OR NOT
TAXPAYER ITEMIZES.—Subsection (a) of section 62 (relat-
ing to adjusted gross income defined) is amended by insert-
ing after paragraph (19) the following new paragraph:
‘‘(20) FAMILY
DEVELOPMENT
ACCOUNTS.—The
deduction allowed by section 1400H(a)(1).’’.
(b) TAX ON EXCESS CONTRIBUTIONS.—
(1) TAX
IMPOSED.—Subsection (a) of section
4973 is amended by striking ‘‘or’’ at the end of para-
graph (3), adding ‘‘or’’ at the end of paragraph (4),
and inserting after paragraph (4) the following new
paragraph:
‘‘(5) a family development account (within the
meaning of section 1400H(e)),’’.
159
(2) EXCESS
CONTRIBUTIONS.—Section 4973 is
amended by adding at the end the following new sub-
section:
‘‘(g) FAMILY DEVELOPMENT ACCOUNTS.—For pur-
poses of this section, in the case of family development ac-
counts, the term ‘excess contributions’ means the sum of—
‘‘(1) the excess (if any) of—
‘‘(A) the amount contributed for the taxable
year to the accounts (other than a qualified roll-
over, as defined in section 1400H(c)(7), or a con-
tribution under section 1400I), over
‘‘(B) the amount allowable as a deduction
under section 1400H for such contributions; and
‘‘(2) the amount determined under this sub-
section for the preceding taxable year reduced by the
sum of—
‘‘(A) the distributions out of the accounts
for the taxable year which were included in the
gross income of the payee under section
1400H(b)(1);
‘‘(B) the distributions out of the accounts
for the taxable year to which rules similar to the
rules of section 408(d)(5) apply by reason of sec-
tion 1400H(d)(3); and
160
‘‘(C) the excess (if any) of the maximum
amount allowable as a deduction under section
1400H for the taxable year over the amount con-
tributed to the account for the taxable year (other
than a contribution under section 1400I).
For purposes of this subsection, any contribution which is
distributed from the family development account in a dis-
tribution to which rules similar to the rules of section
408(d)(4) apply by reason of section 1400H(d)(3) shall be
treated as an amount not contributed.’’.
(c) TAX
ON PROHIBITED TRANSACTIONS.—Section
4975 is amended—
(1) by adding at the end of subsection (c) the fol-
lowing new paragraph:
‘‘(6) SPECIAL RULE FOR FAMILY DEVELOPMENT
ACCOUNTS.—An individual for whose benefit a family
development account is established and any contrib-
utor to such account shall be exempt from the tax im-
posed by this section with respect to any transaction
concerning such account (which would otherwise be
taxable under this section) if, with respect to such
transaction, the account ceases to be a family develop-
ment account by reason of the application of section
1400H(d)(2) to such account.’’; and
161
(2) in subsection (e)(1), by striking ‘‘or’’ at the
end of subparagraph (E), by redesignating subpara-
graph (F) as subparagraph (G), and by inserting
after subparagraph (E) the following new subpara-
graph:
‘‘(F) a family development account de-
scribed in section 1400H(e), or’’.
(d) INFORMATION RELATING TO CERTAIN TRUSTS AND
ANNUITY
PLANS.—Subsection (c) of section 6047 is
amended—
(1) by inserting ‘‘or section 1400H’’ after ‘‘sec-
tion 219’’; and
(2) by inserting ‘‘, of any family development
account described in section 1400H(e),’’, after ‘‘sec-
tion 408(a)’’.
(e) INSPECTION OF APPLICATIONS FOR TAX EXEMP-
TION.—Clause (i) of section 6104(a)(1)(B) is amended by
inserting ‘‘a family development account described in sec-
tion 1400H(e),’’ after ‘‘section 408(a),’’.
(f) FAILURE TO PROVIDE REPORTS ON FAMILY DE-
VELOPMENT ACCOUNTS.—Paragraph (2) of section 6693(a)
is amended by striking ‘‘and’’ at the end of subparagraph
(C), by striking the period and inserting ‘‘, and’’ at the
end of subparagraph (D), and by adding at the end the
following new subparagraph:
162
‘‘(E) section 1400H(g)(6) (relating to fam-
ily development accounts).’’.
(g) CONFORMING AMENDMENTS REGARDING COMMER-
CIAL REVITALIZATION DEDUCTION.—
(1) Section 172 is amended by redesignating
subsection (j) as subsection (k) and by inserting after
subsection (i) the following new subsection:
‘‘(j) NO CARRYBACK OF SECTION 1400K DEDUCTION
BEFORE DATE OF ENACTMENT.—No portion of the net op-
erating loss for any taxable year which is attributable to
any commercial revitalization deduction determined under
section 1400K may be carried back to a taxable year ending
before the date of the enactment of section 1400K.’’.
(2) Subparagraph (B) of section 48(a)(2) is
amended by inserting ‘‘or commercial revitalization’’
after ‘‘rehabilitation’’ each place it appears in the
text and heading.
(3) Subparagraph (C) of section 469(i)(3) is
amended—
(A) by inserting ‘‘or section 1400K’’ after
‘‘section 42’’; and
(B) by inserting ‘‘AND COMMERCIAL REVI-
TALIZATION DEDUCTION’’ after ‘‘CREDIT’’ in the
heading.
163
(h) CLERICAL
AMENDMENTS.—The table of sub-
chapters for chapter 1 is amended by adding at the end
the following new item:
‘‘Subchapter X. Renewal Communities.’’.
SEC. 706. EVALUATION AND REPORTING REQUIREMENTS.
Not later than the close of the fourth calendar year
after the year in which the Secretary of Housing and Urban
Development first designates an area as a renewal commu-
nity under section 1400E of the Internal Revenue Code of
1986, and at the close of each fourth calendar year there-
after, such Secretary shall prepare and submit to the Con-
gress a report on the effects of such designations in stimu-
lating the creation of new jobs, particularly for disadvan-
taged workers and long-term unemployed individuals, and
promoting the revitalization of economically distressed
areas.
Subtitle B—Farming Incentive
SEC. 711. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.
Any option to accelerate the receipt of any payment
under a production flexibility contract which is payable
under the Federal Agriculture Improvement and Reform
Act of 1996 (7 U.S.C. 7200 et seq.), as in effect on the date
of the enactment of this Act, shall be disregarded in deter-
mining the taxable year for which such payment is properly
includible in gross income for purposes of the Internal Rev-
enue Code of 1986.
164
Subtitle C—Oil and Gas Incentives
SEC. 721. 5-YEAR NET OPERATING LOSS CARRYBACK FOR
LOSSES ATTRIBUTABLE TO OPERATING MIN-
ERAL INTERESTS OF INDEPENDENT OIL AND
GAS PRODUCERS.
(a) IN GENERAL.—Paragraph (1) of section 172(b)
(relating to years to which loss may be carried) is amended
by adding at the end the following new subparagraph:
‘‘(H) LOSSES ON OPERATING MINERAL IN-
TERESTS OF INDEPENDENT OIL AND GAS PRO-
DUCERS.—In the case of a taxpayer—
‘‘(i) which has an eligible oil and gas
loss (as defined in subsection (j)) for a tax-
able year, and
‘‘(ii) which is not an integrated oil
company (as defined in section 291(b)(4)),
such eligible oil and gas loss shall be a net oper-
ating loss carryback to each of the 5 taxable
years preceding the taxable year of such loss.’’
(b) ELIGIBLE OIL AND GAS LOSS.—Section 172 is
amended by redesignating subsection (j) as subsection (k)
and by inserting after subsection (i) the following new sub-
section:
‘‘(j) ELIGIBLE OIL AND GAS LOSS.—For purposes of
this section—
165
‘‘(1) IN GENERAL.—The term ‘eligible oil and
gas loss’ means the lesser of—
‘‘(A) the amount which would be the net op-
erating loss for the taxable year if only income
and deductions attributable to operating mineral
interests (as defined in section 614(d)) in oil and
gas wells are taken into account, or
‘‘(B) the amount of the net operating loss
for such taxable year.
‘‘(2) COORDINATION WITH SUBSECTION (b)(2).—
For purposes of applying subsection (b)(2), an eligible
oil and gas loss for any taxable year shall be treated
in a manner similar to the manner in which a speci-
fied liability loss is treated.
‘‘(3) ELECTION.—Any taxpayer entitled to a 5-
year carryback under subsection (b)(1)(H) from any
loss year may elect to have the carryback period with
respect to such loss year determined without regard to
subsection (b)(1)(H).’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to net operating losses for taxable years
beginning after December 31, 1998.
166
SEC. 722. DEDUCTION FOR DELAY RENTAL PAYMENTS.
(a) IN GENERAL.—Section 263 (relating to capital ex-
penditures) is amended by adding after subsection (i) the
following new subsection:
‘‘(j) DELAY RENTAL PAYMENTS FOR DOMESTIC OIL
AND GAS WELLS.—
‘‘(1) IN GENERAL.—Notwithstanding subsection
(a), a taxpayer may elect to treat delay rental pay-
ments incurred in connection with the development of
oil or gas within the United States (as defined in sec-
tion 638) as payments which are not chargeable to
capital account. Any payments so treated shall be al-
lowed as a deduction in the taxable year in which
paid or incurred.
‘‘(2) DELAY RENTAL PAYMENTS.—For purposes
of paragraph (1), the term ‘delay rental payment’
means an amount paid for the privilege of deferring
development of an oil or gas well.’’
(b) CONFORMING AMENDMENT.—Section 263A(c)(3) is
amended by inserting ‘‘263(j),’’ after ‘‘263(i),’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred in taxable
years beginning after December 31, 1999.
167
SEC. 723. ELECTION TO EXPENSE GEOLOGICAL AND GEO-
PHYSICAL EXPENDITURES.
(a) IN GENERAL.—Section 263 (relating to capital ex-
penditures) is amended by adding after subsection (j) the
following new subsection:
‘‘(k) GEOLOGICAL AND GEOPHYSICAL EXPENDITURES
FOR DOMESTIC OIL AND GAS WELLS.—Notwithstanding
subsection (a), a taxpayer may elect to treat geological and
geophysical expenses incurred in connection with the explo-
ration for, or development of, oil or gas within the United
States (as defined in section 638) as expenses which are
not chargeable to capital account. Any expenses so treated
shall be allowed as a deduction in the taxable year in which
paid or incurred.’’
(b) CONFORMING AMENDMENT.—Section 263A(c)(3) is
amended by inserting ‘‘263(k),’’ after ‘‘263(j),’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to costs paid or incurred in taxable
years beginning after December 31, 1999.
SEC. 724. TEMPORARY SUSPENSION OF LIMITATION BASED
ON 65 PERCENT OF TAXABLE INCOME.
(a) IN GENERAL.—Subsection (d) of section 613A (re-
lating to limitation on percentage depletion in case of oil
and gas wells) is amended by adding at the end the fol-
lowing new paragraph:
168
‘‘(6) TEMPORARY SUSPENSION OF TAXABLE IN-
COME LIMIT.—Paragraph (1) shall not apply to tax-
able years beginning after December 31, 1998, and be-
fore January 1, 2005, including with respect to
amounts carried under the second sentence of para-
graph (1) to such taxable years.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
SEC. 725. DETERMINATION OF SMALL REFINER EXCEPTION
TO OIL DEPLETION DEDUCTION.
(a) IN GENERAL.—Paragraph (4) of section 613A(d)
(relating to certain refiners excluded) is amended to read
as follows:
‘‘(4) CERTAIN REFINERS EXCLUDED.—If the tax-
payer or a related person engages in the refining of
crude oil, subsection (c) shall not apply to the tax-
payer for a taxable year if the average daily refinery
runs of the taxpayer and the related person for the
taxable year exceed 50,000 barrels. For purposes of
this paragraph, the average daily refinery runs for
any taxable year shall be determined by dividing the
aggregate refinery runs for the taxable year by the
number of days in the taxable year.’’
170
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
SEC. 732. CAPITAL GAIN TREATMENT UNDER SECTION
631(b) TO APPLY TO OUTRIGHT SALES BY
LAND OWNER.
(a) IN GENERAL.—Subsection (b) of section 631 (relat-
ing to disposal of timber with a retained economic interest)
is amended—
(1) by inserting ‘‘AND OUTRIGHT SALES OF TIM-
BER’’ after ECONOMIC INTEREST’’ in the subsection
heading, and
(2) by adding before the last sentence the fol-
lowing new sentence: ‘‘The requirement in the first
sentence of this subsection to retain an economic in-
terest in timber shall not apply to an outright sale of
such timber by the owner thereof if such owner owned
the land (at the time of such sale) from which the
timber is cut.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to sales after the date of the enactment
of this Act.
171
Subtitle E—Steel Industry Incentive
SEC. 741. MINIMUM TAX RELIEF FOR STEEL INDUSTRY.
(a) IN GENERAL.—Subsection (c) of section 53 (as
amended by section 302) is amended by adding at the end
the following new paragraph:
‘‘(4) STEEL COMPANIES.—
‘‘(A) IN GENERAL.—In the case of a cor-
poration engaged in the trade or business of
manufacturing steel in the United States for sale
to customers, in lieu of applying paragraph (2),
the limitation under paragraph (1) for any tax-
able year beginning after December 31, 1998,
shall be increased (subject to the rule of the last
sentence of paragraph (2)) by 90 percent of the
tentative minimum tax.
‘‘(B) LIMITATION.—The increase in the
credit allowed by this section by reason of this
paragraph for any taxable year shall not exceed
the increase in the credit which would be so al-
lowed if the trade or business of such corporation
of manufacturing steel in the United States for
sale to customers were a separate taxpayer.
‘‘(C) REGULATIONS.—The Secretary shall
prescribe regulations to prevent the abuse of the
purposes of this paragraph, including regula-
172
tions to prevent the benefits of this paragraph
from becoming available to any other corpora-
tion through any reorganization or other acqui-
sition.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1998.
TITLE VIII—RELIEF FOR SMALL
BUSINESSES
SEC. 801. DEDUCTION FOR 100 PERCENT OF HEALTH INSUR-
ANCE COSTS OF SELF-EMPLOYED INDIVID-
UALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l) is
amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—In the case of
an individual who is an employee within the mean-
ing of section 401(c)(1), there shall be allowed as a
deduction under this section an amount equal to 100
percent of the amount paid during the taxable year
for insurance which constitutes medical care for the
taxpayer, his spouse, and dependents.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
173
SEC. 802. INCREASE IN EXPENSE TREATMENT FOR SMALL
BUSINESSES.
(a) IN GENERAL.—Paragraph (1) of section 179(b)
(relating to dollar limitation) is amended to read as follows:
‘‘(1) DOLLAR LIMITATION.—The aggregate cost
which may be taken into account under subsection (a)
for any taxable year shall not exceed $30,000.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
SEC. 803. REPEAL OF FEDERAL UNEMPLOYMENT SURTAX.
(a) IN GENERAL.—Section 3301 (relating to rate of
Federal unemployment tax) is amended—
(1) by striking ‘‘2007’’ and inserting ‘‘2004’’,
and
(2) by striking ‘‘2008’’ and inserting ‘‘2005’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to calendar years beginning after the
date of the enactment of this Act.
SEC. 804. RESTORATION OF 80 PERCENT DEDUCTION FOR
MEAL EXPENSES.
(a) IN GENERAL.—Paragraph (1) of section 274(n)
(relating to only 50 percent of meal and entertainment ex-
penses allowed as deduction) is amended by striking ‘‘50
percent’’ in the text and inserting ‘‘the allowable percent-
age’’.
174
(b) ALLOWABLE PERCENTAGES.—Subsection (n) of
section 274 is amended by redesignating paragraphs (2)
and (3) as paragraphs (3) and (4), respectively, and by
inserting after paragraph (2) the following new paragraph:
‘‘(2) ALLOWABLE PERCENTAGE.—For purposes of
paragraph (1), the allowable percentage is—
‘‘(A) in the case of amounts for items de-
scribed in paragraph (1)(B), 50 percent, and
‘‘(B) in the case of expenses for food or bev-
erages, the percentage determined in accordance
with the following table:
‘‘For taxable years beginning
The allowable
in calendar year—
percentage is—
2000 through 2004 ............................................................
2005 ....................................................................................
2006 ....................................................................................
2007 ....................................................................................
2008 ....................................................................................
2009 ....................................................................................
2010 and thereafter ...........................................................
80.’’
(b) CONFORMING AMENDMENTS.—
(1) The heading for subsection (n) of section 274
is amended by striking ‘‘50 PERCENT’’ and inserting
‘‘LIMITED PERCENTAGES’’.
(2) Subparagraph (A) of section 274(n)(4), as
redesignated by subsection (a), is amended by striking
‘‘50 percent’’ and inserting ‘‘the allowable percent-
age’’.
175
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1999.
TITLE IX—INTERNATIONAL TAX
RELIEF
SEC. 901. INTEREST ALLOCATION RULES.
(a) ELECTION TO ALLOCATE INTEREST ON A WORLD-
WIDE BASIS.—Subsection (e) of section 864 (relating to
rules for allocating interest, etc.) is amended by redesig-
nating paragraphs (6) and (7) as paragraphs (7) and (8),
respectively, and by inserting after paragraph (5) the fol-
lowing new paragraph:
‘‘(6) ELECTION TO ALLOCATE INTEREST ON A
WORLDWIDE BASIS.—
‘‘(A) IN GENERAL.—Except as provided in
this paragraph, this subsection shall be applied
by treating each worldwide affiliated group for
which an election under this paragraph is in ef-
fect as an affiliated group solely for purposes of
allocating and apportioning interest expense of
domestic corporations which are members of such
group.
‘‘(B) WORLDWIDE
AFFILIATED
GROUP.—
For purposes of this paragraph, the term ‘world-
176
wide affiliated group’ means the group of cor-
porations which consists of—
‘‘(i) all corporations in an affiliated
group (as defined in paragraph (5)), and
‘‘(ii) all foreign corporations (other
than a FSC, as defined in section 922(a))
with respect to which corporations described
in clause (i) own stock meeting the owner-
ship requirements of section 957(a) (without
regard to stock considered as owned under
section 958(b)).
‘‘(C) ALLOCATION.—
‘‘(i) IN
GENERAL.—For purposes of
paragraph (1), only the applicable percent-
age of the interest expense and assets of a
foreign corporation described in subpara-
graph (B)(ii) shall be taken into account.
‘‘(ii) APPLICABLE
PERCENTAGE.—For
purposes of this paragraph, the term ‘appli-
cable percentage’ means, with respect to any
foreign corporation, the percentage equal to
the ratio which the value of the stock in
such corporation taken into account under
subparagraph (B)(ii) bears to the aggregate
value of all stock in such corporation.
177
‘‘(D) TREATMENT
OF
FOREIGN
INTEREST
EXPENSE.—Interest expense of domestic corpora-
tions which are members of an electing world-
wide affiliated group which is allocated to for-
eign source income under this subsection shall be
reduced (but not below zero) by the applicable
percentage of the interest expense incurred by
any foreign corporation in the electing world-
wide affiliated group to the extent such interest
expense of such foreign corporation would have
been allocated and apportioned to foreign source
income of such foreign corporation if this sub-
section were applied to a group consisting of all
the foreign corporations in such affiliated group.
‘‘(E) ELECTION.—An election under this
paragraph with respect to any worldwide affili-
ated group may be made only by the common
parent of the affiliated group referred to in sub-
paragraph (B)(i) and may be made only for the
first taxable year beginning after December 31,
2001, in which a worldwide affiliated group ex-
ists which includes such affiliated group and at
least 1 corporation described in subparagraph
(B)(ii). Such an election, once made, shall apply
to such parent and all other corporations which
178
are included in such worldwide affiliated group
for such taxable year and all subsequent years
unless revoked with the consent of the Sec-
retary.’’.
(b) ELECTION TO ALLOCATE INTEREST WITHIN FI-
NANCIAL
INSTITUTION
GROUPS
AND
SUBSIDIARY
GROUPS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection:
‘‘(f) ELECTION TO APPLY SUBSECTION (e) ON BASIS
OF
FINANCIAL
INSTITUTION
GROUP
AND
SUBSIDIARY
GROUPS.—
‘‘(1) IN
GENERAL.—Subsection (e) shall be
applied—
‘‘(A) as if the electing financial institution
group were a separate affiliated group, and
‘‘(B) for purposes of allocating interest ex-
pense with respect to qualified indebtedness of
members of an electing subsidiary group, as if
each electing subsidiary group were a separate
affiliated group.
Subsection (e) shall apply to any such electing group
in the same manner as subsection (e) applies to the
pre-election affiliated group of which such electing
group is a part.
179
‘‘(2) 
ELECTING
FINANCIAL
INSTITUTION
GROUP.—For purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘electing fi-
nancial institution group’ means any group of
corporations if—
‘‘(i) such group consists only of all of
the financial corporations in the pre-elec-
tion affiliated group, and
‘‘(ii) an election under this paragraph
is in effect for such group of corporations.
‘‘(B) FINANCIAL CORPORATION.—The term
‘financial corporation’ means any corporation if
at least 80 percent of its gross income is income
described in section 904(d)(2)(C)(ii) and the reg-
ulations thereunder. To the extent provided in
regulations prescribed by the Secretary, such
term includes a bank holding company (within
the meaning of section 2(a) of the Bank Holding
Company Act of 1956).
‘‘(C) EFFECT OF CERTAIN TRANSACTIONS.—
Rules similar to the rules of paragraph (3)(D)
shall apply to transactions between any member
of the electing financial institution group and
any member of the pre-election affiliated group
180
(other than a member of the electing financial
institution group).
‘‘(D) ELECTION.—An election under this
paragraph with respect to any financial institu-
tion group may be made only by the common
parent of the pre-election affiliated group. Such
an election, once made, shall apply only to the
taxable year for which made.
‘‘(3) ELECTING SUBSIDIARY GROUPS.—
‘‘(A) IN GENERAL.—The term ‘electing sub-
sidiary group’ means any group of corporations
if—
‘‘(i) such group consists only of cor-
porations in the pre-election affiliated
group,
‘‘(ii) such group includes—
‘‘(I) 
a 
domestic 
corporation
(which is not the common parent of the
pre-election affiliated group or a mem-
ber of an electing financial institution
group) which incurs interest expense
with respect to qualified indebtedness,
and
‘‘(II) 
every 
other 
corporation
(other than a member of an electing fi-
181
nancial institution group) which is in
the pre-election affiliated group and
which would be a member of an affili-
ated group having such domestic cor-
poration as the common parent, and
‘‘(iii) an election under this paragraph
is in effect for such group.
‘‘(B) EQUALIZATION RULE.—All interest ex-
pense of a domestic corporation which is a mem-
ber of a pre-election affiliated group (other than
subsidiary group interest expense) shall be treat-
ed as allocated to foreign source income to the ex-
tent such expense does not exceed the excess (if
any) of—
‘‘(i) the interest expense of the pre-elec-
tion affiliated group (including subsidiary
group interest expense) which would (but
for any election under this paragraph) be
allocated to foreign source income, over
‘‘(ii) the subsidiary group interest ex-
pense allocated to foreign source income.
For purposes of the preceding sentence, the sub-
sidiary group interest expense is the interest ex-
pense to which subsection (e) applies separately
by reason of paragraph (1)(B).
182
‘‘(C) QUALIFIED INDEBTEDNESS.—For pur-
poses of this subsection, the term ‘qualified in-
debtedness’ means any indebtedness of a domestic
corporation—
‘‘(i) which is held by an unrelated per-
son, and
‘‘(ii) which is not guaranteed (or other-
wise supported) by any corporation which
is a member of the pre-election affiliated
group other than a corporation which is a
member of the electing subsidiary group.
For purposes of this subparagraph, the term ‘un-
related person’ means any person not bearing a
relationship specified in section 267(b) or
707(b)(1) to the corporation.
‘‘(D) EFFECT
OF
CERTAIN
TRANSACTIONS
ON QUALIFIED INDEBTEDNESS.—In the case of a
corporation which is a member of an electing
subsidiary group, to the extent that such
corporation—
‘‘(i) distributes dividends or makes
other distributions with respect to its stock
after the date of the enactment of this para-
graph to any member of the pre-election af-
filiated group (other than to a member of
183
the electing subsidiary group) in excess of
the greater of—
‘‘(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-tax-
able-year period ending with the tax-
able year preceding the taxable year, or
‘‘(II) 25 percent of its average an-
nual earnings and profits for such 5
taxable year period, or
‘‘(ii) deals with any person in any
manner not clearly reflecting the income of
the corporation (as determined under prin-
ciples similar to the principles of section
482),
an amount of qualified indebtedness equal to the
excess distribution or the understatement or over-
statement of income, as the case may be, shall be
recharacterized (for the taxable year and subse-
quent taxable years) for purposes of this sub-
section as indebtedness which is not qualified in-
debtedness. If a corporation has not been in ex-
istence for 5 taxable years, this subparagraph
shall be applied with respect to the period it was
in existence.
184
‘‘(E) ELECTION.—An election under this
paragraph with respect to any electing sub-
sidiary group may be made only by the common
parent of the pre-election affiliated group. Such
an election, once made, shall apply only to the
taxable year for which made. No election may be
made under this paragraph if the effect of the
election would be to have the same member of the
pre-election affiliated group included in more
than 1 electing subsidiary group.
‘‘(4) PRE-ELECTION
AFFILIATED
GROUP.—For
purposes of this subsection, the term ‘pre-election af-
filiated group’ means, with respect to a corporation,
the affiliated group or electing worldwide affiliated
group of which such corporation would (but for an
election under this subsection) be a member for pur-
poses of applying subsection (e).
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to
carry out this subsection and subsection (e), including
regulations—
‘‘(A) providing for the direct allocation of
interest expense in other circumstances where
such allocation would be appropriate to carry
out the purposes of this subsection,
185
‘‘(B) preventing assets or interest expense
from being taken into account more than once,
and
‘‘(C) dealing with changes in members of
any group (through acquisitions or otherwise)
treated under this subsection as an affiliated
group for purposes of subsection (e).’’
(c) INSURANCE COMPANIES INCLUDED IN AFFILIATED
GROUPS.—Paragraph (5) of section 864(e) is amended to
read as follows:
‘‘(5) AFFILIATED GROUP.—The term ‘affiliated
group’ has the meaning given such term by section
1504 (determined without regard to paragraphs (2)
and (4) of section 1504(b)).’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2001.
SEC. 902. LOOK-THRU RULES TO APPLY TO DIVIDENDS
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS.
(a) IN GENERAL.—Section 904(d)(4) (relating to ap-
plication of look-thru rules to dividends from noncontrolled
section 902 corporations) is amended to read as follows:
‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM
NONCONTROLLED SECTION 902 CORPORATIONS.—