Technical and Miscellaneous Revenue Act of 1988
PL 100-647 (H.R.4333), enacted 11/10/1988

102 STAT. 3342 
PUBLIC LAW 100-647—NOV. 10, 1988 
Public Law 100-647 
100th Congress 
An Act 
Nov. 10, 1988 
[H.R. 4333] 
Technical and 
Miscellaneous 
Revenue Act of 
1988. 
26 u s e 1 note. 
To make technical corrections relating to the Tax Reform Act of 1986, and for other 
purposes. 
Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; ETC. 
(a) SHORT TITLE.—This Act may be cited as the "Technical and 
Miscellaneous Revenue Act of 1988". 
(b) DEFINITIONS.—For purposes of this Act— 
(1) 1986 CODE.—The term "1986 Code" means the Internal 
Revenue Code of 1986. 
(2) REFORM ACT.—Except where incompatible with the intent, 
the term "Reform Act" means the Tax Reform Act of 1986. 
(c) CLERICAL AMENDMENT.—Paragraph (29) of section 7701(a) of 
the 1986 Code is amended by striking out "of 1954" and inserting in 
lieu thereof "of 1986". 
(d) TABLE OF CONTENTS.— 
TITLE I—TECHNICAL CORRECTIONS TO TAX REFORM ACT OF 1986 
Sec. 1001. Amendments related to title I of the Reform Act. 
Sec. 1002. Amendments related to title II of the Reform Act. 
Sec. 1003. Amendments related to title III of the Reform Act 
Sec. 1004. Amendments related to title IV of the Reform Act 
Sec. 1005. Amendments related to title V of the Reform Act. 
Sec. 1006. Amendments related to title VI of the Reform Act. 
Sec. 1007. Amendments related to title VII of the Reform Act. 
Sec. 1008. Amendments related to title VIII of the Reform Act. 
Sec. 1009. Amendments related to title IX of the Reform Act 
Sec. 1010. Amendments related to title X of the Reform Act. 
Sec. 1011. Amendments related to parts I and U of subtitle A of title XI of the 
Reform Act. 
Sec. 1011 
A. Amendments related to parts m and IV of subtitle A of title XI of the 
Reform Act. 
Sec. 101 IB. Amendments related to subtitles B and C of title XI of the Reform Act. 
Sec. 1012. Amendments related to title XII of the Reform Act. 
Sec. 1013. Amendments related to title XIII of the Reform Act. 
Sec. 1014. Amendments related to title XIV of the Reform Act. 
Sec. 1015. Amendments related to title XV of the Reform Act. 
Sec. 1016. Amendments related to title XVI of the Reform Act 
Sec. 1017. Amendments related to title XVII of the Reform Act 
Sec. 1018. Amendments related to title XVIII of the Reform Act 
Sec. 1019. Effective date. 
TITLE n—AMENDMENTS RELATED TO TAX PROVISIONS IN OTHER 
LEGISLATION 
Sec. 2001. Amendments related to Superfund Revenue Act of 1986. 
Sec. 2002. Amendments related to Harbor Maintenance Revenue Act of 1986. 
Sec. 2003. Amendments related to Omnibus Budget Reconciliation Act of 1986. 
Sec. 2004. Amendments related to the Revenue Act of 1987. 
Sec. 2005. Amendments related to Pension Protection Act and full funding limi-
tetions. 
Sec. 2006. Amendments related to section 9201 of the Omnibus Budget Reconcilia-
tion Act of 1987. 
PUBLIC LAW 100-647-NOV. 10, 1988 
102 STAT. 3343 
TITLE in—ADDITIONAL SIMPLIFICATION AND CLARIFICATION 
PROVISIONS 
Subtitle A—Diesel Fuel Excise Tax Collection and Exemption Procedures 
Sec. 3001. Tax-free purchases of certain fuels. 
Sec. 3002. Expedited refund for certain fuels used in nontaxable uses. 
Sec. 3003. Marine retailers treated as producers. 
Subtitle B—Health Care Continuation Rules 
Sec. 3011. Failure to satisfy continuation requirements of group health plans. 
Subtitle C—Employee Benefit Nondiscrimination Rules 
Sec. 3021. Modifications to discrimination rules applicable to certain employee 
benefit plans. 
Subtitle D—Estate and Gift Taxes 
Sec. 3031. Estate tax valuation freezes. 
Subtitle E—Indian Fishing Rights 
Sec. 3041. Federal tax treatment of income derived by Indians from exercise of Hsh-
ing rights secured by treaty, etc. 
Sec. 3042. State tax treatment of income derived by Indians from exercise of fishing 
rights secured by treaty, etc. 
Sec. 3043. Conforming amendments relating to old-age, survivors, and disability 
insurance program. 
Sec. 3044. Effective date; no inference created. 
TITLE IV—EXTENSIONS AND MODIFICATIONS OF EXPIRING TAX 
PROVISIONS 
Sec. 4001. Elxtension and modification of exclusion for employer-provided education 
assistance. 
Sec. 4002. Extension and modification of exclusion of amounts received under group 
l^al services plans. 
Sec. 4003. Carryover of post-1987 low-income housing credit dollar amounts per-
mitted. 
Sec. 4004. Simplification of rule where partnership holds qualified low-income 
building. 
Sec. 4005. Provisions relating to mortgage revenue bonds and mortgage credit 
certificates. 
Sec. 4006. Extension of certain business energy credits. 
Sec. 4007. Extension of credit for increasing research activities. 
Sec. 4008. Denial of deduction for 50 percent of amounts allowed as a research 
credit. 
Sec. 4009. Allocation of research and experimental expenditures. 
Sec. 4010. Extension and modification of targeted jobs credit. 
Sec. 4011. Treatment of publicly offered r^ulated investment companies under 
2-percent floor. 
Sec. 4012. Extension and modifications of provisions relating to financial institu-
tions. 
TITLE V—REVENUE INCREASE PROVISIONS 
Subtitle A—Corporate Estimated Tax Provisions 
Sec. 5001. Corporate estimated tax payments. 
Subtitle B—Insurance Provisions 
Sec. 5011. Limitation on unreasonable mortality and other expense charges under 
section 7702. 
Sec. 5012. Treatment of modified endowment contracts. 
Sec. 5013. Valuation of group-term life insurance. 
Sec. 5014. Study. 
Subtitle C—Loss Transfer Rules for Alaska Native Corporations 
Sec. 5021. Repeal of rules permitting loss transfers by Alaska Native Corporations. 
Subtitle D—Estate and Gift Tax Provisions 
Sec. 5031. Valuation tables. 
Sec 5032. Rate schedule for tax on estates of nonresidents not citizens. 
102 STAT. 3344 
PUBLIC LAW 100-647—NOV. 10, 1988 
Sec. 5033. Disallowance of marital deduction where spouse is not citizen of United 
States. 
Subtitle E—Long-Term Contract Provisions 
Sec. 5041. Long-term contract provisions. 
Subtitle F—Tax-Exempt Bond Provisions 
Sec. 5051. Treatment of certain pooled flnancing bonds. 
Sec. 5052. Treasury regulations relating to student loan bonds. 
Sec. 5053. Restrictions on bonds used to provide residential rental property for 
family units. 
Subtitle G—Excise Tax Provisions 
Sec. 5061. Imposition of excise tax on manufacture or importation of pipe tobacco. 
Sec. 5062. McMdiflcation of distilled spirits tax credit for flavors content. 
Subtitle H—Other Revenue Increase Provisions 
Sec. 5071. Increase in penalty for bad checks. 
Sec. 5072. Time for payment of tax on reversion of pension plan assets. 
Sec. 5073. Denial of deduction for certain residential telephone service. 
Sec. 5074. Partnership reporting of unrelated business taxable income. 
Sec. 5075. Options subject to wash sale rules. 
Sec. 5076. Interest charge on installment sales of certain property. 
Sec. 5077. Applications of net operating loss rules to stock acquired by an employee 
stock ownership plan. 
TITLE VI—OTHER SUBSTANTIVE REVENUE PROVISIONS 
Subtitle A—Provisions Relating to Individuals 
Sec. 6001. Treatment of certain amounts paid to or for the benefit of an institution 
of higher education. 
Sec. 6002. Nonrecognition of gain where one spouse dies before occupying new 
residence. 
Sec. 6003. Meals on certain vessels and offshore oil platforms exempt from 80 per-
cent limitation on deduction for meals. 
Sec. 6004. Treatment of certain innocent spouses. 
Sec. 6005. Interim treatment of certain amounts awarded to Christa McAuliffe 
Fellows. 
Sec. 6006. Election to claim certain unearned income of child on parent's return. 
Sec. 6007. Jury duty pay remitted to an individual's employer allowed as a deduc-
tion in computing gross income. 
Sec. 6008. Business use of automobiles by rural mail carriers. 
Sec. 6009. Exclusion from gross income for income from United States savings 
bonds used to pay tuition and fees. 
Sec. 6010. Modification of additional exemption for student dependents. 
Sec. 6011. Principal residence capital gains exclusion. 
Subtitle B—Provisions Relating to Accounting and Agriculture 
Sec. 6026. Amendments to uniform capitalization rules. 
Sec. 6027. Treatment of single purpose agricultural or horticultural structures. 
Sec. 6028. Treatment of property used in the farming business. 
Sec. 6029. Treatment of certain trees. 
Sec. 6030. One-year deferral of proceeds from live-stock sold on account of drought. 
Sec. 6031. Certain repledges permitted. 
Sec. 6032. Treatment of indirect holdings through trusts under section 448 of the 
1986 Code. 
Sec. 6033. Disaster assistance act payments included in special rule for taxable year 
of inclusion. 
Subtitle C—Pensions and Employee Benefits 
Sec. 6051. Provisions relating to benefits under discriminatory plans. 
Sec. 6052. Modifications of discrimination rules applicable to certain annuity 
contracts. 
Sec. 6053. Required distribution beginning date for governmental and church plans. 
Sec. 6054. Section 415 limitation for State and local plans. 
Sec. 6055. Minimum participation standards. 
Sec. 6056. Study of effect of minimum participation rule on employers required to 
provide certain retirement benefits. 
Sec. 6057. Prohibition on collectibles not to include State coins. 
Sec. 6058. Application of fundings rules to multiple employer plans. 
Sec. 6059. Application of section 415 limitations to police and firefighters. 
PUBLIC LAW 100-647-NOV. 10, 1988 
102 STAT. 3345 
Sec. 6060. Excise tax on disposition of stock by an ESOP not to apply to certain 
forced dispositicMis. 
Sec. 6061. Loans to acquire employer securities. 
Sec. 6062. Effective date of section 415 limitations of collectively bargained agree-
ments. 
Sec. 6063. Treatment of pre-1989 elections for dependent care assistance under cafe-
teria plans. 
Sec. 6064. Modifications to section 457. 
Sec. 6065. Exception for governmental plans. 
Sec. 6066. Air transportation of cargo and of passengers treated as same service for 
purposes of fringe benefits inclusion. 
Sec 6067. Special rule for applying spin-off rules to bridge banks. 
Sec. 6068. Income averaging allowed to lumpsum distributions of alternate payees. 
Sec. 6069. Increase in employer reversion tax. 
Sec. 6070. Definition of part^ime employee for purposes of section 89. 
Sec 6071. Rural teiei^ne cooperatives permitted to have qualified cash or 
deferred arrangements. 
Sec. 6072. Study of treatment of certain technical personnel. 
Subtitle D—^Insurance Provisions 
Sec. 6076. Treatment of certain workers' compensation funds. 
Sec. 6077. S^iedal estimated tax payments. 
Sec. 6078. Qiurch self-funded death benefit plans treated as life insurance. 
Sec. 6079. Treatment of structured settlements. 
Sec. 6080. Variable contracts invested in government securities permitted. 
Subtitle E^Exdse Tax Provisions 
Sec. 6101. Authority to prescribe tolerances for the volume of wine in bottles for 
purposes of the exdse tax on wine. 
Sec. 6102. Wholesale distributors to administer claims for refund of gasoline tax. 
Sec. 6103. Authority to exempt articles from e x c ^ tax on heavy trucks and trailers 
where benefit accrues to United States. 
Sec. 6104. Application of reduced gasoline tax rate to blenders. 
Sec. 6105. Certain educational institutions exempt from user fees on permits for 
industrial use of specially denatured distilled spirits. 
Sec. 6106. Small procedures exempt from occupational tax on distilled spirits 
plants. 
Sec. 6107. Quarterly payment of archery exdse tax. 
Sec. 6108. Extension of time for enacting authorizing legislation relating to the oil 
spill liability trust fund. 
Sec. 6109. Donated cargo exempt from harbor maintenance tax. 
Sec 6110. Relay cargo. 
Sec 6111. Clarification of meaning of manufacture under truck excise tax. 
Subtitle F—^Foreign Provisions 
Sec 6126. Dual resident companies. 
Sec. 6127. Election to be treated as qualified electing fund to be made by taxpayer. 
Sec. 6128. Treatment of certain United States affiliate obligations. 
Sec. 6129. Treatment of certain insurance branches of foreign corporations. 
Sec. 6130. Treatment of certain instruments unckr foreign currency rules. 
Sec. 6131. Treatment of insurance companies under chain deficit rule. 
Sec. 6132. Virgin Islands treated as qualified Caribbean basin country. 
Sec. 6133. Treatment of certain United States obligations held by possession banks 
Sec 6134. Treatment of certain gambling winnings received by nonresident aliens. 
Sec. 6135. Election to be treated as domestic corporation. 
Sec. 6136. Tax exemption for ENJEBI community trust fund. 
Sec. 6137. Applicationof section 912 to judicial employees. 
Sec. 6138. Study of definition of United States resident 
Sec. 6139. Sunset of treaty provisions. 
Sec. 6140. Treatment of certain awards by the district court of Guam. 
Subtitle G—^Estate Tax Provisions 
Sec 6151. Treatment of certain rents under section 2032A. 
Sec. 6152. Clarification of treatment of joint and survivor annuities under Qtip 
rules. 
Subtitle H—^Tax-Exempt Bond Provisions 
Sec 6176. Oarification of small issue bond definition of manufacturing facility. 
Sec. 6177. Rules applicable to tax and revenue anticipation bonds. 
Sec. 6178. Amendment to mortgage bond purchase price regulations. 
102 STAT. 3346 
PUBLIC LAW 100-647—NOV. 10, 1988 
Sec. 6179. Application of security interest test to bond financing of hazardous waste 
clean-up activities. 
Sec. 6180. Tax-exempt financing for certain rail facilities. 
Sec. 6181. Rules relating to rebate on earnings on bona fide debt service fund. 
Sec. 6182. Bonds issued by volunteer fire departments. 
Sec. 6183. Disregard of pooled financings in determination of qualification for small 
issuer exception. 
Subtitle I—Provisions Relating to Exempt Organizations 
Sec. 6201. Certain games of chance not treated as unrelated trade or business. 
Sec. 6202. Purchase of insurance by cooperative hospital service organizations. 
Sec. 6203. Cancellation of certain debts originated by or guaranteed by the United 
States not taken into account in determining tax exempt status of cer-
tain organizations. 
Sec. 6204. Determination of operating foundation status for certain purposes. 
Subtitle J—Taxpayer Rights and Procedures 
Sec. 6226. Short title. 
PART I—TAXPAYER RIGHTS 
Sec. 6227. Disclosure of rights of taxpayers. 
Sec. 6228. Procedures involving taxpayer interviews. 
Sec. 6229. Taxpayers may rely on written advice of Internal Revenue Service. 
Sec. 6230. Teixpayer assistance orders. 
Sec. 6231. Basis for evaluation of Internal Revenue Service employees. 
Sec. 6232. Procedures relating to Internal Revenue Service regulations. 
Sec. 6233. Content of tax due, deficiency, and other notices. 
Sec. 6234. Installment payment of tax liability. 
Sec. 6235. Assistant Commissioner for taxpayer services. 
PART II—LEVY AND LIEN PROVISIONS 
Sec. 6236. Levy and distraint. 
Sec. 6237. Review of jeopardy levy and assessment procedures. 
Sec. 6238. Administrative appeal of liens. 
PART III—PROCEEDINGS BY TAXPAYERS 
Sec. 6239. Awarding costs and certain fees in administrative and court proceedings. 
Sec. 6240. Civil cause of action for damages sustained due to failure to release lien. 
Sec. 6241. Civil cause of action for damages sustained due to certain unauthorized 
actions by internal revenue service. 
Sec. 6242. Assessable penalty for improper disclosure or use of information by pre-
parers of returns. 
PART FV—TAX COURT JURISDICTION 
Sec. 6243. Jurisdiction to restrain certain premature assessments. 
Sec. 6244. Jurisdiction to enforce overpayment determinations. 
Sec. 6245. Jurisdiction to review certain sales of seized property. 
Sec. 6246. Jurisdiction to redetermine interest on deficiencies. 
Sec. 6247. Jurisdiction to inodify decisions in certain estate tax cases. 
Subtitle K—Other Administrative Provisions 
Sec. 6251. Exchange of information. 
Sec. 6252. Provisions relating to previously required studies. 
Sec. 6253. Repeal of secretarial authority to prescribe class lives. 
Sec. 6254. Amendments related to Crude Oil Windfall Profit Tax Act of 1980. 
Subtitle L—Provisions Relating to Corporations and Personal Holding Companies 
Sec. 6276. Authority to pay refunds to certain fiduciaries of insolvent members of 
affiliated groups. 
Sec. 6277. Application of net operating loss limitations to bankruptcy reorganiza-
tions. 
Sec. 6278. Application of section 7503 of 1986 Code for purposes of section 10222(b) 
of Revenue Act of 1987. 
Sec. 6279. Interest earned by brokers or dealers not taken into account as personal 
holding company income. 
Sec. 6280. Treatment of certain bank holding companies. 
Sec. 6281. Authority to waive appraisal requirement for certain charitable contribu-
tions of property. 
Sec. 6282. Distributions by cooperative housing corporations. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3347 
Subtitle M—Miscellaneous Provisions 
Sec. 6301. Repeal of limit on long*term bonds. 
Sec. 6302. One-year extension of credit for producing fuel from a nonconventional 
source. 
Sec. 6303. Certain discharge of debt income not included in adjusted book income. 
Sec. 6304. Nonconventional fuels credit. 
Sec. 6305. Treatment of certain family services providers. 
TITLE Vn—RAILROAD UNEMPLOYMENT AND RETIREMENT PROGRAMS 
Sec T
O
O
L Short title. 
Sec. 7002. References to Railroad Unemployment Insurance Act 
Subtitle A—Financing Provisions 
Sec 7101. Amendments relating to definition of "compensation". 
Sec 7102. Contribution adjustments. 
Sec. 7103. Administrative expenses. 
Sec 7104. Notification to employer. 
Sec 7105. Annual report. 
Sec 7106. Amendments relating to railroad unemployment repayment tax. 
Sec 7107. GAO study of fraud and payment errors. 
Sec. 7108. One-year extension of time limit for filing report by Commission on Rail-
road Retirement Reform. 
Subtitle B—^Benefit and Other Adjustments 
Sec. 7201. Waiting period for benefits and benefit increases. 
Sec. 7202. Qualifying condition. 
Sec 7203. Increase in TnaTimum permitted subsidiary remuneration. 
Subtitle C—^Retirement Act Amendments 
Sec 7301. Additional lump sum payment in certain cases. 
Sec 7302. Deletion of last person service as a disqualification. 
Sec 7303. Beamings of disability annuitants. 
Sec 7304. Allowance of credit for military service. 
TITLE Vffl—AB4ENDMENTS RELATING TO SOCIAL SECURITY ACT 
PROGRAMS 
Subtitle A—Old-Age, Survivors, and Disability Insurance and Related Provisions 
Sec 8001. Interim disability benefits in cases of delayed final decisions. 
Sec 8002. Application of earnings test in year of individual's death. 
Sec. 8003. niaseout of reduction in windfall benefits. 
Sec 8004. Denial of benefits to individuals deported or ordered deported on the 
basis of associations with the Nazi Government of Germany during 
World War U. 
Sec. 8005. Modifications in the term of office of public members of the board of 
trustees of the social security trust funds. 
Sec 8006. Continuation of disability benefits during appeal. 
Sec 8007. Exemption from social security for employers and employees who are 
both members of certain religious faiths. 
Sec. 8008. Blood donor locator service. 
Sec 8009. Requirement of social security account number as a condition for receipt 
of social security benefits. 
Sec 8010. Substitution of certificate of election for application to establish entitle-
ment for certain reduced widow's and widower's benefits. 
Sec 8011. Calculation of the windfall benefit guarantee amount based on pension 
amounts payable in the first month of concurrent entitlement rather 
than concurrent eligibility. 
Sec 8012. Consolidation of reports on continuing disability reviews. 
Sec 8013. Exclusion of employees separated finom employment before January 1, 
1989, from rule including as wages taxable under PICA certain pay-
ments for group-term life insurance. 
Sec 8014. Clarification of applicability of Government pension o f ^ t to certain Fed-
eral employees. 
Sec 8015. Amendments to rules governing social security coverage of Federal 
employment 
Sec 8016. Technical corrections in OASDI provisions. 
Sec 8017. Certain cash wages paid to seasonal agricultural laborers excluded from 
OASDI coverage. 
Sec 8018. Certain employer pension contributions not included in FICA wage base. 
102 STAT. 3348 
PUBLIC LAW 100-647—NOV. 10, 1988 
Sec. 8019. Reports regarding certain disability-related benefits. 
Subtitle B—Public Assistance Provisions 
Sec. 8101. Extension of prohibition against implementation of certain proposed reg-
ulations. 
Sec. 8102. Review of policy governing use of AFDC funds to meet emergency needs 
of families eligible for AFDC through emergency assistance or special 
needs payments; report to Congress. 
Sec. 8103. Disregard of certain housing assistance payments in determining income 
and resources under SSI program. 
Sec. 8104. Foster care independent living initiatives. 
Sec. 8105. Technical corrections to Family Support Act of 1988. 
Subtitle C—National Commission on Children 
Sec. 8201. Delay in reporting date for National Commission on Children. 
Subtitle D—Unemployment Compensation 
Sec. 8301. Self^mployment demonstration project. 
Subtitle E—Medicare and Medicaid 
PART I—PROVISIONS RELATING TO PART A OF MEDICARE 
Sec. 8401. Extension of disproportionate share provisions. 
Sec. 8402. Maintenance of bad debt collection policy. 
Sec. 8403. Application of wage indices in case of areas affected by section 4005(aXl) 
ofOBRAof 1987. 
Sec. 8404. Demonstration projects with respect to chronic ventilator-dependent 
units in hospitals. 
Sec. 8405. Election of personnel policy for PROPAC employees. 
PART II—RELATING TO PARTS A AND B OF MEDICARE PROGRAM 
Sec. 8411. Elimination of waivers of 50:50 rule for HMO enrollment. 
Sec. 8412. Increase in authorization for the patient outcome assessment research 
program. 
Sec. 8413. Delay in reporting deadline for the United States Bipartisan Commission 
on Comprehensive Health Care. 
PART III—PROVISIONS RELATING TO PART B OF MEDICARE 
Sec. 8421. Budget neutrality adjustment for certified registered nurse anesthetists. 
Sec. 8422. Coverage of psychologists' services when provided off-site as part of a 
treatment plan. 
Sec. 8423. Nonapplication of certain requirements to physical therapists in inde-
pendent practice. 
Sec. 8424. Functions of physician payment review commission. 
Sec. 8425. Moratorium on laboratory payment demonstration extended. 
Sec. 8426. Study of trip fees for clinical laboratories. 
PART IV—PROVISIONS RELATING T
O MEDICAID 
Sec. 8431. Delay in issuance of final regulations concerning the use of voluntary 
contributions and provider-paid taxes by States to receive Federal 
matching funds. 
Sec. 8432. Medicaid long-term care waiver program. 
Sec. 8433. Extension of time period for submission of correction and reduction plans 
for certain intermediate care facilities for the mentally retarded. 
Sec. 8434. Correction relating to medicare buy-in. 
Sec. 8435. Clarification of Federal financial participation for case-management serv-
ices. 
Sec. 8436. Determination of premium amounts for extended medical assistance. 
TITLE IX—TRADE PROVISIONS 
Sec. 9001. Trade technical amendments. 
Sec. 9002. Foreign trade zones. 
Sec. 9003. Report on the small business innovation research program. 
Sec. 9004. Extension of certain existing suspensions of duty and duty reductions. 
TITLE X—MANASSAS NATIONAL BATTLEFIELD PARK 
Sec. 10001. Short title. 
Sec. 10002. Addition to Manassas National Battlefield Park. 
Sec. 10003. Visual protection. 
Sec. 10004. Highway relocation. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3349 
TITLE I—TECHNICAL CORRECTIONS TO 
g^r^^r" 
TAX REFORM ACT OF 1986 
SEC. 1001. AMENDMENTS RELATED TO TITLE I OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 101 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 6867(b) of the 1986 Code is amend-
ed by striking out "at a 50-percent rate" and inserting in lieu 
thereof "at the highest rate of tax specified in section 1". 
(2XA) Section 531 of the 1986 Code is amended to read as 
follows: 
•^EC. 531. IMPOSITION OF ACCUMULATED EARNINGS TAX. 
"In addition to other taxes imposed by this chapter, there is 
hereby imposed for each taxable year on the accumulated taxable 
income (as defined in section 535) of each corporation described in 
section 532, an accumulated earnings tax equal to 28 percent of the 
accumulated taxable income." 
O
B
) The amendment made by subparagraph (A) shall apply to 26 USC 531 note. 
taxable years b^inning after December 31, 1987. Such amend-
ment shall not be treated as a change in a rate of tax for 
purposes of section 15 of the 1986 Code. 
(3) The last sentence of section l(gX2) of the 1986 C!ode is 
amended by inserting before the period at the end thereof the 
following: "and subparagraph (B) shall be applied as if a deduc-
tion for a personal exemption were allowable under section 151 
to such individual for such individual's spouse." 
(b) AMENDMENTS RELATED TO SECTION 102 OF THE REFORM ACT.— 
(1) Paragraph (5) of section 63(c) of the 1986 C^e is 
amended— 
(A) by striking out "the standard deduction applicable" 
and inserting in lieu thereof "the basic standard deduction 
applicable", and 
(B) by striking out "STANDARD DEDUCTION" in the para-
graph heading and inserting in lieu thereof "BASIC STAND-
ARD DEDUCTION". 
(2) Subclause a) of section 6012(aXlXCXi) of the 1986 Code is 
amended to read as follows: 
"(I) income (other than earned income) in excess 
of the sum of the amount in effect under section 
63(cX5XA) plus the additional standard deduction 
(if any) to which the individual is entitled, or". 
(3XA) Subparagraph (A) of section 62(aX2) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "The fact that the reimbursement may be provided by a 
third party shall not be determinative of whether or not the 
preceding sentence applies." 
(B) Paragraph (2) of section 527(e) of the 1986 Code (defining 
exempt function) is amended by adding at the end thereof the 
following new sentence: "Such term includes the making of 
expenditures relating to an office described in the preceding 
sentence which, if incurred by the individual, would be allow-
able as a deduction under section 162(a)." 
102 STAT. 3350 
PUBLIC LAW 100-647—NOV. 10, 1988 
Fellowships and 
scholarships. 
Schools and 
colleges. 
Aliens. 
(c) AMENDMENT RELATED TO SECTION 111 OF THE REFORM ACT.— 
Paragraph (3) of section 32(i) of the 1986 Code is amended to read as 
follows: 
"(3) ROUNDING.—If any dollar amount after being increased 
under paragraph (1) is not a multiple of $10, such dollar amount 
shall be rounded to the nearest multiple of $10 (or, if such dollar 
amount is a multiple of $5, such dollar amount shall be in-
creased to the next higher multiple of $10)." 
(d) AMENDMENTS RELATED TO SECTION 123 OF THE REFORM ACT.— 
dXA) Clause (ii) of section 4941(dX2XG) of the 1986 Code is 
amended to read as follows: 
"(ii) scholarships and fellowship grants which would 
be subject to the provisions of section 117(a) (as in effect 
on the day before the date of the enactment of the Tax 
Reform Act of 1986) and are to be used for study at an 
educational 
organization 
described 
in 
section 
170(bXlXAXii),". 
(B) Paragraph (1) of section 4945(g) of the 1986 Code is 
amended to read £is follows: 
"(1) the grant constitutes a scholarship or fellowship grant 
which would be subject to the provisions of section 117(a) (as in 
effect on the day before the date of the enactment of the Tax 
Reform Act of 1986) and is to be used for study at an educational 
organization described in section 170(bXl)(AXii),". 
(2XA) The second sentence of section 1441(b) of the 1986 Code 
is amended to read as follows: "The items of income referred to 
in subsection (a) from which tax shall be deducted and withheld 
at the rate of 14 percent are amounts which are received by a 
nonresident alien individual who is temporarily present in the 
United States as a nonimmigrgmt under subparagraph (F), (J), 
or (M) of section 101(a)(15) of the Immigration and Nationsility 
Act and which are— 
"(1) incident to a qualified scholarship to which section 117(a) 
applies, but only to the extent includible in gross income; or 
"(2) in the case of an individual who is not a candidate for a 
degree 
at 
an 
educational 
organization 
described 
in 
170(bXlXAXii), granted by— 
"(A) an organization described in section 501(cX3) which 
is exempt from tax under section 501(a), 
"(B) a foreign government, 
"(C) an international organization, or a binational or 
multinational educational and cultural foundation 
or 
commission created or continued pursuant to the Mutual 
Educational and Cultural Exchange Act of 1961, or 
"(D) the United States, or an instrumentality or agency 
thereof, or a State, or a possession of the United States, 
or any political subdivision thereof, or the District of 
Columbia, 
as a scholarship or fellowship for study, training, or research in 
the United States." 
(B) Subsection (c) of section 871 of the 1986 Code is amended— 
(i) by striking out "section 1441(bXl) or (2)" and inserting 
in lieu thereof "the second sentence of section 1441(b)"; and 
(ii) by striking out "(F) or (J)" each place it appears and 
inserting in lieu thereof "(F), (J), or (M)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3351 
(C) The following provisions of the 1986 Code are each 
amended by striking out "(F) or (J)" each place it appears and 
inserting in lieu thereof "(F), (J), or (M)": 
(i) Section 3121(bX19). 
(ii) Section 3231(eXl). 
(iii) Section 3306(cX19). 
(D) Clause (iXD of section 7701(bX5XD) of the 1986 Code is 
amended by striking out "subparagraph (F)" and inserting in 
lieu thereof "subparagraph (F) or (M)". 
(E) Section 210(aX19) of the Social Security Act is amended by 42 USC 410. 
striking out "(F) or (J)" each place it appears and inserting in 
lieu thereof "(F), (J), or (M)". 
(e) AMENDMENT RELATED TO SECTION 131 OF THE REFORM ACT.— 
Subsection (f) of section 86 of the 1986 Code is amended by inserting 
"and" at the end of paragraph (3), by striking out paragraph (4), and 
by redesignating paragraph (5) as paragraph (4). 
(f) AMENDMENTS RELATED TO SECTION 132 OF THE REFORM ACT.— 
(1) Section 67 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(f) COORDINATION WITH OTHER LIMITATION.—This section shall be 
applied before the application of the dollar limitation of the last 
sentence of section 162(a) (relating to trade or business expenses)." 
(2) Paragraph (4) of section 67(b) of the 1986 Code is 
amended— 
(A) by striking out "deduction" and inserting in lieu 
thereof "deductions", and 
(B) by inserting before the comma at the end thereof "and 
section 642(c) (relating to deduction for amounts paid or 
permanently set aside for a charitable purpose)". 
(3) Subsection (e) of section 67 of the 1986 (Dode is amended to 
read as follows: 
"(e) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ES-
TATES AND TRUSTS.—For purposes of this section, the adjusted gross 
income of an estate or trust shall be computed in the same manner 
as in the case of an individual, except that— 
"(1) the deductions for costs which are paid or incurred in 
connection with the administration of the estate or trust and 
which would not have been incurred if the property were not 
held in such trust or estate, and 
"(2) the deductions allowable under sections 642(b), 651, and 
661, 
shall be treated as allowable in arriving at adjusted gross income. 
Under regulations, appropriate adjustments shall be made in the 
application of part I of subchapter J of this chapter to take into 
account the provisions of this section." 
(4) Subsection (c) of section 67 of the 1986 Code is amended by 
striking out the last sentence and inserting in lieu thereof the 
following: "The preceding sentence shall not apply— 
"(1) with respect to cooperatives and real estate investment 
trusts, and 
"(2) except as provided in regulations, with respect to estates 
and trusts. 
(g) AMENDMENTS RELATED TO SECTION 142 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 274(nX2) of the 1986 Code is 
amended to read as follows: 
"(A) such expense is described in paragraph (2), (3), (4), (7), 
(8), or (9) of subsection (e),". 
102 STAT. 3352 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2) Paragraph (2) of section 274(k) of the 1986 Code is amended 
to read as follows: 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 
"(A) any expense described in paragraph (2), (3), (4), (7), 
(8), or (9) of subsection (e), and 
"(B) any other expense to the extent provided in regula-
tions." 
(3) Clause (ii) of section 274(m)(l)(B) of the 1986 Code is 
amended to read as follows: 
"(ii) any expense described in paragraph (2), (3), (4), 
(7), (8), or (9) of subsection (e).". 
(4XA) Paragraph (2) of section 274(n) of the 1986 Code is 
amended— 
(i) by striking "or" at the end of subparagraph (C), 
(ii) by striking the period at the end of subparagraph (D) 
and inserting ", or", and 
(iii) by adding at the end thereof the following: 
"(E) in the case of an employer who pays or reimburses 
moving expenses of an employee, such expenses are includ-
ible in the income of the employee under section 82. 
In the case of the employee, the exception of subparagraph (A) 
shall not apply to expenses described in subparagraph (E)." 
(B) The following provisions of the 1986 C!ode are each 
amended by striking out "section 217" and inserting in lieu 
thereof "section 217 (determined without regard to section 
274(n))": 
(i) Section 3121(a)(ll). 
(ii) Section 3306(b)(9). 
(iii) Section 3401(a)(15). 
42 use 409. 
(C) Section 209(k) of the Social Security Act is amended bv 
striking out "section 217 of the Internal Revenue Code of 1954 ' 
and inserting in lieu thereof "section 217 of the Internal Reve-
nue Code of 1986 (determined without regard to section 274(n) of 
such Code)". 
(5) Paragraphs (1) and (2) of section 274(h) of the 1986 Code are 
each amended by striking out "trade or business that" and 
inserting in lieu thereof "trade or business and that". 
Housing. 
(h) AMENDMENTS RELATED TO SECTION 143 OF THE REFORM ACT.— 
(1) Paragraph (5) of section 280A(c) of the 1986 Code 
amended by adding at the end thereof the following new sen-
tence: "Any amount taken into account for any taxable year 
under the preceding sentence shall be subject to the limitation 
of the 1st sentence of this paragraph whether or not the dwell-
ing unit is used as a residence during such taxable year." 
(2) Clause (ii) of section 280A(c)(5XB) of the 1986 Code is 
amended by striking out "trade or business" and inserting 
lieu thereof "trade or business (or rental activity)". 
(3) Section 183(e)(2) of the 1986 Code is amended by striking 
out "2" and inserting in lieu thereof "3 (or 2 if applicable)'. 
SEC. 1002. AMENDMENTS RELATED TO TITLE II OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 201 OF THE REFORM ACT.-
(1) Subsection (d) of section 1250 of the 1986 Code is amended 
by striking out paragraph (11). 
26 use 7701. 
(2) Subparagraph (B) of section 201(dX14) of the Reform Act is 
amended by striking out "section 168(cX2XF)" and inserting in 
lieu thereof "within the meaning of section 168(cX2XF)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3353 
(3) Paragraph (4) of section 312(k) of the 1986 Code is amended 
by striking out "paragraphs (1) and (3)" and inserting in lieu 
thereof "paragraph (1) \ 
(4) Paragraph (4) of section 46(e) of the 1986 Code is 
amended— 
(A) by striking out "168(jX6)" in subparagraph (B) and 
inserting in lieu thereof "168(iX3)", 
(B) by striking out "paragraphs (8) and (9) of section 
168(j)" in subparagraph (D) and inserting in lieu thereof 
"paragraphs (5) and (6) of section 168(h)", 
(C) by striking out "1680*)" in subparagraph (E) and 
inserting in lieu thereof "168(h)", and 
(D) by striking out "168(j)(4)" in subparagraph (E) and 
inserting in lieu thereof "168(hX2)". 
(5) Clause (i) of section 168(dX3XA) of the 1986 Code is 
amended by striking out "and which are". 
(6XA) Subparagraph (B) of section 168(0(5) of the 1986 Code is 
amended— 
(i) by striking out "1st full taxable year" in clause (ii) and 
inserting in lieu thereof "1st taxable year", and 
(ii) by striking out "or" at the end of clause (i), by striking 
out the period at the end of clause (ii) and inserting in lieu 
thereof ", or", and by adding at the end thereof the follow-
ing new clause: 
"(iii) any property to which this section (as amended 
by the Tax Reform Act of 1986) applied in the hands of 
the transferor." 
(B) Paragraph (5) of section 168(f) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(C) SPECIAL RULE.—In the case of any property to which 
this section would apply but for this paragraph, the depre-
ciation deduction under section 167 shall be determined 
under the provisions of this section as in effect before the 
amendments made by section 201 of the Tax Reform Act of 
1986." 
(7XA) Subparagraph (A) of section 168(iX7) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "In any case where this section as in effect before the 
amendments made by section 201 of the Tax Reform Act of 1986 
applied to the property in the hands of the transferor, the 
reference in the preceding sentence to this section shall be 
treated as a reference to this section as so in effect." 
(B) Subparagraph (B) of section 168(iX7) of the 1986 Code is 
amended to read as follows: 
"(B) TRANSACTIONS COVERED.—The transactions described 
in this subparagraph are— 
"(i) any transaction described in section 332, 351, 361, 
371(a), 374(a), 721, or 731, and 
"(ii) any transaction between members of the same 
afBliated group during any taxable year for which a 
consolidated return is made by such group. 
Subparagraph (A) shall not apply in the C£ise of a termi-
nation of a partnership under section 708(bXlXB)." 
(C) Subparagraph (D) of section 168(iX7) of the 1986 Code is 
(8) Subparagraph (B) of section 168(hX2) of the 1986 Code is 
amended to read as follows: 
102 STAT. 3354 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) EXCEPTION FOR CERTAIN PROPERTY SUBJECT TO UNITED 
STATES TAX AND USED BY FOREIGN PERSON OR ENTITY.— 
Clause (iii) of subparagraph (A) shall not apply with respect 
to any property if more than 50 percent of the gross income 
for the taxable year derived by the foreign person or entity 
from the use of such property is— 
"(i) subject to tax under this chapter, or 
"(ii) included under section 951 in the gross income of 
a United States shareholder for the taxable year with 
or within which ends the taxable year of the controlled 
foreign corporation in which such income was derived. 
For purposes of the preceding sentence, any exclusion or 
exemption shall not apply for purposes of determining the 
amount of the gross income so derived, but shall apply for 
purposes of determining the portion of such gross income 
subject to tax under this chapter." 
(9) Subsection (a) of section 178 of the 1986 Code is amended 
by striking out "the deduction allowable to a lessee of a lease for 
any taxable year for amortization under section 167, 169, 179, 
185, 190, 193, or 194" and inserting in lieu thereof "the deduc-
tion allowable to a lessee for exhaustion, wear and tear, obsoles-
cence, or amortization". 
(10) Subparagraph (A) of section 280F(dX3) of the 1986 Code is 
amended by striking out "any recovery deduction" and insert-
ing in lieu thereof "any depreciation deduction". 
(IIXA) Paragraph (2) of section 1680^) of the 1986 Code is 
amended to read as follows: 
"(2) 150 PERCENT DECUNING BALANCE METHOD IN CERTAIN 
CASES.—Paragraph (1) shall be applied by substituting '150 per-
cent' for '200 percent' in the case of— 
"(A) any 15-year or 20-year property, or 
"(B) any property (other than property described in para-
graph (3)) with respect to which the taxpayer elects under 
paragraph (5) to have the provisions of this paragraph 
apply." 
(B) Paragraph (5) of section 168(b) of the 1986 Code is amended 
by striking out "under paragraph (3XC)" and inserting in lieu 
thereof "under paragraph (2XB) or (3XC)". 
(C) Subsection (c) of section 168 of the 1986 Code is amended to 
read as follows: 
"(c) APPLICABLE RECOVERY PERIOD.—For purposes of this section— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
applicable recovery period shall be determined in accordance 
with the following table: 
The applicable 
"In the case of: 
recovery period is: 
3-year property 
3 years 
5-year property 
5 years 
7-year property 
7 years 
10-year property 
10 years 
15-year property 
15 years 
20-year property 
20 years 
Residential rental property 
27.5 years 
Nonresidential real property 
31.5 years. 
"(2) 
PROPERTY FOR W H I C H 1 5 0 PERCENT METHOD ELECTED.—In 
the case of property to which an election under subsection 
(bX2XB) applies, the applicable recovery period shall be deter-
mined under the table contained in subsection (gX2XC)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3355 
(12) Clause (i) of section 56(aXlXC) of the 1986 Code is 
amended by striking out "do not apply" and inserting in lieu 
thereof "do not apply by reason of section 203, 204, or 251(d) of 
such Act" 
(13) The heading of paragraph (24) of section 381(c) of the 1986 
Code is amended by striking out "RECOVERY ALLOWANCE FOR 
RECOVERY PROPERTY" and inserting in lieu thereof "DEPRECIA-
TION DEDUCTION". 
(14) Paragraph (5) of section 48(a) of the 1986 Code is 
amended— 
(A) by striking out "168(jX4)(C)" and inserting in lieu 
thereof "168(hX2XC)", 
(B) by striking out "168(jX4XAXiii)" and inserting in lieu 
thereof "168(hX2XAXiii)", 
(C) by striking out "168(jX4XB)" and inserting in lieu 
thereof "168(hX2XB)", 
(D) by striking out "168(jX6)" and inserting in lieu thereof 
"168(i)(3)", 
(E) by striking out "168(jX3XCXii)" and inserting in lieu 
thereof "168(hXl)(CXii)", 
(F) by striking out "paragraphs (8) and (9) of section 
168(j)" and inserting in lieu thereof "paragraphs (5) and (6) 
of section 168(h)", and 
(G) by striking out subparagraph (E) and inserting in lieu 
thereof the following: 
"(E) CROSS REFERENCE.— 
"For provision providing special rules for the application of this 
paragraph and paragraph (4), see section 168(h)." 
(15) The last sentence of section 46(eX3) of the 1986 Code is 
amended— 
(A) by striking out "recovery property (within the mean-
ing of section 168)" and inserting in lieu thereof "property 
to which section 168 applies", 
(B) by striking out "present class life" and inserting in 
lieu thereof "class life", and 
(C) by striking out "168(gX2)" and inserting in lieu thereof 
"168(iXl)". 
(16XA) Subsection (s) of section 48 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(9) TERMINATION.—This subsection shall not apply to any 
property placed in service after December 31, 1985, unless such 
property is transition property (as defined in section 49(eXl))." 
(B) Paragraph (4) of section 168(f) of the 1986 Code is amended 
to read as follows: 
"(4) SOUND RECORDINGS.—Any works which result from the 
fixation of a series of musical, spoken, or other sounds, regard-
less of the nature of the material (such as discs, tapes, or other 
phonorecordings) in which such sounds are embodied." 
(17) Paragraph (7) of section 46(c) of the 1986 Code is 
amended— 
(A) by striking out "recovery property" and inserting in 
lieu thereof "property to which section 168 applies", 
(B) by striking out "168(c)" each place it appears and 
inserting in lieu thereof "168(e)", 
19-194 O—91—Part 4 
13 i QL 8 
102 STAT. 3356 
PUBLIC LAW 100-647—NOV. 10, 1988 
(C) by striking out "168(£X3XB)" and inserting in lieu 
thereof "168(fX3XB) (as in effect on the day before the date 
of the enactment of the Tax Reform Act of 1986)", and 
(D) by striking out "RECOVERY PROPERTY" in the para-
graph heading and inserting in lieu thereof "PROPERTY TO 
WHICH SECTION 168 APPLIES". 
(18) Paragraph (1) of section 47(d) of the 1986 Code is amended 
by striking out "section 48(cX8XC)" and inserting in lieu thereof 
"section 46(cX8XC)". 
(19) Paragraph (1) of section 179(d) of the 1986 Code is amend-
ed by striking out "recovery property" and inserting in lieu 
thereof "tangible property (to which section 168 applies)". 
(20) Section 48 of the 1986 Code is amended by redesignating 
the subsection (s) relating to cross references as subsection (t). 
(21) Clause (v) of section 168(eX3XB) of the 1986 Code is 
amended by striking out "any property" and inserting in lieu 
thereof "any section 1245 property". 
(22) The last sentence of section 167(1X3)(G) of the 1986 Code is 
amended by striking out "section 168(e)(3XC)" and inserting in 
lieu thereof "section 168(iX9)(B)". 
(23)(A) Subparagraph (B) of section 168(dX3) of the 1986 Code 
is amended to read as follows: 
"(B) CERTAIN PROPERTY NOT TAKEN INTO ACCOUNT.—For 
purposes of subparagraph (A), there shall not be taken into 
account— 
"(i) any nonresidential real property and residential 
rental property, and 
"(ii) any other property placed in service and dis-
posed of during the same taxable year." 
26 use 168 note. 
(B) Clause (ii) of section 168(dX3XB) of the 1986 Code (as added 
by subparagraph (A)) shall apply to taxable years beginning 
after March 31, 1988, unless the taxpayer elects, at such time 
and in such manner as the Secretary of the Treasury or his 
delegate may prescribe, to have such clause apply to taxable 
years beginning on or before such date. 
(24) Subsection (a) of section 167 of the 1986 Code is amended 
by striking out the last sentence. 
(25) Subparagraph (B) of section 46(dXl) of the 1986 Code is 
amended— 
(A) by striking out "recovery property (within the mean-
ing of section 168)" in clause (i) and inserting in lieu thereof 
"property to which section 168 applies", and 
(B) by striking out "which is not recovery property 
(within the meaning of section 168)" in clause (ii) and 
inserting in lieu thereof "to which section 168 does not 
apply". 
(26XA) Subparagraph (E) of section 47(aX5) of the 1986 Code is 
amended by adding at the end thereof the following new clause: 
"(v) TREATMENT AS RECOVERY PROPERTY.—Any ref-
erence in this paragraph to recovery property shall be 
treated as including a reference to any property to 
which section 168 (as amended by the Tax Reform Act 
of 1986) applies." 
(B) Subparagraph (D) of section 47(aX5) of the 1986 Code is 
amended by striking out the last sentence. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3357 
(C) Clause (iii) of section 47(aX5XE) of the 1986 Code is amend-
ed by striking out "section 168(c)" and inserting in lieu thereof 
"section 168(e)". 
(27) Subparagraph (A) of section 47(aX9) of the 1986 Code is 
amended by striking out "section 168(j)(4)(C)" and inserting in 
lieu thereof "section 168(hX2)". 
(28) Clause (i) of section 47(dX3XC) of the 1986 Code is 
amended— 
(A) by striking out "present class life (as defined in 
section 168(gX2)) and inserting in lieu thereof "class life (as 
defined in section 168(iXl))", and 
(B) by striking out "no present class life" and inserting in 
lieu thereof "no class life'. 
(29) Paragraph (1) of section 48(a) of the 1986 CJode is amended 
by striking out "recovery property (within the meaning of 
section 168)" in the material following subparagraph (G) and 
inserting in lieu thereof "property to which section 168 applies". 
(30) Subparagraph (C) of section 48(1X2) of the 1986 Code is 
amended by striking out "which is recovery property (within 
the meaning of section 168)" and inserting in lieu thereof "to 
which section 168 applies". 
(31) Subsection (d) of section 167 of the 1986 Code is amended 
by striking out "recoverv property defined in section 168" and 
inserting in lieu thereof property to which section 168 applies". 
(b) AMENDMENTS RELATED TO SECTION 202 OF THE REFORM ACT.— 
(1) Paragraph (3) of section 179(b) of the 1986 Code is amended 
to read as follows: 
"(3) LIMITATION BASED ON INCOME FROM TRADE OR BUSINESS.— 
"(A) IN GENERAL.—The amount allowed as a deduction 
under subsection (a) for any taxable year (determined after 
the application of paragraphs (1) and (2)) shall not exceed 
the aggregate amount of taxable income of the taxpayer for 
such taxable year which is derived from the active conduct 
by the taxpayer of any trade or business during such tax-
able year. 
"(B) CARRYOVER OF DISALLOWED DEDUCTION.—The amount 
allowable as a deduction under subsection (a) for any tax-
able year shall be increased by the lesser of— 
"(i) the aggregate amount disallowed under subpara-
graph (A) for all prior taxable years (to the extent not 
previously allowed as a deduction by reason of this 
subparagraph), or 
"(ii) the excess (if any) o
f
—
-
"(I) the limitation of paragraphs (1) and (2) (or if 
lesser, the aggregate amount of taxable income 
referred to in subparagraph (A)), over 
"(II) the amount allowable as a deduction under 
subsection (a) for such taxable year without regard 
to this subparagraph. 
"(C) COMPUTATION OF TAXABLE INCOME.—For purposes of 
this paragraph, taxable income derived from the conduct of 
a trade or business shall be computed without regard to the 
deduction allowable under this section." 
(2) Paragraph (1) of section 280F(d) of the 1986 Code is 
amended by striking out "subsections (a) and (b)" and inserting 
in lieu thereof "subsections (a) and (b), and the limitation of 
paragraph (3) of this subsection,". 
102 STAT. 3358 
PUBLIC LAW 100-647—NOV. 10, 1988 
Real property. 
(c) AMENDMENTS RELATED TO SECTION 203 OF THE REFORM ACT.— 
26 use 168 note. 
(1) Subparagraph (B) of section 203(aXl) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "No election may be made under this subparagraph with 
respect to property to which section 168 of the Internal Revenue 
Code of 1986 would not apply by reason of section 168(f)(5) of 
such Code if such property were placed in service after Decem-
ber 31,1986." 
(2) Subsection (d) of section 203 of the Reform Act is 
amended— 
(A) by striking out "the case of any taxable year" and 
inserting in lieu thereof "the case of any taxable year 
beginning before October 1,1987", and 
(B) by adding at the end thereof the following new sen-
tence: "The preceding sentence shall only apply to property 
which would be taken into account if such amendments did 
apply." 
26USCl68note. 
(3) Notwithstanding section 203 of the Reform Act, the 
amendments made by section 201 of the Reform Act shall apply 
to any real property which was acquired before January 1,1987, 
and was converted on or after such date from personal use to a 
use for which depreciation is allowable. 
(4) Paragraph (1) of section 203(b) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: 
"For purposes of this paragraph, all members of the same 
affiliated group of corporations (within the meaning of section 
1504 of the Internal Revenue Code of 1986) filing a consolidated 
return shall be treated as one taxpayer." 
(5) Paragraph (1) of section 203(c) of the Reform Act is 
amended by striking out "Subparagraph" and inserting in lieu 
thereof "Except as otherwise provided in this subsection or 
section 204, subparagraph". 
(6) Clause (i) of section 203(bX2XC) of the Reform Act is 
amended by striking out "shall be the class life" and inserting 
in lieu thereof "applies shall be the class life". 
(7) Paragraph (3) of section 203(b) of the Reform Act is 
amended— 
(A) by inserting before the comma at the end of subpara-
graph (A) "(or would have met such requirements if placed 
in service by such person)", and 
(B) by inserting ", or is leased to such person," before 
"not later than". 
(8) Paragraph (2) of section 203(a) of the Reform Act is 
amended to read as follows: 
"(2) SECTION 202.— 
"(A) IN GENERAL.—The amendments made by section 202 
shall apply to property placed in service after December 31, 
1986, in taxable years ending after such date. 
"(B) SPECIAL RULE FOR FISCAL YEARS INCLUDING JANUARY 
1, 1987.—In the case of any taxable year (other than a 
calendar year) which includes January 1, 1987, for purposes 
of applying the amendments made by section 202 to prop-
erty placed in service during such taxable year and after 
December 31,1986— 
"(i) the limitation of section 179(bXl) of the Internal 
Revenue Code of 1986 (as amended by section 202) shall 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3359 
be reduced by the aggregate deduction under section 
179 (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) for section 
179 property placed in service during such taxable year 
and before January 1,1987, 
"(ii) the limitation of section 179(b)(2) of such Code (as 
so amended) shall be applied by taking into account the 
cost of all section 179 property placed in service during 
such taxable year, and 
"(iii) the limitation of section 179(b)(3) of such Code 
shall be applied by taking into account the taxable 
income for the entire taxable year reduced by the 
amount of any deduction under section 179 of such 
Code for property placed in service during such taxable 
year and before January 1,1987." 
(d) AMENDMENTS RELATED TO SECTION 204 OF THE REFORM ACT.— 
(1) Subparagraph (B) of section 204(a)(1) of the Reform Act is 26 use 168 note. 
amended by striking out "and" at the end of clause (ii), by 
striking out the period at the end of clause (iii) and inserting in 
lieu thereof ", and", and by inserting after clause (iii) the 
following new clause: 
"(iv) described in subparagraph (F) or (H)." 
(2) Subparagraph (C) of section 204(a)(1) of the Reform Act is 
amended by striking out the last sentence and inserting in lieu 
thereof the following: 
"For purposes of this subparagraph, section 203(bX2) shall 
be applied by substituting 'January 1, 1994' for 'January 1, 
1991 each place it appears." 
(3) Subparagraph (E) of section 204(aXl) of the Reform Act is 
amended by striking out the last sentence and inserting in lieu 
thereof the following: "For purposes of this subparagraph, sec-
tion 203(b)(2) shall be applied by substituting 'January 1, 1998' 
for 'January 1,1991' each place it appears." 
(4) Subparagraph (F) of section 204(a)(1) of the Reform Act is 
amended— 
(A) by striking out "paragraph" and inserting in lieu 
thereof "subparagraph", 
(B) by striking out ", or" at the end of clause (iii) and 
inserting in lieu thereof a period, and 
(C) by striking out so much of clause (iv) as precedes 
subclause (I) thereof and inserting in lieu thereof the 
following: 
"A project is also described in this subparagraph if it is a 
mixed-use development which is—". 
(5) The last sentence of section 204(a)(1)(F) of the Reform Act 
is amended— 
(A) by striking out "subsection (b)(2)" and inserting in 
lieu thereof "section 203(b)(2)", and 
(B) by striking out "1993" and inserting in lieu thereof 
"1998". 
(6) Subparagraph (H) of section 204(aXl) of the Reform Act is 
amended by striking out "July 1, 1986" and inserting in lieu 
thereof "June 30,1986". 
(7XA) Paragraph (4) of section 204(a) of the Reform Act is 
amended to read as follows: 
"(4) PROPERTY TREATED UNDER PRIOR TAX ACTS.—The amend-
ments made by section 201 shall not apply— 
102 STAT. 3360 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(A) to property described in section 12(c)(2) (as amended 
by the Technical and Miscellaneous Revenue Act of 1988), 
31(g)(5), or 31(g)(17)(J) of the Tax Reform Act of 1984, 
"(B) to property described in section 209(d)(lXB) of the 
Tax Equity and Fiscal Responsibility Act of 1982, as amend-
ed by the Tax Reform Act of 1984, and 
"(C) to property described in section 216(b)(3) of the Tax 
Equity and Fiscal Responsibility Act of 1982." 
(B) Paragraph (2) of section 12(c) of the Tax Reform Act of 
26 use 168 note. 
1984 is amended by striking out "which is placed in service 
before January 1,1988". 
26 use 168 note. 
(8) Subparagraph (K) of section 204(a)(5) of the Reform Act is 
amended— 
(A) by striking out "either" in the matter preceding 
clause (i), 
(B) by striking out "super calendar" in clause (i) and 
inserting in lieu thereof "supercalendered", 
(C) by striking out "were incurred" in clause (i) and 
inserting in lieu thereof "was incurred", and 
(D) by inserting "the project" before "involves" in clause 
(v). 
(9) Paragraph (5) of section 204(a) of the Reform Act is 
amended by adding at the end thereof the following new 
subparagraph: 
"(Z) A project is described in this subparagraph if— 
"(i) such project involves a fiber optic network of at 
least 475 miles, passing through Minnesota and 
Wisconsin; and 
"(ii) before January 1, 1986, at least $15,000,000 was 
expended or committed for electronic equipment or 
fiber optic cable to be used in constructing the 
network." 
(10)(A) Paragraph (8) of section 204(a) of the Reform Act is 
amended by striking out the period at the end of subparagraph 
(C) and inserting in lieu thereof a comma, and by adding at the 
end thereof the following new subparagraphs: 
"(D) a bond volume carryforward election was made for 
the facility and the facility is for Chattanooga, Knoxville, or 
Kingsport, Tennessee, or 
"(E) such facility is to serve Haverhill, Massachusetts." 
(B) Paragraph (8) of section 204(a) of the Reform Act is 
amended by striking out ", and section 203(c),". 
(11) Paragraph (10) of section 204(a) of the Reform Act is 
amended— 
(A) by striking out "either" in the material preceding 
subparagraph (A), 
South earolina. 
(B) by striking out "wastewater treatment facility" in 
subparagraph (C) and inserting in lieu thereof "wastewater 
treatment facility serving Greenville, South Carolina", and 
(C) by striking out "the letter of intent and service agree-
ment described in subparagraph (AX2) of this paragraph" in 
subparagraph (D) and inserting in lieu thereof "such letter 
of intent and service agreement". 
(12) Paragraph (11) of section 204(a) of the Reform Act is 
amended— 
eommunications 
and tele-
communications. 
Minnesota. 
Wisconsin. 
Tennessee. 
Massachusetts. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3361 
26 u s e 168 note. 
Energy. 
Massachusetts. 
Utilities. 
Oklahoma. 
(A) by striking out "Kansas, Florida, Georgia, or Texas" 
in subparagraph (A) and inserting in lieu thereof "the 
United States", 
(B) by striking out "the purchase" in subparagraph (C) 
and inserting in lieu thereof "the purchaser", and 
(C) by striking out the last sentence. 
(13) Paragraph (14) of section 204(a) of the Reform Act is 
amended by striking out the period at the end of subparagraph 
(E) and inserting in lieu thereof a comma, and by inserting after 
subparagraph (E) the following: 
"(F) the project has a planned scheduled capacity of 
approximately 38,000 kilowatts, the project property is 
placed in service before January 1, 1991, and the project is 
operated, established, or constructed pursuant to certain 
agreements, the negotiation of which began before 1986, 
with public or municipal utilities conducting business in 
Massachusetts, or 
"(G) the Board of Regents of Oklahoma State University 
took official action on July 25, 1986, with respect to the 
project. 
In the case of the project described in subparagraph (F), section 
203(b)(2)(A) shall be applied by substituting 'January 1, 1991' for 
'January 1,1989'." 
(14) Paragraph (15) of section 204(a) of the Reform Act is 
amended— 
(A) by adding "located in New Mexico" after "to a New Mexico, 
project", 
(B) by striking out "$72,000" and inserting in lieu thereof 
"$72,000,000", and 
(C) by striking out the last sentence and inserting in lieu 
thereof the following: 
"For purposes of this paragraph, section 2030t>X2) shall be ap-
plied by substituting 'January 1,1996' for 'January 1,1991' each 
place it appears." 
(15) Paragraph (24) of section 204(a) of the Reform Act is 
amended by adding at the end thereof the following new sub-
paragraphs: 
"(E) The amendments made by section 201 shall not apply 
to the Muskegon, Michigan, Cross-Lake Ferry project 
having a projected cost of approximately $7,200,000. 
"(F) The amendments made by section 201 shall not apply 
to a new automobile carrier vessel, the contract price for 
which is no greater than $28,000,000, and which will be 
constructed for and placed in service by OSG Car Carriers, 
Inc., to transport, under the United States flag and with an 
American crew, foreign automobiles to North America in a 
case where negotiations for such transportation arrange-
ments commenced in 1985, and definitive transportation 
contracts were awarded before June 1986." 
(16) Paragraph (25) of section 204(a) of the Reform Act is 
amended by striking out "wood energy products" and inserting 
in lieu thereof "wood energy projects'. 
(17) Paragraph (27) of section 204(a) of the Reform Act is 
amended— 
(A) in subparagraph (B), by striking out "525,000" and 
inserting in lieu thereof "540,000", 
(B) in subparagraph (C)— 
102 STAT. 3362 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 u s e 168 note. 
Pennsylvania. 
Energy. 
Nevada. 
(i) by striking out "$32,000,000" and inserting in lieu 
thereof "$22,000,000", and 
(ii) by striking out "before" and inserting in lieu 
thereof "on", 
(C) in subparagraph (D), by striking out "and 7th 
Avenue", and 
(D) in subparagraph (H), by striking out "$62,000" and 
inserting in lieu thereof "$62,600,000". 
(18) Paragraph (27) of section 204(a) of the Reform Act is 
amended by adding at the end thereof the following: 
"(I) A 600,000 square foot mixed use building known as 
Flushing Center with respect to which a letter of intent was 
executed on March 26, 1986. 
In the case of the building described in subparagraph (I), section 
203(bX2XA) shall be applied by substituting 'January 1,1993' for 
the applicable date which would otherwise apply." 
(19) Paragraph (31) of section 204(a) of the Reform Act is 
amended by striking out "$10,200,000" and inserting in lieu 
thereof "$10,500,000" 
(20) Paragraph (32) of section 204(a) of the Reform Act is 
amended— 
(A) in subparagraph (A)— 
(i) by striking out "July 30, 1984" and inserting in 
lieu thereof "December 26,1985", 
(ii) by striking out "February 28, 1985" and inserting 
in lieu thereof '^July 2,1986", and 
(iii) by striking out "on June 17, 1985" and inserting 
in lieu thereof "in May 1985", 
(B) in subparagraph (B)— 
(i) by striking out "August 30, 1984" and inserting in 
lieu thereof "December 26,1985", 
(ii) by striking out "May 4, 1985" and inserting in 
lieu thereof "July 2,1986", and 
(iii) by striking out "on July 3,1985" and inserting in 
lieu thereof "in July 1985", 
(C) in subparagraph (E)— 
(i) by striking out "$2,200,000" and inserting in lieu 
thereof "$5,000,000", 
(ii) by striking out "on January 27, 1986" and insert-
ing "in 1986", and 
(iii) by inserting "in Masontown, Pennsylvania," 
after "plant", 
(D) by amending subparagraph (K) to read as follows: 
"(K) A 250 megawatt coal-fired electric plant in north-
eastern Nevada estimated to cost $600,000,000 and known 
as the Thousand Springs project, on which the Sierra Pa-
cific Power Company, a subsidiary of Sierra Pacific Re-
sources, began in 1980 work to design, finance, construct, 
and operate (and section 203(bX2) shall be applied with 
respect to such plant by substituting 'January 1, 1995' for 
'January 1,1991^", 
(E) in subparagraph (L), by inserting "in connection with" 
after "housing", 
(F) by amending subparagraph (M) to read £is follows: 
"(M) property which is part of the Kenosha Downtown 
Redevelopment Project and which is financed with the 
proceeds of bonds issued pursuant to section 1317(6XW),", 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3363 
(G) in subparagraph (O), by striking out "New Orleans, Florida. 
Louisiana" and inserting in lieu thereof "Pensacola, Flor-
ida", and 
(H) in subparagraph (S)— 
(i) by inserting "to be" before "placed", 
(ii) by inserting "Coal" before "Company", 
(iii) by inserting "(or any subsidiary thereof)" after 
"Company", and 
(iv) by striking out "on December 31, 1985" and 
inserting in lieu thereof "by December 31,1985". 
(21) Subparagraph (T) of section 204(aX32) of the Reform Act 
26 use 168 note, 
is amended to read as follows: 
"(T) a portion of a fiber optics network placed in service 
by LDX NET after December 31, 1988, but only to the 
extent 
the 
cost 
of such 
portion 
does not 
exceed 
$25,000,000,". 
(22) Subparagraph (U) of section 204(aX32) of the Reform Act 
is amended by striking out "placed in service" and inserting in 
(23) Subparagraph (X) of section 204(aX32) of the Reform Act 
is amended by striking out "the home rule city and the State 
housing finance agency adopted inducement resolutions on 
December 20,1985" and inserting in lieu thereof "the home rule 
city on December 4,1985, and the State housing finance agency 
on December 20,1985, adopted inducement resolutions". 
(24) Subparagraph (C) of paragraph (33) of section 204(a) of the Energy. 
Reform Act is amended to read as follows: 
New Hampshire. 
"(CXi) a waste-to-energy project in Derry, New Hamp-
shire, costing approximately $60,000,000, and 
"(ii) a waste-to-energy project in Manchester, New Hamp-
shire, costing approximately $60,000,000,". 
(25) Paragraph (33) of section 204(a) of the Reform Act is 
amended by striking out "and" at the end of subparagraph (J), 
by striking out the period at the end of subparsigraph (K) and 
inserting in lieu thereof ", and", and by inserting after subpara-
graph (K) the following: 
"(L) a cc^eneration facility to be built at a paper company 
Massachusetts. 
in Turners Falls, Massachusetts, with respect to which a 
letter of intent was executed on behalf of the paper com-
pany on September 26,1985." 
(26) Subsection (a) of section 204 of the Reform Act is amended 
by adding at the end thereof the following new paragraphs: 
"(34) The amendments made by section 201 shall not apply to 
an approximately 240,000 square foot beverage container manu-
facturing plant located in Batesville, Mississippi, or plant equip-
ment used exclusively on the plant premises if— 
"(A) a 2-year supply contract was signed by the taxpayer 
and a customer on November 1,1985, 
"(B) such contract further obligated the customer to pur- 
/ 
chase beverage containers for an additional 5-year period if 
• physical signs of construction of the plant are present 
before September 1986, 
"(C) ground clearing for such plant began before August 
1986, and 
"(D) construction is completed, the equipment is in-
stalled, and operations are commenced before July 1, 1987. 
102 STAT. 3364 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(35) The amendments made by section 201 shall not apply to 
any property which is part of the multifamily housing at the 
Columbia Point Project in Boston, Massachusetts. A project 
shall be treated as not described in the preceding sentence and 
as not described in section 252(f)(1)(D) unless such project in-
cludes at substantially all times throughout the compliance 
period (within the meaning of section 42(i)(l) of the Internal 
Revenue Code of 1986), a facility which provides health services 
to the residents of such project for fees commensurate with the 
abiUty of such individuals to pay for such services. 
"(36) The amendments made by section 201 shall not apply to 
any ethanol facility located in Blair, Nebraska, i
f
— 
"(A) in July of 1984 an initial binding construction con-
tract was entered into for such facility, 
"(B) in June of 1986, certain Department of Energy rec-
ommended contract changes required a change of contrac-
tor, and 
"(C) in September of 1986, a new contract to construct 
such facility, consistent with such recommended changes, 
was entered into. 
"(37) The amendments made by section 201 shall not apply to 
any property which is part of a sewage treatment facility if, 
prior to January 1, 1986, the City of Conyers, Georgia, selected a 
privatizer to construct such facility, received a guaranteed 
maximum price bid for the construction of such facility, signed 
a letter of intent and began substantial negotiations of a service 
agreement with respect to such facility. 
"(38) The amendments made by section 201 shall not apply 
to— 
"(A) a $28,000,000 wood resource complex for which 
construction was authorized by the Board of Directors on 
August 9,1985, 
"(B) an electrical cogeneration plant in Bethel, Maine 
which is to generate 2 megawatts of electricity from the 
burning of wood residues, with respect to which a contract 
was entered into on July 10,1984, and with respect to which 
$200,000 of the expected $2,000,000 cost had been commit-
ted before June 15,1986, 
"(C) a mixed income housing project in Portland, Maine 
which is known as the Back Bay Tower and which is 
expected to cost $17,300,000, 
"(D) the Eastman Place project and office building in 
Rochester, New York, which is projected to cost $20,000,000, 
with respect to which an inducement resolution was 
adopted in December 1986, and for which a binding contract 
of $500,000 was entered into on April 30,1986, 
"(E) the Marquis Two project in Atlanta, Georgia which 
has a total budget of $72,000,000 and the construction phase 
of which began under a contract entered into on March 26, 
1986, 
"(F) a 166-unit continuing care retirement center in New 
Orleans, Louisiana, the construction contract for which was 
signed on February 12, 1986, and is for a maximum 
amount not to exceed $8,500,000, 
"(G) the expansion of the capacity of an oil refining 
facility in Rosemont, Minnesota from 137,000 to 207,000 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3365 
barrels per day which is expected to be completed by 
December 31,1990, and 
"(H) a project in Ransom, Pennsylvania which will burn 
coal waste (known as 'culm') with an approximate cost of 
$64,000,000 and for which a certification from the Federal 
Energy Regulatory Commission was received on March 11, 
1986. 
"(39) The amendments made by section 201 shall not apply to 
any facility for the manufacture of an improved particle board 
if a binding contract to purchase such equipment was executed 
March 3, 1986, such equipment will be placed in service by 
January 1, 1988, and such facility is located in or near Moncure, 
North Carolina." 
(27) Subsection (b) of section 204 of the Reform Act is amended 26 USC168 note, 
by inserting "(as amended by the Tax Reform Act of 1984)" 
immediately before the period at the end thereof. 
(28) Subparagraph (A) of section 204(cXl) of the Reform Act is Pennsylvania, 
amended by inserting "located in Pennsylvania and" before 
"constructed pursuant". 
(29) Paragraph (3) of section 204(c) of the Reform Act is 
amended— 
(A) by striking out "for the applicable date" and inserting 
in lieu thereof "(or, in the case of a project described in 
subparagraph (B), by substituting 'April 1, 1992') for the 
applicable date", 
(B) by striking out "before April 1,1986" in subparagraph 
(A) and inserting in lieu thereof "on or before April 1, 
1986", and 
(C) by adding at the end thereof the following: 
"In the case of an aircraft described in subparagraph (A), 
section 2030t))(lXA) shall be applied by substituting 'April 1, 
1986' for 'March 1, 1986' and section 49(eXlXB) of the Internal 
Revenue C!ode of 1986 shall not apply." 
(30XA) Paragraph (4) of section 204(c) of the Reform Act is 
amended by striking out all that precedes subparagraph (L) and 
inserting in lieu thereof the following: 
"(4) The amendments made by section 201 shall not apply to a 
limited amount of the following property or a limited amount of 
property set forth in a submission before September 16, 1986, by 
the following taxpayers: 
"(A) Arena project, Michigan, but only with respect to 
$78,000,000 of investments. 
"(B) Campbell Soup Company, Pennsylvania, California, 
North Carolina, Ohio, Maryland, Florida, Nebraska, Michi-
gan, South Carolina, Texas, New Jersey, and Delaware, but 
only with respect to $9,329,000 of regular investment tax 
credits. 
"(C) The Southeast Overtown/Park West development, 
Florida, but only with respect to $200,000,000 of invest-
ments. 
"(D) Equipment placed in service and operated by Leggett 
and Piatt before July 1, 1987, but only with respect to 
$2,000,000 of regular investment tax credits, and subsec-
tions (c) and (d) of section 49 of the Internal Revenue Code 
of 1986 shall not apply to such equipment. 
"(E) East Bank Housing Project. 
102 STAT. 3366 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(F) $1,561,215 of investments by Standard Telephone 
Company. 
"(G) Five aircraft placed in service before January 1, 
1987, by Presidential Air. 
"(H) A rehabilitation project by Ann Arbor Railroad, but 
only with respect to $2,900,000 of investments. 
"(I) Property that is part of a cogeneration project located 
in Ada, Michigan, but only with respect to $30,000,000 of 
investments. 
"(J) Anchor Store Project, Michigan, but only with re-
spect to $21,000,000 of investments. 
"(K) A waste-fired electrical generating facility of Biogen 
Power, but only with respect to $34,000,000 of investments." 
26 use 168 note. 
(B) Paragraph (4) of section 204(c) of the Reform Act is 
amended by striking out all that follows subparagraph (L) and 
inserting in lieu thereof the following: 
"(M) Interests of Samuel A. Hardage (whether owned 
individually or in partnership form). 
"(N) Two aircraft of Mesa Airlines with an aggregate cost 
of $5,723,484. 
"(O) Yam-spinning equipment used at Spray (Dotton 
Mills, but only with respect to $3,000,000 of investments. 
"(P) 328 units of low-income housing at Angelus Plaza, 
but only with respect to $20,500,000 of investments. 
"(Q) One aircraft of 0)ntinental Aviation Services with a 
cost of approximately $15,000,000 that was purchased 
pursuant to a contract entered into during March of 1983 
and that is placed in service by December 31,1988." 
(31) Paragraph (29) of section 204(a) of the Reform Act is 
amended— 
(A) by striking out "January 18" in subparagraph (A) and 
inserting in lieu thereof "January 25", and 
(B) by striking out "law suits filed on June 22, 1984, and 
November 21, 1985" in subparagraph (B) and inserting in 
lieu thereof "a law suit filed on October 25,1985". 
(32) Subparagraph (J) of section 204(aX33) of the Reform Act, 
as amended by paragraph (25), is amended to read as follows: 
"(J) A 25.85 megawatt alternative energy facility located 
in Deblois, Medne, with respect to which certification by 
the Federal Energy Regulatory (Dommission was made on 
April 3,1986,". 
(33) Paragraph (3) of section 204(c) of the Reform Act is 
amended— 
(A) by inserting "and" at the end of subparsigraph (B), 
(B) by striking out subparagraph (C), and 
(C) by redesignating subparagraph (D) as subparagraph 
(C). 
(34) Subclause (II) of section 204(aX5XJXii) of the Reform Act is 
amended to read as follows: 
"(II) the Board of Directors of an automobile 
manufacturer approved a written plan for the 
conversion of existing facilities to produce new 
models of a vehicle not currently produced in the 
United States, such facilities will be placed in serv-
ice by July 1, 1987, and such Board action occurred 
in July 1985 with respect to a $602,000,000 expendi-
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3367 
ture, 
a 
$438,000,000 
expenditure, 
and 
a 
$321,000,000 expenditure." 
(35) Subparagraph (T) of section 204(a)(5) of the Reform Act is 
amended to read as follows: 
"(T) A project is described in this subparagraph if it is a 
Alaska, 
plant facility on Alaska's North Slope which is placed in 
service before January 1,1988, and— 
"(i) the approximate cost of which is $675,000,000, of 
which approximately $400,000,000 was spent on off-site 
construction, 
"(ii) the approximate cost of which is $445,000,000, of 
which approximately $400,000,000 was spent on off-site 
construction and more than 50 percent of the project 
cost was spent prior to December 31,1985, or 
"(iii) the approximate cost of which is $375,000,000, of 
which approximately $260,000,000 was spent on off-site 
construction." 
(e) AMENDMENTS RELATING TO SECTION 211 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 49(d) of the 1986 Code is amended 
to read as follows: 
"(1) IN GENERAL.—In the case of periods after December 31, 
1985, with respect to so much of the credit determined under 
section 46(a) with respect to transition property as is attrib-
utable to the regular investment credit (as defined in subsection 
(c)(5)(B))-
"(A) paragraphs (1), (2), and (7) of section 48(q) and section 
48(d)(5) shall be applied by substituting '100 percent' for '50 
percent' each place it appears, and 
"(B) sections 48(q)(4) and 196(d) shall not apply." 
(2) Subparagraph (B) of section 49(c)(4) of the 1986 Code is 
amended to read as follows: 
"(B) No C
A
R
R
Y
B
A
C
K FOR YEARS STRADDLING JULY 1, 1987; 
GROSS UP OF CARRYFORWARDS.—In any case to which para-
graph (3) applies— 
"(i) the amount of the reduction under paragraph (3) 
may not be carried back to any taxable year, but 
"(ii) there shall be added to the carryforwards from 
the taxable year (before applying paragraph (2)) an 
amount equal to the amount which bears the same 
ratio to the carryforwards from such taxable year 
(determined without regard to this clause) as— 
"(I) the applicable percentage, bears to 
"(II) 1 minus the applicable percentage." 
(3) Clause (i) of section 49(c)(5)(B) of the 1986 Code is amended 
to read as follows: 
"(i) IN GENERAL.—The term 'regular investment 
credit' means the credit determined under section 46(a) 
to the extent attributable to the regular percentage." 
(4) Paragraph (1) of section 211(e) of the Reform Act is 26USC49note. 
amended by adding at the end thereof the following new sen-
tence: "Section 49(c) of the Internal Revenue Code of 1986 (as 
added by subsection (a)) shall apply to taxable years ending 
after June 30, 1987, and to amounts carried to such taxaole 
years." 
(5) Paragraph (4)(A) of section 211(e) of the Reform Act is 
amended— 
102 STAT. 3368 
PUBLIC LAW 100-647—NOV. 10, 1988 
Waste disposal. 
Minnesota. 
Maritime affairs. 
Washington. 
(A) by striking out "Paragraphs (c) and (d) of section 49 of 
the Internal Revenue Code of 1954" and inserting in lieu 
thereof "Subsections (c) and (d) of section 49 of the Internal 
Revenue Code of 1986", and 
(B) by striking out "1935" and inserting in lieu thereof 
"1985". 
26 use 49 note. 
(6) Paragraph (4XB) of section 211(e) of the Reform Act is 
amended by striking out "shall be treated as transition prop-
erty" and inserting in lieu thereof "shall be treated as transi-
tion property and subsections (c) and (d) of section 49 of such 
Code shall not apply to such property". 
(7) Paragraph (4) of section 211(e) of the Reform Act is 
amended by adding at the end thereof the following new sub-
paragraphs: 
"(C) Any solid waste disposal facility which will process 
and incinerate solid waste of one or more public or private 
entities including Dakota County, Minnesota, and with re-
spect to which a bond carryforward from 1985 was elected 
in an amount equal to $12,500,000 shall be treated as 
transition property within the meaning of section 49(e) of 
the Internal Revenue Code of 1986. 
"(D) For purposes of section 49 of such Code, the following 
property shall be treated as transition property: 
"(i) 2 catamarans built by a shipbuilder incorporated 
in the State of Washington in 1964, the contracts for 
which were signed on April 22, 1986 and November 12, 
1985, and 1 barge built by such shipbuilder the contract 
for which was signed on August 7,1985. 
"(ii) 2 large passenger ocean-going United States flag 
cruise ships with a passenger rated capacity of up to 
250 which are built by the shipbuilder described in 
clause (i), which are the first such ships built in the 
United States since 1952, and which were designed at 
the request of a Pacific Coast cruise line pursuant to a 
contract entered into in October 1985. This clause shall 
apply only to that portion of the cost of each ship which 
does not exceed $40,000,000. 
Minnesota. 
"(iii) Property placed in service during 1986 by Sat-
ellite Industries, Inc., with headquarters in Minneapo-
lis, Minnesota, to the extent that the cost of such 
property does not exceed $1,950,000. 
"(E) Subsections (c) and (d) of section 49 of such Code shall 
not apply to property described in section 204(aX4) of this 
Act." 
(8XA) Subsection (d) of section 38 is amended to read as 
follows: 
"(d) ORDERING RULES.—For purposes of sections 46(f), 47(a), 196(a), 
and any other provision of this title where it is necessary to as-
certain the extent to which the credits determined under any 
section referred to in subsection (b) are used in a taxable year or as a 
carryback or carrsrforward— 
"(1) IN GENERAL.—The order in which such credits are used 
shall be determined on the basis of the order in which they are 
listed in subsection (b) as of the close of the taxable year in 
which the credit is used. 
"(2) COMPONENTS OF INVESTMENT CREDIT.—The order in which 
credits attributable to a percentage referred to in section 46(a) 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3369 
are used shall be determined on the basis of the order in which 
such percentages are listed in section 46(a) as of the close of the 
taxable year in which the credit is used. 
"(3) CREDITS NO LONGER LISTED.—For purposes of this sub-
section— 
"(A) the credit allowable by section 40, as in effect on the 
day before the date of the enactment of the Tax Reform Act 
of 1984, (relating to expenses of work incentive programs) 
and the credit allowable by section 41(a), as in effect on the 
day before the date of the enactment of the Tax Reform Act 
of 1986, (relating to employee stock ownership credit) shall 
be treated as referred to in that order after the last para-
graph of subsection (b), and 
"(B) the employee plan percentage (as defined in section 
46(a)(2)(E), as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1984) shall be treated 
as referred to after section 46(a)(2)." 
(B) Subparagraph (C) of section 49(c)(5) of the 1986 Code is 
hereby repealed. 
(C) The amendments made by this paragraph shall apply to 26 USC 38 note, 
taxable years beginning after December 31, 1983, and to 
carrybacks from such years. 
(f) AMENDMENTS RELATED TO SECTION 212 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 212(f) of the Reform Act is 
26 USC 38 note. 
amended by striking out so much of such paragraph as precedes 
subparagraph (A) and insert in lieu thereof the following: 
"(2) SPECIAL RULE.—In the case of the LTV Corporation, in 
lieu of the requirements of paragraph (1)—". 
(2) Subclause (I) of section 212(f)(2)(B)(i) of the Reform Act is 
amended by striking out "such involvement begins" and insert-
ing in lieu thereof "when the corporation receives the refund". 
(3) Subsection (g) of section 212 of the Reform Act is amended 
by adding at the end thereof the following new paragraph: 
"(3) SPECIAL RULE FOR RESTRUCTURING.—In the case of any 
corporation, any restructuring shall not limit, increase, or 
otherwise affect the benefits which would have been available 
under this section but for such restructuring." 
(4) Section 212 of the Reform Act is amended by adding at the 
end thereof the following new subsection: 
"(h) TENTATIVE REFUNDS.—Rules similar to the rules of section 
6425 of the Internal Revenue Code of 1986 shall apply to any 
overpayment resulting from the application of this section." 
(5) Subparagraph (B) of section 212(g)(2) of the Reform Act is 
amended by striking out "determined under" and inserting in 
lieu thereof "determined for periods before January 1, 1986, 
under". 
(6) Section 212(f) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(3) In the case of a qualified corporation, no offset to any 
refund under this section may be made by reason of any tax 
imposed by section 4971 of the Internal Revenue Code of 1986 
(or any interest or penalty attributable to any such tax), and the 
date on which any such refund is to be paid shall be determined 
without regard to such corporation's status under title 11, 
United States Code." 
(g) AMENDMENT RELATED TO SECTION 213 OF THE REFORM ACT.— 
Subparagraph (B) of section 213(e)(2) of the Reform Act is amended 
26 USC 38 note. 
102 STAT. 3370 
PUBLIC LAW 100-647—NOV. 10, 1988 
by striking out "determined under" and inserting in lieu thereof 
"determined for periods before January 1,1986, under". 
Oi) AMENDMENTS RELATED TO SECTION 231 OF THE REFORM ACT.— 
(1) Subsection (g) of section 41 of the 1986 Code is amended by 
adding at the end thereof the following new sentence: "If the 
amount determined under subsection (a) for any taxable year 
exceeds the limitation of the preceding sentence, such amount 
may be carried to other taxable years under the rules of section 
39; except that the limitation of the preceding sentence shall be 
taken into account in lieu of the limitation of section 38(c) in 
applying section 39." 
(2) Subsection (c) of section 6411 of the 1986 Code is amended 
by striking out "unused research credit,". 
(3) Section 936(hX5XCXiXIVXc) of the 1986 Code is amended— 
(A) by striking out "section 30" and inserting in lieu 
thereof "section 41", and 
(B) by striking out "section 30(f)" and inserting in lieu 
thereof "section 41(0". 
(i) AMENDMENTS RELATED TO SECTIONS 241 AND 242 OF THE REFORM 
ACT.— 
(1) Section 167 of the 1986 Code is amended by redesignating 
subsection (r) as subsection (s) and by inserting after subsection 
(q) the following new subsection: 
"(rj TRADEMARK OR TRADE NAME EXPENDITURES NOT DEPRE-
CIABLE.— 
"(1) IN GENERAL.—No depreciation deduction shall be allow-
able under this section (and no depreciation or amortization 
deduction shall be allowable under any other provision of this 
subtitle) with respect to any trademark or trade name 
expenditure. 
"(2) TRADEMARK OR TRADE NAME EXPENDITURE.—For purposes 
of this subsection, the term 'trademark or trade name expendi-
ture' means any expenditure which is directly connected with 
the acquisition, protection, expansion, r^istration (Federal, 
State, or foreign), or defense of a trademark or trade name." 
(2XA) Paragraph (1) of section 168(c) of the 1986 Code (as 
amended by section 102(a) is amended by adding at the end 
thereof the following new item: 
"Any railroad grading or tunnel bore 
50 years." 
(BXi) Paragraph (3) of section 168(b) of the 1986 Code is 
amended by redesignating subparagraph (C) as subparagraph 
(D) and by inserting after subparagraph (B) the following new 
subparagraph: 
"(C) Any railroad grading or tunnel bore." 
(ii) Paragraph (5) of section 168(b) of the 1986 (Dode (as 
amended by section 102(a)) is amended by striking out "(3XC)" 
and inserting in lieu thereof "(3XD)". 
(C) Subsection (e) of section 168 of the 1986 (Dode is amended 
by adding at the end thereof the following new paragraph: 
"(4) RAILROAD GRADING OR TUNNEL BORE.—The term 'railroad 
grading or tunnel bore' means all improvements resulting from 
excavations (including tunneling), construction of embank-
ments, clearings, diversions of roads and streams, sodding of 
slopes, and from similar work necessary to provide, construct, 
reconstruct, alter, protect, improve, replace, or restore a road-
bed or right-of-way for railroad track." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3371 
(D) Paragraph (2) of section 168(d) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (A), 
by inserting "and" at the end of subparagraph (B), and by 
inserting after subparagraph (B) the following new subpara-
graph: 
"(C) any railroad grading or tunnel bore,". 
(E) Clause (i) of section 168(d)(3)(B) of the 1986 Code (as 
amended by section 102(a)) is amended by striking out "and 
residential rental property" and inserting in lieu thereof "resi-
dential rental property, and railroad grading or tunnel bore". 
(F) The table contained in paragraph (2XC) of section 168(g) of 
the 1986 Code is amended by adding at the end thereof the 
following new item: 
"(iv) Any railroad grading or tunnel bore 
50 years." 
(G) Subparagraph (E) of section 168(iXl) of the 1986 Code is 
amended by adding at the end thereof the following new clause: 
"(iii) SPECIAL RULE FOR RAILROAD GRADING OR TUNNEL 
BORES.—In the case of any property which is a railroad 
grading or tunnel bore— 
"(I) such property shall be treated as an assigned 
property, 
"(II) the recovery period applicable to such property 
shall be treated as an assigned item, and 
"(III) clause (ii) of subparagraph (D) shall not apply." 
(H) The table contained in subparagraph (A) of section 
467(eX3) of the 1986 Code is amended by adding at the end 
thereof the following new item: 
"Any railroad grading or tunnel bore 
50 years." 
(I) Paragraph (3) of section 1245(a) of the 1986 Code is 
amended by striking out "or" at the end of subparagraph (D), by 
striking out the period at the end of subparagraph (E), and 
inserting in lieu thereof ", or", and by adding at the end thereof 
the following new subparagraph: 
"(F) any railroad grading or tunnel bore (as defined in section 
168(eX4))." 
(j) AMENDMENTS RELATED TO SECTION 243 OF THE REFORM ACT.— 
(1) Section 243 of the Reform Act (related to deduction of bus 
26 USC165 note. 
and freight forwarder operating authority) is amended by 
redesignating subsection (d) as subsection (e) and by inserting 
after subsection (c) the following new subsection: 
"(d) APPUCATION OF SECTION 334(bX2).—For purposes of subsec-
tions (a) and (b), the reference to section 334(bX2) in section 
266(cX2XAXii) of the Economic Recovery Tax Act of 1981 shall be a 
reference to such section £is in effect before its repeal." 
(2) The heading of subparagraph (A) of section 243(bX2) of the 
Reform Act is amended by striking out "TO BEGIN IN 1987". 
(k) AMENDMENTS RELATED TO SECTION 251 OF THE REFORM ACT.— 
(1) Paragraph (2XB) of section 251(d) of the Reform Act is 
26 USC 46 note. 
amended by striking out clause (i) and redesignating clauses (ii) 
and (iii) as clauses (i) and (ii), respectively. 
(2) Subparagraph (P) of section 251(dX3) of the Reform Act is 
California. 
amended by striking out "San Francisco" and inserting ' 
lieu 
thereof "San Jose, California". 
(3) Paragraph (4) of section 251(d) of the Reform Act is 
amended— 
102 STAT. 3372 
PUBLIC LAW 100-647—NOV. 10, 1988 
State listing. 
26 u s e 46 note. 
(A) by striking out "Lakeland marbel Arcade" in 
subparagraph (K) and inserting in lieu thereof "Marble 
Arcade office building", 
(B) by striking out "and" at the end of subparagraph (Y), 
and 
(C) by striking out subparagraph (Z) and inserting in lieu 
thereof the following: 
"(Z) the Bigelow-Hartford 
Carpet Mill in 
Enfield, 
Connecticut, 
"(AA) properties abutting 125th street in New York 
County from 7th Avenue west to Morningside and the pier 
area on the Hudson River at the end of such 125th Street, 
"(BB) the City of Los Angeles Central Library project 
pursuant to an agreement dated December 28,1983, 
"(CO the Warehouse Row project in Chattanooga, Ten-
nessee, 
"(DD) any project described in section 204(a)(lXF) of this 
Act, 
"(EE) the Wood Street Commons project in Pittsburgh, 
Pennsylvania, 
"(FF) any project described in section 803(d)(6) of this Act, 
"(GG) Union Station, Indianapolis, Indiana, 
"(HH) the Mattress Factory project in Pittsburgh, Penn-
sylvania, 
"(II) Union Station in Providence, Rhode Island, 
"(JJ) South Pack Flaza, Asheville, North Carolina, 
"(KK) Old Louisville Trust Project, Louisville, Kentucky, 
"(LL) Stewarts Rehabilitation Project, Louisville, Ken-
tucky, 
"(MM) Bernheim Officenter, Louisville, Kentucky, 
"(NN) Springville Mill Project, Rockville, Connecticut, 
and 
"(00) the D.J. Stewart Company Building, State and 
Main Streets, Rockford, Illinois." 
(4) Subsection (d) of section 251 of the Reform Act is amended 
by striking out paragraph (6) and inserting in lieu thereof the 
following: 
"(6) 
EXPENSING 
OF 
REHABILITATION 
EXPENSES 
FOR 
THE 
FRANKFORD ARSENAL.—In the case of any expenditures paid or 
incurred in connection with improvements (including repairs 
and maintenance) of the Frankford Arsenal pursuant to a 
contract and partnership agreement during the 8-year period 
specified in the contract or agreement, all such expenditures to 
be made during the period 1986 through and including 1993 
shall— 
"(A) be treated as made (and allowable as a deduction) 
during 1986, 
"(B) be treated as qualified rehabilitation expenditures 
made during 1986, and 
"(C) be allocated in accordance with the partnership 
agreement regardless of when the interest in the partner-
ship was acquired, except that— 
"(i) if the taxpayer is not the original holder of such 
interest, no person (other than the taxpayer) had 
claimed any benefits by reason of this paragraph, 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3373 
"(ii) no interest under section 6611 of the 1986 Code 
on any refund of income taxes which is solely attrib-
utable to this paragraph shall be paid for the period— 
"(I) beginning on the date which is 45 days after 
the later of Apnl 15,1987, or the date on which the 
' 
return for such taxes was filed, and 
"(H) ending on the date the taxpayer acquired 
the interest in the partnership, and 
"(iii) if the expenditures to be made under this provi-
sion are not paid or incurred before January 1, 1994, 
then the tax imposed by chapter 1 of such Code for the 
taxpayer's last taxable year beginning in 1993 shall be 
increased by the amount of the tax benefits by reason 
of this paragraph which are attributable to the 
expenditures not so paid or incurred. 
"(7) SPECIAL RULE.—In the case of the rehabilitation of the 
Willard Hotel in Washington, D.C., section 205(cXlXBXii) of the 
Tax Equity and Fiscal Responsibility Act of 1982 shall be ap-
plied by substitutmg '1987' for '1986'.'^' 
(5) Subparagraph (B) of section 251(dX3) of the Reform Act is 
amended by striking out "Pontabla" and inserting in lieu 
thereof "Pontalba". 
(6) Subparagraph (T) of section 251(dX4) of the Reform Act is 
amended by striking out "Louisville" and inserting in lieu 
thereof "Covington". 
(1) AMENDMENTS RELATED TO SECTION 252 OF THE REFORM ACT.— 
dXA) Subparagraph (A) of section 42(bX2) of the 1986 Code 
is amended by striking out "for the month" and all that follows 
and inserting in lieu thereof "for the earlier of— 
"(i) the month in which such building is placed in 
service, or 
"(ii) at the election of the taxpayer— 
"(I) the month in which the taxpayer and the 
housing credit agency enter into an agreement 
with respect to such building (which is binding on 
such agency, the taxpayer, and all successors in 
interest) as to the housing credit dollar amount to 
be allocated to such building, or 
"(II) in the case of any building to which subsec-
tion (hX4XB) applies, the month in which the tax-
exempt obligations are issued. 
A month may be elected under clause (ii) only if the election 
is made not later than the 5th day aJPter the close of such 
month. Such an election, once made, shall be irrevocable." 
(B) Clause (ii) of section 42(bX2XC) of the 1986 Code is 
amended by striking out "the month in which the building was 
placed in service" and inserting in lieu thereof "the month 
applicable under clause (i) or (ii) of subparagraph (A)". 
(2XA) Subparagraph (A) of section 42(cX2) of the 1986 Code 
(defining qualified low-income building) is amended to read as 
follows: 
"(A) which is part of a qualified low-income housing 
project at all times during the period— 
"(i) beginning on the 1st day in the compliance period 
on which such building is part of such a project, and 
"(ii) ending on the last day of the compliance period 
with respect to such building, and". 
District of 
Columbia. 
26 u s e 46 note. 
Housing. 
Contracts. 
Disadvantaged 
persons. 
102 STAT. 3374 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) Paragraph (1) of section 42(f) of the 1986 Code (defining 
credit period) is amended by striking out "beginning with" and 
all that follows and inserting in lieu thereof "beginning with— 
"(A) the taxable year in which the building is placed in 
service, or 
"(B) at the election of the taxpayer, the succeeding tax-
able year, 
but only if the building is a qualified low-income building as of 
the close of the 1st year of such period. The election under 
subparagraph (B), once made, shall be irrevocable." 
(3) Clause (ii) of section 42(dX2)(D) of the 1986 Code is amended 
to read as follows: 
"(ii) SPECIAL RULES FOR CERTAIN TRANSFERS.—For pur-
poses of determining under subparagraph (B)(ii) when a 
building was last placed in service, there shall not be 
taken into account any placement in service— 
"(I) in connection with the acquisition of the 
building in a transaction in which the basis of the 
building in the hands of the person acquiring it is 
determined in whole or in part by reference to the 
adjusted basis of such building in the hands of the 
person from whom acquired, 
"(II) by a person whose basis in such building is 
determined under section 1014(a) (relating to prop-
erty acquired from a decedent), 
' (III) by any governmental unit or qualified non-
profit organization (as defined in subsection (h)(5)) 
if the requirements of subparagraph (BXii) are met 
with respect to the placement in service by such 
unit or organization and all the income from such 
property is exempt from Federal income taxation, 
or 
"(IV) by any person who acquired such building 
by foreclosure (or by instrument in lieu of fore-
closure) of any purchase-money security interest 
held by such person if the requirements of subpara-
graph (B)(ii) are met with respect to the placement 
in service by such person and such building is 
resold within 12 months after the date such build-
ing is placed in service by such person after such 
foreclosure." 
(4) Paragraph (3) of section 42(d) of the 1986 Code is amended 
to read as follows: 
"(3) EUGIBLE BASIS REDUCED WHERE DISPROPORTIONATE STAND-
ARDS FOR UNITS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the eligible beisis of any building shall be reduced by an 
amount equal to the portion of the adjusted basis of the 
building which is attributable to residential rental units in 
the building which are not low-income units and which are 
above the average quality standard of the low-income units 
in the building. 
"(B) 
EXCEPTION WHERE TAXPAYER ELECTS TO EXCLUDE 
EXCESS COSTS.— 
"(i) IN GENERAL.—Subparagraph (A) shall not apply 
with respect to a residential rental unit in a building 
which is not a low-income unit i
f
— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3375 
"(I) the excess described in clause (ii) with re-
spect to such unit is not greater than 15 percent of 
the cost described in clause (iiXII), and 
"(II) the taxpayer elects to exclude from the 
' 
eligible basis of such building the excess described 
in clause (ii) with respect to such unit, 
"(ii) EXCESS.—The excess described in this clause 
with respect to any unit is the excess o
f
— 
"(I) the cost of such unit, over 
"(II) the amount which would be the cost of such 
unit if the average cost per square foot of low-
income units in the building were substituted for 
the cost per square foot of such unit. 
The Secretary may by regulation provide for the deter-
mination of the excess under this clause on a basis 
other than square foot costs." 
(5) Subparagraph (A) of section 42(d)(5) of the 1986 Code is 
amended by inserting before the period "(increased, in the case 
of an existing building which meets the requirements of para-
graph 
(2)(B), by 
the 
amounts 
described 
in 
paragraph 
(2)(A)(i)(II))". 
(6)(A) Paragraph (5) of section 42(d) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) EUGIBLE BASIS NOT TO INCLUDE EXPENDITURES WHERE 
167 (k) ELECTED.—The eligible basis of any building shall 
not include any portion of its adjusted basis which is attrib-
utable to amounts with respect to which an election is made 
under section 167(k)." 
(B) Subparagraph (A) of section 42(dX5) of the 1986 Code is 
amended by striking out "subparagraph (B)" and inserting in 
lieu thereof "subparagraphs (B) and (C) . 
(7) Subparagraph (A) of section 42(d)(6) of the 1986 Code is 
amended by inserting "or" at the end of clause (i), by striking 
out ", or" at the end of clause (ii) and inserting in lieu thereof a 
period, and by striking out clause (iii). 
(8) Clause (ii) of section 42(d)(6XB) of the 1986 Code (defining 
federally assisted building) is amended by striking out "of 
1934". 
(9XA) Paragraph (3) of section 42(f) of the 1986 Code is 
amended to read as follows: 
"(3) DETERMINATION OF APPUCABLE PERCENTAGE WITH RESPECT 
TO INCREASES IN QUALIFIED BASIS AFTER 1ST YEAR OF CREDIT 
PERIOD.— 
"(A) IN GENERAL.—In the case of any building which was Disadvantaged 
a qualified low-income building as of the close of the 1st persons. 
year of the credit period, if^ 
"(i) as of the close of any taxable year in the compli-
ance period (after the 1st year of the credit period) the 
qualified basis of such building exceeds 
"(ii) the qualified basis of such building as of the close 
of the 1st year of the credit period, 
the applicable percentage which shall apply under subsec-
tion (a) for the taxable year to such excess shall be the 
percentage equal to % of the applicable percentage which 
(after the application of subsection (h)) would but for this 
paragraph apply to such basis. 
102 STAT. 3376 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) 1ST YEAR COMPUTATION APPLIES.—A rule similar to 
the rule of paragraph (2)(A) shall apply to any increase in 
qualified basis to which subparagraph (A) applies for the 1st 
year of such increase." 
(B) Paragraph (3) of section 42(b) of the 1986 Code is amended 
to read as follows: 
"(3) CROSS REFERENCES.— 
"(A) For treatment of certain rehabilitation expenditures as separate new 
buildings, see subsection (e). 
"(B) For determination of applicable percentage for increases in qualifled 
basis after the 1st year of the credit period, see subsection (f)(3). 
"(C) For authority of housing credit agency to limit applicable percentage 
and qualified basis which may be taken into account under this section with 
respect to any building, see subsection (h)(6)." 
(10) Subparagraph (B) of section 42(gX2) of the 1986 Code 
(defining gross rent) is amended by striking out "Federal rental 
assistance" and inserting in lieu thereof "rental assistance". 
(11) Paragraph (2) of section 42(g) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(C) UNITS WHERE FEDERAL RENTAL ASSISTANCE IS REDUCED 
AS TENANT'S INCOME INCREASES.—If the gross rent with 
respect to a residential unit exceeds the limitation under 
subparagraph (A) by reason of the fact that the income of 
the occupants thereof exceeds the income limitation ap-
plicable under paragraph (1), such unit shall, nevertheless, 
be treated as a rent-restricted unit for purposes of para-
graph (1) if— 
"(i) a Federal rental assistance payment described in 
subparagraph (B)(i) is made with respect to such unit or 
its occupants, and 
"(ii) the sum of such payment and the gross rent with 
respect to such unit does not exceed the sum of the 
amount of such payment which would be made and the 
gross rent which would be payable with respect to such 
unit i
f
— 
"(I) the income of the occupants thereof did not 
exceed the income limitation applicable under 
paragraph (1), and 
"(II) such units were rent-restricted within the 
meaning of subparagraph (A). 
The preceding sentence shall apply to any unit only if the 
result described in clause (ii) is required by Federal statute 
as of the date of the enactment of this subparagraph and as 
of the date the Federal rental assistance payment is made." 
(12) Paragraph (3) of section 42(g) of the 1986 Code is amended 
to read as follows: 
Disadvantaged 
"(3) D A T E FOR MEETING REQUIREMENTS.— 
pei*sons. 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, a building shall be treated as a qualified low-
income building only if the project (of which such building 
is a part) meets the requirements of paragraph (1) not later 
than the close of the 12-month period beginning on the date 
the building is placed in service. 
"(B) 
BUILDINGS WHICH RELY ON LATER BUILDINGS FOR 
QUALIFICATION.— 
"(i) IN GENERAL.—In determining whether a building 
(hereinafter in this subparagraph referred to as the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3377 
'prior building') is a qualified low-income building, the 
taxpayer may take into account 1 or more additional 
buildings placed in service during the 12-month period 
described in subparagraph (A) with respect to the prior 
building only if the taxpayer elects to apply clause (ii) 
with respect to each additional building taken into 
account. 
"(ii) TREATMENT OF ELECTED BUILDINGS.—In the case 
of a building which the taxpayer elects to take into 
account under clause (i), the period under subpara-
graph (A) for such building shall end at the close of the 
12-month period applicable to the prior building. 
"(iii) DATE PRIOR BUILDING IS TREATED AS PLACED IN 
SERVICE.—For purposes of determining the credit 
period and the compliance period for the prior building, 
the prior building shall be treated for purposes of this 
section as placed in service on the most recent date any 
additional building elected by the taxpayer (with re-
spect to such prior building) was placed in service. 
"(C) SPECIAL RULE.—A building— 
"(i) other than the 1st building placed in service as 
part of a project, and 
"(ii) other than a building which is placed in service 
during the 12-month period described in subparagraph 
(A) with respect to a prior building which becomes a 
qualified low-income building, 
shall in no event be treated as a qualified low-income 
building unless the project is a qualified low-income hous-
ing project (without regard to such building) on the date 
such building is placed in service." 
(13) Paragraph (4) of section 42(g) of the 1986 Code is amended 
by inserting before the period "; except that, in applying such 
provisions (other than section 142(dX4)(B)(iii)) for such purposes, 
the term 'gross rent' shall have the meaning given such term by 
paragraph (2)(B) of this subsection". 
(14XA) Paragraph (1) of section 42(h) of the 1986 Code is 
amended to read as follows: 
"(1) CREDIT MAY NOT EXCEED CREDIT AMOUNT ALLOCATED TO 
BUILDING.— 
"(A) IN GENERAL.—The amount of the credit determined 
under this section for any taxable year with respect to any 
building shall not exceed the housing credit dollar amount 
allocated to such building under this subsection. 
"(B) TIME FOR MAKING ALLOCATION.—Except in the case of 
an allocation which meets the requirements of subpara-
graph (C) or (D), an allocation shall be taken into account 
under subparagraph (A) only if it is made not later than the 
close of the calendar year in which the building is placed in 
service. 
"(C) EXCEPTION WHERE BINDING COMMITMENT.—An alloca-
tion meets the requirements of this subparagraph if there is 
a binding commitment (not later than the close of the 
calendar year in which the building is placed in service) by 
the housing credit agency to allocate a specified housing 
credit dollar amount to such building beginning in a speci-
fied later taxable year. 
"(D) EXCEPTION WHERE INCREASE IN QUAUFIED BASIS.— 
102 STAT. 3378 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) IN GENERAL.—An allocation meets the require-
ments of this subparagraph if such allocation is made 
not later than the close of the calendar year in which 
ends the taxable year to which it will 1st apply but only 
to the extent the amount of such allocation does not 
exceed the limitation under clause (ii). 
"(ii) LIMITATION.—The limitation under this clause is 
the amount of credit allowable under this section (with-
out regard to this subsection) for a taxable year with 
respect to an increase in the qualified basis of the 
building equal to the excess of— 
"(I) the qualified basis of such building as of the 
close of the 1st taxable year to which such alloca-
tion will apply, over 
"(II) the qualified basis of such building as of the 
close of the 1st taxable year to which the most 
recent prior housing credit allocation with respect 
to such building applied, 
"(iii) HOUSING CREDIT DOLLAR AMOUNT REDUCED BY 
FULL ALLOCATION.—Notwithstanding clause (i), the full 
amount of the allocation shall be taken into account 
under paragraph (2)." 
(B) Clause (ii) of section 42(hX6XB) of the 1986 Code is hereby 
repealed. 
(15) Subparagraph (A) of section 42(hX4) of the 1986 Code is 
amended by striking out "financed" and all that follows and 
inserting in lieu thereof "financed by any obligation the interest 
on which is exempt from tax under section 103 if— 
"(i) such obligation is taken into account under sec-
tion 146, and 
"(ii) principal pa5mients on such financing are ap-
plied within a reasonable period to redeem obligations 
the proceeds of which were used to provide such financ-
ing. 
(16) Paragraph (5) of section 42(h) of the 1986 Code is amended 
by redesignating subparagraph (D) as subparagraph (E) emd by 
inserting after subparagraph (C) the following new subpara-
graph: 
"(D) TREATMENT OF CERTAIN SUBSIDIARIES.— 
"(i) IN GENERAL.—For purposes of this paragraph, a 
qualified nonprofit organization shall be treated as 
satisfying the material participation test of subpara-
graph (B) if any qualified corporation in which such 
organization holds stock satisfies such test. 
(ii) QuAUFiED CORPORATION.—For purposes of clause 
(ii), the term 'qualified corporation' means any corpora-
tion if 100 percent of the stock of such corporation is 
held by 1 or more qualified nonprofit organizations at 
all times during the period such corporation is in 
existence " 
(17) Subparagraph (D) of section 42(hX6) of the 1986 Code is 
amended to read as follows: 
"(D) 
CREDIT 
REDUCED 
IF 
ALLOCATED 
CREDIT 
DOLLAR 
AMOUNT IS LESS THAN CREDIT WHICH WOULD BE ALLOWABLE 
WITHOUT REGARD TO PLACED IN SERVICE CONVENTION, ETC.— 
"(i) IN GENERAL.—The amount of the credit deter-
mined under this section with respect to any building 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3379 
shall not exceed the clause (ii) percentage of the 
amount of the credit which would Ot)ut for this subpara-
graph) be determined under this section with respect to 
such building. 
"(ii) DETERMINATION OF PERCENTAGE.—For purposes 
of clause (i), the clause (ii) percentage with respect to 
any building is the percentage which— 
"(I) the housing credit dollar amount allocated to 
such building bears to 
"(II) the credit amount determined in accordance 
with clause (iii). 
"(iii) DETERMINATION OF CREDIT AMOUNT.—The credit 
amount determined in accordance with this clause is 
the amount of the credit which would (but for this 
subparagraph) be determined under this section with 
respect to the building if— 
"(I) this section were applied without regard to 
paragraphs (2XA) and (3XB) of subsection (f), and 
"(II) subsection (fK3XA) were applied without 
regard to 'the percentage equal to % of." 
(18) Paragraph (6) of section 42(h) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(E) 
HOUSING CREDIT AGENCY TO SPECIFY APPUCABLE 
PERCENTAGE AND MAXIMUM QUAUFIED BASIS.—In allocating 
a housing credit dollar amount to any building, the housing 
credit agency shall specify the applicable percentage and 
the maximum qualiHed basis which may be taken into 
account under this section with respect to such building. 
The applicable percentage and maximum qualiiied basis so 
specified shall not exceed the applicable percentage and 
qualified basis determined under this section without 
rftffsrd to tnis suDS^ction 
(19XA) Subparagraph (A) of section 42(iX2) of the 1986 Code is 
amended— 
(i) by inserting "or any prior taxable year" after "such 
taxable year", 
(ii) by striking out "there is outstanding" and inserting in 
lieu thereof "there is or was outstanding , and 
(iii) by striking out "are used" and inserting in lieu 
thereof are or were used". 
(B) Subparagraph (B) of section 42(iX2) of the 1986 Code is 
amended to read as follows: 
"(B) ELECTION TO REDUCE EUGIBLE BASIS BY BALANCE OF 
LOAN O
R PROCEEDS OF OBUGATiONS.—A loan or tax-exempt 
obligation shall not be taken into account under subpara-
graph (A) if the taxpayer elects to exclude from the eligible 
basis of the building for purposes of subsection (d)— 
"(i) in the case of a loan, the principal amount of such 
loan, and 
"(ii) in the case of a tax-exempt obligation, the pro-
ceeds of such obligation." 
(C) Paragraph (2) of section 42(i) of the 1986 Code is amended 
by redesignating subparagraph (C) as subparagraph (D) and by 
inserting after subparagraph (B) the following new subpara-
graph: 
"(C) SPECIAL RULE FOR SUBSIDIZED CONSTRUCTION FINANC-
ING.—Subparagraph (A) shall not apply to any tax-exempt 
102 STAT. 3380 
PUBLIC LAW 100-647—NOV. 10, 1988 
obligation or below market Federal loan used to provide 
construction financing for any building if— 
"(i) such obligation or loan (when issued or made) 
identified the building for which the proceeds of such 
obligation or loan would be used, and 
"(ii) such obligation is redeemed, and such loan is 
repaid, before such building is placed in service." 
(D) Subparagraph (D) of section 42(iX2) of the 1986 Code is 
amended by striking out "subparagraph (A)" and inserting in 
lieu thereof "this paragraph". 
(20) Paragraph (4) of section 42(j) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(F) N o RECAPTURE WHERE DE MINIMIS CHANGES IN FLOOR 
SPACE.—The Secretary may provide that the increase in tax 
under this subsection shaJl not apply with respect to any 
building if— 
'^i) such increase results from a de minimis change 
in the floor space fraction under subsection (cXD, and 
"(ii) the building is a qualified low-income building 
(21) Clause (i) of section 42(jX5XB) of the 1986 Code is amended 
to read as follows: 
"(i) more than V
a the capital interests, and more than 
Vi the profit interests, in which are owned by a group 
of 35 or more partners each of whom is a natural 
person or an estate, and". 
(22) Paragraph (6) of section 420') of the 1986 Code is 
amended— 
(A) by inserting "(OR INTEREST THEREIN)" after "BUILD-
ING" in the heading, and 
(B) by inserting or an interest therein" after "disposition 
of a building" in the text. 
(23) Subparagraph (B) of section 42(kX2) of the 1986 Code is 
amended by inserting before the period at the end thereof the 
following: , except that this subparagraph shall not apply in 
the case of a federally assisted building described in subsection 
(dX6XB)if-
"(i) a security interest in such building is not per-
mitted by a Federal agency holding or insuring the 
mortgage secured by such building, and 
"(ii) the proceeds from the financing (if any) are 
applied to acquire or improve such building." 
(24XA) Subsection (1) of section 42 of the 1986 Code is amended 
by redesignating paragraph (2) as paragraph (3) and by insert-
ing after paragraph (1) the following new paragraph: 
'(2) ANNUAL REPORTS TO THE SECRETARY.—The Secretary may 
require taxp^ers to submit an information return (at such time 
and in such form and manner as the Secretary prescribes) for 
each taxable year setting forth— 
"(A) the qualified basis for the taxable year of each 
qualified low-income building of the taxpayer, 
"(B) the information described in paragraph (IXC) for the 
taxable year, and 
"(C) such other information as the Secretary may require. 
The penalty under section 6652(j) shall apply to any failure to 
submit the return required by the Secretary under the preced-
ing sentence on the date prescribed therefor." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3381 
(B) The subsection heading of subsection (1) of section 42 is 
amended to read as follows: 
"(1) CERTIFICATIONS AND OTHER REPORTS TO SECRETARY.—". 
(25) Paragraph (1) of section 42(n) of the 1986 Code is amended 
by inserting before the period at the end thereof the following: 
", and, except for any building described in paragraph (2)(B), 
subsection (h)(4) shall not apply to any building placed in service 
after 1989". 
(26) Subsection (d) of section 39 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(4) No CARRYBACK OF LOW-INCOME HOUSING CREDIT BEFORE 
1987.—No portion of the unused business credit for any taxable 
year which is attributable to the credit determined under sec-
tion 42 (relating to low-income housing credit) may be carried 
back to a taxable year ending before January 1,1987." 
(27) Paragraph (1) of section 55(c) of the 1986 Code (defining 
regular tax) is amended by striking out "section 42(j)" and 
inserting in lieu thereof "subsection (j) or (k) of section 42". 
(28) Subparagraph (A) of section 252(0(1) of the Reform Act is 
amended by striking out "and" at the end of clause (i), by 
striking out the period at the end of clause (ii) and inserting in 
lieu thereof a comma, and by inserting after clause (ii) the 
following new clauses: 
"(iii) the eligible basis of such building shall be treat-
ed, for purposes of section 42(hX4XA) of such Code, as if 
it were financed by an obligation the interest on which 
is exempt from tax under section 103 of such Code and 
which is taken into account under section 146 of such 
Code, and 
"(iv) the amendments made by section 803 shall not 
apply." 
(29) Subparagraph (E) of section 252(f)(1) of the Reform Act is 
amended by striking out "maximum annual additional credit" 
and inserting in lieu thereof "maximum present value of addi-
tional credits". 
(30) Subparagraph (E) of section 252(fX2) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall apply to any building only 
to the extent of the portion of the additional housing credit 
dollar amount (allocated to such agency under subparagraph 
(A)) allocated to such building." 
(31) Subsection (f) of section 252 of the Reform Act is amended 
by adding at the end thereof the following new paragraph: 
"(5) TRANSITIONAL RULE.—In the case of any rehabilitation 
expenditures incurred with respect to units located in the 
neighborhood strategy area within the community development 
block grant program in Ft. Wayne, Indiana— 
"(A) the amendments made by this section shall not 
apply, and 
"(B) paragraph (1) of section 167(k) of the Internal Reve-
nue Code of 1986, shall be applied as if it did not contain the 
phrase 'and before January 1,1987'. 
The number of units to which the preceding sentence applies 
shall not exceed 150." 
(32) Subsection (g) of section 42 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
26 u s e 42 note. 
Housing. 
Indiana. 
Community 
development. 
102 STAT. 3382 
PUBLIC LAW 100-647-NOV. 10, 1988 
"(6) SPECIAL RULE WHERE DE MINIMIS EQUITY CONTRIBUTION.— 
Property shall not be treated as failing to be residential rental 
property for purposes of this section merely because the occu-
pant of a residential unit in the project pays (on a voluntary 
basis) to the lessor a de minimis amount to be held toward the 
purchase by such occupant of a residential unit in such project 
if— 
"(A) all amounts so paid are refunded to the occupant on 
the cessation of his occupancy of a unit in the project, and 
"(B) the purchase of the unit is not permitted until after 
the close of the compliance period with respect to the 
building in which the unit is located. 
Any amount paid to the lessor as described in the preceding 
sentence shall be included in gross rent under paragraph (2) for 
purposes of determining whether the unit is rent-restricted." 
(m) AMENDMENTS RELATED TO SECTION 261 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 7518(g)(6) of the 1986 Code, is 
amended by striking out "section l(i)' and inserting in lieu 
thereof "section l(j)". 
(2) Subparagraph (A) of section 607(h)(6) of the Merchant 
46 use app. 
Marine Act, 1936 is amended by striking out "section l(i)" and 
ii'^'^- 
inserting in lieu thereof "section 10')"-
SEC. 1003. AMENDMENTS RELATED TO TITLE III OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 301 OF THE REFORM ACT.— 
(1) Subparagraph (B) of section 172(d)(4) of the 1986 Code is 
amended by striking out ", (2)(B),". 
(2) Paragraph (1) of section 3402(m) of the 1986 Code is 
amended by striking out "section 62^ (other than paragraph (13) 
thereof)" and inserting in lieu thereof "section 62(a) (other than 
paragraph (10) thereof)". 
(3) Paragraph (2) of section 12120?) of the 1986 Code is 
amended to read as follows: 
"(2) TREATMENT OF AMOUNTS ALLOWED UNDER SECTION 1211 (b) 
(1) OR (2).— 
"(A) IN GENERAL.—For purposes of determining the 
excess referred to in subparagraph (A) or (B) of paragraph 
(1), there shall be treated as a short-term capital gain in the 
taxable year an amount equal to the lesser of— 
"(i) the amount allowed for the taxable year under 
paragraph (1) or (2) of section 1211(b), or 
"(ii) the adjusted taxable income for such taxable 
year. 
"(B) 
ADJUSTED 
TAXABLE 
INCOME.—For 
purposes 
of 
subparagraph (A), the term 'adjusted taxable income' 
means taxable income increased by the sum of^ 
"(i) the amount allowed for the taxable year under 
paragraph (1) or (2) of section 1211(b), and 
"(ii) the deduction allowed for such year under 
section 151 or any deduction in lieu thereof. 
For purposes of the preceding sentence, any excess of the 
deductions allowed for the taxable year over the gross 
income for such year shall be taken into account as nega-
tive taxable income." 
(b) AMENDMENTS RELATED TO SECTION 302 OF THE REFORM ACT.— 
26 use 1 note. 
(1) Section 302 of the Reform Act is amended by striking out 
sulDsection (c). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3383 
(2XA) Paragraph (2) of section 904(b) of the 1986 Code is 
amended to read as follows: 
"(2) CAPITAL GAINS.—For purposes of this section— 
"(A) IN GENERAL.—Taxable income from sources outside 
the United States shall include gain from the sale or ex-
change of capital assets only to the extent of foreign source 
capital gain net income. 
"(B) SPECIAL RULES WHERE CAPITAL GAIN RATE DIFFEREN-
TIAL.—In the case of any taxable year for which there is a 
capital gain rate differential— 
"(i) in lieu of applying subparagraph (A), the taxable 
income from sources outside the United States shall 
include gain from the sale or exchange of capital assets 
only in an amount equal to foreign source capital gain 
net income reduced by the rate differential portion of 
foreign source net capital gain, 
"(ii) the entire taxable income shall include gain 
from the sale or exchange of capital assets only in an 
amount equal to capital gain net income reduced by the 
rate differential portion of net capital gain, and 
"(iii) for purposes of determining taxable income 
from sources outside the United States, any net capital 
loss (and any amount which is a short-term capital loss 
under section 1212(a)) from sources outside the United 
States to the extent taken into account in determining 
capital gain net income for the taxable year shall be 
reduced by an amount equal to the rate differential 
portion of the excess of net capital gain from sources 
within the United States over net capital gain." 
(B) Paragraph (3) of section 904(b) of the 1986 Code is amended 
by striking out subparagraph (D) and inserting in lieu thereof 
the following new subparagraphs: 
"(D) CAPITAL GAIN RATE DIFFERENTIAL.—There is a capital 
gain rate differential for any taxable year if— 
"(i) in the case of a taxpayer other than a corpora-
tion, subsection (j) of section 1 applies to such taxable 
year, or 
"(ii) in the case of a corporation, any rate of tax 
imposed by section 11, 511, or 831 (a) or (b) (whichever 
applies) exceeds the alternative rate of tax under sec-
tion 1201(a) (determined without regard to the last 
sentence of section 11(b)). 
"(E) RATE DIFFERENTIAL PORTION.— 
"(i) IN GENERAL.—The rate differential portion of 
foreign source net capital gain, net capital gain, or the 
excess of net capited gain from sources within the 
United States over net capital gain, as the case may be, 
is the same proportion of such amount as— 
"(I) the excess of the highest applicable tax rate 
over the alternative tax rate, bears to 
"(II) the highest applicable tax rate. 
"(ii) HIGHEST APPUCABLE TAX RATE.—For purposes of 
clause (i), the term 'highest applicable tax rate' 
means— 
"(I) in the case of a taxpayer other than a cor-
poration, the highest rate of tax set forth in subsec-
102 STAT. 3384 
PUBLIC LAW 100-647—NOV. 10, 1988 
tion (a), (b), (c), (d), or (e) of section 1 (whichever 
applies), or 
"(II) in the case of a corporation, the highest rate 
of tax specified in section 11(b). 
"(iii) ALTERNATIVE TAX RATE.—For purposes of clause 
(i), the term 'alternative tax rate' means— 
"(I) in the case of a taxpayer other than a cor-
poration, the alternative rate of tax determined 
under section l(j), or 
"(II) in the case of a corporation, the alternative 
rate of tax under section 1201(a)." 
(3) Effective for taxable years beginning after December 31, 
1987, paragraph (1) of section 1445(e) of the 1986 Code is 
amended by striking out "34 percent" and inserting in lieu 
thereof "34 percent (or, to the extent provided in regulations, 28 
percent)". 
(c) AMENDMENTS RELATED TO SECTION 311 OF THE REFORM ACT.— 
(1) Subsection (a) of section 1201 of the 1986 Code is amended 
by striking out "831(a)" and inserting in lieu thereof "831 (a) 
or (b)". 
26 use 1201 
(2) Subsection (c) of section 311 of the Reform Act is amended 
note. 
by inserting before the period at the end thereof the following: 
"; except that the amendment made by subsection (b)(4) shall 
apply to payments made after December 31,1986". 
(3) Subparagraph (D) of section 593(b)(2) of the 1986 Code is 
amended by striking out "and" at the end of clause (iii), by 
striking out the period at the end of clause (iv) and inserting in 
lieu thereof ", and", and by adding at the end thereof the 
following new clause: 
"(v) if there is a capital gain rate differential (as 
defined in section 904(b)(3)(D)) for the taxable year, by 
excluding from gross income the rate differential por-
tion (within the meaning of section 904(b)(3)(E)) of the 
lesser of— 
"(I) the net long-term capital gain for the taxable 
year, or 
"(II) the net long-term capital gain for the tax-
able year from the sale or exchange of property 
other than property described in clause (iii)." 
(d) AMENDMENT RELATED TO SECTION 321 OF THE REFORM ACT.— 
(1)(A) Subsection O?) of section 422A of the 1986 Code is 
amended by adding at the end thereof the following new 
sentence: 
"Such term shall not include any option if (as of the time the option 
is granted) the terms of such option provide that it will not be 
treated as an incentive stock option." 
26 use 422A 
(B) In the case of an option granted after December 31, 1986, 
note. 
and on or before the date of the enactment of this Act, such 
option shall not be treated as an incentive stock option if the 
terms of such option are amended before the date 90 days after 
such date of enactment to provide that such option will not be 
treated as an incentive stock option. 
(2)(A) Section 422A of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(d) $100,000 PER YEAR LIMITATION.— 
"(1) IN GENERAL.—To the extent that the aggregate fair 
market value of stock with respect to which incentive stock 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3385 
options (determined without regard to this subsection) are exer-
cisable for the 1st time by any individual during any calendar 
year (under all plans of the individual's employer corporation 
and its parent and subsidiary corporations) exceeds $100,000, 
such options shall be treated as options which are not incentive 
stock options. 
"(2) ORDERING RULE.—Paragraph (1) shall be applied by 
taking options into account in the order in which they were 
granted. 
"(3) DETERMINATION OF FAIR MARKET VALUE.—For purposes of 
paragraph (1), the fair market value of any stock shall be 
determined as of the time the option with respect to such stock 
is granted." 
(B) Subsection (b) of section 422A of the 1986 Code is amended 
by adding "and" at the end of paragraph (5), by striking out 
"; and" at the end of paragraph (6) and inserting in lieu thereof a 
period, and by striking out paragraph (7). 
(C) Paragraph (1) of section 422A(c) of the 1986 Code is 
amended by striking out "paragraph (7) of subsection (b)" and 
inserting in lieu thereof "subsection (d)". 
SEC 1004. AMENDMENTS RELATED TO TITLE IV OF THE REFORM ACT. Agriculture and 
(a) AMENDMENTS RELATED TO SECTION 405 OF THE REFORM ACT.— commodMes. 
(1) Paragraph (1) of section 108(a) of the 1986 Code is amended 
by striking out "or" at the end of subparagraph (A), by striking 
out the period at the end of subparagraph (B) and inserting in 
lieu thereof ", or" and by adding at the end thereof the follow-
ing new subparagraph: 
"(C) the indebtedness discharged is qualified farm indebt-
edness." 
(2) Paragraph (2) of section 108(a) of the 1986 Code is amended 
to read as follows: 
"(2) COORDINATION OF EXCLUSIONS.— 
"(A) TITLE ii EXCLUSION TAKES PRECEDENCE.—Subpara-
graphs (B) and (C) of paragraph (1) shall not apply to a 
discharge which occurs in a title 11 case. 
"(B) INSOLVENCY EXCLUSION TAKES PRECEDENCE OVER 
QUAUFiED FARM EXCLUSION.—Subparagraph (C) of para-
graph (1) shall not apply to a discharge to the extent the 
taxpayer is insolvent." 
(3) Subsection O
t
>
) of section 108 of the 1986 Code is amended— 
(A) by striking out "subparagraph (A) or (B)" in para-
graph (1) £ind inserting in lieu thereof "subparagraph (A), 
(B), or (C)", and 
(B) by striking out "IN TITLE 11 CASE OR INSOLVENCY" in 
the subsection heading. 
(4) Subsection (g) of section 108 of the 1986 Code is amended to 
read as follows: 
"(g) SPECIAL RULES FOR DISCHARGE OF QUAUFIED FARM INDEBTED-
NESS.— 
"(1) DISCHARGE MUST BE BY QUALIFIED PERSON.— 
"(A) IN GENERAL.—Subparagraph (C) of subsection (aXD 
shall apply only if the discharge is by a qualified person. 
"(B) QUAUFIED PERSON.—For purposes of subparagraph 
(A), the term 'qualified person' has the meaning given to 
such term by section 46(cX8XDXiv); except that such term 
102 STAT. 3386 
PUBLIC LAW 100-647—NOV. 10, 1988 
shall include any Federal, State, or local government or 
agency or instrumentality thereof. 
"(2) QUALIFIED FARM INDEBTEDNESS.—For purposes of this sec-
tion, indebtedness of a taxpayer shall be treated as qualified 
farm indebtedness if— 
"(A) such indebtedness was incurred directly in connec-
tion with the operation by the taxpayer of the trade or 
business of farming, and 
"(B) 50 percent or more of the aggregate gross receipts of 
the taxpayer for the 3 taxable years preceding the taxable 
year in which the discharge of such indebtedness occurs is 
attributable to the trade or business of farming. 
"(3) 
AMOUNT 
EXCLUDED CANNOT 
EXCEED 
SUM 
OF TAX 
ATTRIBUTES AND BUSINESS AND INVESTMENT ASSETS.— 
"(A) IN GENERAL.—The amount excluded under subpara-
graph (C) of subsection (aXD shall not exceed the sum of— 
"(i) the adjusted tax attributes of the taxpayer, and 
"(ii) the aggregate adjusted bases of qualified prop-
erty held by the taxpayer as of the beginning of the 
taxable year following the taxable year in which the 
discharge occurs. 
"(B) ADJUSTED TAX ATTRIBUTES.—For purposes of subpara-
graph (A), the term 'adjusted tax attributes' means the sum 
of the tax attributes described in subparagraphs (A), (B), (C), 
and (E) of subsection (b)(2) determined by taking into ac-
count $3 for each $1 of the attributes described in subpara-
graphs (B) and (E) of subsection (bX2). 
"(C) QUAUFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' means any property 
which is used or is held for use in a trade or business or for 
the production of income. 
"(D) 
COORDINATION WITH INSOLVENCY EXCLUSION.—For 
purposes of this paragraph, the adjusted basis of any quali-
fied property and the amount of the adjusted tax attributes 
shall be determined after any reduction under subsection 
(b) by reason of amounts excluded from gross income under 
subsection (aXlXB)." 
(5) Paragraph (4) of section 1017(b) of the 1986 Code is 
amended to read as follows: 
"(4) SPECIAL RULES FOR QUAUFIED FARM INDEBTEDNESS.— 
"(A) IN GENERAL.—Any amount which under subsection 
(bX2XD) of section 108 is to be applied to reduce basis and 
which is attributable to an amount excluded under subsec-
tion (aXlXC) of section 108— 
"(i) shall be applied only to reduce the basis of quali-
fied property held by the taxpayer, and 
"(ii) shall be applied to reduce the basis of qualified 
property in the following order: 
"(I) First the basis of qualified property which is 
depreciable property. 
(II) Second the basis of qualified property which 
is land used or held for use in the trade or business 
of farming. 
"(Ill) Then the basis of other qualified property. 
"(B) QUAUFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' has the meaning given 
to such term by section 108(gX3XC). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3387 
"(C) CERTAIN RULES MADE APPUCABLE.—Rules similar to 
the rules of subparagraph (C), (D), and (E) of paragraph (8) 
shall apply for purposes of this paragraph and section 
108(g)." 
(6XA) Paragraphs (6) and (7) of section 108(d) of the 1986 Code 
are each amended by striking out "subsections (a) and (b)" and 
inserting in lieu thereof "subsections (a), (b), and (g)". 
(B) The subsection heading for section 108(d) of the 1986 Code 
is amended by striking out "SUBSECTIONS (a), AND (b)" and 
inserting in lieu thereof "SUBSECTIONS (a), (b), AND (g)". 
(C) The headings for paragraphs (6) and (7XA) of section 108(d) 
of the 1986 Code are each amended by striking out "SUBSEC-
TIONS (a) AND (b)" and inserting in lieu thereof "SUBSECTIONS 
(a), (b), AND (g)". 
O
t
)
) AMENDMENT RELATED TO SECTION 406 OF THE REFORM ACT.— 
Section 406 of the Reform Act is amended— 
26 use 1202 
(1) by inserting "before October 1, 1987," after "from the note, 
sale", and 
(2) by striking out "to the extent such gain" and all that 
follows down through the period at the end thereof and insert-
ing in lieu thereof "to the extent such gain is properly taken 
into account under the taxpayer's method of accounting during 
1987.". 
(c) AMENDMENT RELATED TO SECTION 413 OF THE REFORM ACT.— 
Subsection (a) of section 1254 of the 1986 Code is amended by adding 
at the end thereof the following new paragraph: 
"(4) ADJUSTMENT FOR AMOUNTS INCLUDED IN GROSS INCOME 
UNDER SECTION 617 (b) (1) (A) .—The amount of the expenditures 
referred to in paragraph (IXAXi) shall be properly adjusted for 
amounts included in gross income under section 617(bXlXA)." 
SEC. 1005. AMENDMENTS RELATED TO TITLE V OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 501 OF THE REFORM ACT.— 
(1) Clause (ii) of section 469(eXlXA) of the 1986 Code (relating 
to certain income not treated as income from passive activity) is 
amended by inserting "not derived in the ordinary course of a 
trade or business which is" after "gain or loss". 
(2XA) Subparagraph (A) of section 469(gXl) of the 1986 Code 
(relating to disposition of interests in passive activities in fully 
taxable transactions) is amended to read as follows: 
"(A) IN GENERAL.—If all gain or loss realized on such 
disposition is recognized, the excess of— 
"(i) the sum of— 
"(I) any loss from such activity for such taxable 
year (determined after application of subsection 
03)), plus 
"(II) any loss realized on such disposition, over 
"(ii) net income or gain for such taxable year from all 
-• 
passive activities (determined without regard to losses 
described in clause (i)), 
shall be treated as a loss which is not from a passive 
activity." 
(B) Subparagraph (C) of section 469(gXl) of the 1986 Code is 
amended to read as follows: 
"(C) INCOME FROM PRIOR YEARS.—To the extent provided 
in regulations, income or gain from the activity for preced-
ing taxable years shall be taken into account under 
19-194 O—91—Part 4 
14 : QL 3 
102 STAT. 3388 
PUBLIC LAW 100-647—NOV. 10, 1988 
subparagraph (A)(ii) for the taxable year to the extent 
necessary to prevent the avoidance of this section." 
(3) Subparagraph (A) of section 469(g)(2) of the 1986 Code is 
amended— 
(A) by striking out "paragraph (1)" and inserting in lieu 
thereof "paragraph (1)(A)"; and 
(B) by striking out "such losses" the first place it appears 
and inserting in lieu thereof "losses described in paragraph 
(1)(A)". 
(4) Section 469(g)(3) of the 1986 Code is amended— 
(A) by striking out "realized (or to be realized)" and 
inserting in lieu thereof "(realized or to be realized", and 
(B) by inserting a closing parenthesis after "completed". 
(5) Paragraph (4) of section 469(h) of the 1986 Code (relating to 
certain closely held C corporations and personal service corpora-
tions) is amended by inserting "only" before "if. 
(6) Paragraph (1) of section 469(i) of the 1986 Code (relating to 
$25,000 offset for rental real estate activities) is amended by 
striking out "in the taxable year in which such portion of such 
loss or credit arose" and inserting in lieu thereof "in such 
taxable year (and if any portion of such loss or credit arose in 
another taxable year, in such other taxable year)". 
(7) Subparagraph (C) of section 469(i)(6) of the 1986 Code 
(relating to interest as a limited partner) is amended by striking 
out "No" and inserting in lieu thereof "Except as provided in 
regulations, no". 
(8) Subparagraph (A) of section 469(j)(6) of the 1986 Code 
(relating to special rule for gifts) is amended by inserting "with 
respect to which a deduction has not been allowed by reason of 
subsection (a)" before ", and". 
(9) Section 469(j) of the 1986 Code (relating to definitions and 
special rules) is amended by adding at the end thereof the 
following new paragraphs: 
"(10) COORDINATION WITH SECTION 280A.—If a passive activity 
involves the use of a dwelling unit to which section 280A(cX5) 
applies for any taxable year, any income, deduction, gain, or 
loss allocable to such use shall not be taken into account for 
purposes of this section for such taxable year. 
"(11) AGGREGATION 
OF MEMBERS OF AFFIUATED GROUPS.— 
Except as provided in regulations, all members of an affiliated 
group which files a consolidated return shall be treated as 1 
corporation." 
26 use 469 note. 
(10) Section 501(c) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(4) INCOME FROM SALES OF PASSIVE ACTIVITIES IN TAXABLE 
YEARS BEGINNING BEFORE JANUARY 1, 1987.—If^ 
"(A) gain is recognized in a taxable year beginning after 
December 31,1986, from a sale or exchange of an interest in 
an activity in a taxable year beginning before January 1, 
1987, and 
"(B) such gain would have been treated as gain from a 
passive activity had section 469 of the Internal Revenue 
Code of 1986 (as added by this section) been in effect for the 
taxable year in which the sale or exchange occurred and for 
all succeeding taxable years, 
then such gain shall be treated as gain from a passive activity 
for purposes of such section." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3389 
(11) Subsection (j) of section 469 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(12) SPECIAL RULE FOR DISTRIBUTIONS BY ESTATES OR TRUSTS.— 
If any interest in a passive activity is distributed by an estate or 
trust— 
"(A) the basis of such interest immediately before such 
distribution shall be increased by the amount of any passive 
activity losses allocable to such interest, and 
"(B) such losses shall not be allowable as a deduction for 
any taxable year." 
(12) Subsection (m) of section 469 of the 1986 Code, as redesig-
nated by section 10211 of the Revenue Act of 1987, is amended 
by striking all that precedes subparagraph (B) of paragraph (3) 
thereof and inserting in lieu thereof the following: 
"(m) PHASE-IN OF DISALLOWANCE OF LOSSES AND CREDITS FOR 
INTEREST HELD BEFORE DATE OF ENACTMENT.— 
"(1) IN GENERAL.—In the case of any passive activity loss or 
passive activity credit for any taxable year beginning in cal-
endar years 1987 through 1990, subsection (a) shall not apply to 
the applicable percentage of that portion of such loss (or such 
credit) which is attributable to pre-enactment interests. 
"(2) APPUCABLE PERCENTAGE.—For purposes of this subsec-
tion, the applicable percentage shall be determined in accord-
ance with the following table: 
"In the case of taxable 
The applicable 
years beginning in: 
percentage is: 
1987 
65 
1988 
40 
1989 
20 
1990 
10. 
"(3) PORTION OF LOSS OR CREDIT ATTRIBUTABLE TO PRE-ENACT-
MENT INTERESTS.—For purposes of this subsection— 
"(A) IN GENERAL.—The portion of the passive activity loss 
(or passive activity credit) for any taxable year which is 
attributable to preenactment interests is the lesser of— 
,; ,^ 
"(i) the amount of the passive activity loss (or passive 
activity credit) which is disallowed for the tgixable year 
under subsection (a) (without regard to this subsection), 
or 
"(ii) the amount of the passive activity loss (or p£is-
sive activity credit) which would be disallowed for the 
taxable year (without regard to this subsection and 
without regard to any amount allocable to an activity 
for the taxable year under subsection (b)) taking into 
account only pre-enactment interests." 
(b) AMENDMENTS RELATED TO SECTION 502 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 502(dXl) of the Reform Act 26 use 469 note, 
(defining qualified investor) is amended to read as follows: 
"(A) if— 
"(i) in the case of a project placed in service on or 
before August 16, 1986, such person held an interest in 
such project on August 16, 1986, and such person made 
his initial investment after December 31,1983, or 
"(ii) in the case of a project placed in service after 
August 16, 1986, such person made his initial invest-
ment after December 31, 1983, and such person held an 
interest in such project on December 31, 1986, and". 
102 STAT. 3390 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 469 note. 
(2) Subsection (d) of section 502 of the Reform Act (defining 
qualified investor) is amended by adding after paragraph (2) the 
following new paragraph: 
"(3) SPECIAL RULE FOR CERTAIN PARTNERSHIPS.—In the case of 
any property which is held by a partnership— 
"(A) which placed such property in service on or after 
December 31, 1985, and before August 17, 1986, and 
continuously held such property through the close of the 
taxable year for which the determination is being made, 
and 
"(B) which was not treated as a new partnership or as 
terminated at any lime on or after the date on which such 
property was placed in service and through the close of the 
taxable year for which the determination is being made, 
P
aragraph (IXAXi) shall be applied by substituting 'Decem-
er 31, 1988' for 'August 16, 1986' the 2nd place it appears." 
(3) 'The subsection (d) of section 502 of the Reform Act which 
relates to special rules is redesignated as subsection (e). 
(c) AMENDMENTS RELATED TO SECTION 511 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 163(dX3) of the 1986 Code 
(defining investment interest) is amended by striking out "in-
curred or continued to purchase or carry" and inserting in lieu 
thereof "properly allocable to". 
(2) Subparagraph (B) of section 163(dX4) of the 1986 Code is 
amended to read as follows: 
"(B) INVESTMENT INCOME.—The term 'investment income' 
means the sum of— 
"(i) gross income (other than gain taken into account 
under clause (ii)) from property held for investment, 
and 
"(ii) any net gain attributable to the disposition of 
property held for investment." 
(3) Subparagraph (A) of section 163(dX6) of the 1986 Code is 
amended to read as follows: 
"(A) IN GENERAL.—The amount of interest paid or ac-
crued during any such taxable year which is disallowed 
under this subsection shall not exceed the sum of— 
"(i) the amount which would be disallowed under this 
subsection if— 
"(I) paragraph (1) were applied by substituting 
'the sum of the ceiling amount and the net invest-
ment income' for 'the net investment income', and 
"(II) paragraphs (4XE) and (5XAXii) did not apply, 
and 
"(ii) the applicable percentage of the excess of^ 
"(I) the amount which (without regard to this 
paragraph) is not allowable as a deduction under 
this subsection for the taxable year, over 
"(II) the amount described in clause (i). 
The preceding sentence shall not apply to any interest 
treated as paid or accrued during the taxable year under 
paragraph (2)." 
(4) Subparagraph (A) of section 163(hX2) of the 1986 Code is 
amended by striking out "incurred or continued in connection 
with the conduct of' and inserting in lieu thereof "properly 
allocable to". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3391 
(5) Subparagraph (C) of section 163(hX3) of the 1986 Code 
(defining qualified residence interest) is amended to read as 
follows: 
"(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS IN-
CURRED ON O
R BEFORE AUGUST 16, 1986.— 
"(i) IN GENERAL.—The amount under subparagraph 
(B)(ii)(I) at any time after August 16, 1986, shall not be 
less than the outstanding principal amount (as of such 
time) of indebtedness— 
"(I) which was incurred on or before August 16, 
1986, and which was secured by the qualified resi-
dence on August 16,1986, or 
"(II) which is secured by the qualified residence 
and was incurred after August 16, 1986, to re-
finance indebtedness described in subclause (I) (or 
refinanced indebtedness meeting the requirements 
of this subclause) to the extent (immediately after 
the refinancing) the principal amount of the 
indebtedness resulting from the refinancing does 
not exceed the principal amount of the refinanced 
indebtedness (immediately before the refinancing). 
"(ii) 
LIMITATION ON PERIOD 
OF REFINANCING.— 
Subclause (II) of clause (i) shall not apply to any indebt-
edness after— 
"(I) the expiration of the term of the indebted-
ness described in clause (iXD, or 
"(II) if the principal of the indebtedness de-
scribed in clause (iXD is not amortized over its 
term, the expiration of the term of the 1st refinanc-
ing of such indebtedness (or if earlier, the date 
which is 30 years after the date of such refinanc-
ing)." 
(6XA) The heading for section 163(hX5) of the 1986 Code is 
amended to read as follows: 
"(5) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 
(B) Paragraph (5) of section 163(h) of the 1986 Code is 
amended— 
(i) by striking out "For purposes of this subsection—" in 
subparagraph (A), and 
(ii) by striking out "For purposes of this paragraph, any" 
in subparagraph (B) and inserting in lieu thereof "Any". 
(7) Clause (iii) of section 163(hX5XA) of the 1986 Code is 
amended by striking out "USED OR" in the heading thereof and 
by striking out "or use". 
(8) Section 163(hX5) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraphs: 
"(C) UNENFORCEABLE SECURITY INTERESTS.—Indebtedness 
shall not fail to be treated as secured by any property solely 
because, under any applicable State or local homestead or 
other debtor protection law in effect on August 16,1986, the 
security interest is ineffective or the enforceability of the 
security interest is restricted. 
"(D) SPECIAL RULES FOR ESTATES AND TRUSTS.—For pur-
poses of determining whether any interest paid or accrued 
by an estate or trust is qualified residence interest, any 
residence held by such estate or trust shall be treated £is a 
102 STAT. 3392 
PUBLIC LAW 100-647—NOV. 10, 1988 
qualified residence of such estate or trust if such estate or 
trust establishes that such residence is a qualified residence 
of a beneficiary who has a present interest in such estate or 
trust or an interest in the residuary of such estate or trust." 
(9) Paragraph (6) of section 163(h) of the 1986 Code is amended 
by striking out "subsection" the 3rd place it appears and insert-
ing in lieu thereof "paragraph". 
(10) Paragraph (2)(A) of section 511(d) of the Reform Act is 
amended to read as follows: 
"(2XA) Sections 467(cX5) and 1255(b)(2) are each amended by 
striking out •163(d),'." 
26 u s e 469 note. 
(11) If— 
(A) any amount was disallowed as a deduction under 
section 163(d) of the Internal Revenue Code of 1954 (as in 
effect on the day before the date of the enactment of the 
Reform Act), 
(B) such amount would (but for this paragraph) be treated 
as investment interest paid or accrued by the taxpayer in 
the taxpayer's first taxable year beginning after Decem-
ber 31, 1986, and 
(C) the taxpayer makes an election under this paragraph 
at such time and in such manner £is the Secretary of the 
Treasury or his delegate shall prescribe, 
to the extent such amount is attributable to an activity subject 
to the limitations of section 469 of the 1986 Code, such amount 
shall not be treated as investment interest but shall be treated 
as a deduction allocable to such activity for such first taxable 
year. Subsection (m) of section 469 of the 1986 Code and section 
501(c)(2) of the Reform Act shall not apply to any amount so 
(12) Subparagraph (E) of section 163(h)(2) of the 1986 Code is 
amended by inserting before the period "or under section 6166A 
(as in effect before its repeal by the Economic Recovery Tax Act 
of 1981)". 
26 use 163 note. 
(13) For purposes of applying the amendments made by this 
subsection and the amendments made by section 10102 of the 
Revenue Act of 1987, the provisions of this subsection shall be 
treated as having been enacted immediately before the enact-
ment of the Revenue Act of 1987. 
26 use 163 note. 
(14)(A) For purposes of applying section 163(h) of the 1986 
Code to any taxable year beginning during 1987, if, incident to a 
divorce or legal separation— 
(i) an individual acquires the interest of a spouse or 
former spouse in a qualified residence in a transfer to 
which section 1041 of the 1986 Code applies, and 
(ii) such individual incurs indebtedness which is secured 
by such qualified residence, 
the amount determined under paragraph (3)(BXiiXI) of section 
163(h) of the 1986 Code (as in effect before the amendments 
made by the Revenue Act of 1987) with respect to such qualified 
residence shall be increeised by the amount determined under 
subparagraph (B). 
(B) The amount determined under this subparagraph shall be 
equal to the excess (if any) of— 
(i) the lesser of the amount of the indebtedness described 
in subparagraph (A)(ii), or the fair market value of the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3393 
spouse's or former spouse's interest in the qualified resi-
dence as of the time of the transfer, over 
(ii) the basis of the spouse or former spouse in such 
interest in such residence (adjusted only by the cost of any 
improvements to such residence). 
(15) Clause (i) of section 7872(dXlXE) of the 1986 Code is 
amended by striking out "section 163(d)(3)" and inserting in lieu 
thereof "section 163(dX4)". 
SEC. 1006. AMENDMENTS RELATED TO TITLE VI OF THE REFORM ACT. 
(a) AMENDMENT RELATED TO SECTION 601 OF THE REFORM ACT.— 
Section 15 of the 1986 Code is amended by adding at the end thereof 
the following new subsection: 
"(e) REFERENCES TO HIGHEST RATE.—If the change referred to in 
subsection (a) involves a change in the highest rate of tax imposed 
by section 1 or llOt)), any reference in this chapter to such highest 
rate (other than in a provision imposing a tax by reference to such 
rate) shall be treated as a reference to the weighted average of the 
highest rates before and after the change determined on the basis of 
the respective portions of the taxable year before the date of the 
change and on or after the date of the change." 
(b) AMENDMENTS RELATED TO SECTIONS 611 AND 612 OF THE 
26 use 245 note. 
REFORM ACT.— 
(1) In the case of dividends received or accrued during 1987— 
(A) subparagraph (B) of section 245(cXl) of the 1986 Code 
shall be applied by substituting "80 percent" for the 
percentage specified therein, and 
(B) subparagraph (B) of section 861(aX2) of the 1986 Code 
shall be applied by substituting "^""/soths" for the fraction 
(2) Paragraph (3) of section 8540)) of the 1986 Code is amended 
to read as follows: 
"(3) AGGREGATE DIVIDENDS.—For purposes of this subsection— 
"(A) IN GENERAL.—In computing the amount of aggregate 
dividends received, there shall only be taken into account 
dividends received from domestic corporations. 
"(B) DIVIDENDS.—For purposes of subparagraph (A), the 
term 'dividend' shall not include any distribution from— 
"(i) a corporation which, for the taxable year of the 
corporation in which the distribution is made, or for 
the next preceding taxable year of the corporation, is a 
corporation exempt from tax under section 501 (relat-
ing to certain charitable, etc., organizations) or section 
521 (relating to farmers' cooperative associations), or 
"(ii) a real estate investment trust which, for the 
taxable year of the trust in which the dividend is paid, 
qualifies under part II of subchapter M (section 856 and 
following). 
"(C) LIMITATIONS ON DIVIDENDS FROM REGULATED INVEST-
MENT COMPANIES.—In determining the amount of any divi-
dend for purposes of this paragraph, a dividend received 
from a regulated investment company shall be subject to 
the limitations prescribed in this section." 
(c) AMENDMENTS RELATED TO SECTION 614 OF THE REFORM ACT.— 
(1) Section 1059(d) of the 1986 Code (relating to extension to 
certain property distributions) is amended by striking out para-
102 STAT. 3394 
PUBLIC LAW 100-647—NOV. 10, 1988 
graph (5) and redesignating paragraphs (6) and (7) as para-
graphs (5) and (6), respectively. 
(2) Section 1059(dX5) of the 1986 Code (defining dividend 
announcement date), as redesi^ated by paragraph (1), is 
amended by inserting "amount or before payment". 
(3) Section 1059(dX6) of the 1986 Code (relating to exception 
where stock held during entire existence of corporation), as 
redesignated by paragraph (1), is amended to read as follows: 
"(6) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE 
OF CORPORATION.— 
"(A) IN GENERAL.—Subsection (a) shall not apply to any 
extraordinary dividend with respect to any share of stock of 
a corporation if— 
"(i) such stock was held by the taxpayer during the 
entire period such corporation was in existence, and 
"(ii) except as provided in r^ulations, no earnings 
and profits of such corporation were attributable to 
transfers of property from (or earnings and profits of) a 
corporation which is not a qualified corporation. 
"(B) QUALIFIED CORPORATION.—For purposes of subpara-
graph (A), the term 'qualified corporation' means any cor-
poration (including a predecessor corporation)— 
"(i) with respect to which the taxpayer holds directly 
or indirectly during the entire period of such corpora-
tion's existence at least the same ownership interest as 
the taxpayer holds in the corporation distributing the 
extraordinary dividend, and 
"(ii) which has no earnings and profits— 
"(I) which were earned by, or 
"(II) which are attributable to gain on property 
which accrued during a period the corporation 
holding the property was, 
a corporation not described in clause (i). 
"(C) APPLICATION OF PARAGRAPH.—This paragraph shall 
not apply to any extraordinary dividend to the extent such 
application is inconsistent with the purposes of this 
SGct^ion 
(4) Paragraph (1) of section 1059(e) of the 1986 Code (relating 
to treatment of partial liquidation) is amended by striking out 
"for purposes of this section (without regard to the holding 
period of the stock)" and inserting in lieu thereof: "to which 
peu*agraphs (1) and (2) of subsection (a) apply without regard to 
the period the taxpayer held such stock". 
(5) Paragraph (2) of section 1059(e) of the 1986 Code (relating 
to qualif}ring dividends) is amended to read as follows: 
'X2) QUALIFYING DIVIDENDS.— 
(A) IN GENERAL.—Except as provided in regulations, the 
term 'extraordinary dividend' does not include any qualify-
ing dividend (within the meaning of section 243). 
(B) EXCEPTION.—Subparagraph (A) shall not apply to 
any portion of a dividend which is attributable to earnings 
and profits which— 
"(i) were earned by a corporation during a period it 
was not a member of the affiliated group, or 
"(ii) are attributable to gain on property which ac-
crued during a period the corporation holding the prop-
erty was not a member of the affiliated group." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3395 
(6) Subparagraph (A) of section 1059(eX3) of the 1986 Code 
(relating to qualified preferred dividends) is amended to read as 
follows: 
"(A) IN GENERAL.—In the case of 1 or more qualified 
preferred dividends with respect to any share of stock— 
"(i) this section shall not apply to such dividends if 
the taxpayer holds such stock for more than 5 years, 
and 
"(ii) if the taxpayer disposes of such stock before it 
has been held for more than 5 years, the aggregate 
reduction under subsection (aXD with respect to such 
dividends shall not be greater than the excess (if any) 
of— 
"(I) the qualified preferred dividends paid with 
respect to such stock during the period the tax-
paver held such stock, over 
(II) the qualified preferred dividends which 
would have been paid during such period on the 
basis of the stated rate of return." 
(7) Clause (i) of section 1059(eX3XC) of the 1986 Code is 
amended— 
(A) by striking out "any dividend payable" and inserting 
in lieu thereof "any fixed dividend payable", and 
(B) by adding at the end thereof the following new sen-
tence: 
"Such term shall not include any dividend payable 
with respect to any share of stock if the actual rate of 
return on such stock exceeds 15 percent." 
(8) Subparagraph (B) of section 1059(eX3) of the 1986 Code is 
amended— 
(A) by striking out "subparagraph (A)" and the material 
preceding clause (i) and inserting in lieu thereof "this 
paragraph", and 
(B) by striking out "subparagraph (BXiXII)" in clause (ii) 
and inserting in lieu thereof "clause (iXII)". 
(9) Subsection (f) of section 1059 of the 1986 Code is amended 
by inserting before the period at the end thereof the following: 
"and in the case of stock held by pass-thru entities". 
(d) AMENDMENTS RELATED TO SECTION 621 OF THE REFORM ACT.— 
(IXA) Section 382(eX2) of the 1986 Code is amended— 
(i) by inserting "or other corporate contraction" after 
"redemption" each place it appears, and 
(ii) by inserting "OR OTHER CORPORATE CONTRACTION" after 
"REDEMPTION" in the heading thereof. 
(B) Clause (ii) of section 382(hX3XA) of the 1986 Code is 
amended— 
(i) by inserting "or other corporate contraction" after 
"redemption" each place it appears, and 
(ii) by inserting "OR OTHER CORPORATE CONTRACTIONS" 
after "REDEMPTIONS" in the heading thereof. 
(C) Section 382(m) of the 1986 Code is amended by inserting 
"and" at the end of paragraph (3), by striking out paragraph (4), 
and by redesignating paragraph (5) £is paragraph (4). 
(D) The amendments made by this paragraph shall apply with 
26 USC 382 note. 
respect to ownership changes after June 10,1987. 
(2) Section 382(gX4XC) of the 1986 Code is amended by insert-
ing "rules similar to" before "the rules". 
102 STAT. 3396 
PUBLIC LAW 100-647—NOV. 10, 1988 
(3)(A) Section 382(hXlXC) of the 1986 Code is amended to read 
as follows: 
"(C) SPECIAL RULES FOR CERTAIN SECTION 338 GAINS.—If an 
election under section 338 is made in connection with an 
ownership change and the net unrealized built-in gain is 
zero by reason of paragraph (3XB), then, with respect to 
such change, the section 382 limitation for the post-change 
year in which gain is recognized by reason of such election 
' shall be increased by the lesser of— 
"(i) the recognized built-in gains by reason of such 
election, or 
"(ii) the net unrealized built-in gain (determined 
without regard to paragraph (3XB))." 
(B) Paragraph (5) of section 382(h) of the 1986 Code is 
amended by striking out "recognized built-in gains and losses" 
and inserting in lieu thereof 
recognized built-in gains to the 
extent such gains increased the section 382 limitation for the 
year (or recognized built-in losses to the extent such losses are 
treated as pre-change losses)". 
(4) Section 382(iX3) of the 1986 Code is amended— 
(A) by inserting "the earlier o f before "the 1st day", and 
(B) by inserting "or the taxable year in which the trans-
action being tested occurs" after "1st post-change year". 
(5XA) Section 382(kXl) of the 1986 Code is amended by insert-
ing "or having a net operating loss for the taxable year in which 
the ownership change occurs after "carryover". 
(B) Section 382(kX2) of the 1986 Code is amended to read as 
follows: 
"(2) OLD LOSS CORPORATION.—The term 'old loss corporation' 
means any corporation— 
"(A) with respect to which there is an ownership change, 
and 
"(B) which (before the ownership change) was a loss 
corporation." 
(6) Section 382(1X3XA) of the 1986 Code is amended by striking 
out "and" at the end of clause (iii), and by striking out clause 
(iv) and inserting in lieu thereof the following new clauses: 
"(iv) except to the extent provided in regulations, an 
option to acquire stock shall be treated as exercised if 
such exercise results in an ownership change, and 
"(v) in attributing stock from an entity under para-
graph (2) of section 318(a), there shall not be taken into 
account— 
"(I) in the case of attribution from a corporation, 
stock which is not treated as stock for purposes of 
this section, or 
"(II) in the case of attribution from another 
entity, an interest in such entity similar to stock 
described in subclause (I)." 
(7) Clause (ii) of section 382(1X5XA) of the 1986 Code is 
amended by striking out "immediately after such ownership 
change" and inserting in lieu thereof "after such ownership 
change and as a result of being shareholders or creditors imme-
diately before such change". 
(8) Section 382(1X5XF) of the 1986 Code is amended— 
(A) by inserting " '1504(aX2XB)' for '1504(aX2)' and" after 
"substituting" in clause (iXD, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3397 
(B) by striking out "deposits described in subclause (II)" 
in clause (iiXIII) and inserting in lieu thereof "the amount 
of deposits in the new loss corporation immediately after 
the change". 
(9) Paragraph (6) of section 382(1) of the 1986 Code is amended 
by striking out "shall be the value of the new loss corporation 
immediately after the ownership change" and inserting in lieu 
thereof "shall reflect the increase (if any) in value of the old loss 
corporation resulting from any surrender or cancellation of 
creditors' claims in the transaction". 
(10) Section 382(1) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
"(8) PREDECESSOR AND SUCCESSOR ENTITIES.—Except as pro-
vided in regulations, any entity and any predecessor or succes-
sor entities of such entity shall be treated as 1 entity." 
(11) Paragraph (1) of section 621(f) of the Reform Act is 26 use 382 note. 
amended to read as follows: 
"(1) AMENDMENTS MADE BY SUBSECTIONS (a), (b), and (c).— 
"(A) IN GENERAL.— 
"(i) CHANGES AFTER 1986.—The amendments made by 
subsections (a), (b), and (c) shall apply to any ownership 
change after December 31,1986. 
"(ii) PLANS OF REORGANIZATION ADOPTED BEFORE 
1987.—For purposes of clause (i), any equity structure 
shift pursuant to a plan of reorganization adopted 
before January 1, 1987, shall be treated as occurring 
when such plan was adopted. 
"(B) TERMINATION OF OLD SECTION 382.—Except in a case 
described in any of the following paragraphs— 
"(i) section 382(a) of the Internal Revenue Code of 
1954 (as in effect before the amendment made by 
subsection (a) and the amendments made by section 806 
of the Tax Reform Act of 1976) shall not apply to any 
increase in percentage points occurring after Decem-
ber 31,1988, and 
"(ii) section 382(b) of such Code (as so in effect) shall 
' 
not apply to any reorganization occurring pursuant to 
a plan of reorganization adopted after December 31, 
1986. 
In no event shall sections 382 (a) and (b) of such Code (as so 
in effect) apply to any ownership change described in 
subparagraph (A). 
"(C) COORDINATION WITH SECTION 382 (i).—For purposes of 
section 382(i) of the Internal Revenue CJode of 1986 (as 
added by this section), any equity structure shift pursuant 
to a plan of reorganization adopted before January 1, 1987, 
shall be treated as occurring when such plan was adopted." 
(12XA) Section 621(fK2XC) of the Reform Act is amended by 
inserting "and reincorporated in Delaware in 1987," after 
"1924,". 
(B) Clause (ii) of section 621(fK2XC) of the Reform Act is 
amended to read as follows: 
"(ii) the amendments made by subsections (e) and (f) 
of section 806 of the Tax Reform Act of 1976 shall not 
apply to such debt restructuring, except that the 
amendment treated as part of such subsections under 
section 59(b) of the Tax Reform Act of 1984 (relating 
102 STAT. 3398 
PUBLIC LAW 100-647—NOV. 10, 1988 
to qualified workouts) shall apply to such debt restruc-
turing." 
26 use 382 note. 
(13) Subparagraph (D) of section 621(fX2) of the Reform Act is 
amended— 
(A) by striking out "or reorganization", and 
(B) by adding at the end thereof the following new sen-
tence: "For purposes of the preceding sentence, in applying 
section 382 (as so in effect), if a person has a warrant to 
acquire stock, such stock shall be considered as owned by 
such person." 
(14) Section 621(fK3) of the Reform Act is amended by striking 
out "after December 31,1986". 
(15) Paragraph (4) of section 621(f) of the Reform Act is 
amended by striking out the last sentence and inserting in lieu 
thereof the following: 
"Any regulations prescribed under section 382 of the Internal 
Revenue Code of 1986 (as added by subsection (a)) which have 
the effect of treating a group of shareholders as a separate 
5-percent shareholder by reason of a public offering shall not 
apply to any public offering before Jsuiuary 1, 1989, for the 
benefit of institutions described in section 591 of such Code. 
Unless the corporation otherwise elects, an underwriter of any 
offering of stock in a corporation before September 19, 1986 
(January 1, 1989, in the case of an offering for the benefit of an 
institution described in the preceding sentence), shall not be 
treated as acquiring any stock of such corporation by reason of a 
firm commitment underwriting to the extent the stock is dis-
posed of pursuant to the offering (but in no event later than 60 
days after the initial offering)." 
(16) Subparagraph (A) of section 621(fK7) of the Reform Act is 
amended by striking out "the parent corporation referred to in 
section 203(dX13XB)" and inserting in lieu thereof "a parent 
corporation incorporated in Msu-ch 1980 under the laws of 
Delaware". 
(17XA) Subsection (e) of section 382 of the 1986 Code is 
amended by adding at the end thereof the following new 
paragraph: 
"(3) TREATMENT OF FOREIGN CORPORATIONS.—Except as other-
wise provided in regulations, in determining the value of any 
old loss corporation which is a foreign corporation, there shall 
be taken into account only items treated as connected with the 
conduct of a trade or business in the United States." 
26 use 382 note. 
(B) The amendment made by subparagraph (A) shall apply to 
any ownership change after June 10, 1987. For purposes of the 
preceding sentence, any equity structure shift pursuant to a 
plan of reorganization adopted on or before June 10, 1987, shall 
be treated as occurring when such plan was adopted. 
(18) Subparagraph (C) of section 382(1X5) of the 1986 Code is 
amended to read as follows: 
"(C) REDUCTION OF TAX ATTRIBUTES WHERE DISCHARGE OF 
INDEBTEDNESS.— 
"(i) IN GENERAL.—In any case to which subparagraph 
(A) applies, 50 percent of the amount which, but for the 
application of section 108(eX10XB), would have been 
applied to reduce tax attributes under section 1080t)) 
shall be so applied. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3399 
"(ii) CLARIFICATION WITH SUBPARAGRAPH 
(B).—In 
applying clause (i), there shall not be taken into ac-
count any indebtedness for interest described in 
subparagraph (B)." 
(19) Subparagraph (E) of section 382(1X5) of the 1986 Code is 
amended by striking out so much of such subparagraph as 
precedes clause (i) thereof and inserting in lieu thereof the 
following: 
"(E) ONLY CERTAIN STOCK TAKEN INTO ACCOUNT.—For pur-
poses of subparagraph (AXii), stock transferred to a creditor 
shall be taken into account only to the extent such stock is 
transferred in satisfaction of indebtedness and only if such 
indebtedness—". 
(20) Paragraph (4) of section 382(h) of the 1986 Code is 
amended— 
(A) by inserting before the comma at the end of subpara-
graph (A) the following: "(or to the extent the amount so 
disallowed is attributable to capital losses, under rules 
similar to the rules for the carrying forward of net capital 
losses)", and 
(B) by striking out "TREATED AS A NET OPERATING LOSS" in 
the paragraph heading and inserting in lieu thereof "AL-
LOWED AS A CARRYFORWARD". 
(21) Paragraph (1) of section 382(g) of the 1986 Code is 
amended— 
(A) by striking out "new loss corporation" and inserting 
in lieu thereof "loss corporation", and 
(B) by striking out "old loss corporation" and inserting in 
lieu thereof "loss corporation". 
(22) Paragraph (6) of section 382(h) of the 1986 Code is 
amended to read as follows: 
"(6) TREATMENT OF CERTAIN BUILT-IN ITEMS.— 
"(A) INCOME ITEMS.—Any item of income which is prop-
erly taken into account during the recognition period but 
which is attributable to periods before the change date shall 
be treated as a recognized built-in gain for the taxable year 
in which it is properly taken into account. 
"(B) DEDUCTION ITEMS.—Any amount which is allowable 
as a deduction during the recognition period but which is 
attributable to pericSs before the change date shall be 
treated as a recognized built-in loss for the taxable year for 
which it is allowable as a deduction. 
"(C) ADJUSTMENTS.—The amount of the net unrealized 
built-in gain or loss shall be properly adjusted for amounts 
treated as recognized built-in gains or losses under this 
paragraph." 
(23) Paragraph (9) of section 382(h) of the 1986 Code is 
amended by striking out "is transferred" and inserting in lieu 
thereof "was acquired (or is subsequently transferred)". 
(24) Subsection (m) of section 382 of the 1986 Code (as 
amended by paragraph (1)) is amended by striking out "and" at 
the end of paragraph (3), by striking out the period at the end of 
paragraph (4) and inserting in lieu thereof ", and", and by 
adding at the end thereof the following: 
"(5) providing, in the case of any group of corporations de-
scribed in section 1563(a) (determined by substituting '50 per-
cent' for '80 percent' each place it appears and determined 
102 STAT. 3400 
PUBLIC LAW 100-647—NOV. 10, 1988 
without regard to paragraph (4) thereof), appropriate adjust-
ments to value, built-in gain or loss, and other items so that 
items are not omitted or taken into account more than once." 
(25) Clause (ii) of section 382(1X5XA) of the 1986 Code is 
amended by striking out "stock of controlling corporation" and 
inserting in lieu thereof "stock of a controlling corporation". 
(26) Clause (ii) of section 382(hX3XB) of the 1986 Code is 
amended by striking out "there shall not" and inserting in lieu 
thereof "except as provided in regulations, there shall not". 
(27) Subparagraph (B) of section 382(1X5) of the 1986 Code is 
amended by striking out "the net operating loss deduction 
under section 172(a) for any post-change year shall be deter-
mined" and inserting in lieu thereof "the pre-chcmge losses and 
excess credits (within the meaning of section 383(aX2)) which 
may be carried to a post-change year shall be computed". 
(28XA) Clause (ii) of section 382(hX3XA) of the 1986 Code is 
amended by striking out "determinations under clause (i)" and 
inserting in lieu thereof "to the extent provided in regulations, 
determinations under clause (i)". 
26 use 382 note. 
(B) The amendment made by subparagraph (A) shall apply in 
the case of ownership changes on or sifter June 21,1988. 
(29) Subclause (I) of section 382(lX5XFXiii) of the 1986 Code is 
amended by striking out "section 368(a)(DXii)" and inserting in 
lieu thereof "section 368(aX3XDXii)". 
(e) AMENDMENTS RELATED TO SECTION 631 OF THE REFORM ACT.— 
(1) Clause (ii) of section 336(dX2XB) of the 1986 Code is 
amended to read as follows: 
"(ii) 
CERTAIN ACQUISITIONS TREATED AS PART OF 
PLAN.—For purposes of clause (i), any property de-
scribed in clause (iXD acquired by the liquidated cor-
poration after the date 2 years before the date of the 
adoption of the plan of complete liquidation shall, 
except as provided in regulations, be treated as ac-
quired as part of a plan described in clause (iXII)." 
(2) Paragraph (3) of section 336(d) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "The 
preceding sentence shall apply to any distribution to the 80-
percent distributee only if subsection (a) or (bXD of section 337 
applies to such distribution." 
(3) Subsection (e) of section 336 of the 1986 Code is amended 
by striking out "such corporation mav elect" and inserting in 
lieu thereof "an election may be made . 
(4) Subparagraph (B) of section 337(bX2) of the 1986 Code is 
amended— 
(A) by striking out "or 511(bX2)" in clause (i), 
(B) by striking out "in an unrelated trade or business (as 
defined in section 513)" in clause (i) and inserting in lieu 
thereof "in an activity the income from which is subject to 
tax under section 511(a)", and 
(C) by striking out "an unrelated trade or business of such 
organization" in clause (ii) and inserting in lieu thereof "an 
activity referred to in clause (i)". 
(5XA) Subsection (d) of section 337 of the 1986 Code is 
amended— 
(i) by striking out "made to this subpart by the Tax 
Reform Act of 1986" and inserting in lieu thereof "made by 
subtitle D of title VI of the Tax Reform Act of 1986", and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3401 
(ii) by inserting "or through the use of a regulated invest-
ment company, real estate investment trust, or tax-exempt 
entity" after "subchapter)" in paragraph (1). 
(B) The amendment made by subparagraph (A)(ii) shall not 
26 USC 337 note. 
apply to any reorganization if before June 10,1987— 
(i) the board of directors of a party to the reorganization 
adopted a resolution to solicit shareholder approval for the 
transaction, or 
(ii) the shareholders or the board of directors of a party to 
the reorganization approved the transaction. 
(6) Subsection (b) of section 334 of the 1986 Code is amended to 
read as follows: 
'(b) LIQUIDATION OF SUBSIDIARY.— 
"(1) IN GENERAL.—If property is received by a corporate 
distributee in a distribution in a complete liquidation to which 
section 332(a) applies (or in a transfer described in section 
337(bXl)), the basis of such property in the hands of such 
distributee shall be the same as it would be in the hands of the 
transferor; except that, in any case in which gain or loss is 
recognized by the liquidating corporation with respect to such 
property, the basis of such property in the hands of such 
distributee shall be the fair market value of the property at the 
time of the distribution. 
"(2) CORPORATE DISTRIBUTEE.—For purposes of this subsection, 
the term 'corporate distributee' means only the corporation 
which meets the stock ownership requirements specified in 
section 332(b)." 
(7XA) Subparagraph (B) of section 453(hXl) of the 1986 Code is 
amended by striking out "to one person" and inserting in lieu 
thereof "to 1 person in 1 transaction". 
(B) Subparagraph (E) of section 453(hXl) of the 1986 Code is 
amended by striking out "section 368(cXl)" and inserting in lieu 
thereof "section 368(c)". 
(8XA) Part VII of subchapter C of chapter 1 of the 1986 Code is 
hereby repealed. 
(B) Subsection (b) of section 311 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS OF PARTNERSHIP 
O
R TRUST INTERESTS.—If the property distributed consists of an 
interest in a partnership or trust, the Secretary may by regula-
tions provide that the amount of the gain recognized under 
paragraph (1) shall be computed without regard to any loss 
attributable to property contributed to the partnership or trust 
for the principal purpose of recognizing such loss on the dis-
tribution." 
(C) The table of parts for subchapter C of chapter 1 of the 1986 
Code is amended by striking out the item relating to part VII. 
(9) Paragraph (1) of section 267(a) of the 1986 Code is 
amended— 
(A) by striking out "(other than a loss in case of a 
distribution in corporate liquidation)", and 
(B) by adding at the end thereof the following new sen-
tence: The preceding sentence shall not apply to any loss 
of the distributing corporation (or the distributee) in the 
case of a distribution in complete liquidation." 
(10) Paragraph (1) of section 301(b) of the 1986 Code is 
amended to read as follows: 
102 STAT. 3402 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) GENERAL RULE.—For purposes of this section, the amount 
of any distribution shall be the amount of money received, plus 
the fair market value of the other property received." 
(11) Subsection (d) of section 301 of the 1986 Code is amended 
to read as follows: 
"(d) BASIS.—The basis of property received in a distribution to 
which subsection (a) applies sh^l be the fair market value of such 
property." 
(12) Section 301 of the 1986 Code is amended by striking out 
subsection (e) and by redesignating subsections (f) and (g) as 
subsections (e) and (0, respectively. 
(13XA) Subsection (a) of section 367 of the 1986 Code is 
amended by redesignating paragraph (5) as paragraph (6) and 
by inserting after paragraph (4) the following new paragraph: 
"(5) PARAGRAPHS (2) AND (3) NOT TO APPLY TO CERTAIN SEC-
TION 361 TRANSACTIONS.—Paragraphs (2) and (3) shall not apply 
in the case of an exchange described in section 361. Subject to 
such basis adjustments and such other conditions as shall be 
provided in regulations, the preceding sentence shall not apply 
if the transferor corporation is controlled (within the meaning 
of section 368(c)) by 5 or fewer domestic corporations. For 
purposes of the preceding sentence, all members of the same 
affiliated group (within the meaning of section 1504) shall be 
treated as 1 corporation." 
26 use 367 note. 
(B) The amendment made by subparagraph (A) shall apply to 
exchanges on or after June 21, 1988, except that such amend-
ment shall not apply to any exchange pursuant to any reorga-
nization for which a plan of reorganization was adopted before 
June 21,1988. 
(C) Section 367(eX2) of the 1986 Code (as amended by the 
Reform Act) shall not apply in the case of any corporation 
completely liquidated before June 10, 1987, into a corporation 
organized in a country which has an income tax treaty with the 
United States 
(14XA) Subsection (d) of section 1248 of the 1986 Code is 
amended by striking out paragraph (2). 
(B) Subparagraph (B) of section 1248(fXl) of the 1986 Code is 
amended to read as follows: 
"(B) such domestic corporation distributes stock of such 
foreign corporation in a distribution to which section 311(a), 
337, or 361(cXl) applies,". 
(C) Paragraph (1) of section 1248(f) of the 1986 Code is 
amended by striking out "distribution, sale, or exchange" in the 
last sentence and inserting in lieu thereof "distribution". 
(D) Subsection (f) of section 1248 of the 1986 Code is amended 
by striking out paragraph (3) and by redesignating paragraph 
(4) as paragraph (3). 
(E) The subsection heading for section 1248(f) of the 1986 Code 
is amended by striking out "SECTION 311, 336, OR 337 TRANS-
ACTIONS" and inserting in lieu thereof "NONRECOGNITION 
TRANSACTIONS". 
(15) Paragraph (1) of section 995(c) of the 1986 Code is 
amended by inserting "or" at the end of subparagraph (A), by 
striking out ", or" at the end of subparagraph (B) and inserting 
in lieu thereof a period, and by striking out subparagraph (C) 
and the sentence following subparagraph (C). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3403 
(16) Subsection (d) of section 245 of the 1986 Code is hereby 
(17) Paragraph (14) of section 1223 of the 1986 Code is 
amended to read as follows: 
"(14) CROSS REFERENCE.— 
"For special holding period provision relating to certain partnership 
distributions, see section 735(b)." 
(18) Clause (ii) of section 341(eXl)(C) of the 1986 Code is 
amended— 
(A) by striking out "sale or exchange" the first place it 
appears and inserting in lieu thereof "liquidating sale or 
exchange", and 
(B) by striking out ", gain or loss on which was not 
recognized to such other corporation under section 337(a),". 
(19) Subsection (1) of section 897 of the 1986 Code is hereby 
I*613Gd.l6Q 
(20) Paragraph (7) of section 338(h) of the 1986 Code is hereby 
(21)(A) The heading of subsection (b) of section 336 of the 1986 
Code is amended by striking out "IN EXCESS OF BASIS". 
(B) The heading of paragraph (2) of section 311(b) of the 1986 
Code is amended by striking out "IN EXCESS OF BASIS". 
(22) Section 453B of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(h) CERTAIN LIQUIDATING DISTRIBUTIONS BY S CORPORATIONS.— 
If— 
"(1) an installment obligation is distributed by an S corpora-
tion in a complete liquidation, and 
"(2) receipt of the obligation is not treated as payment for the 
stock by reason of section 453(hXl), 
then, except for purposes of any tax imposed by subchapter S, no 
gain or loss with respect to the distribution of the obligation shall be 
recognized by the distributing corporation. Under regulations pre-
scribed by the Secretary, the character of the gain or loss to the 
shareholder shall be determined in accordance with the principles of 
section 1366(b)." 
(f) AMENDMENTS RELATED TO SECTION 632 OF THE REFORM ACT.— 
(1) Subsection (a) of section 1374 of the 1986 Code is amended 
by striking out "a recognized built-in gain" and inserting in lieu 
thereof "a net recognized built-in gain . 
(2) Subsection (b) of section 1374 of the 1986 Code is amended 
by striking out paragraphs (1) and (2) and inserting in lieu 
thereof the following: 
"(1) IN GENERAL.—The amount of the tax imposed by subsec-
tion (a) shall be computed by applying the highest rate of tax 
specified in section 11(b) to the net recognized built-in gain of 
the S corporation for the taxable year. 
"(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS AL-
LOWED.—Notwithstanding section 1371(bXl), any net operating 
loss carryforward arising in a taxable year for which the cor-
poration was a C corporation shall be allowed for purposes of 
this section as a deduction against the net recognized built-in 
gain of the S corporation for the taxable year. For purposes of 
determining the amount of any such loss which may be carried 
to subsequent taxable years, the amount of the net recognized 
built-in gain shall be treated as taxable income. Rules similar to 
102 STAT. 3404 
PUBLIC LAW 100-647—NOV. 10, 1988 
the rules of the preceding sentences of this paragraph shall 
apply in the case of a capital loss carryforward arising in a 
taxable year for which the corporation was a C corporation." 
(3) Subparagraph (B) of section 1374(bX4) of the 1986 Code is 
amended to read as follows: 
"(B) the amount of the net recognized built-in gain shall 
be treated as the taxable income." 
(4) Paragraph (2) of section 1374(c) of the 1986 Code is amend-
ed by striking out "recognized built-in gains" each place it 
appears and inserting in lieu thereof "net recognized built-in 
gain". 
(5XA) Section 1374 of the 1986 Code is amended by striking 
out all that follows paragraph (1) of subsection (d) and inserting 
in lieu thereof the following: 
"(2) NET RECOGNIZED BUILT-IN GAIN.— 
"(A) IN GENERAL.—The term 'net recognized built-in gain' 
means, with respect to any taxable year in the recognition 
period, the lesser of— 
"(i) the amount which would be the taxable income of 
the S corporation for such taxable year if (except as 
provided in subsection (bX2)) only recognized built-in 
gains and recognized built-in losses were taken into 
account, or 
"(ii) such corporation's taxable income for such tax-
able 
year 
(determined 
as 
provided 
in 
section 
1375(bXlXB)). 
"(B) CARRYOVER.—If, for any taxable year, the amount 
referred to in clause (i) of subparagraph (A) exceeds the 
amount referred to in clause (ii) of subparagraph (A), such 
excess shall be treated as a recognized built-in gain in the 
succeeding taxable year. The preceding sentence shall 
apply only in the case of a corporation treated as an S 
corporation by reason of an election made on or after 
March 31,1988. 
"(3) RECOGNIZED BUILT-IN GAIN.—The term 'recognized built-
in gain' means any gain recognized during the recognition 
period on the disposition of any asset except to the extent that 
the S corporation establishes that— 
"(A) such asset was not held by the S corporation as of 
the beginning of the 1st taxable year for which it w£is an S 
corporation, or 
*(B) such gain exceeds the excess (if any) of— 
"(i) the fair market value of such asset as of the 
beginning of such 1st taxable year, over 
(ii) the adjusted basis of the asset as of such time. 
"(4) RECOGNIZED BUILT-IN LOSSES.—The term 'recognized built-
in loss' means any loss recognized during the recognition period 
on the disposition of any asset to the extent that the S corpora-
tion establishes that— 
"(A) such asset was held by the S corporation as of the 
beginning of the 1st taxable year referred to in paragraph 
(3), and 
"(B) such loss does not exceed the excess of— 
"(i) the adjusted basis of such asset as of the begin-
ning of such 1st taxable year, over 
"(ii) the fair market value of such Eisset as of such 
time. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3405 
"(5) TREATMEENT OP CERTAIN BUILT-IN ITEMS.— 
"(A) INCOME ITEMS.—Any item of income which is prop-
erly taken into account during the recognition period but 
which is attributable to periods before the 1st taxable year 
for which the corporation was an S corporation shall be 
treated as a recognized built-in gain for the taxable year in 
which it is properly taken into account. 
"(B) DEDUCTION ITEMS.—Any amount which is allowable 
as a deduction during the recc^nition period but which is 
attributable to periods before the 1st taxable year referred 
to in subparagraph (A) shall be treated as a recognized 
built-in loss for the taxable year for which it is allowable as 
a deduction. 
"(C) ADJUST»«ENT TO NET UNREAUZED BUILT-IN GAIN.—The 
amount of the net unrealized built-in gain shall be properly 
adjusted for amounts treated as recognized built-in gains or 
losses under this paragraph. 
"(6) TREATMENT OF CERTAIN PROPERTY.—If the adjusted basis 
of any asset is determined (in whole or in part) by reference to 
the adjusted basis of any other asset held by the S corporation 
as of the b^inning of the 1st taxable year referral to in 
paragraph (3)— 
"(A) such asset shall be treated as held by the S corpora-
tion as of the beginning of such 1st taxable year, and 
"(B) any determination under paragraph (3XB) or (4XB) 
with respect to such asset shall be made by reference to the 
fair market value and adjusted basis of such other asset as 
of the beginning of such 1st taxable year. 
"(7) RECOGNITION PERIOD.—The term 'recognition period' 
means the 10-year period beginning with the 1st day of the 1st 
taxable year for which the corporation was an S corporation. 
"(8) TREATMENT OF TRANSFER OF ASSETS FROM C CORPORATION 
TO s CORPORATION.— 
"(A) IN GENERAL.—Except to the extent provided in regu-
lations, if— 
"(i) an S corporation acquires any asset, and 
"(ii) the S corporation's basis in such asset is deter-
mined (in whole or in part) by reference to the basis of 
such asset (or any other property) in the hands of a C 
corporation, 
then a tax is hereby imposed on any net recognized built-in 
gain attributable to any such assets for any taxable year 
b a n n i n g in the rec(^nition period. The amount of such tax 
shall be determined under the rules of this section as 
modified by subparagraph (B). 
"(B) MODIFICATIONS.—For purposes of this paragraph, the 
modifications of this subparagraph are as follows: 
"(i) IN GENERAL.—The preceding paragraphs of this 
subsection shall be applied by taking into account the 
day on which the assets were acquired by the S corpora-
tion in lieu of the b a n n i n g of the 1st taxable year for 
which the corporation was an S corporation. 
"(ii) SUBSECTION (C)(1) NOT TO APPLY.—Subsection 
(cXD shall not apply. 
"(9) REFERENCE TO 1ST TAXABLE YEAR.—Any reference in this 
section to the 1st taxable year for which the corporation was an 
S corporation shall be treated as a reference to the 1st taxable 
102 STAT. 3406 
PUBLIC LAW 100-647—NOV. 10, 1988 
year for which the corporation was an S corporation pursuant to 
its most recent election under section 1362. 
"(e) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the purposes of this section 
including regulations providing for the appropriate treatment of 
siicc6ssoir con30i*&tioiis 
(B) Subparagraph (B) of section 1375(bXl) of the 1986 Code is 
amended to read as follows: 
"(B) LIMITATION.—The amount of the excess net passive 
income for any taxable year shall not exceed the amount of 
the corporation's taxable income for such taxable year as 
determined under section 63(a)— 
"(i) without regard to the deductions allowed by part 
VIII of subchapter B (other than the deduction allowed 
by section 248, relating to organization expenditures), 
and 
"(ii) without regard to the deduction under section 
172." 
(C) Subsection (b) of section 1375 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(4) COORDINATION WITH SECTION 1374.—Notwithstanding 
paragraph (3), the amount of passive investment income shall 
be determined by not taking into account any recognized built-
in gain or loss of the S corporation for any taxable year in the 
recognition period. Terms used in the preceding sentence shall 
have the same respective meanings as when used in section 
1374." 
(D) Subsection (c) of section 1375 of the 1986 Code is amended 
to read as follows: 
"(c) CREDITS NOT ALLOWABLE.—No credit shall be allowed under 
part IV of subchapter A of this chapter (other than section 34) 
against the tax imposed by subsection (a)." 
(E) Paragraph (2) of section 1366(f) of the 1986 Code is 
amended by striking out "as defined in section 1374(dX2)" and 
inserting in lieu thereof "within the meaning of section 1374". 
(6) Paragraph (3) of section 1362(d) of the 1986 Code is 
amended— 
(A) by striking out clause (v) of subparagraph (D), and 
(B) by adding at the end thereof the following new 
subparagraph: 
"(E) SPECIAL RULE FOR OPTIONS AND COMMODITY DEAL-
INGS.— 
"(i) IN GENERAL.—In the case of any options dealer or 
commodities de£der, passive investment income shall be 
determined by not taking into account any gain or loss 
(in the normal course of the taxpayers activity of 
dealing in or trading section 1256 contracts) from any 
section 1256 contract or property related to such a 
contract. 
"(ii) DEFINITIONS.—For purposes of this subpara-
graph— 
"(I) OPTIONS DEALER.—The term 'options dealer' 
has the meaning given such term by section 
1256(gX8). 
"(II) CoMMODmES DEALER.—The term 'commod-
ities dealer' means a person who is actively en-
gaged in trading section 1256 contracts and is 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3407 
registered with a domestic board of trade which is 
designated as a contract market by the Commod-
ities Futures Trading Commission. 
"(Ill) SECTION 1256 CONTRACT.—The term 'section 
1256 contract' has the meaning given to such term 
by section 1256(b)." 
(7) The subsection (d) of section 1363 of the 1986 Code which 
relates to distributions of appreciated property, and subsection 
(e) of section 1363 of the 1986 C!ode, are hereby repealed. 
(g) AMENDMENTS RELATED TO SECTION 633 OF THE REFORM ACT.— 
(1) Subsection (b) of section 633 of the Reform Act is amended 
26 USC 336 note, 
to read as follows: 
"(b) BUILT-IN GAINS OF S CORPORATIONS.— 
"(1) IN GENERAL.—The amendments made by section 632 
(other than subsection (b) thereof) shall apply to taxable years 
beginning after December 31, 1986, but only in cases where the 
return for the taxable year is filed pursuant to an S election 
made after December 31,1986. 
"(2) APPLICATION OF PRIOR LAW.—In the case of any taxable 
year of an S corporation which begins after December 31, 1986, 
and to which the amendments made by section 632 (other than 
subsection (b) thereof) do not apply, paragraph (1) of section 
1374(b) of the Internal Revenue Code of 1954 (as in effect on the 
date before the date of the enactment of this Act) shall be 
applied as if it read as follows: 
" '(1) an amount equal to 34 percent of the amount by which 
the net capital gain of the corporation for the taxable year 
exceeds $25,000, or' ". 
(2) Subparagraph (B) of section 633(cXl) of the Reform Act is 
amended by striking out "50 percent or more" and inserting in 
lieu thereof "more than 50 percent". 
(3) Paragraph (1) of section 633(d) of the Reform Act is 
amended— 
(A) by striking out "this section" and inserting in lieu 
thereof "this subtitle", 
(B) by striking out "would be recognized and inserting in 
lieu thereof "would be recognized by the liquidating cor-
poration", and 
(C) by adding at the end thereof the following new sen-
tence: "Section 333 of the Internal Revenue Code of 1954 (as 
in effect on the day before the date of the enactment of this 
Act) shall continue to apply to any complete liquidation 
described in the preceding sentence.'. 
(4) Subparagraph (C) of section 633(d)(2) of the Reform Act is 
amended to read as follows: 
"(C) any gain on an asset acquired by the qualified cor-
poration i
f
— 
"(i) the basis of such asset in the hands of the quali-
fied corporation is determined (in whole or in part) by 
reference to the basis of such asset in the hands of the 
person from whom acquired, and 
"(ii) a principal purpose for the transfer of such asset 
to the qualified corporation was to secure the benefits 
of this subsection." 
(5)(A) Subparagraph (A) of section 633(d)(5) of the Reform Act 
is amended by striking out "10 or fewer qualified persons" and 
inserting in lieu thereof "a qualified group". 
102 STAT. 3408 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 336 note. 
(B) Paragraph (6) of section 633(d) of the Reform Act is 
amended to read as follows: 
"(6) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) Q U A U F I E D GROUP.— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
the term 'qualified group' means any group of 10 or 
fewer qualified persons who at all times during the 5-
year period ending on the date of the adoption of the 
plan of complete liquidation (or, if shorter, the period 
during which the corporation or any predecessor was in 
existence) owned (or was treated as owning under the 
rules of subparagraph (O) more than 50 percent (by 
value) of the stock in such corporation. 
"(ii) 5-YEAR OWNERSHIP REQUIREMENT NOT TO APPLY IN 
CERTAIN CASES.—In the case of— 
"(I) any complete liquidation pursuant to a plan 
of liquidation adopted before March 31,1988, 
"(II) any distribution not in liquidation made 
before March 31,1988, 
"(III) an election to be an S corporation filed 
before March 31,1988, or 
"(IV) a transaction described in section 338 of the 
Internal Revenue Code of 1986 where the acquisi-
tion date (within the meaning of such section 338) 
is before March 31,1988, 
the term 'qualified group' means any group of 10 or 
fewer qualified persons. 
"(B) QuAUFiED PERSON.—The term 'qualified person' 
means— 
"(i) an individual, 
"(ii) an estate, or 
"(iii) any trust described in clause (ii) or clause (iii) of 
section 1361(cX2XA) of the Internal Revenue (Dode of 
1986. 
"(C) ATTRIBUTION RULES.— 
"(i) IN GENERAL.—Any stock owned by a corporation, 
trust (other than a trust referred to in subparagraph 
(BXiii), or partnership shall be treated as owned propor-
tionately by its shareholders, beneficiaries, or partners, 
and shall not be treated as owned by such corporation, 
trust, or partnership. Stock considered to be owned by a 
person by reason of the application of the preceding 
sentence shall, for purposes of applying such sentence, 
be treated as actually owned by such person. 
"(ii) FAMILY MEMBERS.—Stock owned (or treated as 
owned) by members of the same family (within the 
meaning of section 318(aXl) of the Internal Revenue 
(Dode of 1986) shall be treated as owned by 1 person, and 
shall be treated as owned by such 1 person for any 
period during which it was owned (or treated as owned) 
by any such member. 
"(iii) TREATMENT OF CERTAIN TRUSTS.—Stock owned 
(or treated as owned) by the estate of any decedent or 
by any trust referred to in subparagraph (BXiii) with 
respect to such decedent shall be treated as owned by 1 
person and shall be treated as owned by such 1 person 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3409 
for the period during which it was owned (or treated as 
owned) by such estate or any such trust or by the 
decedent. 
"(D) SPECIAL HOLDING PERIOD RULES.—Any property ac- Real property, 
quired by reason of the death of an individual shall be 
treated as owned at all times during which such property 
was owned (or treated as owned) by the decedent. 
"(E) CONTROLLED GROUP OF CORPORATIONS.—All members 
of the same controlled group (as defined in section 267(f)(1) 
of such Code) shall be treated as 1 corporation for purposes 
of determining whether any of such corporations met the 
requirement of paragraph (5)(B) and for purposes of deter-
mining the applicable percentage with respect to any of 
such corporations. For purposes of the preceding sentence, 
an S corporation shall not be treated as a member of a 
controlled group unless such corporation was a C corpora-
tion for its taxable year which includes August 1,1986, or it 
was not described for such taxable year in paragraph (1) or 
(2) of section 1374(c) of such Code (as in effect on the day 
before the date of the enactment of this Act)." 
(6) Subsection (d) of section 633 of the Reform Act is amended 
26 USC 336 note. 
by adding at the end thereof the following new paragraph: 
"(9) 
APPLICATION TO NONUQUIDATING DISTRIBUTIONS.—The 
provisions of this subsection shall also apply in the case of any 
distribution (not in complete liquidation) made by a qualified 
corporation before January 1, 1989, without regard to whether 
such corporation is completely liquidated." 
(7) Paragraph (8) of the section 633(d) of the Reform Act is 
amended by striking out "becomes an S corporation for a tax-
able year beginning before January 1, 1989' and inserting in 
lieu thereof "makes an election to be an S corporation under 
section 1362 of such Code before January 1, 1989, without 
regard to whether such corporation is completely liquidated". 
(8) Section 633 of the Reform Act is amended by redesignating 
the subsections following the first subsection (d) as subsections 
(e), (f), and (g), respectively. 
(9) Subsection (fK2) of section 633 of the Reform Act (as so 
redesignated) is amended by striking out "May 9, 1929" and 
inserting in lieu thereof "May 9, 1929 (or any direct or indirect 
subsidiary of such corporation)". 
(10) Paragraph (3) of section 633(f) of the Reform Act (as so 
redesignated) is amended by striking out "of such Code)" in the 
last sentence thereof and inserting in lieu thereof "of such 
Code". 
(11) Subclause (I) of section 633(fK4XA)(i) of the Reform Act (as Massachusetts. 
so redesignated) is amended by striking out "binding on the 
selling corporation to sell substantially all its assets" and insert-
ing in lieu thereof "to sell substantially all of the assets of a 
selling corporation organized under the laws of Massachusetts 
on October 20,1976,". 
(12) Subparagraph (A) of section 633(f)(5) of the Reform Act (as 
so redesignated) is amended to read as follows: 
"(A) a voting trust established not later than December 
31, 1987, shall qualify as a trust permitted as a shareholder 
of an S corporation and shall be treated as only 1 share-
holder if the holders of beneficial interests in such voting 
trust are— 
102 STAT. 3410 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) employees or retirees of such corporation, or 
"(ii) in the case of stock or voting trust certificates 
acquired from an employee or retiree of such corpora-
tion, the spouse, child, or estate of such employee or 
retiree or a trust created by such employee or retiree 
which is described in section 1361(cX2) of the Internal 
Revenue Code of 1986 (or treated as described in such 
section by reason of section 1361(d) of such Code), and", 
(h) AMENDMENTS RELATED TO SECTION 641 OF THE REFORM ACT.— 
(1) Paragraph (3) of section 1060(b) of the 1986 Code is 
amended by striking out "the Secretary may find necessary" 
and inserting in lieu thereof "the Secretary deems necessary". 
(2) Section 1060 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(d) TREATMENT OF CERTAIN PARTNERSHIP TRANSACTIONS.—In the 
case of a distribution of partnership property or a transfer of an 
interest in a partnership— 
"(1) the rules of subsection (a) shall apply but only for pur-
poses of determining the value of goodwill or going concern 
value (or similar items) for purposes of applying section 755, and 
"(2) if section 755 applies, such distribution or transfer (as the 
case may be) shall be treated as an applicable asset acquisition 
for purposes of subsection (b)." 
(3XA) Subparagraph (B) of section 6724(dXl) of the 1986 Code 
(defining information return) is amended by striking out "or" at 
the end of clause (ix), by striking out the period at the end of 
clause (x) and inserting in lieu thereof ", or", and by adding at 
the end thereof the following new clause: 
"(xi) section 1060(b) (relating to reporting require-
ments of transferors and transferees in certain asset 
acquisitions)." 
(B) Section 1060 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(e) CROSS REFERENCE.— 
"For provisions relating to penalties for failure to file a return required 
by this section, see section 6721." 
(i) AMENDMENTS RELATED TO SECTION 642 OF THE REFORM ACT,— 
(1) Paragraph (1) of section 453(g) of the 1986 Code is amended 
by striking out subparagraphs (A) and (B) and inserting in lieu 
thereof the following: 
"(A) subsection (a) shall not apply, 
"(B) for purposes of this title— 
"(i) except as provided in clause (ii), all payments to 
be received shall be treated as received in the year of 
the disposition, and 
"(ii) in the case of any payments which are contin-
gent as to the amount but with respect to which the 
fair market value may not be reasonably ascertained, 
the basis shall be recovered ratably, and 
"(C) the purchaser may not increase the basis of any 
property acquired in such sale by any amount before the 
time such amount is includible in the gross income of the 
seller." 
(2XA) Section 453(g) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3411 
"(3) RELATED PERSONS.—For purposes of this subsection, the 
term 'related persons' has the meaning given to such term by 
section 1239(b), except that such term shall include 2 or more 
partnerships having a relationship to each other described in 
section 707(b)(1)(B)." 
(B) Section 453(gXl) of the 1986 CJode is amended by striking 
out "(within the meaning of section 1239(b))". 
(3) The heading of paragraph (2) of section 642(c) of the 
Reform Act is amended by striking out "TRADITIONAL" and 
inserting in lieu thereof "TRANSITIONAL". 
(j) AMENDMENTS RELATED TO SECTION 643 OF THE REFORM ACT.— 
(1)(A) Subsection (e) of section 171 of the 1986 Code is 
amended to read as follows: 
"(e) TREATMENT AS OFFSET TO INTEREST PAYMENTS.—Except as 
provided in regulations, in the case of any taxable bond— 
"(1) the amount of any bond premium shall be allocated 
among the interest payments on the bond under rules similar to 
the rules of subsection (bX3), and 
"(2) in lieu of any deduction under subsection (a), the amount 
of any premium so allocated to any interest payment shall be 
applied against (and operate to reduce) the amount of such 
interest payment. 
For purposes of the preceding sentence, the term 'taxable bond' 
means any bond the interest of which is not excludable from gross 
income." 
(B) Paragraph (5) of section 1016(a) of the 1986 Code is 
amended by striking out "allowable pursuant to section 
171(a)(1)" and inserting in lieu thereof "allowable pursuant to 
section 171(aXl) (or the amount applied to reduce interest pay-
ments under section 171(e)(2))". 
(C) The amendments made by this paragraph shall apply in 
the case of obligations acquired after December 31, 1987; except 
that the taxpayer may elect to have such amendment apply to 
obligations acquired after October 22,1986. 
(2) Paragraph (2) of section 643(b) of the Reform Act is 
amended by striking out "issued after" and inserting in lieu 
thereof "acquired after", 
(k) AMENDMENTS RELATED TO SECTION 646 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 646(b) of the Reform Act is 
amended to read as follows: 
"(2) such entity is exclusively engaged in the leasing of min-
eral property and activities incidental thereto, and". 
(2) Paragraph (3) of section 646(b) of the Reform Act is amend-
ed by inserting "as of October 22,1986," after "publicly traded". 
(3) Subparagraph (A) of section 646(cXl) of the Reform Act is 
amended by inserting "before January 1, 1991" after "entity". 
(4) Paragraph (2) of section 646(c) of the Reform Act is 
amended to read as follows: 
"(2) AGREEMENT.— 
"(A) IN GENERAL.—The agreement described in this para-
graph is a written agreement signed by the board of trust-
ees of the entity which provides that the entity will not 
acquire any additional property other than property de-
scribed in subparagraph (B). 
"(B) PERMISSIBLE ACQUISITIONS.—Property is described in 
this paragraph if it is— 
26 u s e 171 note. 
26 u s e 171 note. 
26 u s e 671 note. 
Minerals and 
mining. 
Real property. 
Minerals 
and mining. 
102 STAT. 3412 
PUBLIC LAW 100-647—NOV. 10, 1988 
Gifts and 
property. 
26 u s e 671 note. 
"(i) surface rights to property the acquisition of 
which— 
"(I) is necessary to mine mineral rights held on 
October 22,1986, and 
"(II) is required by a written binding agreement 
between the entity and an unrelated person en-
tered into on or before October 22,1986, 
"(ii) surface rights to property which are not de-
scribed in clause (i) and which— 
"(I) are acquired in an exchange to which section 
1031 applies, and 
"(II) are necessary to mine mineral rights held 
on October 22,1986, 
"(iii) tangible personal property incidental to the 
leasing of mineral property and activities incidental 
thereto, or 
"(iv) part of any required reserves of the entity." 
(5) Paragraph (1) of section 646(d) of the Reform Act is amend-
ed by striking out subparagraph (B) and inserting in lieu 
thereof: 
"(B) for purposes of section 333 of such Code (as so in 
effect)— 
"(i) any person holding an income interest in such 
entity as of such time shall be treated as a qualified 
electing shareholder, and 
"(ii) the earning and profits, and the value of money 
or stock or securities, of such entity shall be appor-
tioned ratably among persons described in clause (i). 
The amendments made by subtitle D of this title and section 
1804 of this Act sh^l not apply to any liquidation under this 
paragraph." 
(6XA) Paragraph (2) of section 646(d) of the Reform Act is 
amended to read as follows: 
"(2) TERMINATION OF ELECTION.—If an entity ceases to be 
described in subsection (b) or violates any term of the agreement 
described in subsection (cX2), the entity shall, for purposes of 
the Internal Revenue C!ode of 1986, be treated as a corporation 
for the taxable year in which such cessation or violation occurs 
and for all subsequent taxable years." 
(B) Paragraph (3) of section 646(c) of the Reform Act is 
amended to read as follows: 
"(3) BEGINNING OP PERIOD FOR WHICH ELECTION IS IN EFFECT.— 
The period during which an election is in effect under this 
subsection shall begin on the 1st day of the 1st taxable year 
beginning after the date of the enactment of this Act and 
following the taxable year in which the election is made." 
(7XA) Subsection (e) of section 646 of the Reform Act is 
amended to read as follows: 
"(e) SPECIAL RULE FOR PERSONS HOLDING INCOME INTERESTS.—In 
appl3dng subpart E of part I of subchapter J of chapter 1 of the 
Internal Revenue Code of 1986 to any entity to which this section 
applies— 
"(1) a reversionary interest shall not be taken into account 
until it comes into possession, and 
"(2) all items of income, gain, loss, deduction, and credit shall 
be allocated to persons holding income interests for the period 
of the allocation." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3413 
(B) Section 646(dX3) of the Reform Act is amended by striking 
26 USC 671 note, 
out "or by reason of subsection (e)". 
(1) AMENDMENTS RELATED TO SECTION 651 OF THE REFORM ACT.— 
(IXA) Paragraph (6) of section 852(b) of the 1986 Code (as 
added by section 651(bXlXA) of the Reform Act) is redesignated 
as paragraph (7). 
(B) Subsection (b) of section 855 of the 1986 Code is amended 
by striking out "section 852(bX6)" and inserting in lieu thereof 
"section 852(bX7)". 
(2) Paragraph (2) of section 4982(e) of the 1986 Code is 
amended to read as follows: 
"(2) CAPITAL GAIN NET INOOBIE.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'capital gain net income' has the meaning 
given such term by section 1222(9) (determined by treating 
the 1-year period ending on October 31 of any calendar year 
as the company's taxable year). 
"(B) REDUCTION BY NET ORDINARY LOSS FOR CALENDAR 
YEAR.—The amount determined under subparagraph (A) 
shall be reduced (but not below the net capital gain) by the 
amount of the company's net ordinary loss for the calendar 
year. 
"(C) DEFINITIONS.—For purposes of this paragraph— 
"(i) NET CAPITAL GAIN.—The term 'net capital gain* 
has the meaning given such term by section 1222(11) 
(determined by treating the 1-year period ending on 
October 31 of the calendar year as the company's tax-
able year). 
"(ii) NET ORDINARY LOSS.—The net ordinary loss for 
the calendar year is the amount which woidd be the 
net operating loss of the company for the calendar year 
if the amount of such loss were determined in the same 
manner as ordinary income is determined under para-
graph (1)." 
(3) Paragraph (2) of section 852(c) of the 1986 Code is amended 
to read as follows: 
"(2) CIOORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—For 
purposes of applying this chapter to distributions made by a 
regulated investment company with respect to any calendar 
year, the earnings and profits of such company shall be deter-
mined without r^ard to any net capital loss (or net foreign 
currency loss) attributable to transactions after October 31 of 
such year and with such other adjustments as the Secretary 
may by regulations prescribe. The preceding sentence shall 
apply— 
"(A) only to the extent that the amount distributed by the 
company with respect to the calendar year does not exceed 
the required distribution for such calendar year (as deter-
mined under section 4982 by substituting '100 percent' for 
each percentage set forth in section 4982(bXl)), and 
"(B) except as provided in r^ulations, only if an election 
under section 4982(eX4) is not in effect with respect to such 
company." 
(4) Subparagraph (C) of section 852(bX3) of the 1986 Code is 
amended— 
102 STAT. 3414 
PUBLIC LAW 100-647—NOV. 10, 1988 
(A) by striking out "net capital loss" each place it appears 
in the 3rd sentence and inserting in lieu thereof "net 
capital loss or net long-term capital loss", and 
(B) by striking out "regulated investment company tax-
able income" in the last sentence and inserting in lieu 
thereof "the taxable income of the regulated investment 
company". 
(5) Subsection (e) of section 4982 of the 1936 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) 
TREATMENT OF FOREIGN CURRENCY GAINS AND LOSSES 
AFTER O
C
T
O
B
E
R 31 OF CALENDAR YEAR.—Any foreign Currency 
gain or loss which is attributable to a section 988 transaction 
and which is properly taken into account for the portion of the 
calendar year after October 31 shall not be taken into account 
in determining the amount of the ordinary income of the regu-
lated investment compsmy for such calendar year but shall be 
taken into account in determining the ordinary income of the 
investment company for the following calendar year. In the case 
of any company making an election under paragraph (4), the 
preceding sentence shall be applied by substituting the last day 
of the company's taxable year for October 31." 
(6) Section 4982 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(f) 
EXCEPTION FOR CERTAIN REGULATED INVESTMENT COMPA-
NIES.—This section shall not apply to any regulated investment 
company for any calendar year if at all times during such calendar 
year each shareholder in such company was either— 
"(1) a trust described in section 401(a) and exempt from tax 
under section 501(a), or 
"(2) a s^regated asset account of a life insurance company 
held in connection with variable contracts (as defined in section 
817(d)). 
For purposes of the preceding sentence, any shares attributable to 
an investment in the regulated investment company (not exceeding 
$250,000) made in connection with the organization of such company 
shall not be taken into account." 
(7) Subsection (b) of section 852 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(8) SPECIAL RULE FOR TREATMENT OF CERTAIN FOREIGN CUR-
RENCY LOSSES.—To the extent provided in regulations, the tax-
able income of a regulated investment company (other than a 
company to which an election under section 4982(eX4) applies) 
shall be computed without regard to any net foreign currency 
loss attributable to transactions after Ctetober 31 of such year, 
and any such net foreign currency loss shall be treated as 
arising on the 1st day of the following taxable year." 
(8) Subsection (a) of section 852 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"The Secretary may waive the requirements of paragraph (1) for 
any taxable year if the regulated investment company establishes to 
the satisfaction of the Secretary that it was unable to meet such 
requirements by reason of distributions previously made to meet the 
requirements of section 4982." 
(9) Effective with respect to dividends declared in 1988 and 
subsequent calendar years, paragraph (7) of section 852(b) of the 
1986 Code (as redesignated by paragraph (1)) is amended— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3415 
(A) by striking out "in December" and inserting in lieu 
thereof "in October, November, or December", 
(B) by striking out "in such month" and inserting in lieu 
thereof "in such a month", 
(C) by striking out "on such date" in subparagraphs (A) 
and (B) and inserting in lieu thereof "on December 31 of 
such calendar year", and 
(D) by striking out "before February 1" and inserting in 
lieu thereof "during January". 
(10) Paragraph (1) of section 852(e) of the 1986 Code is 
amended by striking out "subsection (a)(3)" and inserting in lieu 
thereof "subsection (aX2)". 
(m) AMENDMENTS RELATED TO SECTION 652 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 851(a) of the 1986 Code is amended 
to read as follows: 
"(1) which, at all times during the taxable year— 
"(A) is registered under the Investment Company Act of 
1940, as amended (15 U.S.C. 80a-l to 80b-2) as a manage-
ment company or unit investment trust, or 
"(B) has in effect an election under such Act to be treated 
as a business development company, or". 
(2) Paragraph (1) of section 851(e) of the 1986 Code is amended 
by striking out "a registered management company or reg-
istered business development company" and inserting in lieu 
thereof "a management company or a business development 
company described in subsection (aXD". 
(n) AMENDMENTS RELATED TO SECTION 653 OF THE REFORM ACT.— 
(1) Subsection (b) of section 851 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"Income derived from a partnership or trust shall be treated as 
described in paragraph (2) only to the extent such income is 
attributable to items of income of the partnership or trust (as 
the case may be) which would be described in paragraph (2) if 
realized by the regulated investment company in the same 
manner as realized by the partnership or trust." 
(2)(A) Paragraph (3) of section 851(b) of the 1986 Code is 
amended to read as follows: 
"(3) less than 30 percent of its gross income is derived from 
the sale or disposition of any of the following which was held for 
less than 3 months: 
"(A) stock or securities (as defined in section 2(aX36) of 
the Investment Company Act of 1940, as amended), 
"(B) options, futures, or forward contracts (other than 
options, futures, or forward contracts on foreign cur-
rencies), or 
"(C) foreign currencies (or options, futures, or forward 
contracts on foreign currencies) but only if such currencies 
(or options, futures, or forward contracts) are not directly 
related to the company's principal business of investing in 
stock or securities (or options and futures with respect to 
stocks or securities), and '. 
(B) Subsection (b) of section 851 of the 1986 Code is amended 
by striking out "which are not ancillary" in the material follow-
ing paragraph (4), and inserting in lieu thereof "which are not 
directly related". 
(C) Subparagraph (C) of section 851(bX3) of the 1986 Code (as 26 USC 851 note. 
amended by subparagraph (A)), and the amendment made by 
102 STAT. 3416 
PUBLIC LAW 100-647—NOV. 10, 1988 
subparagraph (B), shall apply to taxable years beginning after 
the date of the enactment of this Act. 
(4) Clause (i) of section 851(g)(2XA) of the 1986 Code (defining 
designated hedge) is amended by striking out "contractual 
option" and inserting in lieu thereof "contractual obligation" 
(5) Subsection (b) of section 851 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "In the 
case of the tsixable year in which a regulated investment com-
pany is completely liquidated, there shall not be taken into 
account under paragraph (3) any gain from the sale, exchange, 
or distribution of any property after the adoption of the plan of 
complete liquidation." 
(o) AMENDMENTS RELATED TO SECTION 654 OF THE REFORM ACT.— 
Subsection (q) of section 851 of the 1986 Code (as added by section 
654 of the Reform Act)— 
(1) is redesignated as subsection (h), and 
(2) is amended by adding at the end thereof the following new 
paragraph: 
"(3) SPECIAL RULE FOR ABNORMAL REDEMPTIONS.— 
"(A) IN GENERAL.—Any fund treated as a separate cor-
poration under paragraph (1) shall not be disqualified 
under subsection (bX3) for any taxable year by reason of 
sales resulting from abnormal redemptions on any day and 
occurring before the close of the 5th business day after such 
day i
f
— 
"(i) the sum of the percentages determined under 
subparagraph (B) for the abnormal redemptions on 
such day and for abnormal redemptions on prior days 
during such taxable year exceeds 30 percent; and 
"(ii) the regulated investment company of which such 
fund is a part would meet the requirements of subsec-
tion (bX3) for such taxable year if all the funds which 
are part of such company were treated as a single 
company. 
"(B) ABNORMAL REDEMPTIONS.—For purposes of subpara-
graph (A), the term 'abnormal redemptions' means redemp-
tions occurring on any day if the net redemptions on such 
day exceed 1 percent of the fund's net asset value. 
(C) DETERMINATION OF NET ASSET VALUE.—For purposes 
of this par£igraph, net asset value for any day shall be 
determined as of the close of the preceding day. 
"(D) LIMITATION.—For purposes of subparagraph (A), any 
sale or other disposition of stock or securities held less than 
3 months occurring during any day shall be deemed to 
result from abnormal redemptions until the cumulative 
proceeds from such sales or dispositions occurring during 
such day, plus the cumulative net positive cash flow of the 
fund for preceding business days (if any) following the day 
with abnormal redemptions, exceed the amount of net 
redemptions on the day with abnormal redemptions." 
(p) AMENDMENTS RELATED TO SECTION 662 OF THE REFORM ACT.— 
(1) Subclause (I) of section 856(cX6XDXi) of the 1986 Code (as 
added by section 662 of the Reform Act) is amended by striking 
out "debt instrument" and inserting in lieu thereof "debt in-
strument (within the meaning of section 1275(aXl))". 
26 use 856 note. 
(2) Notwithstanding section 669 of the Reform Act, the 
amendment made by section 662(c) of the Reform Act shall 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3417 
apply to taxable years beginning after December 31, 1986, but 
only in the case of obligations acquired after October 22, 1986. 
(3) Subsection (c) of section 856 of the 1986 Code is amended by 
adding at the end thereof the following new paragraph: 
"(8) TREATMENT OF UQUIDATING GAINS.—In the case of the 
t£ixable year in which a real estate investment trust is com-
pletely liquidated, there shall not be taken into account under 
paragraph (4) any gain from the sale, exchange, or distribution 
of any property after the adoption of the plan of complete 
liquidation. 
(4XA) Paragraph (6) of section 856(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(G) 
TREATMENT OF CERTAIN INTEREST RATE AGREE-
MENTS.—Except to the extent provided by regulations. Real property. 
any— 
"(i) payment to a real estate investment trust under 
a bona fide interest rate swap or cap agreement en-
tered into by the real estate investment trust to hedge 
any variable rate indebtedness of such trust incurred or 
to be incurred to acquire or carry real estate assets, 
and 
"(ii) any gain from the sale or other disposition of 
such agreement, 
shall be treated as income qualifying under paragraph (2) 
and such agreement shall be treated as a security for 
purposes of paragraph (4XA)." 
(B) The gunendment made by subparagraph (A) shall apply to 
26 USC 856 note. 
taxable years ending after the date of the enactment of this Act. 
(5) Subclause (I) of section 856(cX6XDXii) of the 1986 Code (as 
added by section 662 of the Reform Act) is amended by striking 
out "stock in" and inserting in lieu thereof "stock (or certifi-
cates of beneficial interests) in", 
(q) AMENDMENTS RELATED TO SECTION 663 OF THE REFORM ACT.— Real property. 
(1) Subparagraph (A) of section 856(dX6) of the 1986 C!ode is 
amended to read as follows: 
"(A) IN GENERAL.—If— 
"(i) a real estate investment trust receives or accrues, 
with respect to real or personal property, amounts from 
a tenant which derives substantially all of its income 
with respect to such property from the subleasing of 
substantially all of such property, and 
"(ii) a portion of the amount such tenant receives or 
accrues, directly or indirectly, from subtenants consists 
of qualified rents, 
then the amounts which the trust receives or accrues from 
the tenant shall not be excluded from the term 'rents from 
real property' by reason of being based on the income or 
profits of such tenant to the extent the amounts so received 
or accrued are attributable to qualified rents received or 
accrued by such tenant." 
(2) Subsection (f) of section 856 of the 1986 Code is amended to 
read as follows: 
"(f) INTEREST.— 
"(1) IN GENERAL.—For purposes of paragraphs (2XB) and (3XB) 
of subsection (c), the term 'interest' does not include any 
amount received or accrued, directly or indirectly, if the deter-
102 STAT. 3418 
PUBLIC LAW 100-647—NOV. 10, 1988 
mination of such amount depends in whole or in part on the 
income or profits of any person except that— 
"(A) any amount so received or accrued shall not be 
excluded from the term 'interest' solely by reason of being 
based on a fixed percentage or percentages of receipts or 
sales, and 
"(B) where a real estate investment trust receives any 
amount which would be excluded from the term 'interest' 
solely because the debtor of the real estate investment trust 
receives or accrues any amount the determination of which 
depends in whole or in psut on the income or profits of any 
person, only a proportionate part (determined pursuant to 
regulations prescribed by the Secretary) of the amount 
received or accrued by the real estate investment trust from 
the debtor will be excluded from the term 'interest'. 
"(2) SPECIAL RULE.—If— 
"(A) a real estate investment trust receives or accrues 
with respect to an obligation secured by a mortgage on real 
property or an interest in real property amounts from a 
debtor which derives substantially all of its gross income 
with respect to such property (not t£iking into account any 
gain on any disposition) from the leasing of substantially all 
of its interests in such property to tenants, and 
"(B) a portion of the amount which such debtor receives 
or accrues, directly or indirectly, from tenants consists of 
qualified rents (as defined in subsection (dX6XB)), 
then the amounts which the trust receives or accrues from such 
debtor shall not be excluded from the term 'interest' by reason 
of being based on the income or profits of such debtor to the 
extent the amounts so received are attributable to qualified 
rents received or accrued by such debtor " 
(r) AMENDMENT RELATED TO SECTION 664 OP THE REFORM ACT.— 
Clause (i) of section 857(eX2XB) of the 1986 Code is amended by 
striking out "as original issue discount on instrimaents" and insert-
ing "with respect to instruments" 
(s) AMENDMENTS RELATED TO SECTION 668 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 4981(e) of the 1986 Code is 
amended to read as follows: 
"(2) CAPITAL GAIN NET INCOME.— 
"(A) IN GENERAL.—The term 'capital gain net income' has 
the meaning given such term by section 1222(9) (determined 
by treating the calendar year as the trust's taxable year). 
"(B) REDUCTION FOR NET ORDINARY LOSS.—The amount 
determined under subparagraph (A) shall be reduced by the 
amount of the trust's net ordinary loss for the taxable year. 
"(C) NET ORDINARY LOSS.—For purposes of this paragraph, 
the net ordinary loss for the calendar year is the amount 
which would be net operafmg loss of the trust for the 
calendar year if the amount of such loss were determined in 
the same manner as ordinary income is determined under 
paragraph (1)." 
(2) Subparagraph (C) of section 857(bX3) of the 1986 Code is 
amended by striking out "real estate investment trust taxable 
income" in the last sentence and inserting in lieu thereof "the 
taxable income of the real estate investment trust". 
(3) Subparagraph (A) of section 4981(cXl) of the 1986 Ckxie is 
amended by striking out "such calendar year" and inserting in 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3419 
lieu thereof "such calendar year (but computed without regard 
to that portion of such deduction which is attributable to the 
amount excluded under section 857(bX2XD))". 
(4) Subsection (a) of section 857 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"The Secretary may waive the requirements of paragraph (1) for 
any taxable year if the real estate investment trust establishes to 
the satisfaction of the Secretary that it was unable to meet such 
requirements by reason of distributions previously made to meet the 
requirements of section 4981." 
(5) Effective with respect to dividends declared in 1988 and 
subsequent calendar years, paragraph (8) of section 857(b) of the 
1986 Code is amended— 
(A) by striking out "in December" and inserting in lieu 
thereof "in October, November, or December", 
(B) by striking out "in such month" and inserting in lieu 
thereof "in such a month", 
(C) by striking out "on such date" in subparsigraphs (A) 
and (B) and inserting in lieu thereof "on December 31 of 
such calendar year", and 
(D) by striking out "before February 1" and inserting in 
lieu thereof "during January". 
(t) AMENDMENTS RELATED TO SECTION 671 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 860ae) of the 1986 Code is 
amended to read as follows: 
"(1) AMOUNTS TREATED AS ORDINARY.—Any amount taken into 
account under subsection (a) by any holder of a residual interest 
in a REMIC shall be treated as ordinary income or ordinary 
loss, as the case may be." 
(2XA) Paragraph (4) of section 860D(a) of the 1986 Code is 
amended— 
(i) by striking out "4th month ending after" and inserting 
in lieu thereof "3rd month beginning after", and 
(ii) by striking out "and each quarter ending thereafter" 
and inserting in lieu thereof "and at all times thereafter". 
(B) The amendment made by subparagraph (AXii) shall take Effective date. 
effect on January 1,1988. 
26USC860D 
(3XA) Clause (i) of section 860F(aX2XA) of the 1986 Code is ''°^^-
amended to read as follows: 
"(i) the substitution of a qualified replacement mort-
gage for a qualified mortgage (or the repurchase in lieu 
of substitution of a defective obligation),". 
(BXi) Paragraph (2) of section 860F(a) of the 1986 Code is 
amended by striking out the last sentence of subparagraph (A), 
(ii) Subsection (a) of section 860F of the 1986 Code is amended 
by adding at the end thereof the following new parsigraph: 
"(5) EXCEPTIONS.—Notwithstanding subparagraphs (A) and 
4 (D) of paragraph (1), the term 'prohibited trsmsaction' shall not 
include any disposition— 
"(A) required to prevent default on a regular interest 
where the threatened default resulted from a default on 1 
or more qualified mortggiges, or 
"(B) to facilitate a clean-up call (as defined in regula-
tions)." 
(C) Subparagraph (D) of section 860F(aX2) of the 1986 Code is 
amended by striking out "described in subsection (b)". 
19-194 O—91—Part 4 
15 : QL 3 
102 STAT. 3420 
PUBLIC LAW 100-647—NOV. 10, 1988 
(4) Subparagraph (A) of section 860F(bXl) of the 1986 Code is 
amended by striking out "the transfer of any property to a 
REMIC" and inserting in lieu thereof "the transfer of any 
property to a REMIC in exchange for regular or residual in-
terests in such REMIC". 
(5XA) Paragraph (1) of section 860G(a) of the 1986 Code is 
amended to read as follows: 
"(1) REGULAR INTEREST.—The term 'regular interest' means 
any interest in a REMIC which is issued on the startup day with 
fixed terms and which is designated as a regular interest i
f
— 
"(A) such interest unconditionally entitles the holder to 
receive a specified principal amount (or other similar 
amount), and 
"(B) interest payments (or other similar amount), if any, 
with respect to such interest at or before maturity— 
"(i) are payable based on a fixed rate (or to the extent 
provided in regulations, at a variable rate), or 
"(ii) consist of a specified portion of the interest 
payments on qualified mortgages and such portion does 
not vary during the period such interest is outstanding. 
The interest shall not fail to meet the requirements of subpara-
graph (A) merely because the timing (but not the amount) of the 
principal payments (or other similar amounts) may be contin-
gent on the extent of prepayments on qualified mortgages and 
the amount of income from permitted investments." 
(B) Paragraph (2) of section 860G(a) of the 1986 Code is 
amended to read £is follows: 
"(2) RESIDUAL INTEREST.—The term 'residual interest' means 
an interest in a REMIC which is issued on the startup day, 
which is not a regular interest, and which is designated as a 
residual interest" 
(C) Paragraph (3) of section 860G(a) of the 1986 Code is 
amended— 
(i) by striking out "on or before the startup day" in 
subparagraph (AXi) and inserting in lieu thereof "on the 
startup day in exchange for regular or residual interests in 
the REMIC", 
(ii) by inserting "if, except as provided in regulations, 
such purchase is pursuant to a fixed-price contract in effect 
on the startup day" before the comma at the end of 
subparagraph (AXii), and 
(iii) by striking out "on or before the startup day" in 
subparagraph (C) and inserting in lieu thereof "on the 
startup day in exchange for regular or residual interests in 
the REMIC". 
(D) Subparagraph (A) of section 860G(aX4) of the 1986 Code is 
amended to read as follows: 
"(A) which would be a qualified mortgage if transferred 
on the startup day in exchange for regular or residual 
interests in the REMIC, and". 
(E) Paragraph (9) of section 860G(a) of the 1986 Code is 
amended to read as follows: 
"(9) STARTUP DAY.—The term 'startup day' means the day on 
which the REMIC issues all of its regular and residual interests. 
To the extent provided in regulations, all interests issued (and 
all transfers to the REMIC) during any period (not exceeding 10 
days) permitted in such regulations shall be treated as occur-
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3421 
ring on the day during such period selected by the HEMIC for 
purposes of this paragraph." 
(F) The amendments made by this paragraph shall not apply 
26 USC 860G 
to any REMIC where the startup day (as defined in section note. 
860G(aX9) of the 1986 Code as in effect on the day before the 
date of the enactment of this Act) is before July 1, 1987. 
(6) Paragraph (3) of section 860G(a) of the 1986 Code is 
amended— 
(A) by striking out "directly or indirectly," in subpara-
graph (A), and 
(B) by adding at the end thereof the following new sen-
tence: 
"For purposes of this subparagraph, any obligation secured by 
stock held by a person as a tenant-stockholder (as defined in 
section 216) in a cooperative housing corporation (as so defined) 
shall be treated as secured by an interest in real property." 
(7) Subparagraph (B) of section 860G(aX7) of the 1986 Code is 
amended by inserting before the period at the end of the 1st 
sentence the following: "or lower than expected returns on cash 
flow investments". 
(8XA) Paragraph (8) of section 860G(a) of the 1986 Code is 
amended— 
(i) by striking out "section 856(e)" in subparagraph (A) 
and inserting in lieu thereof "section 856(e) (without regard 
to paragraph (5) thereof)", and 
(ii) by striking out the last sentence and inserting in lieu 
thereof the following: 
"Solely for purposes of section 860D(a), the determination of 
whether any property is foreclosure property shall be made 
without r^ard to section 856(eX4)." 
(B) Section 860G of the 1986 Code is amended by redes^at-
ing subsection (c) as subsection (d) and by inserting after subsec-
tion (b) the following new subsection: 
"(c) TAX ON INCOME FROM FORECLOSURE PROPERTY,— 
"(1) IN GENERAL.—A tax is hereby imposed for each taxable 
year on the net income from foreclosure property of each 
REMIC. Such tax shall be computed by multiplying the net 
income from foreclosure property by the highest rate of tax 
specified in section 11(b). 
"(2) NET INCOME FROM FORECLOSURE PROPERTY.—For purposes 
of this part, the term 'net income from foreclosure property' 
means the amount which would be the REMIC's net income 
from foreclosure property under section 857(bX4XB) if the 
REMIC were a real estate investment trust." 
(C) Paragraph (1) of section 860C(b) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (C), 
by striking out the period at the end of subparagraph (D) and 
inserting in lieu thereof ", and", and by adding at the end 
thereof the following new subparagraph: 
"(E) the amount of the net income from foreclosure prop-
erty (if any) shall be reduced by the amount of the tax 
imposed by section 860G(c)." 
(9XA) Section 860G of the 1986 Code (as amended by para-
graph (8)) is amended by redesignating subsection (d) as subsec-
tion (e) and by inserting after subsection (c) the following new 
subsection: 
"(d) TAX ON (;k)NTRiBunoNS AFTER STARTUP DATE.— 
102 STAT. 3422 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) IN GENERAL.—Except as provided in paragraph (2), if any 
amount is contributed to a REMIC after the startup day, there 
is hereby imposed a tax for the taxable year of the REMIC in 
^ 
which the contribution is received equal to 100 percent of the 
amount of such contribution. 
"(2) EXCEPTIONS.—Parg^aph (1) shall not apply to any con-
tribution which is made in cash and is describcKl in any of the 
following subparagraphs: 
"(A) Any contribution to facilitate a clean-up call (as 
defined in r^ulations) or a qualified liquidation. 
"(B) Any pa3anent in the nature of a guarantee. 
"(C) Any contribution during the 3-month period begin-
ning on the startup day. 
"(D) Any contribution to a qualified reserve fund by any 
holder of a residual interest in the REMIC. 
"(E) Any other contribution permitted in regulations." 
26USC860G 
(B) The amendment made by subparagraph (A) shall not 
>^ot®. 
apply to any REMIC where the startup day (as defined in 
section 860G<aX9) of the 1986 Code as in effect on the day before 
the date of the enactment of this Act) is before July 1, 1987. 
(10) Subsection (e) of section 860G of the 1986 Code (as redesig-
nated by paragraph (9)) is amended by striking out "and" at the 
end of parsigraph (2), by striking out the period at the end of 
paragraph (3) and inserting in lieu thereof a comma, and by 
adding at the end thereof the following new paragraphs: 
"(4) providing appropriate rules for treatment of transfers of 
qualified replacement mortgages to the REMIC where the 
transferor holds any interest in the REMIC, and 
"(5) providing that a mortgage will be treated as a qualified 
replacement mortgage only if it is part of a bona fide replace-
ment (and not part of a swap of mortgages)." 
(11) Paragraph (6) of section 856(c) of the 1986 CJode is amend-
ed by redesignating the last subparagraph as subparagraph (F) 
and by striking out the subparagraph (D) added by section 
671(bXl) of the Reform Act and inserting in lieu thereof the 
following: 
"(E) A regular or residual interest in a REMIC shall be 
treated as a real estate £isset, and any amount includible in 
gross income with respect to such an interest shall be 
treated as interest on an obligation secured by a mortgage 
on real property; except that, if less than 95 percent of the 
assets of such REMIC are real estate assets (determined as 
if the real estate investment trust held such assets), such 
real estate investment trust shall be treated as holding 
directly (and as receiving directly) its proportionate share of 
the assets and income of the REMIC. For purposes of 
determining whether any interest in a REMIC qualifies 
under the preceding sentence, any interest held by such 
REMIC in another REMIC shall be treated as a real estate 
asset under principles similar to the principles of the 
preceding sentence, except that, if such REMIC's are part of 
a tiered structure, they shall be treated as one REMIC for 
purposes of this subparagraph." 
(12) Clause (xi) of section 7701(a)(19)(C) of the 1986 Code is 
amended by striking out "are loans described" and inserting in 
lieu thereof "are assets described". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3423 
(13) Subparagraph (B) of section 860E(cX2) of the 1986 Code is 
amended by striking out "issue price of residual interest" and 
inserting in lieu thereof "issue price of the residual interest". 
(14) Clause (ii) of section 860F(bXlXD) of the 1986 Code is 
amended by striking out "the real estate mortgage pool" and 
inserting in lieu thereof "the REMIC". 
(15) Subsection (a) of section 860E of the 1986 Code is amended 
by adding at the end thereof the following new paragraphs: 
"(3) SPECIAL RULE FOR AFFIUATED GROUPS.—All members of an 
affiliated group filing a consolidated return shall be treated as 1 
taxpayer for purposes of this subsection, except that paragraph 
(2) shall be applied separately with respect to each corporation 
which is a member of such group and to which section 593 
applies. 
"(4) TREATMENT OF CERTAIN SUBSIDIARIES.— 
"(A) IN GENERAL.—For purposes of this subsection, a 
corporation to which section 593 applies and each qualified 
subsidiary of such corporation shall be treated as a single 
corporation to which section 593 applies. 
"(B) QUAUFIED SUBSIDIARY.—For purposes of this subsec-
tion, the term 'qualified subsidiary' means any corpora-
tion— 
"(i) all the stock of which, and substantially all the 
indebtedness of which, is held directly by the corpora-
tion to which section 593 applies, and 
"(ii) which is organized and operated exclusively in 
connection with the organization and operation of 1 or 
more REMIC's." 
(16XA) Subsection (a) of section 860D of the 1986 Code is 
amended by striking out "and" at the end of paragraph (4), by 
striking out the period at the end of paragraph (5) and inserting 
in lieu thereof ", and", and by adding at the end thereof the 
following new paragraph: 
"(6) with respect to which there are reasonable arrangements 
designed to ensure that— 
"(A) residual interests in such entity are not held by 
disqualified organizations (as defined in section 860EXeX5)), 
and 
"(B) information necessary for the application of section 
860E(e) will be made available by the entity." 
(B) Section 860E of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(e) TAX ON TRANSFERS OF RESIDUAL INTERESTS TO CERTAIN 
, 
ORGANIZATIONS, ETC.— 
"(1) IN GENERAL.—A tax is hereby imposed on any transfer of 
"'^ a residual interest in a REMIC to a disqualified organization. 
"(2) AMOUNT OF TAX.—The amount of the tax imposed by 
paragraph (1) on any transfer of a residual interest shall be 
equal to the product of— 
"(A) the amount (determined under regulations) equal to 
the present value of the total anticipated excess inclusions 
with respect to such interest for periods after such transfer, 
multiplied by 
"(B) the highest rate of tax specified in section ll(bXl). 
"(3) LIABIUTY.—The tax imposed by paragraph (1) on any 
transfer shall be paid by the transferor; except that, where such 
102 STAT. 3424 
PUBLIC LAW 100-647—NOV. 10, 1988 
transfer is through an agent for a disqualified organization, 
such tax shall be paid by such agent. 
"(4) TRANSFEREE FURNISHES AFFIDAVIT.—The person (other-
wise liable for any tax imposed by paragraph (1)) shall be 
relieved of liability for the tax imposed by paragraph (1) with 
respect to any transfer if— 
"(A) the transferee furnishes to such person an affidavit 
that the transferee is not a disqualified organization, and 
"(B) as of the time of the transfer, such person does not 
have actual knowledge that such affidavit is false. 
"(5) DiSQUAUFiED ORGANIZATION.—For purposes of this sec-
tion, the term 'disqualified organization' means— 
"(A) the United States, any State or political subdivision 
thereof, 
any 
foreign 
government, 
any 
international 
organization, or any agency or instrumentality of any of the 
foregoing, 
"(B) any organization (other than a cooperative described 
in section 521) which is exempt from tax imposed by this 
chapter unless such organization is subject to the tax im-
posed by section 511, and 
"(C) any organization described in section 1381(aX2XC). 
For purposes of subparagraph (A), the rules of section 
168(h)(2XD) (relating to treatment of certain taxable instrumen-
talities) shall apply; except that, in the case of the Federal 
Home Loan Mortgage Corporation, clause (ii) of such section 
shall not apply. 
"(6) TREATMENT OF PASS-THRU ENTITIES.— 
"(A) IMPOSITION OF TAX.—If, at any time during any 
taxable year of a pass-thru entity, a disqualified organiza-
tion is the record holder of an interest in such entity, there 
is hereby imposed on such entity for such taxable year a tax 
equal to the product of— 
"(i) the amount of excess inclusions for such taxable 
year allocable to the interest held by such disqualified 
organization, multiplied by 
(ii) the highest rate of tax specified in section 
ll(bXl). 
"(B) PASS-THRU ENTITY.—For purposes of this paragraph, 
the term 'pass-thru entity' means— 
"(i) any regulated investment company, real estate 
investment trust, or common trust fund, 
"(ii) any partnership, trust, or estate, and 
"(iii) any organization to which part I of subchapter 
T applies. 
Except as provided in regulations, a person holding an 
interest in a pass-thru entity as a nominee for another 
person shall, with respect to such interest, be treated as a 
pass-thru entity. 
"(C) TAX TO BE DEDUCTIBLE.—Any tax imposed by this 
paragraph with respect to any excess inclusion of any pass-
thru entity for any taxable year shall, for purposes of this 
title (other than this subsection), be applied against (and 
operate to reduce) the amount included in gross income 
with respect to the residual interest involved. 
"(D) EXCEPTION WHERE HOLDER FURNISHES AFFIDAVIT.—No 
tax shall be imposed by subparsigraph (A) with respect to 
any interest in a pass-thru entity for any period if— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3425 
"(i) the record holder of such interest furnishes to 
such pass-thru entity an affidavit that such record 
holder is not a disqualified organization, and 
"(ii) during such period, the pass-thru entity does not 
have actual knowledge that such affidavit is false. 
"(7) WAIVER.—The Secretary may waive the tax imposed by 
paragraph (1) on any transfer tf— 
"(A) within a reasonable time after discovery that the 
transfer was subject to tax under paragraph (1), steps are 
taken so that the interest is no longer held by the disquali-
fied organization, and 
"(B) there is paid to the Secretary such amounts as the 
Secretary may require. 
"(8) ADMINISTRATIVE PROVISIONS.—For purposes of subtitle F, 
the taxes imposed by this subsection shall be treated as excise 
taxes with respect to which the deficiency procedures of such 
subtitle apply. 
(C) Paragraph (2) of section 26(b) of the 1986 (Dode is amended 
by striking out "and" at the end of subparagraph (J), by striking 
out the period at the end of subparagraph (K) and inserting in 
lieu thereof ", and", and by adding at the end thereof the 
following new subparagraph: 
"(L) section 860E(e) (relating to taxes with respect to 
certain residual interests)." 
(DXi) The amendments made by subparagraph (A) shall apply 
26 use 860D 
in the case of any REMIC where the start-up day (as defined in ^°^-
section 860G(aX9) of the 1986 Code, as in effect on the day before 
the date of the enactment of this Act) is after March 31, 1988; 
except that such amendments shall not apply in the case of a 
REMIC formed pursuant to a binding written contract in effect 
on such date. 
(ii) The amendments made by subparagraphs (B) and (C) 26USC860E 
(except to the extent they relate to paragraph (6) of section 
note. 
860E(e) of the 1986 (Dode as added by such amendments) shall 
apply to transfers after March 31,1988; except that such amend-
ments shall not apply to any transfer pursuant to a binding 
written contract in effect on such date. 
(iii) Except as provided in clause (iv), the amendments made 
by subparagraphs (B) and (C) (to the extent they relate to 
paragraph (6) of section 860E(e) of the 1986 (Dode as so added) 
shall apply to excess inclusions for periods after March 31, 1988 
but only to the extent such inclusions are— 
(I) allocable to an interest in a pass-thru entity acquired 
after March 31,1988, or 
(II) allocable to an interest in a pass-thru entity acquired 
on or before March 31, 1988, but attributeble to a residual 
interest acquired by the pass-thru entity after March 31, 
1988. 
For purposes of the preceding sentence, any interest in a pass-
thru entity (or residual interest) acquired after March 31, 1988, 
pursuant to a binding written contract in effect on such date 
shall be treated as acquired before such date. 
(iv) In the case of any real estate investment trust, regulated 
investment company, common trust fund, or publicly traded 
partnership, no tax shall be imposed under section 860E(eX6) of 
the 1986 Code (as added by the amendment made by subpara-
102 STAT. 3426 
PUBLIC LAW 100-647—NOV. 10, 1988 
graph (B)) for any taxable year beginning before January 1, 
1989 
(17) Subparagraph (B) of section 860E(cX2) of the 1986 Code is 
amended— 
(A) by inserting "(adjusted for contributions)" after 
"residual interest" the second place it appears, and 
(B) by striking "decreased by" in clause (ii) and inserting 
in lieu thereof "decreased (but not below zero) by". 
(18XA) Subsection (e) of section 860F of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tences: "Such return shall be filed by the REMIC. The deter-
mination of who may sign such return shall be made without 
regard to the first sentence of this subsection." 
26 use 860F 
(B) Unless the REMIC otherwise elects, the amendment made 
note. 
by subparagraph (A) shall not apply to any REMIC where the 
start-up day (as defined in section 860(jr(aX9) of the 1986 C!ode as 
in effect on the day before the date of the enactment of this Act) 
is before the date of the enactment of this Act. 
(19) Subsection (a) of section 860D of the 1986 (Dode is amended 
by adding at the end thereof the following new sentence: 
"In the case of a qualified liquidation (as defined in section 
860F(aX4XA)), paragraph (4) shall not apply during the liquidation 
period (as defined in section 860F(aX4XB).'^ 
(20) Subsection (a) of section 860A of the 1986 Code is 
amended by striking out "this chapter" each place it appears 
and inserting in lieu thereof "this subtitle". 
(21) Paragraph (1) of section 860C(b) of the 1986 Code is 
amended by striking out "and in the same manner" and insert-
ing in lieu thereof "and, except as provided in regulations, in 
the same manner". 
(22) The following sections of the 1986 Code are each amended 
by striking out "real estate mortgage pool" and inserting in lieu 
thereof "REMIC": 
(A) Section 382(lX4XBXii). 
(B) Section 860F(aX2XAXiii). 
(C) Section 860F(aX2XC). 
(D) Section 860F(bXlXCXii). 
(E) Section 860F(bXlXDXii). 
(23) Subsection (d) of section 860E of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"Rules similar to the rules of the preceding sentence shall apply also 
in the case of regulated investment companies, common trust funds, 
and organizations to which part I of subchapter T applies." 
(24) Subparagraph (C) of section 6049(dX7) of the 1986 Code is 
amended by striking out "the issue price" and inserting in lieu 
thereof "the adjusted issue price". 
(25XA) Paragraph (19) of section 7701(a) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
Loans, 
tence: "For purposes of determining whether any interest in a 
REMIC qualifies under clause (xi), any regular interest in an-
other REMIC held by such REMIC shall be treated as a loan 
described in a preceding clause under principles similar to the 
principles of clause (xi); except that, if such REMIC's are part of 
a tiered structure, they shall be treated as 1 REMIC for pur-
poses of clause (xi)." 
(B) Paragraph (4) of section 593(d) of the 1986 Ckxie is amended 
by adding at the end thereof the following new sentence: "For 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3427 
purposes of determining whether any interest in a REMIC 
qualifies under the preceiding sentence, any interest in another 
REMIC held by such REMIC shall be treated as a qualifying 
real property loan under principles similar to the principles of 
the preceding sentence, except that if such REMIC's are part of 
a tiered structure, they shall be treated as 1 REMIC for pur-
poses of this paragraph." 
(26) Section 860E of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(f) TREATMENT OF VARIABLE INSURANCE CONTRACTS.—^Except as 
provided in r^ulations, with respect to any variable contract (as 
defined in section 817), there shall be no adjustment in the reserve 
to the extent of any excess inclusion." 
(27) Subsection (a) of section 860E of the 1986 Ckxle is amended 
by adding at the end thereof the following new paragraph: 
"(5) (COORDINATION WITH SECTION 172.—^Any excess inclusion 
for any taxable year shall not be taken into account— 
"(A) in determining under section 172 the amount of any 
net operating loss for such taxable year, and 
"(B) in determining taxable income for such taxable year 
for purposes of the 2nd sentence of section 172(bX2)." 
(u) AMENDlifENTS RELATED TO SECTION 672 OP THE REFORM ACT.— 
(1) Subparagraph (B) of section 163(eX2) of the 1986 Code is 
amended by striking out "paragraph (6)" and inserting in lieu 
thereof "paragraph (7)". 
(2) Subparagraph (B) of section 1278(aX4) of the 1986 Code is 
amended by striking out "section 1272(aX6)" and inserting in 
lieu thereof "section 1272(aX7)". 
(3) Section 1288(a) of the 1986 Code is amended by striking out 
"paragraph (6)" each place it appears and inserting in lieu 
thereof "paragraph (7)". 
(4) Sections 1271(aX2XAXii) and 1275(aX4XBXiiXD of the 1986 
Code are each amended by striking out "subsection (aX6)" and 
inserting in lieu thereof "subsection (aX7)". 
(v) AMENDMENT RELATED TO SECTION 674 OF THE REFORM ACT.— 
Subparagraph (A) of section 6049(dX7) of the 1986 Ck)de is amended 
by inserting "(and such amounts shall be treated as paid when 
includible in gross income under section 860B(b))" before the period 
at the end thereof. 
(w) AMENDMENTS RELATED TO SECTION 675 OF THE REFORM ACT.— 
(1) Subsection (a) of section 675 of the Reform Act is amended 
to read as follows: 
"(a) GENERAL RULE.—Except as otherwise provided in this section, 
the amendments made by this subtitle shall take effect on Janu-
ary 1,1987." 
(2) Section 675 of the Reform Act is amended by adding at the 
end thereof the following new subsection: 
"(d) STUDY.—The Secretary of the Treasury or his delegate shall 
conduct a study of the operation of the amendments made by this 
part and their competitive impact on savings and loan institutions 
and similar financial institutions. Not later than January 1, 1990, 
the Secretary shall submit a report of such study to the (jommittee 
on Ways and Means of the House of Representatives and the 
Ck>mmittee on Finance of the Senate (t<^ether with such rec-
ommendations as he may deem advisable)." 
26 use 860A 
note. 
Effective date. 
Banks and 
banking. 
26 use 860A 
note. 
Reports. 
102 STAT. 3428 
PUBLIC LAW 100-647—NOV. 10, 1988 
Real property. 
SEC. 1007. AMENDMENTS RELATED TO TITLE VII OF THE REFORM ACT. 
(a) AMENDMENTS TO SECTION 55 OF THE 1986 CODE.— 
(1) Paragraph (1) of section 55(c) of the 1986 Code is amended 
by inserting before the period at the end of the first sentence 
the following: "and the section 936 credit allowable under sec-
tion 27(b)". 
(2) Paragraph (2) of section 55(b) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"If a taxpayer is subject to the regular tax, such taxpayer shall 
be subject to the tax imposed by this section (and, if the regular 
tax is determined by reference to an amount other than taxable 
income, such amount shall be treated as the taxable income of 
such taxpayer for purposes of the preceding sentence)." 
(3) Effective with respect to taxable years ending after the 
date of the enactment of this Act, paragraph (3) of section 55(d) 
of the 1986 Code is amended by adding at the end thereof the 
following new sentence: "In the case of a taxpayer described in 
paragraph (l)(CXi), alternative minimum taxable income shall 
be increased by the lesser of (i) 25 percent of the excess of 
alternative minimum taxable income (determined without 
regard to this sentence) over $155,000, or (ii) $20,000.". 
(b) AMENDMENTS TO SECTION 56 OF THE 1986 CODE.— 
(1) Paragraph (3) of section 56(a) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "For 
purposes of the preceding sentence, in the case of a contract 
described in section 460(eXl), the percentage of the contract 
completed shall be determined under section 4600t))(2) by using 
the simplified procedures for allocation of costs prescribed 
under section 460(b)(4)." 
(2) Subparagraph (E) of section 56(bXl) of the 1986 Code is 
amended to read as follows: 
"(E) STANDARD DEDUCTION AND DEDUCTION FOR PERSONAL 
EXEMPTIONS NOT ALLOWED.—The standard deduction under 
section 63(c), the deduction for personal exemptions under 
section 151, and the deduction under section 6420t)) shall not 
be allowed." 
(3) Subparagraph (C) of section 560^X1) of the 1986 Code is 
amended by striking out "and" at the end of clause (ii), by 
striking out the period at the end of clause (iii) and inserting in 
lieu thereof a comma, and by adding at the end thereof the 
following new clauses: 
"(iv) in 
lieu 
of the 
exception 
under 
section 
163(d)(3XBXi), the term 'investment interest' shall not 
include any qualified housing interest (as defined in 
subsection (e)), and 
"(v) the adjustments of this section and sections 57 
and 58 shall apply in determining net investment 
income under section 163(d)." 
(4) Clause (iii) of section 56(bXlXC) of the 1986 Code is 
amended— 
(A) by striking out "specified activity bond" and inserting 
in lieu thereof "specified private activity bond", and 
(B) by striking out "section 56(aX5XB)" and inserting m 
lieu thereof "section 57(aX5XB)". 
(5) Subparagraph (A) of section 56(dX2) of the 1986 Code is 
amended— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3429 
(A) by striking out "(other than subsection (a)(6) thereof)", 
and 
(B) by adding at the end thereof the following new sen-
tence: 
"An item of tax preference shall be taken into account 
under clause (ii) only to the extent such item increased the 
amount of the net operating loss for the taxable year under 
section 172(c)." 
(6XA) Paragraph (1) of section 56(e) of the 1986 Code is 
amended— 
(i) by striking out "interest which is" and inserting in lieu 
thereof "interest which is qualified residence interest (as 
defined in section 163(h)(3)) and is", and 
(ii) by striking out "section 163(hX3)" in subparagraph (B) 
and inserting in lieu thereof "section 163(h)(4)'. 
(B) Paragraph (3) of section 56(e) of the 1986 Code is amended 
by striking out "interest paid or accrued" and inserting in lieu 
thereof "interest which is qualified residence interest (as de-
fined in section 163(hX3)) and is paid or accrued". 
(7) The last sentence of section 56(fK2XB) of the 1986 Code is 
amended by striking out "any such taxes" and inserting in lieu 
thereof "any such taxes (otherwise eligible for the credit pro-
vided by section 901 without regard to section 9010'))". 
(8) Clause (iii) of section 56(fK3XA) of the 1986 Code is 
amended by striking out "an income statement" and inserting 
in lieu thereof "an income statement for a substantial nontax 
purpose". 
(9) Subparagraph (B) of section 56(fK3) of the 1986 Code is 
amended by striking out "paragraph (3)(A)" and inserting in 
lieu thereof "this subsection '. 
(10) Subparagraph (C) of section 56(fK3) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "If the taxpayer has 2 or more statements described in 
the clause (or subclause) with the lowest number designation, 
the applicable financial statement shall be the one of such 
statements specified in regulations." 
(IIXA) Subparagraph (F) of section 56(fK2) of the 1986 Code is 
amended to read as follows: 
"(F) TREATMENT OF TAXES ON DIVIDENDS FROM 936 COR-
PORATIONS.— 
"(i) IN GENERAL.—For purposes of determining the 
alternative minimum tax foreign tax credit, 50 percent 
of any withholding tax or income tax paid to a posses-
sion of the United States with respect to dividends 
received from a corporation eligible for the credit pro-
vided by section 936 shall be treated as a tax paid to a 
foreign country by the corporation receiving the divi-
dend. 
"(ii) LIMITATION.—If the aggregate amount of the 
dividends referred to in clause (i) for any taxable year 
exceeds the excess referred to in paragraph (1), the 
amount treated as a tax paid to a foreign country under 
clause (i) shall not exceed the amount which would be 
so treated without regard to this clause multiplied by a 
fraction— 
"(I) the numerator of which is the excess referred 
to in paragraph (1), and 
102 STAT. 3430 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(II) the denominator of which is the aggregate 
amount of such dividends, 
"(iii) TREATMENT OF TAXES IMPOSED ON 936 CORPORA-
TION.—For purposes of this subparagraph, taxes paid 
by any corporation eUgible for the credit provided by 
section 936 to a possession of the United States shall be 
treated as a withholding tax paid with respect to any 
dividend paid by such corporation to the extent such 
taxes would be treated as paid by the corporation 
receiving the dividend under rules similar to the rules 
of section 902 (and the amount of any such dividend 
shall be increased by the amount so treated)." 
(B) Qause (iii) of section 56(gX4XC) of the 1986 Ck)de is 
amended by striking out "clause (iiXD" and inserting in lieu 
(12) Clause (iii) of section 56(gX4XB) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall not apply to anv annuity 
contract held under a plan described in section 403(a). 
(13) Paragraph (1) of section 56(c) of the 1986 Code is 
amended— 
(A) by striking out "ADJUSTED EARNINGS AND PROFITS" in 
the paragraph heading and inserting in lieu thereof 
"ADJUSTED CURRENT EARNINGS", and 
(B) by striking out "ADJUSTED EARNINGS AND PROFITS" in 
the heading of subparagraph (B) and inserting in lieu 
thereof "ADJUSTED CURRENT EARNINGS". 
(14XA) Subsection (b) of section 56 of the 1986 (Dode is 
amended by adding at the end thereof the following new para-
graph: 
"(3) TREATMENT OF INCENTIVE STOCK OPTIONS.—Section 421 
shall not apply to the transfer of stock acquired pursuant to the 
exercise of an incentive stock option (as defined in section 
422A). The adjusted basis of any stock so acquired shall be 
determined on the basis of the treatment prescribed by the 
preceding sentence." 
(B) Paragraph (3) of section 57(a) of the 1986 Code is hereby 
repealed. 
26 use 56 note. 
(C) The amendments made by this paragraph shall apply with 
respect to options exercised after December 31,1987. 
(15) Clause (i) of section 56(aXlXA) of the 1986 Code is 
amended by striking out "REAL" in the heading and inserting in 
lieu thereof "PERSONAL". 
(16) The heading of paragraph (1) of section 56(b) of the 1986 
Code is amended by striking out "ITEMIZED". 
(17) Subparagraph (A) of section 56(gX4) of the 1986 Code is 
amended by adding at the end thereof the following new 
clauses: 
"(vi) ELECTION TO HAVE CUMULATIVE LIMITATION.— 
"(I) IN GENERAL.—In the case of any property 
placed in service during a taxable year to which an 
election under this clause applies, in lieu of apply-
ing clause (i), the depreciation deduction for such 
property for any taxable year shall be the lesser of 
the 
accumulated 
168(g) depreciation 
or the 
accumulated book depreciation; reduced by the 
aggregate amount of the depreciation deductions 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3431 
determined under this subclause with respect to 
such property for prior taxable years, 
"(II) ACCUMULATED 166(g) DEPRECIATION.—For 
purposes of this clause, the term'accumulated sec-
tion 168(g) depreciation' means the aggregate 
amount of the depreciation deductions determined 
under the alternative system of section 168(g) with 
respect to the property for all periods before the 
close of the teixable year. 
"(Ill) ACCUMULATED BOOK DEPRECIATION.—For 
purposes of this clause, the term 'accumulated 
book depreciation' means the aggregate amount of 
the depreciation deductions determined under the 
method used for book purposes with respect to the 
property for all periods before the close of the 
taxable year. 
"(IV) ELECTION.—The taxpayer may make an 
election under this clause for any taxable year 
beginning after 1989. Such an election, once made 
with respect to any such taxable year, shall apply 
to all property placed in service during such tax-
able year, and shall be irrevocable. 
"(V) SIMILAR RULES FOR PROPERTY DESCRIBED IN 
CLAUSE (i), (iii), OR (iv).—Rules similar to the 
rules of the preceding provisions of this clause 
shall also apply in the case of property to which 
clause (ii), (iii), or (iv) applies. 
"(vii) SPECIAL RULE FOR CERTAIN PROPERTY.—In the 
case of any property described in paragraph (1), (2), (3), 
or (4) of section 168(f), the amount of depreciation 
allowable for purposes of the regular tax shall be 
treated as the amount allowable under the alternative 
system of section 168(g)." 
(18) Paragraph (4) of section 56(g) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(1) ADJUSTED BASIS.—The adjusted basis of any property 
with respect to which an adjustment under this paragraph 
applies shall be determined by applying the treatment 
prescribed in this paragraph." 
102 STAT. 3432 
PUBLIC LAW 100-647—NOV. 10, 1988 
(19) Subsection (a) of section 56 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(8) SECTION 87 NOT APPLICABLE.—Section 87 (relating to alco-
hol fuel credit) shall not apply." 
(c) AMENDMENTS TO SECTION 57 OF THE 1986 CODE.— 
(1) Clause (iii) of section 57(a)(5)(C) of the 1986 Code is 
amended by inserting "(whether a current or advance refund-
ing)" after "any refunding bond". 
(2) Clause (i) of section 57(a)(5)(C) of the 1986 Code is amended 
to read as follows: 
"(i) IN GENERAL.—For purposes of this part, the term 
'specified private activity bond' means any private 
activity bond (as defined in section 141) which is issued 
after August 7, 1986, and the interest on which is not 
includible in gross income under section 103." 
(3) Subparagraph (A) of section 57(a)(6) of the 1986 Code is 
amended by inserting "or 642(c)" after "section 170". 
(d) AMENDMENTS TO SECTION 58 OF THE 1986 CODE.— 
(1) Paragraph (2) of section 58(a) of the 1986 Code is 
amended— 
(A) by striking out "(as modified by section 461(iX4XA))", 
and 
(B) by striking out "section 469(d), without regard to 
paragraph (1)(B) thereof and inserting in lieu thereof "sec-
tion 469(c)". 
(2) Paragraph (3) of section 58(a) of the 1986 Code is amended 
by striking out "section 469(gXl)(C)" and inserting in lieu 
thereof "section 469(jX2)". 
(3) Subsection (a) of section 58 of the 1986 Code is amended by 
adding at the end thereof the following new paragraph: 
Agriculture and 
"(4) DETERMINATION OF LOSS.—In determining the amount of 
agricultural 
the loss from any tax shelter farm activity, the adjustments of 
T^S°^'^'^^' 
sections 56 and 57 shall apply." 
(4) Subsection (b) of section 58 of the 1986 Code is amended by 
striking out paragraphs (1), (2), and (3), and inserting in lieu 
thereof the following: 
"(1) the adjustments of sections 56 and 57 shall apply, 
"(2) the provisions of section 469(m) (relating to phase-in of 
disallowance) shall not apply, and 
Taxes. 
"(3) in lieu of applying section 469(jX7), the passive activity 
loss of a taxpayer shall be computed without regard to qualified 
housing interest (as defined in section 56(e))." 
(e) AMENDMENTS TO SECTION 59 OF THE 1986 CODE.— 
(1) Paragraph (2) of section 59(e) of the 1986 Code is amended 
by striking out "would have been allowable as a deduction" and 
inserting in lieu thereof "would have been allowable as a 
deduction (determined without regard to section 291)". 
(2) Subsection (h) of section 59 of the 1986 (IJode is amended by 
striking out "taxable year—" and all that follows and inserting 
in lieu thereof "taxable year with the adjustments of sections 
56, 57, and 58." 
(3) Paragraph (1) of section 59(a) of the 1986 Code is amended 
by striking out "and" at the end of subparagraph (B), by strik-
ing out the period at the end of subparagraph (C) and inserting 
in lieu thereof ", and", and by adding at the end thereof the 
following new subparagraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3433 
"(D) the determination of whether any income is high-
taxed income for purposes of section 904(dX2) were made on 
the basis of the applicable rate specified in section 
55(bXlXA) in lieu of the highest rate of tax specified in 
section 1 or 11 (whichever applies)." 
(4) Subsection (i) of section 59 of the 1986 (Dode is amended— 
(A) by striking out "of this subtitle" and inserting in lieu 
thereof "of this subtitle (other than this part)", and 
(B) by striking out "by this title" and inserting in lieu 
thereof "by this subtitle". 
(f) TRANSITIONAL PROVISIONS.— 
(1) In the case of the taxable year of an estate or trust which 
26 USC 55 note. 
begins before January 1, 1987, and ends on or after such date, 
the items of tax preference apportioned to any beneficiary of 
such estate or trust under section 58(c) of the Internal Revenue 
Code of 1954 (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) shall be taken into 
account for purposes of determining the amount of the tax 
imposed by section 55 of the Internal Revenue CJode of 1986 (as 
amended by the Tax Reform Act of 1986) on such beneficiary for 
such beneficiary's taxable year in which such taxable year of 
the estate or trust ends. 
(2) The last sentence of subparagraph (B) of section 701(fX6) of 
the Reform Act is amended to read as follows: "The aggregate 
26 USC 55 note. 
amount of investment tax credits with respect to the unit in 
Mississippi allowed solely by reason of being described in this 
subparagraph shall not exceed $141,000,000." 
(3) Subsection (f) of section 701 of the Reform Act is amended 
by adding at the end thereof the following new paragraph: 
"(7) AGREEMENT VESSEL DEPRECIATION ADJUSTMENT.— 
"(A) For purposes of part VI of subchapter A of chapter 1 
of the Internal Revenue (Dode of 1986, in the case of a 
qualified taxpayer, alternative minimum taxable income 
for the taxable year shall be reduced by an amount equal to 
the agreement vessel depreciation adjustment. 
"(B) For purposes of this paragraph, the agreement vessel 
depreciation adjustment shall be an amount equal to the 
depreciation deduction that would have been allowable for 
such year under section 167 of such Code with respect to 
agreement vessels placed in service before January 1, 1987, 
if the basis of such vessels had not been reduced under 
section 607 of the Merchant Marine Act of 1936, as 
amended, and if depreciation with respect to such vessel 
had been computed using the 25-year straight-line method. 
The aggregate amount by which basis of a qualified tax-
payer is treated as not reduced by reason of this subpara-
graph shall not exceed $100,000,000. 
"(C) For purposes of this paragraph, the term 'qualified 
taxpayer' means a parent corporation incorporated in the 
State of Delaware on December 1, 1972, and engaged in 
water transportation, and includes any other corporation 
which is a member of the affiliated group of which the 
parent corporation is the common parent. No taxpayer 
shall be treated as a qu£dified corporation for any taxable 
year beginning after December 31, 1991." 
(4XA) If any property to which this paragraph applies is 
26 USC 57 note. 
placed in service in a taxable year which begins before Janu-
102 STAT. 3434 
PUBLIC LAW 100-647—NOV. 10, 1988 
ary 1,1987, and ends on or after August 1, 1986, the item of tax 
preference determined under section 57(a) of the Internal Reve-
nue Code of 1954 (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) with respect to such 
property shall be the excess of— 
(i) the amount allowable as a deduction for depreciation 
or amortization for such taxable year, over 
(ii) the amount which would be determined for such 
taxable year under the rules of paragraph (1) or (5) (which-
ever is appropriate) of section 56(a) of the Internal Revenue 
Code of 1954 (as amended by the Tax Reform Act of 1986). 
(B) This paragraph shall apply to any property— 
(i) which is described in paragraph (4) or (12) of section 
57(a) of the Internal Revenue Code of 1954 (as so in effect), 
and 
(ii) to which paragraph (1) or (5) of section 56(a) of the 
Internal Revenue Code of 1986 would apply if the taxable 
year referred to in subparagraph (A) began after Decem-
ber 31, 1986. 
26 use 59 note. 
(5) In determining the amount of the alternative minimum 
tax foreign tax credit under section 59 of the 1986 (Dode, there 
shall not be taken into account any taxes paid or accrued in a 
taxable year beginning after December 31, 1986, which are 
treated under section 904(c) of the 1986 Code as paid or accrued 
in a taxable year beginning on or before December 31, 1986. 
(g) MISCELLANEOUS AMENDMENTS.— 
(1) Subparagraph (K) of section 26(bX2) of the 1986 Code is 
amended by striking out the comma at the end thereof and 
inserting in lieu thereof ").". 
(2XA) So much of section 38(c) as precedes paragraph (4) 
thereof is amended to read as follows: 
"(c) LIMITATION BASED ON AMOUNT OF TAX.— 
"(1) IN GENERAL.—The credit allowed under subsection (a) for 
any taxable year shall not exceed the excess (if any) of the 
taxpayer's net income tax over the greater of— 
"(A) the tentative minimum tax for the taxable year, or 
"(B) 25 percent of so much of the taxpayer's net regular 
tax liability as exceeds $25,000. 
For purposes of the preceding sentence, the term 'net income 
tax' means the sum of the regular tax liability and the tax 
imposed by section 55, reduced by the credits allowable under 
subparts A and B of this part, and the term 'net regular tax 
liability' means the regular tax liability reduced by the sum of 
the credits allowable under subparts A and B of this part. 
"(2) REGULAR INVESTMENT TAX CREDIT MAY OFFSET 25 PERCENT 
OF MINIMUM TAX.— 
"(A) IN GENERAL.—In the case of a C corporation, the 
amount determined under paragraph (IXA) shall be re-
duced by the lesser of— 
"(i) the portion of the regular investment tax credit 
not used against the normal limitation, or 
"(ii) 25 percent of the taxpayer's tentative minimum 
tax for the taxable year. 
"(B) PORTION OF REGULAR INVESTMENT TAX CREDIT NOT 
USED AGAINST NORMAL UMiT.—For purposes of Subpara-
graph (A), the portion of the regular investment tax credit 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3435 
for any taxable year not used against the normal limitation 
is the excess (if any) of— 
"(i) the portion of the credit under subsection (a) 
which is attributable to the application of the regular 
percenteige under section 46, over 
"(ii) the limitation of paragraph (1) (without regard to 
this paragraph) reduced by the portion of the credit 
under subsection (a) which is not so attributable. 
"(C) LIMITATION.—In no event shall this paragraph 
permit the allowance of a credit which would result in a net 
chapter 1 tax less than an amount equal to 10 percent of 
the amount determined under section 55(bXlXA) without 
regard to the alternative tax net operating loss deduction. 
For purposes of the preceding sentence, the term 'net chap-
ter 1 tax' means the sum of the regular tax liability for the 
taxable year and the tax imposed by section 55 for the 
taxable year, reduced by the sum of the credits allowable 
under this part for the taxable year (other than under 
section 34)." 
(B) Subsection (c) of section 38 of the 1986 Code is amended— 
(i) by redesignating paragraph (4) as paragraph (3), and 
(ii) by striking out "subparagraphs (A) and (B) of para-
graph (1)" each place it appears in such paragraph and 
inserting in lieu thereof "subparagraph (B) of paragraph (1). 
(3)(A) Subsection (c) of section 47 of the 1986 Code is amended 
by striking out "or D" and inserting in lieu thereof "D, or G". 
(B) Subparagraph (D) of section 42qX4) of the 1986 Code is 
amended by striking out "or D" and inserting in lieu thereof 
"D, or G". 
(4) The last sentence of clause (ii) of section 53(dXlXB) of the 
1986 Code is amended by striking out "earnings and profits" 
and inserting in lieu thereof "current earnings". 
(5) Sections 173(b), 174(eX2), and 263(c) of the 1986 Code are 
each amended by striking out "section 59(d)" and inserting in 
lieu thereof "section 59(e)". 
(6) Section 511 of the 1986 C!ode is amended by striking out 
subsection (d). 
(7) Sections 616(e) and 617g) of the 1986 Code are each 
amended by striking out "section 58(i)" and inserting in lieu 
thereof "section 59(e)". 
(8) Paragraph (4) of section 701(c) of the Reform Act is 26USC38. 
amended by striking out "section 631(a)" and inserting in lieu 
thereof "section 221(a)". 
(9) Subparagraph (B) of section 1362(eX5) of the 1986 Code is 
amended by striking out "Subsection (dX2)" and inserting in 
lieu thereof "Subsection (d)". 
(10) Subsection (a) of section 6154 of the 1986 Ck)de (as in effect 
before its repeal by the Revenue Act of 1987) is amended by 
striking out "11, 59A" and inserting in lieu thereof "11, 55, 
59 
A". 
(11) Paragraph (1) of section 962(a) of the 1986 Code is 
amended— 
(A) by striking out "section 1" and inserting in lieu 
thereof "sections 1 and 55", and 
(B) by striking out "section 11" and inserting in lieu 
thereof "sections 11 and 55". 
102 STAT. 3436 
PUBLIC LAW 100-647—NOV. 10, 1988 
(12) Subsection (h) of section 32 of the 1986 Code is amended 
by striking out "for taxpayers other than corporations". 
(13XA) Subsection (d) of section 2 of the 1986 Ckxle is amended 
by striking out "the tax imposed by section 1" and inserting in 
lieu thereof "the taxes imported by sections 1 and 55". 
(B) Subsection (d) of section 11 of the 1986 Code is amended by 
striking out "the tax imposed by subsection (a)" and inserting in 
lieu thereof "the taxes imposed by subsection (a) and section 
55". 
SEC. 1008. AMENDMENTS RELATED TO TITLE VIII OP THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 801 OF THE REFORM ACT.— 
dXA) Subparagraph (B) of section 448(dX2) of the 1986 Code 
(defining qualified person£d service corporation) is amended by 
striking out "or indirectly" and inserting in lieu thereof "(or 
indirectly through 1 or more partnerships, S corporations, or 
qusdified personal service corporations not described in para-
graph (2) or (3) of subsection (a))". 
(B) Section 448(d) of the 1986 Oxie is amended by adding at 
the end thereof the following new paragraph: 
Regulations. 
"(8) UsE OF RELATED PARTIES, ETC.—The Secretary shall pre-
scribe such regulations as may be necessary to prevent the use 
of related parties, pass-thru entities, or intermediaries to avoid 
the application of this section." 
(2) Subparagraph (C) of section 448(dX4) of the 1986 Code 
(relating to special rules for application of paragraph (2)) is 
amended by striking out "all such members" and inserting in 
lieu thereof "such group". 
(3) Paragraph (2) of section 461(i) of the 1986 Code is amended 
to read as follows: 
"(2) SPECIAL RULE FOR SPUDDING OF OIL OR GAS WELLS.— 
"(A) IN GENERAL.—In the case of a tax shelter, economic 
performance with respect to amounts paid during the tax-
able year for drilling an oil or gas well shall be treated as 
having occurred within a taxable year if drilling of the well 
commences before the close of the 90th day after the close 
of the taxable year. 
"(B) DEDUCTION LIMITED TO CASH BASIS.— 
"(i) TAX SHELTER PARTNERSHIPS.—In the case of a tax 
shelter which is a partnership, in applying section 
704(d) to a deduction or loss for any taxable year 
attributable to an item which is deductible by reason of 
subparagraph (A), the term 'cash basis' shall be sub-
stituted for the term 'adjusted basis*. 
"(ii) OTHER TAX SHELTERS.—Under regulations pre-
scribed by the Secretary, in the case of a tax shelter 
other than a partnership, the aggregate amount of the 
deductions allowable by reason of subparagraph (A) for 
any taxable year shall be limited in a manner similar 
to the limitation under clause (i). 
"(C) CASH BASIS DEFINED.—For purposes of subparagraph 
(B), a partner's cash basis in a partnership shall be equal to 
the adjusted basis of such partner's interest in the partner-
ship, determined without regard to— 
"(i) any liability of the partnership, and 
"(ii) any amount borrowed by the partner with re-
spect to such partnership which— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3437 
"(I) was arranged by the partnership or by any 
person who participated in the organization, sale, 
or management of the partnership (or any person 
related to such person within the meaning of sec-
tion 465(bX3)(C)), or 
"(II) was secured by any asset of the partner-
ship." 
(4) Section 464 of the 1986 Code (relating to limitations on 
deductions for certain farming expenses) is amended by adding 
at the end thereof the following new subsection: 
"(g) TERMINATION.—Except as provided in subsection (f), subsec-
tions (a) and (b) shall not apply to any t£ixable year beginning after 
December 31,1986." 
(5) Paragraph (4) of section 801(d) of the Reform Act is amend- 26 USC 448 note. 
ed by striking out "the completed contract method" and insert-
ing in lieu thereof "a method of accounting for long-term 
contracts". 
(6) Section 801(d) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(5) SPECIAL RULE FOR PARAGRAPHS (2) AND (3).—If any loan, 
lease, contract, or evidence of any transaction to which para-
graph (2) or (3) applies is transferred after June 10, 1987, to a 
person other than a related party (within the meaning of para-
graph (2)), paragraph (2) or (3) shall cease to apply on and after 
the date of such transfer.'' 
(7) Paragraph (3) of section 448(d) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "An S 
corporation shall not be treated as a tax shelter for purposes of 
this section merely by reason of being required to file a notice of 
exemption from registration with a State agency described in 
section 461(iX3)(A), but only if there is a requirement applicable 
to all corporations offering securities for sale in the State that 
to be exempt from such registration the corporation must file 
sucii 3. noticp 
(8) Subparagraph (C) of section 448(d)(4) of the 1986 Code is 
amended by striking out "substantially all o f and inserting in 
lieu thereof "90 percent or more of. 
(9) Paragraph (3) of section 448(c) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(D) TREATMENT OF PREDECESSORS.—Any reference in this 
subsection to an entity shall include a reference to any 
predecessor of such entity." 
(b) AMENDMENTS RELATED TO SECTION 803 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 263A(a) of the 1986 Code is amend-
ed by adding at the end thereof the following new sentence: 
"Any cost which (but for this subsection) could not be taken into 
account in computing taxable income for any taxable year shall 
not be treated as a cost described in this paragraph." 
(2) Section 263A(c) of the 1986 Code (relating to general 
exceptions) is amended— 
(A) by striking out "263(c), 616(a), or 617(a)" and inserting 
in lieu thereof "263(c), 263(i), 291(b)(2), 616, or 617", and 
(B) by adding at the end thereof the following new para-
graph: 
"(6) COORDINATION WITH SECTION 59(e).—Paragraphs (2) and 
(3) shall apply to any amount allowable as a deduction under 
102 STAT. 3438 
PUBLIC LAW 100-647—NOV. 10, 1988 
section 59(e) for qualified expenditures described in subpara-
graphs (B), (C), (D), and (E) of paragraph (2) thereof." 
(3) Subparagraph (B) of section 263A(dX2) of the 1986 Code 
(relating to special rule for person with minority interest who 
materially participates) is amended— 
(A) by striking out "such grove, orchard, or vineyard" in 
clause (i) and inserting in lieu thereof "the plants described 
in subparagraph (A) at all times during the taxable year in 
which such amounts were paid or incurred", and 
(B) by striking out "such grove, orchard, or vineyard 
during the 4-taxable year period beginning with the taxable 
year in which the grove, orchard, or vineyard was lost or 
damaged" and inserting in lieu thereof "the plants de-
scribed in subparagraph (A) during the taxable year in 
which such amounts were paid or incurred". 
(4) Paragraph (3) of section 263A(f) of the 1986 Code (relating 
to interest relating to property used to produce property) is 
amended— 
(A) by striking out "incurred or continued in connection 
with" and inserting in lieu thereof "allocable (as deter-
mined under paragraph (2)) to", and 
(B) by inserting "(as so determined)" after "allocable". 
(5) Section 447(b) of the 1986 Code is amended— 
(A) by striking out "of before "expenses", and 
(B) by striking out "OF" before "EXPENSES" in the heading 
thereof. 
(6) Section 447(gXl) of the 1986 Code is amended by striking 
out "trade or business of farming" each place it appears and 
inserting in lieu thereof "qualified farming trade or business". 
26 use 263A 
(7) Paragraph (4XAXi) of section 803(d) of the Reform Act is 
note. 
amended by striking out "203" each place it appears and insert-
ing in lieu thereof "204". 
26USC263A 
(8) The allocation used in the regulations prescribed under 
note. 
section 263A(hX2) of the Internal Revenue Code of 1986 for 
apportioning storage costs and related handling costs shall be 
determined by dividing the amount of such costs by the begin-
ning inventory balances and the purchases during the year and 
by multiplying the resulting allocation ratio by inventory 
amounts determined in accordance with the provisions of the 
joint explanatory statement of the committee of conference of 
the conference report accompanying H.R. 3838 (H.R. Rept. No. 
99-841, Vol. II., 99th Cong., 2d Sess. 11-306-307 (1986)). 
Contracts. 
(c) AMENDMENTS RELATED TO SECTION 804 OF THE REFORM ACT.— 
(1) Paragraph (3) of section 460(b) of the 1986 Code is 
amended— 
|; 
^ v^ 
~. 
(A) by striking out "subparagraph" and inserting in lieu 
thereof "paragraph", 
(B) by striking out "paragraph (1)" each place it appears 
in subparagraph (B) and inserting in lieu thereof "subpara-
graph (A)", and 
(C) by striking out "paragraph (1)" in subparagraph (C) 
and inserting in lieu thereof "subparagraph (B)". 
(2)(A) Section 4600)) of the 1986 Code (relating to percentage 
of completion method) is amended by adding at the end thereof 
the following new parsigraph: 
"(4) SPECIAL RULES.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3439 
"(A) SiMPUFiED METHOD OF cx)ST ALLOCATION.—In the case 
of any long-term contract, the Secretary may prescribe a 
simplified procedure for allocation of costs to such contract 
in lieu of the method of allocation under subsection (c). 
"(B) LOOK-BACK METHOD NOT TO APPLY TO CERTAIN CON-
TRACTS.—Paragraph (2XB) and subsection (aX2) shall not 
apply to any contract— 
"(i) the gross price of which (as of the completion of 
the contract) does not exceed the lesser of— 
"O) $1,000,000, or 
"(ED 1 percent of the average annual gross re-
ceipts of the taxpayer for the 3 taxable years 
preceding the taxable year in which the contract 
was completed, and 
"(ii) which is completed within 2 years of the contract 
commencement date. 
For purposes of this subparagraph, rules similar to the 
rules of subsections (eX2) and (fX3) shall apply." 
(B) Section 460(bX2) of the 1986 Code is amended by striking 
out "In" and inserting in lieu thereof "Except as provided in 
paragraph (4), in". 
(3) Subparagraph (B) of section 804(dX2) of the Reform Act is 
26 use 460 note. 
amended by striking out "section 263A(cX5)" and inserting in 
lieu thereof "section 460(cX5)". 
(4XA) Paragraph (3) of section 4600t)) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tences: 
"For purposes of the preceding sentence, any amount received 
or accrued after completion of the contract shall be taken into 
account by discounting (using the Federal mid-term rate deter-
mined under section 1^4(d) as of the time such amount was 
received or accrued) such amount to its value as of the comple-
tion of the contract. The taxpayer may elect with respect to any 
contract to have the preceding sentence not apply to such 
coiity]rd.c^ 
(B) Subparagraph (B) of section 4600i)X2) of the 1986 Code is 
amended by striking out "completion of the contract" and 
inserting in lieu thereof "completion of the contract (or, with 
respect to any amount received or accrued after completion of 
the contract, when such amount is so received or accrued)". 
(d) AMENDIKIENT RELATED TO SECTION 805 OF THE REFORM ACT.— 
(1) Section 166(dXlXA) of the 1986 Code is amended by striking 
out "subsections (a) and (c)" and inserting in Ueu thereof 
"subsection (a)". 
(2) Subsection (b) of section 805 of the Reform Act is amended 
26 use 166. 
by inserting ", as amended by section 901(dX4)," after "Section 
166". 
(3) Subsection (a) of section 582 of the 1986 (Dode is amended 
by striking out "subsections (a), (b), and (c) of section 166" and 
inserting in lieu thereof "subsections (a) and (b) of section 166". 
(e) AMENDMENTS RELATED TO SECTION 806 OF THE REFORM ACT.— 
(IXA) Clause (i) of section 706a)XlXB) of the 1986 Code is 
amended to read as follows: 
"(i) the majority interest taxable year (as defined in 
paragraph (4)),". 
(B) Paragraph (4) of section 7060t)) of the 1986 Code is amended 
to read as follows: 
102 STAT. 3440 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(4) MAJORITY INTEREST TAXABLE YEAR; UMITATION ON RE-
QUIRED CHANGES.— 
"(A) MAJORITY INTEREST TAXABLE YEAR DEFINED.—For 
purposes of paragraph (l)(BXi)— 
"(i) IN GENERAL.—The term 'majority interest tax-
able year' means the taxable year (if any) which, on 
each testing day, constituted the taxable year of 1 or 
more partners having (on such day) an aggregate in-
terest in partnership profits and capital of more than 
50 percent, 
"(ii) TESTING DAYS.—The testing days shall be— 
"(I) the 1st day of the partnership taxable year 
(determined without regard to clause (i)), or 
"(11) the days during such representative period 
as the Secretary may prescribe. 
"(B) FURTHER CHANGE NOT REQUIRED FOR 3 YEARS.— 
Except as provided in regulations necessary to prevent the 
avoidance of this section, if, by reason of paragraph (IXBXi), 
the taxable year of a partnership is changed, such partner-
ship shall not be required to change to another taxable year 
for either of the 2 taxable years following the year of 
change." 
(2) Clause (iii) of section 706(bXlXB) of the 1986 Code is 
amended by striking out "or such other period as the Secretary 
may prescribe in regulations" and inserting in lieu thereof 
"unless the Secretary by regulations prescribes another period". 
(3) Section 706(b) of the 1986 Code is amended by adding at the 
end thereof the following new paragraph: 
"(5) APPLICATION WITH OTHER SECTIONS.—Except as provided 
in regulations, for purposes of determining the taxable year to 
which a partnership is required to change by reason of this 
subsection, changes in taxable years of other persons required 
by this subsection, section 441(i), section 584(h), section 645, or 
section 1378(a) shall be taken into account." 
(4) Paragraph (2) of section 441(i) of the 1986 Code (defining 
personal service corporation) is amended by adding at the end 
thereof the following: 
"A corporation shall not be treated as a personal service cor-
poration unless more than 10 percent of the stock (by value) in 
such corporation is held by employee-owners (within the mean-
ing of section 269A(bX2), as modified by the preceding sentence). 
If a corporation is a member of an affiliated group filing a 
consolidated return, all members of such group shall be taken 
into account in determining whether such corporation is a 
personal service corporation." 
(5XA) Section 584 of the 1986 Code (relating to common trust 
funds) is amended by adding at the end thereof the following 
new subsection: 
"(h) TAXABLE YEAR OF COMMON TRUST FUND.—For purposes of 
this subtitle, the taxable year of any common trust fund shall be the 
calendar year." 
26 use 584 note. 
(B) The amendment made by subparagraph (A) shall take 
effect as if included in the amendments made by section 806 of 
the Reform Act, except that section 806(eXl) shall be applied by 
substituting "December 31, 1987" for "December 31, 1986". For 
purposes of section 806(eX2) of the Reform Act— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3441 
(i) a participant in a common trust fund shall be treated 
in the same manner as a partner, and 
(ii) subparagraph (C) thereof shall be applied by substitut-
mg "December 31, 1987" for "December 31, 1986" and as if 
it did not contain the election to include all income in the 
short taxable year. 
(6) Section 806(cX2) of the Reform Act is amended by striking 26 use 267. 
out "Section 267(a)" and inserting in lieu thereof "Section 
267(aX2)". 
(7) Subparagraph (C) of section 806(eX2) of the Reform Act is 26 use 1378 
amended— 
^°^-
(A) by striking out "(including such short taxable year)", 
and 
(B) by striking out "short taxable year" the second place 
it appears and inserting in lieu thereof "the partner's or 
shareholder's taxable year with or within which the part-
nership's or S corporation's short taxable year ends". 
(8) Section 806(e)(2) of the Reform Act is amended— 
(A) by striking out "any taxable year" and inserting in 
lieu thereof "the taxpayer's first taxable year beginning 
after December 31,1986'\ and 
(B) by striking out "taxpayer" each place it appears and 
inserting in lieu thereof "partnership, S corporation, or 
personal service corporation'. 
(9) Nothing in section 806 of the Reform Act or in any 26 use 1378 
legislative history relating thereto shall be construed as requir- note. 
ing the Secretary of the Treasury or his delegate to permit an 
automatic change of a taxable year. 
(10) Subsection (e) of section 806 of the Reform Act is amended 26 use 1378 
by adding at the end thereof the following new paragraph: 
^°^-
"(3) BASIS, ETC. RULES.— 
"(A) BASIS RULE.—The adjusted basis of any partner's 
interest in a partnership or shareholder's stock in an S 
corporation shall be determined as if all of the income to be 
taken into account ratably in the 4 taxable years referred to 
in paragraph (2XC) were included in gross income for the 
1st of such taxable years. 
"(B) TREATMENT OF DISPOSITIONS.—If any interest in a 
partnership or stock in an S corporation is disposed of 
before the last taxable year in the spread period, all 
amounts which would be included in the gross income of 
the partner or shareholder for subsequent taxable years in 
the spread period under paragraph (2XC) and attributable 
to the interest or stock disposed of shall be included in gross 
income for the taxable year in which the disposition occurs. 
For purposes of the preceding sentence, the term 'spread 
period' means the period consisting of the 4 taxable years 
referred to in paragraph (2XC)." 
(f) AMENDMENTS RELATED TO SECTION 811 OF THE REFORM ACT.— 
(1) Paragraph (4) of section 45300)) of the 1986 Code is 
amended— 
(A) by striking out "at any time during" and inserting in 
lieu thereof "as of the close of, and 
(B) by striking out "as of the close of such taxable year in 
lieu" and inserting in lieu thereof "as of the close of such 
taxable year (determined by not taking into account any 
indebtedness described in paragraph (3XB)) in lieu" 
102 STAT. 3442 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2) So much of paragraph (2) of section 453C(d) of the 1986 
Code as precedes subparagraph (A) is amended to read as 
follows: 
"(2) 
EXCESS ALLOCABLE INSTALLMENT INDEBTEDNESS.—If 
the 
allocable installment indebtedness for any taxable year exceeds 
the amount which may be allocated under paragraph (1) to 
applicable installment obligations arising in (and outstanding as 
of the close of) such taxable year, such excess shall—". 
(3) Subparagraph (A) of section 453aeXl) of the 1986 Code is 
amended by adding at the end thereof the following new 
sentence: 
"Such term also includes any obligation held by any person 
if the basis of such obligation in the hands of such person is 
determined (in whole or in part) by reference to the basis of 
such obligation in the hands of another person and such 
obligation was an applicable installment obligation in the 
hands of such other person." 
(4) Paragraph (2) of section 453C(e) of the 1986 Code (relating 
to aggregation rules) is amended by striking out "For" and 
inserting in lieu thereof "Except as provided in regulations, 
for". 
(5) Subparagraph (B) of section 453C(eX4) of the 1986 Code is 
amended by striking out "or (3)". 
26USC453C 
(6) Paragraph (4) of section 811(c) of the Reform Act is 
note. 
amended by striking out the second subparagraphs (D) and (E). 
(7) Paragraph (5) of section 811(c) of the Reform Act is 
amended by striking out "October 23, 1985" each place it ap-
pears and inserting in lieu thereof "October 23,1984". 
(8) Section 811(c) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(9) SPECIAL RULES.—For purposes of section 453C of the 1986 
Code (as added by subsection (a))— 
"(A) REVOLVING CREDIT PLANS, ETC.—The term 'applicable 
installment obligation' shall not include any obligation aris-
ing out of any disposition or sale described in paragraph (1) 
or (2) of section 453(k) of such Code (as added by section 
812(a)). 
"(B) CERTAIN DISPOSITIONS DEEMED MADE ON FIRST DAY OP 
TAXABLE YEAR.—In the case of a taxpayer's 1st taxable year 
ending after December 31,1986, dispositions after February 
28, 1986, and before the 1st day of such taxable year shall 
be treated as made on such 1st day." 
26 use 453C 
(9) For purposes of appljdng the amendments made by this 
*^ote. 
subsection and the amendments made by section 10202 of the 
Revenue Act of 1987, the provisions of this subsection shall be 
treated as having been enacted immediately before the enact-
ment of the Revenue Act of 1987. 
(g) AMENDMENTS RELATED TO SECTION 812 OF THE REFORM ACT.— 
(1) Section 453 of the 1986 Code is amended by redesignating 
the subsection (j) added by section 812 of the Reform Act as 
subsection (k). 
(2) Subsection (c) of section 453A of the 1986 Code (as in effect 
on the date before the date of the enactment of the Revenue Act 
of 1987) is amended by striking out "453(j)" and inserting in lieu 
thereof "453(k)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3443 
(3) Paragraph (1) of section 812(c) of the Reform Act is 26 use 453 note. 
amended by striking out "paragraph (2)" and inserting in lieu 
thereof "paragraphs (2) and (3)". 
(4) Sul^ection (c) of section 812 of the Reform Act is amended 
by redesignating paragraph (2) as paragraph (3) and inserting 
after paragraph (1) the following new paragraph: 
"(2) SALES OF STOCK, ETC.—Section 453(kX2) of the Internal 
Revenue Code of 1986, as added by subsection (a), shall apply to 
sales after December 31, 1986, in taxable years ending after 
such date." 
(5) Paragraph (3) of section 812(c) of the Reform Act (as so 
redesignated) is amended by striking out subparagraphs (B) and 
(C) and inserting in lieu thereof the following: 
"(B) such change shall be treated as having been made 
with the consent of the Secretary, 
"(C) the period for taking into account adjustments under 
section 481 of such Code by reason of such chemge shall be 
equal to 4 years, and 
"(D) except as provided in paragraph (4), the amount 
taken into account in each of such 4 years shall be the 
applicable percentage (determined in accordance with the 
following table) of the net adjustment: 
The applicable 
"In the case of the: 
percentage is: 
1st tcuuble year 
15 
2nd taxable year 
25 
3rd taxable year 
30 
4th taxable year 
30. 
If the taxpayer's last taxable year beginning before January 1, 
1987, was the taxpayer's 1st taxable year in which sales were 
made under a revolving credit plan, all adjustments under 
section 481 of such Code shall be taken into account in the 
taxpayer's 1st taxable year beginning after December 31,1986." 
(6) Subsection (c) of section 812 of the Reform Act is amended 
by adding at the end thereof the following new paragraphs: 
"(4) ACCELERATION OP ADJUSTMENTS WHERE CONTRACTION IN 
AMOUNT OF INSTALLMENT OBLIGATIONS.— 
"(A) IN GENERAL.—If the percentage determined under 
subparagraph (B) for any taxable year in the adjustment 
period exceeds the percentage which would otherwise apply 
under paragraph (3)(D) for such taxable year (determined 
after the application of this paragraph for prior taxable 
years in the adjustment period)— 
"(i) the percentage determined under subparagraph 
(B) shall be substituted for the applicable percentage 
which would otherwise apply under p£u-agraph (3)(D), 
and 
"(ii) any increase in the applicable percentage by 
reason of clause (i) shall be appUed to reduce the 
applicable percentage determined under paragraph 
(3)Q)) for subsequent taxable years in the adjustment 
period (beginning with the 1st of such subsequent tax-
able years). 
"(B) DETERBONATION OF PERCENTAGE.—For purposes of 
subparagraph (A), the percentage determined under this 
subparagraph for any taxable year in the adjustment period 
is the excess (if any) of— 
102 STAT. 3444 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) the percentage determined by dividing the aggre-
gate contraction in revolving installment obligations by 
the aggregate face amount of such obligations outstand-
ing as of the close of the taxpayer's last taxable year 
beginning before January 1,1987, over 
(ii) the sum of the applicable percentages under 
paragraph (3XD) (as modified by this paragraph) for 
prior taxable years in the adjustment period. 
"(C) AGGREGATE coNTRAcmoN IN REVOLVING INSTALLMENT 
OBUGATiONS.—For purposes of subparagraph (B), the aggre-
gate contraction in revolving instadlment obligations is the 
amount by which— 
"(i) the aggregate face amount of the revolving 
installment obligations outstanding as of the close of 
the taxpayer's last taxable year beginning before Janu-
ary 1,1987, exceeds 
"(ii) the aggregate face amount of the revolving 
installment obligations outstanding as of the close of 
the taxable year involved. 
"(D) REVOLVING INSTALLMENT OBUGATIONS.—For pur-
poses of this paragraph, the term 'revolving installment 
obligations' means installment obligations arising under a 
revolving credit plan. 
"(E) "TREATMENT OF CERTAIN OBLIGATIONS DISPOSED OF ON 
O
R BEFORE O
C
T
O
B
E
R 26, 1987.—For purposes of subpara-
graphs (BXi) and (CXi), in determining the aggregate face 
amount of revolving installment obligations outstanding as 
of the close of the taxpayer's last teaable year beginning 
before January 1, 1987, there shall not be taken into ac-
count any obligation— 
"(i) which was disposed of to an unrelated person on 
or before October 26,1987, or 
"(ii) was disposed of to an unrelated person on or 
after such date pursuant to a binding written contract 
in effect on October 26,1987, and at all times thereafter 
before such disposition. 
For purposes of the preceding sentence, the term 'unrelated 
person' means any person who is not a related person (as 
defined in section 453(g) of the Internal Revenue Code of 
1986). 
"(5) LIMITATION ON LOSSES FROM SALES OF OBLIGATIONS UNDER 
R
E
V
O
L
V
I
N
G CREDIT PLANS.—If 1 or more obligations arising 
under a revolving credit plan and taken into account under 
paragraph (3) are disposed of during the adjustment period, 
then, notwithstanding any other provision of law— 
"(A) no losses from such dispositions shall be recognized, 
and 
"(B) the aggregate amount of the adjustment for taxable 
years in the adjustment period (in reverse order of time) 
A 
shall be reduced by the amount of such losses. 
"(6) ADJUSTMENT PERIOD.—For purposes of paragraphs (4) and 
(5), the adjustment period is the 4-year period under paragraph 
(3)." 
(h) AMENDBIENT RELATED TO SECTION 821 OF THE REFORM ACT.— 
26 use 451 note. Section 821(bX3) of the Reform Act is amended by adding at the end 
thereof the following new sentence: "The preceding sentence shall 
also apply to any taxable year beginning after August 16,1986, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3445 
before January 1, 1987, if the taxpayer treated such income in the 
same manner for the taxable year preceding such taxable year." 
(i) AMENDMENT RELATED TO SECTION 822 OF THE REFORM ACT.— 
Paragraph (1) of section 703(b) of the 1986 Code is amended by 
striking out "or (dX4)". 
(j) AMENDMENTS RELATED TO SECTION 824 OF THE REFORM ACT.— 
(1) Section 6501(o) of the 1986 Code which relates to cross 
references is amended by striking out paragraph (3). 
(2) Paragraph (4) of section 824(c) of the Reform Act is amend- 26 USC118 note. 
ed by striking out "an indemnity agreement" and inserting in 
lieu thereof "an underwriting agreement". 
SEC. 1009. AMENDMENTS RELATED TO TITLE IX OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 901 OF THE REFORM ACT.— 
(1) Subparagraph (C) of section 46(eX4) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tences: "Notwithstamding the preceding provisions of this 
subparagraph, any such election shall terminate effective with 
respect to the 1st taxable year of the organization making such 
election which begins aiter 1986 and during which such 
organization (or any successor organization) was not at any time 
the lessee under any lease of regular investment tax credit 
property. For purposes of the preceding sentence, the term 
'r^ular investment tax credit property' means any section 38 
property if the regular percentage applied to such property and 
the amount of qualified investment with respect to such prop-
erty would have been reduced under paragraph (1) but for an 
election under this subparagraph." 
(2XA) Paragraph (5) of section 585(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) ELECTION MADE BY EACH MEMBER.—In the case of a 
parent-subsidiary controlled group, any election under this 
section shall be made separately by each member of such 
group." 
(B) Subclause (1) of section 585(cX3XAXiii) of the 1986 Code is 
amended by striking out "or such greater amount as the tax-
payer may designate" and inserting in lieu thereof "or such 
higher percentage of such net amount as the taxpayer may 
elect". 
(C) aause (ii) of section 585(cX3XB) of the 1986 Code is 
amended by striking out "designate an amount" and inserting 
in lieu thereof "elects a higher percentage". 
(3) Paragraph (4) of section 585(c) of the 1986 CJode is amended 
by adding at the end thereof the following new sentence: 
"If the amount of the reserve referred to in subparagraph (B) as of 
the close of any taxable year exceeds the outstanding badance (as of 
such time) of the loans referred to in subpsu'agraph (B), such excess 
shall be included in gross income for such taxable year." 
(b) AMENDMENTS RELATED TO SECTION 902 OF THE REFORM ACT.— 
(1) Paragraph (3) of section 902(f) of the Reform Act is State listing. 
amended— 
26 USC 265 note. 
(A) in subparagraph (F), by striking out "distribution 
company" and inserting in lieu thereof 
"distribution 
facility', 
(B) in subparagraph (L), by striking out "waterfront 
project" and inserting in lieu thereof "2 Festival Market 
102 STAT. 3446 
PUBLIC LAW 100-647—NOV. 10, 1988 
Place projects at Union Pier Terminal and 1 project at the 
Remount Road Container Yard, State Pier No. 15 at North 
Charleston Terminal", 
(C) in subparagraph (M), by striking out "Pontabla" and 
inserting in lieu thereof "Pontalba", 
(D) in subparagraph (P), by striking out "Birmingham, 
Alabama," and inserting in lieu thereof "Homewood, Ala-
bama, the", and 
(E) by adding at the end thereof the following new 
subparagraphs: 
"(T) Bellows Falls, Vermont—building project. 
"(U) East Broadway Project, Louisville, Kentucky. 
"(V) O.K. Industries, Oklahoma." 
26 use 265 note. 
(2) Paragraph (4) of section 902(f) of the Reform Act is 
amended by striking out "subparagraph" and inserting in lieu 
thereof "paragraph". 
(3XA) Paragraph (3) of section 265(b) of the 1986 Code is 
amended to read as follows: 
"(3) EXCEPTION FOR CERTAIN TAX-EXEMPT OBUGATIONS.— 
"(A) IN GENERAL.—Any qualified tax-exempt obligation 
acquired after August 7, 1986, shall be treated for purposes 
of paragraph (2) and section 291(eXlXB) as if it were ac-
quired on August 7,1986. 
"(B) QUAUFIED TAX-EXEMPT OBLIGATION.— 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
the term 'qualified tax-exempt obligation' means a tax-
exempt obligation— 
"(I) which is issued after August 7, 1986, by a 
qualified small issuer, 
"(II) which is not a private activity bond (as 
defined in section 141), and 
"(III) which is designated by the issuer for pur-
poses of this paragraph, 
"(ii) CERTAIN BONDS NOT TREATED AS PRIVATE ACTIVITY 
BONDS.—For purposes of clause (iXII), there shall not be 
treated as a private activity bond— 
"(I) any qualified 501(cX3) bond (as defined in 
section 145), or 
"(II) any obligation issued to refund (or which is 
part of a series of obligations issued to refund) an 
obligation issued before August 8, 1986, which was 
not an industrial development bond (as defined in 
section 103(bX2) as in effect on the day before the 
date of the enactment of the Tax Reform Act of 
1986) or a private loan bond (as defined in section 
103(oX2XA), as so in effect, but without regard to 
any exemption from such definition other than 
section 103(oX2XA)). 
"(C) QUALIFIED SMALL ISSUER.— 
"(i) IN GENERAL.—For purposes of subparagraph (B), 
the term 'qualified small issuer' means, with respect to 
obligations issued during any calendar year, any issuer 
if the reasonably anticipated amount of tax-exempt 
obligations (other than obligations described in clause 
(ii)) which will be issued by such issuer during such 
calendar year does not exceed $10,000,000. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3447 
"(ii) OBUGATIONS NOT TAKEN INTO ACCOUNT IN DETER 
MINING STATUS AS QUAUFIED SMALL ISSUER.—For pur-
poses of clause (i), an obligation is described in this 
clause if such obligation is— 
"(I) a private activity bond (other than a quali-
fied 501(cX3) bond, as defined in section 145), 
"(II) an obligation to which section 141(a) does 
not apply by reason of section 1312, 1313, 1316(g), 
or 1317 of the Tax Reform Act of 1986 and which 
would (if issued on August 15, 1986) have been an 
industrial development bond (as defined in section 
103(bX2) as in effect on the day before the date of 
the enactment of such Act) or a private loan bond 
(as defined in section 103(oX2XA), as so in effect, 
but without regard to any exception from such 
definition other than section 103(oX2XA)), or 
"(III) an obligation issued to refund (other than 
to advance refund within the meaning of section 
149(dX5)) any obligation to the extent the amount 
of the refunding obligation does not exceed the 
outstanding amount of the refunded obligation. 
"(iii) ALLOCATION OF AMOUNT OF ISSUE IN CERTAIN 
CASES.—In the case of an issue under which more than 
1 governmental entity receives benefits, if— 
"(I) all governmental entities receiving benefits 
from such issue irrevocably agree (before the date 
of issuance of the issue) on an allocation of the 
amount of such issue for purposes of this subpara-
graph, and 
"(II) such allocation bears a reasonable relation-
ship to the respective benefits received by such 
entities, 
then the amount of such issue so allocated to an entity 
(and only such amount with respect to such issue) shall 
be taken into account under clause (i) with respect to 
such entity. 
"(D) LIMITATION ON AMOUNT OF OBLIGATIONS WHICH MAY 
BE DESIGNATED.— 
"(i) IN GENERAL.—Not more than $10,000,000 of 
obligations issued by an issuer during any calendar 
year may be designated by such issuer for purposes of 
this paragraph. 
"(ii) CERTAIN REFUNDINGS OF DESIGNATED OBUGATIONS 
DEEMED DESIGNATED.—Except as provided in clause (iii), 
in the case of a refunding (or series of refundings) of a 
qualified tax-exempt obligation, the refunding obliga-
tion shall be treated as a qualified tax-exempt obliga-
tion (and shall not be taken into account under clause 
(i))if-
"(I) the refunding obligation was not taken into 
account imder subparagraph (C) by reason of 
clause (ii)(III) thereof, 
"(II) the average maturity date of the refunding 
obligations issued as part of the issue of which such 
refunding obl^ation is a part is not later than the 
average maturity date of the obligations to be re-
funded by such issue, and 
102 STAT. 3448 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(HI) the refunding obligation has a maturity 
date which is not later than the date which is 30 
years after the date the original qualified tax-
exempt obligation was issued. 
Subclause (11) shall not apply if the average maturity of 
the issue of which the original qualifi^ tax-exempt 
obligation was a part (and of the issue of which the 
obligations to be refunded are a part) is 3 years or less. 
For purposes of this clause, average maturity shall be 
determined in accordance with section 147(bX2XA). 
"(iii) CERTAIN OBUGATIONS MAY NOT BE DESIGNATED 
O
R DEEMED DESIGNATED.—No obligation issued as part 
of an issue may be designated under this paragraph (or 
may be treated as designated under clause (ii)) if— 
"(I) any obligation issued as part of such issue is 
issued to refund another obligation, and 
"(II) the aggregate face amount of such issue 
exceeds $10,000,000. 
"(E) AGGREGATION OP ISSUERS.—For purposes of subpara-
graphs (C) and (D)— 
"(i) an issuer and all entities which issue obligations 
on behalf of such issuer shall be treated as 1 issuer, 
"(ii) all obligations issued by a subordinate entity 
shall, for purposes of applying subparagraphs (C) and 
(D) to each other entity to which such entity is subordi-
nate, be treated as issued by such other entity, and 
"(iii) an entity formed (or, to the extent provided by 
the Secretary, availed of) to avoid the purposes of 
subparagraph (C) or (D) and all entities benefiting 
thereby shall be treated as 1 issuer. 
"(F) TREATMENT OF COMPOSITE ISSUES.—In the case of an 
obligation which is issued as part of a direct or indirect 
composite issue, such obligation shaU not be treated as a 
qualified tax-exempt obligation unless— 
"(i) the requirements of this paragraph are met with 
respect to such composite issue (determined by treating 
such composite issue as a single issue), and 
"(ii) the requirements of this paragraph are met with 
respect to each separate lot of obligations which are 
part of the issue (determined by treating each such 
separate lot as a separate issue)." 
26 use 265 note. 
(B) In the case of any obligation issued after August 7, 
1986, and before January 1, 1987, the time for msdking a 
designation with respect to such obligation under section 
265(bX3XBXiii) of the 1986 Code shall not expire before 
January 1,1989. 
(C)If-
(i) an obligation is issued on or after January 1, 1986, 
and on or before August 7,1986, 
(ii) when such obl^ation was issued, the issuer made 
a designation that it intended to qualify under section 
802(eX3) of H.R. 3838 of the 99th Congress as passed by 
the House of Representatives, and 
(iii) the issuer makes an election under this subpara-
graph with respect to such obligation, 
for purposes of section 265(bX3) of the 1986 Code, such 
obligation shall be treated as issued on August 8, 1986. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3449 
(DXi) Except as provided in clause (ii), the following provi-
sions of section 265(bX3) of the 1986 Code (as amended by 
this subparagraph (A)) shall apply to obligations issued 
after June 30,1987: 
a) subparagraph (CXiiXIH), 
(II) clauses (ii) and (iii) of subparagraph (D), and 
(III) subparagraphs (E) and (F). 
(ii) At the election of an issuer (made at such time and in 
such manner as the Secretary of the Treasury or his dele-
gate may prescribe), the provisions referred to in clause (i) 
shall apply to such issuer as if included in the amendments 
made by section 902(a) of the Tax Reform Act of 1986. 
(4) Subparagraph (B) of section 291(eXl) of the 1986 Code is 
amended by redesignating the clause (iv) added by section 
902(cX2) of the Reform Act as clause (v). 
(5) Clause (i) of section 291(eXlXB) of the 1986 Code is 
amended by striking out "section 582(a)(2)" and inserting in lieu 
thereof "section 585(aX2)". 
(6) Paragraph (1) of section 902(e) of the Reform Act is 26 USC 163. 
amended by striking out "Section 163(hX12)" and inserting in 
lieu thereof "Section 163(iX2) (as redesignated by section 511(b) 
of this Act)". 
(7) Paragraph (4) of section 902(f) of the Reform Act is 
26 use 265 note. 
amended— 
(A) by inserting "and qualified 501(cX3) bonds designated 
by such Grovemor for purposes of this paragraph," after 
"1987),", and 
(B) by striking out "subparagraph" in the last sentence 
and inserting in lieu thereof "paragraph". 
(c) AMENDMENTS RELATED TO SECTION 903 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 172(b) of the 1986 CJode is amended 
by redesignating subpareigraphs (L) and (M) as subparagraphs 
(K) and (L), respectively. 
(2) Subparagraph (A) of section 172(bXl) of the 1986 Code is 
amended by striking out "Except" and all that follows down 
through "a net operating loss" and inserting in lieu thereof 
"Except as otherwise provided in this paragraph, a net operat-
ing loss". 
(3) Subparagraph (B) of section 172(bXl) of the 1986 Code is 
amended to read as follows: 
"(B) Except as otherwise provided in this paragraph, a 
net operating loss for any taxable year ending after Decem-
ber 31, 1975, shall be a net operating loss carryover to each 
of the 15 taxable years following the taxable year of the 
loss." 
(d) AMENDMENTS RELATED TO SECTION 905 OF THE REFORM ACT.— 
(1) Subsection G) of section 165 of the 1986 Code is amended by 
redesignating paragraph (6) as paragraph (7) and by striking out 
paragraph (5) and inserting in lieu thereof the following: 
"(5) ELECTION TO TREAT AS ORDINARY LOSS.— 
"(A) IN GENERAL.—In lieu of any election under para-
graph (1), the taxpayer may elect to treat the amount 
referred to in paragraph (1) for the taxable year as an 
ordinary loss described in subsection (cX2) incurred during 
the taxable year. 
"(B) LIMITATIONS.— 
102 STAT. 3450 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) DEPOSIT MAY NOT BE FEDERALLY INSURED.—No 
election may be made under subparagraph (A) with 
respect to any loss on a deposit in a qualified financial 
institution if part or all of such deposit is insured under 
Federal law. 
Banks and 
"(ii) D
O
L
L
A
R UMiTATiON.—With respect to each finan-
banking. 
cial institution, the aggregate amount of losses attrib-
utable to deposits in such financial institution to which 
an election under subparagraph (A) may be made by 
the taxpayer for any taxable year shsdl not exceed 
$20,000 ($10,000 in the case of a separate return by a 
married in<Uvidual). The limitation of the preceding 
sentence shall be reduced by the amount of any insur-
ance proceeds under any State law which can reason-
ably be expected to be received with respect to losses on 
deposits in such institution. 
"(6) ELECTION.—Any election by the taxpayer under this 
subsection for any taxable year— 
"(A) shall apply to all losses for such taxable year of the 
taxpayer on deposits in the institution with respect to 
which such election was made, and 
"(B) may be revoked only with the consent of the 
Secretary.'-
26 use 451 note. 
(2) Paragraph (1) of section 905(c) of the Reform Act is 
amended to read as follows: 
"(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31,1981, 
and, except as provided in paragraph (2), the amendment made 
by subsection (b) shall apply to taxable years beginning sifter 
December 31,1982." 
(3) The subsection (f) of section 451 of the 1986 Code which 
was added by section 905(b) of the 1986 Reform Act is redesig-
nated as subsection (g). 
26 use 165 note. 
(4) If on the date of the enactment of this Act (or at any time 
before the date 1 year after such date of enactment) credit or 
refund of any overpayment of tax attributable to amendments 
made by section 905 of the Reform Act or by this subsection (or 
the assessment of any underpayment of tax so attributable) is 
barred by any law or rule of law— 
(A) credit or refund of any such overpayment may never-
theless be made if claim therefore is filed before the date 1 
year after such date of enactment, and 
(B) assessment of any such underpayment may neverthe-
less be made if made before the date 1 year after such date 
of enactment. 
SEC. 1010. AMENDMENTS RELATED TO TITLE X OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1011 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 813(a) of the 1986 Code (relating to 
foreign life insurance companies) is amended by striking out 
"the special life insurance company deduction and". 
26 use 801 note. 
(2) Paragraph (1) of section 1011(d) of the Reform Act is 
amended— 
(A) by striking out "any bond" and inserting in lieu 
thereof "einy market discount bond (as defined in section 
1278 of the Internal Revenue Code of 1986)", 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3451 
(B) by striking out "28 percent" and inserting in lieu 
thereof "31.6 percent", and 
(C) by adding at the end thereof the following new sen-
tence: The preceding sentence shall apply only if the tax 
determined under the preceding sentence is less than the 
tax which would otherwise be imposed." 
(3) Paragraph (2) of section 1011(d) of the Reform Act is 26 USC 801 
amended to read as follows: 
^°^-
"(2) QUALIFIED LIFE INSURANCE COMPANY.—For purposes of 
paragraph (1), the term 'qualified life insurance company' 
means any life insurance company subject to tax under part I of 
subchapter L of chapter 1 of the Internal Revenue Code of 
1986." 
0)) AMENDMENTS RELATED TO SECTION 1012 OF THE REFORM ACT.— 
(1) Qause (iv) of section 1012(cX4XC) of the Reform Act is 26 USC 833 note. 
amended to read as follows: 
"(iv) dental benefit coverage provided by a Delta Health care 
Dental Plans Association organization through con- professionals. 
tracts with independent professional service providers 
so long as the provision of such coverage is the prin-
cipal £^tivity of such organization." 
(2) aause (ii) of section 1012(cX4XC) of the Reform Act is 
amended by striking out "Association" and inserting in lieu 
thereof "Plan". 
(3) The Secretary of the Treasury or his del^ate may pre- 26 USC 833 note. 
scribe rules providing proper adjustments for taxpayers which 
become subject to subchapter L of chapter 1 of the 1986 (Dode by 
reason of the amendments made by section 1012 of the Reform 
Act with respect to short taxable years which b^;in during 1987 
by reason of section 843 of such C^ode. 
(4XA) Paragraph (3) of section 501(m) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (C), 
by striking out the period at the end of subparagraph (D) and 
inserting in lieu thereof ", and", and by adding at tiie end 
thereof the following new subparagraph: 
"(E) charitable gift annuities." 
(B) Subsection (m) of section 501 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) CHARITABLE GIFT ANNUITY.—For purposes of paragraph 
(3)(E), the term 'charitable gift annuity* means an annuity if— 
"(A) a portion of the amount paid in connection with the 
issuance of the annuity is allowable as a deduction under 
section 170 or 2055, and 
"(B) the annuity is described in section 514(cX5) (deter-
mined as if any amount paid in cash in connection with 
such issuance were property)." 
(c) AMENDMENTS RELATED TO SECTION 1021 OF THE REFORM ACT.— insurance. 
(IXA) Subparagraph (C) of section 832ft)X7) of the 1986 Code 
(relating to special rules for determining premiums earned) is 
amended by striking out "this part" and inserting in lieu 
thereof "section 831(a)". 
O
B
) The subparagraph heading for such subparagraph is 
amended by striking out "NONUFE INSURANCE COMPANY and 
inserting in lieu thereof "INSURANCE COMPANY TAXABLE UNDER 
SECTION 831 (a)". 
(2) Paragraph (7) of section 8320)) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraphs: 
19-194 O—91—Part 4 
16 : QL 3 
102 STAT. 3452 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(D) TREATMENT OF COMPANIES WHICH BECOME TAXABLE 
UNDER SECTION 831 (a).— 
"(i) EXCEPTION TO PHASE-IN FOR COMPANIES 
WHICH 
WERE NOT TAXABLE, ETC., BEFORE 1987.—Subparagraph 
(,C) of paragraph (4) shall not apply to any insurance 
company which, for each taxable year beginning before 
January 1, 1987, was not subject to the tax imposed by 
section 821(a) or 831(a) (as in effect on the day before 
the date of the enactment of the Tax Reform Act of 
1986) by reason of being— 
"(I) subject to tax under section 821(c) (as so in 
effect), or 
"(II) described in section 501(c) (as so in effect) 
and exempt from tax under section 501(a). 
"(ii) PHASE-IN BEGINNING AT LATER DATE FOR COMPA-
NIES NOT 1ST TAXABLE UNDER SECTION 831 (a) IN 1987.— 
In the case of an insurance company— 
"(I) which was not subject to the tax imposed by 
section 831(a) for its 1st taxable year beginning 
after December 31, 1986, by reason of being sulv 
ject to tax under section 831(b), or described in 
section 501(c) and exempt from tax under section 
501(a), and 
"(II) which, for any taxable year beginning 
before January 1, 1987, was subject to the tax 
imposed by section 821(a) or 831(a) (as in effect on 
the day before the date of the enactment of the Tax 
Reform Act of 1986), 
subparagraph (C) of paragraph (4) shall apply begin-
ning with the 1st taxable year beginning after Decem-
ber 31, 1986, for which such company is subject to the 
tax imposed by section 831(a) and shall be applied by 
substituting the last day of the preceding taxable year 
for 'December 31, 1986' and the 1st day of the 7th 
succeeding taxable year for 'January 1,1993'. 
"(E) TREATMENT OF CERTAIN RECIPROCAL INSURERS.—In 
the case of a reciprocal (within the meaning of section 
835(a)) which reports (as required by State law) on its 
annual statement reserves on unearned premiums net of 
premium acquisition expenses— 
"(i) subparagraph (B) of paragraph (4) shall be ap-
plied by treating unearned premiums as including an 
amount equal to such expenses, and 
"(ii) appropriate adjustments shall be made under 
subparagraph (c) of paragraph (4) to reflect the amount 
by which— 
"(I) such reserves at the close of the most recent 
taxable year beginning before January 1,1987, are 
greater or less than, 
"(II) 80 percent of the sum of the amount under 
subclause (I) plus such premium 
acquisition 
expenses," 
(3) Paragraph (5) of section 832(e) of the 1986 Code is amended 
by striking out "and" at the end of subparagraph (A) and by 
striking out the period at the end of subparagraph (B) and 
inserting in lieu thereof a comma. 
(d) AMENDMENTS RELATED TO SECTION 1022 OF THE REFORM ACT.— 
T*'"-
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3453 
(1) Section 832 of the 1986 Code (defining insurance company 
taxable income) is amended by adding at the end thereof the 
following new subsection: 
"(g) DIVIDENDS WITHIN GROUP.—In the case of an insurance com-
pany subject to tax under section 831(a) filing or required to file a 
consolidated return under section 1501 with respect to any afHliated 
group for any taxable year, any determination under this part with 
respect to any dividend paid by one member of such group to 
another member of such group shall be made as if such group were 
not filing a consolidated return." 
(2) Subclause (H) of section 832(bX5XBXii) of the 1986 Ck)de 
(relating to losses incurred) is amended by inserting "(directly 
or indirectly)" after "attributable". 
(3) For purposes of section 832(bX5XCXi) of the 1986 Code, any 26 USC 832 note. 
stock or obligation acquired on or after August 8, 1986, by an 
insurance company subject to the tax imposed by section 831 of 
the 1986 Clode (hereinafter in this paragraph referred to as the 
"acquiring company") from another insurance company so sub-
ject (hereinafter in this paragraph referred to as the "transferor 
company") shall be treated as acquired on the date on which 
such stock or obligation was acquired by the transferor com-
pany if ^ 
(A) the transferor company acquired such stock or obliga-
tion before August 8,1986, and 
(B) at all times after the date on which such stock or 
obligation was acquired by the transferor company and 
before the date of the acquisition by the acquiring company, 
the transferor company and the acquiring company were 
members of the same affiliated group filing a consolidated 
return. 
For purposes of the preceding sentence, the date on which the 
stock or obligation was acquired by the transferor company 
shall be determined with r^ard to any prior application of the 
preceding sentence. For purposes of this paragraph, if the 
acquiring corporation or transferor corporation was a party to a 
reorganization described in section 368(aXl)(F) of the 1986 Code, 
any reference to such corporation shall include a reference to 
any predecessor thereof involved in such reorganization, 
(e) AMENDBOINTS RELATED TO SECTION 1023 OP THE REFORM ACT.— 
(1) Subparagraph (B) of section 846(fX6) of the 1986 Code 
(relating to special rule for certain accident and health insur-
ance lines of business) is amended by striking out "paid during 
the year" and inserting in lieu thereof "paid in the middle of 
the year". 
(2) Subsection (g) of section 846 of the 1986 (Dode is amended 
by striking out "and" at the end of paragraph (1), by striking 
out the period at the end of paragraph (2) and inserting in lieu 
thereof ", and", and by adding at the end thereof the following 
new paragraph: 
"(3) r^ulations providing appropriate adjustments in the 
application of this section to a taxpayer having a taxable year 
wMch is not the calendar year." 
(3) Subsection (e) of section 1023 of the Reform Act (relating to 26 use 846 note. 
discounting of unpaid losses and certain unpaid expenses) is 
amended by adding at the end thereof the following new 
paragraph: 
102 STAT. 3454 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(4) APPUCATION OF FRESH START TO COMPANIES WHICH BECOME 
SUBJECT TO SECTION 831(a) TAX IN LATER TAXABLE YEAR.—If— 
"(A) an insurance company was not subject to tax under 
section 831(a) of the Internal Revenue Code of 1986 for its 
1st taxable year beginning after December 31, 1986, by 
reason of being— 
"(i) subject to tax under section 831(b) of such Code, 
or 
"(ii) described in section 501(c) of such Code and 
exempt from tax under section 501(a) of such Cktde, and 
"(B) such comparty becomes subject to tax under such 
section 831(a) for any later taxable year, 
paragraph (2) and subparagraphs (A) and (C) of paragraph (3) 
shall be applied by treating such later taxable year as its 1st 
taxable year beginning after December 31, 1986, and by treat-
ing the calendar year in which such later taxable year begins as 
1987; and paragraph (3XB) shall not apply." 
(f) AMENDMENTS RELATED TO SECTION 1024 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 831(bX2) of the 1986 Code 
(relating to companies to which alternative tax applies) is 
amended by adding at the end thereof the following new 
sentence: 
"The election under clause (ii) shall apply to the taxable 
year for which made and for all subsequent taxable years 
for which the requirements of clause (i) are met. Such an 
election, once made, may be revoked only with the consent 
of the Secretary." 
(2) Subsection (a) of section 835 of the 1986 Code (relating to 
election by reciprocal) is amended by striking out "section 
821(a)" and inserting in lieu thereof "section 831(a)". 
(3) Subsection (f) of section 835 of the 1986 Code is amended by 
striking out "subsection (e)" and inserting in lieu thereof 
"subsection (d)". 
(4) Paragraph (6) of section 2430?) of the 1986 Code (relating to 
special rules for insurance companies) is amended by striking 
out "or 821". 
(5) Subsection (c) of section 543 of the 1986 Code (relating to 
gross income of insurance companies other than life or mutual) 
is amended— 
(A) by striking out "OR MUTUAL" in the heading and 
inserting in lieu thereof "INSURANCE CJOMPANIES", and 
(B) by striking out "life or mutual" in the text and 
inserting in lieu thereof "a life insurance company". 
(6) Subsection (g) of section 816 of the 1986 Code (relating to 
burial and funeral benefit insurance companies) is amended by 
striking out "section 821 or". 
(7) The table of sections for part II of subchapter L of chapter 
1 of the 1986 Code (relating to other insurance companies) is 
amended by striking out the item relating to section 831 and 
inserting in lieu thereof the following new item: 
"Sec. 831. Tax on insurance companies other than life 
insurance 
companies." 
26 use 831 note. 
(8) Paragraph (1) of section 1024(d) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "In the case of a company taxable under section 831(b) of 
the Internal Revenue Code of 1986 (as amended by subsection 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3455 
(a)), any amount included in gross income under this paragraph 
shall be treated as gross investment income." 
(9) Section 831(b) of the 1986 Code is amended by adding at the 
end thereof the following new paragraph: 
"(3) LIMITATION ON USE OF NET OPERATING LOSSES.—For pur-
poses of this part, except as provided in section 844, a net 
operating loss (as defined in section 172) shall not be carried— 
"(A) to or from any taxable year for which the insurance 
company is not subject to the tax imposed by subsection (a), 
or 
"(B) to any taxable year if, between the taxable year from 
which such loss is being carried and such taxable year, 
there is an intervening taxable year for which the insur-
ance company was not subject to the tax imposed by subsec-
tion (a)." 
(g) AMENDMENTS RELATED TO SECTION 1031 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 1031(a) of the Reform Act is 
26 use 832 note. 
amended by inserting "(whether made in a lump sum or a series 
of substantially equal payments over a period of not more than 
6 years)" after "any initial payment". 
(2) Paragraph (2) of section 1031(a) of the Reform Act is 
amended by striking out "initial payment" each place it ap-
pears and inserting in lieu thereof "initial pajonent referred to 
in paragraph (1)". 
(3) Paragraph (2) of section 1031(a) of the Reform Act is 
amended by striking out "this title" each place it appears and 
inserting in lieu thereof "the Internal Revenue Code of 1986". 
(h) SPECIAL RULE FOR MUTUAL LIFE INSURANCE COMPANY.— 
(1) IN GENERAL.—Paragraph (2) of section 217(i) of the Tax 
Reform Act of 1984 is amended to read as follows: 
26 use 816 note. 
"(2) 
EFFECT OF ELECTION ON SUBSIDIARIES OF ELECTING 
PARENT.—For purposes of determining the amount of the small 
life insurance company deduction of any controlled group which 
includes a mutusd company which made an election under 
paragraph (1), the taxable income of such electing company 
shall be taken into account under section 806(bX2) of the 
Internal Revenue Code of 1954 (relating to phaseout of small life 
insurance company deduction)." 
(2) EFFECTIVE DATE.—The amendment made by this subsection 
26 use 816 note. 
shall apply to taxable years beginning after December 31,1986, 
and before January 1,1992. 
(3) REVENUE LOSS LIMITED.—The decrease in the amount of 
26 use 816 note. 
Federal revenue by reason of the amendment made by this 
subsection shall not exceed $300,000 per taxable year, 
(i) DELAY IN EM^CTIVE DATE FOR DIVERSIFICATION REQUIREMENTS 
26 use 817 note. 
WITH RESPECT TO ACCOUNTS FOR CERTAIN IMMEDIATE ANNUITIES.— 
Section 817(h) of the 1986 Code shall not apply until January 1,1989 
with respect to a variable contract (as defined in section 817(d) of the 
1986 Code) if— 
(1) such contract provides for the payment of an immediate 
annuity (as defined in section 72(uX4) of the 1986 Code), 
(2) such contract was outstanding on September 12, 1986, and 
(3) the segregated asset account on which such contract is 
based was, on September 12, 1986, wholly invested in deposits 
insured by the Federal Deposit Insurance Corporation or the 
Federal Savings and Loan Insurance Corporation. 
102 STAT. 3456 
PUBLIC LAW 100-647—NOV. 10, 1988 
0') TREATMENT OF ALTERNATIVE MINIMUM TAX WITH RESPECT TO 
SHAREHOLDERS SURPLUS ACXX)UNT.— 
(1) Paragraph (2) of section 815(c) of the 1986 Code (relating to 
shareholders surplus account) is amended by adding at the end 
thereof the following new sentence: 
"If for any taxable year a tax is imposed by section 55, under 
r^^ations proper adjustments shall be made for such year and 
all subsequent taxable years in the amounts taken into account 
under subparagraphs (A) and (B) of this paragraph and subpara-
graph (B) of subsection (dX3)." 
26 use 815 note. 
(2) EFFECTIVE D
A
T
E
.
—
^
T
T
i
e amendment made by paragraph (1) 
shall apply to taxable years b^innii^ after December 31, 1986. 
(k) TREATMENT OF CERTAIN ITEMS AS NOT INTEREST FOR SOURCE 
RULES, ETC.—Subsection (f) of section 818 of the 1986 0)de is 
amended by adding at the end thereof the following new paragraph: 
"(3) 
ITEMS DESCRIBED IN SECTION 807(C) 
TREATED AS NOT 
INTEREST FOR SOURCE RULES, ETC.—For purposes of part I of 
subchapter N, items described in any paragraph of section 807(c) 
shall be treated as amounts which are not interest." 
SEC. 1011. AMENDMENTS RELATED TO PARTS I AND II OF SUBTITLE A OF 
TITLE XI OF THE REFORM ACT. 
(a) AMENDMENT RELATED TO SECTION 1101 OF THE REFORM ACT.— 
(1) Paragraph (4) of section 2 1 ^ ) of the 1986 Code (relatmg to 
special rule for married individuals filing separately) is 
amended to read as foUows: 
"(4) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPA-
RATELY AND LIVING APART.—A husband and wife who— 
"(A) file separate returns for any taxable year, and 
"(B) live apart at all times during such taxable year, 
shall not be treated as married individuals for purposes of this 
subsection." 
26 use 219 note. 
(2XA) Except as provided in subparagraph (B), the amend-
ment made by paragraph (1) shall apply to taxable years b a n -
ning after December 31,1987. 
(B) A taxpayer may elect to have the amendment made by 
paragraph (1) apply to any taxable year b^inning in 1987. 
(b) AMran>MENTS RELATED TO SECTION 1102 OF THE REFORM ACT.— 
(1) Sections 408(dX2XC) and 408(oX4XBXiv) of the 1986 Code 
are each amended by striking out "with or within which the 
taxable year ends" and inserting in lieu thereof "in which the 
taxable year begins". 
(2XA) Section 408(dX4) of the 1986 Code (relating to excess 
contributions returned before due date of return) is amended by 
striking out "to the extent that such contribution exceeds the 
amount allowable as a deduction under section 219". 
(B) Section 408(dX4) of the 1986 Code is amended— 
(i) by striking out "excess" each place it appears, and 
(ii) by striking out "EXCESS CONTRIBUTIONS" in the head-
ing and inserting in lieu thereof "0)NTRIBUTIONS". 
(3) Sections 408(dX5) and 4973(b) of the 1986 Code are each 
amended by striking out all that follows "section 219" in the 
last sentence thereof and inserting in lieu thereof "shall be 
computed without r^ard to section 219(g).". 
(4XA) Section 6693(b) of the 1986 Code (relating to overstate-
ment of designated nondeductible contributions) is amended to 
read as follows: 
crime. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3457 
"
O
t
)
) PENALTIES RELATING TO NONDEDUCTIBLE CONTRIBUTIONS.— 
"(1) 
OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CON-
TRIBUTIONS.—Any individual who— 
"(A) is required to furnish information under section 
408(oX4) as to the amount of designated nondeductible con-
tributions made for any taxable year, and 
"(B) overstates the amount of such contributions made 
for such taxable year, 
shall pay a penalty of $100 for each such overstatement unless 
it is shown that such overstatement is due to reasonable cause. 
"(2) FAILURE TO FILE FORM.—Any individual who fails to file a Law 
form required to be filed by the Secretary under section 408(oX4) f
^
^
^
*
^
®
'
"
®
"
*
^ ^^ 
shall pay a penalty of $50 for each such failure unless it is 
shown that such failure is due to reasonable cause." 
(BXi) The heading for section 6693 of the 1986 Code is 
amended by striking out "overstatement o f and inserting in 
lieu thereof "penalties relating to". 
(ii) The item relating to section 6693 in the table of sections 
for subchapter B of chapter 68 is amended by striking out 
"overstatement o f and inserting in lieu thereof "penalties 
relating to". 
(c) AMENDMENTS RELATED TO SECTION 1105 OF THE REFORM ACT.— 
(1) Section 402(gX2XC) of the 1986 Code (relating to taxation of 
distribution) is amended— 
(A) by striking out "(and no tax shall be imposed under 
section 72(t))" in clause (i), 
(B) by striking out "such excess deferral is made" in 
clause (ii) and inserting in lieu thereof "such income is 
distributed", and 
(C) by inserting at the end thereof the following new flush 
sentence: 
"No tax shall be imposed under section 72(t) on any dis-
tribution described in the preceding sentence." 
(2) Section 402(gX2) is amended by striking out "REQUIRED 
DISTRIBUTION" in the heading thereof and inserting in lieu 
thereof "DISTRIBUTION". 
(3) Section 402(gX2) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(D) PARTIAL DISTRIBUTIONS.—If a plan distributes only a 
portion of any excess deferral and income allocable thereto, 
such portion shall be treated as having been distributed 
ratably from the excess deferral and the income." 
(4) Section 402(gX3) of the 1986 Code (defining elective defer-
ral) is amended by striking out "paragraph" and inserting in 
lieu thereof "subsection" 
(5XA) Qause (iii) of section 402(gX8XA) of the 1986 Code 
(relating to special rule for certain organizations) is amended by 
inserting "(determined in the manner prescribed by the Sec-
retary)" after "taxable years". 
(B) Section 402(gX8) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(D) YEARS OF SERVICE.—For purposes of this paragraph, 
the term 'years of service' has the meaning given such term 
by section 4O301>)." 
(6XA) Section 402(g) of the 1986 Code, as added by section 
1852(b)(3XA) of the Reform Act, is redesignated as subsection (i). 
102 STAT. 3458 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) Section 402(g) of the 1986 Code, as added by section 
1854(fX2) of the Reform Act, is redesignated as subsection 0')-
26 use 402 note. 
(Q Section 1854(0(4XC) of the Reform Act is amended by 
striking out "section 402(g)" and inserting in lieu thereof "sec-
tion 402(j)". 
(7XA) Section 401(a) of the 1986 (Ik)de is amended by adding at 
the end thereof the following new paragraph: 
"(30) LIMITATIONS ON ELECTIVE DEFERRALS.—In the case of a 
trust which is part of a plan under which elective deferrals 
(within the meaning of section 402(gX3)) may be made with 
respect to any individual during a calendar year, such trust 
shsdl not constitute a qualified trust under this subsection 
unless the plan provides that the amount of such deferrals 
under such plan and all other plans, contracts, or arrangements 
of an employer maintaining such plan may not exceed the 
amount of the limitation in effect under section 402(gXl) for 
taxable years b^inning in such calendar year." 
(B) Section 403a>Xl) of the 1986 Code is amended by striking 
out "and" at the end of subparagraph (CJ), by inserting "and" at 
the end of subparagraph (D), and by inserting after subpara-
graph (D) the following new subparagraph: 
"(E) in the case of a contract purchased under a plan 
which provides a salary reduction agreement, the plan 
meets the requirements of section 401(aX30),". 
(Q Subparagraph (A) of section 408(kX6) of the 1986 Code, as 
amended by subsection (fXl), is amended by adding at the end 
thereof the following new clause: 
"(iv) LIMITATIONS ON ELECTIVE DEFERRALS.—(Dlause (i) 
shall not apply to a simplified employee pension unless 
the requirements of section 401(aX30) are met." 
(D) Subparagraph (D) of section 501(cX18) of the 1986 Code is 
amended by striking out "and" at the end of clause (ii), by 
striking out the period at the end of clause (iii) and inserting in 
lieu thereof ", and", and by inserting after clause (iii) the 
following new clause: 
"(iv) the requirements of section 401(aX30) are met." 
26 use 401 note. 
(EXD Elxcept as provided in clause (ii), the amendments made 
by this paragraph shall apply to plan years b^^inning after 
December 31,1987. 
(ii) In the case of a plan described in section 1105(cX2) of the 
Reform Act, the amendments made by this paragraph shall not 
apply to contributions made pursuant to an agreement de-
scribed in such section for plan years b^inning before the 
earlier of— 
(D the later of January 1,1988, or the date on which the 
last of such agreements terminates (determined without 
r^ard to any extension thereof after February 28,1986), or 
(ID January 1,1989. 
26 use 402 note. 
(8) Section 1105(cX2XA) of the Reform Act is amended by 
striking out "the last of such collective bargaining agreements' 
and inserting in lieu thereof "such agreement". 
(9) Section 1105(c) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(6) REPORTING REQUIREMENTS.—The amendments made by 
subsection (b) shall apply to calendar years banning after 
December 31,1986." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3459 
(10) Notwithstanding any other provision of law, a plgm may 26 use 402 note. 
incorporate by reference the dollar limitations under section 
402(g) of the Internal Revenue Code of 1986. 
(11) Section 402(gX3) of the 1986 CJode is amended by inserting Wages. 
' at the end thereof the following new sentence: "An employer 
contribution shall not be treated as an elective deferral de-
scribed in subparagraph (C) if under the salary reduction 
agreement such contribution is made pursuant to a one-time 
irrevocable election made by the employee at the time of initial 
eligibility to participate in the agreement or is made pursuant 
to a similar arrangement specified in regulations." 
(12) Subpara^aph (A) of section 403(bX12) of the 1986 Code is Wages. 
amended by mserting after clause (ii) the following new 
sentence: 
"For purposes of clause (i), a contribution shall be treated 
as not made pursuant to a salary reduction agreement if 
under the agreement it is made pursuant to a 1-time irrev-
ocable election made by the employee at the time of initial 
eligibility to participate in the agreement or is made pursu-
ant to a similar arrangement specified in regulations." 
(d) AMENDMENTS RELATED TO SECTION 1106 OF THE REFORM ACT.— 
(1) Section 404(1) of the 1986 (Dode (relating to limitation on 
amount of compensation which may be taken into account) is 
amended by adding at the end thereof the following new sen-
tence: "For purposes of clause (i), (ii), or (iii) of subsection 
(aXlXA), and in computing the full funding limitation, any 
adjustment under the preceding sentence shall not be taken 
into account for any year before the year for which such 
adjustment first takes effect.". 
(2) Section 415(bX5XD) of the 1986 Code (relating to applica-
tion to changes in benefit structures) is amended by striking out 
"this paragraph" and inserting in lieu thereof "subparagraph 
(A)". 
(3) Paragraph (2) of section 415(k) of the 1986 Code (relating to 
contributions to provide cost-of-living protection under defined 
benefit plans), as added by section 1106(c) of the Reform Act, is 
amended— 
(A) by striking out "to the arrangement" in subparagraph 
(CXii) and inserting in lieu thereof "to such increase , and 
(B) by striking out subparagraph (D) and inserting in lieu 
thereof: 
"(D) ARRANGEMENT ELECTIVE; TIME FOR ELECTION.—An 
arrangement meets the requirements of this subparagraph 
only if it is elective, it is available under the same terms to 
€01 participants, and it provides that such election may at 
least be made in the year in which the participant— 
"(i) attains the earliest retirement age under the 
defined benefit plan (determined without regard to any 
requirement of separation from service), or 
(ii) separates from service." 
(4) Sections 401(aX17) and 404a) of the 1986 Code are each 
amended by adding at the end thereof the following new sen-
tence: "In determining the compensation of an employee, the 
rules of section 414(qX6) shall apply, except that in applying 
such rules, the term 'family' shall include only the spouse of the 
employee and any lineal descendants of the employee who have 
not attained age 19 before the close of the year. 
102 STAT. 3460 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 415 note. 
(5) Paragraph (4) of section 1106(i) of the Reform Act is 
amended by striking the period at the end thereof and inserting 
in Ueu thereof "(determined as if the amendments made by this 
section were in effect for such year).". 
(6) Section 415(bX5XB) of the 1986 Code is amended by insert-
ing "and subsection (e)" after "paragraphs (IXB) and (4) . 
(7) Subparagraph (A) of section 415(cX6) of the 1986 Code is 
amended— 
(A) by striking out "paragraph (cXlXA) (as adjusted for 
such year pursuant to subsection (dXD)", and inserting in 
lieu thereof "paragraph (IXA)"; and 
(B) by striking out "paragraph (cXlXA) (as so adjusted)" 
and inserting in Heu thereof "paragraph (1)(A)". 
(8) Sections 414(qXlXD) and 416(iXlXAXi) of the 1986 Code are 
each amended by striking out "150 percent of the amount in 
effect under section 415(cXlXA)" and inserting in Heu thereof 
"50 percent of the amount in effect under section 415(bXlXA)". 
(e) AMENDMENTS RELATED TO SECTION 1107 OF THE REFORM ACT.— 
(1) Section 457(cX2) of the 1986 Code is amended by striking 
out "and paragraphs (2) and (3) of subsection (b)". 
(2) Section 457(dXlXA) of the 1986 Code (relating to distribu-
tion requirements) is amended to read as follows: 
(A) under the plan amounts will not be made available 
to participants or beneficiaries earlier than— 
"(i) the calendar year in which the participant at-
tains age 70 y2, 
"(ii) when the participant is separated from service 
with the employer, or 
"(iii) when the participant is faced with an unforesee-
able emergency (determined in the manner prescribed 
by the Secretary in regulations)." 
(3) Paragraph (7) of section 401(k) of the 1986 Code (defining 
rural electric cooperative plan) is amended to read as follows: 
"(7) RURAL ELECTRIC COOPERATIVE PLAN.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'rural electric cooperative 
plan' means any pension plan— 
"(i) which is a defined contribution plan (as defined 
in section 414(i)), and 
"(ii) which is established and maintained by a rural 
electric cooperative. 
"(B) 
RURAL ELECTRIC COOPERATIVE DEFINED.—For 
pur-
p>oses of subpareigraph (A), the term 'rural electric coopera-
tive' means— 
"(i) any organization which— 
"(I) is exempt from tax under this subtitle or 
which is a State or local government or political 
subdivision thereof (or agency or instrumentality 
thereof), and 
"(II) is engaged primarily in providing electric 
service on a mutual or cooperative basis, 
"(ii) any organization described in paragraph (4) or 
(6) of section 501(c) and at least 80 percent of the 
members of which are organizations described in clause 
(i), and 
"(iii) an organization which is a national association 
of organizations described in clause (i) or (ii)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3461 
(4) Section 414(o) of the 1986 Code is amended by inserting "or 
any requirement under section 457" after "(nX3)". 
(5XA) Paragraph (6) of section 818(a) of the 1986 Code (defin-
ing pension plan contracts) is amended— 
(i) by striking out "State" in subparagraph (A), 
(ii) by inserting "or any organization (other than a 
governmental imit) exempt from tax under this subtitle," 
> 
after "forgoing," in subparagraph (B), 
(iii) by striking out "or" before "agency" in subparagraph 
(B), and 
(iv) by inserting ", or organization" after "instrumental-
ity" the second place it appears in subparagraph (B). 
(B) The amendments made by this paragraph shall apply to 
26 USC 818 note. 
contracts issued after December 31,1986. 
(6) Section 1107(cX3) of the Reform Act is amended— 
26 USC 457 note. 
(A) by striking out "eligible" each place it appears, and 
(B) by inserting at the end of subparagraph (B) the follow-
ing new sentence: "This subparagraph shall only apply to 
individuals who were covered under the plan and agree-
ment on August 16,1986." 
(7) Paragraph (5) of section 1107(c) of the Reform Act is 
amended— 
(A) by striking out "to employees on August 1,1986, of, 
(B) by striking out "a deferred compensation plan" in 
subparagraph (A) and inserting in lieu thereof "to employ-
ees on August 16,1986,", 
(C) by inserting "maintaining a deferred compensation 
plan" aiter "Alabama" in subparagraph (A), and 
. 
(D) by striking out "a deferred compensation plan" in 
subparagraph (B) and inserting in lieu thereof "to individ-
uals eligible to participate on August 16,1986, in a deferred 
compensation plan". 
(8) Section 3121(vX3XA) of the 1986 Code is amended by 
striking out "457(eXl)" and inserting in lieu thereof "457(£X1)". 
(9) Effective for years beginning after December 31, 1988, 
paragraph (9) of section 457(e) of the 1986 (Dode is amended by 
inserting "after separation from service and" before "within 60 
days". 
(10) Subclause (1) of section 457(dX2XBXi) of the 1986 Code is 
amended to read as follows: 
"(I) the amounts payable with respect to the 
participant will be paid at times specified by the 
Secretary which are not later than the time deter-
mined under section 401(aX9XG) (relating to in-
cidental death benefits),", 
(f) AMENDMENTS RELATED TO SECTION 1108 OF THE REFORM ACT.— 
Retirement. 
(1) Subparagraph (A) of section 408(kX6) of the 1986 Code 
(relating to salary reduction arrangements under simplified 
employee pensions) is amended to read as follows: 
. 
"(A) ARRANGEBIENTS WHICH QUALIFY.— 
"(i) IN GENERAL.—A simplified employee pension 
shall not fail to meet the requirements of this subsec-
tion for a year merely because, under the terms of the 
pension, an employee may elect to have the employer 
make payments— 
102 STAT. 3462 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(I) as elective employer contributions to the 
simplified employee pension on behalf of the em-
ployee, or 
(II) to the employee directly in cash. 
"(ii) 50 PERCENT OP EUGIBLE EMPLOYEES MUST ELECT.— 
Clause (i) shall not apply to a simplified employee 
pension unless an election described in clause (iXD is 
made or is in effect with respect to not less than 50 
percent of the employees of the employer eligible to 
participate. 
"(iii) REQUIREMENTS RELATING TO DEFERRAL PERCENT-
AGE.—Clause (i) shall not apply to a 
simplified 
employee pension for any year unless the deferral 
percentage for such year of each highly compensated 
employee eligible to participate is not more than the 
product of— 
"(I) the average of the deferral percentages for 
such year of all employees (other than highly com-
pensated employees) eligible to participate, multi-
plied by 
"(II) 1.25." 
(2) Section 408(kX6XB) of the 1986 Code (relating to exception 
where more than 25 employees) is amended by inserting who 
were eligible to participate (or would have been required to be 
eligible to participate if a pension was maintained)" after "25 
employees'. 
(3XA) Section 408(kX6XDXii) of the 1986 Code (defining defer-
ral percentage) is amended by striking out "(within the mean-
ing of section 414(s))" and inserting in lieu thereof "(not in 
excess of the first $200,000)". 
(B) Subparagraph (B) of section 408(kX7) of the 1986 Code 
(defining compensation) is amended to read as follows: 
"(B) COMPENSATION.—Except as provided in paragraph 
(2X0), the term 'compensation' has the meaning given such 
term by section 414(s)." 
(C) Subparagraph (C) of section 408(kX3) of the 1986 Code is 
amended by striking out "total" before "compensation". 
(D) Section 408(kX8) of the 1986 Code is amended by striking 
out "paragraph (3XC)" and inserting in lieu thereof "paragraphs 
(3XC)and(6XDXii)". 
(4) Section 408(kX6) of the 1986 Code (relating to employee 
may elect salary reduction arrangement) is amended by 
redesignating subparagraph (F) as subparagraph (G) and 
by inserting after 
subparagraph 
(E) the following 
new 
subparagraph: 
"(F) EXCEPTION WHERE PENSION DOES NOT MEET REQUIRE-
MENTS NECESSARY TO INSURE DISTRIBUTION OF EXCESS CON-
TRIBUTIONS.—This paragraph shall not apply with respect 
to any year for which the simplified employee pension does 
not meet such requirements as the Secretary may prescribe 
as are necessary to insure that excess contributions 
are distributed in accordance with subparagraph (C), 
including— 
"(i) reporting requirements, and 
"(ii) requirements which, notwithstanding paragraph 
(4), provide that contributions (and any income alloca-
ble thereto) may not be withdrawn from a simplified 
employee pension until a determination has been made 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3463 
that the requirements of subparagraph (AXiii) have 
been met with respect to such contributions." 
(5) Section 408(d) of the 1986 Code (relating to tax treatment 
of distributions) is amended by adding at the end thereof the 
following new paragraph: 
"(7) SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS.— 
"(A) TRANSFER OR ROLLOVER OF CONTRIBUTIONS PROHIBITED 
UNTIL DEFERRAL T
E
S
T MET.—Notwithstanding any other 
provision of this subsection or section 72(t), paragraph (1) 
and section 72(tXl) shall apply to the transfer or distribu-
tion from a simplified employee pension of any contribution 
under a salary reduction arrangement described in subsec-
tion (kX6) (or any income allocable thereto) before a deter-
mination as to whether the requirements of subsection 
(kX6XAXiii) are met with respect to such contribution. 
"(B) (JERTAIN EXCLUSIONS TREATED AS DEDUCTIONS.—For 
purposes of paragraphs (4) and (5) and section 4973, any 
amount excludable or excluded from gross income under 
section 402(h) shall be treated as an amount allowable or 
allowed as a deduction under section 219." 
(6) Subparagraph (C) of section 404(hXl) of the 1986 Code is 
amended by inserting "(or during the taxable year in the case of 
a taxable year described in subparagraph (AXii))" after "taxable 
year" the second place it appears. 
(7) Section 1108(h) of the Reform Act is amended to read as 
26 USC 219 note. 
follows: 
"(h) EFFECTIVE DATES.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to years b^in 
ning after December 31,1986. 
"(2) INTEGRATION RULES.—Subparagraphs (D) and (E) of sec-
tion 408(kX3) of the Internal Revenue Code of 1954 (as in effect 
before the amendments made by this section) shall continue to 
apply for years b^inning after December 31, 1986, and before 
January 1, 1989, except that employer contributions under an 
arrangement under section 408(kX6) of the Internal Revenue 
Code of 1986 (as added by this section) may not be int^rated 
under such subparagraphs." 
(8) Section 209(eX8) of the Social Security Act is amended to 
42 USC 409. 
read as follows: 
"(8) under a simplified employee pension (as defined in section 
408(kXl) of such Code), other than any contributions described 
in section 408(kX6) of such Code,". 
(9) Section 3401(aX12XC) of the 1986 Code is amended— 
(A) by striking out "section 219" and inserting in lieu 
thereof "section 402(h) (1) and (2)", and 
(B) by striking out "a deduction" and inserting in lieu 
thereof "an exclusion". 
(10) Section 408(kX8) of the 1986 Ck)de is amended by inserting 
", except that in the case of years b^^inning after 1988, the 
$200,000 amount (as so adjusted) shall not exceed the amount in 
effect under section 401(aX17)" after "section 415(d)". 
(g) AMENDMENTS RELATED TO SECTION 1111 OF THE REFORM ACT.— 
dXA) Section 40iaX2XB) of the 1986 Code (defining contribu-
tion percentages) is amended by inserting "by the employer" 
after "contributed" each place it appears. 
102 STAT. 3464 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) Clause (ii) of section 40iaX3XA) of the 1986 Code is 
amended by inserting ''attributable to employer contributions" 
after "benefits". 
(2) Section 4010X5X0 of the 1986 Code (defining average 
annual compensation) is amended to read as follows: 
"(O AVERAGE ANNUAL COMPENSATION.—^The term 'aver-
age annual compensation' means the participant's highest 
average annual compensation for— 
"(i) any period of at least 3 consecutive years, or 
"(ii) if shorter, the participant's full period of 
service. 
(3) Section 4biaX5XE) of the 1986 Code (defining covered 
compensation) is amended— 
(A) by striking out "age 65" each place it appears and 
inserting in lieu thereof "the social security retirement 
age", and 
(B) by adding at the end thereof the following new clause: 
"(iii) SOCIAL SECURITT RETIREMENT AGE.—For pur-
poses of this subparagraph, the term 'social security 
retirement age' has the meaning given such term by 
section 415(bX8)." 
26 use 401 note. 
(4) Section 1111(c)(3) of the Reform Act is amended by striking 
out "benefits pursuant to, and individuals covered by, any such 
agreement in", 
(h) AMENDMENTS RELATED TO SECTION 1112 OF THE REFORM ACT.— 
(1) Section 410(bX4XB) of the 1986 Code (relating to exclusion 
of employees not meeting age and service requirements) is 
amended— 
(A) by striking out "do not meet" and inserting in lieu 
thereof "not meeting", and 
(B) by striking out "and". 
(2) Section 410(bX6) of the 1986 Code (relating to definitions 
and special rules) is amended by redesignating subparagraph (F) 
as subparagraph (G) and by adding after subparagraph (E) the 
following new subparagraph: 
"CF) EMPLOYERS WTTH ONLY HIGHLY COMPENSATED EMPLOY-
EES.—^A plan maintained by an employer which has no 
employees other than highly compensated employees for 
any year shall be treated as meetuig the requirements of 
th^ subsection for such year." 
(3) Section 401(aX26) of the 1986 Code (relating to additional 
participation requirements) is amended by redesignating 
subparagraph (F) as subparagraph (H) and by adding after 
subparagraph (E) the following new subparagraphs: 
"CF) SPECIAL RULE FOR CERTAIN DISPOSITIONS OR ACQUISI-
TIONS.—^Rules similar to the rules of section 410(bX6XC) 
shall am)ly for purposes of this paragraph. 
"(G) SEPARATE LINES OF BUSINESS.—At the election of the 
employer and with the consent of the Secretary, this para-
graph may be applied separately with respect to each sepa-
rate line of business of ^ e employer. For purposes of this 
paragraph, the term 'separate line of business' has the 
meaning given such term by section 414(r) (without r^ard 
to paragraph (7) thereof)." 
(4) Section 402(bX2) of the 1986 Code (relating to failure to 
meet requirements of section 410(b)) is amended by striking out 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3465 
subparagraphs (A) and (B) and inserting in lieu thereof the 
following: 
"(A) HIGHLY COMPENSATED EMPLOYEES.—If 1 of the rea-
sons a trust is not exempt from tax under section 501(a) is 
the failure of the plan of which it is a part to meet the 
requirements of section 401(aX26) or 410(b), then a highly 
compensated employee shall, in lieu of the amount deter-
mined under paragraph (1), include in gross income for the 
taxable year with or within which the taxable year of the 
trust ends an amount equal to the vested accrued benefit of 
such employee (other than the employee's investment in 
the contract) as of the close of such taxable year of the 
trust. 
"(B) FAILURE TO MEET COVERAGE TESTS.—If a trust is not 
exempt from tax under section 501(a) for any taxable year 
solely because such trust is part of a plan which fails to 
meet the requirements of section 401(aX26) or 410(b), para-
graph (1) shall not apply by reason of such failure to any 
employee who was not a highly compensated employee 
during— 
"(i) such taxable year, or 
"(ii) any preceding period for which service was cred-
itable to such employee under the plan." 
(5» Subsections (mX4XA) and (nX3XA) of section 414 of the 1986 
Code are each amended by striking out "and (16)" and inserting 
in lieu thereof "(16), (17), and (26)". 
(6) Clause (iii) of section 1112(eX3XA) of the Reform Act is 
26 use 401 note. 
amended by striking out "a plan or merger" and inserting in 
lieu thereof "the plan". 
(7) Section 1112(eX2) of the Reform Act is amended by striking 
out "employees covered by such agreement in". 
(8) Subsection (e) of section 1112 of the Reform Act is amended 
by striking out paragraph (3XC) and by adding at the end of 
such subsection the following new paragraph: 
"(4) SPECIAL RULE FOR PLANS WHICH MAY NOT TERMINATE.—^To 
the extent provided in r^ulations prescribed by the Secretary 
of the Treasury or his delegate, if a plan is prohibited from 
terminating under title IV of the Employee Retirement Income 
Security Act of 1974 before the 1st year to which the amend-
ment made by subsection (b) would apply, the amendment made 
by subsection (b) shall only apply to years after the 1st year in 
which the plan is able to terminate." 
(9) Subparagraph (B) of section 1112(eX3) of the Reform Act is 
amended to read as follows: 
"(B) INTEREST RATE FOR DETERMINING ACCRUED BENEFIT OF 
HIGHLY COMPENSATED EMPLOYEES FOR CERTAIN PURPOSES.—In 
the case of a termination, transfer, or distribution of assets 
of a plan described in subparagraph (AXii) before the 1st 
year to which the amendment made by subsection (b) 
applies— 
"(i) AMOUNT ELIGIBLE FOR ROLLOVER, INCOME AVERAG-
ING, O
R TAX-FREE TRANSFER.—For purposes of determin-
ing anv eligible amount, the present value of the 
accrued benefit of any highly compensated employee 
shall be determined by using an interest rate not less 
than the highest of— 
102 STAT. 3466 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(I) the applicable rate under the plan's method 
in effect under the plan on August 16,1986, 
"(II) the highest rate (as of the date of the termi-
nation, transfer, or distribution) determined under 
any of the methods applicable under the plan at 
any time after August 15, 1986, and before the 
termination, transfer, or distribution in calculating 
the present value of the accrued benefit of an 
employee who is not a highly compensated em-
ployee under the plan (or any other plan used in 
determining whether the plan meets the require-
ments of section 401 of the Internal Revenue Code 
of 1986), or 
"(III) 5 percent, 
"(ii) EuGiBLE AMOUNT.—For purposes of clause (i), 
the term 'eligible amount' means any amount with 
respect to a highly compensated employee which— 
"(I) may be rolled over under section 402(aX5) of 
such Code, 
"(II) is eligible for income avers^ng under sec-
tion 402(eXl) of such Code, or capital gains treat-
ment under section 402(aX2) or 403(aX2) of such 
Code (as in effect before this Act), or 
"(III) may be transferred to another plan without 
inclusion in gross income. 
"(iii) AMOUNTS SUBJECT TO EARLY WITHDRAWAL OR 
EXCESS DISTRIBUTION TAX.—For purposes of sections 
72(t) and 4980A of such Code, there shall not be taken 
into account the excess (if any) of— 
"(I) the amount distributed to a highly com-
pensated employee by reason of such termination 
or distribution, over 
"(II) the amount determined by using the in-
terest rate applicable under clause (i). 
"(iv) 
DISTRIBUTIONS OF ANNUITY CONTRACTS.—If an 
<
, 
annuity contract purchased after August 16, 1986, is 
distributed to a highly compensated em{)loyee in 
connection with such termination or distribution, there 
shall be included in gross income for the taxable year of 
such distribution an amount equal to the excess of— 
"(I) the purchase price of such contract, over 
"(II) the present value of the benefits payable 
under such contract determined by using the in-
terest rate applicable under clause (i). 
Such excess shall not be taken into account for pur-
poses of sections 72(t) and 4980A of such Code. 
"(v) HIGHLY COMPENSATED EMPLOYEE.—For purposes 
of this subparagraph, the term 'highly compensated 
employee' has the meaning given such term by section 
414(q) of such Code." 
(10) Section 413(b) of the 1986 CJode is amended by adding at 
the end thereof the following new paragraph: 
"(9) PLANS COVERING A PROFESSIONAL EMPLOYEE.—Notwith-
standing subsection (a), in the case of a plan (and trust forming 
part thereof) which covers any professional employee, para-
graph (1) shall be applied by substituting 'section 410(a)' for 
Section 410', and paragraph (2) shall not apply." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3467 
(11) Section 410(bX4) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(C) REQUIREMENTS NOT TREATED AS BEING MET BEFORE 
ENTRY DATE.—An employee shall not be treated as meeting 
the age and service requirements described in this para-
graph until the first date on which, under the plan, any 
employee with the same age and service would be eligible to 
commence participation in the plan." 
(i) AMENDMENTS RELATED TO SECTION 1114 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 414(q) of the 1986 Code (defining 
highly compensated employee) is amended by adding at the end 
thereof the following new flush sentence: 
"The Secretary shall adjust the $75,000 and $50,000 amounts 
under this paragraph at the same time and in the same manner 
as under section 415(d)." 
(2) Section 414(qX6) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(C) RULES TO APPLY TO OTHER PROVISIONS.— 
"(i) IN GENERAL.—Except as provided in regulations 
and in clause (ii), the rules of subparagraph (A) shall be 
applied in determining the compensation of (or any 
contributions or benefits on behalf of) any employee for 
purposes of any section with respect to which a highly 
compensated employee is defined by reference to this 
subsection. 
"(ii) 
EXCEPTION 
FOR 
DETERMINING 
INTEGRATION 
LEVELS.—Clause (i) shall not apply in determining the 
portion of the compensation of a participant which is 
under the integration level for purposes of section 
401(1)." 
(3XA) Section 414(qX8) of the 1986 Code (relating to excluded 
employees) is amended— 
(i) by inserting "and" at the end of subparagraph (D), by 
striking ", and" at the end of subparagraph (E) and insert-
ing in lieu thereof a period, and by striking out subpara-
graph (F), and 
(ii) by striking out "The" in the last sentence thereof and 
inserting in lieu thereof "Except as provided by the Sec-
retary, the". 
(B) Section 414(q) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
"(11) SPECIAL RULE FOR NONRESIDENT AUENS.—For purposes of 
this subsection and subsection (r), employees who are non-
resident aliens and who receive no earned income (within the 
meaning of section 911(dX2)) from the employer which 
constitutes income from sources within the United States 
(within the meaning of section 861(aX3)) shall not be treated as 
emolovees " 
(4XA) Paragraph (8) of section 414(q) of the 1986 Code is 
amended by inserting "or the number of officers taken into 
account under paragraph (5)" after "paragraph (4)". 
(B) Section 416(iXlXA) of the 1986 Code is amended by adding 
at the end thereof the following new sentence: "For purposes of 
determining the number of officers taken into account under 
clause (i), employees described in section 414(qX8) shall be 
excluded." 
102 STAT. 3468 
PUBLIC LAW 100-647—NOV. 10, 1988 
(5) Subparagraph (B) of section 408(kX3) of the 1986 Code is 
amended to read as follows: 
"(B) SPECIAL RULES.—For purposes of subparagraph (A), 
there shall be excluded from consideration employees de-
scribed in subparagraph (A) or (C) of section 410(bX3)." 
0') AMENDMENTS RELATED TO SECTION 1115 OF THE REFORM ACT.— 
(1) So much of section 414(s) of the 1986 Code as precedes 
paragraph (2) is amended to read as follows: 
"(s) COMPENSATION.—For purposes of any applicable provision— 
"(1) IN GENERAL.—Except as provided in this subsection, the 
term 'compensation' has the meaning given such term by sec-
tion 415(c)(3)." 
(2) Section 414(s) of the 1986 Code is amended by striking out 
paragraph (2), by redesignating paragraphs (3) and (4) as para-
graphs (2) and (3), respectively, and by adding at the end thereof 
the following new paragraph: 
"(4) APPLICABLE PROVISION.—For purposes of this subsection, 
the term 'applicable provision' means any provision which 
specifically refers to this subsection." 
(3XA) Section 416(iXl) of the 1986 Code (defining key 
employee) is amended by adding at the end thereof the follow-
ing new subparagraph: 
"(D) COMPENSATION.—For purposes of this paragraph, the 
term 'compensation' has the meaning given such term by 
section 414(qX7)." 
26 use 416 note. 
(B) The amendment made by tWs paragraph shall apply to 
years beginning after December 31,1988. 
(k) AMENDMENTS RELATED TO SECTION 1116 OF THE REFORM ACT.— 
dXA) Subparagraph (B) of section 401(kX2) of the 1986 Code 
(relating to distributions from a cash or deferred arrangement) 
IS amended— 
(i) by striking out subclauses (11), (III), and (IV) of clause 
(i) and inserting in lieu thereof: 
"(II) an event described in paragraph (10),", and 
(ii) by redesignating subclauses (V) and (VI) as subclauses 
(III) and (IV), respectively. 
(B) Section 401(k) of the 1986 (IJode is amended by adding at 
the end thereof the following new paragraph: 
"(10) DISTRIBUTIONS UPON TERMINATION OF PLAN OR DISPOSI-
TION OF ASSETS OR SUBSIDIARY — 
"(A) IN GENERAL.—The following events are described in 
this paragraph: 
"(i) TERMINATION.—The termination of the plan with-
out establishment or maintenance of another defined 
contribution plan (other than an employee stock owner-
ship plan as defined in section 4975(eX7)). 
' (ii) DISPOSITION OF ASSETS.—The disposition by a 
corporation of substantially all of the assets (within the 
meaning of section 409(dX2)) used by such corporation 
in a trade or business of such corporation, but only 
with respect to an employee who continues employ-
ment with the corporation acquiring such assets. 
"(iii) DISPOSITION OF SUBSIDIARY.—The disposition by 
a corporation of such corporation's interest in a subsidi-
ary (within the meaning of section 409(d)(3)), but only 
with respect to an employee who continues employ-
ment with such subsidiary. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3469 
"(B) DISTRIBUTIONS MUST BE LUMP SUM DISTRIBUTIONS.— 
"(i) IN GENERAL.—An event shall not be treated as 
described in subparagraph (A) with respect to any em-
ployee unless the employee receives a lump sum dis-
tribution by reason of the event. 
"(ii) LUMP SUM DISTRIBUTION.—For purposes of this 
subparagraph, the term 'lump sum distribution' has 
the meaning given such term by section 402(eX4), with-
out regard to clauses (i), (ii), (iii), and (iv) of subpara-
graph (A), subparagraph (B), or subparagraph (H) 
thereof. 
"(C) TRANSFEROR CORPORATION MUST MAINTAIN PLAN.—An 
event shall not be treated as described in clause (ii) or (iii) of 
subparagraph (A) unless the transferor corporation contin-
ues to maintain the plan after the disposition." 
(CXi) Subparagraph (AXi) of section 401(kX10) of the 1986 Code 26 USC 401 note. 
(as added by subparagraph (B)) shall apply to distributions after 
October 16,1987. 
(ii) Subparagraph (B) of section 401(kX10) of the 1986 Code (as 
added by subparagraph (B)) shall apply to distributions after 
March 31,1988. 
(2) Subparagraph (B) of section 401(kX2) of the 1986 Code is 
amended— 
(A) by inserting "amounts held by the trust which are 
attributable to employer contributions made pursuant to 
the employee's election" after "under which", 
(B) by striking out "amounts held by the trust which are 
attributable to employer contributions made pursuant to 
the employee's election" in clause (i), and 
(C) by striking out "amounts" in clause (ii). 
(3XA) Clause (ii) of section 401(kX3XA) of the 1986 Code is 
amended by inserting "eligible" before "highly compensated 
employees" each place it appears. 
(B) Section 1116(bX4) of the Reform Act is amended by strik- 
26 use 401. 
ing out "any" the first place it appears and inserting in lieu 
thereof "an'\ 
(4) Subparagraph (C) of section 401(kX3) of the 1986 Code, as 
added by section 1116(e) of the Reform Act, is redesignated as 
subparagraph (D). 
(5) Subclause (I) of section 401(kX3XDXii) of the 1986 Code, as 
redesignated by paragraph (4), is amended by striking out 
"meets" and inserting in lieu thereof "meet". 
(6) Section 401(kX4XA) of the 1986 Code is amended by strik-
ing out "provided by such employer". 
(7) Section 401(kX8) of the 1986 Code (relating to arrangement 
not disqualified if excess contributions distributed) is amended 
by redesignating subparagraph (E) as subparagraph (F) 
and by inserting after subparagraph (D) the following new 
subparagraph: 
"
C
E
) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED 
BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION.—For pur-
poses of paragraph (2XC), a matching contribution (within 
the meaning of subsection (m)) shsdl not be treated as 
forfeitable merely because such contribution is forfeitable if 
the contribution to which the matching contribution relates 
is treated as an excess contribution under subparagraph 
102 STAT. 3470 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B), an excess deferral under section 402(gX2XA), or an 
excess aggregate contribution under section 401(mX6)(B)." 
26 use 401 note. 
(8) Subparagraph (B) of section 1116(fK2) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "If clause (i) or (ii) applies to any arrangement adopted by 
a governmental unit, then any cash or deferred arrangement 
adopted by such unit on or after the date referred to in the 
applicable clause shall be treated as adopted before such date." 
(9) Section 401(kX4XB) of the 1986 Code is amended by adding 
at the end thereof the following new sentence: 
"This subparagraph shall not apply to a rural electric 
cooperative plan." 
26 use 401 note. 
(10) Clause (i) of section 1116(fK2XB) of the Reform Act is 
amended by striking out "(or political subdivision thereof)" and 
inserting in lieu thereof "or political subdivision thereof, or any 
agency or instrumentality thereof,". 
' 
(1) AMENDMENTS RELATED TO SECTION 1117 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 401(m) of the 1986 Code (relating 
to nondiscrimination test for matching contributions and em-
ployee contributions) is amended by striking out "A plan" £ind 
inserting in lieu therepf "A defined contribution plan". 
(2) Paragraph (3) of section 401(m) of the 1986 Code (relating 
to requirements) is amended by adding at the end thereof the 
following new sentence: "If matching contributions are taken 
into account for purposes of subsection (kX3XAXii) for any plan 
year, such contributions shall not be taken into account under 
subparagraph (A) for such year." 
(3) The last sentence of section 401(mX2XB) of the 1986 Code is 
amended by strikinjg out "such contributions" the first place it 
appears and inserting in lieu thereof "contributions to which 
this subsection applies". 
(4) Section 401(mX4XA) of the 1986 Code (defining matching 
contribution) is amended by striking out "the plan" each place 
it appears and inserting in lieu thereof "a defined contribution 
plan'. 
(5XA) Section 401(mX4XB) of the 1986 Code (defining elective 
deferral) is amended by striking out "section 402(gX3XA)" and 
inserting in lieu thereof "section 402(gX3)". 
Effective date. 
(B) The amendment made by this paragraph shall take effect 
26 use 401 note. 
as if included in the amendments made by section 1120 of the 
Reform Act. 
(6) Subparagraph (C) of section 401(mX6) of the 1986 Code is 
amended by striHng out "EXCESS" in the subparagraph heading 
and inserting in lieu thereof "EXCESS AGGREGATE". 
(7) Section 401(mX7XA) of the 1986 Code (relating to additional 
tax of section 72(t) not applicable) is amended by striking out 
"paragraph (8)" and inserting in lieu thereof "paragraph (6)". 
(8) Section 4979(aXl) of the 1986 Code (relating to tax on 
certain excess contributions) is amended by striking out "a cash 
or deferred arrangement which is part of. 
(9) Section 4979(c) of the 1986 Code (defining excess contribu-
tions) is amended— 
(A) by striking out "403(b),", and 
(B) by striking out "408(kX8XB)" and inserting in lieu 
thereof "408(kX6XC)". 
(10) Section 4979(d) of the 1986 Code (defining excess aggre-
gate contribution) is amended by adding at the end thereof the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3471 
following new sentence: "For purposes of determining excess Contracts. 
aggr^ate contributions under an annuity contract described in 
section 403Q)), such contract shall be treated as a plan described 
in subsection (eXD." 
(11) Paragraph (2) of section 4979(f) of the 1986 Code (relating 
to inclusion in prior year) is amended to read as follows: 
"(2) YEAR OF INCLUSION.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), any amount distributed as provided in paragraph (1) 
shall be treated as received and earned by the recipient in 
his taxable year for which such contribution was made. 
"(B) DE MINIMIS DISTRIBUTIONS.—If the total excess con-
tributions and excess aggregate contributions distributed to 
a recipient under a plan for any plan year are less than 
$100, such distributions (and any income allocable thereto) 
shall be treated as earned and received by the recipient in 
his taxable year in which such distributions were made." 
(12) Subsection (d) of section 1117 of the Reform Act 
26 USC 401 note. 
is amended by adding at the end thereof the following new 
paragraph: 
"(4) DISTRIBUTIONS BEFORE PLAN AMENDMENT.— 
"(A) IN GENERAL.—If a plan amendment is required to 
allow a plan to make any distribution described in section 
401(mX6) of the Internal Revenue CJode of 1986, any such 
distribution which is made before the close of the 1st plan 
year for which such amendment is required to be in effect 
under section 1140 shall be treated as made in accordance 
with the provisions of the plan. 
"(B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.— 
"(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Sec-
retary of the Treasury or his del^ate shall prescribe 
an amendment which allows a plan to make any dis-
tribution described in section 401(mX6) of the Internal 
Revenue CJode of 1986. 
"(ii) ADOPTION BY PLAN.—If a plan adopts the amend-
ment prescribed under clause (i) and makes a dis-
tribution in accordance with such amendment, such 
distribution shall be treated as made in accordance 
with the provisions of the plan." 
(m) AMENDMENTS RELATED TO SECTION 1120 OF THE REFORM ACT.— 
(IXA) Section 403a)X10) of the 1986 Code (relating to non-
discrimination requirements), as added by section 1120(b) of the 
Reform Act, is redesignated as paragraph (12). 
(B) Subparagraph (D) of section 403(bXl) of the 1986 Code is 
amended by striking out "paragraph (10)" and inserting in lieu 
thereof "paragraph (12)". 
(2) (Dlause (i) of section 403(bX12XA), as redesignated by para-
graph (1), is amended— 
(A) by inserting "(17)," after "(5),", and 
(B) by inserting ", section 401(m)," after "section 401(a)" 
the first place it appears. 
(3) Section 112(Xc) of the Reform Act is amended to read as 
26 USC 403 note. 
follows: 
"(c) EFFECTIVE DATES.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to years begin-
ning after December 31,1988. 
102 STAT. 3472 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a 
plan maintained pursuant to 1 or more collective bargaining 
agreements between employee representatives and 1 or more 
employers ratified before March 1,1986, the amendments made 
by this section shall not apply to plan years beginning before 
the earlier of— 
"(A) January 1,1991, or 
"(B) the later of— 
"(i) January 1,1989, or 
"(ii) the date on which the last of such collective 
bargaining agreements terminates (determined without 
regard to any extension thereof after February 28, 
1986)." 
SEC. lOllA. AMENDMENTS RELATED TO PARTS III AND IV OF SUBTITLE A 
OF TITLE XI OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1121 OP THE REFORM ACT.— 
(1) Subparagraph (F) of section 402(aX5) of the 1986 Code 
(relating to transfer treated as rollover contribution under sec-
tion 408) is amended by striking out "described in subparagraph 
(A)" and inserting in lieu thereof "resulting in any portion of a 
distribution being excluded from gross income under subpara-
graph (A)". 
(2XA) Section 408(dX3XA) is amended by striking out the last 
sentence thereof. 
26 use 408 note. 
(B) The amendment made by subparagraph (A) shall apply to 
rollover contributions made in taxable years beginning aiter 
December 31 1986. 
26 use 401 note. 
(3) Section 'll21(d) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(5) 
PLANS MAY INCORPORATE SECTION 401 (a) (9) 
REQUIRE-
MENTS B
Y REFERENCE.—Notwithstanding any other provision of 
law, except as provided in regulations prescribed by the Sec-
retary of the Treasury or his delegate, a plan may incorporate 
by reference the requirements of section 401(aX9) of the Internal 
Revenue Code of 1986." 
(4) Section 1121(dX3) of the Reform Act is amended by striking 
out "plan years" and inserting in lieu thereof "years". 
26 use 402 note. 
(5) Section 402(aX5XFXii) of the Internal Revenue Code of 1954 
shall not apply to distributions after October 22, 1986, and 
before the 1st taxable year beginning after 1986 which are 
attributable to benefits which accrued before January 1, 1985. 
(b) AMENDMENTS RELATED TO SECTION 1122 OF THE REFORM ACT,— 
(IXA) Section 72(f) of the 1^86 Code (relating to special rules 
for computing employees' contributions) is amended by striking 
out "for purposes of subsections (dXD and (eX7), the consider-
ation for the contract contributed by the employee,". 
(B) Section 72(n) of the 1986 Ckxle (relating to annuities under 
retired serviceman's family protection plan or survivor benefit 
plan) is amended by striking out "Subsections (b) and (d)" and 
inserting in lieu thereof "Subsection (b)". 
(C) Sections 406(e) and 407(e) of the 1986 Code are each 
amended by striking out paragraph (1) and by redesignating 
paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respec-
tively. 
(2XA) Section 72 of the 1986 Code (relating to annuities and 
certain proceeds of endowment and life insurance contracts) is 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3473 
amended by adding after subsection (c) the following new 
subsection: 
"(d) TREATMENT OF EMPLOYEE Ck)NTRiBUTiONS UNDER DEFINED 
CONTRIBUTION PLANS AS SEPARATE CONTRACTS.—For purposes of this 
section, employee contributions (and any income allocable thereto) 
under a defined contribution plan may be treated as a separate 
contract." 
(B) Section 72(e) of the 1986 Oxle is amended by striking out 
paragraph (9). 
(3) Section 414(kX2) of the 1986 Code (relating to certain plans 
treated as defined contribution plans) is amended by inserting 
"72(d) (relating to treatment of employee contributions as sepa-
rate contract)," before "411(aX7XA)". 
(4XA) Hie amendment made by section 1122(eXl) of the 
Reform Act is repealed and the Internal Revenue (Dode of 1986 26 USC 402 and 
shall be applied and administered as if such amendment had note. 
(B) Subclause (D of section 402(aX5XDXi) of the 1986 Code is 
amended by inserting "is payable as provided in clause (i), (iii), 
or (iv) of subsection (eX4XA) (without r^ard to the second 
sentence thereof) and" after "such distribution" the first place 
it appears. 
(C) Section 402(aX5XDXi) of the 1986 0)de is amended by 
addu^ at the end thereof the following new sentence: "Any 
distribution described in section 401(aX28)(BXii) shall be treated 
as meeting the requirements of subclauses (I) and (11)." 
(D) Section 402(aX5)(DXiii) is amended by striking out "lO-
YEAR" in the heading. 
(E) Section 402(aX5XDXiXID of the 1986 Code (as in effect after 26 USC 402 note. 
the amendment made by subparagraph (A)) shall not apply to 
distributions after December 31, 1986, and before March 31, 
1988 
(5) Qause (ii) of section 402(aX6XH) of the 1986 Code (relating 
to special rule for frozen deposits) is amended by adding at the 
end thereof the following new flush sentence: 
"A deposit shall not be treated as a frozen deposit 
unless on at least 1 day during the 60-day period 
described in paragraph (5XC) (without r^ard to this 
subparagraph) such deposit is described in the preced-
ing sentence." 
(6) Qause (i) of section 402(eX4XB) of the 1986 Code is 
amended by striking out "taxpayer" and inserting in lieu 
thereof "employee". 
(7) The last sentence of section 402(eX4XJ) of the 1986 Code 
(relating to unrealized appreciation on employer securities) is 
amended to read as follows: "In accordance with rules pre-
scribed by the Secretary, a taxpayer may elect, on the return of 
tax on which a distribution is required to be included, not to 
have this subparagraph apply with respect to such dis-
tribution." 
(8) Section 402 of the 1986 Code (relating to taxabiUty of 
beneficiary of employees' trust) is amended as follows: 
(A) Subsection (aXl) is amended by striking out "para-
graphs (2) and (4)" and inserting in Ueu thereof "para-
graph (4)". 
(B) Subsection (aX4) is amended by striking out "or (2)". 
102 STAT. 3474 
PUBLIC LAW 100-647—NOV. 10, 1988 
(C) Subsection (aX6XC) is amended by striking out "para-
graph (2) of subsection (a), and". 
(D) Subsection (aXBXEXii) is amended by striking out 
"paragraph (2) of subsection (a), and" and by striking out 
the comma after "subsection (e)". 
(E) Subsection (eXlXA) is amended by striking out "ordi-
nary income portion of a". 
(F) Subsection (eX4XA) is amended— 
(i) by striking out "Except for purposes of subsection 
(aX2) and section 403(aX2), a" and inserting in Heu 
thereof "A", and 
(ii) by striking out "subsection (aX2) of this section, 
and subsection (aX2) of section 403,". 
(G) Subparagraph (L) of subsection (eX4) is hereby re-
pealed. 
(H) Subsection (eX4XM) is amended by striking out ", 
subsection (aX2) of this section, and section 403(aX2) . 
(I) Subsection (eX5) is amended by striking out "and 
paragraph (2) of subsection (a)". 
(J) Subsection (eX6XC) is amended to read as follows: 
"(C) SPECIAL LUMP-SUM TREATMENT,—For purposes of this 
paragraph, special lump sum treatment applies to any 
distribution if any portion of such distribution is taxed 
under this subsection by reason of an election under para-
graph (4XB)." 
(9XA) Section 72(eX7) of the 1986 Code is hereby repealed. 
(B) Section 72(eX5XD) is amended by striking out "paragraphs 
(7) and (8)" and inserting in lieu thereof "paragraph (8)". 
(C) Section 72(eX8XA) is amended by striking out "(other than 
paragraph (7))". 
(D) Section 72(qX2XE) of the 1986 Code is amended by striking 
out "(determined without regard to subsection (eX7))". 
(10) Section 402(eXlXB) of the 1986 Code (relating to amount of 
tax on lump-sum distributions) is amended by adding at the end 
thereof the following new flush sentence: 
"For purposes of the preceding sentence, in determining the 
amount of tax under section 1(c), section 1(g) shall be 
applied without regard to paragraph (2XB) thereof." 
26 use 402 note. 
(11) Section 1122(h) of the Reform Act is amended by adding 
at the end thereof the following new paragraph: 
"(9) SPECIAL RULE FOR STATE PLANS.—In the case of a plan 
maintained by a State which on May 5, 1986, permitted with-
drawal by the employee of employee contributions (other than 
as an annuity), section 72(e) of the Internal Revenue Code of 
1986 shall be applied— 
"(A) without regard to the phrase 'before separation from 
service' in paragraph (8XD), and 
"(B) by treating any amount received (other than as an 
annuity) before or with the 1st annuity payment as having 
been received before the annuity starting date." 
(12) Subparagraph (B) of section 1122(hX2) of the Reform Act 
is amended by inserting ", except that section 72(bX3) of the 
Internal Revenue Code of 1986 (as added by such subsection) 
shall apply to individuals whose annuity starting date is after 
July 1,1986" after "1986". 
(13) Sections 1122 (hX3XC) and (hX4XC) of the Reform Act are 
each amended by striking out "with respect to any other lump 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3475 
sum distribution" and inserting in lieu thereof "for purposes of 
such Code". 
(14) Clause (i) of section 1122(hX3XC) of the Reform Act is' 26 use 402 note. 
amended— 
(A) by striking out "individual" and inserting in lieu 
thereof "employee", and 
(B) by inserting "or by an individual, estate, or trust with 
respect to such an employee" after "1986". 
(15) Section 1122(hX5) of the Reform Act is amended— 
(A) by striking out "individual" and inserting in lieu 
thereof "employee", 
(B) by inserting "and by including in gross income the 
zero bracket amount in effect under section 63(d) of such 
Code for such years" after "1986" in the last sentence, and 
(C) by adding at the end thereof the following new sen-
tence: "This paragraph shall also apply to an individual, 
estate, or trust which receives a distribution with respect to 
an employee described in this paragraph." 
(16) Sections 406(c) and 407(c) of the 1986 Code are each 
amended— 
(A) by striking out "subsections (aX2) and (e) of section 
402, and section 403(aX2)" and inserting in lieu thereof 
"section 402(e)", and 
(B) by striking out "OP CAPITAL GAIN PROVISIONS AND" in 
the heading thereof. 
(c) AMENDMENTS RELATED TO SECTION 1123 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 72(tX2) of the 1986 Code 
(relating to subsection not to apply to certain distributions) is 
amended by striking out "on account of early retirement under 
the plan" in clause (v). 
(2) Subparagraph (C) of section 72(tX2) of the 1986 Code (relat-
ing to certain plans) is amended to read as follows: 
"(C) EXCEPTIONS FOR DISTRIBUTIONS PROM EMPLOYEE STOCK 
OWNERSHIP PLANS.—Any distribution made before January 
1, 1990, to an employee from an employee stock ownership 
plan (as defined in section 4975(eX7)) or a tax credit em-
ployee stock ownership plan (as defined in section 409) if— 
"(i) such distribution is attributable to assets which 
have been invested in employer securities (within the 
meaning of section 409(1)) at all times during the 5-
plan-year period preceding the plan year in which the 
distribution is made, and 
"(ii) at all times during such period the requirements 
of sections 401(aX28) and 409 (as in effect at such times) 
are met with respect to such employer securities." 
(3) Subparagraph (A) of section 72(tX3) of the 1986 Code 
(relating to certain exceptions not to apply to individual retire-
ment plans) is amended by striking out "and (C)" and inserting 
m lieu thereof "(C), and (D)". 
(4) Subparagraphs (D) and (G) of section 72(qX2) of the 1986 
Code are each amended by striking out the period at the end 
thereof and inserting in lieu thereof a comma. 
(5) Subparagraph (B) of section 72(qX3) of the 1986 Ckxle 
(relating to change in substantially equal pajonents) is amended 
by striking out "employee" each place it appears and inserting 
in lieu thereof "taxpayer". 
102 STAT. 3476 
PUBLIC LAW 100-647—NOV. 10, 1988 
(6) Section 72(qX2) of the 1986 Code (relating to subsection not 
to apply to certain dispositions) is amended by inserting after 
subparagraph (G) the following new subparagraph: 
"CH) to which subsection (t) applies (without r^ard to 
paragraph (2) thereof)/'. 
(7) Subparagraph (D) of section 72(qX2) and clause (iv) of 
section 72(tX2XA) of the 1986 (Jode are each amended by insert-
ing "designated" before **beneficiary". 
(8) Paragraph (2) of section 72(o) of the 1986 Code (relating to 
additional tax if amount received before age 59V^) is hereby 
repealed. 
(9) Subparagraph (I) of section 402(eX4) of the 1986 Code is 
amended by striking out "clause (ii) of. 
(10) Section 26(bX2) of the 1986 Code is amended— 
(A) by striking out ", (oX2)," in subparagraph (Q, and 
(B) by striking out "408(f) (relating to additional tax on 
income from certain retirement accounts)" in subparagraph 
(D) and inserting in lieu thereof "72(t) (relating to 10-
percent addition£d tax on early distributions from qualified 
retirement plans)". 
26 use 72 note. 
? (11) Section 1123(eX2) of the Reform Act is amended— 
(A) by striking out "taxable", and 
(B) by inserting ", but only with respect to distributions 
from contracts described in section 403(b) of the Internal 
Revenue Code of 1986 which are attributable to assets other 
than assets held as of the close of the last year b^inning 
before January 1,1989" after "1988". 
(12) Section 1123(e) of the Reform Act is amended by adding at 
the end thereof the following new paragraph: 
"(5) SPECIAL RULE FOR DISTRIBUTIONS UNDER AN ANNUITY CON-
TRACT.—The amendments made by paragraphs (1), (2), and (3) of 
subsection (b) shall not apply to any distribution under an 
annuity contract if— 
"(A) as of March 1, 1986, payments were being made 
under such contract pursuant to a written election provid-
ing a specific schedule for the distribution of the taxpayer's 
interest in such contract, and 
"(B) such distribution is made pursuant to such written 
election." 
26 use 72 note. 
(13) Section 72(t) of the 1986 Code shall apply to any distribu-
tion without r^ard to whether such distribution is made with-
out the consent of the participant pursuant to section 411(aXll) 
or section 417(e) of the 1986 Code, 
(d) AMENDMENTS RELATED TO SECTION 1124 OF THE REFORM ACT.— 
26 use 402 note. 
(1) Section 1124(a) of the Reform Act is amended to read as 
follows: 
Handicapped 
"(a) IN GENERAL.—^If an employee dies, separates from service, or 
P®^<)"s- 
becomes disabled before 1987 and an individual, trust, or estate 
receives a lump-sum distribution with respect to such employee 
after December 31, 1986, and before March 16, 1987, on account of 
such death, separation fh>m service, or disability, then, for purposes 
of the Internal Revenue Code of 1986, such individual, ^(tate, or 
trust may treat such distribution as if it were received in 1986." 
(2) Section 1124(b) of the Reform Act is amended— 
(A) by striking out "employee" each place it appears and 
inserting in Ueu thereof individual, estate, or trust", and 
PUBLIC LAW 100-647—NOV. 10,1988 
102 STAT. 3477 
(B) by inserting "with respect to an employee" after 
"receives". 
(3) Section 1124 of the Reform Act is amended by adding at 
the end thereof the following new subsection: 
"(c) LUMP SUM DISTRIBUTION.—For purposes of this section, the 
term 'lump sum distribution' has the meaning given such term by 
section 402(eX4XA) of the Internal Revenue Code of 1986, without 
regard to subparagraph (B) or (H) of section 402(eX4) of such Code." 
(e) AMENDMENTS RELATED TO SECTION 1131 OF THE REFORM ACT.— 
(1) Subsection (c) of section 4972 of the 1986 Code (defining 
nondeductible contributions) is amended to read as follows: 
"(c) 
NONDEDUCTIBLE CONTRIBUTIONS.—For purposes of this 
section— 
"(1) IN GENERAL.—^The term 'nondeductible contributions' 
means, with respect to any qualified employer pl£ui, the sum 
of— 
"(A) the excess (if any) of— 
"(i) the amount contributed for the taxable year by 
the employer to or under such plan, over 
"(ii) the amount allowable as a deduction under sec-
tion 404 for such contributions (determined without 
regard to subsection (e) thereof), and 
"(B) the amount determined under this subsection for the 
preceding taxable year reduced by the sum of— 
"(i) the portion of the amount so determined re-
turned to the employer during the taxable year, and 
"(ii) the portion of the amount so determined deduct-
ible under section 404 for the taxable year (determined 
without r^ard to subsection (e) thereof). 
"(2) ORDERING RULE FOR SECTION 404.—For purposes of para-
graph (1), the amount allowable as a deduction under section 
404 for any taxable year shall be treated as— 
"(A) first from carryforwards to such taxable year from 
preceding taxable years (in order of time), and 
"(B) then from contributions made during such taxable 
year. 
"(3) CONTRIBUTIONS wracH MAY BE RETURNED TO EMPLOYER.— 
In determining the amoimt of nondeductible contributions for 
any taxable year, there shall not be taken into account any 
contribution for such taxable year which is distributed to the 
employer in a distribution described in section 4980(cX2)(BXii) if 
such distribution is made on or before the last day on which a 
contribution may be made for such taxable year under section 
404(aX6). 
"(4) PRE-1987 CONTRIBUTIONS.—The term 'nondeductible con-
tribution' shall not include any contribution made for a taxable 
year b^inning before January 1,1987." 
(2) Paragraph (1) of section 4972(d) of the 1986 Code (definmg 
qualified employer plan) is amended to read as follows: 
"(1) QUALIFIED EMPLOYER PLAN.— 
"(A) IN GENERAL.—The term 'qualified employer plan* 
means— 
"(i) any plan meeting the requirements of section 
401(a) which includes a trust exempt from tax under 
section 501(a), 
"(ii) an annuity plan described in section 403(a), and 
102 STAT. 3478 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(iii) any simplified employee pension (within the 
meaning of section 408(k)). 
"(B) EXEMPTION FOR GOVERNMENTAL AND TAX EXEMPT 
PLANS.—The term 'qualified employer plan' does not in-
clude a plan described in subparagraph (A) or (B) of section 
4980(cXl)." 
26 use 404 note. 
(3) Section 1131(d) of the Reform Act is amended to read as 
follows: 
"(d) EFFECTIVE DATES.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31,1986. 
"(2) SPECIAL RULES FOR COLLECTIVE BARGAINING AGREE-
MENTS.—In the case of a plan maintained pursuant to 1 or more 
collective bargaining agreements between employee representa-
tives and 1 or more employers ratified before March 1,1986, the 
amendments made by this section shall not apply to contribu-
tions pursuant to any such agreement for taxable years begin-
ning before the earlier of— 
"(A) January 1,1989, or 
"(B) the date on which the last of such collective bargain-
ing agreements terminates (determined without regard to 
any extension thereof after February 28,1986)." 
(4XA) Subparagraph (A) of section 404(aX7) of the 1986 Ck)de is 
amended— 
(i) by striking out "provisions" and inserting in lieu 
thereof "paragraphs", and 
(ii) by inserting "or in connection with trusts or plans 
described in 2 or more of such pareigraphs" after "1 or more 
defined benefit plans". 
(B) Paragraph (3) of section 404(h) of the 1986 Code is amend-
ed to read as follows: 
"(3) COORDINATION WITH SUBSECTION (a) (7).—For purposes of 
subsection (aX7), a simplified employee pension shall be treated 
as if it were a separate stock bonus or profit-sharing trust." 
26 use 4972 
(5) In the case of any taxable year beginning in 1987, the 
note. 
amount under section 4972(cXlXAXii) of the 1986 Code for a plan 
to which title IV of the Employee Retirement Income Security 
Act of 1974 applies shall be increased by the amount (if any) by 
which, as of the close of the plan year with or within which such 
taxable year begins— 
(A) the liabilities of such plan (determined as if the plan 
had terminated as of such time), exceed 
(B) the assets of such plan. 
Securities. 
(f) AMENDMENTS RELATED TO SECTION 1132 OF THE REFORM ACT.— 
(1) Section 4980(cXlXA) of the 1986 Code (defining qualified 
plan) is amended by striking out "this subtitle" and inserting in 
lieu thereof "subtitle A". 
(2) Section 4980(cX3XA) of the 1986 Code (relating to exception 
for employee stock ownership plans) is amended— 
(A) by inserting "or a tax credit emplovee stock owner-
ship plan (as described in section 409) 
after "section 
4975(eX7)", and 
(B) by inserting ", except to the extent necessary to meet 
the requirements of section 401(aX28)," after "must". 
(3) Subparagraph (C) of section 4980(cX3) of the 1986 Code is 
amended— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3479 
(A) by striking out "(by reason of the limitations of 
section 415)", and 
(B) by adding at the end thereof the following new 
sentence: 
"The amount allocated in the year of transfer shall not be 
less than the lesser of the maximum amount allowable 
under section 415 or Vs of the amount attributable to the 
securities acquired." 
(4) Subparagraph (B) of section 1132(cX2) of the Reform Act is 
26 use 4980 
amended by striking out "November 19, 1978" and inserting in note. 
lieu thereof "September 19,1978". 
(5) Section 1132(c) of the Reform Act is amended by adding at 
the end thereof the followii^ new paragraph: 
"(5) SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP PLANS.— 
Section 4980(cX3) of the Internal Revenue Code of 1986 (as added 
by subsection (a)) shall apply to reversions occurring after 
March 31,1985." 
(6) Section 4980(cX3) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraphs: 
"(F) No C
R
E
D
I
T O
R D
E
D
U
C
T
I
O
N ALLOWED.—No Credit or 
deduction shall be allowed under chapter 1 for any amount 
transferred to an employee stock ownership plan in a trans-
fer to which this paragraph applies. 
"(G) AMOUNT TRANSFERRED TO INCLUDE INCOME THEREON, 
ETC.—The amount transferred shall not be treated as meet-
ing the requirements of subparagraphs (B) and (O unless 
amounts attributable to such amount also meet such 
requirements." 
(7) Section 4980(cX3XC) of the 1986 Code is amended by adding 
at the end thereof the following new sentence: 
"In the case of dividends on securities held in the suspense 
account, the requirements of this subparagraph are met 
only if the dividends are allocated to accounts of partici-
pants or paid to participants in proportion to their ac-
coimts, or used to repay loans used to purchase employer 
securities." 
(g) AMENDMENTS RELATED TO SECTION 1133 OF THE REFORM ACT.— Retirement. 
(IXA) Section 4981A of the 1986 Code (as added by section 
1133 of the Reform Act) is redesignated as section 4980A. 
(B) The table of sections for chapter 43 of the 1986 Code is 
amended by redesignating section 4981A as section 4980A. 
(2) Paragraph (1) of section 4980A(c) of the 1986 Code (as 
redesignated by paragraph (1)) is amended by striking out 
"$112,500 (adjusted at the same time and in the same manner as 
under section 415(d))" and inserting in lieu thereof "the greater 
of— 
"(A) $150,000, or 
"(B) $112,500 (adjusted at the same time and in the same 
manner as under section 415(d))." 
(3) Section 4980A(cX2) of the 1986 Code (relating to exclusion 
of certain distributions), as redesignated by paragraph (1), is 
amended— 
(A) by striking out "employee's" in subparagraph (C) and 
inserting in lieu thereof "individual's", and 
(B) by adding after subp€u*agraph (D) the following new 
subparagraphs: 
102 STAT. 3480 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(E) Any retirement distribution with respect to an 
individual of an annuity contract the value of which is not 
includible in gross income at the time of the distribution 
(other than distributions under, or proceeds from the sale 
or exchange of, such contract). 
"(F) Any retirement distribution with respect to an 
individual of— 
"(i) excess deferrals (and income allocable thereto) 
under section 402(gX2XAXii), or 
"(ii) excess contributions (and income allocable there-
to) under section 401(kX8) or 408(dX4) or excess aggre-
gate contributions (and income allocable thereto) under 
section 401(mX6)." 
(4)(A) Section 4980A of the 1986 Code, as redesignated by 
paragraph (1), is amended by adding at the end thereof the 
following new subsection: 
"(f) EXEMPTION OF ACCRUED BENEFITS IN EXCESS OF $562,500 ON 
AUGUST 1,1986.—For purposes of this section— 
"(1) IN GENERAL.—If an election is made with respect to an 
eligible individual to have this subsection apply, the individual's 
excess distributions and excess retirement accumulation shall 
be computed without regard to any distributions or interests 
attributable to the accrued benefit of the individual as of 
August 1,1986. 
"(2) REDUCTION IN AMOUNTS WHICH MAY BE RECEIVED WITHOUT 
TAX.—If this subsection applies to any individual— 
"(A) EXCESS DISTRIBUTIONS.—Subsection (cXD shall be 
applied— 
"(i) without regard to subparagraph (A), and 
"(ii) by reducing (but not below zero) the amount 
determined under subparagraph (B) thereof by retire-
ment distributions attributable (as determined under 
rules prescribed by the Secretary) to the individual's 
accrued benefit as of August 1,1986. 
"(B) 
EXCESS RETIREMENT ACCUMULATION.—The amount 
determined under subsection (dX3XB) (without regard to 
subsection (cXlXA)) with respect to such individual shall be 
reduced (but not below zero) by the present value of the 
individual's accrued benefit as of August 1,1986, which has 
not been distributed as of the date of death. 
"(3) EUGIBLE INDIVIDUAL.—For purposes of this subsection, 
the term 'eligible individual' means any individual if, on August 
1, 1986, the present value of such individual's interests in 
qualified employer plans and individual retirement plans ex-
ceeded $562,500. 
"(4) CERTAIN AMOUNTS EXCLUDED.—In determining an individ-
ual's accrued benefit for purposes of this subsection, there shall 
not be taken into account any portion of the accrued benefit— 
"(A) payable to an alternate payee pursuant to a qualified 
domestic relations order (within the meaning of section 
414(p)) if includible in income of the alternate payee, or 
"(B) attributable to the individual's investment in the 
contract (as defined in section 72(f)). 
"(5) ELECTION.—An election under paragraph (1) shall be 
made on an individual's return of tax imposed by chapter 1 or 
11 for a taxable year beginning before January 1,1989.' 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3481 
(B) Section 4980A(c) of the 1986 Code, as redesignated by 
paragraph (1), is amended by striking out paragraph (5). 
(5) Section 4980A(d) of the 1986 Code (relating to increase in 
estate tax if individual dies with excess accumulation), as re-
designated by paragraph (1), is amended— 
(A) by striking out "section 2010" in paragraph (2) and 
inserting in lieu thereof "chapter 11", and 
(B) by adding at the end thereof the following new para-
graphs: 
"(4) RULES FOR COMPUTING EXCESS RETIREMENT ACCUMULA-
TION.—The excess retirement accumulation of an individual 
shall be computed without regard to— 
"(A) any community property law, 
"(B) the value of— 
"(i) amounts payable to an alternate payee pursuant 
to a qualified domestic relations order (within the 
meaning of section 414(p)) if includible in income of the 
alternate payee, and 
"(ii) the individual's investment in the contract (as 
defined in section 72(f)), and 
"(C) the excess (if any) of— 
"(i) any interests which are payable immediately 
after death, over 
"(ii) the value of such interests immediately before 
death. 
"(5) ELECTION BY SPOUSE TO HAVE EXCESS DISTRIBUTION RULE 
APPLY.— 
"(A) IN GENERAL.—If the spouse of an individual is the 
beneficiary of all of the interests described in paragraph 
(3XA), the spouse may elect— 
"(i) not to have this subsection apply, and 
"(ii) to have this section apply to such interests and 
any retirement distribution attributable to such in-
terests as if such interests were the spouse's. 
"(B) DE MINIMIS EXCEPTION.—If 1 or more persons other 
than the spouse are beneficiaries of a de minimis portion of 
the interests described in paragraph (3XA)— 
"(i) the spouse shall not be treated as failing to meet 
the requirements of subparagraph (A), and 
"(ii) if the spouse makes the election under subpara-
graph (A), this section shall not apply to such portion or 
any retirement distribution attributable to such 
portion." 
(6) Subparagraph (B) of section 4980A(dX3) of the 1986 Code, 
as redesignated by paretgraph (1), is amended to read as follows: 
"(B) the present value (as determined under rules pre-
scribed by the Secretary as of the valuation date prescribed 
in subparagraph (A)) of a single life annuity with annual 
payments equal to the limitation of subsection (c) (as in 
effect for the year in which death occurs and as if the 
individual had not died)." 
(7) Section 2013 of the 1986 Code (relating to credit for tax on 
prior transfer) is amended by adding at the end thereof the 
following new subsection: 
"(g) TREATMENT OF ADnmoNAL TAX UNDER SECTION 4980A.—For 
purposes of this section, the estate tax paid shall not include any 
portion of such tax attributable to section 4980A(d)." 
102 STAT. 3482 
PUBLIC LAW 100-647—NOV. 10, 1988 
26USC4980A 
(8) Paragraph (1) of section 1133(c) of the Reform Act is 
note. 
amended by inserting ", other than a distribution with respect 
to a decedent dying before January 1, 1987" after "1986". 
(9) Section 4980A(dX3XA) of the 1986 Code is amended by 
inserting "(other than as a beneficiary, determined after ap-
plication of paragraph (5))" after "the individual's interests . 
(10) Section 691(cXl) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(C) EXCESS RETIREMENT ACCUMULATION TAX.—For pur-
poses of this subsection, no deduction shall be allowed for 
the portion of the estate tax attributable to the increase in 
such tax under section 4980A(d)." 
(11) Section 2053(cXlXB) of the 1986 Code is amended by 
adding at the end thereof the following new sentence: "This 
subparagraph shall not apply to any increase in the tax imposed 
by this chapter by reason of section 4980A(d)." 
(12) Section 6018(a) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
"(5) RETURN REQUIRED IF EXCESS RETIREMENT ACCUMULATION 
TAX.—The executor shall make a return with respect to the 
estate tax imposed by subtitle B in any case where such tax is 
increased by reason of section 4980A(d)." 
(h) AMENDMENTS RELATED TO SECTION 1134 OF THE REFORM ACT.— 
(1) Section 72(pX3XA) of the 1986 Code (relating to denial of 
interest deductions in certain cases) is amended by inserting "to 
which paragraph (1) does not apply by reason of paragraph (2) 
during the period" after "loan". 
(2) Subparagraph (B) of section 72(pX3) of the 1986 Code is 
amended to read as follows: 
"(B) PERIOD TO WHICH SUBPARAGRAPH (A) APPLIES.—For 
purposes of subparagraph (A), the period described in this 
subparagraph is the period— 
"(i) on or after the 1st day on which the individual to 
whom the loan is made is a key employee (as defined in 
section 416(i)), or 
"(ii) such loan is secured by amounts attributable to 
elective deferrals described in subparagraph (A) or (C) 
of section 402(gX3)." 
(i) AMENDMENTS RELATED TO SECTION 1135 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 72(uXl) of the 1986 Code 
(relating to annuity contracts not held by natural persons) is 
amended by inserting "(other than subchapter D" after 
"subtitle". 
(2) Subparagraph (D) of section 72(uX3) of the 1986 Code 
(relating to exceptions) is amended by striking out "until such 
time as the employee separates from service" and inserting in 
lieu thereof "until all amounts under such contract are distrib-
uted to the employee for whom such contract was purchased or 
the employee's beneficiary". 
(3) Subparagraphs (D) and (E) of section 72(uX3) of the 1986 
dkxle (relating to exceptions) are each amended by striking out 
"which". 
(4) Paragraph (4) of section 72(u) of the 1986 Code is amended 
by striking out "and" at the end of subparagraph (A), by 
striking out the period at the end of subparagraph (B) and 
inserting in heu thereof ", and", and by adding at the end 
thereof the following new subparagraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3483 
"(C) which provides for a series of substantially equal 
periodic payments (to be made not less frequently than 
annually) during the annuity period." 
(j) AMENDMENTS RELATED TO SECTION 1136 OP THE REFORM ACT.— 
(1) Section 401(aX27) of the 1986 Code is amended by adding at 
the end thereof the following new subparagraph: 
"(B) PLAN MUST DESIGNATE TYPE.—In the case of a plan 
which is intended to be a money purchase pension plan or a 
profit-sharing plan, a trust forming part of such plan shall 
not constitute a qualified trust under this subsection unless 
the plan designates such intent at such time and in such 
manner as the Secretary may prescribe." 
(2) Section 401(aX27) of the 1986 Code is amended by striking 
out "(27)" and inserting in lieu thereof: 
"(27) DETERMINATIONS AS TO PROFIT-SHARING PLANS.— 
"(A) CONTRIBUTIONS NEED NOT BE BASED ON PROFITS.—". 
(k) AMENDMENT RELATED TO SECTION 1139 OF THE REFORM ACT.— 
Clause (i) of section 1139(dX2XA) of the Reform Act is amended by 
26 use 4ii note, 
striking out "before January" and inserting in lieu thereof "after 
January". 
(1) AMENDMENT RELATED TO SECTION 1145 OP THE REFORM ACT.— 
Subparagraph (E) of section 401(aXll) of the 1986 Code (relating to 
cross reference) is redesignated as subparagraph (F). 
(m) AMENDMENTS RELATED TO SECTION 1147 OP THE REFORM ACT.— 
(1) Subparagraph (C) of section 770igXl) of the 1986 Code 
(relating to tax treatment of Federal Tiirift Savings Fund) is 
amended by inserting ", section 401(kX4XB)," after "paragraph 
(2)". 
(2) Section 8440(aX3) of title 5, United States Code, is amended 
by inserting ", 401(kX4XB) of such Code," after "subsection (b)". 
SEC. lOllB. AMENDMENTS RELATED TO SUBTITLES B AND C OF TITLE XI 
OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1151 OP THE REFORM ACT.— 
(1) Paragraph (2) of section 89(a) of the 1986 Code (relating to 
year of inclusion) is amended to read as follows: 
"(2) YEAR OF INCLUSION.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B)-
"(i) any amount included in gross income under para-
graph (1) shall be taken into account for the taxable 
year of the employee with or within which the plan 
year ends, and 
"(ii) any deduction of the employer attributable to 
such amount shall be allowable for the taxable year of 
the employer with or within which the plan year ends. 
"(B) ELECTION TO DELAY INCLUSION FOR i YEAR.—If an 
employer maintaining a plan with a plan year ending after 
September 30 and on or before December 31 of a calendar 
year elects the application of this subparagraph— 
"(i) amounts included in gross income under para-
graph (1) with respect to employees of such employer 
shall be taken into account for the taxable year of the 
y ; 
employee following the taxable year determined under 
subparagraph (A), but 
"(ii) any deduction of the employer which is attrib-
utable to such amounts shall be allowable for the tax-
102 STAT. 3484 
PUBLIC LAW 100-647—NOV. 10, 1988 
able year with or within which the plan year following 
the plan year in which the excess benefits occurred 
ends." 
(2) Paragraph (4) of section 89(b) of the 1986 Code (defining 
nontaxable beneHts) is amended by adding at the end thereof 
the following new sentence: "Such term includes any group-
term life insurance the cost of which is includible in gross 
income under section 79." 
(3) Paragraph (1) of section 89(g) of the 1986 Code (relating to 
the a^r^ation of comparable health plans) is amended by 
adding at the end thereof the following new subparagraph: 
"(C) EMPLOYEES COVERED BY MORE THAN i PLAN.—The 
Secretary may provide that 2 or more plans providing 
benefits to the same participant shall be treated as 1 plan 
for purposes of applying suteections (dXDCB), (dX2), and (f)." 
(4) Subparagraph (B) of section 89(gX2) of the 1986 Code 
(relating to sworn statements) is amended by adding at the end 
thereof the following new sentence: "No statement shall be 
required under clause (ii) with respect to any individual eligible 
for coverage at no cost under a health plan which provides core 
health benefits and with respect to whom the employee does not 
elect any core health coverage from the employer." 
(5) Subparagraph (D) of section 89(gX2) of the 1986 Code is 
amended by striking out "under such plan" and inserting in 
lieu thereof "under such plans". 
(6) Section 89(g) of the 1986 Code is amended by striking out 
paragraph (6). 
(7) Subparagraph (A) of section 89(hXl) of the 1986 Code 
(relating to excluded employees) is amended by inserting "(or 
1st day of a period of less than 31 days specified by the plan)" 
after' Wnttf'. 
(8) Section 89(j) of the 1986 (Dode (relating to other definitions 
and special rules) is amended by adding at the end thereof the 
following new paragraph: 
"(12) EMPLOYERS WITH ONLY HIGHLY COBIPENSATED EMPLOY-
EES.—The requirements of subsections (d) and (e) shall not apply 
to any statutory employee benefit plan for any year for which 
the only employees of the employer maintaining the plan are 
highly compensated employees." 
(9) Section 89(k) of the 1986 Code (relating to requirement that 
plan be in writing) is amended by adding at the end thereof the 
following new paragraph: 
"(5) Loss O
F EXEMPTION FOR CERTAIN PLANS.—If a plan de-
scribed in paragraph (2)(E) fails to meet the requirements of 
paragraph (1), the organization which is part of such plan shall 
not be exempt from tax under section 501(a)." 
(10) Section 6652(kX2XB) of the 1986 Code (relating to amount 
of additional tax) is amended by striking out "subsection (gX3)" 
and inserting in lieu thereof "subsection (gX3XCXi)". 
(IIXA) Subsection (a) of section 125 of the 1986 Code is 
amended to read as follows: 
"(a) GENERAL RULE.—Except as provided in subsection (b), no 
amount shall be included in the gross income of a participant in a 
cafeteria plan solely because, under the plan, the participant may 
choose among the benefits of the plan." 
(B) Paragraph <1) of section 12d(b) of the 1986 Code is amended 
-by striking out "A plan shall be treated as fiedling to meet tl^ 
PUBLIC LAW 106-647—NOV. 10, l§8g 
102 STAT. 3485 
requirements of this subsection" and inserting in lieu thereof 
"In the case of a highly compensated employee, subsection (a) 
shall not apply to any benefit attributsJble to a plan year". 
(O Paragraph (2) of section 125(b) of the 1986 Ckxle is amended 
by striking out "a plan shall be treated as failing to meet the 
requirements of this subsection" and inserting in lieu thereof 
"subsection (a) shall not apply to any plan year". 
(12) Subparagraph (B) of section 125(cXl) of the 1986 Code 
(defining cafeteria plans) is amended to read as follows: 
"(B) the participant may choose among 2 or more benefits 
consisting of cash and qusdified benefits." 
(13XA) Paragraph (1) of section 125(e) of the 1986 Code (defin-
ing qualified benefits) is amended by inserting "and without 
regard to section 89(a)" after "subsection (a)". 
(B) The last sentence of section 125(bX2) of the 1986 Code is 
amended to read as follows: "For purposes of the preceding 
sentence, qualified benefits shall not include benefits which 
(without r^ard to this paragraph) are includible in gross 
income." 
(14) Subsection (d) of section 129 of the 1986 (Dode is amended 
by redesignating paragraph (8) as paragraph (7). 
(15) Paragraph (7) of section 129(d) of the 1986 Code (as so 
redesignated) is amended— 
(A) by inserting "under all plans of the employer" after 
"employees" the 2nd and 3rd time it appears in subpara-
graph (A), 
(B) by striking out "there shall be disr^arded" in 
subparagraph (B) and inserting in lieu thereof "a plan may 
disregard", and 
(C) by striking out "415(qX7)" in subparagraph (B) and 
inserting in lieu thereof "414(q)(7)". 
(16) Section 414(mX4) of the 1986 Code is amended by insert-
ing "and" at the end of subparagraph (A), by striking out the 
comma at the end of subparagraph (B) and inserting in lieu 
thereof a period, and by striking out subparagraphs (C) and (D). 
(17) Paragraph (2) of section 414(t) of the 1986 Code is amend-
ed by striking out "132," and inserting in lieu thereof "132, 
162(iX2), 162(k),". 
(18) Paragraph (6) of section 129(e) of the 1986 Code is amend-
ed by striUng out "of subsection (d)" and inserting in lieu 
thereof "of subsection (d) (other than paragraphs (4) and (7) 
thereof)". 
(19) Subparagraph (C) of section 414(nX3) of the 1986 Code is 
amended by striking out "132," and inserting in lieu thereof 
"132,162(iX2), 162(k),". 
(20) Section 414(tXl) of the 1986 Code (relating to appUcation 
of controlled group rules to certain employees) is amended by 
striking out "of section 414" each place it appears. 
(21) Section 89(jX6) of the 1986 Code is amended by striking 
out "described in subparagraph (A), (B), or (Q of subsection 
(iX2)". 
(22XA) Section 3121 of the 1986 Code (relating to definitions) 
is amended by adding at the end thereof the following new sub-
section: 
"(x) 
BENEFITS PROVTOED UNDER CERTAIN E}MPLOYEE BENEFIT 
PLANS.—Notwithstanding any paragraph of subsection (a) (other 
102 STAT. 3486 
PUBLIC LAW 100-647—NOV. 10, 1988 
than paragraph (1)), the term 'wages' shall include anv amount 
which is includible in gross income by reason of section 89.' 
(B) Section 3231(e) of the 1986 Code (defining compensation) 
is amended by adding at the end thereof the following new 
paragraph: 
"(8) 
BENEFITS PROVIDED UNDER CERTAIN EMPLOYEE BENEFIT 
PLANS.—Notwithstanding any other paragraph of this subsec-
tion (other than paragraph (2)), the term 'compensation' shall 
include any amount which is includible in gross income by 
reason of section 89." 
(C) Section 3306 of the 1986 Code (relating to definitions) is 
amended by adding at the end thereof the following new subsec-
tion: 
"(t) BENEFITS PROVIDED UNDER 
CERTAIN EMPLOYEE BENEFIT 
PLANS.—Notwithstanding any paragraph of subsection (b) (other 
than paragraph (1)), the term 'wages' shall include anv amount 
which is includible in gross income by reason of section 89.' 
(D) Section 3401 of the 1986 Code (relating to definitions) 
is amended by adding at the end thereof the following new sub-
section: 
"(g) 
BENEFITS PROVIDED UNDER 
CERTAIN EMPLOYEE BENEFIT 
PLANS.—Notwithstanding any paragraph of subsection (a), the term 
'wages' shall include anv amount which is includible in gross income 
by reason of section 89.' 
(E) The third to last sentence of section 209 of the Social 
42 use 409. 
Security Act is amended— 
(i) by striking out the period at the end of clause (2) £md 
inserting in lieu thereof ", or", and 
(ii) by inserting after clause (2) the following new clause: 
"(3) Any amount required to be included in gross income 
under section 89 of the Internal Revenue Code of 1986." 
26 use 3121 
(F) The amendments made by this paragraph shall not apply 
note. 
to any individual who separated from service with the employer 
before January 1,1989. 
Wages. 
(23XA) Sections 3121(aX5XG) and 3306(bX5XG) of the 1986 Code 
are each amended by inserting "if such payment would not be 
treated as wages without regard to such plan and it is reason-
able to believe that (if section 125 applied for purposes of this 
section) section 125 would not treat any wages as constructively 
received" after "section 125)". 
(B) Section 209(eX9) of the Social Security Act is amended by 
inserting "if such payment would not be treated as wages 
without regard to such plan and it is reasonable to believe that 
(if section 125 applied for purposes of this section) section 125 
would not treat any wages as constructively received" after 
"1986)". 
26USe6039B, 
(24) Section 1151(hX3) of the Reform Act is amended by 
6039D. 
striking out "Section 6039B(c)" and inserting in lieu thereof 
"Section 6039D(c)". 
26 use 89 note. 
(25) Paragraph (i) of section 1151(k) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "Notwithstanding the preceding sentence, the amend-
ments made by subsections (eXl) and (iX3XC) shall, to the extent 
they relate to sections 106, 162(iX2), and 162(k) of the Internal 
Revenue Code of 1986, apply to years beginning after 1986." 
(26) Section 1151(k) of the Reform Act is amended by adding 
at the end thereof the following new paragraph: 
PUBLIC LAW 100-647—NdV. 10,1988 
102 STAT. 3487 
"(6) 
CERTAIN PLANS MAINTAINED BY EDUCATIONAL INSTITU-
TIONS.—If an educational organization described in section 
170(bXlXAXii) of the Internal Revenue Code of 1986 makes an 
election under this paragraph with respect to a plan described 
in section 125(cX2XC) of such Code, the amendments made by 
this section shall apply with respect to such plan for plan years 
b a n n i n g after the date of the enactment of this Act. 
(27XA) Section 4976 of the 1986 Code is amended by re-
designating subsection (c) as subsection (d) and by inserting 
after subsection (b) the following new subsection: 
"(c) TAX ON FUNDED WELFARE BENEFIT FUNDS WHICH INCLUDE 
DISCRIMINATORY EMPLOYEE BENEFIT PLAN.— 
"(1) IN GENERAL.—If— 
"(A) an employer maintains a welfare benefit fund, and 
"(6) a discnminatory employee benefit plan (within the 
meaning of section 89) is part of such fund for any plan 
year, 
there is hereby imposed on such employer for the taxable year 
with or within which the plan year ends a tax in the amount 
determined under paragraph (2). 
"(2) AMOUNT OF TAX.—The amount of the tax under para-
graph (1) shall be equal to the excess (if any) of— 
"(A) the product of the highest rate of tax imposed by 
section 11, multiplied by the lesser of— 
"(i) the aggregate excess benefits (as defined in sec-
tion 89) for such plan year, or 
"(ii) the taxable income of the fund for such plan 
year, over 
"(B) the amount of tax imposed by chapter 1 on such fund 
for such plan year." 
(B) Section 4976(b) of the 1986 (Dode is amended by adding at 
the end thereof the following new paragraph: 
"(5) LIMITATION IN CASE OF BENEFITS TO WHICH SECTION 89 
APPLIES.—If section 89 applies to any post-retirement medical 
benefit or life insurance benefit provided by a fund, the amount 
of the disqualified benefit under paragraph (1)(B) with respect to 
such benefit shall not exceed the aggregate excess benefits 
provided by the plan (as determined under section 89)." 
(C) Section 505(aXl) of the 1986 Code is amended by adding at 
the end thereof the following new subsection: "This paragraph 
shall not apply to any organization by reason of a failure to 
meet the requirements of subsection (b) with respect to a benefit 
to which section 89 applies." 
(28) Section 89(hX4) of the 1986 Code is amended by striking 
out "subsection (h)(5)" and inserting in lieu thereof "subsection 
(gX5)". 
(29) Section 89(kXl) of the 1986 Code is amended by striking 
out the last sentence and inserting in lieu thereof the following 
new sentences: 
"Such inclusion shall be coordinated (under regulations pre-
scribed by the Secretary) with any inclusion under subsection 
(a) with respect to such plan. In the case of a statutory employee 
benefit plan described in subsection (iXlXB), any amount re-
quired to be included in gross income under this subsection 
shall be included in the gross income of the beneficiary." 
(30) Section 129(dXlXB) of the 1986 Code is amended by strik-
ing out "(6)" and inserting in lieu thereof "(7)". 
102 STAT. 3488 
PUBLIC LAW 100-647—NOV. 10, 1988 
(31)(A) Section 129(d) of the 1986 Code is amended— 
(i) by striking out the last sentence of paragraph (3), and 
(ii) by inserting at the end thereof the following new 
paragraph: 
"(8) EXCLUDED EMPLOYEES.—For purposes of paragraphs (2), 
(3), and (7), there shall be excluded from consideration employ-
ees who are excluded from consideration under section 89(h)." 
(B) Sections 117(dX4), 120(c)(2), 127(b)(2), 132(h)(1), and 505(bX2) 
of the 1986 Code are each amended— 
(i) by striking out "may" the first place it appears and 
inserting in lieu thereof "shall", and 
(ii) by striking out "may be" the second place it appears 
and inserting in lieu thereof "are". 
(32) Section 505(b) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
"(7) $200,000 COMPENSATION UMIT.—A plan shall not be treat-
ed as meeting the requirements of this subsection unless under 
the plan the annual compensation of each employee taken into 
account for any year does not exceed $200,000. The Secretary 
shall adjust the $200,000 amount at the same time and in the 
same manner as under section 415(d)." 
(33) Section 3401(a) of the 1986 Code is amended by inserting 
"or" at the end of paragraph (18), by striking out paragraph 
(19), and by redesignating paragraph (20) as paragraph (19). 
(34) Section 89(1X2) of the 1986 Code is amended by striking 
out "6652(1)" and inserting in lieu thereof "6652(k)". 
(b) AMENDMENTS RELATED TO SECTION 1161 OF THE REFORM ACT.— 
(1) Section 162(m) of the 1986 Code (relating to special rules 
for health insurance costs of self-employed individuals) is 
amended by redesignating paragraph (4) as paragraph (5) and 
by inserting after paragraph (3) the following new paragraph: 
"(4) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT TAX PUR-
POSES.—The deduction allowable by reason of this subsection 
shall not be taken into account in determining an individual's 
net earnings from self-employment (within the meaning of sec-
tion 1402(a)) for purposes of chapter 2." 
(2) Section 162(m) of the 1986 Code (relating to cross reference) 
as redesignated by section 1161(a) of the Reform Act, is redesig-
nated as subsection (n). 
(3) Section 162(mX2XA) of the 1986 Code is amended by insert-
ing: "derived by the taxpayer from the trade or business with 
respect to which the plan providing the medical care coverage is 
established" after "401(c))". 
42 use 411. 
(4) Section 211(a) of the Social Security Act is amended by 
inserting after paragraph (13) the following new paragraph: 
"(14) The deduction under section 162(m) (relating to health 
insurance costs of self-employed individuals) shall not be al-
lowed." 
(c) AMENDMENTS RELATED TO SECTION 1163 OF THE REFORM ACT.— 
(1) Paragraph (8) of section 129(e) of the 1986 Code (relating to 
treatment of onsite facilities) is amended— 
(A) by inserting "maintained by an employer" after 
"onsite facility", 
(B) by inserting "of dependent care assistance provided to 
an employee" after "the amount", 
(C) by inserting "of the facility by a dependent of the 
employee" after "utilization" in subparagraph (A), and 
PUBLIC LAW 100-647—NOV. 10,1988 
102 STAT. 3489 
(D) by inserting "with respect to such dependent" after 
"provided" in subparagraph (B). 
(2XA) Paragraph (2) of section 129(a) of the 1986 CJode is 
£imended to read as follows: 
"(2) LIMITATION OF EXCLUSION.— 
"(A) IN GENERAL.—The amount which may be excluded 
under paragraph (1) for dependent care assistance with 
respect to dependent care services provided during a tax-
able year shall not exceed $5,000 ($2,500 in the case of a 
separate return by a married individual). 
(B) YEAR OF INCLUSION.—The amount of any excess 
under subparagraph (A) shall be included in gross income 
in the taxable year in which the dependent care services 
were provided (even if pajrment of dependent care assist-
ance for such services occurs in a subsequent taxable year). 
"(C) MARITAL STATUS.—For purposes of this paragraph, 
marital status shall be determined under the rules of para-
graphs (3) and (4) of section 21(e)." 
(B) Section 6051(a) of the 1986 Code is amended by striking 
out the period at the end of paragraph (8) £uid inserting in lieu 
thereof ", and", and by adding at the end thereof the following 
new paragraph: 
"(9) the total amount incurred for dependent care assistance 
with respect to such employee under a dependent care assist-
ance program described in section 129(d)." 
(CXi) Except as provided in this subparagraph, the amend- 
26 use 129 note. 
ments made by this paragraph shall apply to taxable years 
beginning after December 31,1987. 
(ii) A taxpayer may elect to have the amendment made by 
subparagraph (A) apply to taxable years beginning in 1987, 
(iii) In the case of a taxpayer not making an election under 
clause (ii), any dependent care assistance provided in a tsixable 
year beginning in 1987 with respect to which reimbursement 
was not received in such taxable year shall be treated as 
provided in the taxpayer's first taxable year beginning after 
December 31,1987. 
(d) AMENDMENT RELATED TO SECTION 1164 OF THE REFORM ACT.— 
Section 119(dX2) of the 1986 Code is amended— 
(1) by striking out "(as of the close of the calcmdar year in 
which the taxable year begins)" in subparagraph (AXi), and 
(2) by adding at the end thereof the following: 
"The appraised value under subparagraph (AXi) shall be deter-
mined as of the close of the calendar year in which the taxable 
year begins, or, in the case of a rental period not greater than 1 
year, at any time during the calendar year in which such period 
begins." 
(e) AMENDMENTS RELATED TO SECTION 1166 OF THE REFORM 
ACT.—Section 7701(aX20) of the 1986 Code (defining employee) is 
amended— 
(1) by striking out "106, and 125" and inserting in lieu thereof 
"and 106", and 
(2) by inserting "and for purposes of applying section 125 with 
respect to cafeteria plans," before "the term". 
(f) AMENDMENTS RELATED TO SECTION 1168 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 134(b) of the 1986 Code is amended 
by striking out "or regulation thereunder" and inserting in lieu 
thereof ", regulation, or administrative practice". 
102 STAT. 3490 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2XA) Section 134(bXl) of the 1986 Code is amended by insert-
ing "(other than personal use of a vehicle)" after "in-kind 
benefit". 
26 use 134 note. 
(B) The amendment made by subparagraph (A) shall apply to 
taxable years b^inning after December 31, 1986. 
(3) Section 134(bX3XA) of the 1986 Code is amended by striking 
out "under any provision of law or r^^ation described in 
paragraph (1)". 
26 use 134 note. 
(4) Section 1168(c) of the Reform Act is amended by striking 
out "1986" and insertmg in Ueu thereof "1984". 
(g) AMENDMENTS RELATED TO SECTION 1172 OF THE REFORM ACT.— 
26 use 409. 
(1) Section 1172(bXlXA) of the Reform Act is amended by 
inserting "each place it appears" before the comma. 
(2) Paragraphs (2) and (3) of section 409(n) of the 1986 Code 
(relating to securities received in certain transactions) is 
amended by inserting "or section 2057" after "section 1042" 
each place it appears. 
(3) Paragraph (1) of section 2057(b) of the 1986 Code (relating 
to qualified sale) is amended by striking out "is". 
Loans. 
(h) AMENDMENTS RELATED TO SECTION 1173 OF THE REFORM ACT.— 
(1) Section 133 of the 1986 Code (relating to exclusion of 
interest on securities acquisition loans) is amended by adding at 
the end thereof the following new subsection: 
"(e) PERIOD TO WHICH INTEREST EXCLUSION APPLIES.— 
"(1) IN GENERAL.—In the case of— 
"(A) an original securities acquisition loan, and 
"(B) any securities acquisition loan (or series of such 
loans) used, to refinance tiie original securities acquisition 
loan, 
subsection (a) shall apply only to interest accruing during the 
excludable period with respect to the original securities acquisi-
tion loan. 
"(2) ElxcLUDABLE PERIOD.—For purposes of this subsection, the 
term 'excludable period' means, with respect to any original 
securities acquisition loan— 
"(A) IN GENERAL.—The 7-year period b^inning on the 
date of such loan. 
"(B) 
LOANS DESCRIBED IN SUBSECTION 0)X1XA).—If 
the 
term of an original securities acquisition loan described in 
subsection (bXlXA) is greater than 7 years, the term of such 
loan. This subparagraph shall not apply to a loan described 
in subsection (bX3)(B). 
"(3) ORIGINAL SECURITIES ACQUISITION LOAN.—For the pur-
poses of this subsection, the term 'original securities acquisition 
loan' means a securities acquisition loan described in subpara-
graph (A) or (B) of subsection a>Xl)." 
(2XA) Section 133(b) of the 1986 Code (defining securities 
acquisition loan) is amended— 
(i) by strikii^ out "or are used to refinance such a loan," 
in paragraph (IXA), 
(ii) by striking out ", except that this subparagraph shall 
not apply to any loan the commitment period of which 
exceeds 7 years" in paragraph (1)(B), and 
(iii) by adding at the end thereof the following new 
paragraph: 
"(5) TMAT»«ENT O
F REFINANCINGS.—The term 'securities ac-
quisition loan' shall include any loan which— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3491 
"(A) is (or is part of a series of loans) used to refinance a 
loan described-in subparagraph (A) or (B) of paragraph (1), 
and 
"(B) meets the requirements of paragraphs (2) and (3)." 
(B) Subparagraph (B) of section 133(bX3) of the 1986 Code is 
amended to read as follows: 
"(B) repayment terms providing for more rapid repay-
ment of principal or interest on such loan, but only if 
allocations under the plan attributable to such repajnnent 
do not discriminate in favor of highly compensated em-
ployees (within the meaning of section 414(q)).' 
(3) Section 404(k) of the 1986 Code is amended— 
(A) by inserting "(whether or not allocated to partici-
pants)" after "employer securities" in paragraph (2XC), and 
(B) by adding at the end thereof the following new sen-
tence: Paragraph (2XC) shall not apply to dividends from 
employer securities which are allocated to any participant 
unless the plan provides that employer securities with a 
fair market value not less than the amount of such divi-
dends are allocated to such participant for the year which 
(but for paragraph (2XC)) such dividends would have been 
allocated to such participant." 
(4) Subparagraph (C) of section 852(bX5) of the 1986 Code 
(relating to interest on certain loans used to acquire employer 
securities) is amended by striking out "paragraph" and insert-
ing in lieu thereof "section". 
(5)(A) The amendments made by parcigraphs (1) and (2) shall 26 use 133 note, 
apply to— 
(i) any loan used to acquire employer securities after 
July 18,1984, and 
(ii) loans made after July 18, 1984, which were used (or 
were part of a series of loans used) to refinance any loan 
which— 
(I) was used to acquire employer securities after 
May 23, 1984 (July 18, 1984, in the case of a loan 
described in section 133(bX3XB) of the Internal Revenue 
Code of 1986), and 
(II) met the requirements of section 133 (other than 
subsection (bX2) thereof) of such (Dode as in effect as of 
the later of the date on which the loan was made, or 
July 19,1984. 
In no event shall such amendments apply to any loan described 
in section 133(bXl)(B) of such Code which is made before Octo-
ber 22, 1986 (or loan used, or part of a series of loans used, to 
refinance such a loan). 
(B) Subparagraph (B) of section 1173(cX2) of the Reform Act is 26 use 133 note. 
amended to read as follows: 
"(B) Section 133(bXlXA) of the Internal Revenue Code of 
1986, as amended by subsection (bX2), shall apply to any 
loan used (or part of a series of loans used) to refinance a 
loan which— 
"(i) was used to acquire employer securities after 
May 23,1984, and 
"(ii) met the requirements of section 133 of the In-
ternal Revenue CJode of 1986 as in effect as of the later 
of— 
"(I) the date on which the loan was made, or 
102 STAT. 3492 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(II) July 19,1984." 
(6) Section 404(k) of the 1986 Code is amended by striking out 
"merely by reason of any distribution" in the third sentence 
and inserting in lieu thereof "or as engaging in a prohibited 
transaction for purposes of section 4975(dX3) merely by reason 
of any distribution or payment", 
(i) AMENDMENTS RELATED TO SECTION 1174 OF THE REFORM ACT.— 
(1) Clause (ii) of section 409(oXlXA) of the 1986 Code (relating 
to distribution requirement) is amended by striking out "such 
year" and inserting in lieu thereof "distribution is required to 
begin under this clause". 
26 use 409 note. 
(2) Section 1174(a)(2) of the Reform Act is amended by striking 
out "plan terminations" and inserting in lieu thereof "distribu-
tions". 
(3) Section 409(oXlXA) of the 1986 Code is amended by striking 
out "unless the participant otherwise elects" and inserting in 
lieu thereof "if the participant and, if applicable pursuant to 
sections 401 (aXU) and 417, with the consent of the participant's 
spouse elects", 
(j) AMENDMENTS RELATED TO SECTION 1175 OF THE REFORM ACT.— 
(1) Subclause (H) of section 401(aX28XB) of the 1986 Code 
(relating to method of meeting requirements) is amended by 
inserting "and within 90 da3rs after the period during which the 
election may be made, the plan invests the portion of the 
participant's account covered by the election in accordance with 
such election" after "clause (i)". 
(2) Clause (iv) of section 401(aX28XB) of the 1986 Code is 
amended to read as follows: 
"(iv) QUALIFIED ELECTION PERIOD.—For purposes of 
this subparagraph, the term 'qualified election period' 
means the 6-plan-year period beginning with the later 
of-
"(I) the 1st plan year in which the individual 
first became a qualified participant, or 
"(n) the Ist plan year b^inning after Decem-
ber 31,1986. 
For purposes of the preceding sentence, an employer 
may elect to treat an individual first becoming a quali-
fied p£u*ticip€mt in the 1st plan year beginning in 1987 
as having become a participant in the 1st plan year 
beginning in 1988." 
(3) The last sentence of section 409(d) of the 1986 Code (relat-
ing to employer securities must stay in the plan) is amended by 
inserting "or to any distribution or reinvestment required 
under section 401(aX28)" after "section 401(aX9)". 
(4) Section 4978(d) of the 1986 Ck>de (relating to section not to 
apply to certain dispositions) is amended by adding at the end 
thereof the following new paragraph: 
"(4) DISPOSITIONS TO MEET DIVERSIFICATION REQUIREMENTS.— 
This section shall not apply to any disposition of qualified 
securities which is required under section 401(aX28)," 
(5) Section 409(h) of the 1986 Code (relating to right to demand 
employer securities; put option) is amended by adding at the 
end thereof the following new paragraph: 
"(7) EXCEPTK»( WHERE EMPLOYEE ELECTED DIVERSIFICATION.— 
-Faragrs^h (IXA) Jihall not apply iwith respect to the portion of 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3493 
the participant's account which the employee elected to have 
reinvested under section 401(aX28XB)." 
(6) Section 401(aX28XB) of the 1986 Code is amended by adding 
at the end thereof the following new clause: 
"(v) COORDINATION WITH DISTRIBUTION RUI£S.—Any 
distribution required by this subparagraph shall not be 
taken into account in determining whether— 
"(I) a subsequent distribution is a lump-sum dis-
tribution under section 402(eX4XA), or 
/ 
"(U) section 402(aX5XDXiii) applies to a subse-
quent distribution." 
(k) AMENDMENTS RELATED TO SECTION 1176 OF THE REFORM ACT.— 
(1) Section 401(aX22) of the 1986 Code is amended by striking 
out "is not publicly traded" each place it appears and inserting 
in lieu thereof "is not readily tradable on an established 
(2) Section 401(aX22) of the 1986 Code is amended by adding at 
the end thereof the following new sentence: "For purposes of 
the preceding sentence, subsections (b), (c), (m), and (o) of section 
414 shall not apply except for determining whether stock of the 
employer is not readily tradable on an established msirket." 
(3) Section 4090X4) of the 1986 Code (relating to nonvoting 
common stock may be acquired in certain cases), as added by 
section 1176(b) of the Reform Act, is redesignated as para-
graph (5). 
G) AMENDMENTS RELATED TO SECTION 1177 OF THE REFORM ACT.— 
(1) Paragraph (2) of section 1177(b) of the Reform Act is 26 USC 38 note. 
amended by striking out "section 143(dX3XC)" and inserting in 
lieu thereof "section 146(dX3XC)". 
(2) Subsection (b) of section 1177 of the Reform Act is amended 
by striking out "made by this subtitle" and inserting in lieu 
thereof "made by section 1175". 
(3) If any newspaper corporation described in section 1177(b) 
of the Reform Act, as amended by this subsection, pays in cash a 
dividend within 60 days after the date of the enactment of this 
Act to the corporation's employee stock ownership plans and if 
a corporate resolution declaring such dividend was adopted 
before November 30, 1987, and such resolution specifies that 
such dividend shall be contingent upon passage by the Congress 
of technical corrections, then such dividend (to the extent the 
aggr^ate amount so paid does not exceed $3,500,000) shall be 
treated as if it had been declared and paid in 1987 for all 
purposes of the Internal Revenue Code of 1986. 
SEC. 1012. AMENDMENTS RELATED TO TITLE XII OF THE REFORM ACT. Corporations. 
(a) AMENDMENTS RELATED TO SECTION 1201 OF THE REFORM ACT.— 
(IXA) Subparagraph (C) of section 904(dX2) of the 1986 Cbde is 
amended to read as follows: 
"(dO FiNANCLAL SERVICES INCOME.— 
"(i) IN GENERAL.—Except as otherwise provided in 
this subparagraph, the term'financial services income' 
means any income which is received or accrued by any 
person predominantly engaged in the active conduct of 
a banking, insurance, financing, or similar business, 
and which is— 
"(D described in clause (ii). 
Newspapers. 
26 USC 38 note. 
^ 
102 STAT. 3494 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(II) passive income (determined without regard 
to subclause (I) of subparagraph (AXiii)), or 
"(III) export financing interest which (but for 
subparagraph (BXii)) would be high withholding 
tax interest. 
"(ii) GENERAL DESCRIPTION OF FINANCIAL SERVICES 
INCOME.—Income is described in this clause if such 
income is— 
"(I) derived in the active conduct of a banking, 
financing, or similar business, 
"(II) derived from the investment by an insur-
ance company of its unearned premiums or 
reserves ordinary and necessary for the proper 
conduct of its insurance business, or 
"(III) of a kind which would be insurance income 
as defined in section 953(a) determined without 
regard to those provisions of paragraph (IXA) of 
such section which limit insurance income to 
income from countries other than the country in 
which the corporation was created or organized, 
"(iii) EXCEPTIONS.—^The term 'financial services 
income' does not include— 
"(I) any high withholding tax interest, 
"(II) any dividend from a noncontrolled section 
902 corporation, and 
"(III) any export financing interest not described 
in clause (iXIII)." 
(B) Clause (i) of section 864(dX5XA) of the 1986 Code is 
amended by striking out "(CXiii)" and inserting in lieu thereof 
"(CXiiiXIII)*^. 
(2) Subparagraph (D) of section 904(dX2) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "Such term does not include any dividend from a 
noncontrolled section 902 corporation and does not include any 
financial services income." 
(3) Paragraph (3) of section 904(d) of the 1986 Code is amended 
by adding at the end thereof the following new subparagraph: 
"(H) EXCEPTION FOR CERTAIN HIGH WITHHOLDING TAX IN-
TEREST.—This paragraph shall not apply to any amount 
which— 
"(i) without regard to this paragraph, is high 
withholding tax interest (including any amount treated 
as high withholding tax interest under paragraph 
(2XBXiii)), and 
"(ii) would (but for this subparagraph) be treated as 
financial services income under this paragraph. 
The amount to which this paragraph does not apply by 
reason of the preceding sentence shall not exceed the 
interest or equivalent income of the controlled foreign cor-
poration taken into account in determining financial serv-
ices income without regard to this subparagraph." 
(4) Subparagraph (E) of section 904(dX3) of the 1986 Code is 
amended— 
(A) by striking out the first sentence and inserting in lieu 
thereof the following: "If a controlled foreign corporation 
meets the requirements of section 954(bX3XA) (relating to 
de minimis rule) for any taxable year, for purposes of this 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3495 
paragraph, none of its foreign base company income (as 
defined in section 954(a) without r ^ a r d to section 954(bX5)) 
and none of its gross insurance income (as defined in sec-
tion 954(bX3XC)) for such taxable year shall be treated as 
income in a separate cat^ory, except that this sentence 
shall not apply to any income which (without regard to this 
sentence) would be treated as financial services income.", 
and 
(B) by striking out "income (other than high withholding 
tax interest and dividends from a noncontroUed section 902 
corporation)" and inserting in lieu thereof 
"passive 
income". 
(5) Paragraph (2) of section 1201(e) of the Reform Act is 26 USC 904 note. 
amended by adding at the end thereof the following new 
subparagraph: 
"(J) 
TREATMENT OF AFFILIATED GROUP FILING CONSOLI-
DATED RETURN.—For purposes of this paragraph, all mem-
bers of an affiliated group of corporations filing a consoli-
dated return shall be treated as 1 corporation." 
(6) Subparagraph (A) of section 904(dX2) of the 1986 Code is 
amended— 
(A) by striking out "The term" in clause (ii) and inserting 
in lieu thereof "Except as provided in clause (iii), the term', 
and 
(B) by adding at the end thereof the following new clause: 
(iv) 
CLARIFICATION OF APPLICATION OF SECTION 
864 (d) (6).—In determining whether any income is of a 
kind which would be foreign personal holding company 
income, the rules of section 864(dX6) shall apply only in 
the case of income of a controlled foreign corporation." 
(7) Subparagraph (F) of section 904(dX3) of the 1986 Code is 
amended to read as follows: 
"(F) SEPARATE CATEGORY.—For purposes of this para-
graph— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
the term 'separate cat^ory' means any category of 
income described in subparagraph (A), (B), (C), (D), or 
(E) of paragraph (1). 
"(ii) COORDINATION WITH HIGH-TAXED INCOME PROVI-
- 
SIONS.— 
"(I) In determining whether any income of a 
controlled foreign corporation is in a separate cat-
egory, subclause (HI) of paragraph (2XAXiii) shall 
not apply. 
"(II) Ajiy income of the taxpayer which is treated 
as income in a separate category under this para-
graph shall be so treated notwithstanding any 
provision of paragraph (2); except that the deter-
mination of whether any amount is high-taxed 
income shall be made after the application of this 
paragraph." 
(8) a a u s e (iii) of section 904(dX2XB) of the 1986 Code is 
amended to read as follows: 
"(iii) REGULATIONS.—The Secretary may by regula-
tions provide that— 
"(I) amounts (not otherwise high withholding tax 
interest) shall be treated as high withholding tax 
102 STAT. 3496 
PUBLIC LAW 100-647—NOV. 10, 1988 
interest where necessary to prevent avoidance of 
the purposes of this subparagraph, and 
"(11) a tax shall not be treated as a withholding 
tax or other tax imposed on a gross basis if such 
tax is in the nature of a prepajnnent of a tax 
imposed on a net basis." 
(9) Clause (ii) of section 904(dX2XI) of the 1986 Code is 
amended by striking out "except to the extent that" and all that 
follows down through "and" at the end thereof and inserting in 
lieu thereof the following: 
"except that— 
"(I) such taxes shall be treated as paid or accrued 
with respect to shipping income to the extent the 
taxpayer establishes to the satisfaction of the Sec-
retary that such taxes were paid or accrued with 
respect to such income, 
* (II) in the case of a person described in subpara-
graph (CXi), such taxes shall be treated as paid or 
accrued with respect to financial services income to 
the extent the taxpayer establishes to the satisfac-
tion of the Secretary that such taxes were paid or 
accrued with respect to such income, and 
"(III) such taxes shall be treated as paid or ac-
crued with respect to high withholding tax interest 
to the extent the taxpayer establishes to the satis-
faction of the Secretary that such taxes were paid 
or accrued with respect to such income, and". 
(10) Clause (i) of section 904(dX2XE) of the 1986 Code is 
amended by striking out "during which it was a controlled 
foreign corporation" and inserting in lieu thereof "during which 
it was a controlled foreign corporation and except as provided in 
regulations, the taxpayer was a United States shareholder in 
such corporation". 
(11) Subparagraph (E) of section 904(dXl) of the 1986 Code is 
amended by striking out "dividends" and inserting in lieu 
thereof "in the case of a corporation, dividends". 
(b) AMENDMENT RELATED TO SECTION 1202 OF THE REFORM ACT.— 
(1) Paragraph (7) of section 902(c) of the 1986 Code is 
amended— 
(A) by striking out "secton 960" and inserting in lieu 
thereof "section 960", and 
(B) by striking out "this section" the second place it 
appears and inserting in lieu thereof "this section and 
section 960". 
(2) Paragraph (1) of section 902(c) of the 1986 (Dode is amended 
by striking out "sections 964 and 986" and inserting in lieu 
thereof "sections 964(a) and 986". 
26 use 902 note. 
(3) For purposes of sections 902 and 960 of the 1986 Code, the 
increase in earnings and profits of any foreign corporation 
under section 1023(eX3XC) of the Reform Act shall be taken into 
account ratably over the 10-year period beginning with the 
corporation's first taxable year beginning after December 31, 
1986. 
(4) Paragraph (3) of section 404A(d) of the 1986 Code is 
amended by striking out "the amount determined" and insert-
ing in lieu thereof "except £is provided in regulations, the 
amount determined". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3497 
(c) AMENDMENT RELATED TO SECTION 1203 OF THE REFORM ACT.— 
Paragraph (5) of section 904(f) of the 1986 Code is amended by 
adding at the end thereof the following new subparsigraph: 
"(F) DISPOSITIONS.—If any separate limitation loss for any 
taxable year is allocated against any separate limitation 
income for such taxable year, except to the extent provided 
in regulations, rules similar to the rules of paragraph (3) 
shall apply to any disposition of property if gain from such 
disposition would be in the income category with respect to 
which there was such separate limitation loss." 
(d) AMENDMENTS RELATED TO SECTION 1211 OF THE REFORM ACT.— 
(1) Subsection (d) of section 865 of the 1986 Code is amended 
by adding at the end thereof the following new pargigraph: 
"(4) COORDINATION WITH SUBSECTION (C) .— 
"(A) GAIN NOT IN EXCESS OF DEPRECIATION ADJUSTMENTS 
souRCED UNDER SUBSECTION (c).—Notwithstanding para-
graph (1), any gain from the sale of an intangible shall be 
sourced under subsection (c) to the extent such gain does 
not exceed the depreciation adjustments with respect to 
such intangible. 
"(B) SUBSECTION (C) (2) NOT TO APPLY TO INTANGIBLES.— 
Paragraph (2) of subsection (c) shall not apply to any gain 
from the sale of an intangible." 
(2) Subparagraph (A) of section 865(eXl) of the 1986 Code is 
amended by striking out "(d), or (f)" and inserting in lieu 
thereof "(dXlXB) or (3), or (f)". 
(3XA) Clause (ii) of section 865(gXlXA) of the 1986 Code is 
amended by striking out "partnership,". 
(B) Subsection (h) of section 865 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) TREATMENT OF PARTNERSHIPS.—In the case of a partner-
ship, except as provided in regulations, this section shall be 
applied at the partner level." 
(4) Subsection (f) of section 865 of the 1986 Code is amended to 
read as follows: 
"(f) STOCK OF AFFILIATES.—If— 
"(1) a United States resident sells stock in an affiliate which is 
a foreign corporation, 
"(2) such sale occurs in a foreign country in which such 
afHliate is engaged in the active conduct of a trade or business, 
and 
"(3) more than 50 percent of the gross income of such affiliate 
for the 3-year period ending with the close of such af^iate's 
taxable year immediately preceding the year in which the sale 
occurred was derived from the active conduct of a trade or 
business in such foreign country, 
any gain from such sale shall be sourced outside the United States. 
For purposes of paragraphs (2) and (3), the United States resident 
may elect to treat an affiliate and all other corporations which are 
wholly owned (directly or indirectly) by the affiliate as one 
corporation." 
(5) Effective with respect to taxable years beginning after 
December 31, 1987, subparagraph (B) of section 865(eX2) of the 
1986 Code is amended to read as follows: 
"(B) EXCEPTION.—Subparagraph (A) shall not apply to 
^ ^
^
. 
any sale of inventory property which is sold for use, disposi-
tion, or consumption outside the United States if an office 
102 STAT. 3498 
PUBLIC LAW 100-647—NOV. 10, 1988 
or other fixed place of business of the taxpayer in a foreign 
country materially participated in the sale." 
(6XA) Subsection (g) of section 865 of the 1986 Code is 
amended by adding at the end thereof the following new para-
graph: 
"(3) SPECIAL RULE FOR CERTAIN STOCK SALES BY RESIDENTS OF 
P
U
E
R
T
O RICO.—Paragraph (2) shall not apply to the sale by an 
individual who was a bona fide resident of Puerto Rico during 
the entire taxable year of stock in a corporation if— 
"(A) such corporation is engaged in the active conduct of 
a trade or business in Puerto Rico, and 
"(B) more than 50 percent of its gross income for the 
3-year period ending with the close of such corporation's 
taxable year immediately preceding the year in which such 
sale occurred was derived from the active conduct of a trade 
or business in Puerto Rico. 
For purposes of the preceding sentence, the taxpayer may elect 
to treat a corporation and all other corporations which are 
wholly owned (directly or indirectly) by such corporation as one 
corporation." 
(B) Subsection (i) of section 865 of the 1986 Code is amended 
by striking out "and" at the end of paragraph (1), by striking 
out the period at the end of paragraph (2) and inserting in lieu 
thereof ", and", and by adding at the end thereof the following 
new paragraph: 
"(3) providing that, subject to such conditions (which may 
include provisions comparable to section 877) as may be pro-
vided in such r^^ations, subsections (eXl)(B) and (gX2) shall 
not apply for purposes of sections 931,933, and 936." 
(7) Subparagraph (B) of section 864(cX4) of the 1986 Code is 
amended by striking out "or" at the end of clause (i), by striking 
out the period at the end of clause (ii) and inserting in lieu 
thereof ; or", and by adding at the end thereof the following 
new clause: 
"(iii) is derived from the sale or exchange (outside the 
United States) through such office or other fixed place 
of business of personal property described in section 
1221(1), except that this clause shall not apply if the 
property is sold or exchanged for use, consumption, or 
disposition outside the United States and an office or 
other fixed place of business of the taxpayer in a 
foreign country participated materially in such sale." 
(8) Section 865 of the 1986 Code is amended by redesignating 
subsections (h), (i), and (j) as subsections (i), (j), and (k), respec-
tively, and by inserting after subsection (g) the following new 
subsection: 
"(h) TREATMENT OF GAINS FROM SALE OF CERTAIN STOCK OR INTAN-
GIBLES AND FROM CERTAIN LIQUIDATIONS.— 
"(1) IN GENERAL.—In the case of gain to which this subsection 
applies— 
"(A) such gain shall be sourced outside the United States, 
but 
"(B) subsections (a), (b), and (c) of section 904 and sections 
902, 907, and 960 shall be applied separately with respect to 
such gain. 
"(2) GAIN TO WHICH SUBSECTION APPLIES.—This subsection 
shall apply to— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3499 
"(A) G A I N FROM SALE OF CERTAIN STOCK OR INTANGIBLES.— 
Any gain— 
"(i) which is from the sale of stock in a foreign 
corporation or an intangible (as defined in subsection 
(dX2)) and which would otherwise be sourced in the 
United States under this section, 
"(ii) which, under a treaty obligation of the United 
States (applied without regard to this section), would be 
sourced outside the United States, and 
"(iii) with respect to which the taxpayer chooses the 
benefits of this subsection. 
"(B) GAIN FROM UQUIDATION IN POSSESSION.—Any gain 
which is derived from the receipt of any distribution in 
liquidation of a corporation— 
"(i) which is organized in a possession of the United 
States, and 
"(ii) more than 50 percent of the gross income of 
which during the 3-taxable year period ending with the 
close of the taxable year immediately preceding the 
taxable year in whicn the distribution is received is 
from the active conduct of a trade or business in such 
possession." 
(9) Subparagraph (A) of section 865(eXl) of the 1986 Code is 
amended by striking out "outside the United States" the first 
place it appears and inserting in lieu thereof "in a foreign 
country". 
(10) Subparagraph (B) of section 864(cX4) of the 1986 Code is 
amended— 
(A) by striking out "(including any gain or loss realized on 
the sale or exchange of such property)" in clause (i), and 
(B) by striking out ", or gain or loss from the sale or 
exchange of stock or notes, bonds, or other evidences of 
indebtedness" in clause (ii). 
(11) Clause (i) of section 865(gXlXA) of the 1986 Cbde is Aliens. 
amended to read as follows— 
"(i) any individual who— 
"(I) is a United States citizen or a resident alien 
and does not have a tax home (as defined in 
section 911(dX3)) in a foreign country, or 
"(II) is a nonresident Edien and has a tax home 
(as so defined) in the United States, and". 
(12) Paragraph (2) of section 865(d) of the 1986 Code is 
amended by inserting "franchise," after "trade brand,". 
(e) AMENDMENTS RELATED TO SECTION 1212 OF THE REFORM ACT.— 
(IXA) Paragraph (3) of section 883(c) of the 1986 Code is 
amended to read as follows: 
"(3) SPECIAL RULES FOR PUBLICLY TRADED CORPORATIONS.— 
"(A) EXCEPTION.—Paragraph (1) shall not apply to any 
corporation which is organized in a foreign country meeting 
the requirements of paragraph (1) or (2) of subsection (a) (as 
the case may be) and the stock of which is primarily and 
regularly traded on an established securities market in 
such foreign country, another foreign country meeting the 
requirements of such paragraph, or the United States. 
(B) TREATMENT OF STOCK OWNED BY PUBUCLY TRADED 
CORPORATION.—Any stock in another corporation which is 
owned (directly or indirectly) by a corporation meeting the 
102 STAT. 3500 
PUBLIC LAW 100-647—NOV. 10, 1988 
requirements of subparagraph (A) shall be treated as owned 
by individuals who are residents of the foreign country in 
which the corporation meeting the requirements of 
subparagraph (A) is organized." 
(B) Paragraph (1) of section 883(c) of the 1986 Code is 
amended— 
(i) by striking out "Paragraphs (1) and (2) of subsection 
(a)" and inserting in lieu thereof "Paragraph (1) or (2) of 
subsection (a) (as the case may be)", and 
(ii) by stri^ng out "such paragraphs (1) and (2)" and 
inserting in lieu thereof "such paragraph". 
(2XA) Paragraphs (1) and (2) of section 883(a) of the 1986 Code 
are each amended by striking out "to citizens of the United 
States and" 
(B) Paragraphs (1) and (2) of section 872(b) of the 1986 Code 
are each amended by striking out "to citizens of the United 
States and to corporations organized in the United States" and 
inserting in lieu thereof "to individual residents of the United 
States". 
(3XA) The section heading for section 863 of the 1986 Code is 
amended to read as follows: 
"SEC 863. SPECIAL RULES FOR DETERMINING SOURCE.'* 
(B) The table of sections for part I of subchapter N of chapter 
1 of the 1986 Code is amended by striking out the item relating 
to section 863 and inserting in lieu thereof the following: 
"Sec. 863. Special rules for determining source." 
(4) Subsection (c) of section 862 is hereby repealed. 
(5) Paragraphs (1) and (2) of section 872(b) of the 1986 Code 
and paragraphs (1) and (2) of section 883(a) of the 1986 Oxle are 
each amended by striking out "operation" and inserting in lieu 
thereof "international operation". 
(6) Paragraph (1) of section 887(b) of the 1986 Code is 
amended— 
(A) by striking out "under section 863(c)" and inserting in 
lieu thereof "under section 863(cX2)", and 
(B) by adding at the end thereof the following new sen-
tence: "To the extent provided in regulations, such term 
does not include any income of a kind to which an exemp-
tion under paragraph (1) or (2) of section 883(a) would not 
apply." 
(f) AMENDBIIENT RELATED TO SECTION 1213 OF THE REFORM ACT.— 
Paragraph (2) of section 863(e) of the 1986 Code is amended by 
striUng out "foreign country" each place it appears and inserting in 
lieu thereof "foreign country (or possession of the United States)". 
(g) AMENDMENTS RELATED TO SECTION 1214 OF THE REFORM ACT.— 
26 use 861 note. 
dXA) Paragraph (1) of section 1214(d) of the Reform Act is 
amended to read as follows: 
"(1) IN GENERAL.—^The amendments made by this section 
shall apply to payments made in a taxable year of the payor 
b^inning after December 31,1986." 
(B) A taxpayer may elect not to have the amendment made by 
subparagraph (A) apply and to have section 1214(dXl) of the 
Reform Act apply as in effect before such amendment. Such 
election shall be made at such time and in such manner as the 
Secretary of the Treasury or his delegate may prescribe. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3501 
(2) Subparagraph (B) of section 1214(dX2) of the Reform Act is 
amended by striking out "section 904(dX2XG)" and inserting in 
lieu thereof "section 904(dX2XH)". 
(3) Subparagraph (B) of section 861(cXl) of the 1986 Code is 
amended— 
(A) by striking out "subchapter)" in clause (i) and insert-
ing in lieu thereof "subchapter) or, in the case of a corpora-
tion, is attributable to income so derived by a subsidiary of 
such corporation", 
(B) by striking out "or chain of subsidiaries of such 
corporation" in clause (ii), and 
(C) by adding at the end thereof the following new 
sentence: 
"For purposes of this subparagraph, the term 'subsidiary' 
means any corporation in which the corporation referred to in 
this subparagraph owns (directly or indirectly) stock meeting 
the requirements of section 1504(aX2) (determined by substitut-
ing '50 percent' for '80 percent' each place it appears)." 
(4) Paragraph (1) of section 210501)) of the 1986 Code is 
amended by striking out "section 861(c), if any interest thereon 
would be treated by reason of section 861(aXlXA) as income 
from sources without the United States" and inserting in lieu 
thereof "section 871(iX3), if any interest thereon would not be 
subject to tax by reason of section 871(iXl)". 
(5) Paragraph (2) of section 864(c) of the 1986 CJode is amended 
by striking out the last sentence. 
(6) Paragraph (3) of section 907(c) of the 1986 Ckxie is amended: 
(A) by striking out subparagraph (B) and redesignating 
subparagraphs (C) and (D) as subparagraphs (B) and (C), 
respectively, and 
(B) by striking out "and dividends described in subpara-
graph (B)". 
(7) Subsection (a) of section 1442 of the 1986 Code is 
amended— 
(A) by striking out "and the references in" and inserting 
in lieu thereof "the references in", and 
(B) by inserting before the period at the end thereof the 
following: ", and the reference in section 1441(cX10) to 
section 871(iX2) shall be treated as referring to section 
881(d)". 
(h) AMENDMENTS RELATED TO SECTION 1215 
OF THE REFORM ACT.— 
(1) Paragraph (4) of section 864(e) of the 1986 Code is amended 
to read as follows: 
"(4) BASIS OF STOCK IN NONAFFILIATED IO-PERCENT OWNED COR-
PORATIONS ADJUSTED FOR EARNINGS AND PROFITS CHANGES.— 
"(A) IN GENERAL.—For purposes of allocating and appor-
tioning expenses on the basis of assets, the adjusted basis of 
any stock in a nonaffiliated 10-percent owned corporation 
shall be— 
"(i) increased by the amount of the earnings and 
profits of such corporation attributable to such stock 
and accumulated during the period the taxpayer held 
such stock, or 
"(ii) reduced (but not below zero) by any deficit in 
earnings and profits of such corporation attributable to 
such stock for such period. 
102 STAT. 3502 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) NONAFFILIATED IO-PERCENT OWNED CORPORATION.— 
For purposes of this paragraph, the term 'nonaffiliated 
10-percent owned corporation' means any corporation if— 
"(i) such corporation is not included in the taxpayer's 
affiliated group, and 
"(ii) members of such affiliated group own 10 percent 
or more of the total combined voting power of all 
classes of stock of such corporation entitled to vote. 
"(C) EARNINGS AND PROFITS OF LOWER TIER CORPORATIONS 
TAKEN INTO ACCOUNT.— 
"(i) IN GENERAL.—If, by reason of holding stock in a 
nonaffiliated 10-percent owned corporation, the tax-
payer is treated under clause (iii) as owning stock in 
another corporation with respect to which the stock 
ownership requirements of clause (ii) are met, the 
adjustment under subparagraph (A) shall include an 
adjustment for the amount of the earnings and profits 
(or deficit therein) of such other corporation which are 
attributable to the stock the taxpayer is so treated as 
owning and to the period during which the taxpayer is 
treated as owning such stock. 
"(ii) 
STOCK OWNERSHIP REQUIREMENTS.—The stock 
ownership requirements of this clause are met with 
respect to any corporation if members of the taxpayer's 
affiliated group own (directly or through the applica-
tion of clause (iii)) 10 percent or more of the total 
combined voting power of all classes of stock of such 
corporation entitled to vote. 
"(iii) STOCK OWNED THROUGH ENTITIES.—For purposes 
of this subparagraph, stock owned (directly or in-
directly) by a corporation, partnership, or trust shall be 
treated as being owned proportionately by its share-
holders, partners, or beneficiaries. Stock considered to 
be owned by a person by reason of the application of 
the preceding sentence, shall, for purposes of applying 
such sentence, be treated as actually owned by such 
person. 
"(D) COORDINATION WITH SUBPART F, ETC.—For purposes of 
this paragraph, proper adjustment shall be made to the 
earnings and profits of any corporation to take into account 
any earnings and profits included in gross income under 
section 951 or under any other provision of this title and 
reflected in the adjusted basis of the stock." 
(2XA) Paragraph (1) of section 864(e) of the 1986 Code is 
amended by striking out "from sources outside the United 
States". 
(B) Subsection (h) of section 936 of the 1986 Code is amended 
by redesignating paragraph (7) as paragraph (8) and by insert-
ing after paragraph (6) the following new paragraph: 
"(7) SECTION 864(eKi) NOT TO APPLY.—This subsection shall 
be applied as if section 864(eXl) (relating to treatment of affili-
ated groups) had not been enacted." 
(C) The heading for part I of subchapter N of chapter 1 of the 
1986 Code is amended to read as follows: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3503 
TART 
I—SOURCE 
RULES 
AND 
OTHER 
GENERAL 
RULES 
RELATING 
TO 
FOREIGN 
INCOME". 
(D) The table of parts for subchapter N of chapter 1 of the 
1986 Code is amended by striking out the item relating to part I 
and inserting in lieu thereof the following: 
"Part I. Source rules and other general rules relating to foreign income." 
(3) Paragraph (3) of section 864(e) of the 1986 Code is amended 
by striking out the last sentence and inserting in lieu thereof 
the following: "A similar rule shall apply in the case of the 
portion of any dividend (other than a qualifying dividend as 
defined in section 243(b)) equal to the deduction allowable under 
section 243 or 245(a) with respect to such dividend and in the 
case of a like portion of any stock the dividends on which would 
be so deductible and would not be qualif}dng dividends (as so 
defined)." 
(4XA) Paragraph (5) of section 864(e) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(D) TREATMENT OF BANK HOLDING COMPANIES.—TO the 
extent provided in regulations— 
"(i) a bank holding company (within the meaning of 
section 2(a) of the Bank Holding Company Act of 1956), 
and 
"(ii) any subsidiary of a financial institution de-
scribed in section 581 or 591 or of any bank holding 
company if such subsidiary is predominantly engaged 
(directly or indirectly) in the active conduct of a bank-
ing, financing, or similar business, 
shall be treated as a corporation described in subparagraph 
(C)." 
(B) Subparagraph (B) of section 864(eX5) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "This subparagraph shall not apply for purposes of para-
graph (6)." 
(5) Paragraph (6) of section 864(e) of the 1986 (Dode is amended 
by striking out "directly allocable and apportioned" and insert-
ing in lieu thereof "directly allocable or apportioned". 
(6XA) Paragraph (7) of section 864(e) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (B), 
by striking out the period at the end of subparagraph (C) and 
inserting in lieu thereof a comma, and by adding at the end 
thereof the following new subparagraphs: 
"(D) for direct allocation of interest expense in the case of 
indebtedness resulting in a disallowance under section 
246A, 
"(E) for appropriate adjustments in the application of 
paragraph (3) in the case of an insurance company, and 
"(F) that this subsection shall not apply for purposes of 
any provision of this subchapter to the extent the Secretary 
determines that the application of this subsection for such 
purposes would not be appropriate." 
(B) Subsection (e) of section 864 of the 1986 Code is amended 
by striking out "(except as provided in regulations)" in the 
material preceding paragraph (1). 
102 STAT. 3504 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 864 note. 
(7) Paragraph (2) of section 1215(c) of the Reform Act is 
amended to read as follows: 
"(2) TRANSITIONAL RULES.— 
"(A) G E N E R A L PHASE-IN.— 
"(i) IN GENERAL.—In the case of the 1st 3 taxable 
years of the taxpayer beginning after December 31, 
1986, the amendments made by this section shall not 
apply to interest expenses paid or accrued by the tax-
payer during the taxable year with respect to an aggre-
gate amount of indebtedness which does not exceed the 
general phase-in amount. 
"(ii) GENERAL PHASE-IN AMOUNT.—Except as provided 
in clause (iii), the general phase-in amount for purposes 
of clause (i) is the applicable percentage (determined 
under the following table) of the aggregate amount of 
indebtedness of the taxpayer outstanding on Novem-
ber 16,1985: 
The applicable 
"In the case of the: 
percentage is: 
1st taxable year 
75 
2nd taxable year 
50 
3rd taxable year 
25. 
"(iii) LOWER LIMIT WHERE TAXPAYER REDUCES INDEBT-
EDNESS.—For purposes of applying this subparagraph 
' 
to interest expenses attributable to any month, the 
general phase-in amount shall in no event exceed the 
lowest amount of indebtedness of the taxpayer 
outstanding as of the close of any preceding month 
beginning after November 16, 1985. To the extent pro-
vided in regulations, the average amount of indebted-
ness outstanding during any month shall be used (in 
lieu of the amount outstanding as of the close of such 
month) for purposes of the preceding sentence. 
"(B) 
ClONSOLIDATION RULE NOT TO APPLY TO CERTAIN 
INTEREST.— 
"(i) IN GENERAL.—In the case of the 1st 5 taxable 
years of the taxpayer beginning after December 31, 
1986— 
"(I) subparagraph (A) shall not apply for pur-
poses of paragraph (1) of section 864(e) of the In-
ternal Revenue Code of 1986 (as added by this 
section), but 
"(II) such paragraph (1) shall not apply to in-
terest expenses paid or accrued by the taxpayer 
during the taxable year with respect to an aggre-
gate amount of indebtedness which does not exceed 
the special phase-in amount, 
"(ii) SPECIAL PHASE-IN AMOUNT.—The special phase-in 
amount for purposes of clause (i) is the sum of— 
"(I) the general phase-in amount as determined 
for purposes of subparagraph (A), 
"(II) the 5-year phase-in amount, and 
"(HI) the 4-year phase-in amount. 
For purposes of applying this subparagraph to interest 
expense attributable to any month, the special phase-in 
amount shall in no event exceed the limitation deter-
mined imder subparagraph (AXiii)-
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3505 
"(iii) 5-YEAR PHASE-IN AMOUNT.—The 5-year phase-in 
amount is the lesser of— 
"(I) the applicable percentage (determined under 
the following table for purposes of this subclause) 
of the 5-year debt amount, or 
"(II) the applicable percentage 
(determined 
under the following table for purposes of this 
subclause) of the 5-year debt amount reduced by 
paydowns: 
The applicable 
The applicable 
"In the case of the: 
'^l':""*?!*/?'" 
^nnr^!!^?'' 
purposes of 
purposes of 
subclause (I) is: 
subclause (II) is: 
1st taxable year 
8% 
10 
2nd taxable year 
16% 
25 
3rd taxable year 
25 
50 
4th taxable year 
33% 
100 
5th taxable year 
16% 
100. 
"(iv) 4-YEAR PHASE-IN AMOUNT.—The 4-year phase-in 
amount is the lesser of— 
"(I) the applicable percentage (determined under 
the following table for purposes of this subclause) 
of the 4-year debt amount, or 
"dD the applicable percentage 
(determined 
under the following table for purposes of this 
subclause) of the 4-year debt amount reduced by 
paydowns to the extent such paydowns exceed the 
5-year debt amount: 
The applicable 
The applicable 
.., .. 
, . . 
percentage for 
percentage for 
"In the case of the: 
%urposls of 
purposes of 
subclause (I) is: 
subclause (II) is: 
1st taxable year 
5 
6V* 
2nd taxable year 
10 
16% 
3rd taxable year 
15 
31V2 
4th taxable year 
20 
100 
5th taxable year 
0 
0. 
"(v) 5-YEAR DEBT AMOUNT.—The term '5-year debt 
amount' means the excess (if any) of— 
"(X) the amount of the outstanding indebtedness 
of the taxpayer on May 29,1985, over 
"(11) the amount of the outstaiiding indebtedness 
of the taxpayer as of the close of December 31, 
1983. 
The 5-year debt amount shall not exceed the aggregate 
amount of indebtedness of the taxpayer outstanding on 
November 16,1985. 
"(vi) 4-YEAR DEBT AMOUNT.—The term *4-year debt 
amount' means the excess (if any) of— 
"(I) the amount referred to in clause (v)(n), over 
"(II) the amount of the outstanding indebtedness 
of the taxpayer as of the close of December 31, 
1982. 
The 4-year debt amount shall not exceed the aggregate 
amount t}f inddbtedness of the taxpayer outstanding on 
November 16,1985, reduced l)y the^year debt amount. 
102 STAT. 3506 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(vii) PAYDOWNS.—For purposes of applying this 
subparagraph to interest expenses attributable to any 
month, the term 'paydowns' means the excess (if any) 
of— 
"(I) the aggregate amount of indebtedness of the 
taxpayer outstanding on November 16, 1985, over 
"(II) the lowest amount of indebtedness of the 
taxpayer outstanding as of the close of any preced-
ing month beginning after November 16, 1985 (or, 
to the extent provided in regulations under 
subparagraph (A)(iii), the average amount of 
indebtedness outstanding during any such month). 
"(C) COORDINATION OF SUBPARAGRAPHS (A) AND (B).—In 
applying subparagraph (B), there shall first be taken into 
account indebtedness to which subparagraph (A) applies. 
"(D) SPECIAL RULES.— 
"(i) In the case of the 1st 9 taxable years of the 
taxpayer beginning after December 31, 1986, the 
amendments made by this section shall not apply to 
interest expenses paid or accrued by the taxpayer 
during the taxable year with respect to an aggregate 
amount of indebtedness which does not exceed the 
applicable percentage (determined under the following 
table) of the indebtedness described in clause (iii) or (iv): 
The applicable 
"In the case of the: 
percentage is: 
1st taxable year 
90 
2nd taxable year 
80 
3rd taxable year 
70 
4th taxable year 
60 
5th taxable year 
50 
6th taxable year 
40 
7th taxable year 
30 
8th taxable year 
20 
9th taxable year 
10. 
"(ii) The provisions of this subparagraph shall apply 
in lieu of the provisions of subparagraphs (A) and (B). 
Oklahoma. 
"(iii) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.— 
Indebtedness is described in this clause if it is indebted-
ness (which was outstanding on May 29, 1985) of a 
corporation incorporated on June 13, 1917, which has 
its principal place of business in Bartlesville, Okla-
homa. 
New York. 
"(iv) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.— 
Indebtedness is described in this clause if it is indebted-
ness (which was outstanding on May 29, 1985) of a 
member of an affiliated group (as defined in section 
1504(a)), the common parent of which was incorporated 
on August 26, 1926, and has its principal place of 
business in Harrison, New York. 
"(E) TREATMENT OF AFFIUATED GROUP.—For purposes of 
this paragraph, all members of the same affiliated group of 
corporations (as defined in section 864(e)(5)(A) of the In-
ternal Revenue Code of 1986, as added by this section) shall 
be treated as 1 taxpayer whether or not such members filed 
a consolidated return. 
"(F) ELECTION TO HAVE PARAGRAPH NOT APPLY.—A tax-
payer may elect (at such time and in such manner as the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3507 
Secretary of the Treasury or his delegate may prescribe) to 
have this paragraph not apply. In the case of members of 
the same af^liated group (as so defined), such an election 
may be made only if each member consents to such 
election." 
(i) AMENDMENTS RELATED TO SECTION 1221 OF THE REFORM ACT.— 
dXA) Subparagraph (C) of section 953(cX3) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: 
"An election under this subparagraph made for any taxable 
year shall not be effective if the corporation (or any prede-
cessor thereof) was a disqualified corporation for the tax-
able year for which the election was made or for any prior 
taxable year beginning after 1986." 
(B) Clause (i) of section 953(cX3XD) of the 1986 Code is 
amended to read as follows: 
"(i) PERIOD DURING WHICH ELECTION IN EFFECT.— 
"(I) 
IN GENERAL.—Except 
as 
provided 
in 
subclause (II), any election under subparagraph (C) 
shall apply to the taxable year for which made and 
all subsequent taxable years unless revoked with 
the consent of the Secretary. 
"(II) TERMINATION.—If a foreign 
corporation 
which made an election under subparagraph (C) for 
any taxable year is a disqualified corporation for 
any subsequent taxable year, such election shall 
not apply to any taxable year beginning after such 
subsequent taxable year. 
(C) Paragraph (3) of section 953(c) of the 1986 Clode is amended 
by adding at the end thereof the following new subparagraph: 
"(E) DISQUALIFIED CORPORATION.—For purposes of this 
paragraph the term 'disqualified corporation' means, with 
respect to any taxable year, any foreign corporation which 
is a controlled foreign corporation for an uninterrupted 
period of 30 days or more during such taxable year (deter-
mined without regard to this subsection) but only if a 
United States shareholder (determined without regard to 
this subsection) owns (within the meaning of section 958(a)) 
stock in such corporation at some time during such taxable 
year." 
(2XA) Paragraph (1) of section 953(c) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (A), 
by striking out the period at the end of subparagraph (B) and 
inserting in lieu thereof ", and", and by adding at the end 
thereof the following new subparagraph: 
"(C) the pro rata share referred to in section 951(aXl)(AXi) 
shall be determined under paragraph (5) of this subsection." 
(B) Subsection (c) of section 953 of the 1986 Code is amended 
by redesignating paragraph (5) as paragraph (6) and by insert-
ing after paragraph (4) the following new paragraph: 
"(5) DETERMINATION OF PRO RATA SHARE.— 
"(A) IN GENERAL.—The pro rata share determined under 
this paragraph for any United States shareholder is the 
lesser of— 
"(i) the amount which would be determined under 
paragraph (2) of section 951(a) if— 
102 STAT. 3508 
PUBLIC LAW 100-647—NOV. 10, 1988 
Regulations. 
26 u s e 953 note. 
26 u s e 952 note. 
"(I) only related person insurance income were 
taken into account, 
"(II) stock owned (within the meaning of section 
958(a)) by United States shareholders on the last 
day of the taxable year were the only stock in the 
foreign corporation, and 
"(III) only distributions received by United 
States shareholders were taken into account under 
subparagraph (B) of such paragraph (2), or 
"(ii) the amount which would be determined under 
paragraph (2) of section 951(a) if the entire earnings 
and profits of the foreign corporation for the taxable 
year were subpart F income. 
"(B) COORDINATION WITH OTHER PROVISIONS.—The Sec-
retary shall prescribe regulations providing for such modi-
fications to the provisions of this subpart as may be nec-
essary or appropriate by reason of subparagraph (A)." 
(3)(A) Paragraph (2) of section 953(c) of the 1986 Code is 
amended by striking out "with respect to which the primary 
insured is" and inserting in lieu thereof "with respect to which 
the person (directly or indirectly) insured is". 
(B) Subparagraph (A) of section 953(cX3) of the 1986 Code is 
amended— 
(i) by striking out "persons who are the primary insured" 
and inserting in lieu thereof "persons who are (directly or 
indirectly) insured", and 
(ii) by striking out "to any such primary insured" and 
inserting in lieu thereof "to any such person . 
(C) The amendments made by this paragraph to the extent 
such amendments add the phrase "(directly or indirectly)" shall 
apply only to taxable years beginning after December 31, 1987. 
(4)(A) Subsection (c) of section 953 of the 1986 Code (as amend-
ed by paragraph (2)) is amended by redesignating paragraph (6) 
as paragraph (7) and by inserting after paragraph (5) the follow-
ing new paragraph: 
"(6) RELATED PERSON.—For purposes of this subsection— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'related person' has the meaning given such 
term by section 954(dX3). 
"(B) TREATMENT OF CERTAIN LIABILITY INSURANCE POU-
ciES.—In the case of any policy of insurance covering liabil-
ity arising from services performed as a director, officer, or 
employee of a corporation or as a partner or employee of a 
partnership, the person performing such services and the 
entity for which such services are performed shall be treat-
ed as related persons." 
(B) Paragraphs (2) and (3XA) of section 953(c) of the 1986 Code 
are each amended by striking out "(within the meeming of 
section 954(dX3))". 
(5) Paragraph (2) of section 953(c) of the 1986 Code is amended 
by striking out "insurance income attributable" and inserting 
in lieu thereof "insurance income (within the meaning of 
subsection (a)) attributable". 
(6) For purposes of applying section 952(c)(lXA) of the 1986 
Code, the earnings and profits of any corporation shall be 
determined without regard to any increase in earnings and 
profits under section 1023(eX3XC) of the Reform Act. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3509 
(7) Subsection (b) of section 953 of the 1986 Code is amended— 
(A) by striking out paragraph (1) and redesignating para-
graphs (2), (3), and (4) as paragraphs (1), (2), and (3), respec-
tively, 
(B) by striking out subparagraph (A) of paragraph (1) (as 
so redesignated) and inserting in lieu thereof the following: 
"(A) The small life insurance company deduction.", and 
(C) by striking out "(other than those taken into account 
under paragraph (3))" in paragraph (3) (as so redesignated). 
(8) Subparagraph (B) of section 953(cX3) of the 1986 Code is 
amended— 
(A) by striking out "related person insursmce income" 
and inserting in lieu thereof "related person insurance 
income (determined on a gross basis)", and 
(B) by striking out "its insurance income" and inserting 
in lieu thereof "its insurance income (as so determined)". 
(9) Subclause (H) of section 953(cX3XCXi) of the 1986 Code is 
amended— 
(A) by striking out "all benefits" and inserting in lieu 
thereof "all benefits (other than with respect to section 
884)", and 
(B) by striking out "under any income tax treaty" and 
inserting in lieu thereof "granted by the United States 
under any treaty". 
(10) Paragraph (7) of section 861(a) of the 1986 Code is 
amended to read as follows: 
"(7) Amounts received as underwriting income (as defined in 
section 832(bX3)) derived from the issuing (or reinsuring) of any 
insurance or annuity contract— 
"(A) in connection with property in, liability arising out 
of an activity in, or in connection with the lives or health of 
residents of, the United States, or 
"(B) in connection with risks not described in subpara-
graph (A) as a result of any arrangement whereby another 
corporation receives a substantially equal amoimt of pre-
miums or other consideration in respect to issuing (or 
reinsuring) any insurance or annuity contract in connection 
with property in, liability arising out of activity in, or in 
connection with the lives or health of residents of, the 
United States." 
(11) Subparagraph (A) of section 955(aX2) of the 1986 Code is 
amended by striking out "b^;inning before 1987" and inserting 
in lieu thereof "b^inning before 1987 (to the extent such 
amount exceeds the sum of the decreases in qualified invest-
ments determined under this paragraph for prior taxable years 
beginning after 1986)". 
(12) Paragraphs (6) and (7) of section 954(b) of the 1986 Code 
are each amended Jby striking out "(determined without regard 
to the exclusion under paragraph (2) of this subsection)". 
(13XA) Subparagraph (C) of section 1221(gX3) of the Reform 
Act is amended— 
26 USC 954 note, 
(i) by striking out "July 9" and inserting in lieu thereof 
"June 9", and 
(ii) by striking out "March 31, 1982" and inserting in lieu 
thereof "November 3,1981". 
(B) Subparagraph (D) of section 1221(gX3) of the Reform Act is 
amended— 
102 STAT. 3510 
PUBLIC LAW 100-647—NOV. 10, 1988 
(i) by striking out "as of August 16,1986, under a reinsur-
ance contract in effect on such date" and inserting in lieu 
thereof "under a reinsurance contract", 
(ii) by striking out "the preceding sentence" and inserting 
in lieu thereof "this subparagraph", and 
(iii) by adding at the end thereof the following: "For 
purposes of this paragraph, the amount of qualified reinsur-
ance income shall not exceed the amount of insurance 
income from reinsurance contracts for calendar year 1985. 
In the case of controlled foreign corporations described in 
subparagraph (C)(ii), the preceding sentence shall not apply 
and the qualified reinsurance income of any such corpora-
tion shall not exceed such corporation's proportionate share 
of $27,000,000 (determined on the basis of respective 
amounts of qualified reinsurance income determined with-
out regard to this subparagraph)." 
(14)(A) Paragraph (3) of section 954(d) of the 1986 Code is 
amended by striking out "50 percent or more" each place it 
appears and inserting in lieu thereof "more than 50 percent". 
(B) Clause (ii) of section 861(c)(2XB) of the 1986 Code is amend-
ed to read as follows: 
"(ii) such section shall be applied by substituting *10 
percent or more' for 'more than 50 percent' each place 
it appears." 
(15) Subsection (b) of section 951 of the 1986 Code is amended 
by striking out "section 957(d)" and inserting in lieu thereof 
"section 957(c)". 
(16) Subsection (c) of section 952 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) SPECIAL RULE FOR DETERMINING EARNINGS AND PROFITS.— 
For purposes of this subsection, earnings and profits of any 
controlled foreign corporation shall be determined without 
regard to paragraphs (4), (5), and (6) of section 312(n). Under 
regulations, the preceding sentence shall not apply to the extent 
it would increase earnings and profits by an amount which was 
previously distributed by the controlled foreign corporation." 
(17) Subparagraph (A) of section 881(cX4) of the 1986 Code is 
amended by strilang out clauses (ii), (iii), (iv), and (v) and 
inserting in lieu thereof the following: 
"(ii) Paragraph (4) of section 954(b) (relating to excep-
tion for certain income subject to high foreign taxes). 
"(iii) Clause (i) of section 954(c)(3)(A) (relating to cer-
tain income received from related persons)." 
(18) Subparagraph (B) of section 954(c)(1) of the 1986 Code is 
amended by striking out "or" at the end of clause (i), by 
redesignating clause (ii) as clause (iii), and by inserting after 
clause (i) the following new clause: 
"(ii) which is an interest in a trust, partnership, or 
REMICor". 
(19)(A) Subsection (a) of section 6046 of the 1986 Code is 
amended by striking out "and" at the end of paragraph (2), by 
redesignating paragraph (3) as paragraph (4), and by inserting 
after paragraph (2) the following new paragraph: 
"(3) each person (not described in paragraph (2)) who, at any 
time after January 1, 1987, is treated as a United States share-
holder under section 953(c) with respect to a foreign corporation, 
and". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3511 
(B) Subsection (b) of section 6046 of the 1986 Code is amended 
by striking out "subsection (aX2)" and inserting in lieu thereof 
"paragraph (2) or (3) of subsection (a)". 
(C) Subsection (a) of section 6046 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"In the case of a foreign corporation with respect to which any 
person is treated as a United States shareholder under section 
953(c), paragraph (1) shall be treated as including a reference to each 
United States person who is an officer or director of such corpora-
tion." 
(20) Subparagraph (B) of section 954(cXl) of the 1986 Code is 
amended by striking out the last sentence and inserting in lieu 
thereof the following: 
"In the case of any regular dealer in property, gains and losses 
from the sale or exchange of any such property or arising out of 
bona fide hedging transactions reasonably necessary to the 
conduct of the business of being a dealer in such property shall 
not be taken into account under this subparagraph. Gains and 
losses from the sale or exchange of any property which, in the 
hands of the controlled foreign corporation, is property de-
scribed in section 1221(1) also shall not be taken into account 
under this subparagraph." 
(21) Subsection (c) of section 953 (as amended by this subsec-
tion) is amended by striking out paragraph (7) and inserting in 
lieu thereof the following: 
"(7) (COORDINATION WITH SECTION 1248.—For purposes of sec-
tion 1248, if any person is (or would be but for paragraph (3)) 
treated under parsigraph (1) as a United States shareholder with 
respect to any foreign corporation which would be taxed under 
subchapter L if it were a domestic corporation and which is (or 
would be but for paragraph (3)) treated under paragraph (1) as a 
controlled foreign corporation— 
"(A) such person shall be treated as meeting the stock 
ownership requirements of section 1248(aX2) with respect to 
such foreign corporation, and 
"(B) such foreign corporation shall be treated as a con-
trolled foreign corporation. 
"(8) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary to carry out the purposes of this 
subsection, including— 
"(A) regulations preventing the avoidance of this subsec-
tion through cross insurance arrangements or otherwise, 
and 
"(B) regulations which may provide that a person will not 
be treated as a United States shareholder under paragraph 
(1) with respect to any foreign corporation if neither such 
person (nor any related person to such person) is (directly or 
indirectly) insured under any policy of insurance or reinsur-
ance issued by such foreign corporation." 
(22) Subclause (III) of section 952(cXlXBXiii) of the 1986 Code is 
amended by striking out "insurance income" and inserting in 
lieu thereof "insurance income or foreign personal holding 
company income,". 
(23) Clause (iii) of section 952(cXlXB) of the 1986 Code is 
amended 
by redesignating subclauses (III) and 
(IV) as 
subclauses (V) and (VI), respectively, and by inserting after 
subclause (II) the following new subclauses: 
102 STAT. 3512 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(III) foreign base company sales income, 
"(IV) foreign base company services income,". 
(24) Clause (ii) of section 952(c)(lXB) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "In determining the deficit attributable to qualified 
activities described in clause (iiiXIH) or (IV), deficits in earnings 
and profits (to the extent not previously taken into account 
under this section) for taxable years beginning after 1962 and 
' 
before 1987 also shall be taken into account. In the case of the 
qualified activity described in clause (iiiXH), the rule of the 
preceding sentence shall apply, except that '1982' shall be sub-
stituted for '1962'." 
(25XA) Paragraph (1) of section 952(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) CERTAIN DEFICITS OF MEMBER OF THE SAME CHAIN OF 
CORPORATIONS M
A
Y BE TAKEN INTO ACCOUNT.— 
"(i) IN GENERAL.—A Controlled foreign corporation 
may elect to reduce the amount of its subpart F income 
for any taxable year which is attributable to any quali-
fied activity by the amount of any deficit in earnings 
and profits of a qualified chain member for a taxable 
year ending with (or within) the taxable year of such 
controlled foreign corporation to the extent such deficit 
is attributable to such activity. To the extent any defi-
cit reduces subpart F income under the preceding sen-
tence, such deficit shall not be taken into account 
under subparagraph (B). 
"(ii) QuAUFiED CHAIN MEMBER.—For purposes of this 
subparagraph, the term 'qualified chain member' 
means, with respect to any controlled foreign corpora-
tion, any other corporation which is created or orga-
nized under the laws of the same foreign country as the 
controlled foreign corporation but only if— 
"(I) all the stock of such other corporation (other 
than directors' qualifying shares) is owned at all 
times during the taxable year in which the deficit 
arose (directly or through 1 or more corporations 
other than the common parent) by such controlled 
foreign corporation, or 
"(II) all the stock of such controlled foreign cor-
poration (other than directors' qualifjdng shares) is 
owned at all times during the taxable year in 
which the deficit arose (directly or through 1 or 
more corporations other th£m the common parent) 
by such other corporation, 
"(iii) CJooRDiNATiON.—This subparagraph shall be ap-
plieid after subparagraphs (A) and (B). 
(B) Subparagraph (B) of section 954(cX3) of the 1986 Code is 
amended by inserting before the period at the end thereof the 
following: "or creates (or increases) a deficit which under sec-
tion 952(c) may reduce the subpart F income of the payor or 
another controlled foreign corporation", 
(j) AMENDMENT RELATED TO SECTION 1224 OF THE REFORM ACT.— 
Paragraph (2) of section 901(g) of the 1986 Code and section 
936(dX3)(B) of the 1986 Code are each amended by striking out 
"section 957(c)" and inserting in lieu thereof "section 957(c) (as in 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3513 
effect on the day before the date of the enactment of the Tax Reform 
Act of 1986)". 
QO AMENDMENT RELATED TO SECTION 1225 OP THE REFORM Acrr.— 
Subsection (c) of section 1225 of the Reform Act is amended by 26 USC 535 note. 
striking out "March 1,1986" and inserting in lieu thereof "January 
1,1986". 
G) AMENDMENTS RELATED TO SECTION 1226 OF THE REFORM ACT.— 
(1) Subsection (a) of section 246A of the 1986 Code is amended 
by striking out the last sentence. 
(2XA) Paragraph (8) of section 245 of the 1986 Code is 
amended to read as follows: 
"(8) DISALLOWANCE OF FOREIGN TAX CREDIT.—No credit shall 
be allowed under section 901 for any taxes paid or accrued (or 
treated as paid or accrued) with respect to the United States-
source portion of any dividend received by a corporation from a 
qualified 10-percent-owned foreign corporation." 
(6) Subsection (a) of section 245 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(10) (COORDINATION WITH TREATIES.—If^ 
"(A) any portion of a dividend received by a corporation 
from a qualified 10-percent-owned foreign corporation 
would be treated as from sources in the United States 
under paragraph (9), 
"(B) under a treaty obligation of the United States (ap-
plied without r ^ a r d to this subsection), such portion would 
be treated as arising from sources outside the United 
States, and 
"((D) the taxpayer chooses the benefits of this paragraph, 
this subsection shall not apply to such dividend (but subsections 
(a), 0>), and (c) of section 904 and sections 902, 907, and 960 shall 
be apphed separately with respect to such portion of such 
dividend)." 
(3) Subsection (a) of section 245 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(11) COORDINATION WITH SECTION 1248.—For purposes of this 
subsection, the term 'dividend' does not include any amount 
treated as a dividend under section 1248." 
(m) AMENDMENTS RELATED TO SECTION 1228 OF THE REFORM ACT.— 
(1) Subsection (a) of section 1228 of the Reform Act is amended 
26 use 897 note. 
by striking out "and" at the end of paragraph (3), and by 
striking out paragraph (4) and inserting in lieu thereof the 
following: 
"(4) the transfer, sale, exchange, or other disposition is part of 
a single int^rated plan, whereby the stock of the corporation 
described in paragraph (1) becomes owned directly by the 2 
corporations specifically referred to in subsection (b) or by such 
2 corporations and by 1 or both of their jointly owned direct 
subsidiaries, 
"(5) within 20 days after each transfer, sale, exchange, or 
other disposition, the person making such transfer, sale, ex-
change, or other disposition notifies the Internal Revenue Serv-
ice of the transaction, the date of the transad^ion, the baas of 
the stock involved, the holding period for such^stock, and^suc^ 
other mf<n*mation as the Internal Revenue Sendce^may reqpiire, 
and 
102 STAT. 3514 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(6) the integrated plan is completed before the date 4 years 
after the date of the enactment of the Technical and Miscellane-
ous Revenue Act of 1988. 
In the case of any underpayment attributable to a failure to meet 
any requirement of this subsection, the period during which such 
underpayment may be assessed shall in no event expire before the 
date 5 years after the date of the enactment of the Technical and 
Miscellaneous Revenue Act of 1988." 
(2) Subsection (c) of section 1228 of the Reform Act is hereby 
repealed, 
(n) AMENDMENTS RELATED TO SECTION 1231 OF THE REFORM ACT.— 
26 use 936 note. 
(1) Subparagraph (A) of section 1231(g)(2) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "In the case of any transfer (or license) which is not to a 
foreign person, the preceding sentence shall be applied by 
substituting 'August 16,1986' for 'November 16,1985'." 
(2) Subparagraph (B) of section 1231(g)(2) of the Reform Act is 
amended by striking out "was made" and inserting in lieu 
thereof ", if any, weis made". 
26 use 936 note. 
(3) Subsection (g) of section 1231 of the Reform Act is amended 
by adding at the end thereof the following new paragraph: 
"(5) TRANSITIONAL RULE FOR INCREASE IN GROSS INCOME TEST.— 
"(A) IN GENERAL.—If— 
"(i) a corporation fails to meet the requirements of 
subparagraph (B) of section 936(aX2) of the Internal 
Revenue Code of 1986 (as amended by subsection (dXD) 
for any taxable year beginning in 1987 or 1988, 
"(ii) such corporation would have met the require-
ments of such subparagraph (B) if such subparagraph 
had been applied without regard to the amendment 
made by subsection (dXD, and 
"(iii) 75 percent or more of the gross income of such 
corporation for such taxable year (or, in the case of a 
taxable year beginning in 1988, for the period consist-
ing of such taxable year and the preceding taxable 
year) was derived from the active conduct of a trade or 
business within a possession of the United States, such 
corporation shall nevertheless be treated as meeting 
the requirements of such subparagraph (B) for such 
taxable year if it elects to reduce the amount of the 
qualified possession source investment income for the 
taxable year by the amount of the shortfall determined 
under subparagraph (B) of this paragraph. 
"(B) DETERMINATION OF SHORTFALL.—The shortfall deter-
mined under this subparagraph for any taxable year is an 
amount equal to the excess of— 
"(i) 75 percent of the gross income of the corporation 
for the 3-year period (or part thereof) referred to in 
section 936(aX2)(A) of such Code, over 
"(ii) the amount of the gross income of such corpora-
tion for such period (or part thereof) which was derived 
from the active conduct of a trade or business within a 
possession of the United States. 
"(C) SPECIAL RULE.—Any income attributable to the 
investment of the amount not treated as qualified posses-
sion source investment income under subparagraph (A) 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3515 
shall not be treated as qualified possession source invest-
ment income for any taxable year.' 
(4) Subparagraph (B) of section 1231(aXl) of the Reform Act is 
amended by striking out "at the end thereof and inserting in 
lieu thereof "at the end of the material relating to payment of 
cost sharing". 
(5XA) Qause (ii) of section 936(dX4XA) of the 1986 Ckxie is Puerto Rico. 
amended to read as follows: 
"(ii) in accordance with a specific authorization 
granted by the Conmiissioner of Financial Institutions 
of Puerto Rico pursuant to r^ulations issued by such 
Commissioner." 
(B) Qauses (i) and (ii) of section 936(dX4XC) of the 1986 Code 
are each amended by striking out "the Secretary of the Treas-
ury of Puerto Rico" and inserting in Ueu thereof "the (Dommis-
sioner of Financial Institutions of Puerto Rico", 
(o) AMENDMENT RELATED TO SECTION 1234 OF THE REFORM ACT.— 
Subsection (d) of section 6039E of the 1986 Code is amended by 
adding at the end thereof the following new sentence: 
"Nothing in the preceding sentence shall be construed to require the 
disclosure of information which is subject to section 245A of the 
Immigration and Nationality Act (as in effect on the date of the 
enactment of this sentence)." 
(p) AMENDMENTS RELATED TO SECTION 1235 OF THE REFORM ACT.— 
(1) Paragraph (1) of section 1291(d) of the 1986 Code is 
amended to read as follows: 
"(1) IN GENERAL.—This section shall not apply with respect to 
any distribution paid by a passive foreig^i investment company, 
or any disposition of stock in a passive foreign investment 
company, if such company is a qualified electing fund for each 
of its taxable years— 
"(A) which begins after December 31,1986, and for which 
such company is a passive f o r e ^ investment company, and 
"(B) which includes any portion of the taxpayer s holding 
period." 
(2) Subsection (c) of section 1296 of the 1986 Ck)de is amended 
by striking out "owns at least" and inserting in lieu thereof 
"owns (directly or indirectly) at least". 
(3) Paragraph (3) of section 1291(b) of the 1986 Code is 
amended by striking out "and" at the end of subparagraph (D), 
by striking out the period at the end of subparagraph (E) and 
inserting in lieu thereof ", and", and by adding at the end 
thereof tiie following new subparagraph: 
"(F) proper adjustment shall be made for amounts not 
includible in gross income by reason of section 551(d), 
959(a), or 1293(c)." 
(4) Paragraph (2) of section 1294(c) of the 1986 Code is 
amended— 
(A) by striking out "is disposed o f in subparagraph (A) 
and inserting in lieu thereof is transferred", 
C
B
) by striking out "such disposition or cessation" each 
place it appears and inserting in lieu thereof "such transfer 
or cessation", and 
(O by striking out "DLSPOSITIONS" in the p£u*agraph head-
ing and insertii^ in lieu thereof "TRANSFERS". 
(5) Paragraph (1) of section 1296(b) of the 1986 Code is 
amended to read as follows: 
19-194 O—91—Part 4
18 : OL 3
102 STAT. 3516 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) IN GENERAL.—Except as provided in paragraph (2), the 
term 'passive income' means any income which is of a kind 
which would be foreign personal holding company income as 
defined in section 954(c)." 
(6XA) Subsection (f) of section 1291 of the 1986 Code is 
amended to read as follows: 
"(f) RECOGNITION OF GAIN.—To the extent provided in regulations, 
in the case of £iny transfer of stock in a passive foreign investment 
company where (but for this subsection) there is not full recognition 
of gain, the excess (if any) of— 
"(1) the fair market value of such stock, over 
"(2) its adjusted basis, 
shall be treated as gain from the sale or exchange of such stock and 
shall be recognized notwithstanding any provision of law. Proper 
adjustment shall be made to the basis of any such stock for gain 
recognized under the preceding sentence." 
(B) Subsection (e) of section 1291 of the 1986 (Dode is amended 
by striking out "Rules similar" and inserting in lieu thereof 
"Except to the extent inconsistent with the regulations pre-
scribed under subsection (f), rules similar". 
(7)(A) Paragraphs (4) and (5) of section 1291(a) of the 1986 (^de 
are hereby repealed. 
(B) Section 1291 of the 1986 CJode is amended by adding at the 
end thereof the following new subsection: 
"(g) COORDINATION WITH FOREIGN TAX CREDIT RULES.— 
"(1) IN GENERAL.—If there are creditable foreign taxes with 
respect to any distribution in respect of stock in a peissive 
foreign investment company— 
"(A) the amount of such distribution shall be determined 
for purposes of this section with regard to section 78, 
"(B) the excess distribution taxes shall be allocated rat-
ably to each day in the taxpayer's holding period for the 
stock, and 
"(C) to the extent— 
"(i) that such excess distribution taxes are allocated 
to a taxable year referred to in subsection (aXlXB), such 
taxes shall be taken into account under section 901 for 
the current year, and 
"(ii) that such excess distribution taxes are allocated 
to any other taxable year, such taxes shall reduce 
(subject to the principles of section 904(d) and not below 
zero) the increase in tax determined under subsection 
(cX2) for such taxable year by reason of such distribu-
tion (but such taxes shall not be taken into account 
under section 901). 
"(2) DEFINITIONS.—For purposes of this subsection— 
"(A) CREDITABLE FOREIGN TAXES.—The term 'creditable 
foreign taxes' means, with respect to any distribution— 
"(i) any foreign taxes deemed paid under section 902 
with respect to such distribution, and 
"(ii) any withholding tax imposed with respect to 
such distribution, 
but only if the taxpayer chooses the benefits of section 901 
and such taxes are creditable under section 901 (determined 
without regard to paragraph (IXCXii))-
"(B) EXCESS DISTRIBUTION TAXES.—The term 'excess dis-
tribution taxes' means, with respect to any distribution, the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3517 
portion of the creditable foreign taxes with respect to such 
distribution which is attributable (on a pro rata basis) to the 
portion of such distribution which is an excess distribution. 
"(C) SECTION 1248 GAIN.—The rules of this subsection also 
shall apply in the case of any gain which but for this section 
would be includible in gross income as a dividend under 
section 1248." 
(8) Section 1294 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
'(g) CROSS REFERENCE.— 
"For provisions providing for interest for the period of the extension 
under tliis section, see section 6601." 
(9) Paragraph (2) of section 1291(e) of the 1986 Code is 
amended by striking out "not" the second place it appears. 
(lOXA) Subsection (a) of section 1297 of the 1986 Code is 
amended by redesignating paragraph (4) as paragraph (5) and 
by inserting after paragraph (3) the following new paragraph: 
"(4) OPTIONS.—To the extent provided in regulations, if any 
person has an option to acquire stock, such stock shall be 
considered as owned by such person. For purposes of this para-
graph, an option to acquire such an option, and each one of a 
series of such options, shall be considered as an option to 
acquire such stock." 
(B) Paragraph (5) of section 1297(a) of the 1986 Code (as 
redesignated by subparagraph (A)) is amended by striking out 
"paragraph (2) or (3)" and inserting in lieu thereof "paragraph 
(2), (3), or (4)". 
(11) Paragraph (3) of section 904(d) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(I) LOOK-THRU APPUES TO PASSIVE FOREIGN INVESTMENT 
COMPANY INCLUSION.—If^ 
"(i) a passive foreign investment company is a con-
trolled foreign corporation, and 
"(ii) the taxpayer is a United States shareholder in 
such controlled foreign corporation, 
any amount included in gross income under section 1293 
shall be treated as income in a separate category to the 
extent such amount is attributable to income in such cat-
egory." 
(12) Clause (ii) of section 1291(aXlXB) of the 1986 Code is 
amended to read as follows: 
"(ii) any period in the taxpayer's holding period 
before the 1st day of the 1st taxable year of the com-
pany which begins after December 31, 1986, and for 
which it was a passive foreign investment company, 
and". 
(13) Subparagraph (A) of section 1291(bX2) of the 1986 Code is 
amended by adding at the end thereof the following new 
sentence: 
"For purposes of clause (ii), any excess distribution received 
during such 3-year period shall be taken into account only 
to the extent it was included in gross income under subsec-
tion (aXlXB)." 
(14) Subparagraph (A) of section 1291(aX3) of the 1986 Code is 
amended by striking out "in the case of an excess distribution" 
102 STAT. 3518 
PUBLIC LAW 100-647—NOV. 10, 1988 
and inserting in lieu thereof "for purposes of appl3dng this 
section to an excess distribution". 
(15) Subsection (b) of section 1293 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "To 
the extent provided in regulations, if the fund establishes to the 
satisfaction of the Secretary that it uses a shorter period than 
the taxable year to determine shareholders' interests in the 
earnings of such fund, pro rata shares may be determined by 
using such shorter period." 
(16) Subparagraph (B) of section 1296(b)(2) of the 1986 Code is 
amended by striking out "by a corporation which" and inserting 
in lieu thereof "by a corporation which is predominantly en-
gaged in an insurance business and which". 
(17) Paragraph (5) of section 1297(b) of the 1986 Code is 
amended to read as follows: 
"(5) APPUCATION OF PART WHERE HELD BY OTHER ENTITY.— 
"(A) IN GENERAL.—Under regulations, in any case in 
which a United States person is treated as owning stock in a 
passive foreign investment company by reason of subsection 
( a ) -
"(i) any disposition by the United States person or the 
person owning such stock which results in the United 
States person being treated as no longer owning such 
stock, or 
"(ii) any disposition of property in respect of such 
stock to the person holding such stock, 
shall be treated as a disposition to, the United States person 
with respect to the stock in the passive foreign investment 
company. 
"(B) AMOUNT TREATED IN SAME MANNER AS PREVIOUSLY 
TAXED INCOME.—Rules similar to the rules of section 959(b) 
shall apply to any amount described in subparagraph (A) 
and to any amount included in gross income under section 
1293(a) (or which would have been so included but for 
section 951(f)) in respect of stock which the taxpayer is 
treated as owning under subsection (a)." 
(18) Subsection (e) of section 1293 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) DETERMINATION OF EARNINGS AND PROFITS.—The earnings 
and profits of any qualified electing fund shall be determineid 
without regard to paragraphs (4), (5), and (6) of section 312(n). 
Under regulations, the preceding sentence shall not apply to the 
extent it would increase earnings and profits by an amount 
which was previously distributed by the qualified electing 
fund." 
(19) Subsection (d) of section 1248 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(7) 
AMOUNTS INCLUDED IN GROSS INCOME UNDER SECTION 
1293.—Earnings and profits of the foreign corporation attrib-
utable to any amount previously included in the gross income of 
such person under section 1293 with respect to the stock sold or 
exchanged, but only to the extent the inclusion of such amount 
did not result in an exclusion of an amount under section 
1293(c)." 
(20) Paragraph (6) of section 1297(b) of the 1986 Code is 
amended by striking out "If a" and inserting in lieu thereof 
"Except as provided in regulations, if a". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3519 
, 
(21) Section 1246 of the 1986 Code is amended by redesignat-
ing the sulwection relating to information with respect to cer-
tain foreign investment companies as subsection (f), by re-
designating the subsection relating to coordination with section 
1248 as subsection (g), and by redesignating the subsection 
relating to cross reference as subsection (h). 
(22) Subparagraph (A) of section 1297(bX3) of the 1986 Code is 
amended to read as follows: 
"(A) neither such corporation (nor any predecessor) was a 
passive foreign investment company for any prior taxable 
year,". 
(23) Subsection (c) of section 1293 of the 1986 Code is amended 
by striking out "shall be treated as a distribution which is not a 
dividend" and inserting in heu thereof "shall be treated, for 
purposes of this chapter, as a distribution which is not a divi-
dend; except that such distribution shall immediately reduce 
earnings and profits". 
(24) Subsection (b) of section 1297 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(8) TREATMENT OP CERTAIN FOREIGN CORPORATIONS OWNING 
STOCK IN 25-PERCENT OWNED DOMESTIC CORPORATION.— 
"(A) IN GENERAL.—If— 
"(i) a foreign corporation is subject to the tax imposed 
by section 531 (or waives any benefit under any treaty 
which would otherwise prevent the imposition of such 
tax), and 
"(ii) such foreign corporation owns at least 25 percent 
(by value) of the stock of a domestic corporation, 
for purposes of determining whether such foreign corporation is 
a passive foreign investment company, any qualified stock held 
by such domestic corporation shall be treated as an asset which 
does not produce passive income (and is not held for the produc-
tion of passive income) and any amount included in gross 
income with respect to such stock shall not be treated as passive 
income. 
"(B) QUALIFIED STOCK.—For purposes of subparagraph (A), 
the term 'qualified stock' means any stock in a C corpora-
tion which is a domestic corporation and which is not a 
regulated investment company or real estate investment 
trust." 
(25) Section 1294 of the 1986 (Ik)de is amended by adding at the 
end thereof the following new subsection: 
"(f) TREATMENT OF LOANS TO SHAREHOLDER.—^For purposes of this 
section and section 1293, any loan by a qualified electing fund 
(directly or indirectly) to a shareholder of such fund shall be treated 
as a distribution to such shareholder. 
(26XA) Paragraph (2) of section 1296(b) of the 1986 Code is 
amended by striking out "or" at the end of subparagraph (A), by 
striking out the period at the end of subparagraph (B) and 
inserting in lieu thereof ", or", and by adding at tiie end thereof 
the following: 
"(C) which is interest, a dividend, or a rent or royalty, 
which is received or accrued from a related person (withm 
the meaning of section 954(dX3)) to the extent such amount 
is properly allocable (under regulations prescribed by the 
Secretary) to income of such related person which is not 
passive income. 
102 STAT. 3520 
PUBLIC LAW 100-647—NOV. 10, 1988 
For purposes of subparagraph (C), the term 'related person' has 
the meaning given such term by section 954(dX3) determined by 
substituting 'foreign corporation' for 'controlled foreign corpora-
tion' each place it appears in section 954(dX3)." 
(B) The paragraph heading for paragraph (2) of section 1296(b) 
of the 1986 Code is amended by striking out"ExcEPnoN FOR 
CERTAIN BANKS AND INSURANCE COMPANIES" and inserting in 
lieu thereof "EXCEPTIONS". 
(27) Subsection (a) of section 1296 of the 1986 Code is amended 
by adding at the end thereof the following new sentences: 
"A foreign corporation may elect to have the determination under 
paragraph (2) based on the adjusted bases of its assets in lieu of their 
value. Such an election, once made, may be revoked only with the 
consent of the Secretary." 
(28) Paragraph (2) of section 1291(d) of the 1986 Code is 
amended by striking out subparagraph (B) and inserting in lieu 
thereof the following: 
"(B) 
ADDITIONAL ELECTION FOR SHAREHOLDER OF CON-
TROLLED FOREIGN CORPORATIONS.— 
"(i) IN GENERAL.—If— 
"(I) a passive foreign investment company be-
comes a qualified electing fund for a taxable year 
which begins after December 31,1986, 
"(II) the taxpayer holds stock in such company 
on the first day of such taxable year, and 
"(III) such company is a controlled foreign cor-
poration (as defined in section 957(a)), 
the taxpayer may elect to include in gross income as a 
dividend received on such first day an amount equal to 
the portion of the post-1986 earnings and profits of such 
company attributable (under regulations prescribed by 
the Secretary) to the stock in such company held by the 
taxpayer on such first day. The amount treated as a 
dividend under the preceding sentence shall be treated 
as an excess distribution and shall be allocated under 
subsection (aXlXA) only to days during periods taken 
into account in determining the post-1986 earnings and 
profits so attributable. 
"(ii) POST-1986 EARNINGS AND PROFITS.—For purposes 
of clause (i), the term 'post-1986 earnings and profits' 
means earnings and profits which were accumulated in 
taxable years of such company beginning after Decem-
ber 31, 1986, and during the period or periods the stock 
was held by the taxpayer while the company was a 
passive foreign investment company. 
"(iii) COORDINATION WITH SECTION 959(e).—For pur-
poses of section 959(e), any amount included in gross 
income under this subparagraph shall be treated as 
included in gross income under section 1248(a). 
"(C) ADJUSTMENTS.—In the case of any stock to which 
subparagraph (A) or (B) applies— 
"(i) the adjusted basis of such stock shall be increased 
by the gain recognized under subparagraph (A) or the 
amount treated as a dividend under subparsigraph (B), 
as the case may be, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3521 
"(ii) the taxpayer's holding period in such stock shall 
be treated as beginning on the first day referred to in 
such subparagraph." 
(29XA) Clause (ii) of section 904(dX2XA) of the 1986 Code is 
amended by striking out "or section 1293" and inserting in lieu 
thereof "or, except as provided in subparagraph (EXiii) or para-
graph (3X1), section 1293". 
(B) Subparagraph (E) of section 904(dX2) of the 1986 Code is 
amended by adding at the end thereof the following new clause: 
"(iii) TREATMENT OF INCLUSIONS UNDER SECTION 1293.—If 
any foreign corporation is a non-controlled section 902 cor-
poration with respect to the taxpayer, any inclusion under 
section 1293 with respect to such corporation shall be 
treated as a dividend from such corporation." 
(30) Clause (ii) of section 864(bX2XA) of the 1986 Code is 
amended by striking out "section 542(cX7)" and inserting in lieu 
thereof "section 542(cX7), 542(cX10),". 
(31) Paragraph (1) of section 1291(c) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "Any increase in the tax imposed by this chapter for the 
current year under subsection (a) to the extent attributable to 
the amount referred to in subparagraph (B) shall be treated as 
interest paid under section 6601 on the due date for the current 
year." 
(32) Section 1293 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(g) OTHER SPECIAL RULES.— 
"(1) EXCEPTION FOR CERTAIN INCOME.—For purposes of deter-
mining the amount included in the gross income of any person 
under this section, the ordinary earnings and net capital gain of 
a qualified electing fund shall not include any item of income 
received by such fund if— 
"(A) such fund is a controlled foreign corporation (as 
defined in section 957(a)) and such person is a United States 
shareholder (as defined in section 951(b)) in such fund, and 
"(B) such person establishes to the satisfaction of the 
Secretary that— 
"(i) such income was subject to an effective rate of 
income tax imposed by a foreign country greater than 
90 percent of the maximum rate of tax specified in 
section 11, or 
"(ii) such income is— 
"(I) from sources within the United States, 
"(II) effectively connected with the conduct by 
the qualified electing fund of a trade or business in 
the United States, and 
"(III) not exempt from taxation (or subject to a 
reduced rate of tax) pursuant to a treaty obligation 
of the United States. 
"(2) PREVENTION OF DOUBLE INCLUSION.—The Secretary shall 
prescribe such adjustment to the provisions of this section as 
may be necessary to prevent the same item of income of a 
qualified electing fund from being included in the gross income 
of a United States person more than once." 
(33) Paragraph (3) of section 12910t)) of the 1986 Code (as 
amended by paragraph (3)) is amended by striking out "and" at 
the end of subparagraph (E), by striking out the period at the 
102 STAT. 3522 
PUBLIC LAW 100-647—NOV. 10, 1988 
end of subparagraph (F) and inserting in lieu thereof ", and", 
and by adding at the end thereof the following new 
subparagraph: 
"(G) if a charitable deduction was allowable under section 
642(c) to a trust for any distribution of its income, proper 
adjustments shall be made for the deduction so allowable to 
the extent allocable to distributions or gain in respect of 
stock in a passive foreign investment company." 
(34) Paragraph (2) of section 1294(c) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "To the extent provided in regulations, the preceding 
sentence shall not apply in the case of a transfer in a trans-
action with respect to which gain or loss is not recognized (in 
whole or in part), and the transferee in such transaction shall 
succeed to the treatment under this section of the transferor." 
(35) Section 1297 of the 1986 Oxie is amended by redesignat-
ing subsection (c) as subsection (d) and by inserting after subsec-
tion (b) the following new subsection: 
"(c) TREATMENT OF STOCK HELD BY POOLED INCOME P^JND.—If stock 
in a passive foreign investment company is owned (or treated as 
owned under subsection (a)) by a pooled income fund (as defined in 
section 642(cX5)) and no portion of any gain from a disposition of 
such stock may be allocated to income under the terms of the 
governing instrument of such fund— 
"(1) section 1291 shall not apply to any gain on a disposition of 
such stock by such fund if (without regard to section 1291) a 
deduction would be allowable with respect to such gain under 
section 642(cX3), 
"(2) section 1293 shall not apply with respect to such stock, 
and 
"(3) in determining whether section 1291 applies to any dis-
tribution in respect of such stock, subsection (d) of section 1291 
shall not apply. 
(36) Paragraph (1) of section 1297(b) of the 1986 Code is 
amended by striking out "passive foreign investment corpora-
tion" and inserting in heu thereof "passive foreign investment 
company". 
(37XA) Paragraph (2) of section 1295(b) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "To the extent provided in r^ulations, such an election 
may be made later than as required by the preceding sentence 
in cases where the company failed to make a timely election 
because it reasonably believed it was not a passive foreign 
investment company. 
26 use 1295 
(B) The period during which an election under section 1295(b) 
note. 
of the 1986 Code may be made shall in no event expire before 
the date 60 dajrs after the date of enactment of this Act. 
(q) AMENDMENTS RELATED TO SECTION 1241 OF THE ACT.— 
dXA) Subparagraph (B) of section SS4(bX2) of the 1986 Code is 
amended to read as follows: 
"(B) LIMITATION.— 
"(i) IN GENERAL.—The increase imder subparagraph 
(A) for any taxable year shall not exceed the accumu-
lated effectively connected earnings and profits as of 
the close of the preceding taxable year. 
"(ii) ACCUMULATED EFFECTIVELY CONNECTED EARNINGS 
AND PROFITS.—For puiposes of clause (i), the term 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3523 
'accumulated effectively connected earnings and prof-
its' means the excess of— 
"(I) the aggregate effectively connected earnings 
and profits for preceding taxable years beginning 
after December 31,1986, over 
"(11) the aggregate dividend equivalent amounts 
determined for such preceding taxable years." 
(B) For purposes of appl3dng section 884 of the 1986 Code, the 
26 USC 884 note, 
earnings and profits of any corporation shall be determined 
without regard to any increase in earnings and profits under 
sections 1023(eX3XC) and 1021(eX2XC) of the Reform Act or 
arising from section 823(bX4XC) of the 1986 Code. 
(2XA) Paragraph (1) of section 884(e) of the 1986 Code is 
amended to read as follows: 
"(1) LIMITATION ON TREATY EXEMPTION.—No treaty between 
' 
the United States and a foreign country shall exempt any 
foreign corporation from the tax imposed by subsection (a) (or 
reduce the amount thereof) unless— 
"(A) such treaty is an income tax treaty, and 
"(B) such foreign corporation is a qualified resident of 
such foreign country." 
(B) Paragraph (3) of section 884(e) of the 1986 Code is amended 
to read as follows: 
"(3) C!OORDINATION WITH WITHHOLDING TAX.— 
"(A) IN GENERAL.—If a foreign corporation is subject to 
the tax imposed by subsection (a) for any taxable year 
(determined after the application of any treaty), no tax 
shall be imposed by section 871(a), 881(a), 1441, or 1442 on 
any dividends paid by such corporation out of its earnings 
and profits for such taxable year. 
"(B) LIMITATION ON CERTAIN TREATY BENEFITS.—If— 
"(i) any dividend described in section 861(aX2XB) is 
received by a foreign corporation, and 
"(ii) subparagraph (A) does not apply to such 
dividend, 
rules similar to the rules of subparagraphs (A) and (B) of 
subsection (fX3) shall apply to such dividend." 
(C) Subsection (f) of section 884 of the 1986 Code is amended— 
(i) by striking out the 2nd sentence of paragraph (1), Eind 
(ii) by adding at the end thereof the following new 
paragraph: 
"(3) COORDINATION WITH TREATIES.— 
"(A) PAYOR MUST BE QUALIFIED RESIDENT.—In the case of 
any interest described in paragraph (1) which is paid or 
accrued by a foreign corporation, no benefit under any 
treaty between the United States and the foreign country of 
which such corporation is a resident shall apply unless— 
"(i) such treaty is an income tax treaty, and 
"(ii) such foreign corporation is a qualified resident of 
such foreign country. 
"(B) RECIPIENT MUST BE QUALIFIED RESIDENT.—In the case 
of any interest described in paragraph (1) which is received 
or accrued by any corporation, no benefit under any treaty 
between the United States and the foreign country of which 
such corporation is a resident shall apply unless— 
"(i) such treaty is an income tax treaty, and 
102 STAT. 3524 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(ii) such foreign corporation is a qualified resident of 
such foreign country." 
(3) Paragraph (1) of section 884(0 of the 1986 Code is 
amended— 
(A) by striking out "sections 871, 881, 1441, and 1442" and 
inserting in lieu thereof "this subtitle", and 
(B) by adding at the end thereof the following new 
sentence: 
"To the extent provided in regulations, subparagraph (A) shall 
not apply to interest in excess of the amounts reasonably ex-
• pected to be deductible under section 882 in computing the 
effectively connected teixable income of such foreign corpora-
tion." 
(4) Paragraph (4) of section 884(e) of the 1986 Code is 
amended by redesignating subparagraph (C) as subparagraph 
(D) and by inserting after subparagraph (B) the following new 
' 
subparagraph: 
"(C) CORPORATIONS OWNED BY PUBLICLY TRADED DOMESTIC 
CORPORATIONS.—A foreign corporation which is a resident of 
a foreign country shall be treated as a qualified resident of 
such foreign country if— 
"(i) such corporation is wholly owned (directly or 
indirectly) by a domestic corporation, and 
"(ii) the stock of such domestic corporation is pri-
marily and regularly traded on an established securi-
ties market in the United States." 
(5) Subparagraph (A) of section 884(eX4) of the 1986 Code is 
amended— 
(A) by striking out "more than 50 percent" in clause (i) 
and inserting in lieu thereof "50 percent or more", and 
(B) by striking out "or the United States" in clause (ii) 
and inserting in lieu thereof "or citizens or residents of the 
United States". 
(6) Subsection (e) of section 884 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) EXCEPTION FOR INTERNATIONAL ORGANIZATIONS.—This sec-
tion shall not apply to an international organization (as defined 
in section 7701(aX18))." 
(7) Subparagraph (B) of section 861(aX2) of the 1986 Code is 
amended by striking out "other than under section 884(dX2)" 
each place it appears and inserting in lieu thereof "other than 
income described in section 884(dX2)". 
(8) Paragraph (2) of section 26(b) of the 1986 Code is amended 
by striking out "and" at the end of subparagraph (J), by striking 
out the period at the end of subparagraph (K) and inserting in 
lieu thereof ", and", and by adding at the end thereof the 
following new subparagraph: 
"(L) section 884 (relating to branch profits tax)." 
(9) Section 861 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(0 CROSS REFERENCE.— 
"For treatment of interest paid by the branch of a foreign corporation, 
see section 884(f)." 
(10) The paragraph (6) of section 906(b) of the 1986 Code which 
was added by section 1241(c) of the Reform Act is redesignated 
as paragraph (7). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3525 
(11) Subsection (c) of section 2104 of the 1986 Code is amended 
by striking out "section 861(aXlXB), section 861(aXlXG), or sec-
tion 861(aXlXH)" and inserting in lieu thereof "subparagraph 
(A), (C), or (D) of section 861(aXl)". 
(12) Subparagraph (A) of section 904(gX9) of the 1986 Code is 
amended by striking out "861(aXlXB)' and inserting in lieu 
thereof "861(aXlXA)". 
(13XA) Paragraph (1) of section 4373 of the 1986 Code is 
amended to read as follows: 
"(1) EFFECTIVELY CONNECTED ITEMS.—Any amount which is 
effectively connected with the conduct of a trade or business 
within the United States unless such amount is exempt from 
the application of section 882(a) pursuant to a treaty obligation 
of the United States." 
(B) The amendment made by subparagraph (A) shall apply 26USC4373 
with respect to premiums paid after the date 30 days after the note. 
date of the enactment of this Act. 
(14) Paragraph (1) of section 884(f) of the 1986 Code is 
amended by inserting "(or having gross income treated as effec-
tively connected with the conduct of a trade or business in the 
United States)" after "United States" in the material preceding 
subparagraph (A) thereof. 
(15) Section 861(aX2XC) of the 1986 Code is amended by strik-
ing out "section 243(d)" and inserting in lieu thereof "section 
243(e)". 
(r) AMENDMENTS RELATED TO SECTION 1242 OF THE REFORM ACT.— 
(1) Paragraph (7) of section 864(c) of the 1986 Code is amended 
to read as follows: 
"(7) TREATMENT OF CERTAIN PROPERTY TRANSACTIONS.—For 
purposes of this title, if^ 
"(A) any property ceases to be used or held for use in 
connection with the conduct of a trade or business within 
the United States, and 
"(B) such property is disposed of within 10 years after 
such cessation, 
the determination of whether any income or gain attributable 
to such disposition is taxable under section 871(b) or 882 (as the 
case may be) shall be made as if such sale or exchange occurred 
immediately before such cessation and without regard to the 
requirement that the taxpayer be engaged in a trade or business 
within the United States during the taxable year for which such 
income or gain is taken into account." 
(2) Paragraph (6) of section 864(c) of the 1986 (Dode is amended 
to read as follows: 
"(6) TREATMENT OF CERTAIN DEFERRED PAYMENTS, ETC.—For 
purposes of this title, in the case of any income or gain of a 
nonresident alien individual or a foreign corporation which— 
"(A) is taken into account for any taxable year, but 
"(B) is attributable to a sale or exchange of property or 
the performance of services (or any other transaction) in 
any other taxable year, 
the determination of whether such income or gain is taxable 
under section 871(b) or 882 (as the case may be) shall be made as 
if such income or gain were taken into account in such other 
taxable year and without regard to the requirement that the 
taxpayer be engaged in a trade or business within the United 
States during the taxable year referred to in subparagraph (A)," 
102 STAT. 3526 
PUBLIC LAW 100-647—NOV. 10, 1988 
Regulations. 
Petroleum and 
petroleum 
products. 
Natural gas. 
(s) AMENDMENTS RELATED TO SECTION 1246 OF THE REFORM ACT.— 
(IXA) Section 1446 of the 1986 Code is amended to read as 
follows: 
"SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' SHARE OF 
EFFECTIVELY CONNECTED INCOME. 
"(a) GENERAL RULE.—If— 
"(1) a partnership has effectively connected taxable income 
for any taxable year, and 
"(2) any portion of such income is allocable under section 704 
to a foreign partner, 
such partnership shall pay a withholding tax under this section at 
such time and in such manner as the Secretary shall by regulations 
prescribe. 
"(b) AMOUNT OF WITHHOLDING TAX.— 
"(1) IN GENERAL.—The amount of the withholding tax payable 
by any partnership under subsection (a) shall be equal to the 
applicable percentage of the effectively connected taxable 
income of the partnership which is allocable under section 704 
to foreign partners. 
"(2) APPUCABLE PERCENTAGE.—For purposes of paragraph (1), 
the term 'applicable percentage' means— 
"(A) the highest rate of tax specified in section 1 in the 
case of the portion of the effectively connected taxable 
income which is allocable under section 704 to foreign 
partners who are not corporations, and 
"(B) the highest rate of tax specified in section 11(b) in 
the case of the portion of the effectively connected taxable 
income which is allocable under section 704 to foreign 
partners which are corporations. 
"(c) EFFECTIVELY CONNECTED TAXABLE INCOME.—For purposes of 
this section, the term 'effectively connected taxable income' means 
the taxable income of the partnership which is effectively connected 
(or treated as effectively connected) with the conduct of a trade or 
business in the United States computed with the following 
adjustments: 
"(1) Paragraph (1) of section 703(a) shall not apply. 
"(2) The partnership shall be allowed a deduction for deple-
tion with respect to oil and gas wells but the amount of such 
deduction shall be determined without regard to sections 613 
and 613A. 
"(3) There shall not be taken into account any item of income, 
gain, loss, or deduction to the extent allocable under section 704 
to any partner who is not a foreign partner. 
"(d) TREATMENT OF FOREIGN PARTNERS.— 
"(1) ALLOWANCE OF CREDIT.—Each foreign partner of a part-
nership shall be allowed a credit under section 33 for such 
partner's share of the withholding tax paid by the partnership 
under this section. Such credit shall be allowed for the partner's 
taxable year in which (or with which) the partnership taxable 
year (for which such tax was paid) ends. 
"(2) CREDIT TREATED AS DISTRIBUTED TO PARTNER.—A foreign 
partner's share of any withholding tax paid by the partnership 
under this section shall be treated as distributed to such partner 
by such partnership on the last day of the partnership's taxable 
year (for which such tax was paid). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3527 
"(e) FOREIGN PARTNER.—For purposes of this section, the term 
'foreign partner' means any partner who is not a United States 
person. 
"(f) REGULATIONS.—The Secretary shall prescribe such regulations 
as may be necessary to carry out the purposes of this section, 
including regulations providing for the application of this section in 
the case of publicly traded partnerships." 
(B) Paragraph (2) of section 6401(b) of the 1986 C!ode is amend-
ed by striking out the last sentence and inserting in lieu thereof 
the following: "The preceding sentence shall not apply to any 
credit so allowed by reason of section 1446." 
(C) The table of sections for subchapter A of chapter 3 of the 
1986 Code is amended by striking out the item relating to 
section 1446 and inserting in lieu thereof the following: 
"Sec. 1446. Withholding of tax on foreign partners' share of effectively con-
nected income." 
(D) The amendments made by this paragraph shall apply to 
26 USC 1446 
taxable years beginning after December 31, 1987. No amount 
note. 
shall be required to be deducted and withheld under section 
1446 of the 1986 Code (as in effect before the amendment made 
by subparagraph (A)). 
(2XA) Subsection (a) of section 872 of the 1986 Code is 
amended by striking out "the case of a nonresident alien 
individual" and inserting in lieu thereof "the case of a non-
resident alien individual, except where the context clearly in-
dicates otherwise". 
(B) Subsection (b) of section 882 of the 1986 Code is amended 
by striking out "the case of a foreign corporation" and 
inserting in lieu thereof "the case of a foreign corporation, 
except where the context clearly indicates otherwise". 
(t) AMENDMENTS RELATED TO SECTION 1247 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 892(aX2) of the 1986 Code is 
amended by striking out "or" at the end of clause (i), by striking 
out the period at the end of clause (ii) and inserting in lieu 
thereof ", or", and by adding at the end thereof the following 
new clause: 
"(iii) derived from the disposition of any interest in a 
controlled commercial entity." 
(2) Clause (ii) of section 892(aX2XA) of the 1986 Code is 
amended to read as follows: 
"(ii) received by a controlled commercial entity or 
received (directly or indirectly) from a controlled 
commercial entity." 
(3) Subsection (a) of section 892 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) TREATMENT AS RESIDENT.—For purposes of this title, a 
foreign government shall be treated as a corporate resident of 
its country. A foreign government shall be so treated for pur-
poses of any income tax treaty obligation of the United States if 
such government grants equivalent treatment to the Grovern-
ment of the United States." 
(4) Section 893 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(c) LIMITATION ON EXCLUSION.—Subsection (a) shall not apply 
to— 
102 STAT. 3528 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) any employee of a controlled commercial entity (as de-
fined in section 892(aX2XB)), or 
"(2) any employee of a foreign government whose services are 
primarily in connection with a commercial activity (whether 
within or outside the United States) of the foreign government." 
(u) AMENDMENT RELATED TO SECTION 1249 OF THE REFORM ACT.— 
Subsection (d) of section 1503 of the 1986 CJode is amended by adding 
at the end thereof the following new paragraphs: 
"(3) TREATMENT OF LOSSES OF SEPARATE BUSINESS UNITS.—To 
the extent provided in regulations, any loss of a separate unit of 
a domestic corporation shall be subject to the limitations of this 
subsection in the same manner as if such unit were a wholly 
owned subsidiary of such corporation. 
Regulations. 
"(4) INCOME ON ASSETS ACQUIRED AFTER THE LOSS.—The Sec-
retary shall prescribe such regulations as may be necessary or 
appropriate to prevent the avoidance of the purposes of this 
subsection by contributing assets to the corporation with the 
dual consolidated loss after such loss was sustained." 
(v) AMENDMENTS RELATED TO SECTION 1261 OF THE REFORM ACT.— 
(IXA) SO much of section 986 of the 1986 Code as precedes 
subsection (c) thereof is amended to read as follows: 
"SEC. 986. DETERMINATION OF FOREIGN TAXES AND FOREIGN CORPORA-
TION'S EARNINGS AND PROFITS. 
"(a) FOREIGN TAXES.— 
"(1) IN GENERAL.—For purposes of determining the amount of 
the foreign tax credit— 
"(A) any foreign income taxes shall be translated into 
dollars using the exchange rates as of the time such taxes 
were paid to the foreign country or possession of the United 
States, and 
"(B) any adjustment to the amount of foreign income 
taxes shall be translated into dollars using— 
"(i) except as provided in clause (ii), the exchange 
rate as of the time when such adjustment is paid to the 
foreign country or possession, or 
"(ii) in the case of any refund or credit of foreign 
income taxes, using the exchange rate as of the time of 
original pajnment of such foreign income taxes. 
"(2) FOREIGN INCOME TAXES.—For purposes of paragraph (1), 
'foreign income taxes' means any income, war profits, or excess 
profits taxes paid to any foreign country or to any possession of 
the United States. 
"(b) EARNINGS AND PROFITS AND DISTRIBUTIONS.—For purposes of 
determining the tax under this subtitle— 
"(1) of any shareholder of any foreign corporation, the earn-
ings and profits of such corporation shall be determined in the 
corporation's functional currency, and 
* (2) in the case of any United States person, the earnings and 
profits determined under paragraph (1) (when distributed, 
deemed distributed, or otherwise taken into account under this 
subtitle) shall (if necessary) be translated into dollars using the 
appropriate exchange rate." 
(B) Section 987 of the 1986 (Dode is amended by inserting 
"and" at the end of paragraph (2), by striking out ", and" at the 
, 
end of paragraph (3) and inserting in lieu thereof a period, and 
by striking out paragraph (4). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3529 
(C) The table of sections for subpart J of part III of subchapter 
N of chapter 1 is amended by striking out the item relating to 
section 986 and inserting in lieu thereof the following: 
"Sec. 986. Determination of foreign taxes and foreign corporation's earnings 
and profits." 
(2XA) Subsection (c) of section 988 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) SPECIAL RULES WHERE TAXPAYER TAKES OR MAKES DEUV-
ERY.—If the taxpayer takes or makes delivery in connection 
with any section 988 transaction described in paragraph 
(IXBXiii), any gain or loss (determined as if the taxpayer sold 
the contract, option, or instrument on the date on which he took 
or made delivery for its fair market value on such date) shall be 
recognized in the same manner as if such contract, option, or 
instrument were so sold." 
(B) The amendment made by subparagraph (A) shall not 
26 USC 988 note. 
apply in any case in which the taxpayer takes or makes delivery 
before June 11,1987. 
(3XA) Subsection (b) of section 988 of the 1986 Code is 
amended by adding at the end thereof the following new 
paragraph: 
"(3) SPECIAL RULE FOR CERTAIN CONTRACTS, ETC.—In the case of 
any section 988 transaction described in subsection (cXlXBXiii), 
any gain or loss from such transaction shall be treated as 
foreign currency gain or loss (as the case may be)." 
(B) Subclause (II) of section 988(cXlXCXi) of the 1986 Code is 
amended to read as follows: 
"(II) any gain or loss from such transaction shall 
be treated as foreign currency gain or loss (as the 
case may be)." 
(C) Paragraph (2) of section 988(c) of the 1986 Code is amended 
by inserting "or" at the end of subparagraph (A), by striking out 
", or" at the end of subparsigraph (B) and inserting in lieu 
thereof a period, and by striking out subpargigraph (C). 
(D) Paragraph (3) of section 988(c) of the 1986 (Dode is amended 
to read as follows: 
"(3) PAYMENT DATE.—The term 'payment date' means the 
date on which the payment is made or received." 
(4) The first sentence of paragraph (1) of section 988(d) is 
amended by striking out "this section" and inserting in lieu 
thereof "this subtitle". 
(5) Subsection (b) of section 989 of the 1986 Code is amended— 
(A) by striking out "951(a)" in paragraph (3) and inserting 
in lieu thereof "951(aXlXA)", and 
(B) by adding at the end thereof the following new 
sentence: 
"For purposes of the preceding sentence, any amount included in 
income under section 951(a)(1)(B) shall be treated as an actual 
distribution made on the last day of the taxable year for which such 
amount was so included." 
(6) Clause (iii) of section 988(cXlXB) of the 1986 Code is 
amended to read as follows: 
"(iii) Entering into or acquiring any forward con- 
Contracts. 
tract, futures contract, option, or similar financial in-
strument unless such instrument would be marked to 
102 STAT. 3530 
PUBLIC LAW 100-647—NOV. 10, 1988 
market under section 1256 if held on the last day of the 
taxable year." 
(7) Subparagraph (B) of section 988(aX3) of the 1986 Code is 
amended by adding at the end thereof the following new clause: 
"(iii) SPECIAL RULE FOR PARTNERSHIPS.—To the extent 
provided in regulations, in the case of a partnership, the 
determination of residence shall be made at the partner 
level." 
(8) Clause (i) of section 988(aX3XB) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "If an individual does not have a tax home (as so defined), 
the residence of such individual shall be the United States if 
such individual is a United States citizen or a resident alien and 
shall be a country other than the United States if such individ-
ual is not a United States citizen or a resident alien." 
(9) Section 903 of the 1986 Code is amended by striking out 
"this subpart" and inserting in lieu thereof "this part". 
(w) AMENDMENTS RELATED TO SECTION 1274 OF THE REFORM ACT.— 
(1) Subsection (e) of section 932 of the 1986 Code is amended to 
read as follows: 
"(e) 
SPECIAL RULE FOR APPLYING SECTION TO TAX IMPOSED IN 
VIRGIN ISLANDS.—In applying this section for purposes of determin-
ing income tax liability incurred to the Virgin Islands, the provi-
sions of this section shaJl not be affected by the provisions of Federal 
law referred to in section 934(a)." 
(2) Paragraph (4) of section 932(c) of the 1986 Code is amended 
to read as follows: 
"(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an 
individual— 
"(A) who is a bona fide resident of the Virgin Islands at 
the close of the taxable year, 
"(B) who, on his return of income tax to the Virgin 
Islands, reports income from all sources and identifies the 
source of each item shown on such return, and 
"(C) who fully pays his tax liability referred to in section 
934(a) to the Virgin Islands with respect to such income, 
for purposes of calculating income tax liability to the United 
States, gross income shall not include any amount included in 
gross income on such return, and allocable deductions and 
credits shall not be taken into account." 
(3) Paragraph (2) of section 932(c) of the 1986 Code is amended 
by striking out "his income tax return" and inserting in lieu 
thereof "an income tax return". 
26 use 932 note. 
(4) Subsection (c) of section 1274 of the Reform Act is amended 
by striking out "this title" and inserting in lieu thereof "the 
Internal Revenue Code of 1986". 
(x) AMENDMENT RELATED TO SECTION 1275 OF THE REFORM ACT.— 
Section 1444 of the 1986 Code is amended by striking out "(as 
modified by section 934A)". 
(y) AMENDMENT RELATED TO SECTION 1276 OF THE REFORM ACT.— 
Subsection (a) of section 7654 of the 1986 Code is amended by 
striking out "an individual to which" and inserting in lieu thereof 
"an individual to whom". 
(z) AMENDMENT RELATED TO SECTION 1277 OF THE REFORM ACT.— 
26 use 931 note. 
(1) Section 1277 of the Reform Act is amended by adding at 
the end thereof the following new subsection: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3531 
"(f) EXEMPTION FROM WITHHOLDING.—Notwithstanding subsection 
(b), the modification of section 884 of the Internal Revenue Code of 
1986 by reason of the amendment to section 881 of such Code by 
section 1278(b)(1) of this Act shall apply to taxable years beginning 
after December 31,1986." 
(2) Subsection (e) of section 1277 of the Reform Act is amended 
by striking out "The preceding sentence" and inserting in lieu 
thereof 
"Notwithstanding 
subsection 
(b), the 
preceding 
sentence", 
(aa) COORDINATION WITH TREATIES.— 
(1) TREATY OBLIGATIONS.— 
(A) Subsection (d) of section 7852 of the 1986 Code is 
amended to read as follows: 
"(d) TREATY OBUGATIONS.— 
"(1) IN GENERAL.—For purposes of determining the relation-
ship between a provision of a treaty and any law of the United 
States affecting revenue, neither the treaty nor the law shall 
have preferential status by reason of its being a treaty or law. 
"(2) SAVINGS CLAUSE FOR 1954 TREATIES.—No provision of this 
title (as in effect without regard to any amendment thereto 
enacted after August 16, 1954) shall apply in any case where its 
application would be contrary to any treaty obligation of the 
United States in effect on August 16,1954." 
(B) Section 7852(d)(1) of the 1986 Code, as added by 
26 use 7852 
subparagraph (A), shall apply to any taxable period with 
note. 
respect to which the time for assessment of any deficiency 
has not expired by reason of any law or rule of law before 
the date of the enactment of this Act. 
(2) CERTAIN AMENDMENTS TO APPLY NOTWITHSTANDING TREA- 
26 use 861 note. 
TIES.—The following amendments made by the Reform Act shall 
apply notwithstanding any treaty obligation of the United 
States in effect on the date of the enactment of the Reform Act: 
(A) The amendments made by section 1201 of the Reform 
Act. 
(B) The amendments made by title VII of the Reform Act 
to the extent such amendments relate to the alternative 
minimum tax foreign tax credit. 
(3) CERTAIN AMENDMENTS NOT TO APPLY TO THE EXTENT 
26 use 861 note. 
INCONSISTENT WITH TREATIES.—The following amendments made 
by the Reform Act shall not apply to the extent the application 
of such amendments would be contrary to any treaty obligation 
of the United States in effect on the date of the enactment of 
the Reform Act: 
(A) The amendments made by section 1211 of the Reform 
Act to the extent— 
(i) such amendments apply in the case of an individ-
ual treated as a resident of a foreign country under a 
treaty obligation of the United States as so in effect, or 
(ii) such amendments relate to income of a non-
resident from the sale or exchange of inventory prop-
erty which would otherwise be sourced under section 
865(eX2) of the 1986 Code. 
(B) The amendments made by section 1212(a) of the 
Reform Act; except for purposes of determining the amount 
of the foreign tax credit. 
(C) The amendments made by subsections (b) and (c) of 
section 1212 of the Reform Act. 
102 STAT. 3532 
PUBLIC LAW 100-647—NOV. 10, 1988 
(D) The amendments made by section 1214 of the Reform 
Act; except for purposes of determining the amount of the 
foreign tax credit. 
(E) The amendment made by section 1241(a) of the 
Reform Act to the extent that, under a treaty obligation of 
the United States, interest described in section 884(fKlXA) 
of the 1986 Code (as added by such amendment) which is in 
excess of amounts deducted would be treated as other than 
United States source. 
(F) The amendment made by section 1241(bX2XA) of the 
Reform Act. 
(G) The amendment made by section 1241(a) of the 
Reform Act to the extent such amendment relates to sec-
tion 884(f)(lXB) of the 1986 Code. 
(H) The amendments made by section 1242 of the Reform 
Act to the extent they relate to paragraph (7) of section 
864(c) of the 1986 Code. 
(I) The amendment made by section 1247(a) of the Reform 
Act. 
(J) The amendments made by section 123 of the Reform 
Act. 
26 u s e 861 note. 
(4) TREATMENT OF TECHNICAL CORRECTIONS.—For purpOSeS of 
paragraphs (2) and (3), any amendment made by this title shall 
be treated as if it had been included in the provision of the 
Reform Act to which such amendment relates. 
(5) REPORTING OF CERTAIN TREATY-BASED RETURN POSITIONS.— 
(A) Subchapter B of chapter 61 of the 1986 Code is 
amended by redesignating section 6114 as section 6115 and 
by inserting after section 6113 the following new section: 
"SEC. 6114. TREATY-BASED RETURN POSITIONS. 
"(a) IN GENERAL.—Each taxpayer who, with respect to any tax 
imposed by this title, takes the position that a treaty of the United 
States overrules (or otherwise modifies) an internal revenue law of 
the United States shall disclose (in such manner as the Secretary 
may prescribe) such position— 
"(1) on the return of tax for such tax (or any statement 
attached to such return), or 
"(2) if no return of tax is reqiiired to be filed, in such form as 
the Secretary may prescribe. 
"(b) WAIVER AUTHORITY.—^The Secretary may by r^ulations 
waive the requirements of subsection (a) with respect to classes of 
cases for which the Secretary determines that the waiver will not 
impede the assessment and collection of tax." 
(B) Part I of subchapter B of chapter 68 of the 1986 Code is 
amended by adding at the end thereof the following new section: 
"SEC. 6712. FAILURE TO DISCLOSE TREATY-BASED RETURN POSITIONS. 
Law 
"(a) GENERAL RULE.—If a taxpayer fails to meet the requirements 
enforcement and 
of section 6114, there is hereby imposed a penalty equal to $1,000 
($10,000 in the case of a C corporation) on each such 
failure. 
"(b) AUTHORITY TO WAIVE.—^The Secret«uy may waive all or any 
part of the penalty provided by this section on a showing by the 
taxpayer that there was reasonable cause for the failure and that 
the taxpayer acted in good faith. 
crime. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3533 
"(c) PENALTY IN ADDITION TO OTHER PENALTIES.—The penalty 
imposed by this section shall be in addition to any other penalty 
imposed by law." 
(CXi) The table of sections for subchapter B of chapter 61 of 
the 1986 Code is amended by striking out the item relating to 
section 6114 and inserting in lieu thereof the following: 
"Sec. 6114. Treaty-based return positions. 
"Sec. 6115. Cross reference." 
(ii) The table of sections for part I of subchapter B of chapter 
68 of the 1986 Code is amended by adding at the end thereof the 
following new item: 
"Sec. 6712. Failure to disclose treaty-based return positions." 
(D) The amendments made by this paragraph shall apply to 26 USC 6114 
taxable periods the due date for filing returns for which (with- note, 
out extension) occurs after December 31,1988. 
(6) Subsection (a) of section 894 of the 1986 Code is amended to 
read as follows: 
"(a) TREATY PROVISIONS.— 
"(1) IN GENERAL.—The provisions of this title shall be applied 
to any taxpayer with due regard to any treaty obligation of the 
United States which applies to such taxpayer. 
"(2) CROSS REFERENCE.— 
"For relationship between treaties and this title, see section 7852(d)." 
(bb) MISCELLANEOUS FOREIGN TECHNICAL CORRECTIONS.— 
(1) PROVISIONS RELATING TO FOREIGN PERSONAL HOLDING 
COMPANIES.— 
(A) Subsection (f) of section 551 of the 1986 Code is 
amended— 
(i) by amending paragraph (1) to read as follows: 
"(1) a foreign partnership or an estate or trust which is a 
foreign estate or trust, or", and 
(ii) by striking out the last sentence and inserting in 
lieu thereof the following: "In any case to which the 
preceding sentence applies, the Secretary may by regu-
lations provide that rules similar to the rules of section 
1297(bX5) shall apply, and provide for such other 
adjustments in the application of this subchapter as 
may be necessary to carry out the purposes of this 
subsection." 
(B) Subsection (a) of section 551 of the 1986 Code is 
amended by striking out "(other than estates or trusts the 
gross income of which under this subtitle includes only 
income from sources within the United States)" and insert-
ing in lieu thereof "(other than foreign estates or trusts)". 
(C) Subsection (c) of section 552 of the 1986 Code is 
amended to read as follows: 
"(c) LOOK-THRU FOR CERTAIN DIVIDENDS AND INTEREST.— 
"(1) IN GENERAL.—For purposes of this part, any related 
person dividend or interest shall be treated as foreign personal 
holding company income only to the extent such dividend or 
interest is attributable (determined under rules similar to the 
rules of subparagraphs (C) and (D) of section 904(dX3)) to income 
of the related person which would be foreign personal holding 
company income. 
102 STAT. 3534 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(2) RELATED PERSON DIVIDEND OR INTEREST.—For purposes of 
paragraph (1), the term 'related person dividend or interest' 
means any dividend or interest which— 
"(A) is described in subparagraph (A) of section 954(c)(3), 
and 
"(B) is received from a related person which is not a 
foreign personal holding company (determined without 
regard to this subsection). 
For purposes of the preceding sentence, the term 'related 
person' has the meaning given such term by section 954(d)(3) 
(determined by substituting 'foreign personal holding company' 
for 'controlled foreign corporation each place it appears)." 
26 use 551 note. . 
(D) The amendments made by this paragraph shall apply 
to taxable years of foreign corporations beginning after 
December 31,1986. 
(2) TREATMENT OF CERTAIN PAYMENTS OUTSIDE THE UNITED 
STATES. 
(A) Subparagraph (A) of section 3405(d)(13) of the 1986 
Code is amended by striking out "the United States" and 
inserting in lieu thereof "the United States and any posses-
sion of the United States". 
(B) Clause (i) of section 3405(dX13XB) of the 1986 Code is 
amended to read as follows: 
"(i) a United States citizen or a resident alien of the 
United States, or". 
(C) The heading of paragraph (13) of section 3405(d) of the 
1986 Code is amended by striking out "UNITED STATES" and 
inserting in lieu thereof "UNITED STATES OR ITS POSSES-
SIONS". 
26 use 3405 
(D) The amendments made by this paragraph shall apply 
note. 
to distributions made after the date of the enactment of this 
Act. 
(3) 
CLARIFICATION 
OF DISCLOSURE UNDER 
CERTAIN 
AGREE-
MENTS.— 
(A) Paragraph (4) of section 6103(k) of the 1986 Code is 
amended— 
(i) by striking out "or other convention" and insert-
ing in lieu thereof "or other convention or bilateral 
agreement", and 
(ii) by striking out "such convention" and inserting 
in lieu thereof "such convention or bilateral agree-
ment". 
(B) Subparagraph (A) of section 6103(bX5) of the 1986 
Code is amended by striking out "the Commonwealth of the 
Northern Mariana Islands, the Republic of the Marshall 
Islands, the Federated States of Micronesia, and the Repub-
lic of Palau" and inserting in lieu thereof "and the 
Commonwealth of the Northern Mariana Islands". 
Effective date. 
(C) The amendments made by this paragraph shall take 
26 use 6103 
effect on the date of the enactment of the Tax Reform Act 
note. 
of 1986. 
(4) COORDINATION OF TREATIES WITH SECTION 904 (g).— 
(A) Subsection (g) of section 904 of the 1986 Code is 
amended by redesignating paragraph (10) as paragraph (11) 
and by inserting after paragraph (9) the following new 
paragraph: 
"(10) COORDINATION WITH TREATIES.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3535 
f 
"(A) I N GENERAL.—If— 
"(i) any amount derived from a United States-owned 
foreign corporation would be treated as derived from 
sources within the United States under this subsection 
by reason of an item of income of such United States-
OMmed foreign corporation, 
"(ii) under a treaty obligation of the United States 
(applied without r^ard to this subsection and by treat-
ing any amount included in gross income under section 
951(aXl) as a dividend), such amount would be treated 
as arising from sources outside the United States, and 
"(iii) the taxpayer chooses the benefits of this 
paragraph, 
this subsection shall not apply to such amount to the extent 
attributable to such item of income (but subsections (a), (b), 
and (c) of this section and sections 902, 907, and 960 shall be 
applied separately with respect to such amount to the 
extent so attributable). 
"(B) SPECIAL RULE.—Amounts included in gross income 
under section 951(aXl) shall be treated as a dividend under 
subparagraph (AXii) only if dividends paid by each corpora-
tion (the stock in which is taken into account in determin-
ing whether the shareholder is a United States shareholder 
in the United States-owned foreign corporation), if paid to 
the United States shareholder, would be treated under a 
treaty obligation of the United States as arising from 
sources outside the United States (applied without r^ard to 
this subsection)." 
(B) The amendment made by subparagraph (A) shall take 
Effective date. 
effect as if included in the amendment made by section 121 
26 USC 904 note. 
of the Tax Reform Act of 1984. 
(5) TREATMENT OP ELECTION UNDER SECTION 338.— 
(A) IN GENERAL.—Subsection (h) of section 338 of the 1986 
Oxie is amended by adding at the end thereof the following 
new paragraph: 
"(16) CioORDINATION WITH FOREIGN TAX CREDIT PROVISIONS.— 
Except as provided in regulations, this section shall not apply 
for purposes of determining the source or character of any item 
for purposes of subpart A of part III of subchapter N of this 
chapter (relating to foreign tax credit). The preceding sentence 
shall not apply to any gain to the extent such gain is includible 
in gross income as a dividend under section 1248 (determined 
without r^ard to any deemed sale under this section by a 
foreign corporation)." 
(B) EFFECTIVE DATE.—The amendment made by subpara- 
26 USC 338 note. 
graph (A) shall apply to qualified stock purchases (as 
defined in section 338(dX3) of the 1986 Code) after March 31, 
1988, except that, in the case of an election under section 
338(hX10) of the 1986 CJode, such amendment shall apply to 
quedified stock purchases (as so defined) after June 10,1987. 
(6) TREATMENT OP TAX-EXEMPT SHAREHOLDERS OP A DISC.— 
? 
(A) Section 995 of the 1986 (Dode is amended by adding at 
the end thereof the following new subsection: 
"(g) TREATMENT OP TAX-EXEMPT SHAREHOLDERS.—If any organiza-
tion described in subsection (aX2) or (bX2) of section 511 is a share-
holder in a DISC— 
102 STAT. 3536 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) any amount deemed distributed to such shareholder 
under subsection (b), 
"(2) any actual distribution to such shareholder which under 
section 996 is treated as out of accumulated DISC income, and 
"(3) any gain which is treated as a dividend under subsection 
(0, 
shall be treated as derived from the conduct of an unrelated trade or 
business (and the modifications of section 512(b) shall not apply). 
The rules of the preceding sentence shall apply also for purposes of 
determining any such shareholder's DISC-related deferred tax liabil-
ity under subsection (f)." 
26 use 995 note. 
(B) The amendment made by subparagraph (A) shall 
apply to taxable years beginning after December 31, 1987. 
(7) TREATMENT OP CERTAIN AMOUNTS PREVIOUSLY TAXED UNDER 
SECTION 1248.— 
(A) IN GENERAL.—Subsection (e) of section 959 of the 1986 
Code is amended by striking out "such person under" and 
inserting in lieu thereof "such person (or, in any case to 
which section 1248(e) applies, of the domestic corporation 
referred to in section 1248(eX2)) under". 
26 use 959 note. 
(B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply in the case of transactions to which 
section 1248(e) of the 1986 Code applies and which occur 
after December 31,1986. 
(8) TREATMENT OF SHARED FSC'S.— 
(A) IN GENERAL.—Section 927 of the 1986 Code is amend-
ed by adding at the end thereof the following new subsec-
tion: 
"(g) TREATMENT OF SHARED FSC's.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), each 
separate account referred to in pareigraph (3) maintained by a 
shared FSC shall be treated as a separate corporation for 
purposes of this subpart. 
"(2) CERTAIN REQUIREMENTS APPUED AT SHARED FSC LEVEL.— 
Paragraph (1) shall not apply— 
"(A) for purposes of— 
"(i) subparagraphs (A), (B), (D), and (E) of section 
922(aXl), 
"(ii) paragraph (2) of section 922(a), 
"(iii) subsections (b), (c), and (e) of section 924, and 
"(iv) subsection (f) of this section, and 
"(B) for such other purposes as the Secretary may by 
regulations prescribed. 
"(3) SHARED FSC.—For purposes of this subsection, the term 
'shared FSC' means any corporation if— 
"(A) such corporation maintains a separate account for 
transactions with each shareholder (and persons related to 
such shareholder), 
"(3) distributions to each shareholder are based on the 
amounts in the separate account maintained with respect 
to such shareholder, and 
"(C) such corporation meets such other requirements as 
the Secretary may by regulations prescribe." 
26 use 927 note. 
(B) The amendment made by subparagraph (A) shall apply as 
if included in the provision of the Tax Reform Act of 1984 to 
which it relates. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3537 
(9) CLARIFICATION OF DIVIDENDS RECEIVED DEDUCTION FOR DIVI-
DENDS FROM A FSC.— 
(A) Subsection (c) of section 245 of the 1986 Code is 
amended to read as follows: 
"(c) CERTAIN DIVIDENDS RECEIVED FROM FSC— 
"(1) IN GENERAL.—In the case of a domestic corporation, there 
shall be allowed as a deduction an amount equal to— 
"(A) 100 percent of any dividend received from another 
corporation which is distributed out of earnings and profits 
attributable to foreign trade income for a period during 
which such other corporation was a FSC, and 
"(B) 70 percent (80 percent in the case of dividends from a 
20-percent owned corporation as defined in section 243(cX2)) 
of any dividend received from another corporation which is 
distributed out of earnings and profits attributable to effec-
tively connected income received or accrued by such other 
corporation while such other corporation was a FSC. 
"(2) EXCEPTION FOR CERTAIN DIVIDENDS.—Paragraph (1) shall 
not apply to any dividend which is distributed out of earnings 
and profits attributable to foreign trade income which— 
"(A) is section 923(aX2) nonexempt income (within the 
meaning of section 927(dX6)), or 
"(B) would not, but for section 923(aX4), be treated as 
exempt foreign trade income. 
"(3) No DEDUCTION UNDER SUBSECTION (a) OR (b).—No deduc-
tion shall be allowable under subsection (a) or (b) with respect to 
any dividend which is distributed out of earnings and profits of 
a corporation accumulated while such corporation was a FSC. 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) 
FOREIGN TRADE INCOME; EXEMPT FOREIGN TRADE 
INCOME.—The terms 'foreign trade income' and 'exempt 
foreign trade income' have the respective meanings given 
such terms by section 923. 
"(B) EFFECTIVELY CONNECTED INCOME.—The term 'effec-
tively connected income' means any income which is effec-
tively connected (or treated as effectively connected) with 
the conduct of a trade or business in the United States and 
is subject to tax under this chapter. Such term shall not 
include any foreign trade income." 
(B) The amendment made by subparagraph (A) shall 
26 use 245 note. 
apply as if included in the provision of the Tax Reform Act 
of 1984 to which it relates. 
SEC. 1013. AMENDMENTS RELATED TO TITLE XIII OP THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1301 OF THE REFORM ACT.— 
(1) Clause (iii) of section 142(dX4XB) of the 1986 Code is 
amended by striking out "average rent" and inserting in lieu 
thereof "average gross rent". 
(2) Clause (iii) of section 143(aX2XA) of the 1986 Code is 
amended by striking out "no bond which is part of such issue 
meets" and inserting in lieu thereof "such issue does not meet". 
(3) Paragraph (4) of section 143(b) of the 1986 Ckxie is amended 
by inserting "is part of an issue which" after "which". 
(4XA) Clause (ii) of section 144(aX12XA) of the 1986 Code is 
amended by inserting "(or series of bonds)" before "issued to 
refund". 
102 STAT. 3538 
PUBLIC LAW 100-647—NOV. 10,1988 
(BXi) Subclause 0) of section 144(aX12XAXii) of the 1986 Code 
is amended to read as follows: 
"
C
D the average maturity date of the issue of 
which the refunding bond is a part is not later than 
the average maturity date of the bonds to be 
refunded by such issue,", 
(u) Subparagraph (A) of section 144(aX12) of the 1986 Code is 
amended by addmg at the end thereof the following new sen-
tence: 
"For purposes of clause (iiXD, average maturity shall be 
determined in accordance with section 147G>X2XA)." 
26 use 144 note. 
(iii) A refunding bond issued before July 1, 1987, shall be 
treated as meeting the requirement of subclause (I) of section 
144(aX12XAXii) of the 1986 Code if such bond met the require-
ment of such subclause as in effect before the amendments 
made by this subparagraph. 
(Q Clause (ii) of section 144(aX12XA) of the 1986 Code is 
amended by adding "and" at the end of subclause (II), by 
striking out subclause (m), and by redesignating subclause (TV) 
as subclause OH). 
Loans. 
(5) Subparagraph (B) of section 144(bXl) of the 1986 Code is 
amended— 
(A) by striking out "to which part B of title IV of the 
Higher Education Act of 1965 (relating to guaranteed stu-
dent loans) does not apply", and 
(B) by striking out "of such Act" and inserting in lieu 
thereof "of the Higher Education Act of 1965", and 
(O by striking out "eligible" and all that follows in such 
subparagraph and inserting in lieu thereof the following: 
"eligible. A p n ^ a m shall not be treated as described in 
this subparagraph if such program is described in subpara-
graph (A). 
A bond shall not be treated as a qualified student loan bond if 
the issue of which such bond is a part meets the private 
I 
business tests of paragraphs (1) and (2) of section 141(b) (deter-
' 
mined by treating 501(c)(3) organizations as governmental units 
with respect to their activities which do not constitute unre-
lated trades or businesses, determined by appl3mig section 
513(a))." 
(6) Subclause (D of section 145a)X2XBXii) of the 1986 Code is 
amended by striking out "103(b)" and inserting in lieu thereof 
"103(bX2)". 
(7) Qause (i) of section 145a)X2XC) of the 1986 Code is 
amended by striking out "subparagraph (BXii)" and inserting in 
lieu thereof "subparagraph (B)". 
(8) Paragraph (4) of section 145(b) of the 1986 Code is amended 
by striking out "subparagraphs (C) and (D)" and inserting in 
lieu thereof "subparagraphs (C), (D), and (E)". 
(9) Subparagraph (A) of section 146(fX5) of the 1986 Code (as in 
efTect before the amendments made by section 10631 of the 
Revenue Act of 1987) is amended to read as follows: 
"(A) the purpose of issuing exempt facility bonds 
described in 1 of the paragraphs of section 142(a),". 
(lOXA) Paragraph (1) of section 1460c) of the 1986 Code is 
amended by striking out "paragraph (2)" and inserting in lieu 
thereof "paragraphs (2) and (3)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3539 
(B) Subsection (k) of section 146 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) TREATMENT OP GOVERNMENTAL BONDS TO WHICH VOLUME 
CAP ALLOCATED.—Paragraph (1) shall not apply to any bond to 
which volume cap is allocated under section 141(bX5)— 
"(A) for an output facility, or 
"(B) for a facility of a tjrpe described in paragraph (4), (5), 
(6), or (10) of section 142(a), 
if the issuer establishes that the State's share of the private 
business use (as defined by section 141(bX6)) of the facility will 
equal or exceed the State's share of the volume cap allocated 
with respect to bonds issued to finance the facility." 
(11) Subsection (e) of section 147 of the 1986 Code is amended 
by striking out "treated as". 
(12) Subsection (f) of section 147 of the 1986 Code (relating to 
public approval requirement for private activity bonds) is 
amended by adding at the end thereof the following new para-
graph: 
"(4) SPECIAL RULES FOR SCHOLARSHIP FUNDING BOND ISSUES AND 
VOLUNTEER FIRE DEPARTMENT BOND ISSUES.— 
"(A) SCHOLARSHIP FUNDING BONDS.—In the case of a quali-
fied scholarship funding bond, any governmental unit 
which made a request described in section 150(dX2XB) with 
respect to the issuer of such bond shall be treated for 
purposes of paragraph (2) of this subsection as the govern-
mental unit on behalf of which such bond was issued. 
Where more than one governmental unit within a State has 
made a request described in section 150(dX2)(B), the State 
may also be treated for purposes of paragraph (2) of this 
subsection as the governmental unit on behalf of which 
such bond was issued. 
"(B) VOLUNTEER FIRE DEPARTMENT BONDS.—In the case of 
a bond of a volunteer fire department which meets the 
requirements of section 150(e), the political subdivision 
described in section 150(eX2XB) with respect to such depart-
ment shall be treated for purposes of paragraph (2) of this 
subsection as the governmental unit on behalf of which 
such bond was issued." 
(13XA) Paragraph (1) of section 147(g) of the 1986 Code (relat-
ing to restriction on issuance costs financed by issue) is 
amended by striking out "aggregate face amount of the issue" 
and inserting in lieu thereof "proceeds of the issue". 
(B) Paragraph (2) of section 147(g) of the 1986 Code is amended 
by striking out "aggregate authorized face amount of the issue 
does not" and inserting in lieu thereof "proceeds of the issue do 
not". 
(C) The amendments made by this paragraph shall apply to 
26 USC147 note, 
bonds issued after June 30,1987. 
(14) Paragraph (2) of section 148(d) of the 1986 Code (relating 
to special rules for reasonably required reserve or replacement 
fund) is amended by striking out "any fund described in para-
graph (1)" and inserting in lieu thereof "any reserve or replace-
ment fund". 
(15) Paragraph (3) of section 148(f) of the 1986 Code is amend-
ed by adding at the end thereof the following new sentence: "A 
series of issues which are redeemed during a 6-month period (or 
such longer period as the Secretary may prescribe) shall be 
102 STAT. 3540 
PUBLIC LAW 100-647—NOV. 10, 1988 
treated (at the election of the issuer) as 1 issue for purposes of 
the preceding sentence if no bond which is part of any issue in 
such series has a maturity of more than 270 days or is a private 
activity bond." 
(16XA) Subclause (I) of section 148(fX4)(BXiii) of the 1986 Code 
(relating to safe harbor for determining when proceeds of tax or 
revenue anticipation bonds are expended) is amended by strik-
ing out "aggregate face amount of such issue" and inserting in 
lieu thereof "proceeds of such issue". 
26 use 148 note. 
(B) The amendment made by subparagraph (A) shall apply to 
bonds issued after June 30,1987. 
(17XA) Subparagraph (C) of section 148(fX4) of the 1986 Code is 
amended— 
(i) by striking out the heading and inserting in lieu 
thereof: 
"(C) 
EXCEPTION 
FOR 
GOVERNMENTAL UNITS 
ISSUING 
$5,000,000 OR LESS OF BONDS.— 
"(i) IN GENERAL.—", 
(ii) by redesignating clauses (i) through (iv) as subclauses 
(I) through (IV), respectively, and moving the margins of 
such subclauses 2 ems to the right, and 
(iii) by striking out the last sentence and inserting in lieu 
thereof the following new clauses: 
"(ii) AGGREGATION OF ISSUERS.—For purposes of 
subclause (IV) of clause (i)— 
"(I) an issuer and all entities which issue bonds 
on behalf of such issuer shall be treated as 1 issuer, 
"(n) all bonds issued by a subordinate entity 
shall, for purposes of applying such subclause to 
each other entity to which such entity is subordi-
nate, be treated as issued by such other entity, and 
"(IQ) an entity formed (or, to the extent provided 
by the Secretary, availed of) to avoid the purposes 
of such subclause (TV) and aU other entities bene-
fiting thereby shall be treated as 1 issuer, 
"(iii) (SKTAIN REFUNDING BONDS NOT TAKEN INTO AC-
COUNT IN DETERMINING SMALL ISSUER STATUS.—There 
shall not be taken into account under subclause (IV) of 
clause (i) any bond issued to refund (other than to 
advance refund) any bond to the extent the amount of 
the refunding bond does not exceed the outstanding 
amount of the refunded bond. 
"(iv) CERTAIN ISSUES ISSUED BY SUBORDINATE GOVERN-
MENTAL UNITS, ETC., E
X
E
B
f
F
T F
R
O
M R
E
B
A
T
E REQUIRE-
MENT.—^An issue issued by a subordinate entity of a 
governmental unit with general taxing powers shall be 
treated as described in clause (i)CD if the aggr^ate face 
amount of such issue does not exceed the lesser of— 
"a) $5,000,000, or 
"(II) the amount which, when added to the aggre-
gate face amount of other issues issued by such 
entity, does not exceed the portion of the $5,000,000 
limitation under clause dXTV) which such govern-
mental unit allocates to such entity. 
For purposes of the preceding sentence, an entity 
which issues bonds on behalf of a governmental unit 
with general taxing powers shsdl be treated as a 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3541 
subordinate entity of such unit. An allocation shall be 
taken into account under subclause (II) only if it is 
irrevocable and made before the issuance date of such 
issue and only to the extent that the limitation so 
allocated bears a reasonable relationship to the bene-
fits received by such governmental unit from issues 
issued by such entity, 
"(v) DETERMINATION OF WHETHER REFUNDING BONDS 
EUGIBLE FOR EXCEPTION FROM REBATE REQUIREMENT.—If 
any portion of an issue is issued to refund other bonds, 
such portion shall be treated as a separate issue which 
does not meet the requirements of paragraphs (2) and 
(3) by reason of this subparagraph unless— 
"(I) the aggregate face amount of such issue does 
not exceed $5,000,000, 
"(II) each refunded bond was issued as part of an 
issue which was treated as meeting the require-
ments of paragraphs (2) and (3) by reason of this 
subparagraph, 
"(III) the average maturity date of the refunding 
bonds issued as part of such issue is not later than 
the average maturity date of the bonds to be 
refunded by such issue, and 
"(IV) no refunding bond has a maturity date 
which is later than the date which is 30 years after 
the date the original bond was issued. 
Subclause (III) shall not apply if the average maturity 
of the issue of which the original bond was a part (and 
of the issue of which the bonds to be refunded are a 
part) is 3 years or less. For purposes of this clause, 
average maturity shall be determined in accordance 
with section 147(bX2XA). 
"(vi) REFUNDINGS OF BONDS ISSUED UNDER LAW PRIOR 
TO TAX REFORM ACT OF 1986.—If section 141(a) did not 
apply to any refunded bond, the issue of which such 
refunded bond was a part shall be treated as meeting 
the requirements of subclause (II) of clause (v) if— 
' (I) such issue was issued by a governmental unit 
with general taxing powers, 
"(II) no bond issued as part of such issue was an 
industrial development bond (as defined in section 
103(bX2), but without regard to subparagraph (B) of 
section 103(bX3)) or a private loan bond (as defined 
in section 103(oX2XA), but without regard to any 
exception from such definition other than section 
103(oX2XC)), and 
"(III) the aggregate face amount of all tax-
exempt bonds (other than bonds described in 
subclause (ID) issued by such unit during the cal-
endar year in which such issue was issued did not 
exceed $5,000,000. 
References in subclause (II) to section 103 shall be to 
such section as in effect on the day before the date of 
the enactment of the Tax Reform Act of 1986. Rules 
similar to the rules of clauses (ii) and (iii) shall apply 
for purposes of subclause (III). For purposes of 
subclause (II) of clause (i), bonds described in subclause 
102 STAT. 3542 
PUBLIC LAW 100-647—NOV. 10, 1988 
(II) of this clause to which section 141(a) does not apply 
shall not be treated as private activity bonds." 
(B) Subclause (IV) of section 148(fX4)(C)(i) of the 1986 Code (as 
redesignated by subparagraph (A)) is amended by striking out 
"(and all subordinate entities thereof)". 
26 use 148 note. 
(CXD Except as provided in clause (ii), the Eimendments made 
by this paragraph shall apply to bonds issued after June 30, 
1987. 
(ii) At the election of an issuer (made at such time and in such 
manner as the Secretary of the Treasury or his delegate may 
prescribe), the amendments made by this paragraph shall apply 
to such issuer as if included in the amendments made by section 
1301(a) of the Tax Reform Act of 1986. 
(18) Clause (i) of section 148(fK4XD) of the 1986 Code is 
amended— 
(A) by inserting "for a program" before "described in 
section 144(bXlXA)", 
(B) by striking out "such a program" and inserting in lieu 
thereof "such program", and 
Loans. 
(C) by adding at the end thereof the following: "Amounts 
designated as interest on student loans shall not be taken 
into account in determining whether the issuer 
is 
reimbursed for such costs. Except as otherwise hereafter 
provided in regulations prescribed by the Secretary, costs 
described in subclause (I) paid from amounts earned as 
described in the first sentence of this clause may also be 
taken into account in determining the yield on the student 
loans under a program described in section 144(bXlXA)." 
(19) Subparagraph (B) of section 148(fK7) of the 1986 Code is 
amended by striking out "due to reasonable cause and not" and 
inserting in lieu thereof "not due". 
(20) Clause (iii) of section 149(bX3XA) of the 1986 Code is 
amended by striking out "with respect to any bond issued before 
July 1,1989". 
(21) Subparagraph (A) of section 149(bX4) of the 1986 Code is 
amended by striking out "a qualified student loan bond, and a 
qu^ified redevelopment bond" and inserting in lieu thereof 
and a qualified student loan bond". 
(22) Paragraph (3) of section 149(e) of the 1986 Code (relating 
to information reporting) is amended by striking out "there is 
reasonable cause for the failure to file such statement in a 
timely fashion" and inserting in lieu thereof "the failure to file 
in a timely fashion is not due to willful neglect". 
(23XA) Subparagraph (B) of section 150a)X4) of the 1986 Code 
(relating to change in use of facilities financed with tax-exempt 
private activity bonds) is amended by inserting before the 
period "or a qualified small issue bond". 
(B) The heading for paragraph (4) of section 150(b) of the 1986 
Code is amended by inserting "AND SMALL ISSUE BONDS" after 
"EXEIMPT FACILITY BONDS" 
(C) Subparagraph (A) of section 150(bXl) of the 1986 Code is 
amended by inserting "tax-exempt" before "qualified mortgage 
bond". 
(24XA) Subsection (e) of section 150 of the 1986 Code is amend-
ed by adding at the end thereof the following new paragraph: 
"(3) TREATMENT AS PRIVATE ACTIVITY BONDS ONLY FOR CERTAIN 
PURPOSES.—Bonds which are part of an issue which meets the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3543 
requirements of paragraph (1) shall not be treated as private 
activity bonds except for purposes of sections 147(f) and 149(d)." 
(B) The amendment made by subparagraph (A) shall apply to 
26 USC150 note, 
bonds issued after October 21,1988. 
(25) Clause (ii) of section 1301(fX2XC) of the Reform Act is 26 USC 25. 
amended to read as follows: 
"(ii) Clause (ii) of section 25(cX2XA) is amended by strik-
ing out all that follows 'an amount of and inserting in lieu 
thereof 'private activity bonds which it may otherwise issue 
during such calendar year under section 146,'." 
(26) Subsection (h) of section 25 of the 1986 Code (relating to 
credit for interest on certain home mortgages) is amended by 
striking out "1987" and inserting in lieu thereof "1988". 
(27) The date contained in section 143(aXlXB) of the 1986 Code 26 USC 143 note, 
shall be treated as contained in section 103A(cXlXB) of the 
Internal Revenue Code of 1954, as in effect on the day before the 
date of the enactment of the Reform Act, for purposes of any 
bond issued to refund a bond to which such 103A(cXl) applies. 
(28XA) Subparagraph (A) of section 146(iX2) of the 1986 Code is 
amended to read as follows: 
"(A) the average maturity date of the qualified student 
loan bonds to be refunded by the issue of which the refund-
ing bond is a part, or". 
(B) Subparagraph (A) of section 146(iX3) of the 1986 Code is 
amended to read as follows: 
"(A) the average maturity date of the qualified mortgage 
bonds to be refunded by the issue of which the refunding 
bond is a part, or". 
(C) Subsection (i) of section 146 of the 1986 Code is amended 
by redesignating paragraph (4) as paragraph (5) and by insert-
ing after paragraph (3) the following new paragraph: 
(4) AVERAGE MATURITY.—For purposes of paragraphs (2) and 
(3), avereige maturity shall be determined in accordance with 
section 147(bX2XA)." 
(29) Subparagraph (D) of section 147(0(2) of the 1986 Code is 
amended by striking out "the maturity date" and all that 
follows and inserting in lieu thereof "the average maturity date 
of the issue of which the refunding bond is a part is later than 
the average maturity date of the bonds to be refunded by such 
issue. For purposes of the preceding sentence, average maturity 
shall be determined in accordance with subsection (bX2XA). 
(30) Subparagraph (A) of section 150(bXl) of the 1986 Code is 
amended by inserting before the period "and before the date 
such residence is again the principal residence of at least 1 of 
the mortggigors who received such financing". 
(31) Subparagraph (A) of section 150(bX2) of the 1986 Code is 
amended by striking out "described paragraph" and inserting 
in lieu thereof "described in paragraph". 
(32) Paragraph (2) of section 150(b) of the 1986 Code is amend-
ed by adding at the end thereof the following: "If the provisions 
of prior law corresponding to section 142(d) apply to a refunded 
bond, such provisions shall apply (in lieu of section 142(d)) to the 
refunding bond." 
(33) Subsection (b) of section 150 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(6) SMALL ISSUE BONDS WHICH EXCEED CAPITAL EXPENDFTURE 
LIMITATION.—In the case of any financing provided from the 
102 STAT. 3544 
PUBLIC LAW 100-647—NOV. 10, 1988 
proceeds of any bond which, when issued, purported to be a 
qualified small issue bond, no deduction shall be allowed under 
this chapter for interest on such financing which accrues during 
the period such bond is not a qualified small issue bond. 
(34XA) Paragraph (7) of section 103(c) of the Internal Revenue 
Code of 1954 (as in effect on the day before the date of the 
enactment of the Tax Reform Act of 1986) is amended by 
striking out "necessary" and inserting in lieu thereof "nec-
essary . 
26 use 103 note. 
(B) Subparagraph (A) shall apply to obligations sold after May 
2, 1978, and to which Treasury regulation section 1.103-13 
(1979) was provided to apply. 
26 use 103 note. 
(35) VAUDATION OF SINKING FUND REGULATIONS.— 
(A) Treasunr Regulation section 1.103-13(g) (1979) is 
hereby enacted into positive law. 
(BXi) Except as provided in clause (ii), subparagraph (A) 
shall apply to obligations sold after May 2, 1978, and to 
which such regulation was provided to apply. 
(ii) Treasury Regulation section 1.103-13(g) (1979) as 
enacted into positive law by subparagraph (A) shall cease to 
apply to the extent hereafter modified by the Secretary of 
the Treasury or his delegate by regulations. 
(36) Clause (i) of section 147(fK2XE) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: 
"If the office of any elected official described in 
subclause (II) is vacated and an individual is appointed 
by the chief elected executive officer of the govern-
mental unit and confirmed by the elected legislative 
body of such unit (if any) to serve the remaining term 
of the elected official, the individual so appointed shall 
be treated as the elected official for such remaining 
term." 
(37) The table of sections for part III of subchapter B of 
chapter 1 of the 1986 Code is amended by striking out the items 
relating to sections 103 and 103A and inserting in lieu thereof 
the following new item: 
"Sec. 103. Interest on State and local bonds." 
(38) Subparagraph (B) of section 141(bX5) of the 1986 Code is 
amended by striking out "which would cause bond" and insert-
ing in lieu thereof "which would cause a bond". 
(39) Clause (ii) of section 142(bXlXB) of the 1986 Code is 
amended by striking out "(as defined in 168(iX3))" and inserting 
in lieu thereof "(as defined in section 168(iX3))". 
(40) Subparagraph (B) of section 146(dX4) of the 1986 Code is 
£unended by striking out "with respect a possession" and insert-
ing in lieu thereof "with respect to a possession". 
(41) Clause (ii) of section 48(1X1 IXA) of the 1986 Code is 
amended by striking out "an industrial development bond 
(within the meaning of section 103(bX2))" and inserting in lieu 
thereof "a private activity bond (within the meaning of section 
141)". 
(42) Subsection (a) of section 7478 of the 1986 Code is 
amended— 
(A) by striking out "whether prospective obligations are 
described in section 103(a)" in paragraph (1) and inserting 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3545 
' 
in lieu thereof "whether interest on prospective obligations 
will be excludable from gross income under section 103(a)", 
and 
(B) by striking out "whether such prospective obligations 
are described in section 103(a)" and inserting in lieu thereof 
"whether interest on such prospective obligations will be 
excludable from gross income under section 103(a)". 
(43XA) Subsection (b) of section 148 of the 1986 Code (defining 
higher jdelding investments) is amended by adding at the end 
thereof the following new paragraph: 
"(3) ALTERNATIVE MINIMUM TAX BONDS TREATED AS INVEST-
MENT PROPERTY IN CERTAIN CASES.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'investment property' does not include any 
tax-exempt bond. 
"(B) EXCEPTION.—With respect to an issue other than an 
issue a part of which is a specified private activity bond (as 
defined in section 57(aX5XC)), the term 'investment prop-
erty' includes a specified private activity bond (as so 
defined)." 
(B) Paragraph (2) of section 148(b) of the 1986 Code (defining 
investment property) is amended Ijy striking the last sentence. 
(C) The amendments made by this paragraph shall apply to 
26 USC148 note. 
obligations issued eifter March 31,1988. 
(44) Subparagraph (B) of section 46(cX5) of the 1986 (Dode is 
amended— 
(A) by striking out "INDUSTRIAL DEVELOPMENT BONDS" in 
the heading and inserting in lieu thereof "PRIVATE ACTIVITY 
BONDS", and 
(B) by striking "an industrial development bond (within 
the meaning of section 103(bX2))" and inserting in lieu 
thereof "a private activity bond (within the meaning of 
section 141)". 
(b) AMENDMENTS RELATED TO SECTION 1311 OF THE REFORM ACT.— 
(1) Section 1311 of the Reform Act is amended by redesignat- 
26 USC 141 note, 
ing subsection (d) as subsection (f), and by inserting after subsec-
tion (c) the following new subsections: 
"(d) PUBUC APPROVAL AND INFORMATION 
REPORTING.—Sections 
147(f) and 149(e) of the 1986 Code shall apply to bonds issued after 
December 31,1986. 
"(e) REBATE REQUIREMENT FOR QUALIFIED SCHOLARSHIP FUNDING 
BONDS.—Section 150(d) of the 1986 (Dode shall apply to payments 
made after August 15,1986." 
(2) Paragraph (2) of section 1311(b) of the Reform Act (relating 
to effective date for section 1301(f)) is amended by inserting 
"with respect to non-issued bond amounts elected" after 
"issued". 
(c) AMENDMENTS RELATED TO SECTION 1313 OF THE REFORM ACT.— 
(1) Clause (i) of section 1313(aXlXB) of the Reform Act is 
amended by striking out "the proceeds" and inserting in lieu 
thereof "the net proceeds". 
(2XA) Subparagraph (C) of section 1313(aX3) of the Reform Act 
is amended by striking out "section 148" and inserting in lieu 
thereof "sections 143(g) and 148". 
(B) The amendment made by subparagraph (A) shall apply to 
26 USC 141 note. 
bonds issued after June 30,1987. 
102 STAT. 3546 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 141 note. 
(3) Subparagraph (E) of section 1313(aX3) of the Reform Act is 
amended by striking out "of such Code". 
(4) Paragraph (3) of section 1313(a) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "In the case of a refunding bond described in paragraph 
(1) with respect to a qualified bond described in paragraph (2XB), 
the requirements of section 13120))(1) which applied to such 
qualified bond shall be treated as specified in this paragraph 
with respect to such refunding bond.' 
(5) Subparsigraph (A) of section 1313(aX4) of the Reform Act is 
amended by inserting "and by substituting 'September 1, 1986' 
for 'August 16, 1986 
before the comma at the end thereof. 
(6) Paragraph (2) of section 1313(b) of the Reform Act is 
amended by adding at the end thereof "For purposes of the 
preceding sentence, the determination of whether a bond is 
described in such subsection (oX2XA) shall be made without 
regard to any exception other than section 103(oX2XC) of such 
Code." 
(7) Subparagraph (F) of section 131303X3) of the Reform Act is 
amended by strilang out "of such Code". 
(8) Paragraph (3) of section 1313(b) of the Reform Act is 
amended by adding eifter subparagraph (F) the following new 
subparagraph: 
"(G) Except as provided in the last sentence of subsection 
(cX2) of this section, the requirements of section 145(b) 
(relating to $150,000,000 limitation on bonds other than 
hospital bonds)." 
(9) Paragraph (5) of section 1313(b) of the Reform Act is 
amended by striking out "are to be" and inserting in lieu 
thereof "are or will be". 
(lOXA) The heading for subsection (c) of section 1313 of the 
Reform Act is amended by striking out "CURRENT" and insert-
ing in lieu thereof "CERTAIN". 
(B) Paragraph (1) of section 1313(c) of the Reform Act is 
amended— 
(i) by striking out "apply to any bond" and inserting in 
lieu thereof "apply to any bond (or series of bonds)", and 
(ii) by striking out "law do not" and inserting in lieu 
thereof "law did not". 
(IIXA) Subparagraph (A) of section 1313(cXl) of the Reform 
Act is amended to read as follows: 
"(A) the average maturity date of the issue of which the 
refunding bond is a part is not later than the average 
maturity date of the bonds to be refunded by such issue,". 
(B) Paragraph (1) of section 1313(c) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: 
"For purposes of subparagraph (A), average maturity shall be 
determined in accordance with section 147(bX2XA) of the 1986 
Code." 
(C) Paragraph (1) of section 1313(c) of the Reform Act is 
amended by adding "and" at the end of subparagraph (B), by 
striking out subparagraph (C), and by redesignating subpara-
graph (D) as subparagraph (C). 
(D) Subparagraph (B) of section 1313(cX2) of the Reform Act is 
amended by striking out "and (D)" and inserting in lieu thereof 
"and(C)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3547 
(E) A refunding bond issued before July 1, 1987, shall be 
26 USC141 note. 
treated as meeting the requirement of subparagraph (A) of 
section 1313(cXl) of the Reform Act if such bond met the 
requirement of such subparagraph as in effect before the 
amendments made by this paragraph. 
(12XA) Subparagraph (N) of section 103(bX6) of the Internal 
Revenue Code of 1954, as in effect on the day before the date of 
the enactment of the Reform Act (relating to termination 
dates), is amended by redesignating clauses (ii) and (iii) as 
clauses (iii) and (iv), respectively, and by striking out clause (i) 
and inserting in lieu thereof the following new clauses: 
"(i) IN GENERAL.—Except as provided in clause (ii), 
this paragraph shall not apply to any obligation issued 
after December 31,1986. 
"(ii) CERTAIN REFTJNDINGS.—This paragraph shall 
apply to any obligation (or series of obligations) issued 
to refund an obligation issued on or before December 
31,1986, if— 
"(I) the average maturity date of the issue of 
which the refmuting obligation is a part is not later 
than the average maturity date of the obligations 
to be refunded by such issue, 
"(ID the amount of the refunding obligation does 
not exceed the outstanding amount of the refunded 
obligation, and 
"OJD the proceeds of the refunding obligation are 
used to redeem the refunded obligation not later 
than 90 days after the date of the issuance of the 
refunding obligation. 
For purposes of subclause (I), average maturity shall be 
determined in accordance ¥dth subsection (bX14)(BXi)." 
(B) The date applicable imder section 144(aX12)(B) of the 1986 
26 USC 144 note. 
Code shall be treated as contained in section 103(bX6)(NXiii) of 
the Internal Revenue C!ode of 1954, as in effect on the day before 
the date of the enactment of the Reform Act, for purposes of any 
bond issued to refund a bond to which such section 
103(bX6XNXiii) applies. 
(13) Paragraph (2) of section 1313(c) of the Reform Act is 
26 USC 141 note. 
amended— 
(A) by striking out "apply to any bond" and inserting in 
lieu thereof "apply to any bond (or series of bonds)", 
(B) by striking out "subsection does not" and inserting in 
lieu thereof "subsection did not", and 
(
C
J
) by striking out "the proceeds" in subparagraph (AXD 
and inserting in lieu thereof "the net proceeds". 
(14XA) Section 1313 of the Reform Act is amended by adding 
at the end thereof the following new subsection: 
"(d) MORTGAGE AND STUDENT LOAN TARGETING RULES TO APPLY TO 
LOANS MADE MORE THAN 3 YEARS AFTER THE DATE OF THE ORIGINAL 
ISSUE.—Subsections (aX3) and (bX3) shall be treated as including the 
requirements of subsections (e) and (f) of section 143 and paragraphs 
(3) and (4) of section 144(b) of the 1986 Code with respect to bonds the 
proceeds of which are used to finance loans made more than 3 years 
after the date of the issuance of the original bond." 
(B) The amendment made by subparagraph (A) shall apply 
26 USC 141 note. 
with respect to refunding bonds issued after October 16, 1987. 
19-194 O 01 port
i-
102 STAT. 3548 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 103 note. 
(15) A bond issued to refund an obligation described in section 
103(o)(3) of the Internal Revenue Code of 1954 (as in effect on 
the day before the date of the enactment of the Tax Reform Act 
of 1986) shall not be treated as described in section 144(b) of the 
1986 Code unless it is described in section 144(b)(1)(A) of the 
1986 Code. 
(d) AMENDMENTS RELATED TO SECTION 1314 OF THE REFORM ACT.— 
26 use 141 note. 
(1) Subsection (a) of section 1314 of the Reform Act is 
amended by adding at the end thereof the following: "The 
preceding sentence shall not apply to the first advance refund-
ing after September 25, 1985, of a bond issued before Septem-
ber 26, 1985." 
(2) Subsection (f) of section 1314 of the Reform Act is amended 
by striking out "December" and inserting in lieu thereof 
"August". 
(3) Section 1314 of the Reform Act is amended by redesignat-
ing subsection (g) as subsection (i) and by inserting after subsec-
tion (f) the following new subsections: 
"(g) 
TERMINATION 
OF 
MORTGAGE 
BOND 
POUCY 
STATEMENT 
REQUIREMENT.—Paragraph (5) of section 103A(j) of the 1954 Code 
(relating to policy statement) shall not apply to any bond issued 
after August 15, 1986, and shall not apply to nonissued bond 
amounts elected under section 25 of the 1986 Code after such date. 
"(h) ARBITRAGE RESTRICTION ON INVESTMENTS IN INVESTMENT-TYPE 
PROPERTY.—In the case of a bond issued before August 16, 1986 
(September 1, 1986 in the case of a bond described in section 
1312(c)(2)), section 103(c) of the 1954 Code shall be applied by treat-
ing the reference to securities in paragraph (2) thereof as including a 
reference to investment-type property but only for purposes of 
determining whether any bond issued after October 16, 1987, to 
advance refund such bond (or a bond which is part of a series of 
refundings of such bond) is an arbitrage bond (within the meaning of 
section 148(a) of the 1986 Code)." 
(e) AMENDMENTS RELATED TO SECTION 1315 OF THE REFORM ACT.— 
(1) Subsection (c) of section 1315 of the Reform Act is 
amended— 
(A) by inserting "for calendar year 1986" after "1954 
Code" each place it appears, 
(B) by striking out "before August 16" each place it 
appears and inserting in lieu thereof "on August 15", and 
(C) by adding at the end thereof the following new 
sentence: 
"The preceding sentence shall not apply to the extent section 
1313(bX5) treats any bond as a private activity bond for purposes of 
section 146 of the 1986 Code." 
(2XA) Subsection (e) of section 1315 of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall not apply to any bond 
which (if issued on August 15, 1986) would have been an indus-
trial development bond (as defined in section 103(b)(2) of the 
1954 Code)." 
26 use 141 note. 
(B) The amendment made by subparagraph (A) shall apply to 
bonds issued after June 10,1987. 
(f) AMENDMENTS RELATED TO SECTION 1316 OF THE REFORM ACT.— 
(1)(A) Subsections (aXD, (bXD, (cXD, and (fXD of section 1316 of 
26 use 141 note. 
the Reform Act are each amended by inserting "and as having a 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3549 
carryforward purpose described in section 14G(fX5) of such 
Code" after "the 1986 Code". 
(B) The amendment made by subparagraph (A) shall apply 26 USC141 note. 
only with respect to carr3rforwards of volume cap for years after 
1986. 
(2) Subsection (c) of section 1316 of the Reform Act is amended 26 USC 141 note, 
by adding at the end thereof the following new paragraph: 
"(4) APPUCATION OF SECTION 147(b).—A bond to which this 
subsection applies (other than a refunding bond) shall be treat-
ed as meeting the requirements of section 147(b) of the 1986 
Code if the average maturity (determined in accordance with 
section 147(bX2XA) of such Code) of the issue of which such bond 
is a part does not exceed 20 years. A bond issued to refund (or 
which is part of a series of bonds issued to refund) a bond 
described in the preceding sentence shall be treated as meeting 
the requirements of such section if the refunding bond has a 
maturity date not later than the date which is 20 years after the 
date on which the original bond was issued." 
(3) Paragraph (1) of section 1316(e) of the Reform Act is 
(A) by inserting "(and section 103(hX2XBXii) of the 1954 
Code)" after "1986 (Dode" the first place it appears, and 
(B) by inserting "(and section 103(bX16) of the 1954 Code)" 
after "1986 Ck)de in the last sentence. 
(4) Paragraph (2) of section 1316(g) of the Reform Act is 
amended— 
(A) by striking out "described in the paragraph (3)" in 
subparagraph (A) and inserting in lieu thereof 
issued to 
provide a facility described in paragraph (3)", and 
(B) by striking out "which paragraph (3)" in subpara-
graph (C) and inserting in lieu thereof "which such para-
graph (3)". 
(5) Paragraph (6) of section 1316(g) of the Reform Act is 
amended by inserting "(and the provisions of section 1314)" 
after "section 1301". 
(6) Paragraph (7) of section 1316(g) of the Reform Act is 
amended to read as follows: 
"(7) In the case of a bond described in section 632(d) of the Tax 
Reform Act of 1984— 
"(A) section 141 of the 1986 Code shall be applied without 
regard to subsection (aX2) and paragraphs (4) and (5) of 
subsection (b), 
"(B) paragraphs (1) and (2) of section 141(b) of the 1986 
Code shall be applied by substituting '25 percent' for '10 
percent' each place it appears, and 
"(C) section 1490?) of the 1986 Code shall not apply. 
This paragraph shall not apply to any bond issued after Decem-
ber 31,1990.'^ 
(7XA) Subparagraph (A) of section 1316(gX8) of the Reform Act 
is amended by inserting "and as having a carryforward purpose 
described in section 146(fX5) of such Code" after "the 1986 
Code" 
(B) The amendment made by subparagraph (A) shall apply 
26 USC 141 note. 
only with respect to carryforwards of volume cap for years after 
1986. 
(8) Paragraph (2) of section 1316(j) of the Reform Act is 
amended to read as follows: 
102 STAT. 3550 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(2) by adding at the end thereof the following new sentence: 
Florida. 
'In the case of refunding obligations not to exceed $100,000,000 
issued after October 21, 1986, by Dade County, Florida, for the 
purpose of advance refunding its Aviation Revenue Bonds 
(Series J), the first sentence of this paragraph shall be applied 
by substituting "the date which is 1 year after the date of the 
enactment of the Technical and Miscellaneous Revenue Act of 
1988" for "December 31, 1984" and the amendments made by 
section 1301 of the Tax Reform Act of 1986 shall not apply.''' 
26 use 141 note. 
(9) Paragraph (2) of section 1316(k) of the Reform Act is 
amended by striking out "$55,000,000 must be redeemed no 
later than November 1, 1987" and inserting in lieu thereof "no 
more than $55,000,000 shall be outstanding later than Novem-
ber 1,1987". 
(10) Section 1104 of the Mortgage Subsidy Bond Tax Act of 
1980 is amended by adding at the end of subsection (r) the 
following new sentence: 
"Section 148(f) of the Internal Revenue Code of 1986 and the amend-
ments made by section 1301 of the Tax Reform Act of 1986 shall not 
apply to any bonds described in paragraph (1) which may be issued 
as a result of the amendments made by the Tax Reform Act of 
1986." 
(11) Subsection (1) of section 1316 of the Reform Act is hereby 
repealed. 
Community 
(g) AMENDMENTS RELATED TO SECTION 1317 OF THE REFORM ACT.— 
development. 
(1) Subparagraph (J) of section 1317(2) of the Reform Act is 
26USC^rilnote 
amended by striking out "began construction in 1980" and 
inserting in lieu thereof ", a subsidiary of Sierra Pacific 
Resources, began in 1980 work to design, finance, construct, and 
operate". 
(2) Subparagraph (C) of section 1317(3) of the Reform Act is 
amended to read as follows: 
Baseball. 
"(C) A facility is described in this subparagraph if— 
Football. 
"(i) it is one or more stadiums to be used either by an 
Stadiums. 
American League baseball team or a National Football 
League team currently using a stadium in a city having 
a population in excess of 2,500,000 and described in 
section 146(dX3) of the 1986 Code, 
"(ii) the bonds to be used to provide financing for one 
or more such stadiums are issued by a political subdivi-
sion or a State agency pursuant to a resolution approv-
ing an inducement resolution adopted by a State 
agency on November 20, 1985, as it may be amended 
(whether or not the beneficiaries of such issue or issues 
are the beneficiaries (if any) specified in such induce-
ment resolution and whether or not the number of such 
stadiums and the locations thereof are as specified in 
such inducement resolution) or pursuant to P.A. 
84-1470 of the State in which such city is located (and 
by an agency created thereby), and 
"(iii) such stadium or stadiums are located in the city 
described in (i). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $250,000,000. In the case of 
any carryforward of volume cap for one or more stadiums 
described in the first sentence of this subparagraph, such 
carryforward shall be valid with respect to bonds issued for 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3551 
such stadiums notwithstanding any other provision of the 
1986 Code or the 1954 Code, and whether or not (i) there is a 
change in the number of stadiums or the beneficiaries or 
sites of the stadium or stadiums and (ii) the bonds are 
issued by either of the state agencies described in the first 
sentence of this subparagraph." 
(3XA) Subparagraph (P) of section 1317(3) of the Reform Act is 
amended— 
(i) by striking out "approved" and inserting in heu 
thereof "authorized", and 
(ii) by striking out "December 9, 1985" and inserting in 
Heu thereof "December 2,1985". 
(B) Section 1317(3XA) of the Reform Act is amended by strik-
ing out "domed". 
(C) Section 1317(3XU) of the Reform Act is amended by delet- California, 
ing "coliseum complex." and inserting in lieu thereof "coliseum Baseball, 
complex, or is a renovation of an existing stadium located in 
Oakland, California, and used by an American League baseball 
team." 
(D) Section 1317(3XW) of the Reform Act is amended by 
striking out "$225,000,000" and inserting "$25,000,000". 
(4) Paragraph (3) of section 1317 of the Reform Act is amended 
by adding at the end thereof the following new subparagraph: 
"(Z) A facility is described in this subparagraph if— 
"(i) such facility was a redevelopment project that 
was approved in concept by the city council sitting as 
the redevelopment agency in October 1984, and 
"(ii) $20,000,000 in funds for such facility was identi-
fied in a 5-year budget approved by the city redevelop-
ment agency on October 25,1984. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $80,000,000." 
(5) Paragraph (4) of section 1317 of the Reform Act is 
amended— 
(A) by striking out "1986. The bonds" and inserting in 
lieu thereof "1986, and the bonds", 
(B) by striking out "and" at the end the subparagraph 
(A), and 
(C) by adding "and" at the end of subparagraph (B). 
(6) Subparagraph (W) of section 1317(6) of the Reform Act is 
amended to read as follows: 
"(W) A project is described in this subparagraph if such 
project is— 
"(i) a part of the Kenosha Downtown Redevelopment 
project, and 
"(ii) located in an area bounded— 
"(I) on the east by the east wall of the Army 
(Dorps of Engineers Confined Disposal Facility 
(extended), 
"(II) on the north by 48th Street (extended), 
"(III) on the west by the present Chicago & 
Northwestern Railroad tracks, and 
"(IV) on the south by the north line of 
Eichelman Park (60th Street) (extended). 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $105,000,000." 
102 STAT. 3552 
PUBLIC LAW 100-647—NOV. 10, 1988 
California. 
(7) Paragraph (6) of section 1317 of the Reform Act is amended 
by redesignating subparagraph (X) as subparagraph (Z) and by 
inserting after subparagraph (W) the following new subpara-
graphs: 
"(X) A project is described in this subparagraph if a 
redevelopment plan for such project was approved by the 
city council of Bell Gardens, California, on June 12, 1979. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000. 
"(Y) Nothing in this paragraph shall be construed as 
having the effect of exempting from tax interest on any 
bond issued after June 10, 1987, if such interest would not 
have been exempt from tax were such bond issued on 
August 15,1986." 
(8) The last sentence of subparagraph (A) of section 1317(7) of 
the Reform Act is amended by inserting before the period "and 
section 149(dX2) of the 1986 Code shall not apply to bonds so 
treated". 
(9) Subparagraph (D) of section 1317(7) of the Reform Act is 
amended to read as follows: 
"(D) A facility is described in this subparagraph if— 
"(i) it is a convention, trade, or spectator facility, 
"(ii) a regional convention, trade, and spectator facili-
ties study committee was created before March 19, 
1985, with respect to such facility, and 
"(iii) feasibility and preliminary design consultants 
were hired on May 1, 1985, and October 31, 1985, with 
respect to such facility. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed the excess of $175,000,000 
over the amount of bonds to which paragraph (48XB) 
applies." 
(10) Clause (ii) of section 1317(7)(G) of the Reform Act is 
amended to read as follows: 
"(ii) such facility's location was approved in Decem-
ber 1985 by a task force created jointly by the Governor 
of the State within which such facility will be located 
and the mayor of the capital city of such State, and". 
(11) Subparagraph (J) of section 1317(7) of the Reform Act is 
amended— 
(A) by striking out "civic festival" in clause (i) and insert-
ing in lieu thereof "aquafestival", 
(B) by striking out clause (ii) and inserting in lieu thereof 
the following: 
"(ii) a referendum was held on April 6,1985, in which 
voters permitted the city council to lease 130 acres of 
dedicated parkland for the purpose of constructing 
such facility, and", and 
(C) by striking out "$5,000,000" and inserting in lieu 
thereof "$10,000,000". 
(12) Subparagraph (E) of section 1317(9) of the Reform Act is 
amended by striking out "March 5, 1985" and inserting in lieu 
thereof "March 6,1985". 
(13) Clause (iii) of section 1317(9XJ) of the Reform Act is 
amended by striking out all that precedes "by the governor" 
and inserting in lieu thereof the following: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3553 
"(iii) such facility's location was approved in Decem-
ber 1985 by a task force created jointly". 
(14) Subparagraph (A) of section 1317(11) of the Reform Act is 
amended by striking out "and section 142(a)" and inserting in 
lieu thereof "in section 142(a)". 
(15) Subparagraph (C) of section 1317(11) of the Reform Act is 
amended to read as follows: 
"(C) A facility is described in this subparagraph if it is 
described in section 1865(cX2XC) of this Act." 
(16) Subparagraph (X) of section 1317(13) of the Reform Act is 
amended by striking out the last sentence. 
(17) Paragraph (13) of section 1317 of the Reform Act is 
amended by adding at the end thereof the following new sub-
paragraphs: 
"(AA) A residential rental property project is described in 
this subparagraph if it is the Carriage Trace residential 
rental project in Clinton, Tennessee. The aggregate face 
amount of bonds to which this subparagraph applies shall 
: not exceed $10,000,000. 
"(BB) A residential rental property project is described in 
this subparagraph if— 
"(i) a contract to purchase such property was dated 
as of August 9,1985, 
"(ii) there was an inducement resolution adopted on 
September 27, 1985, for the issuance of obligations to 
finance such property, 
"(iii) there was a State court final validation of such 
financing on November 15,1985, and 
"(iv) the certificate of nonappeal from such valida-
tion was available on December 15,1985. 
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $27,750,000." 
(18) Paragraph (14) of section 1317 of the Reform Act is 
amended by striking out "$90,000,000" and inserting in lieu 
thereof "$130,000,000" and by inserting "incorporated on Feb-
ruary 20, 1985" before the period at the end of the 1st sentence. 
(19) Subparagraph (B) of section 1317(15) of the Reform Act is 
amended— 
(A) by striking out all that follows "agreement with" in 
clause (i) and inserting in lieu thereof "an underwriter to 
provide planning and financial guidance for a possible bond 
issue, and", and 
(B) by striking out "certificates" in clause (ii) and insert-
ing in lieu thereof "bond issue" 
(20) Paragraph (16) of section 1317 of the Reform Act is 
amended by striking out the last sentence. 
(21) Clause (i) of section 1317(19XD) of the Reform Act is 
amended by striking out "light rail transitway" and inserting in 
lieu thereof "fixed guideway". 
(22) Paragraph (20) of section 1317 of the Reform Act is 
amended by striking out "Section 148(f)" and inserting in lieu 
thereof "Subsections (cX2) and (f) of section 148". 
(23) Subparagraph (B) of section 1317(21) of the Reform Act is 
amended— 
(A) by striking out "Subsection (c)" and inserting in lieu 
thereof "Subsections (cX2)", and 
Tennessee. 
Real property. 
Contracts. 
102 STAT. 3554 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) by striking out "103A(gX5XC)l" and inserting in lieu 
thereof "103A(gX5XC)". 
(24) Paragraph (22) of section 1317 of the Reform Act is 
amended to read as follows: 
"(22) DOWNTOWN REDEVELOPMENT PROJECT.—Subsection (b) of 
section 626 of the Tax Reform Act of 1984 is amended by adding 
at the end thereof the following new paragraph: 
" '(7) EXCEPTION FOR CERTAIN DOWNTOWN REDEVELOPMENT 
PROJECT.—The amendments made by this section shall not 
apply to any obligation which is issued as part of an issue 95 
percent or more of the proceeds of which are to be used to 
provide a project to acquire and redevelop a downtown area i
f
— 
" '(A) on August 15, 1985, a downtown redevelopment 
authority adopted a resolution to issue obligations for such 
project, 
" '(B) before September 26, 1985, the city expended, or 
entered into binding contracts to expend, more than 
$10,000,000 in connection with such project, and 
" '(C) the State supreme court issued a ruling regarding 
the proposed financing structure for such project on Decem-
ber 11,1985. 
The aggregate face amount of obligations to which this para-
graph applies shall not exceed $85,000,000 and such obligations 
must be issued before January 1,1992.' " 
(25) Subparagraph (A) of section 1317(24) of the Reform Act is 
amended by adding at the end thereof the following: "The last 
paragraph of this section shall not apply to the treatment under 
the Drecedinsf sentence 
(26XA) Clause (i) of section 1317(25XA) of the Reform Act is 
amended by striking out "3 counties" and inserting in lieu 
thereof "1 or more of 3 counties". 
(B) Clause (i) of section 1317(25XB) of the Reform Act is 
amended by adding at the end thereof the following new sen-
tence: "For purposes of applying section 146(k) of the 1986 Code, 
the public utility facility described in subparagraph (A) shall be 
treated as described in paragraph (2) of such section and such 
paragraph shall be applied without regard to the requirement 
that the issuer establish that a State s share of the use of a 
facility (or its output) will equal or exceed the State's share of 
the private activity bonds issued to finance the facility." 
(27) Subparagraph (I) of section 1317(27) of the Reform Act is 
amended by adding at the end thereof the following: "For 
purposes of determining whether any bond to which this 
subparagraph applies is a qualified small issue bond, there shall 
not be taken into account under section 144(a) of the 1986 Code 
capital expenditures with respect to any facility of the United 
Stetes Government and there shall not be t£iken into account 
any bond allocable to the United States Government." 
(28) Clause (i) of section 1317(29XB) of the Reform Act is 
amended by striking out all that follows "1993" and inserting in 
lieu thereof ", by the Stete of (Connecticut, and". 
(29) Subparagraph (D) of section 1317(29) of the Reform Act is 
amended by striking out "the net proceeds" and inserting in 
lieu thereof "the proceeds". 
(30) Section 1317(33XAXii) of the Reform Act is amended— 
(A) bv striking out "on" and inserting in lieu thereof 
"dated' each place it appears, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3555 
(B) by inserting "dated on December 1, 1985" after 
"(Series 1985A and 1985B)" in subclause (III). 
(31) Subparagraph (B) of section 1317(33) of the Reform Act is 
amended— 
(A) by striking out "and before August 7, 1988,", and 
(B) bv adding at the end thereof the following new sen-
tence: The aggregate face amount of bonds to which this 
subparagraph applies shall not exceed $90,000,000." 
(32) Subparagraph (G) of section 1317(33) of the Reform Act is 
amended by striking out "subparagraph (H)" and inserting in 
lieu thereof "subparagraph (F)'. 
(33) Subparagraph (H) of section 1317(33) of the Reform Act is 
amended— 
(A) by striking out clause (ii) and inserting in lieu thereof 
the following: 
"(ii) the proceeds of the issue are to be used to 
finance projects (to be determined by such university 
and the issuer) which are similar to those projects 
intended to be financed by bonds that were the subject 
of a request transmitted to Congress on November 7, 
1985", and 
(B) by adding at the end thereof the following: "Bonds to 
which this subparagraph applies shall be treated as quali-
fied 501(cX3) bonds if such bonds would not (if issued on 
August 15, 1986) be industrial development bonds (as de-
fined in section 103(bX2) of the 1954 Code), and section 147(f) 
of the 1986 Code shall not apply to the issue of which such 
bonds are a part. Bonds issued to finance facilities described 
in this subparagraph shall be treated as issued to finance 
such facilities notwithstanding the fact that a period in 
excess of 1 year has expired since the facilities were placed 
in service. 
(34) Subparagraph (K) of section 1317(33) of the Reform Act is 
amended— 
(A) by striking out "the issue is" in clause (i) and insert-
ing in lieu thereof "the issue or issues are", 
(B) by inserting "at least" before "900 units", 
(C) by striking out "2,000 square feet" and inserting in 
lieu thereof "245,000 square feet", and 
(D) by striking out ^'$150,000,000" and inserting in lieu 
thereof "$112,000,000". 
(35) Paragraph (33) of section 1317 of the Reform Act is 
amended by striking out subparagraphs (M), (N), and (O) and 
inserting in lieu thereof the following new subparagraphs: 
"(M) Proceeds of an issue are described in this subpara- 
Health care 
graph if such issue is issued on behalf of the Society of the 
facilities. 
New York Hospital to finance completion of a project com-
menced by such hospital in 1981 for construction of a 
diagnostic and treatment center or to refund bonds issued 
on behalf of such hospital in connection with the construc-
tion of such diagnostic and treatment center or to finance 
construction and renovation projects associated with an 
inpatient psychiatric care facility. The aggregate face 
amount of bonds to which this subparagraph applies shall 
not exceed $150,000,000. 
"(N) Any bond to which section 145(b) of the 1986 Ckxie 
does not apply by reason of this paragraph (other than 
102 STAT. 3556 
PUBLIC LAW 100-647—NOV. 10,1988 
California. 
Washington. 
subparagraph (A) thereof) shall be taken into account in 
determining whether such section applies to any later issue. 
"(O) In the case of any refunding bond— 
"(i) to which any subparagraph of this paragraph 
applies, and 
"(ii) to which the last sentence of section 1313(cX2) 
applies, 
such bond shall be treated as having such subparagraph 
apply (and the refunding bond shall be treated for purposes 
of such section as issued before January 1, 1986, and as not 
being an advance refunding) unless the issuer elects the 
opposite result." 
(36) Paragraph (36) of section 1317 of the Reform Act is 
amended by striking out "$80,000,000" and inserting in lieu 
thereof "$400,000,000". 
(37) Paragraph (38) of section 1317 of the Reform Act is 
amended by striking out "and sections 148 and 149". 
(38) Paragraphs (39) and (40) of section 1317 of the Reform Act 
are amended to read as follows: 
"(39) CERTAIN BONDS TREATED AS QUAUFIED 501(CX3) BONDS.— 
A bond issued as part of an issue shall be treated for purposes of 
part IV of subchapter B of chapter 1 of the 1986 Code as a 
qualified 501(cX3) bond if— 
"(A) such bond would not (if issued on August 15,1986) be 
an industrial development bond (as defined in section 
103(bX2) of the 1954 Code), and 
"(B) such issue was approved by city voters on January 
19, 1985, for construction or renovation of facilities for the 
cultural and performing arts. 
The aggregate face amount of bonds to which this par£igraph 
applies shall not exceed $5,000,000. 
"(40) CERTAIN UBRARY BONDS.—In the case of a bond issued 
before January 1, 1986, by the City of Los Angeles Community 
Redevelopment Agency to provide the library and related struc-
tures associated with the City of Los Angeles Central Library 
Project, the ownership and use of the land and facilities associ-
ated with such project by persons which are not governmental 
units (or payments from such persons) shall not adversely affect 
the exclusion from gross income under section 103 of the 1954 
Code of interest on such bonds." 
(39) Paragraph (41) of section 1317 of the Reform Act is 
amended to read as follows: 
"(41) 
CERTAIN REFUNDING OBLIGATIONS FOR CERTAIN POWER 
FACILITIES.—With respect to 2 net billed nuclear power facilities 
located in the State of Washington on which construction has 
been suspended, the requirements of section 147(b) of the 1986 
Code shall be treated as satisfied with respect to refunding 
bonds issued before 1992 if— 
"(A) each refunding bond has a maturity date not later 
than the maturity date of the refunded bond, and 
"(B) the facilities have not been placed in service as of the 
date of issuance of the refunding bond. 
The aggregate face amount of bonds to which this paragraph 
applies shall not exceed $2,000,000,000. Section 146 of the 1986 
Code and the last paragraph of this section shall not apply to 
bonds to which this paragraph applies." 
->?*• 5^>P 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3557 
(40) Paragraph (43) of section 1317 of the Reform Act is 
amended by inserting before the period "and the Internal Reve-
nue (Dode of 1986 shall be applied without regard to section 
149(dX2)." 
(41) Paragraph (44) of section 1317 of the Reform Act is 
amended— 
(A) by inserting after "1986 CJode" the following: "and the 
temporary period limitation of section 148(cX2) of the 1986 
Code", 
(B) by striking out "$100,000,000" and inserting in lieu 
thereof "$200,000,000", and 
(C) by striking out "Hospitals Bond Pool" in the second 
item in the table and inserting in lieu thereof "Hospital 
Equipment Loan Council". 
(42) Paragraph (48) of section 1317 of the Reform Act is 
amended by striking out "either" in the material preceding 
subparagraph (A) and inserting in lieu thereof "any". 
(43) Subparagraph (B) of section 1317(48) of the Reform Act is 
amended by striking out "subparagraph (O)" and inserting in 
lieu thereof "paragraph (6XU)". 
(44) Paragraph (48) of section 1317 of the Reform Act is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) A facility which is part of a project described in 
paragraph (6XO). The aggregate face amount of bonds to 
which 
this 
subparagraph 
applies 
shall 
not 
exceed 
$20,000,000." 
(45) Paragraph (49) of section 1317 of the Reform Act is 
amended— 
(A) by striking out "149(d)" and inserting in lieu thereof 
"149(dX2)", and 
(B) by inserting "United States" before "Housing Act of 
1937". 
(46) Paragraph (50) of section 1317 of the Reform Act is 
amended to read as follows: 
"(50) TRANSITIONED BONDS SUBJECT TO CERTAIN RULES.—In the 
case of any bond to which any provision of this section applies, 
except as otherwise expressly provided, sections 103 and 103A of 
the 1954 Code shall be applied as if the requirements of sections 
147(g), 148, and 149(d) of the 1986 Code were included in each 
such section." 
(47) Paragraph (51) of section 1317 of the Reform Act is 
amended— 
(A) by striking out "Section 141(a)" and inserting in lieu 
thereof "Section 1410))", and 
(B) by striking out "141(aX3)" and inserting in lieu 
thereof "14ia)X3)^. 
(48) Paragraph (52) of section 1317 of the Reform Act is 
amended by striking out "This section" and inserting in lieu 
thereof "Except as otherwise provided in this section, this sec-
tion". 
(49) The material preceding subparagraph (A) of section 
1317(2) of the Reform Act is amended by striking out "section 
10303X4XC)" and inserting in lieu thereof "section 103(bX4XF)". 
(50) Clause (ii) of section 1317(27XH) of the Reform Act is 
amended by striking out "November 14, 1985" and inserting in 
lieu thereof "November 13,1985". 
102 STAT. 3558 
PUBLIC LAW 100-647—NOV. 10, 1988 
(51) Subparagraph (I) of section 1317(33) of the Reform Act is 
amended by striking out "November 11, 1985" gind inserting in 
lieu thereof "November 1,1985". 
(52) Subparagraph (J) of section 1317(3) of the Reform Act is 
amended by striking out "October 29" in clause (iv) and insert-
ing in lieu thereof "November 5". 
(h) AMENDMENTS RELATED TO SECTION 1318 OF THE REFORM ACT.— 
26 use 141 note. Section 1318 of the Reform Act (relating to definitions, etc., relating 
to effective dates and transitional rules) is amended— 
(1) by inserting "(a) DEFINITIONS.—" before "For purposes of 
this subtitle—", and 
(2) by adding at the end thereof the following new subsections: 
"(b) MINIMUM TAX TREATMENT.— 
"(1) IN GENERAL.—Any bond described in paragraph (2) shall 
not be treated as a private activity bond for purposes of section 
57 of the 1986 Clode unless such bond would (if issued on August 
7,1986) be— 
"(A) an industrial development bond (as defined in sec-
tion 103(bX2) of the 1954 Code), or 
"(B) a private loan bond (as defined in section 103(oX2XA) 
of the 1954 Code, without regard to any exception from such 
definition other them section 103(oX2XC) of such (Dode). 
"(2) BONDS DESCRIBED.—For purposes of paragraph (1), a bond 
is described in this paragraph if— 
"(A) the amendments made by section 1301 do not apply 
to such bond by reason of section 1312 or 1316(g), 
"(B) any provision of section 1317 applies to such bond, or 
"(C) the proceeds of such bond are used to refund any 
bond referred to in subparagraph (A) or (B) (or any bond 
which is part of a series of refundings of such a bond) if the 
requirements of paragraphs (1), (2), and (3) of subsection (c) 
are met with respect to the refunding bond. 
"(c) CURRENT REFUNDINGS NOT TAKEN INTO ACCOUNT IN APPLYING 
AGGREGATE LIMIT ON BONDS TO WHICH TRANSITIONAL RULES 
APPLY.—The limitation on the aggregate face amount of bonds to 
which any provision of section 1316(g) or 1317 applies shall not be 
reduced by the face amount of any bond the proceeds of which are to 
be used exclusively to refund any bond to which such provision 
applies (or any bond which is part of a series of refundings of such 
bond) if— 
"(1) the average maturity date of the issue of which the 
refunding bond is a part is not later than the average maturity 
date of the bonds to be refunded by such issue, 
"(2) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond, and 
"(3) the net proceeds of the refunding bond are used to redeem 
the refunded bond not later than 90 days after the date of the 
issuance of the refunding bond. 
For purposes of paragraph (1), average maturity shall be determined 
in accordemce with section 147(bX2XA) of the 1986 CJode. No limita-
tion in section 1316(g) or 1317 on the period during which bonds may 
be issued under such section shall apply to any refunding bond 
which meets the requirements of this subsection. 
"(d) SPECIAL RULE PERMITTING CARRYFORWARD OF VOLUME CAP 
FOR CERTAIN TRANSITIONED PROJECTS.—A bond to which section 1312 
or 1317 applies shall be treated as having a carryforward purpose 
described in section 146(fK5) of the 1986 (Jode, and the requirement 
-Hi^^v 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3559 
of section 146(fX2XA) of the 1986 Code shall be treated as met if such 
project is identified with reasonable specificity. The preceding sen-
tence shall not apply so as to permit a carryforward with respect to 
any qualified small issue bond." 
(i) APPUCATION TO 501 (c) (3) BONDS.—In accordance with section 
26 use 501 note. 
1302 of the Reform Act, each amendment and other provision of this 
Act which applies to private activity bonds shall, unless otherwise 
expressly provided, apply to qualified 501(cX3) bonds. 
SEC. 1014. AMENDMENTS RELATED TO TITLE XIV OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1401 OF THE REFORM ACT.— 
(1) Subsection (e) of section 672 of the 1986 Code is amended to 
read as follows: 
"(e) GRANTOR TREATED AS HOLDING ANY POWER OR INTEREST OF 
GRANTOR'S SPOUSE.— 
"(1) IN GENERAL.—For purposes of this subpart, a grantor 
shall be treated as holding any power or interest held by— 
"(A) any individual who was the spouse of the grantor at 
the time of the creation of such power or interest, or 
"(B) any individual who became the spouse of the grantor 
after the creation of such power or interest, but only with 
respect to periods after such individual became the spouse 
of the grantor. 
"(2) MARITAL STATUS.—For purposes of paragraph (IXA), an 
individual legally separated from his spouse under a decree of 
divorce or of separate maintenance shall not be considered as 
married." 
(2) Paragraph (3) of section 675 of the 1986 (Dode is amended 
by adding at the end thereof the following new sentence: 
"For periods during which an individual is the spouse of the 
grantor (within the meaning of section 672(eX2)), any reference 
in this paragraph to the grantor shall be treated as including a 
reference to such individual." 
(3) Subsection (c) of section 674 of the 1986 (Dode is amended by 
adding at the end thereof the following new sentence: "For 
periods during which an individual is the spouse of the grantor 
(within the meaning of section 672(eX2)), any reference in this 
subsection to the grantor shall be treated as including a ref-
erence to such individual." 
(b) AMENDMENT RELATED TO SECTION 1402 OF THE REFORM ACT.— 
Section 673 of the 1986 Code is amended by adding at the end 
thereof the following new subsections: 
"(c) 
SPECIAL RULE FOR DETERMINING VALUE OF REVERSIONARY 
INTEREST.—For purposes of subsection (a), the value of the grantor's 
reversionary interest shall be determined by assuming the maxi-
mum exercise of discretion in favor of the grantor. 
"(d) POSTPONEMENT OF DATE SPECIFIED FOR REACQUISITION.—Any 
postponement of the date specified for the reacquisition of posses-
sion or enjoyment of the reversionary interest shall be treated as a 
new transfer in trust commencing with the date on which the 
postponement is effective and terminating with the date prescribed 
by the postponement. However, income for any period shall not be 
included in the income of the grantor by reason of the preceding 
sentence if such income would not be so includible in the absence of 
such postponement." 
(c) AMENDMENTS RELATED TO SECTION 1403 OF THE REFORM ACT.— 26 use 645 note. 
102 STAT. 3560 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) If a beneficiary of a trust to which section 664 of the 1986 
Code applies elects (at such time and in such manner as the 
Secretary of the Treasury or his delegate may prescribe) to have 
this paragraph apply, such beneficiary shall be entitled to the 
benefits of section 1403(cX2) of the Reform Act with respect to 
amounts included in gross income under section 664(b) of the 
1986 Code in the same manner as if such amounts were included 
in gross income under section 652(a) of the 1986 Code. 
(2) Any trust beneficiary may elect (at such time and in such 
manner as the Secretary of the Treasury or his delegate may 
prescribe) to waive the benefits of section 1403(cX2) of the 
Reform Act. 
(3XA) For purposes of determining the gross income of any 
pass-thru entity, such pass-thru entity shall not be allowed the 
benefits of section 806(eX2XC) (other than with respect to income 
from a common trust fund) or 1403(cX2) of the Reform Act if 
such pass-thru entity is required to change its taxable year by 
reason of the amendments made by section 806 or 1403 of the 
Reform Act. 
(B) For purposes of subparagraph (A), the term "pass-thru 
entity" means any trust, partnership, S corporation, or common 
trust fund. 
(4) If any trust was required to change its taxable year by the 
amendments made by section 1403 of the Reform Act, such 
change shall be treated as initiated by such trust and approved 
by the Secretary of the Treasury or his delegate, 
(d) AMENDMENTS RELATED TO SECTION 1404 OF THE REFORM ACT.— 
26 use 6654. 
(D Subsection (a) of section 1404 of the Reform Act is 
amended— 
(A) by striking out "Subsection (k) of section 6654" and 
inserting in lieu thereof "Subsection (1) of section 6654, as 
amended by section 1841 of this Act", and 
(B) by striking out " '(k) TRUSTS" and inserting in lieu 
thereof "'(1) TRUSTS". 
(2) Subsection (1) of section 6654 of the 1986 Code is amended 
to read as follows: 
"(1) ESTATES AND TRUSTS.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, this subsection shall apply to any estate or trust. 
"(2) 
EXCEPTION FOR ESTATES AND CERTAIN TRUSTS.—With 
respect to any taxable year ending before the date 2 years after 
the date of the decedent's death, this section shall not apply 
to— 
"(A) the estate of such decedent, or 
"(B) any trust— 
"(i) all of which was treated (under subpart E of part 
I of subchapter J of chapter 1) as owned by the 
decedent, and 
"(ii) to which the residue of the decedent's estate will 
pass under his will. 
"(3) EXCEPTION FOR CHARITABLE TRUSTS AND PRIVATE FOUNDA-
TIONS.—This section shall not apply to any trust which is sub-
ject to the tax imposed by section 511 or which is a private 
foundation. 
"(4) SPECIAL RULE FOR ANNUAUZATIONS.—In the case of any 
estate or trust to which this section applies, subsection 
(d)(2XBXi) shall be applied by substituting 'ending before the 
-^ii^ -
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3561 
date 1 month before the due date for the installment' for 
'ending before the due date for the installment'." 
(3) Subsection (g) of section 643 of the 1986 Code is amended— 
(A) by striking out the last sentence of paragraph (1), and 
(B) by amending paragraph (2) to read as follows: 
"(2) TIME FOR MAKING ELECTION.—An election under para-
graph (1) shall be made on or before the 65th day after the close 
of the taxable year of the trust and in such manner as the 
Secretary may prescribe." 
(4) Subsection (g) of section 643 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) EXTENSION TO LAST YEAR OF ESTATE.—In the case of a 
taxable year reasonably expected to be the last taxable year of 
an estate— 
"(A) any reference in this subsection to a trust shall be 
treated as including a reference to an estate, and 
"(B) the fiduciary of the estate shall be treated as the 
trustee." 
(e) AMENDMENTS RELATED TO SECTION 1411 OF THE REFORM ACT.— 
(1) Paragraph (3) of section l(i) of the 1986 Code is amended by 
adding at the end thereof the following new subparagraph: 
"(C) COORDINATION WITH SECTION 644.—If tax is imposed 
under section 644(aXl) with respect to the sale or exchange 
of any property of which the parent was the transferor, for 
purposes of appljdng subparagraph (A) to the taxable year 
of the parent in which such sale or exchange occurs— 
"(i) taxable income of the parent shall be increased 
by the amount treated as included in gross income 
under section 644(aX2XAXi), and 
"(ii) the amount described in subparagraph (AXii) 
shall be increased by the amount of the excess referred 
to in section 644(aX2XA)." 
(2) The last sentence of subparagraph (A) of section l(iX3) of 
the 1986 Code is amended by striking out "any deduction or 
credit" and inserting in lieu thereof "any exclusion, deduction, 
or credit". 
(3) Subparagraph (A) of section l(iX4) of the 1986 Code is 
amended— 
(A) by striking out "gross income for the taxable year 
which is not earned income" in clause (i) and inserting in 
lieu thereof "adjusted gross income for the taxable year 
which is not attributable to earned income", 
(B) by striking out "his deduction" in clause (iiXH) and 
inserting in lieu thereof "his deductions", 
(C) by striking out "the deductions allowed" in clause 
(ii)(II) and inserting in lieu thereof "the itemized deductions 
allowed", and 
(D) by striking out "gross income" in clause (iiXII) and 
inserting in lieu thereof "adjusted gross income". 
(4) Clause (iv) of section 6103(eXlXA) of the 1986 Code is 
amended by striking out "section l(j)" and inserting in lieu 
thereof "section l(i) or 590')". 
(5XA) Section 59 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(j) TREATMENT OF UNEARNED INCOME OF MINOR CHILDREN.— 
102 STAT. 3562 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) LIMITATION ON EXEMPTION AMOUNT.—In the case of a 
child to whom section l(i) appUes, the exemption amount for 
purposes of section 55 shall not exceed the sum of— 
"(A) such child's earned income (as defined in section 
911(dX2)) for the taxable year, plus 
"(B) $1,000. 
"(2) LIMITATION BASED ON PARENTAL MINIMUM TAX.— 
"(A) IN GENERAL.—In the case of a child to whom section 
l(i) applies, the amount of the tax imposed by section 55 
shall not exceed such child's share of the allocable parental 
minimum tax. 
"(B) ALLOCABLE PARENTAL MINIMUM TAX.—For purposes 
of this paragraph, the term 'allocable parental minimum 
tax' means the excess of^ 
"(i) the tax which would be imposed by section 55 on 
the parent if— 
"(I) the amount of the parent's tentative mini-
mum tax were increased by the aggregate of the 
tentative minimum taxes of all children of the 
parent to whom section l(i) applies, and 
"(II) the amount of the parent's regular tax were 
increased by the aggregate of the regular taxes of 
all children of the parent to whom section l(i) 
applies, over 
"(ii) the tax imposed by section 55 on the parent 
without regard to this subparagraph. 
"(C) CHILD SHARE.—A child's share of any allocable paren-
tal minimum tax shall be determined under rules similar to 
the rules of section l(iX3XB). 
"(D) OTHERS RULES MADE APPUCABLE.—For purposes of 
this paragraph, rules similar to the rules of paragraphs (5) 
and (6) of section l(i) shall apply." 
26 use 59 note. 
(B) The amendment made by subparagraph (A) shall 
apply to taxable years beginning after December 31, 1988. 
(6) Subparagraph (A) of section l(iX5) of the 1986 Code is 
amended by striking out "custodial parent" and inserting in 
lieu thereof "custodial parent (within the meaning of section 
152(e))". 
(7) Paragraph (3) of section l(i) of the 1986 Code is amended by 
adding at the end thereof the following new subparagraph: 
"(C) SPECIAL RULE WHERE PARENT HAS DIFFERENT TAXABLE 
YEAR.—Except as provided in regulations, if the parent does 
not have the same taxable year as the child, the allocable 
parental tax shall be determined on the basis of the taxable 
year of the parent ending in the child's taxable year." 
(£) AMENDMENT RELATED TO SECTION 1421 OF THE REFORM ACT.— 
26 use 2032A 
Subsection (a) of section 1421 of the Reform Act is amended by 
note. 
striking out "within the time prescribed for filing such return 
(including extensions thereof)". 
(g) AMENDMENTS RELATED TO SECTION 1431 OF THE REFORM ACT.— 
(1) Subsection (a) of section 2611 of the 1986 Code is amended 
by striking out "generation-skipping transfers" and inserting in 
lieu thereof "generation-skipping transfer". 
(2) Subsection (b) of section 2611 of the 1986 Code is amended 
by striking out paragraph (1) and by redesignating paragraphs 
(2) and (3) as paragraphs (1) and (2), respectively. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3563 
(3XA) Section 2642 of the 1986 Ckxie is amended by adding at 
the end thereof the following new subsection: 
(e) SPECIAL RULES FOR CHARITABLE LEAD ANNUITY TRUSTS.— 
"(1) IN GENERAL.—For purposes of determining the inclusion 
ratio for any charitable lead annuity trust, the applicable frac-
tion shall be a fraction— 
"(A) the numerator of which is the adjusted GST exemp-
tion, and 
"OB) the denominator of which is the value of all of the 
property in such trust immediately after the termination of 
the charitable lead annuity. 
"(2) ADJUSTED GST EXEMPTION.—For purposes of paragraph (1), 
the adjusted GST exemption is an amount equal to the GST 
exemption allocated to the trust increased by interest deter-
mined— 
"(A) at the interest rate used in determining the amount 
of the deduction under section 2055 or 2522 (as the case may 
be) for the charitable lead annuity, and 
"(B) for the actual period of the charitable lead annuity. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) CHARITABLE LEAD ANNUITY TRUST.—The term 'chari-
table lead annuity trust' means any trust in which there is 
a charitable lead annuity. 
"(B) CHARITABLE LEAD ANNUITY.—The term 'charitable 
lead annuity' means any interest in the form of a guaran-
teed annuity with respect to which a deduction w£is allowed 
under section 2055 or 2522 (as the case may be). 
"(4) COORDINATION WITH SUBSECTION (d).—Under regulations, 
appropriate adjustments shall be made in the application of 
subsection (d) to take into account the provisions of this subsec-
tion." 
(B) The amendment made by subparagraph (A) shall apply for 
26 use 2642 
purposes of determining the inclusion ratio with respect to note. 
property transferred after October 13,1987. 
(4XA) Section 2642 of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(f) SPECIAL RULES FOR CERTAIN INTER VIVOS TRANSFERS.—Except Real property. 
as provided in regulations— 
"(1) IN GENERAL.—For purposes of determining the inclusion 
ratio, if— 
"(A) an individual makes an inter vivos transfer of prop-
erty, and 
"(B) the value of such property would be includible in the 
gross estate of such individual under chapter 11 if such 
individual died immediately after making such transfer 
(other than by reason of section 2035), 
any allocation of GST exemption to such property shall not be 
made before the close of the estate tax inclusion period (and the 
value of such property shall be determined under paragraph 
(2)). If such transfer is a direct skip, such skip shall be treated as 
occurring as of the close of the estate tsoc inclusion period. 
"(2) VALUATION.—In the case of any property to which para-
graph (1) applies, the value of such property sh^l be— 
"(A) tf such property is includible in the gross estate of 
the transferor (other than by reason of section 2035), its 
value for purposes of chapter 11, or 
102 STAT. 3564 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) if subparagraph (A) does not apply, its value as of the 
close of the estate tax inclusion period (or, if any allocation 
of GST exemption to such property is not made on a timely 
filed gift t£ix return for the calendar year in which such 
period ends, its value as of the time such allocation is filed 
with the Secretary). 
"(3) ESTATE TAX INCLUSION PERIOD.—For purposes of this 
subsection, the term 'estate tax inclusion period' means any 
period after the transfer described in paragraph (1) during 
which the value of the property involved in such transfer would 
be includible in the gross estate of the transferor under chapter 
11 if he died. Such period shall in no event extend beyond the 
earlier of— 
"(A) the date on which there is a generation-skipping 
transfer with respect to such property, or 
"(B) the date of the death of the transferor. 
"(4) TREATMENT OF SPOUSE.—Except as provided in regula-
tions, any reference in this subsection to an individual or 
transferor shall be treated as including a reference to the 
spouse of such individual or transferor. 
"(5) COORDINATION WITH SUBSECTION (d).—Under regulations, 
appropriate adjustments shall be made in the application of 
subsection (d) to take into account the provisions of this subsec-
tion." 
(B) Paragraph (2) of section 2642(a) of the 1986 Code is 
amended by striking out the last sentence. 
(C) Subparagraph (A) of section 2642(bX2) of the 1986 Code is 
amended by inserting before the period at the end thereof the 
following: "; except that, if the requirements prescribed by the 
Secretary respecting allocation of post-death changes in value 
are not met, the value of such property shall be determined as 
of the time of the distribution concerned." 
(D) Subsection (b) of section 2642 of the 1986 Code is amended 
by inserting "Except as provided in subsection (f)—" imme-
diately after the subsection heading. 
(E) Subparagraph (B) of section 2642(bX2) of the 1986 Code is 
amended— 
(i) by striking out "at or after the death of the transferor" 
and inserting in lieu thereof "to property transferred as a 
result of the death of the transferor"; and 
(ii) by striking out "AT OR AFTER DEATH" in the subpara-
graph heading and inserting in lieu thereof "TO PROPERTY 
TRANSFERRED AT DEATH". 
(F) Paragraph (3) of section 2642(b) of the 1986 Code is 
amended— 
(i) by striking out "to any property is made during the life 
of the transferor but is" and inserting in lieu thereof "to 
any property not transferred as a result of the death of the 
transferor is"; and 
(ii) by striking out "INTER VIVOS ALLOCATIONS" in the 
subparagraph heading and inserting in lieu thereof 
"ALLOCATIONS TO INTER VIVOS TRANSFERS". 
(5XA) Paragraph (1) of section 2613(a) of the 1986 Code is 
amended by striking out "a person assigned" and inserting in 
lieu thereof "a natural person assigned". 
(B) Subsection (c) of section 2612 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3565 
"(3) LOOK-THRU RULES NOT TO APPLY.—Solely for purposes of 
determining whether any transfer to a trust is a direct skip, the 
rules of section 2651(eX2) shall not apply." 
(6) Subsection (c) of section 2652 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) CERTAIN SUPPORT OBUGATIONS DISREGARDED.—The fact 
Gifts and 
that income or corpus of the trust may be used to satisfy an property, 
obligation of support arising under State law shall be dis-
regarded in determining whether a person has an interest in 
the trust, if— 
"(A) such use is discretionary, or 
"(B) such use is pursuant to the provisions of any State 
law substantially equivalent to the Uniform Gifts to Minors 
Act." 
(7) Paragraph (2) of section 2612(c) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "If any transfer of property to a trust would be a direct 
skip but for this paragraph, any generation assignment under 
this paragraph shall apply also for purposes of applying this 
chapter to transfers from the portion of the trust attributable to 
such property." 
(8) Paragraph (2) of section 2652(c) of the 1986 Code is 
amended— 
(A) by striking out "NOMINAL INTERESTS" in the para-
graph heading and inserting in lieu thereof "INTERESTS", 
and 
(B) by striking out "the tax" and inserting in lieu thereof 
"any tax". 
(9) Paragraph (1) of section 2652(a) of the 1986 Code is 
amended— 
(A) by striking out "a transfer of a kind" each place it 
appears and inserting in lieu thereof "any property", and 
(B) by adding at the end thereof the following new sen-
tence: 
"An individual shall be treated as transferring any property with 
respect to which such individual is the transferor." 
(10) Section 2663-of the 1986 Code is amended by striking out 
"and" at the end of paragraph (1), by striking out the period at 
the end of paragraph (2) and inserting in lieu thereof ", and", 
and by adding at the end thereof the following new paragraph: 
"(3) regulations providing for such adjustments as may be 
necessary to the application of this chapter in the case of any 
arrangement which, although not a trust, is treated as a trust 
under section 2652(b)." 
(11) Paragraph (3) of section 2651(e) of the 1986 Code is 
amended to read as follows: 
"(3) TREATMENT OF CERTAIN CHARITABLE ORGANIZATIONS AND 
GOVERNMENTAL ENTmES.—Any— 
"(A) organization described in section 511(aX2), 
"(B) charitable trust described in section 511(bX2), and 
"(C) governmental entity, 
shall be assigned to the transferor's generation." 
(12) Paragraph (2) of section 2654(a) of the 1986 Code is 
amended— 
(A) by striking out "any increase" and inserting in lieu 
thereof "any increase or decrease", and 
102 STAT. 3566 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) by striking out "such increase" and inserting in lieu 
thereof "such increase or decrease (as the case may be)". 
(13) Subsection (b) of section 2654 of the 1986 Code is amended 
to read as follows: 
"(b) CERTAIN TRUSTS TREATED AS SEPARATE TRUSTS.—For purposes 
of this chapter— 
"(1) the portions of a trust attributable to transfers from 
different transferors shall be treated as separate trusts, and 
"(2) substantially separate and independent shares of dif-
ferent beneficiaries in a trust shall be treated as separate trusts. 
Except as provided in the preceding sentence, nothing in this chap-
ter shall be construed as authorizing a single trust to be treated as 2 
or more trusts." 
(14) Paragraph (3) of section 2652(a) of the 1986 Code is 
amended— 
(A) by striking out "any property" in subparagraphs (A) 
and (B) and inserting in lieu thereof "any trust", and 
(B) by striking out "may elect to treat such property" and 
inserting in lieu thereof "may elect to treat all of the 
DroDertv in such trust" 
(15) Paragraph (2) of section 2612(a) of the 1986 Code is 
amended to read as follows: 
"(2) CERTAIN PARTIAL TERMINATIONS TREATED AS TAXABLE.—If, 
upon the termination of an interest in property held in trust by 
reason of the death of a lineal descendant of the transferor, a 
specified portion of the trust's assets are distributed to 1 or 
more skip persons (or 1 or more trusts for the exclusive benefit 
of such persons), such termination shall constitute a taxable 
termination with respect to such portion of the trust property." 
(16) Paragraph (2) of section 2632(b) of the 1986 Code is 
amended bv striking out "paragraph (D) with respect to a prior 
direct sldp' and inserting in lieu thereof "paragraph (1) with 
respect to a prior direct skip)". 
(17XA) Subsection (c) of section 2642 of the 1986 Code is 
amended to read as follows: 
"(c) TREATMENT OF CERTAIN DIRECT SKIPS WHICH ARE NON-
TAXABLE GIFTS.— 
"(1) IN GENERAL.—In the case of a direct skip which is a 
nontaxable gift, the inclusion ratio shall be zero. 
"(2) EXCEPTION FOR CERTAIN TRANSFERS IN TRUST.—Paragraph 
(1) shall not apply to any transfer to a trust for the benefit of an 
individual unless— 
"(A) during the life of such individual, no portion of the 
corpus or income of the trust may be distributed to (or for 
the benefit of) any person other than such individual, and 
"(B) if such individual dies before the trust is terminated, 
the assets of such trust will be includible in the gross estate 
of such individual. 
"(3) NONTAXABLE GIFT.—For purposes of this subsection, the 
term 'nontaxable gift' means any transfer of property to the 
extent such transfer is not treated as a taxable gift by reason 
of— 
"(A) section 2503(b) (taking into account the application 
of section 2513), or 
"(B) section 2503(e)." 
(B) Paragraph (1) of section 2642(d) of the 1986 Code is amend-
ed by striking out "(other than a nontaxable gift)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3567 
(C) The amendments made by this paragraph shall apply to 
26 USC 2642 
transfers after March 31,1988. 
note. 
(18) Clause (i) of section 2642(dX2XB) of the 1986 Code is 
amended to read as follows: 
"(i) the value of the property involved in such trans-
fer reduced by the sum of— 
"(I) any Federal estate tax or state death tax 
actually recovered from the trust attributable to 
such property, and 
"(II) any charitable deduction allowed under sec-
tion 2055 or 2522 with respect to such property, 
and". 
(19) Paragraph (2) of section 2651(b) of the 1986 Code is 
amended by striking out "a spouse of the transferor" and 
inserting in lieu thereof "a spouse (or former spouse) of the 
transferor". 
(20) Section 2652 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(d) Executor.—For purposes of this chapter, the term 'executor' 
has the meaning given such term by section 2203." 
(h) AMENDMENTS RELATED TO SECTION 1433 OF THE REFORM ACT.— 
(1) Subsection (a) of section 1433 of the Reform Act is amended 
26 USC 2601 
by striking out "this part" and inserting in lieu thereof "this note, 
subtitle". 
(2) Paragraph (2) of section 1433(b) of the Reform Act is 
amended— 
(A) by striking out "this part" in the material preceding 
subparagraph (A) and inserting in lieu thereof "this sub-
title", 
(B) by inserting before the comma at the end of subpara-
graph (A) the following: "(or out of income attributable to 
corpus so added)", and 
(C) by inserting "or revocable trust" after "a will" in 
subparagraph (B). 
(3XA) Subsection (b) of section 1433 of the Reform Act is 
amended by striking out paragraph (3) and inserting in lieu 
thereof the following new paragraphs: 
"(3) TREATMENT OF CERTAIN TRANSFERS TO GRANDCHILDREN.— 
"(A) IN GENERAL.—For purposes of chapter 13 of the 
Internal Revenue Code of 1986, the term 'direct skip' shall 
not include any transfer before January 1, 1990, from a 
transferor to a grandchild of the transferor to the extent 
the aggregate transfers from such transferor to such grand-
child do not exceed $2,000,000. 
"(B) TREATMENT OF TRANSFERS IN TRUST.—For purposes of 
subparagraph (A), a transfer in trust for the benefit of a 
grandchild shall be treated as a transfer to such grandchild 
if (and only if)— 
"(i) during the life of the grandchild, no portion of 
the corpus or income of the trust may be distributed to 
(or for the benefit of) any person other than such 
grandchild, 
"(ii) the eissets of the trust will be includible in the 
gross estate of the grandchild if the grandchild dies 
before the trust is terminated, and 
"(iii) all of the income of the trust for periods gifter 
the grandchild has attained age 21 will be distributed 
102 STAT. 3568 
PUBLIC LAW 100-647—NOV. 10, 1988 
to (or for the benefit of) such grandchild not less fre-
quently than annually. 
"(C) COORDINATION WITH SECTION 2653(a) OF THE I986 
CODE.—In the case of any transfer which would be a genera-
tion-skipping transfer but for subparagraph (A), the rules of 
section 2653(a) of the Internal Revenue Code of 1986 shall 
apply as if such transfer were a generation-skipping trans-
fer. 
"(D) COORDINATION WITH TAXABLE TERMINATIONS AND TAX-
ABLE DISTRIBUTIONS.—For purposes of chapter 13 of the 
Internal Revenue Code of 1986, the terms 'taxable termi-
nation' and 'taxable distribution' shall not include any 
transfer which would be a direct skip but for subparagraph 
(A). 
"(4) DEFINITIONS.—Terms used in this section shall have the 
same respective meanings as when used in chapter 13 of the 
Internal Revenue CJode of 1986; except that section 2612(cX2) of 
such (Dode shall not apply in determining whether an individual 
is a grandchild of the transferor." 
26 use 2601 
(B) Clause (iii) of section 1443(bX3XB) of the Reform Act (as 
"°*®- 
amended by subparagraph (A)) shall apply only to transfers 
after June 10,1987. 
26 use 2601 
(4) Subsection (d) of section 1433 of the Reform Act is 
note. 
amended— 
(A) by striking out "shall be treated as a direct skip" and 
inserting in lieu thereof "shall be treated as a direct skip to 
such grandchild", 
(B) by striking out "would be a direct skip" in subpara-
graph (B) and inserting in lieu thereof "would be a direct 
skip to a grandchild", and 
(C) by adding at the end thereof the following new sen-
tence: "Unless the grandchild otherwise directs by will, the 
estate of such grandchild shall be entitled to recover from 
the person receiving the property on the death of the 
grandchild any increase in Federal estate tax on the estate 
of the grandchild by reason of the preceding sentence." 
26 use 2601 
(5) Subparagraph (C) of section 1433(bX2) of the Reform Act 
^°^- 
shall not exempt any direct skip from the amendments made by 
subtitle D of title XIV of the Reform Act if— 
(A) such direct skip results from the application of section 
2044 of the 1986 Code, and 
(B) such direct skip is attributable to property transferred 
to the trust after October 21,1988. 
SEC. 1015. AMENDMENTS RELATED TO TITLE XV OF THE REFORM ACT. 
(a) AMENDMENT RELATED TO SECTION 1501 OF THE REFORM ACT.— 
Subparagraph (B) of section 6724(dX2) of the 1986 Code is amended 
by striking out "6031(b)" and inserting in lieu thereof "6031(b) or 
(0". 
(b) AMENDMENTS RELATED TO SECTION 1503 OF THE REFORM ACT.— 
(1) Subparagraph (A) of section 6013(bX5) of the 1986 Code is 
amended to read as follows: 
"(A) COORDINATION WITH SECTION 6653.—For purposes of 
section 6653, where the sum of the amounts shown as tax 
on the separate returns of each spouse is less than the 
amount shown as tax on the joint return made under this 
subsection— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3569 
"(i) such sum shall be treated as the amount shown 
on the joint return, 
"(ii) any negligence (or disregard of rules or regula-
tions) on either separate return shall be treated as 
negligence (or such disregard) on the joint return, and 
"(iii) any fraud on either separate return shall be 
treated as fraud on the joint return." 
(2XA) Paragraph (1) of section 6653(a) of the 1986 Code is 
amended to read as follows: 
"(1) IN GENERAL.—If any part of any underpajmient (as de-
fined in subsection (c)) of tax required to be shown on a return is 
due to negligence (or disregard of rules or regulations), there 
shall be added to the tax an amount equal to 5 percent of the 
underpajmient." 
(B) Paragraph (1) of section 6653(b) of the 1986 Ck)de is amend-
ed to read as follows: 
"(1) IN GENERAL.—If any part of any underpayment (as de-
fined in subsection (c)) of t8ix required to be shown on a return is 
due to fraud, there shall be added to the tax an amount equal to 
75 percent of the portion of the underpa3ntnent which is attrib-
utable to fraud." 
(C) Paragraph (2) of section 6601(e) of the 1986 Code is amend; 
ed by striking out "6659" each place it appears and inserting in 
lieu thereof "6653, 6659". 
(3) Subsection (g) of section 6653 of the 1986 (Dode is amended 
by adding at the end thereof the following new sentence: "If any 
penalty is imposed under subsection (a) by reason of the preced-
ing sentence, only the portion of the underpayment which is 
attributable to the failure described in the preceding sentence 
shall be taken into account in determining the amount of the 
penalty under subsection (a)." 
(4) The amendments made by this subsection (other than 
paragraph (3)) shall apply to returns the due date for which 
(determined without regard to extensions) is after December 31, 
1988. 
(c) AMENDMENT RELATED TO SECTION 1504 OF THE REFORM ACT.— 
The repeal made by section 8002(c) of the Omnibus Budget Reconcili-
ation Act of 1986 shall take effect as if the Tax Reform Act of 1986 
had been enacted on the day before the date of the enactment of the 
Omnibus Budget Reconciliation Act of 1986. 
(d) AMENDMENTS RELATED TO SECTION 1511 OF THE REFORM ACT.— 
Section 6621 of the 1986 C!ode is amended— 
(1) by striking out "short-term Federal rate" each place it 
appears in subsections (a) and (bXD and inserting in lieu thereof 
"Federal short-term rate", and 
(2) by striking out "SHORT-TERM FEDERAL RATE" in the head-
ing of subsection (b) and inserting in lieu thereof "FEDERAL 
SHORT-TERM RATE". 
(e) AMENDMENTS RELATED TO SECTION 1521 OF THE REFORM ACT.— 
(IXA) Paragraph (1) of section 6045(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
sentence: 
"A person shall not be treated as a broker with respect to 
activities consisting of managing a farm on behalf of another 
person." 
Fraud. 
Fraud. 
26 u s e 6001 
note. 
Effective date. 
26 u s e 6661 
note. 
Agriculture and 
agricultural 
commodities. 
102 STAT. 3570 
PUBLIC LAW 100-647—NOV. 10, 1988 
Effective date. 
26 u s e 6045 
note. 
Resil property. 
Effective date. 
26 u s e 6045 
note. 
Classified 
information. 
Defense and 
national 
security. 
(B) The amendment made by subparagraph (A) shall take 
effect as if included in the amendments made by section 
311(aXl) of the Tax Equity and Fiscal Responsibility Act of 1982. 
(2XA) Subsection (e) of section 6045 of the 1986 Code is amend-
ed by adding at the end thereof the following new paragraph: 
"(3) PROHIBITION OF SEPARATE CHARGE FOR FILING RETURN.—It 
shall be unlawful for any real estate reporting person to sepa-
rately charge any customer for complying with any require-
ment of paragraph (1)." 
(B) The amendment made by subparagraph (A) shall take 
effect on the date of the enactment of this Act. 
(3) Subsection (e) of section 6045 of the 1986 Code is 
amended— 
(A) by striking out "real estate broker" each place it 
appears in the text and inserting in lieu thereof "real estate 
reporting person", and 
(B) by striking out "REAL ESTATE BROKER" in the heading 
of paragraph (2) and inserting in lieu thereof "REAL ESTATE 
REPORTING PERSON". 
(f) AMENDMENT RELATED TO SECTION 1522 OF THE REFORM ACT.— 
Section 6050M of the 1986 Code is amended by adding at the end 
thereof the following new subsection: 
"(e) EXCEPTION FOR CERTAIN CLASSIFIED OR CONFIDENTIAL CON-
TRACTS.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), this 
section shall not apply in the case of a contract described in 
paragraph (3). 
"(2) 
REPORTING 
REQUIREMENT.—Each 
Federal 
executive 
agency which has entered into a contract described in para-
graph (3) shall, upon a request of the Secretary which identifies 
a particular person, acknowledge whether such person has 
entered into such a contract with such agency and, if so, provide 
to the Secretary— 
"(A) the information required under this section with 
respect to such person, and 
(B) such other information with respect to such person 
which the Secretary and the head of such Federal executive 
agency agree is appropriate. 
"(3) DESCRIPTION OF CONTRACT.—For purposes of this subsec-
tion, a contract between a Federal executive agency and an-
other person is described in this paragraph if— 
"(A) the fact of the existence of such contract or the 
subject matter of such contract has been designated and 
clearly marked or clearly represented, pursuant to the 
provisions of Federal law or an Executive order, as requir-
ing a specific degree of protection against unauthorized 
disclosure for reasons of national security, or 
"(B) the head of such Federal executive agency (or his 
designee) pursuant to regulations issued by such agency 
determines, in writing, that filing the required return 
under this section would interfere with the effective con-
duct of a confidential law enforcement or foreign counter-
intelligence activity." 
(g) AMENDMENTS RELATED TO SECTION 1523 OF THE REFORM ACT.— 
Section 6676 of the 1986 Code is amended— 
(1) by striking out "6049, or 6050N" in subsection (aX3) and 
inserting in lieu thereof "or 6049", 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3571 
(2) by striking out "6049, or 6050N" in subsection (bXlXA) and 
inserting in lieu thereof "or 6049", and 
(3) by striking out 
", DIVIDENDS, AND ROYALTIES" in 
the 
heading for subsection (b) and inserting in lieu thereof "AND 
DIVIDEND", 
(h) AMENDMENTS RELATED TO SECTION 1542 OF THE REFORM ACT.— 
Subsection (h) of section 6154 of the 1986 Code (as in effect before its 
repeal by the Revenue Act of 1987) is amended— 
(1) by striking out "subject to the tax imposed by section 
4940" in paragraph (1), 
(2) by amending paragraph (2) to read as follows: 
"(2) any tax imposed by section 511, and any tax imposed by 
section 1 or 4940 on a private foundation, shall be treated as a 
tax imposed by section 11, and", and 
(3) by adding at the end thereof the following new sentence: 
"In the case of an organization described in paragraph (1), subsec-
tion (c) of section 6655 shall be applied by substituting '5th month' 
for 'third month' and subsection (dX3XA) of section 6655 shall be 
applied by substituting *2 months' for '3 months' in clause (i), by 
substituting '4 months' for *5 months, in clause (ii), by substituting '7 
months' for '8 months' in clause (iii), and by substituting '10 months' 
for '11 months' in clause (iv)." 
(i) AMENDMENT RELATED TO SECTION 1551 OF THE REFORM ACT.— 
Clause (iii) of section 7430(cX2XA) of the 1986 Code is amended to 
read as follows: 
"(iii) meets the requirements of the 1st sentence of 
section 2412(dXlXB) of title 28, United States Code (as 
in effect on October 22, 1986) and meets the require-
ments of section 2412(dX2XB) of such title 28 (as so in 
effect)." 
(j) PROVISION RELATED TO SECTION 1556 OF THE REFORM ACT.—To 
26 use 7443A 
the extent the salary recommendations submitted by the President 
^°^-
on January 5, 1987, are inconsistent with the provisions of section 
7443A(dXl) of the 1986 Code, such recommendations shall not be 
effective for any period, 
(k) AMENDMENT RELATED TO SECTION 1557 OF THE REFORM ACT.— 
(1) Subsection (d) of section 7447 of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "In 
computing the rate of the retired pay under paragraph (1) of 
this subsection for any individual who is entitled thereto, any 
period during which such individual performs services under 
subsection (c) on a substantially full-time basis shall be treated 
as a period during which he has served as a judge." 
(2) The amendment made by paragraph (1) shall apply for 
26 use 7447 
purposes of determining the amount of retired pay for months 
note. 
beginning after the date of the enactment of this Act regardless 
of when the services under section 7447(c) of the 1986 Code were 
performed. 
(1) AMENDMENTS RELATED TO SECTION 1561 OF THE REFORM ACT.— 
(1) Subsection (eX2) of section 7609 of the 1986 Code is 
amended— 
(A) by inserting "or the summoned party's response to a 
summons described in subsection (f)," after "the summons 
described in subsection (c),", and 
(B) by striking out "the summons is issued other" and 
inserting in lieu thereof "the summons is issued". 
102 STAT. 3572 
PUBLIC LAW 100-647—NOV. 10, 1988 
Effective date. 
26 use 7609 
note. 
26 use 3402 
note. 
Effective date. 
26 use 6011 
note. 
(2) Subsection (i) of section 7609 of the 1986 Code is 
amended— 
(A) by striking out "the third-party recordkeeper" in 
paragraph (4) and inserting in lieu thereof "the summoned 
party", and 
(B) by inserting "AND SUMMONED PARTY" after "RECORD-
KEEPER in the subsection heading. 
(3) The amendments made by this subsection shall take effect 
on the date of the enactment of this Act. 
(m) AMENDMENT RELATED TO SECTION 1562 OF THE REFORM ACT.— 
Subsection (d) of section 6212 of the 1986 Code is amended by adding 
at the end thereof the following new sentence: "Nothing in this 
subsection shall affect any suspension of the running of any period 
of limitations during any period during which the rescinded notice 
was outstanding." 
(n) AMENDMENT RELATED TO SECTION 1563 OF THE REFORM ACT.— 
Subparagraph (B) of section 6404(eXl) of the 1986 Code is amended— 
(1) by inserting "error or" before "delay", and 
(2) by inserting "erroneous or" before "dilatory". 
(o) AMENDMENT RELATED TO SECTION 1565 OF THE REFORM ACT.— 
Effective with respect to levies made after December 31, 1988, 
paragraph (10) of section 6334(a) of the 1986 Code is amended— 
(1) in subparagraph (A)— 
(A) by striking out "IV" and inserting in lieu thereof "III, 
IV, V,", and 
(B) by adding "or" at the end thereof, 
(2) in subparagraph (C) by striking out "21," and inserting in 
lieu thereof "13, 21, 23," and 
(3) by striking out subparagraph (B) and redesignating 
subparagraph (C) as subparagraph (B). 
(p) AMENDMENT RELATED TO SECTION 1581 OF THE REFORM ACT.— 
Subsection (c) of section 1581 of the Reform Act is amended by 
adding at the end thereof the following new sentence: 
"The preceding sentence shall not apply if its application would 
result in an increase in the number of withholding allowances for 
the employee." 
(q) GENERAL REQUIREMENT OF RETURN, STATEMENT, OR LIST.— 
(1) Subsection (a) of section 6011 of the 1986 Code is amended 
by striking out "for the collection thereof and inserting in lieu 
thereof "with respect to the collection thereof. 
(2) The amendment made by paragraph (1) shall take effect on 
the date of the enactment of this Act. 
(r) CERTAIN REFUNDABLE CREDITS To BE ASSESSED UNDER DEFI-
CIENCY PROCEDURES.— 
(1) Subsection (a) of section 6201 of the 1986 Code is amended 
by striking out paragraph (4). 
(2) Paragraph (4) of section 6211(b) is amended to read as 
follows: 
"(4) For purposes of subsection (a)— 
"(A) any excess of the sum of the credits allowable under 
sections 32 and 34 over the tax imposed by subtitle A 
(determined without regard to such credits), and 
"(B) any excess of the sum of such credits £is shown by the 
taxpayer on his return over the amount shown as the tax 
by the taxpayer on such return (determined without regard 
to such credits), 
shall be taken into account as negative amounts of tax." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3573 
(3) Subsection (h) of section 6211 of the 1986 Code is amended 
by striking out paragraph (3) and by redesignating paragraph 
(4) as paragraph (3). 
(4) The amendments made by this subsection shaU apply to 
notices of deficiencies mailed after the date of the enactment of 
this Act. 
(s) NoncB O
P LIEN ON PEHSONAL PROPERTY.— 
(1) Subsection (f) of section 6323 of the 1986 Code is 
amended— 
(A) by inserting ", except that State law merely conform-
ing to or reenacting Federal law establishing a national 
filing system does not constitute a second office for filing as 
designated by the laws of such State" after "situated" in 
paragraph (IXAXiiX and 
(B) by adding at the end thereof the following new para-
graph: 
"(5) NATIONAL FILING SYSTEMS.—^The filing of a notice of lien 
shall be governed solely by this titie and shall not be subject to 
any other Federal law establishing a place or places for the 
filing of liens or encumbrances under a national filing system." 
(2) The amendments made by this subsection shall take effect 
on the date of 
tibe 
enactment of this Act. 
(t) EFFECT OF HONORING LEVY.— 
(1) Subsection (d) of section 6332 of the 1986 Code is 
amended— 
(A) by inserting "and any other person" after "delinquent 
taxpayer", and 
(B) by striking out the last sentence thereof. 
(2) The amendment made by this subsection shall apply to 
levies issued after the date of the enactment of this Act. 
(u) 
COLLECTION AFTER COMMENCEMENT OF JUDICIAL PROCEED-
INGS.— 
(1) The last sentence of section 6502(a) of the 1986 Code is 
amended to read as follows: "If a timely proceeding in court for 
the collection of a tax is commenced, the period during which 
such tax may be collected by levy shall be extended and shall 
not expire until the liability for tiie tax (or a judgment against 
the taxpayer arising from such liability) is satisfied or becomes 
enforceable." 
(2) The amendment made by this subsection shall apply to 
levies issued after the date of the enactment of this Act. 
SEC 1016. AMENDMENTS RELATED TO TITLE XVI OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1603 OF THE REFORM ACT.— 
(IXA) Subparagraph (A) of section 501(cX25) of the 1986 Code 
ia amended by adding at the end thereof the following new 
sentence: 
"For purposes of clause (iii), the term 'real property* shall not 
include any interest as a tenant in common (or similar interest) 
and shall not include any indirect interest" 
(B) The amendment made by subparagraph (A) shall apply 
¥rith respect to property acquired by tiie organization after June 
10, 1987, except that such amendment shall not apply to any 
property acquired after June 10, 1987, pursuant to a binding 
written contract in effect on June 10, 1987, and at all times 
thereafl:er before such acquisition. 
26 u s e 6201 
note. 
Effective date. 
26 u s e 6323 
note. 
26 u s e 6332 
note. 
26 use 6502 
note. 
Real property, 
eontracts. 
eorporations. 
26 u s e 501 note. 
102 STAT. 3574 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2) Subparagraph (D) of section 501(cX25) of the 1986 Code is 
amended by striking out so much of such subparagraph as 
precedes clause (i) and inserting in lieu thereof the following: 
"(D) A corporation or trust shall in no event be treated as 
described in subparagraph (A) unless such corporation or 
trust permits its shareholders or beneficiaries—". 
(3XA) Paragraph (25) of section 501(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(EXi) For purposes of this title— 
"(I) a corporation which is a qualified subsidiary 
shall not be treated as a separate corporation, and 
"(II) all assets, liabilities, and items of income, deduc-
tion, and credit of a qualified subsidiary shall be 
treated as assets, liabilities, and such items (as the case 
may be) of the corporation or trust described in sub-
paragraph (A), 
"(ii) For purposes of this subparagraph, the term 'quali-
fied subsidiary' means any corporation if, at all times 
during the period such corporation was in existence, 100 
percent of the stock of such corporation is held by the 
corporation or trust described in subparagraph (A). 
"(iii) For purposes of this subtitle, if any corporation 
which was a qualified subsidiary ceases to meet the require-
ments of clause (ii), such corporation shall be treated as a 
new corporation acquiring all of its assets (and assuming all 
of its liabilities) immediately before such cessation from the 
corporation or trust described in subparagraph (A) in ex-
clid.ii£r6 
ft)r 
its s^ock 
(B) Subparagraph (C) of section 501(cX25) of the 1986 Code is 
amended by inserting "or" at the end of clause (iii), by striking 
out ", or" at the end of clause (iv) and inserting in lieu thereof a 
period, and by striking out clause (v). 
(4) Paragraph (25) of section 501(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(F) For purposes of subparagraph (A), the term 'real 
property' includes any personal property which is leased 
under, or in connection with, a lease of real property, but 
only if the rent attributable to such personal property 
(determined under the rules of section 856(dXl)) for the 
taxable year does not exceed 15 percent of the total rent for 
the taxable year attributable to both the real and personal 
property leased under, or in connection with, such lease." 
(5XA) Paragraph (9) of section 514(c) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(E) SPECIAL RULES FOR ORGANIZATIONS DESCRIBED IN SEC-
TION 501(CX25).— 
"(i) IN GENERAL.—In computing under section 512 the 
unrelated business taxable income of a disqualified 
holder of an interest in an organization described in 
section 501(cX25), there shall be taken into account— 
"(I) as gross income derived from an unrelated 
trade or business, such holder's pro rata share of 
the items of income described in clause (ii)(I) of 
such organization, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3575 
"(ID as deductions allowable in computing unre-
lated business taxable income, such holder's pro 
rata share of the items of deduction described in 
clause (iiXn) of such organization. 
Such amounts shall be token into account for the 
taxable year of the holder in which (or with which) the 
taxable year of such organization ends. 
"(ii) DESCRIPTION OF AMOUNTS.—For purposes of 
clause (i)— 
"(0 gross income is described in this clause to the 
extent such income would (but for this paragraph) 
be treated under subsection (a) as derived from an 
unrelated trade or business, and 
"(ID any deduction is described in this clause to 
the extent it would (but for this paragraph) be 
allowable under subsection (aX2) in computing un-
related business taxable income, 
"(iii) DISQUALIFIED HOLDER.—For purposes of this 
subparagraph, the term 'disqualified holder' means any 
shareholder (or beneficiary) which is not described in 
clause (i) or (ii) of subparagraph (C)." 
(B) The amendment made by subparagraph (A) shall apply 
26 use 514 note. 
with respect to interests in the organization acquired after June 
10, 1987, except that such amendment shall not apply to any 
such interest acquired after June 10, 1987, pursuant to a bind-
ing written contract in effect on Jiuie 10, 1987, and at all times 
thereafter before such acquisition. 
(6) The last sentence of section 514(cX9XB) of the 1986 Code is 
amended by striking out "clause (vi)" and inserting in lieu 
thereof "th^ paragraph", 
(b) REPEAL OF SECTIION 1608 OF THE REFORM ACT.—Section 1608 of 
the Reform Act is hereby repealed. 
26 USC170 note. 
SEC. 1017. AMENDMENTS RELATED TO TITLE XYII OF THE REFORM ACT. 
(a) AMENDMENTS RELATED TO SECTION 1701 OF THE REFORM ACT.— 
Oause (i) of section 51(dX12XB) of the 1986 Code is amended by 
striking out "subsection (a)(1)" and inserting in lieu thereof "subsec-
tion (a)". 
(b) AMENDMENT RELATED TO SECTION 1702 OF THE REFORM ACT.— 
Subsection (j) of section 6652 of the 1986 (^ode, as added by section 
1702(b) of the Reform Act and as in effect before its repeal by the 
Revenue Act of 1987, is amended by inserting "(and the correspond-
ing provision of section 4041(dXl))" after "section 4041(aXl)". 
(c) AMENDBCENTS RELATED TO SECTION 1703 OF THE REFORM ACT.— 
dXA) Subsection (a) of section 4081 of the 1986 Code, as 
amended by section 1703 of the Reform Act, is amended by 
redesignating paragraph (2) as paragraph (3) and by striking out 
paragraph (1) and inserting in lieu thereof the following new 
paragraphs: 
"(1) IN GENERAL.—^There is hereby imposed a tax at the rate 
specified in paragraph (2) on the earlier of— 
"(A) the removal, or 
"(B) the sale, 
of gasoline by the refiner or importer thereof or the terminal 
operator. 
"(2) RATES OF TAX.— 
102 STAT. 3576 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(A) IN GENERAL.—The rate of the tax imposed by this 
section is the sum of— 
"(i) the Highway Trust Fund financing rate, and 
"(ii) the Leaking Underground Storage Tank Trust 
Fund financing rate. 
"(B) RATES.—For purposes of subparsigraph (A)— 
"(i) the Highway Trust Fund financing rate is 9 cents 
a gallon, and 
"(ii) the Leaking Underground Storage Tank Trust 
Fund financing rate is 0.1 cent a gallon." 
(B) Subsections (b) and (c) of section 4081 of the 1986 Code, as 
amended by section 1703 of the Reform Act, are each amended 
by striking out "subsection (d)" and inserting in lieu thereof 
"subsection (a)". 
(C) Subsection (e) of section 4081 of the 1986 C!ode, as amended 
by section 1703 of the Reform Act, is amended— 
(i) by striking out "subsection (dX2XA)" in par£igraph (1) 
and inserting in lieu thereof "subsection (aX2)", and 
(ii) by striking out "subsection (dX2)(B)" each place it 
appears in paragraph (2) and inserting in lieu thereof 
"subsection (aX2)". 
(D) Section 4081 of the 1986 Code, as amended by section 1703 
of the Reform Act, is amended by striking out subsection (d) and 
by redesignating subsection (e) as subsection (d). 
(2) Subsection (b) of section 34 of the 1986 Code is amended by 
striking out "section 6421(i) or 6427(j)" and inserting in lieu 
thereof "section 6421(j) or 6427(k)". 
(3) Sections 4041(bXlXC) and 6427(mX3) of the 1986 Code are 
each amended by striking out "section 6421(dX2)" and inserting 
in lieu thereof "section 6421(eX2)". 
(4) Paragraph (3) of section 4041(0 of the 1986 Code is 
amended to read as follows: 
"(3) TERMINATION.—Except with respect to the taxes imposed 
by subsection (d), paragraph (1) shall not apply on and after 
October 1,1993." 
26 use 4221 
(5) The amendment made by section 10502(dX4) of the Reve-
note. 
nue Act of 1987 shall be treated as if included in the amend-
ments made by section 1703 of the Reform Act except that the 
reference to section 4091 of the Internal Revenue Code of 1986 
shall not apply to sales before April 1,1988. 
(6) Section 6421 of the 1986 C!ode is amended by redesignating 
subsection (i) (relating to income tax credit in lieu of pa3maent) 
and subsection (j) (relating to cross references) as subsections 0') 
and (k), respectively. 
(7) Subsections (a) and (hXD of section 6421 of the 1986 Code 
are each amended by striking out "subsection (i)" and inserting 
in lieu thereof "subsection (j)". 
(8) Paragraph (2) of section 6421(j) of the 1986 Code (as redesig-
nated by paragraph (6)) is amended by striking out "subsection 
'cX2)" and inserting in lieu thereof "subsection (dX2)". 
(9) Sections 7210, 7603, 7604(b), 7604(cX2), 7605(a), 7609(cXl), 
and 7610(c) of the 1986 Code are each amended by striking out 
"6421(fX2)" and inserting in lieu thereof "6421(gX2)". 
(10) Paragraph (2) of section 6427(k) of the 1986 Code is 
amended by striking out "subsection" and all that follows and 
inserting in lieu thereof "paragraph (2) or (3) of subsection (i)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3577 
(11) Paragraph (6) of section 6511(i) of the 1986 Code is 
amended by strikii^ out "section 6421(c)" and inserting in lieu 
thereof "section 6421(d)". 
(12) Subparagraph (G) of section 1703(eX2) of the Reform Act 
100 Stat. 2774. 
is amended by striking out all that follows "are amended" and 
inserting in lieu thereof "by striking out '6427(iX2)' and insert-
ing in lieu thereof '6427(jX2)'." 
(13) Paragraph (2) of section 1703(f) of the Reform Act is 26 USC 4081 
amended by adding at the end thereof the following new sen- ^
o
*
®
-
tence: "All other provisions of law, including penalties, ap-
plicable with respect to the taxes imposed by section 4081 of the 
Internal Revenue Code of 1986 shall apply to the floor stocks 
taxes imposed by this section." 
(14) Paragraph (1) of section 4081(c) of the 1986 Code, as 
amended by section 1703 of the Reform Act, is amended by 
strikii^ out "3 cents" and inserting in lieu thereof "SVa cents". 
(15) Subsection (d) of section 6421 of the 1986 dkxle is amended 
by adding at the end thereof the following new paragraph: 
"(3) APPUCATION TO SALES UNDER SUBSECTION (C) .—For pur- 
Petroleum and 
poses of this subsection, gasoline shall be treated as used for a petroleum 
purpose referred to in subsection (c) when it is sold for such a Products. 
purpose." 
(16) Section 4222(d) of the 1986 Code is amended by striking 
out "4083" and inserting in lieu thereof "4101". 
SEC. 1018. AMENDMENTS RELATED TO TITLE XVIII OF THE REFORM ACT. 
(a) AMENDMENT RELATED TO SECTION 1801 OF THE REFORM ACT.— 
Clause (iii) of section 1801(aX2XA) of the Reform Act is amended to 26 USC 168 note. 
read as follows: 
"(iii) a person became a partner in such partnership 
(or a beneficiary in such trust) after its formation but 
before September 26,1985,". 
(b) AMEND&HENTS RELATED TO SECTION 1802 OF THE REFORM ACT.— 
(1) The last sentence of section 31(gX17XL) of the Tax Reform 
Act of 1984, as added by section 1802(aX10XG) of the Reform Act, 
26 use 168 note. 
is amended— 
(A) by striking out "Registry of Deeds" each place it 
appears and inserting in lieu thereof "Roister of Deed", 
and 
(B) by strikii^ out "May 7, 1985" and inserting in lieu 
thereof "May 7,1984". 
(2) Subparagraph (E) of section 168(jX9) of the 1986 Code (as 
amended by section 1802(aX2) of the Reform Act and as in effect 
before the amendments made by section 201 of the Reform Act) 
is amended— 
(A) by striking out "this paragraph" in clauses (i) and 
(iiXD and inserting in lieu thereof "this paragraph and 
paragraph (8)", and 
(B) by striking out clause (iii) and inserting in lieu thereof 
the following: 
"(iii) TAX-EXEMPT CONTROLLED ENTmr.— 
"(I) IN GENERAL.—^The term 'tax-exempt con-
trolled entity' means any corporation (which is not 
a tax-exempt entity determined without regard to 
this subparagraph and paragraph (4)CE)) if 50 per-
cent or more (in value) of the stock in such corpora-
102 STAT. 3578 
PUBLIC LAW 100-647—NOV. 10, 1988 
tion is held by 1 or more tax-exempt entities (other 
than a foreign person or entity). 
"(II) ONLY 5-PERCENT SHAREHOLDERS TAKEN INTO 
ACCOUNT IN CASE OF PUBLICLY TRADED STOCK.—For 
purposes of subclause (I), in the case of a corpora-
tion the stock of which is publicly traded on an 
established securities market, stock held by a tax-
exempt entity shall not be taken into account 
unless such entity holds at least 5 percent (in 
value) of the stock in such corporation. For pur-
poses of this subclause, related entities (within the 
meaning of paragraph (7)) shall be treated as 1 
entity. 
"(Ill) SECTION 318 TO APPLY.—For purposes of this 
clause, a tax-exempt entity shall be treated as 
holding stock which it holds through application of 
section 318 (determined without regard to the 
50-percent limitation 
contained 
in 
subsection 
(a)(2XC) thereof)." 
(c) AMENDMENT RELATED TO SECTION 1803 OF THE REFORM ACT.— 
26 use 1281 
(1) Subparagraph (A) of section 1803(aX8) of the Reform Act is 
note. 
amended by striking out "September 27, 1985" and inserting in 
lieu thereof "December 31,1985". 
(2) Subsection (c) of section 1278 of the 1986 Code is amended 
by inserting before the period ", including regulations providing 
proper adjustments in the case of a bond the principal of which 
may be paid in 2 or more paynients". 
(3) Section 1278(b) of the 1986 Code is amended by adding at 
the end thereof the following new paragraph: 
"(4) BASIS ADJUSTMENT.—The basis of any bond in the hands 
of the taxpayer shall be increased by the amount included in 
gross income pursuant to this subsection." 
(d) AMENDMENTS RELATED TO SECTION 1804 OF THE REFORM ACT.— 
26 use 311 note. 
(1) Paragraph (3) of section 1804(b) of the Reform Act is 
amended by striking out "Paragraph (3) of section 54" and 
inserting "Paragraph (3) of section 54(d)". 
(2) Clause (i) of section 54(dX3XD) of the Tax Reform Act of 
26 use 311 note. 
1984 is amended by striking out "subtitle D of title VI" and 
inserting "subtitle D of title VI of the Tax Reform Act of 1986". 
(3) Clause (ii) of section 54(dX3XD) of the Tax Reform Act of 
1984 (as added by section 180406X3) of the Tax Reform Act of 
1986) is amended— 
(A) by striking out "December 9, 1968," each place it 
appears and inserting in lieu thereof "December 10,1968,", 
and 
(B) by striking out "October 5,1981" and inserting in lieu 
thereof "March 2,1978,". 
(4) Subsection (b) of section 312 of the 1986 Code is amended 
by striking out "of any property" and inserting in lieu thereof 
"of any property (other than an obligation of such corporation)". 
(5XA) Section 361 of the 1986 Code is amended to read as 
follows: 
"SEC. 361. NONRECOGNITION OF GAIN OR LOSS TO CORPORATIONS; 
TREATMENT OF DISTRIBUTIONS. 
"(a) GENERAL RULE.—No gain or loss shall be recognized to a 
corporation if such corporation is a party to a reorganization and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3579 
exchanges property, in pursuance of the plan of reorganization, 
solely for stock or securities in another corporation a party to the 
reoi^anization. 
"(b) EXCHANGES NOT SOLELY IN KIND.— 
"(1) GAIN.—If subsection (a) would apply to an exchange but 
for the fact that the property received in exchai^e consists not 
only of stock or securities permitted by subsection (a) to be 
received without the recognition of gain, but also of other 
property or money, then— 
"(A) PROPERTY DISTRIBUTED.—^If the corporation receiving 
such other property or money distributes it in pursuance of 
the plan of reorganization, no gain to the corporation shall 
be recognized from the exchange, but 
"(B) PROPERTY NOT DISTRIBUTED.—If the corporation 
receiving such other property or money does not distribute 
it in pursuance of the plan of reorganization, the gain, if 
any, to the corporation shall be reco^iized. 
The amount of gain recogiazed under subparagraph (B) shall 
not exceed the sum of the money and the fair market value of 
the other property so received which is not so distributed. 
"(2) Loss.—U subsection (a) would apply to an exchange but 
for the fact that the property received in exchai^e consists not 
only of property permitted by subsection (a) to be received 
without the recognition of gain or loss, but also of other prop-
erty or money, then no loss from the exchange shall be 
recognized. 
"(3) TREATMENT OF TRANSFERS TO CREDITORS.—For purposes of 
pars^aph (1), any transfer of the other property or money 
received in the exchange by the corporation to its creditors in 
connection with the reorganization shall be treated as a dis-
tribution in pursuance of the plan of reorganization. Tlie Sec-
retary may prescribe such r^ulations as may be necessary to 
prevent avoidance of tax through abuse of the preceding sen-
tence or subsection (cX3). 
"(c) TREATMENT OF DISTRIBUTIONS.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), no 
gain or loss shall be recognized to a corporation a party to a 
reorganization on the distribution to its shareholders of prop-
erty in pursuance of the plan of reorganization. 
' (2) DISTRIBUTIONS OF APPRECIATED PROPERTY.— 
"(A) IN GENERAL.—If— 
"(i) in a distribution referred to in paragraph (1), the 
corporation distributes property other than qualified 
property, and 
"(ii) tiie fair market value of such property exceeds 
its adjusted basis (in the hands of the distributing 
corporation), 
then gain shall be recognized to the distributing corpora-
tion as if such property were sold to the distributee at its 
fair market value. 
"(B) QUALIFIED PROPERTY.—^For purposes of this subsec-
tion, the term 'qualified property* means— 
"(i) any stock in (or right to acquire stock in) the 
distributuig corporation or obligation of the distribut-
ii^ corporation, or 
'(ii) any stock in (or right to acquire stock in) another 
corporation which is a party to the reorganization or 
19-194 O—91—Part 4 
20 : QL 3 
102 STAT. 3580 
PUBLIC LAW 100-647—NOV. 10, 1988 
obligation of another corporation which is such a party 
if such stock (or right) or obligation is received by the 
distributing corporation in the exchange. 
"(C) TREATMENT OF UABILTTIES.—If any property distrib-
uted in the distribution referred to in paragraph (1) is 
subject to a liability or the shareholder assumes a liability 
of the distributing corporation in connection with the dis-
tribution, then, for purposes of subparagraph (A), the fair 
market value of such property shall be treated as not less 
than the amount of such liability. 
"(3) TREATMENT OF CERTAIN TRANSFERS TO CREDITORS.—For 
purposes of this subsection, any transfer of qualified property by 
the corporation to its creditors in connection with the reorga-
nization shall be treated as a distribution to its shareholders 
pursuant to the plan of reorganization. 
"(4) COORDINATION WITH OTHER PROVISIONS.—Section 311 and 
subpart B of part II of this subchapter shall not apply to any 
distribution referred to in paragraph (1).' 
(B) Section 358 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(f) DEFINITION OF NONRECOGNITION PROPERTY IN CASE OF SECTION 
361 EXCHANGE.—For purposes of this section, the property per-
mitted to be received under section 361 without the recognition of 
gain or loss shall be treated as consisting only of stock or securities 
in another corporation a party to the reorganization." 
(C) Section 355 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(c) TAXABILITY OF CORPORATION ON DISTRIBUTION.—Section 311 
shall apply to any distribution— 
"(1) to which this section (or so much of section 356 as relates 
to this section) applies, and 
"(2) which is not in pursuance of a plan of reorganization, 
in the same manner as if such distribution were a distribution to 
which subpart A of part I applies; except that subsection (b) of 
section 311 shall not apply to any distribution of stock or securities 
in the controlled corporation." 
(D) Subsection (c) of section 336 of the 1986 Code (as amended 
by section 631 of the Reform Act) is amended to read as follows: 
"(c) EXCEPTION FOR LIQUIDATIONS WHICH ARE PART OF A REORGA-
NIZATION.— 
"For provision providing that tliis subpart does not apply to distributions 
in pursuance of a plan of reorganization, see section 361(c)(4)." 
(E) Subsection (a) of section 311 of the 1986 Code is amended 
by striking out "distribution, with respect to its stock," and 
inserting in lieu thereof "distribution (not in complete liquida-
tion) with respect to its stock". 
(F) The table of sections for subpart C of part III of subchapter 
C of chapter 1 of the 1986 Code is amended by striking out the 
item relating to section 361 and inserting in lieu thereof the 
following new item: 
"Sec. 361. Nonrecognition of gain or loss to corporations; treatment of dis-
tributions." 
(G) Effective with respect to transfers on or after June 21, 
1988, section 351 of the 1986 Code is amended by redesignating 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3581 
subsection (f) as subsection (g) and by inserting after subsection 
(e) the following new subsection: 
"(0 TREATBdENT OF CONTROLLED CORPORATION.—^If— 
"(1) property is transferred to a corporation (hereinafter in 
this subsection referred to as the 'controlled corporation') in an 
exchange with respect to which gain or loss is not reo^nized (in 
whole or in part) to the transferor under this section, and 
"(2) such exchange is not in pursuance of a plan of reorganiza-
tion, 
section 311 shall apply to any transfer in such exchange by the 
controlled corporation in the same manner as if such transfer were 
a distribution to which subpart A of part I applies." 
(6) Subparagraph (A) of section 280G(bX5) of the 1986 Code is 
amended— 
(A) in clause (i) by striking out "section 1361(b))" and 
inserting in lieu thereof "section 1361(b) but without r^ard 
to paragraph (IXC) thereof)", and 
(B) by adding at the end thereof the following: "Stock 
described in section 1504(aX4) shall not be taken into ac-
count under clause (ii)(D if tiie payment does not adversely 
affect the shareholder's redemption and liquidation rights.' 
(7) Subparagraph (B) of section 280G(bX5) of the 1986 Code 
(relatii^ to shareholder approval requirements) is amended by 
adding at the end thereof tiie followii^ new sentence: 
"The r^ulations prescribed under subsection (e) shall in-
clude r^ulations providing for the appUcation of this 
subparagraph in the case of shareholders which are not 
individimls (including the treatment of nonvoting interests 
in an entity which is a shareholder) and where an entitv 
holds a de minimis amount of stock in the corporation.' 
(8) Paragraph (5) of section 280G(d) of the 1986 Code is 
amended by striking out "officer or any member" and inserting 
in lieu thereof "officer of any member". 
(9) Paragraph (3) of section 338(e) of the 1986 Code is amended 
by striking out "which meet the 80 percent requirements of 
subparagraphs (A) and (B) of subsection (dX3)" and inserting in 
lieu thereof "which meet the requirements of section 
1504(aX2)". 
(lOXA) Paragraph (7) of section 1504(b) of the 1986 Code is 
amended to read as follows: 
"(7) A DISC (as defined in section 992(aXl))." 
(B) Section 1504 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(f) SPECIAL RULE FOR C^TAIN AMOUNTS DERIVED FROM A COR-
PORATION PREVIOUSLY TREATED AS A DISC.—In determining the 
consolidated taxable income of an affiliated group for any taxable 
year b^innii^ after December 31, 1984, a corporation which had 
been a DISC and which would otherwise be a member of such group 
shall not be treated as such a member with respect to— 
"(1) any distribution (or deemed distribution) of accumulated 
DISC income which was not treated as previously taxed income 
under section 805(bX2XA) of the Tax Reform Act of 1984, and 
"(2) any amount treated as received under section 805(bX3) of 
such Act." 
(e) PROVISION RELATED TO SECTION 1806 OF THE REFORM ACT.—^If— 
26 use 643 note. 
(1) on a return for the 1st taxable year of the trusts involved 
b^inning after March 1, 1984, 2 or more trusts were treated as 
102 STAT. 3582 
PUBLIC LAW 100-647—NOV. 10, 1988 
a single trust for purposes of the tax imposed by chapter 1 of the 
Internal Revenue Code of 1954, 
(2) such trusts would have been required to be so treated but 
for the amendment made by section 1806(b) of the Reform Act, 
and 
(3) such trusts did not accumulate any income during such 
taxable year and did not make any accumulation distributions 
during such taxable year, 
then, notwithstanding the amendment ma^e by section 18060)) of 
the Reform Act, such trusts shall be treated as one trust for 
purposes of such taxable year. 
(f) AMENDMENTS RELATED TO SECTION 1807 OF THE REFORM ACT.— 
(1) Paragraphs (IXA) and (2XE) of section 468B(d) of the 1986 
Code are each amended by striking out "the taxpayer" and 
inserting in lieu thereof "the taxpayer (or any related person)". 
(2) Subparagraph (A) of section 468B(dX2) of the 1986 Code is 
amended to read as follows: 
"(A) which is established pursuant to a court order and 
which extinguishes completely the taxpayer's tort liability 
with respect to claims described in subparagraph (D),". 
26USC468B 
(3) Clause (i) of section 1807(aX7XC) of the Reform Act is 
note. 
amended to read as follows: 
"(i) any portion of such fund which is established 
pursuant to a court order and with qualified pa3mients, 
which meets the requirements of subparagraphs (C) 
and (D) of section 468B(dX2) of the Internal Revenue 
Code of 1954 (as added by this paragraph), and with 
respect to which an election is made under subpara-
graph (F) thereof, shall be treated as a designated 
settlement fund for purposes of section 468B of such 
Code,". 
(4) Paragraph (2) of section 468B(b) of the 1986 Code is 
amended— 
(A) by striking out "the corporation," and inserting in 
lieu thereof "a corporation.", and 
(B) by striking out "no other" and inserting in lieu 
thereof "No other". 
(5XA) Section 468B of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.—Nothing in 
any provision of law shall be construed as providing that an escrow 
account, settlement fund, or similar fund is not subject to current 
Regulations. 
income tax. The Secretary shall prescribe regulations providing for 
the taxation of any such account or fund whether as a grantor trust 
or otherwise." 
(B) Subparagraph (D) of section 1807(aX7) of the Reform Act is 
hereby repealed. 
(g) AMENDMENTS RELATED TO SECTION 1810 OF THE REFORM ACT.— 
26 use 904 note. 
(1) Paragraph (5) of section 181(Ka) of the Reform Act is 
amended by striking out "section 125(bX5)" each place it ap-
pears and inserting in lieu thereof "section 121(bX5)". 
(2) Section 133(dX3XBXiii) of the Tax Reform Act of 1984, as 
26 use 959 note. 
amended by section 1810(iX2) of the Reform Act, is amended by 
striking out "Tax Reform Act of 1985" and inserting in lieu 
thereof "Tax Reform Act of 1986". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3583 
(3) aause (iv) of section 7701(bX5XA) of the 1986 Code is 
amended by striking out "section 274(kX2)" and inserting in lieu 
thereof "section 274(1X1XB)". 
Qi) AMENDMENT RELATED TO SECTION 1821 OF THE REFORM ACT.— 
(1) Subsection (e) of section 812 of the 1986 Code (relating to 
dividends from certain subsidiaries not included in gross invest-
ment income) is amended to read as follows: 
"(e) DIVIDENDS FROM (CERTAIN SUBSIDIARIES NOT INCLUDED IN 
GROSS INVESTMENT INCOIKIE.— 
"(1) IN GENERAL.—For purposes of this section, the term 'gross 
investment income' shall not include any dividend received by 
the life insurance company which is a 100 percent dividend. 
"(2) 100 PERCENT DIVIDEND DEFINED.— 
"(A) IN GENERAL.—Elxcept as provided in subparagraphs 
(B) and (CO, the term '1()0 percent dividend' means any 
dividend if the percentage used for purposes of determining 
the deduction sdlowable under section 243, 244, or 245(b) is 
100 percent. 
"(B) 
(DERTAIN DIVIDENDS OUT OF TAX-EXEMPT INTEREST, 
ETC.—The term '100 percent dividend' does not include any 
distribution by a corporation to the extent such distribution 
is out of tax-exempt interest or out of dividends which are 
not 100 percent dividends (determined with the application 
of this subparagraph). 
"(C) CJERTAIN DIVIDENDS RECEIVED BY FOREIGN CORPORA-
TIONS.—The term '100 percent dividends' does not include 
any dividend described in section 805(aX4)(E) (relating to 
certain dividends in the case of foreign corporations)." 
(2) The amendment made by paragraph (1) shall take effect as 
if included in the amendments made by section 211 of the Tax 
Reform Act of 1984. 
(i) AMENDMENT RELATED TO SECTION 1822 OF THE REFORM ACT.— 
Clause (i) of section 216(bX4XC) of the Tax Reform Act of 1984 
(relating to section 818(c) elections made by certain acquired compa-
nies) is amended by striking out "clause (i)" and inserting in lieu 
thereof "subclause (I)". 
(j) AMENDMENT RELATED TO SECTION 1825 OF THE REFORM ACT.— 
Paragraph (4) of section 1825(a) of the Reform Act (relating to 
amendments related to section 221 of the Tax Reform Act of 1984) is 
amended by strikii^ out "Section 7702(eX2)" and inserting in Ueu 
thereof "Effective with respect to contracts entered into aftier Octo-
ber 22,1986, section 7702(eX2)". 
(k) AMENDMENTS RELATED TO SECTION 1826 OF THE REFORM ACT.— 
(1) Paragraph (5) of section 72(s) of the 1986 Code is amended 
by striking out "or" at the end of subparagraph (B), by striking 
out the period at the end of subparagraph (C) and inserting in 
lieu thereof ", or", and by adding at the end thereof the 
following new subparagraph: 
"CD) which is a qualified funding asset (as defined in 
section 13(Kd), but without r^ard to whether there is a 
qualified assignment)." 
(2) The paragraph heading of paragraph (5) of section 72(s) of 
the 1986 Code is amended by striking out "ANNUITY CONTRACTS 
WHICH ARE PART OF QUALIFIED PLANS" and inserting in lieu 
thereof "CERTAIN ANNUITY CONTRACTS". 
G) AMENDMENTS RELATED TO SECTION 1842 OF THE REFORM ACT. 
Effective date. 
26 u s e 812 note. 
26 u s e 801 note. 
Contracts. 
26 u s e 7702 
note. 
102 STAT. 3584 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) Subsection (c) of section 425 of the 1986 Code is amended by 
adding at the end thereof the following new paragraph: 
"(4) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE.—In 
the case of any transfer described in subsection (a) of section 
1041— 
"(A) such transfer shall not be treated as a disposition for 
purposes of this part, and 
"(B) the same tax treatment under this part with respect 
to the transferred property shall apply to the transferee as 
would have applied to the transferor." 
(2) Paragraph (1) of section 425(c) of the 1986 Code is amended 
by striking out "paragraph (2) and (3)" and inserting in lieu 
thereof "paragraphs (2), (3), and (4)". 
(3) Effective with respect to transfers after June 21, 1988, 
subsection (d) of section 1041 of the 1986 Code is amended— 
(A) by striking out "Paragraph (1) of subsection (a)" and 
inserting in lieu thereof "Subsection (a)", and 
(B) by striking out "the spouse" and inserting in lieu 
thereof "the spouse (or former spouse)". 
(m) AMENDMENTS RELATED TO SECTION 1866 OF THE REFORM ACT.— 
26 use 103 note. 
(1) Section 1866 of the Reform Act is amended by striking out 
"obligation issued to refund" and inserting in lieu thereof 
"obligation (or series of obligations) issued to refund". 
(2)(A) Paragraph (1) of section 1866 of the Reform Act is 
amended to read as follows: 
"(1) the average maturity of the issue of which the refunding 
obligation is a part does not exceed the average maturity of the 
obligations to be refunded by such issue,". 
(B) Section 1866 of the Reform Act is amended by adding at 
the end thereof the following new sentence: "For purposes of 
paragraph (1), average maturity shall be determined in accord-
ance with subsection (b)(14)(B)(i) of such Code." 
(3) Paragraph (4) of section 1866 of the Reform Act is amended 
by striking out "30 days" and inserting in lieu thereof "90 
days". 
(4) Section 1866 of the Reform Act is amended by adding 
"and" at the end of paragraph (2), by striking out paragraph (3), 
and by redesignating paragraph (4) as paragraph (3). 
26 use 103 note. 
(5) A refunding obligation issued before July 1, 1987, shall be 
treated as meeting the requirement of paragraph (1) of section 
1866 of the Reform Act if such obligation met the requirement 
of such paragraph as enacted by the Reform Act. 
(n) AMENDMENTS RELATED TO SECTION 1869 OF THE REFORM ACT.— 
26 use 103 
(1) Clause (ii) of section 1869(c)(3)(A) of the Reform Act is 
"°t^ 
amended by striking out "pursuant to the exercise of eminent 
domain" and inserting in lieu thereof "(by a governmental unit 
having the power to exercise eminent domain)". 
(2) Subparagraph (C) of section 1869(c)(3) of the Reform Act is 
amended by inserting "(or similar issues)" after "resulting from 
the issue", 
(o) AMENDMENTS RELATED TO SECTION 1875 OF THE REFORM ACT.— 
(1) Clause (ii) of section 6230(aX2)(A) of the 1986 Code is 
amended by striking out "nonpartnership items" and inserting 
in lieu thereof "nonpartnership items (other than by reason of 
section 6231(bXl)(C))". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3585 
(2) Subsection (g) of section 1246 of the 1986 Code (as redesig-
nated by this Act) is amended by striking out "1248(gX3)" and 
inserting in lieu thereof "1248(gX2)". 
(3) Subsection (f) of section 6229 of the 1986 Code is amended 
Contracts, 
by adding at the end thereof the following new sentence: "The 
period described in the preceding sentence (including any exten-
sion period under this sentence) may be extended with respect 
to any partner by agreement entered into by the Secretary and 
such partner." 
(p) AMENDMEISTT RELATED TO SECTION 1878 OF THE REFORM ACT.— 
Paragraph (1) of section 852(e) of the 1986 Code is amended by 
striking out "subsection (aX3)" and inserting in lieu thereof "subsec-
tion (aX2)". 
(q) AMENDMENTS RELATED TO SECTION 1879 OF THE REFORM ACT.— 
(1) Subclause (II) of section 28(bX2XAXii) of the 1986 Code is 
amended to read as follows: 
"(II) before the date on which an application 
with respect to such drug is approved under section 
505(b) or 507 of such Act or, if the drug is a 
biological product, before the date on which a li-
cense for such drug is issued under section 351 of 
the Public Health Service Act; cmd". 
(2) The last sentence of section 1361(dX3) of the 1986 Code is 
amended by striking out "treated as a separate trust under 
section 663(c)" and inserting in lieu thereof "within the mean-
ing of section 663(c)". 
(3) Subsection (p) of section 1879 of the Reform Act is 
26 USC 83 note. 
amended— 
(A) by striking out "Subsection (a)" in paragraph (2) and 
inserting "Paragraph (1)", and 
(B) by striking out "subsection (a)" each place it appears 
in paragraphs (2) and (3) and inserting in lieu thereof 
"paragraph (1)". 
(4XA) Subsection (d) of section 1286 of the 1986 Code is 
amended to read as follows: 
"(d) SPECIAL RULES FOR TAX-EXEMPT OBUGATIONS.— 
"(1) IN GENERAL.—In the case of any tax-exempt obligation (as 
defined in section 1275(aX3)) from which 1 or more coupons have 
been stripped— 
"(A) the amount of the original issue discount determined 
under subsection (a) with respect to any stripped bond or 
stripped coupon— 
"(i) shall be treated as original issue discount on a 
tax-exempt obligation to the extent such discount does 
not exceed the tax-exempt portion of such discount, and 
"(ii) shall be treated as original issue discount on an 
obligation which is not a tax-exempt obligation to the 
extent such discount exceeds the tax-exempt portion of 
such discount, 
"(B) subsection (bXlXA) shall not apply, and 
"(C) subsection (bX2) shall be applied by increasing the 
basis of the bond or coupon by the sum of— 
"(i) the interest accrued but not paid before such 
bond or coupon was disposed of (and not previously 
reflected in basis), plus 
"(ii) the amount included in gross income under 
subsection (bXlXB). 
102 STAT. 3586 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(2) TAX-EXEMPT PORTION.—For purposes of paragraph (1), the 
tax-exempt portion of the original issue discount determined 
under subsection (a) is the excess of— 
"(A) the amount referred to in subsection (aXD, over 
"(B) an issue price which would produce a jdeld to matu-
rity as of the purchase date equal to the lower of— 
"(i) the coupon rate of interest on the obligation from 
which the coupons were separated, or 
"(ii) the yield to maturity (on the basis of the pur-
chase price) of the stripped obligation or coupon. 
The purchaser of any stripped obligation or coupon may 
elect to apply clause (i) by substituting 'original yield to 
maturity of for 'coupon rate of interest on'." 
26 use 1286 
(BXi) Except as provided in clause (ii), the amendment 
J^ote. 
made by subparagraph (A) shall apply to any purchase or 
sale after June 10, 1987, of any stripped tax-exempt obliga-
tion or stripped coupon from such an obligation. 
(ii)If-
(I) any person held any obligation or coupon in 
stripped form on June 10,1987, and 
(II) such obligation or coupon was held by such 
person on such date for sale in the ordinary course of 
such person's trade or business, 
the amendment made by subparagraph (A) shall not apply 
to any sale of such obligation or coupon by such person and 
shall not apply to any such obligation or coupon while held 
by another person who purchased such obligation or coupon 
from the person referred to in subclause (I). 
(5) Clause (ii) of section 368(aX2XF) of the 1986 Code is 
amended— 
(A) by striking out the two parenthetical phrases in the 
first sentence, and 
(B) by adding at the end thereof the following new sen-
tence: 
For purposes of this clause, a person holding stock 
in a regulated investment company, a real estate invest-
ment trust, or an investment company which meets the 
requirements of this clause shall, except as provided in 
regulations, be treated as holding its proportionate share of 
the assets held by such company or trust. 
(r) AMENDMENTS RELATED TO SECTION 1895 OF THE REFORM ACT.— 
42 use 1
3
9
5
W
W 
(1) Subsection (b) of section 1895 of the Reform Act is amended 
and note. 
by Striking out paragraphs (1) and (2). 
(2XA) Clause (ii) of section 3121(uX2XB) of the 1986 Code is 
amended by striking out "or" at the end of subclause (IV), by 
striking out the period at the end of subclause (V) and inserting 
in lieu thereof ' , or", and by inserting after subclause (V) the 
following new subclause: 
"(VI) by an individual in a position described in 
section 1402(cX2XE)." 
(B) The amendment made by subparagraph (A) shall apply to 
services performed after March 31,1986. 
(s) MISCELLANEOUS PROVISIONS.— 
(1) Subsection (a) of section 8021 of the 1986 Code is amended 
by striking out "6103(d)" and inserting in lieu thereof "6103(f)". 
(2XA) Section 2503 of the 1986 Code is amended by adding at 
the end thereof the following new subsection: 
"(f) TREATMENT OF CERTAIN LOANS OF ARTWORKS.— 
M^r--..'—.v-v 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3587 
"(1) IN GENERAL.—For purposes of this subtitle, any loan of a Loans, 
qualified work of art shall not be treated as a transfer (and the 
value of such qualified work of art shall be determined as if 
such loan had not been made) if— 
"(A) such loan is to an organization described in section 
501(cX3) and exempt from tax under section 501(c) (other 
than a private foundation), and 
"(B) the use of such work by such organization is related 
to the purpose or function constituting the basis for its 
exemption under section 501. 
"(2) DEFINITIONS.—For purposes of this section— 
"(A) QUALIFIED WORK OF ART.—The term 'qualified work 
of art' means any archaeological, historic, or creative tan-
gible personal property. 
"(B) PRIVATE FOUNDATION.—The term 'private founda-
tion' has the meaning given such term by section 509, 
except that such term shall not include any private operat-
ing foundation (as defined in section 4942(jX3))." 
(B) The amendment made by subparagraph (A) shall apply to 
26 use 2503 
loans after July 31 1969. 
"°**-
(3XA) Subparagraph (B) of section 1563(dXl) of the 1986 Code 
is amended by strilang out "subsection (eXD" and inserting in 
lieu thereof "paragraphs (1), (2), and (3) of subsection (e)" 
(B) The amendment made by subparagraph (A) shall apply to 
26 use 1563 
taxable years beginning after the date of the enactment of this note-
Act, 
(t) ADDITIONAL AMENDMENTS RELATED TO PENSION PLANS.— 
(1) AMENDMENTS RELATED TO SECTION I826 OF THE REFORM 
^cr^ 
(A) Section 72(sX7) of the 1986 Code is amended by strik-
ing out "primary annuity" and inserting in lieu thereof 
"primary annuitant". 
(B) Section 72(qX2XB) of the 1986 Code is amended by 
striking out the last parenthesis. 
(C) Section 419A(f)(5) of the 1986 Code is amended by 
striking out "accounts" and inserting in lieu thereof 
"account". 
(D) Section 1826(c) of the Reform Act is amended by 
26 use 72 note. 
striking out 
"made" and 
inserting in lieu 
thereof 
"commencing". 
(2) AMENDMENTS RELATED TO SECTION 1851 OF THE REFORM 
ACT.— 
(A) Section 1851(a) of the Reform Act is amended by 26USC419A. 
striking out paragraph (4) thereof. 
(B) Subclause (U) of section 512(aX3XEXii) of the 1986 
Code is amended, (i) by striking out "subclause (II)" and 
inserting in lieu thereof "subclause (I)", and (ii) by striking 
out the comma at the end thereof and inserting in lieu 
tflicrGOi 8, i36iriod 
(C) Section 419(aXl) of the 1986 Code is amended by 
striking out "subchapter" and inserting in lieu thereof 
"chapter". 
(D) Subparagraph (B) of section 1851(aX3) of the Reform 
Act is amended by inserting ", section 505, and section 
26USe4l9A 
4976(bXlXB)" after "section 419A". 
note. 
(3) AMENDMENTS RELATED TO SECTION 1852 OF THE REFORM 
ACT.— 
102 STAT. 3588 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 401 note. 
(A) Paragraph (4) of section 1852(a) of the Reform Act is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) An individual whose required beginning date would, 
but for the amendment made by subparagraph (A), occur 
after December 31,1986, but whose required beginning date 
after such amendment occurs before January 1, 1987, shall 
be treated as if such individual had become a 5-percent 
owner during the plan year ending in 1986," 
26 use 415. 
(B) Section 1852(hX2) of the Reform Act is amended by 
striking out "section 416(1)" and inserting in lieu thereof 
"section 415(1)". 
26 use 401 note. 
(C) Section 1852(hXl) of the Reform Act is amended by 
striking out "Subsection" and inserting in lieu thereof 
"Effective for years beginning after December 31, 1985, 
subsection". 
(D) Subparagraph (E) of section 408(dX3) of the 1986 Code 
is amended by striking out "subparagraph" and inserting 
in lieu thereof "paragraph". 
(4) AMENDMENTS RELATED TO SECTION 1854 
OF THE REFORM 
ACT.— 
(A) Section 404(k) of the 1986 Code is amended by striking 
out "avoidance" in the 4th sentence and inserting in lieu 
thereof "evasion". 
(B) Section 409(hX2) of the 1986 Code (relating to plan 
may distribute cash) is amended by striking out "section 
409(o)" and inserting in lieu thereof "paragraph (IXB)". 
(C) Subparagraph (C) of section 409(nX3) of the 1986 Code 
(defining nonallocation period) is amended to read as fol-
lows: 
"(C) NONALLOCATION PERIOD.—The term 'nonallocation 
period' means the period beginning on the date of the sale 
of the qualified securities and ending on the later of— 
"(i) the date which is 10 years after the date of sale, 
or 
"(ii) the date of the plan allocation attributable to the 
final payment of acquisition indebtedness incurred in 
connection with such sale." 
(D) Subparagraph (A) of section 1042(cX4) of the 1986 Code 
(defining qualified replacement property) is amended by 
inserting ' (as in effect immediately before the Tax Reform 
Act of 1986)" after "section 954(cX3)". 
(E) Clause (i) of section 1042(cX4XB) of the 1986 Code 
(relating to operating corporation) is amended by striking 
out "placement period" and inserting in lieu thereof 
(F) Section 1854(aX3XB) of the Reform Act is amended by 
striking out "1042(b)(3)" and inserting in lieu thereof 
"1042(b)". 
(G) Subparagraph (C) of section 1854(aX3) of the Reform 
26 use 409 note. 
Act is amended to read as follows: 
"(CXi) Except as provided in clause (ii), the amendments made 
by this paragraph shall apply to sales of securities after the date 
of the enactment of this Act. 
"(ii) A taxpayer or executor may elect to have section 
1042(bX3) of the Internal Revenue Code of 1954 (as in effect 
before the amendment made by subparagraph (B)) apply to sales 
i^l" 
'• 
'-'^^fS-. • 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3589 
before the date of the enactment of this Act as if such section 
included the last sentence of section 409(nXl) of the Internal 
Revenue Code of 1986 (as added by subparagraph (A))." 
(H) Section 409(eX5) of the 1986 Code is amended by 
striking out "(2) or". 
(5) AMENDMENT RELATED TO SECTION 1875 OF THE REFORM 
ACT.—Section 1875(cX7XB) of the Reform Act is amended by 26 USC 404. 
striking out "and section 405(c)". 
(6) AMENDMENT RELATED TO SECTION I879 OF THE REFORM 
ACT.—Subparagraph (B) of section 125(cX2) of the 1986 Code 
(relating to exception for cash and deferred arrangements) is 
amended by inserting "or rural electric cooperative plan (within 
the meaning of section 401(kX7))" after "stock bonus plan". 
(7) AMENDMENTS RELATED TO SECTION 1895 
OF THE REFORM 
ACT.— 
(A) Section 106(bXl) of the 1986 Code (relating to excep-
tion for highly compensated individuals where plan fails to 
provide certsiin continuation coverage) is amended— 
(i) by striking out "any amount contributed by an 
employer" and inserting in lieu thereof "any employer-
provided coverage", and 
(ii) by striking out "to a group" and inserting in lieu 
thereof "under a group". 
(B) Section 1895(dX5XA) of the Reform Act is amended by 26 USC 162. 
striking out "section 162(kX2)" and inserting in lieu thereof 
"section 162(kX5)". 
(8) AMENDMENTS RELATED TO SECTION 1898 
OF THE REFORM 
(A) Subparagraph (G) of section 402(aX6) of the 1986 Code 
(relating to treatment of potential future vesting), as added 
by section 1898(aX3) of the Reform Act, is redesignated as 
subparagraph (I). 
(B) Subparagraph (A) of section 411(aXll) of the 1986 
Code is amended by striking out "vested" and inserting in 
lieu thereof "nonforfeitable". 
(C) Section 402(fKl) of the 1986 Code is amended by 
striking out "a eligible" and inserting in lieu thereof "an 
eligible". 
(D) Section 1899A of the Reform Act is amended by 
26 USC 415. 
striking out paragraph (13). 
(E) Subparagraph (B) of section 414(pX4) of the 1986 Code 
is amended— 
(i) by striking out "means earlier o f and inserting in 
lieu thereof "means the earlier of, and 
(ii) by striking out "in" each place it appears. 
(F) Section 414(pX10) of the 1986 Code (relating to waiver 
of certain distribution requirements) is amended by insert-
ing ", 403(b)," after "section 401". 
(G) Section 414(pX9) of the 1986 C!ode is amended by Contracts. 
adding at the end thereof the following new sentence: "For 
purposes of this title, except as provided in regulations, any 
distribution from an annuity contract under section 403(b) 
pursuant to a qualified domestic relations order shall be 
treated in the same manner as a distribution from a plan to 
which section 401(aX13) applies." 
(u) ADDITIONAL CLERICAL AMENDMENTS.— 
102 STAT. 3590 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 402. 
(1) Paragraph (5) of section 104(b) of the Reform Act is 
amended by striking out "12220b)" and inserting in lieu thereof 
"1122(b)". 
\ 
26 use 274 note. 
(2) The amendment made by section 122(cX2) of the Reform 
Act shall be applied as if it also struck out the comma at the end 
of section 274(bXlXB) of the 1986 Code. 
(3) Clause (i) of section 280F(bX3XB) of the 1986 Code is 
amended by striking out "recovery deductions" and inserting in 
lieu thereof "depreciation deductions". 
26 use 312. 
(4) Subparagraph (A) of section 803(bX3) of the Reform Act is 
amended by inserting closing quotation marks after "section 
189)" and by striking out the closing quotation marks following 
"subparagraph (B)". 
26 use 461. 
(5) Paragraph (1) of section 823(b) of the Reform Act is 
amended to read as follows: 
"(1) Paragraph (5) of section 461(h), as amended by section 
805(c)(5), is amended by striking out subparagraph (B) and by 
redesignating subparagraph (C) as subparagraph (B)." 
26 use 402 note. 
(6) The amendment made by section 1122(bX2XBXiii) of the 
Reform Act shall be applied as if it struck out "Initial separate 
tax". 
26 use 402 note. 
(7) The amendment made by section 1122(bX2XC) of the 
Reform Act shall be applied as if it did not strike out "the" 
(8) Paragraph (2) of section 72(qX2) of the 1986 Code is 
amended by striking out the period at the end of subparagraph 
(D) and inserting in lieu thereof a comma. 
(9) Subparagraph (A) of section 417(eX3) of the 1986 Code is 
amended by striking out "subclause (II)" and inserting in lieu 
thereof "clause (ii)". 
(10) Subparagraph (A) of section 246(cXl) of the 1986 Code is 
amended by striking out "Which" and inserting in lieu thereof 
"which". 
(11) Subsection (a) of section 164 of the 1986 Code is amended 
by striking out "the GST tax" and inserting in lieu thereof "The 
GST tax". 
26 use 419A. 
(12) Subparagraph (B) of section 1851(aX6) of the Reform Act 
is amended by striking out "Subsection (b)" and inserting in lieu 
thereof "Subsection (a)". 
26 use 514. 
(13XA) Paragraph (1) of section 1878(e) of the Reform Act is 
amended by striking out "last sentence of section 514(cX9XB) 
(relating to exceptions)" and inserting in lieu thereof "second to 
the last sentence of section 514(cX9)(B) (as amended by para-
graph (3))". 
(B) Paragraph (3) of section 1878(e) of the Reform Act is 
amended by striking out "is amended" and inserting in lieu 
thereof ", and the last sentence of such section, are amended". 
(14) Paragraph (23) of section 501(c) of the 1986 Code is 
amended by striking out "any association" and inserting in lieu 
thereof "Any association". 
(15) Paragraph (1) of section 501(c) of the 1986 Code is 
amended by striking out "any corporation organized" and 
inserting in lieu thereof "Any corporation organized" 
(16) The table of chapters for subtitle E of the 1986 Code is 
amended by inserting 'smokeless tobacco," after "cigarettes," 
in the item relating to chapter 52. 
(17) Paragraph (4) of section 3321(c) of the 1986 Code is 
amended by adding a period at the end thereof. 
PUBLIC LAW 100-647-NOV. 10, 1988 
102 STAT. 3591 
(18) Paragraph (3) of section 521(b) of the Superfund Revenue 
Act of 1986 is amended by striking out "Paragraph (1) of section 
26 use 9506. 
9506(b)" and inserting in lieu thereof "Subsection (b) of section 
9506". 
(19) Paragraph (2) of section 5054(a) of the 1986 Code is 
amended by adding a period at the end thereof. 
(20) Paragraph (3) of section 9507(b) of the 1986 Code is 
amended by striking out "Deep Water" each place it appears 
and inserting in lieu thereof "Deepwater". 
(21) Subparagraph (I) of section 231(d)(3) of the Reform Act is 26 USC 6511. 
amended by striking out "section 6511(d)(6)" and inserting in 
lieu thereof "section 6511(d)(4)". 
(22) Subsection (a) of section 1016 of the 1986 Code is amended 
by striking out all that follows paragraph (20) and inserting in 
lieu thereof the following: 
"(21) to the extent provided in section 48(q), in the case of 
expenditures with respect to which a credit has been allowed 
under section 38; 
"(22) for amounts allowed as deductions under section 59(e) 
(relating to optional 10-year writeoff of certain tax preferences); 
"(23) to the extent provided in section 1059 (relating to reduc-
tion in basis for extraordinary dividends); and 
"(24) in the case of qualified replacement property the acquisi-
tion of which resulted under section 1042 in the nonrecognition 
of any part of the gain realized on the sale or exchange of any 
property, to the extent provided in section 1042(d)." 
(23) Paragraph (1) of section 7518(g) of the 1986 Code is 
amended by striking out "not qualified withdrawal" and insert-
ing in lieu thereof "not a qualified withdrawal". 
(24) The table of sections for part IV of subchapter P of 
chapter 1 of the 1986 Code is amended by striking out the item 
relating to section 1254 and inserting in lieu thereof the follow-
ing: 
"Sec. 1254. Gain from disposition of interest in oil, gas, geothermal, or other 
mineral properties." 
(25) Paragraph (1) of section 453(f) of the 1986 Code is 
amended by striking out "subsection (g)" and inserting in lieu 
thereof "subsections (sY' 
(26) Paragraph (8) of section 453(f) of the 1986 Code is 
amended by striking out "pajnnent to be" and inserting in lieu 
thereof "payments to be". 
(27) Subparagraph (B) of section 668(bXl) of the Reform Act is 26 USC 858. 
amended by striking out "section 856" and inserting in lieu 
thereof "section 858". 
(28) The second to the last sentence of section 857(b)(3)(C) of 
the 1986 (Ilode is amended by striking out "such capital loss 
such" and inserting in lieu thereof "such capital loss shall". 
(29) Subsection (a) of section 669 of the Reform Act is amended 
26 use 856 note. 
by striking out "this part" and inserting in lieu thereof "this 
subtitle". 
(30) The table of parts for subchapter M of chapter 1 of the 
1986 Code is amended by adding at the end thereof the following 
new item: 
"Part IV. Real estate mortgage investment conduits." 
102 STAT. 3592 
PUBLIC LAW 100-647—NOV. 10, 1988 
(31) Subsection (c) of section 1277 of the 1986 Code is amended 
by inserting a closing parenthesis after "section 585(aX2)". 
(32) The table of parts for subchapter L of chapter 1 of the 
1986 Code is amend^ by striking out the items relating to parts 
n, m, and IV and inserting in lieu thereof the following: 
'Tart n. Other insurance companies. 
"Part m. Provisions of general application." 
(33) Paragraph (7) of section 6051(a) of the 1986 Code is 
amended by adding a comma at the end thereof 
2
6 use 501. 
(34) Paragraph (14) of section 1114(b) of the Reform Act is 
amended— 
(A) by striking out "section 501(cX17)" and inserting in 
lieu thereof "section 501(cX17XA)", and 
(B) by striking out "duties consists" and inserting in lieu 
thereof "duties consist". 
(35) Subparagraph (C) of section 3121(vX3) of the 1986 Code is 
amended by striking out "Saving" and inserting in lieu thereof 
"Savings". 
(36) Paragraph (4) of section 6652(k) of the 1986 Code is 
amended by striking out "or section 6678" and inserting in lieu 
thereof "or part 11 of subchapter B of this chapter". 
(37) The table of sections for part I of subchapter N of chapter 
1 of the 1986 Code is amended by adding at the end thereof the 
following new item: 
"Sec. 865. Source rules for personal property sales." 
26 use 954 note. 
(38) The amendment made by section 12210>X3XB) of the 
Reform Act shall be construed as striking out paragraph (3) of 
section 954(e) of the 1986 Code. 
(39) The heading of section 861(aX6) of the 1986 Code is 
amended by striking out "personal property" and inserting in 
lieu thereof "inventory property". 
(40) Subsection (a) of section 1296 of the 1986 Code is amended 
by inserting a comma after "this subpart". 
(41) Subsection (b) of section 7703 of the 1986 Code is amended 
by striking out "section 151(eX3)" and inserting in lieu thereof 
"section 151(cX3)". 
2
6 use 6601. 
(42) Paragraph (3) of section 1404(c) of the Reform Act is 
amended by striking out "section 6601" and inserting in lieu 
thereof "section 6601(b)". 
(43) Subsection (a) of section 2611 of the 1986 Code is amended 
by striking out "mean" and inserting in lieu thereof "means". 
(44) Subparagraph (D) of section 3406(hX5) of the 1986 C
k
>
d
e is 
amended by adding a period at the end thereof 
(45) The table of sections for part III of subchapter C of 
chapter 76 of the 1986 Code is amended by adding at the end 
thereof the following new item: 
"Sec. 7475. Practice fee." 
(46) The paragraph added to section 1276(b) of the 1986 Code 
by section 1803(aX13XAXiii) of the Reform Act is amended— 
(A) by inserting "(3)" before "SPECIAL" in the paragraph 
heading, 
(B) by inserting a 1 em dash after "PAYMENTS." in the 
heading, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3593 
(C) by adding a period at the end thereof. 
(47) Subparagraph (C) of section 809(d)(4) of the 1986 Code is 
amended by striking out "the Secretary—" and inserting in lieu 
thereof "The Secretary—". 
(48) Subsection (f) of section 7872 of the 1986 Code is amended 
by redesignating the paragraph (11) added by section 1854 of the 
Reform Act £is paragraph (12). 
(49) Paragraph (5) of section 761 l(i) of the 1986 Code is 
amended by striking out "the title" and inserting in lieu thereof 
"this title". 
(50) Section 13303(a) of Public Law 99-272 is amended (in the 
matter proposed to be inserted in section 3306(c) of the Internal 
Revenue Code of 1954), effective as of the date of its enactment, 
by inserting a comma immediately after "1988". 
(51) Subsection (f) of section 6511 of the 1986 Code is 
amended— 
(A) by striking out "chapter 42" in the text and inserting 
in lieu thereof "section 4912, chapter 42,", and 
(B) by striking out "CERTAIN CHAPTER 43 TAXES" in 
the 
subsection heading and inserting in lieu thereof "SIMILAR 
TAXES". 
(52) Section 2503(e)(2XB) of the 1986 Code is amended by 
striking out "section 213(e)" and inserting in lieu thereof "sec-
tion 213(d)". 
SEC. 1019. EFFECTIVE DATE. 
(a) GENERAL RULE.—Except as otherwise provided in this title, any 
amendment made by this title shall take effect as if included in the 
provision of the Reform Act to which such amendment relates. 
Ot)) WAIVER OF ESTIMATED TAX PENALTIES.—No addition to tax 
shall be made under section 6654 or 6655 of the 1986 Code for any 
period before April 16, 1989 (March 16, 1989 in the case of a 
taxpayer subject to section 6655 of the 1986 Code) with respect to 
any underpayment to the extent such underpa3niient was created or 
increased by any provision of this title or title II. 
TITLE II—AMENDMENTS RELATED TO 
TAX PROVISIONS IN OTHER LEGISLA-
TION 
26 use 3306 
note. 
26 use 1 note. 
SEC. 2001. AMENDMENTS RELATED TO SUPERFUND REVENUE ACT OF 1986. 
(a) AMENDMENTS RELATED TO SECTION 513 OF THE ACT.— 
(1) Subsection (e) of section 4662 of the 1986 Code is amended 
by redesignating paragraph (3) as paragraph (4) and by insert-
ing after paragraph (2) the following new paragraph: 
(3) REFUNDS DIRECTLY TO EXPORTER.—The Secretary shall 
provide, in regulations, the circumstances under which a credit 
or refund (without interest) of the tax under section 4661 shall 
be allowed or made to the person who exported the taxable 
chemical or taxable substance, where— 
"(A) the person who paid the tax waives his claim to the 
amount of such credit or refund, and 
"(B) the person exporting the taixable chemical or taxable 
substance provides such information as the Secretary may 
require in such regulations." 
Regulations. 
102 STAT. 3594 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2) Subparagraph (A) of section 4662(bX10) of the 1986 Code is 
amended by striking out "a mixture of' and inserting in lieu 
thereof "one or more". 
(b) AMENDMENTS RELATED TO SECTION 515 OF THE ACT.— 
(1) Subparagraph (B) of section 4672(aX2) of the 1986 Code is 
amended by inserting "(or more than 50 percent of the value)" 
after "more than 50 percent of the weight . 
(2) Paragraph (2) of section 4672(a) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: 
Imports. 
"If an importer or exporter of any substance requests that the 
Exports. 
Secretary determine whether such substance be listed as a 
taxable substance under paragraph (1) or be removed from such 
listing, the Secretary shall make such determination within 180 
days after the date the request was filed." 
(3) Paragraph (4) of section 4672(a) of such (Dode is amended to 
read as follows: 
"(4) MODIFICATIONS TO LIST.—The Secretary shall add to the 
list under paragraph (3) substances which meet either the 
weight or value tests of paragraph (2)(B) and may remove from 
such list only sutetances which meet neither of such tests." 
(c) AMENDBCENTS RELATED TO SECTION 516 OF THE ACT.— 
(1) Section 59A of the 1986 Code (relating to environmental 
tax) is amended by redesignating subsections (c) and (d) as 
subsections (d) and (e), respectively, and by inserting after 
subsection (b) the following new subsection: 
"(c) EXCEPTION FOR RIC'S AND REIT'S.—The tax imposed by 
subsection (a) shall not apply to— 
"(1) a r^ulated investment company to which part I of 
subchapter M applies, and 
"(2) a real estate investment trust to which part II of sub-
chapter M applies." 
(2) Paragraph (1) of section 882(a) of the 1986 Code is amended 
by inserting '^9A," after "55,". 
(3XA) Subparagraph (B) of section 56(fX2) of the 1986 Code is 
amended by ad<£ng at the end thereof the following new sen-
tence: "No adjustment shall be made under this subparagraph 
for the tax imposed by section 59A." 
(B) Paragraph (2) of section 59A0t>) of the 1986 Code is 
amended by inserting "(and the last sentence of section 
56(fX2XB))" before the period at the end thereof. 
(d) AMENDBfENTS RELATED TO SECTION 521 OF THE ACT.— 
26 use 4041 
(IXA) The amendments made by subsections O
t
>
X
3
) and (dX17) 
note. 
of section 10502 of the Revenue Act of 1987 shall be treated as if 
included in the amendments made by section 521 of the 
Superfimd Revenue Act of 1986 except that the last sentence of 
paragraphs (2) and (3) of section 4041(d) of the Internal Revenue 
Code of 1986 (as amended by such subsection (bX3)) and the 
reference to section 4091 of such C]k)de in section 9508(cX2XA) of 
such Code (as amended by such subsection (dXD) shall not apply 
to sales before April 1,1988. 
(B) Paragraph (2) of section 6416(b) of the 1986 Code is 
amended by striking out "(or under paragraph (IXA) or (2XA) of 
section 4041(a) or under paragraph (IXA) or (2XA) of section 
4041(d) or under section 4051)" and inserting in lieu thereof "(or 
under subsection (a) or (d) of section 4041 in respect of sales or 
under section 4051)". 
'--t«yS%c,: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3595 
(2) Paragraph (3) of section 4041(c) of the 1986 Ck)de is 
amended by striking out "the rate at which" and inserting in 
lieu thereof "the Highway Trust Fund financing rate at which". 
(3XA) Subparagraph (A) of section 4041(bXl) of the 1986 Code 
is amended by striking out "subsection (a)" and inserting in lieu 
thereof "subsection (a) or (dXD". 
(B) Subparagraph (B) of section 4041(bXl) of the 1986 Code is 
amended by inserting before the period "and by the correspond-
ing provision of subsection (dXD". 
(Q Subsection 0>) of section 4041 of the 1986 Code is amended 
by striking out paragraph (3). 
(D) Subparagraph (A) of section 4041(bX2) of the 1986 Code is 
amended to r c ^ as follows: 
"(A) IN GENERAL.—^In the case of any qualified methanol 
or ethanol fuel— 
"(i) subsection (aX2) shall be applied by substituting 
*3 cents' for *9 cents', and 
"(ii) subsection (dXD shall be applied by substituting 
'0.05 cent' for '0.1 cent' with respect to the sales and 
uses to which clause (i) applies." 
(E) Subsection (f) of section 6421 of the 1986 Code is amended 
by striking out all that follows paragraph (1) and inserting in 
lieu thereof the follovdng new paragraphs: 
"(2) GASOLINE USED IN AVIATION.—This section shall not apply 
in respect of gasoline which is used as a fuel in an aircraft— 
"(A) in noncommercial aviation (as defined in section 
4041(cX4)), or 
"(B) in aviation which is not noncommercial aviation (as 
so defined) with respect to the tax imposed by section 4081 
at the Leaking Underground Storage Tank Trust Fund 
financing rate. 
"(3) LEAKING UNDERGROUND STORAGE TANK TRUST FUND TAX 
ON GASOLINE USED IN TRAINS.—^This section shall not apply with 
respect to the tax imposed by section 4081 at the Leaking 
Underground Storage Tank Trust Fund financing rate on gaso-
line used as a fiiel in a train." 
(F) The second sentence of section 6421(a) of the 1986 Code is 
amended by striking out "paragraph (3) of subsection (e)" and 
inserting in lieu thereof "paragraph (2) of subsection (0". 
(4XA) Paragraph (1) of section 1703(f) of the Reform Act 
(relating to floor stock taxes) is amended by striking out "9 26 use 4081 
cents" and insertii^ in lieu thereof "9.1 cents". 
(B) Paragraph (4) of section 1703(f) of the Reform Act is 
amended to read as ifbllows: 
"(4) TRANSFER OF FLOOR STOCK TAX REVENUES TO TRUST 
FUNDS,—For purposes of determining the amount transferred to 
any trust fund, the tax imposed by this section shall be treated 
as imposed by section 4081 of the Internal Revenue Ciode of 
1986— 
"(A) at the Highway Trust Fund financing rate under 
such section to the extent of 9 cents per gallon, and 
"(B) at the Leaking Underground Storage Tank Trust 
Fund financing rate under such section to the extent of 0.1 
cent per gallon." 
(5XA) Paragraph (1) of section 4081(c) of the 1986 Code, as 
amended by section 1703 of the Reform Act, is amended by 
note. 
102 STAT. 3596 
PUBLIC LAW 100-647—NOV. 10, 1988 
inserting "and by substituting '% cent' for '0,1 cent' " before "in 
the case of the removal". 
(B) The last sentence of section 4081(cX2) of the 1986 Code, as 
amended by such section 1703, is amended by striking out "5% 
cents a gallon" and inserting in lieu thereof "reduced by the 
amount of tax imposed (and not credited or refunded) on any 
prior removal or sale of such fuel". 
(6XA) Paragraph (1) of section 4091(c) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: 
"In the case of a sale described in subparagraph (B), the Leaking 
Underground Storage Tank Trust Fund financing rate shall be 
% cent per gallon." 
(B) Paragraph (4) of section 4091(b) of the 1986 Code is 
amended by inserting "except as provided in subsection (c)," 
after "paragraph (1),". 
(C) The last sentence of section 4091(cX2) of the 1986 Code is 
amended by striking out "5 cents a gallon" and inserting in lieu 
thereof "reduced by the amount of tax imposed (and not cred-
ited or refunded) on any prior sale of such fuel". 
Effective date. 
(D) The amendments made by this paragraph shall take effect 
26 use 4091 
as if included in the amendments made by section 10502 of the 
note. 
Revenue Act of 1987. 
26 use 6427 
(7XA) The amendment made by section 10502(cX4) of the 
note. 
Revenue Act of 1987 shall be treated as if included in the 
amendments made by section 1703 of the Reform Act except 
that references to section 4091 of the Internal Revenue Code of 
1986 shall not apply to sales before April 1,1988. 
(B) Subparagraph (A) of section 6427(fXl) of the 1986 Code is 
amended— 
(i) by striking out "r^ular Highway Trust Fund financ-
ing rate" each place it appears and inserting in lieu thereof 
"regular tax rate", and 
(Li) by striking out "incentive Highway Trust Fund 
financing rate" and inserting in lieu thereof "incentive tax 
rate". 
(C) Subparagraph (B) of section 6427(gXl) of the 1986 Code is 
amended to read as follows: 
"(B) DEFINITIONS.—For purposes of subparagraph (A)— 
"(i) REGULAR TAX RATE.—The term 'r^ular tax rate' 
means— 
"
O
D in the case of gasoline, the aggr^ate rate of 
tax imposed by section 4081 determined without 
r^ard to subsection (c) thereof, and 
"(II) in the case of diesel fuel, the aggr^ate rate 
of tax imposed by section 4091 on such fuel deter-
mined without regard to subsection (c) thereof, 
"(ii) INCENTIVE TAX RATE.—The term 'incentive tax 
rate' means— 
"(I) in the case of gasoline, the aggr^ate rate of 
tax imposed by section 4081 with respect to fuel 
described in subsection (cXD thereof, and 
"(II) in the case of diesel fuel, the aggr^ate rate 
of tax imposed by section 4091 with respect to fuel 
described in subsection (cXlXB) thereof.' 
(D) Paragraph (2) of section 6427(1) of the 1986 Code is 
amended by inserting "under section 4041" after "exempt". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3597 
(E) The amendments made by this paragraph shall take effect 
Effective date. 
as if included in the amendments made by section 10502 of the 26 USC 6427 
Revenue Act of 1987. 
"°*^ 
(e) EFFECTIVE DATE.—Except as otherwise provided in this section, 
26 USC 56 note. 
the amendments made by this section shall take effect as if included 
in the provision of the Superfund Revenue Act of 1986 to which it 
relates. 
SEC. 2002. AMENDMENTS RELATED TO HARBOR MAINTENANCE REVENUE 
ACT OF 1986. 
(a) ORDER OF ENACTMENTS.— 
(1) For purposes of section 4042 of the 1986 Code, the 26 USC 4042 
amendment made by section 521(a)(3) of the Superfund Revenue ^°^^-
Act of 1986 shall be treated as enacted after the amendment 
made by section 1404(a) of the Harbor Maintenance Revenue 
Act of 1986. 
(2) Paragraph (2) of section 4042(b) of the 1986 Code is 
amended to read as follows: 
"(2) RATES.—For purposes of paragraph (1)— 
"(A) The Inland Waterways Trust Fund financing rate is 
the rate determined in accordance with the following table: 
The tax per 
If the use occurs: 
gallon is: 
Before 1990 
10 cents 
During 1990 
11 cents 
During 1991 
13 cents 
During 1992 
15 cents 
During 1993 
17 cents 
During 1994 
19 cents 
After 1994 
20 cents. 
"(B) The Leaking Underground Storage Tank Trust Fund 
financing rate is 0.1 cent per gallon." 
(b) CARGO TRANSPORTED BETWEEN POSSESSIONS, ETC.—Subpara-
graph (B) of section 44620t)Xl) of the 1986 Code is amended to read as 
follows: 
"(B) cargo loaded on a vessel in Alaska, Hawaii, or any 
possession of the United States for transportation to the 
United States mainland, Alaska, Hawaii, or such a posses-
sion for ultimate use or consumption in the United States 
mainland, Alaska, Hawaii, or such a possession,". 
(c) DELAY IN DUE DATE FOR STUDY OF CARGO DIVERSION.—Section 
1407 of the Harbor Maintenance Revenue Act of 1986 is amended by 26 USC 4461 
striking out "1 year from the date of the enactment of this Act" and "ote. 
inserting in lieu thereof "December 1,1988". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 4042 
take effect as if included in the provision of the Harbor Maintenance 
note. 
Revenue Act of 1986 to which it relates. 
SEC. 2003. AMENDMENTS RELATED TO OMNIBUS BUDGET RECONCILI-
ATION ACT OF 1986. 
(a) AMENDMENT RELATED TO SECTION 1011 OF THE ACT.— 
(1) Subparagraph (B) of section 501(cX12) of the 1986 Code is 
amended by striking out "or" at the end of clause (ii), by 
striking out the period at the end of clause (iii), and inserting in 
lieu thereof ", or", and by adding at the end thereof the 
following new clause: 
102 STAT. 3598 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(iv) from the prepayment of a loan under section 
306A, 306B, or 311 of the Rural Electrification Act of 
1936 (as in effect on January 1,1987)." 
(2) Subparagraph (C) of section 501(cX12) of the 1986 Code is 
amended to read as follows: 
"(C) In the case of a mutual or cooperative electric com-
pany, subparagraph (A) shall be applied without taking into 
account any income received or accrued— 
"(i) from qualified pole rentals, or 
"(ii) fix>m the prepayment of a loan under section 
306A, 306B, or 311 of the Rural Electrification Act of 
1936 (as in effect on January 1,1987)." 
26 use 501 note. 
(3) The amendments made by this subsection shall apply to 
taxable years ending after the date of the enactment of the 
Omnibus Bu(]^et Reconciliation Act of 1986. 
(b) AMENDMENTS RELATED TO SECTION 8011 OF THE ACT.— 
(1) The following provisions of the 1986 Code are each 
amended by striking out "the 14th day after the date on which" 
and inserting in lieu thereof "the 14th day after the last day of 
the semimonthly period during which": 
(A) Subparagraphs (A) and (B) of section 5061(dX2). 
(B) Paragraph (3) of section 5061(d). 
(C) aauses (i) and (ii) of section 5703(bX2XB). 
(D) Subparagraph (C) of section 5703(bX2). 
Effective date. 
(2) The amendments made by paragraph (1) shall take effect 
26 use 5061 
as if included in the amendments made by section 8011 of the 
note. 
Omnibus Budget Reconciliation Act of 1986. 
(c) AMENDMENT RELATED TO SECTION 8041 OF THE ACT.— 
(1) IN GENERAL.—Paragraph (3) of section 901(j) of the 1986 
Code is amended— 
(A) by striking out "Section 275" and inserting in lieu 
thereof "Sections 275 and 78", and 
(B) by inserting ", ETC." after "DEDUCTION" in the para-
graph heading. 
26 use 901 note. 
(2) EFFECTIVE DATE.—^Thc amendments made by paragraph (1) 
shaU take effect on January 1,1987. 
(d) AMENDMENT RELATED TO SECTION 9002 OF THE ACT.—Para-
graph (3) of section 3509(d) of the 1986 Code is amended by striking 
out "subsection (dX3)" and inserting in Ueu thereof "subsection 
(dX4)". 
SEC. 2004. AMENDMENTS RELATED TO THE REVENUE ACT OF 1987. 
(a) AMENDMENT RELATED TO SECTION 10101 OF THE ACT.—Section 
26 use 21 note. 
10101(b) of the Revenue Act of 1987 is amended to read as follows: 
"(b) EFFECTIVE DATE.— 
"(1) IN GENERAL.—^The amendment made by subsection (a) 
shall apply to expenses paid in taxable years b^inning after 
December 31,1987. 
"(2) SPECIAL RULE FOR CAFETERIA PLANS.—For purposes of 
section 125 of the Internal Revenue Code of 1986, a plan shall 
not be treated as failing to be a cafeteria plan solely because 
under the plan a participant elected before January 1, 1988, to 
receive reimbursement imder the plan for dependent care 
assistance for periods after December 31, 1987, and such assist-
ance included reimbursement for expenses at a camp where the 
dependent stays overnight." 
(b) AMENDMENTS RELATED TO SECTION 10102 OF THE ACT.— 
PUBLIC LAW 100-647—NOV. 10,1988 
102 STAT. 3599 
(1) Subsection (h) of section 163 of the 1986 Code is amended 
by redesignating paragraph (6) as paragraph (5). 
(2) Clause (ii) of section 56(bXlXC) of the 1986 Code is amended 
by striking out "163(hX6)" and inserting in lieu thereof 
"163(hX5)". 
(3) Paragraph (1) of section 56(e) of the 1986 Code is 
amended— 
(A) by striking out "substantially rehabilitating" and 
inserting in lieu thereof "substantially improving", and 
(B) by striking out "or is paid" in subparagraph (A). 
(c) AMENDMENT RELATED TO SECTION 10103.—Paragraph (1) of 
section 10103(a) of the Revenue Act of 1987 is amended by inserting 
26 USC 219 note. 
"in a plan established for its employees by the United States" after 
"participant". 
(d) AMENDMENTS RELATED TO SECTION 10202 OF THE ACT.— 
(1) Subparagraph (A) of section 453(1X1) of the 1986 Code, is 
amended by striking out "disposes of personal property" and 
inserting in lieu thereof "disposes of personal property of the 
same type". 
(2) Section 453A of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(e) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the purposes of this section, 
including regulations— 
"(1) disallowing the use of the installment method in whole or 
in part for transactions in which the rules of this section 
otherwise would be avoided through the use of related persons, 
pass-thru entities, or intermediaries, and 
"(2) providing that the sale of an interest in a partnership or 
other pass-thru entity will be treated as a sale of the propor-
tionate share of the assets of the partnership or other entity." 
(3) Paragraph (3) of section 10202(e) of the Revenue Act of 
1987 is amended by adding at the end thereof the following new 26 USC 453 note. 
subparagraph: 
"(C) CERTAIN DISPOSITIONS DEEMED MADE ON 1ST DAY OF 
TAXABLE YEAR.—If the taxpayer makes an election under 
subparagraph (A), in the case of the taxpayer's 1st taxable 
year ending after December 31,1986— 
"(i) dispositions after August 16, 1986, and before the 
1st day of such taxable year shall be treated as made on 
such 1st day, and 
"(ii) subsections (bX2XB) and (cX4) of section 453A of 
such Code shall be applied separately with respect to 
such dispositions by substituting for '$5,000,000' the 
amount which bears the same ratio to $5,000,000 as the 
number of days after August 16, 1986, and before such 
1st day bears to 365." 
(4) Paragraph (2) of section 10202(e) of the Revenue Act of 
1987 is amended by adding at the end thereof the following new 
subparagraph: 
"(C) CERTAIN RULES MADE APPUCABLE.—For purposes of 
this paragraph, rules similar to the rules of paragraphs (4) 
and (5) of section 812(c) of the Tax Reform Act of 1986 (as 
added by the Technical and Miscellaneous Revenue Act of 
1988) shall apply." 
(5) Subsection (k) of section 453 of the 1986 Code is amended 
by striking out "and section 453A". 
102 STAT. 3600 
PUBLIC LAW 100-647—NOV. 10, 1988 
(6) Subparagraph (A) of section 10202(eX2) of the Revenue Act 
26 use 453 
of 1987 is amended by striking out "section 453A of the Internal 
"ot®- 
Revenue Code of 1986" and inserting in heu thereof "section 
453(1X1) of the Internal Revenue Code of 1986 as added by this 
SGct 
i on 
(7) Paragraph (2) of section 453A(b) of the 1986 Code is 
amended by striking out "for purposes of this paragraph" and 
inserting in lieu thereof "for purposes of this paragraph and 
subsftction fc)(4i 
(8) Paragraph' (3) of section 453A(b) of the 1986 Code is 
amended to read as follows: 
"(3) EXCEPTION FOR FARM PROPERTY.—An installment obliga-
tion shall not be treated as described in paragraph (1) if it arises 
from the disposition of any property used or produced in the 
trade or business of farming (within the meaning of section 
2032A(e) (4) or (5)." 
(e) AMENDMENTS RELATED TO SECTION 10206 OF THE ACT.— 
(IXA) Subsection (a) of section 444 of the 1986 (Dode is 
amended by striking out "as provided in subsections (b) and (c)" 
and inserting in lieu thereof "as otherwise provided in this 
section". 
(B) Paragraph (3) of section 444(d) of the 1986 Code is amended 
to read as follows: 
"(3) TIERED STRUCTURES, ETC.— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph— 
"(i) no election may be under subsection (a) with 
respect to any entity which is part of a tiered structure, 
and 
"(ii) an election under subsection (a) with respect to 
any entity shall be terminated if such entity becomes 
part of a tiered structure. 
"(B) EXCEPTIONS FOR STRUCTURES CONSISTING OF CERTAIN 
ENTITIES WITH SAME TAXABLE YEAR.—Subparagraph (A) 
shall not apply to any tiered structure which consists only 
of partnerships or S corporations (or both) all of which have 
the same taxable year." 
(C) Subparagraph (B) of section 444(dX2) of the 1986 C ^ e is 
amended by striking out "under subparagraph (A)" and insert-
ing in lieu thereof "under subparagraph (A) or paragraph 
(3XA)". 
(2XA) Section 444 of the 1986 Code is amended by redesignat-
ing subsection (f) as subsection (g) and inserting after subsection 
(e) the following new subsection: 
"(f) PERSONAL SERVICE CORPORATION.—For purposes of this sec-
tion, the term 'personal service corporation' has the meaning given 
to such term by section 441(iX2)." 
(B) Subsection (f) of section 280H of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(5) PERSONAL SERVICE CORPORATION.—The term 'personal 
service corporation' has the meaning given to such term by 
section 441(iX2)." 
(3) Paragraph (2) of section 280H(f) of the 1986 Code is 
amended by striking out "section 296A(bX2)" and inserting in 
lieu thereof 
"section 269A(bX2) (as modified by section 
441(iX2))". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3601 
(4XA) Paragraph (2) of section 75190)) of the 1986 Code is 
amended to read as follows: 
"(2) the net required payment balance." 
(B) Subsection (e) of section 7519 of the 1986 Code is amended 
by adding at the end tiiereof the following new paragraph: 
"(4) NET REQUIRED PAYMENT BALANCE.—^The term 'net required 
payment balance' means the excess (if any) of— 
"(A) the aggr^ate of the required payments under this 
section for aU preceding applicable election years, over 
"(B) the aggr^ate amount allowable as a refund to the 
entity under subsection (c) for all preceding applicable elec-
tion years." 
(5) Subsection (c) of section 7519 of the 1986 Code is amended 
to read as follows: 
"(c) REFUND OF PAYBCENTS.— 
"(1) IN GENERAL.—If, for any applicable election year, the 
amount determined under subsection (bX2) exceeds the amount 
determined under subsection (bXl), the entity shall be entitled 
to a refund of such excess for such year. 
"(2) TERMINATION OF ELECTIONS, ETC.—If^ 
"(A) an election under section 444 is terminated effective 
with respect to any year, or 
"(B) the entity is liquidated during any year, the entity 
shall be entitled to a refund of the net required pajrment 
balance. 
"(3) DATE ON WHICH REFUND PAYABLE.—Any refund under this 
subsection shall be payable on later of— 
"(A) April 15 of the calendar year following— 
"(i) in the case of the year referred to in paragraph 
(1), the calendar year in which it b ^ n s , 
"(ii) in the case of the year referred to in paragraph 
(2), the calendar year in which it ends, or 
"(B) the day 90 days after the day on which claim there-
for is filed with the Secretary." 
(6) Subsection (g) of section 7519 of the 1986 Code is amended 
by striking out "including r^ulations" and all that follows 
down through the period at the end thereof and inserting in lieu 
thereof 
"including regulations providing for appropriate adjustments in the 
application of this section and sections 280H and 444 in cases 
where— 
"(1) 2 or more applicable election years b ^ ^ in the same 
calendar year, or 
"(2) the base year is a taxable year of less than 12 months." 
(7) Subparagraph (B) of section 7519(dX2) of the 1986 Code is 
amended by inserting before the period at the end thereof the 
following: "(and such corporation shall be treated as an S 
corporation for such taxable year for purposes of paragraph 
(3))r 
(8) Subsection (d) of section 7519 of the 1986 CJode is amended 
by adding at the end thereof the following new paragraph: 
"(5) TREATMENT OF GUARANTEED PAYMENTS.— 
"(A) IN GENERAL.—Any guaranteed pa3rment by a part-
nership shall not be treated as an applicable payment, and 
the amount of the net income of the partnership shall be 
determined by not taking such guaranteed pajnnent into 
account. 
102 STAT. 3602 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) GUARANTEED PAYMENT.—For purposes of subpara-
graph (A), the term 'guaranteed payment' means any pay-
ment referred to in section 707(c)." 
(9) Paragraph (4) of section 7519(d) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "Notwithstanding the preceding provisions of this para-
graph, for taxable years beginning after 1987, the applicable 
percentage for any partnership or S corporation shall be 100 
percent if more than 50 percent of such entity's net income for 
the short taxable year which would have resulted if the entity 
had not made an election under section 444 would have been 
allocated to partners or shareholders who would not have been 
entitled to the benefits of section 806(eX2XC) of the Tax Reform 
Act of 1986 with respect to such income." 
(10) Subparagraphs (A) and (B) of section 7519(dX2) of the 1986 
Code are each amended by striking out "(other than credits)" 
and inserting in lieu thereof "(other than credits and tax-
exempt income)". 
(11) Paragraph (4) of section 10206(d) of the Revenue Act of 
26 use 444 note. 
1987 is amended by adding at the end thereof the following new 
sentence: "The preceding sentence shall apply only in the case 
of an election under section 444 of such (Dode made for a taxable 
year beginning before 1989." 
(12) Subparagraph (A) of section 444(dX2) of the 1986 Code is 
amended by inserting "or otherwise terminates such election" 
before the period at the end of the first sentence thereof. 
(13) Paragraph (4) of section 444(b) of the 1986 Code is 
amended by striking out "the term" and inserting in lieu 
thereof "except as provided in regulations, the term". 
(14XA) Paragraph (4) of section 280H(f) of the 1986 Code is 
amended to read as follows: 
"(4) ADJUSTED TAXABLE INCOME.—The term 'adjusted taxable 
income' means taxable income determined without regard to— 
"(A) any amount paid to an employee-owner which is 
includible in the gross income of such employee-owner, and 
"(B) any net operating loss carryover to the extent such 
carryover is attributable to amounts described in subpara-
graph (A)." 
(B) Subparagraph (A) of section 7519(dX3) of the 1986 Code is 
amended by striking out "or incurred". 
(C) Subsections (cXlXAXi) and (dXD of section 280H of the 1986 
Code are each amended by striking out "or incurred". 
(f) AMENDMENTS RELATED TO SECTION 10211 OF THE ACT.— 
(1) Paragraph (4) of section 7704(e) of the 1986 Code is 
amended by striking out "as may be required" and inserting in 
lieu thereof "or to pay such amounts as may be required". 
(2) Paragraph (2) of section 10211(c) of the Revenue Act of 
26 use 7704 
1987 is amended by adding at the end thereof the following new 
subparagraph: 
"(C) COORDINATION WITH PASSIVE-TYPE INCOME REQUIRE-
MENTS.—In the case of an existing partnership, paragraph 
(1) of section 7704(c) of the Internal Revenue Code of 1986 
(as added by this section) shall be applied by substituting 
for 'December 31,1987' the earlier of— 
"(i) December 31,1997, or 
note. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3603 
"(ii) the day (if any) £is of which such partnership 
ceases to be treated as an existing partnership by 
reason of subparagraph (B)." 
(3) Paragraph (1) of section 7704(c) of the 1986 Ck)de is 
amended by adding at the end thereof the following new sen-
tence: "For purposes of the preceding sentence, a partnership 
shall not be treated as being in existence during any period 
before the 1st taxable year in which such partnership (or a 
predecessor) was a publicly traded partnership." 
(4) Paragraph (1) of section 7704(d) of the 1986 Code is 
amended by adding at the end thereof the following new sen-
tence: "For purposes of subparagraph (E), the term 'mineral or 
natural resource' means any product of a character with respect 
to which a deduction for depletion is allowable under section 
611; except that such term shall not include any product 
described in subparagraph (A) or (B) of section 613(b)(7). 
(5) Paragraph (3) of section 7704(d) of the 1986 Code is 
amended to read as follows: 
"(3) REAL PROPERTY RENT.—The term 'real property rent' 
means amounts which would qualify as rent from real property 
under section 856(d) if— 
"(A) such section were applied without regard to para-
graph (2XC) thereof (relating to independent contractor 
requirements), and 
(B) stock owned, directly or indirectly, by or for a part-
ner would not be considered as owned under section 
318(aX3XA) by the partnership unless 5 percent or more (by 
value) of the interests in such partnership are owned, 
directly or indirectly, by or for such partner.' 
(g) AMENDMENT RELATED TO SECTION 10212 OF THE ACT.—Subsec-
tion (k) of section 469 of the 1986 Code is amended by adding at the 
end thereof the following new paragraph: 
"(3) COORDINATION WITH SUBSECTION (g).—For purposes of 
subsection (g), a taxpayer shall not be treated as having dis-
posed of his entire interest in an activity of a publicly traded 
partnership until he disposes of his entire interest in such 
partnership." 
(h) AMENDMENTS RELATED TO SECTION 10214 OF THE ACT.— 
(1) Subparagraph (E) of section 514(cX9) of the 1986 Code is 
amended by adding at the end thereof the following new clause: 
(iii) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary to carry out the 
purposes of this subparagraph, including regulations 
which may provide for exclusion or segregation of 
items." 
(2) Clause (i) of section 514(cX9XE) of the 1986 Code is 
amended by striking out subclause (I) and by redesignating 
subclauses (ID and (III) as subclauses (I) and (II), respectively. 
(i) AMENDMENTS RELATED TO SECTION 10221 OF THE ACT.— 
(1) Paragraph (2) of section 10221(e) of the Revenue Act of 
1987 is amended by striking out "amendments made by subsec- 
26 USC 243 note. 
tion (b)" and inserting in lieu thereof "amendments made by 
subsection (c)". 
(2) Subsection (b) of section 244 of the 1986 Code is amended 
by striking out "section 243(cX4)" and inserting in lieu thereof 
"section 243(dX4)". 
(j) AMENDMENTS RELATED TO SECTION 10222 OF THE ACT.— 
102 STAT. 3604 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 1503 
note. 
(IXA) Paragraph (1) of section 1503(e) of the 1986 Code is 
amended by striking out so much of such paragraph as precedes 
subparagraph (A) thereof and inserting in lieu thereof the 
following: 
"(1) IN GENERAL.—Solely for purposes of determining gain or 
loss on the disposition of intragroup stock and the amount of 
any inclusion by reason of an excess loss account, in determin-
ing the adjustments to the basis of such intragroup stock on 
account of the earnings and profits of any member of an affili-
ated group for any consolidated year (and in determining the 
amount in such account)—" 
(B) Paragraph (2) of section 10222(a) of sthe Revenue Act of 
1987 is amended by adding at the end thereof the following new 
subparagraph: 
"(C) TREATMENT OF CERTAIN EXCESS LOSS ACCOUNTS.— 
"(i) IN GENERAL.—If— 
"(I) any disposition on or before December 15, 
1987, of stock resulted in an inclusion of an excess 
loss account (or would have so resulted if the 
amendments made by paragraph (1) had applied to 
such disposition), and 
"(II) there is an unrecaptured amount with 
respect to such disposition, 
the portion of such unrecaptured amount allocable to 
stock disposed of in a disposition to which the amend-
ment made by paragraph (1) applies shall be taken into 
account as negative basis. To the extent permitted by 
the Secretary of the Treasury or his delegate, the 
preceding sentence shall not apply to the extent the 
taxpayer elects to reduce its basis in indebtedness of 
the corporation with respect to which there would have 
been an excess loss account. 
"(ii) SPECIAL RULES.—For purposes of this subpara-
graph— 
"(I) 
UNRECAPTURED 
AMOUNT.—The 
term 
'unrecaptured amount' means the amount by 
which the inclusion referred to in clause (iXI) 
would have been increased if the amendment made 
by paragraph (1) and applied to the disposition. 
"(II) 
COORDINATION WITH 
BINDING CONTRACT 
EXCEPTION.—A disposition shall be treated as 
occurring on or before December 15, 1987, if the 
amendment made by paragraph (1) does not apply 
to such disposition by reason of subparagraph (B)." 
(2) Subsection (e) of section 1503 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(3) ADJUSTMENTS.—Under regulations prescribed by the Sec-
retary, proper adjustments shall be made in the application of 
paragraph (1)— 
"(A) in the case of any property acquired by the corpora-
tion before consolidation, for the difference between the 
adjusted basis of such property for purposes of computing 
taxable income and its adjusted bsisis for purposes of 
computing earnings and profits, and 
"(B) in the case of any property, for any basis adjustment 
under section 48(q)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3605 
(3XA) Paragraph (2) of section 1503(e) of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) APPUCATION OF SECTION 312 (n) (7) NOT AFFECTED.— 
The reference in paragraph (1) to subsection (n) of section 
312 shall be treated sis not including a reference to para-
graph (7) of such subsection." 
(B) Subsection (e) of section 301 of the 1986 Code (as redesig-
nated by section 106(eX12) of this Act) is amended by redesignat-
ing paragraph (3) as paragraph (4) and by inserting after para-
graph (2) the following new paragraph: 
"(3) APPUCATION OF SECTION 312 (n) (7) NOT AFFECTED.—The 
reference in paragraph (1) to subsection (n) of section 312 shall 
be treated as not including a reference to paragraph (7) of such 
siibsficiiioii 
(4) Subparagraph (B) of section 10222(bX2) of the Revenue Act 
of 1987 is amended to read as follows: 
26 use 301 note. 
"(B) EXCEPTION.—The amendment made by paragraph (1) 
shall not apply for purposes of determining gain or loss on 
any disposition of stock after December 15,1987, and before 
January 1,1989, if such disposition is pursuEint to a written 
binding contract, governmental order, letter of intent or 
preliminary agreement, or stock acquisition agreement, in 
effect on or before December 15,1987." 
(k) AMENDMENTS RELATED TO SECTION 10223 OF THE ACT.— 
(1) Subparagraph (D) of section 3550)X2) of the 1986 Code is 
amended by striking out clauses (i) and (ii) and inserting in lieu 
thereof the following: 
"(i) was not acquired by any distributee corporation 
directly (or through 1 or more corporations, whether 
through the distributing corporation or otherwise) 
within the period described in subparagraph (B) and 
was not acquired by the distributing corporation di-
rectly (or through 1 or more corporations) within such 
period, or 
"(ii) was so acquired by any such corporation within 
such period, but, in each case in which such control was 
so acquired, it was so acquired, only by reason of 
transactions in which gain or loss was not recognized in 
whole or in part, or only by reason of such transactions 
combined with acquisitions before the beginning of 
sucli 1361*iod '* 
(2) Subparagraph (A) of section 304(bX4) of the 1986 Code is 
amended by striking out "stock of 1 member" and inserting in 
lieu thereof "stock from 1 member". 
(3) Paragraph (2) of section 10223(d) of the Revenue Act of 
1987 is amended by adding at the end thereof the following new 
26 USC 304 note. 
subparagraph: 
"(D) 
TREATMENT OF CERTAIN MEMBERS OF AFFIUATED 
GROUP.— 
"(i) IN GENERAL.—For purposes of subparagraph (A), 
all corporations which were in existence on the des-
ignated date and were members of the same affiliated 
group which included the distributees on such date 
shall be treated as 1 distributee. 
"(ii) 
LIMITATION TO STOCK HELD ON DESIGNATED 
DATE.—Clause (i) shall not exempt any distribution 
102 STAT. 3606 
PUBLIC LAW 100-647—NOV. 10, 1988 
from the amendments made by this section if such 
distribution is with respect to stock not held by the 
distributee (determined without regard to clause (i)) on 
the designated date directly or indirectly through a 
corporation which goes out of existence in the trans-
action. 
"(iii) 
DESIGNATED 
DATE.—For 
purposes 
of 
this 
subparagraph, the term 'designated date' means the 
later of— 
"(I) December 15,1987, or 
"(11) the date on which the acquisition meeting 
the requirements of subparagraph (A) occurred. 
(4) Subparagraph (B) of section 10223(dX2) of the Revenue Act 
26 use 304 note. 
of 1987 is amended— 
(A) by striking out "before January 1,1993" and inserting 
in lieu thereof "on or before March 31,1988", and 
(B) by striking out "before January 1,1989,". 
(1) AMENDMENT RELATED TO SECTION 10224 OF THE ACT.—Sections 
1201(a) and 1561(a) of the 1986 Code, and section 904(b)(3)(DXii) of the 
1986 Code (as amended by section 106(bX2) of this Act), are each 
amended by striking out "section 11(b)" and inserting in lieu thereof 
"section IKbXD". 
(m) AMENDMENTS RELATED TO SECTION 10226 OF THE ACT.— 
(IXA) Subsection (a) of section 384 of the 1986 Code is 
amended to read as follows: 
"(a) GENERAL RULE.—If— 
"(IXA) a corporation acquires directly (or through 1 or more 
other corporations) control of another corporation, or 
"(B) the assets of a corporation are acquired by another 
corporation in a reorganization described in subparagraph (A), 
(C), or (D) of section 368(aXl), and 
"(2) either of such corporations is a gain corporation, 
income for any recognition period taxable year (to the extent attrib-
utable to recognized built-in gains) shall not be offset by any 
preacquisition loss (other than a preacquisition loss of the gain 
corporation)." 
(B) Subsection (c) of section 384 of the 1986 Code is amended 
by redesignating paragraph (4) as paragraph (8) and by insert-
ing after paragraph (3) the following new paragraphs: 
"(4) GAIN CORPORATION.—The term 'gain corporation' means 
any corporation with a net unrealized built-in gain. 
(5) CONTROL.—The term 'control' means ownership of stock 
in a corporation which meets the requirements of section 
1504(aX2). 
"(6) "TREATMENT OF MEMBERS OF SAME GROUP.—Except as pro-
vided in regulations and except for purposes of subsection (b), all 
corporations which are members of the same afQliated group 
immediately before the acquisition date shall be treated as 1 
corporation. To the extent provided in regulations, section 1504 
shall be applied without regard to subsection (b) thereof for 
purposes of the preceding sentence. 
"(7) TREATMENT OF PREDECESSORS AND SUCCESSORS.—Any ref-
erence in this section to a corporation shall include a reference 
to any predecessor or successor thereof." 
(C) Paragraph (2) of section 384(c) of the 1986 Code is amended 
to read as follows: 
"(2) ACQUISITION DATE.—The term 'acquisition date' means 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3607 
"(A) in any case described in subsection (aXlXA), the date 
on which the acquisition of control occurs, or 
"(B) in any case described in subsection (aXlXB), the date 
of the transfer in the reorganization." 
(D) Paragraph (1) of section 384(c) of the 1986 Code is amended 
by striking out "subsection (aX2)" and inserting in lieu thereof 
"subsection (aXlXB)". 
(2) Paragraph (2) of section 384(e) of the 1986 Code is amended 
by striking out "the gain corporation" and inserting in lieu 
thereof "a corporation'. 
(3) Subsection (b) of section 384 of the 1986 Code is amended to 
read as follows: 
"(b) EXCEPTION WHERE CORPORATIONS UNDER COMMON CONTROL.— 
"(1) IN GENERAL.—Subsection (a) shall not apply to the 
preacquisition loss of any corporation if such corporation and 
the gain corporation were members of the same controlled 
group at all times during the 5-year period ending on the 
acquisition date. 
"(2) CONTROLLED GROUP.—For purposes of this subsection, the 
term 'controlled group' means a controlled group of corpora-
tions (£is defined in section 1563(a)); except that— 
"(A) 'more than 50 percent' shall be substituted for 'at 
least 80 percent' each place it appears, 
"(B) the ownership requirements of section 1563(a) must 
be met both with respect to voting power and value, and 
"(C) the determination shall be made without regard to 
subsection (aX4) of section 1563. 
"(3) SHORTER PERIOD WHERE CORPORATIONS NOT IN EXISTENCE 
FOR 5 YEARS.—If either of the corporations referred to in para-
graph (1) was not in existence throughout the 5-year period 
referred to in paragraph (1), the period during which such 
corporation WEIS in existence (or if both, the shorter of such 
periods) shall be substituted for such 5-year period." 
(4) Section 384 of the 1986 Code is amended by redesignating 
subsection (e) as subsection (f) and by inserting after subsection 
(d) the following new subsection: 
"(e) ORDERING RULES FOR NET OPERATING LOSSES, ETC.— 
"(1) CARRYOVER RULES.—If any preacquisition loss may not 
offset a recognized build-in gain by reason of this section, such 
gain shall not be taken into account in determining under 
section 172(bX2) the amount of such loss which may be carried 
to other taxable years. A similar rule shall apply in the case of 
any excess credit or net capital loss limited by reason of subsec-
tion (d). 
"(2) ORDERING RULE FOR LOSSES CARRIED FROM SAME TAXABLE 
YEAR.—In any case in which^ 
"(A) a preacquisition loss for any taxable year is subject 
to limitation under subsection (a), and 
"(B) a net operating loss from such taxable year is not 
subject to such limitation, 
taxable income shall be treated as having been offset 1st by the 
loss subject to such limitation." 
(5) In any case where the acquisition date (as defined in 
26 USC 384 note. 
section 384(cX2) of the 1986 Code as amended by this subsection) 
is before March 31, 1988, the acquiring corporation may elect to 
have the amendments made by this subsection not apply. Such 
an election shall be made in such manner as the Secretary of 
102 STAT. 3608 
PUBLIC LAW 100-647—NOV. 10, 1988 
the Treasury or his delegate shall prescribe and shall be made 
not later than the later of the due date (including extensions) 
for filing the return for the taxable year of the acquiring 
corporation in which the acquisition date occurs or the date 120 
days after the date of the enactment of this Act. Such an 
election, once made, shall be irrevocable, 
(n) AMENDMENTS RELATED TO SECTION 10227 OF THE ACT.—Para-
graph (4) of section 1363(d) of the 1986 Code (relating to recapture of 
LIFO benefits) is amended by adding at the end thereof the follow-
ing new subparagraph: 
"(D) NOT TREATED AS MEMBER OF AFFIUATED GROUP.— 
Except as provided in regulations, the corporation referred 
to in paragraph (1) shall not be treated as a member of an 
affiliated group with respect to the amount included in 
gross income under paragraph (1)." 
(o) AMENDMENTS RELATED TO SECTION 10228 OF THE ACT.— 
dXA) Subsection (a) of section 5881 of the 1986 Code is 
amended by striking out "gain realized by such person on such 
receipt" and inserting in lieu thereof "gain or other income of 
such person by reason of such receipt". 
(BXi) Subsection (b) of section 5881 of the 1986 Code is 
amended by striking out "a corporation to directly or indirectly 
acquire its stock" and inserting in lieu thereof "a corporation (or 
any person acting in concert with such corporation) to directly 
or indirectly acquire stock of such corporation". 
26 use 5881 
(ii) The amendment made by clause (i) shall apply to trans-
note, 
actions occurring on or after March 31,1988. 
(C) Subsection (d) of section 5881 of the 1986 Code is 
amended— 
(i) by striking out "the gain" and inserting in lieu thereof 
"the gain or other income", and 
(ii) by striking out "GAIN RECOGNIZED" in the subsection 
heading and inserting in lieu thereof "AMOUNT RECOG-
NIZED". 
(2) Section 5881 of the 1986 (Dode is amended by adding at the 
end thereof the following new subsection: 
"(e) ADMINISTRATIVE PROVISIONS.—For purposes of the deficiency 
procedures of subtitle F, any tax imposed by this section shall be 
treated as a tax imposed by subtitle A." 
(p) AMENDMENTS RELATED TO SECTION 10241 OF THE ACT.— 
(1) Paragraph (1) of section 811(d) of the 1986 Code is amended 
by striking out "the prevailing State assumed interest rate for 
the contract" and inserting in lieu thereof "the greater of the 
prevailing State assumed interest rate or applicable Federal 
interest rate in effect under section 807 for the contract". 
(2) Paragraph (2) of section 812(b) of the 1986 (Dode is amended 
by striking out the last sentence and inserting in lieu thereof 
the following: 
"In any case where neither the prevailing State assumed interest 
rate nor the applicable Federal interest rate is used, another appro-
priate rate shall be used for purposes of subparagraph (A)." 
(q) AMENDMENTS RELATED TO SECTION 10242 OF THE ACT.— 
(1) Subsection (h) of section 816 of the 1986 Code is amended 
by striking out "section 842(cXlXA)" and inserting in lieu 
thereof "section 842(bX2XBXi)". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3609 
(2XA) Subparagraph (B) of section 842(bX3) of the 1986 Code is 
amended by striking out "held for the production of such 
income". 
(B) Subparagraph (B) of section 842(bX4) of the 1986 Code is 
amended by striking out "held for the production of investment 
income". 
(3) Subparagraph (d) of section 842 of the 1986 Code is 
amended by striking out "and" at the end of paragraph (2), by 
striking out the period at the end of paragraph (3) and inserting 
in lieu thereof ", and", and by adding at the end thereof the 
foUowing new paragraph: 
"(4) which may provide that, in the case of companies taxable 
under part II of this subchapter, determinations under subsec-
tion (b) will be made separately for cat^ories of such companies 
established in such r^ulations." 
(r) AMENDMENT RELATED TO SECTION 10301 OP THE ACT.—Para-
graph (3) of section 6655(g) of the 1986 Code is amended by striking 
the sentence following subparagraph (Q and inserting in lieu 
thereof the following: 
"In the case of any organization described in subparagraph (A), 
subsection 0>X2XA) shall be applied by substituting '5th month' 
for '3rd month', and subsection (eX2XA) shall be applied by 
substituting '2 months' for '3 months' and in clause (iXD, by 
substituting '4 months' for '5 months' in clause (iXII)> by 
substituting '7 months' for '8 months' in clause (iXHI), and by 
substituting '10 months' for *11 months' in clause (iXIV)". 
(s) AMENDMENTS RELATED TO SECTION 10502 OF THE ACT.— 
(1) Section 4093 of the 1986 Code is amended by redesignating 
subsections (d) and (e) as subsections (e) and (f), respectively, and 
by inserting after subsection (c) the following new subsection: 
"(d) CERTAIN AVIATION FUEL SALES.—Under r^ulations pre-
scribed by the Secretary, the Leaking Underground Storage Tank 
Trust Fund financing rate under section 4091 shall not apply to 
aviation fuel sold for use or used as supplies for vessels or aircraft 
(within the meaning of section 4221(dX3))." 
(2) Subparagraph (B) of section 64270X3) of the 1986 Code 
(relating to no refund of Leaking Underground Storage Tank 
Trust Fund financing tax) is amended by inserting "(except as 
supplies for vessels or aircraft within the meaning of section 
4221(dX3))" after "aircraft". 
(3) Section 6427 of the 1986 Code is amended by redesignating 
the subsection (p) relating to gasoline used in noncommercial 
aviation during period rate reduction in effect and subsection (q) 
(relating to cross references) as subsections (q) and (r), respec-
tively. 
(t) AMQIIDMENTS RELATED TO SECTION 10512 OF THE ACT.— 
(1) Section 5276 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(c) EIXCEPTION FOR UNFTED STATES.—Subsection (a) shall not apply 
to any permit issued to an agency or instrumentality of the United 
States." 
(2) Subsection (a) of section 5113 of the 1986 Code is 
amended— 
(A) by inserting "taxpaid wine bottling house," after 
"bonded wine cellar," each place it appears, and 
102 STAT. 3610 
PUBLIC LAW 100-647—NOV. 10, 1988 
(B) by striking out "DISTILLED SPIRITS PLANTS, BONDED 
WINE CELLARS, OR BREWERIES" in the heading and inserting 
in lieu thereof "CONTROLLED PREMISES". 
(3) Section 5123 of the 1986 Code is amended by redesignating 
subsection (c) as subsection (d) and by inserting after subsection 
Qy) the following new subsection: 
"(c) COORDINATION OF TAXES UNDER SECTION 5121,—NO tax shall 
be imposed by section 5121(a) with respect to a person's activities at 
any place during a year if such person has paid the tax imposed by 
section 5121(b) with respect to such place for such year." 
(4) Section 5113 of the 1986 Code is amended by adding at the 
end thereof the following new subsection: 
"(g) COORDINATION OF TAXES UNDER SECTION 5111.—No tax shall 
be imposed by section 5111(a) with respect to a person's activities at 
any place during a year if such person has paid the tax imposed by 
section 5111(b) with respect to such place for such year." 
26 use 56 note. 
(u) EFFECTIVE DATE.—Except as otherwise provided in this section, 
any amendment made by this section shall take effect as if included 
in the provisions of the Revenue Act of 1987 to which such amend-
ment relates. 
SEC. 2005. AMENDMENTS RELATED TO PENSION PROTECTION ACT AND 
FULL FUNDING LIMITATIONS. 
(a) AMENDMENT RELATED TO SECTION 9303.— 
(1) Section 4972(c) of the 1986 Code is amended by redesignat-
ing paragraph (4) as paragraph (5) and by inserting after para-
graph (3) the following new paragraph: 
"(4) SPECIAL RULE FOR SELF-EMPLOYED INDIVIDUALS.—For pur-
poses of paragraph (1), if— 
"(A) the amount which is required to be contributed to a 
plan under section 412 on behalf of an individual who is an 
employee (within the meaning of section 401(cXl)), exceeds 
"(B) the earned income (within the meaning of section 
404(aX8)) of such individual derived from the trade or busi-
ness with respect to which such plan is established, 
such excess shall be treated as an amount allowable as a 
deduction under section 404." 
(2XA) Subparagraph (C) of section 412(1X3) of the 1986 Code is 
amended— 
(i) by striking out "October 17, 1987" in clause (i) and 
inserting in lieu thereof "October 29,1987", and 
(ii) by striking out "October 16, 1987" in clause (iii) and 
inserting in lieu thereof "October 28,1987". 
(B) Subparagraph (C) of section 302(dX3) of the Employee 
29 use 1082. 
Retirement Income Security Act of 1974 is amended— 
(i) by striking out 'MOctober 17, 1987" in clause (i) and 
inserting in lieu thereof "October 29,1987", and 
(ii) by striking out "October 16, 1987" in clause (iii) and 
inserting in lieu thereof "October 28,1987". 
(b) AMENDMENTS RELATED TO SECTION 9307.— 
(1) The last sentence of section 404(aXlXD) of the 1986 Code is 
amended by striking out "For purposes of this subparagraph" 
and inserting in lieu thereof "For purposes of determining 
whether a plan has more than 100 participants". 
(2) Section 404(aX7XA) of the 1986 Code is amended by adding 
at the end thereof the following new sentence: "For purposes of 
clause (ii), if paragraph (IXD) applies to a defined benefit plan 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3611 
for any plan year, the amount necessary to satisfy the minimum 
funding standard provided by section 412 with respect to such 
plan for such plan year shall not be less than the unfunded 
current liability of such plan under section 412(1).". 
(3) Section 404(aXlXD) of the 1986 Ck)de is amended by striking 
out "(without r^ard to any reduction by the credit balance in 
the funding standard account)", 
(c) AMENDMENTS RELATED TO SECTION 9301.— 
(1) Section 414(1) of the 1986 <3ode is amended by adding at the 
end thereof the following new paragraph: 
"(2) ALLOCATION OF ASSETS IN PLAN SPIN-OFFS, ETC.— 
"(A) IN GENERAL.—In the case of a plan spin-off of a 
defined benefit plan, a trust which forms part of— 
"(i) the original plan, or 
"(ii) any plan spun off from such plan, 
shall not constitute a qualified trust under this section 
imless the applicable percentage of excess assets are allo-
cated to each of such plans. 
"(B) APPLICABLE PERCENTAGE.—^For purposes of subp£u-a-
graph (A), the term 'applicable percentage' means, with 
respect to each of the plans describied in clauses (i) and (ii) of 
subparagraph (A), the percentage determined by dividing— 
"(i) the excess (if any) of— 
"(D the amount determined under section 
412(c)(7XAXi) with respect to the plan, over 
"(II) the amount of the assets required to be 
allocated to the plan after the spin-off (without 
r^ard to this paragraph), by 
"(ii) the sum of the excess amounts determined sepa-
rately under clause (i) for all such plans. 
"
(
C
D
) BIxcESS ASSETS.—For purposes of subparagraph (A), 
the term 'excess assets' means an amount equal to the 
excess (if any) of— 
"(i) the fair market value of the assets of the original 
plan immediately before the spin-off, over 
"(ii) the amount of assets required to be allocated 
after the spin-off to all plans (determined without 
r^ard to this paragraph). 
"(D) CERTAIN SPUN-OFF PLANS NOT TAKEN INTO ACCOXJNT.— 
"(i) IN GENERAL.—^A plan involved in a spin-off which 
is described in clause (ii), (ill), or (iv) shall not be taken 
into account for purposes of this paragraph, except that 
the amount determined under subparagraph (CXii) 
shall be increased by the amount of assets allocated to 
such plan. 
"(ii) 
PLANS 
TRANSFERRED 
OUT 
OF CONTROLLED 
GROUPS.—^A plan is described in this clause if, after 
such spin-off, such plan is maintained by an employer 
who is not a member of the same controlled group as 
the employer maintaining the original plan. 
"(iii) PLANS TRANSFERRED OUT OF BCULTEPLE EMPLOYER 
PLANS.—^A plan as described in this clause if, after the 
spin-off, aiw employer maintaining such plan (and any 
member of the same controlled group as such em-
ployer) does not maintain any other pkm remaining 
after the spin-off which is also maintained by another 
employer (or member of the same controlled group as 
102 STAT. 3612 
PUBLIC LAW 100-647—NOV. 10, 1988 
such other employer) which maintained the plan in 
existence before the spin-off. 
"(iv) TERMINATED PLANS.—A plan is described in this 
clause if, pursuant to the transaction involving the 
spin-off, the plan is terminated. 
"(v) 
CONTROLLED GROUP.—For purposes of this 
subparagraph, the term 'controlled group' means any 
group treated as a single employer under subsection (b), 
(c), (m), or (o). 
"(E) 
PARAGRAPH NOT TO APPLY TO MULTIEMPLOYER 
PLANS.—This paragraph does not apply to any multiem-
ployer plan with respect to any spin-off to the extent that 
participants either before or after the spin-off are covered 
under a multiemployer plan to which title IV of the 
Employee Retirement Income Security Act of 1974 applies. 
"(F) 
APPLICATION TO SIMILAR TRANSACTION.—Except as 
provided by the Secretary, rules similar to the rules of this 
paragraph shall apply to transactions similar to spin-offs." 
(2) Section 414(1) of the 1986 Code is amended by striking out 
the heading and inserting in lieu thereof: 
"(1) MERGER AND CONSOUDATIONS OF PLANS OR TRANSFERS OF PLAN 
ASSETS.— 
"(1) IN GENERAL.—". 
26 use 414 note. 
(3XA) Except as provided in subparagraph (B), the amend-
ments made by this subsection shall apply with respect to 
transactions occurring after July 26,1988. 
(B) The eimendments made by this subsection shall not apply 
to any transaction occurring after July 26, 1988, if on or before 
such date the board of directors of the employer, approves such 
transaction or the employer took similar binding action, 
(d) OTHER PROVISIONS.— 
(1) Subparagraph (C) of section 412(1X3) of the 1986 Code is 
amended— 
(A) by striking out "October 17, 1987" in clause (i) and 
inserting in lieu thereof "October 29,1987", and 
(B) by striking out "October 16, 1987" in clause (iii) and 
inserting in lieu thereof "October 28,1987". 
(2) Subparagraph (B) of section 302(dX3) of the Employee 
29 use 1082. 
Retirement Income Security Act of 1974 is amended— 
(A) by striking out '^October 17, 1987" in clause (i) and 
inserting in lieu thereof "October 29,1987", and 
(B) by striking out "October 16, 1987" in clause (iii) and 
inserting in lieu thereof "October 28,1987". 
26 use 404 note. 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
take effect as if included in the amendments made by the provisions 
of the Omnibus Budget Reconciliation Act of 1987 to which it 
relates. 
SEC. 2006. AMENDMENTS RELATED TO SECTION 9201 OF THE OMNIBUS 
BUDGET RECONCILIATION ACT OF 1987. 
(a) Subsection (c) of section 4132 of the 1986 Code (relating to 
imposition of tax on certain vaccines) is amended by redesignating 
paragraphs (1) and (2) as paragraphs (3) and (4), respectively, and by 
inserting before paragraph (3) (as so redesignated) the following new 
paragraphs: 
"(1) CERTAIN USES TREATED AS SALES.—Any manufacturer, 
producer, or importer of a vaccine which uses such vaccine 
''W^iMP* 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3613 
before it is sold shall be liable for the tax imposed by section 
4131 in the same manner as if such vaccine were sold by such 
manufacturer, producer, or importer. 
"(2) TREATBCENT OF VACCINES SHIPPED TO UNITED STATES POSSES-
SIONS.—Section 4221(aX2) shall not apply to any vaccine shipped 
to a possession of the United States." 
(b) Subsection (a) of section 9510 of the 1986 Code is amended— 
(1) by inserting "appropriated or" before "credited", and 
(2) by inserting "this section or" before "section 9602(b)". 
(c) The amendments made by this section shall take effect as if Effective date. 
included in the amendments made by section 9201 of the Omnibus 
26 use 4132 
Budget Reconciliation Act of 1987. 
"o^. 
TITLE III—ADDITIONAL SIMPLIFICATION 
AND CLARIFICATION PROVISIONS 
Subtitle A—Diesel Fuel Excise Tax Collection 
and Exemption Procedures 
SEC. 3001. TAX-FREE PURCHASES OF CERTAIN FUELS. 
(a) IN GENERAL.—Subsection (c) of section 4093 of the 1986 Code 
(relating to exceptions; special rule) is amended to read as follows: 
"(C) EbCEMPTION FOR NONTAXABLE USES AND BuS USES.— 
"(1) IN GENERAL.—No tax shall be imposed by section 4091 on 
fuel sold by a producer or importer for use by the purchaser in a 
nontaxable use (as defined in section 6427(1X2)) or a use 
described in section 6427(bXl). 
"(2) EXCEPTIONS.— 
"(A) CERTAIN LEAKING UNDERGROUND STORAGE TANK 
TRUST FUND TAXES.—In the case of fuel sold for use in— 
"(i) a diesel-powered train, and 
"(ii) an aircraft, 
paragraph (1) shall not apply to so much of the tax imposed 
by section 4091 as is attributable to the Leaking Under-
ground Storage Tank Trust Fund financing rate imposed by 
such section. 
"(B) (CERTAIN BUS USES.—Paragraph (1) shall not apply to 
so much of the tax imposed by section 4091 as is not 
refundable by reason of the application of section 
6427(bX2XA). 
"(3) REGISTRATION REQUIRED.—^Except to the extent provided 
by the Secretary, paragraph (1) shall not apply to any sale 
unless— 
"(A) both the seller and the purchaser are registered 
under section 4101, and 
"(B) the purchaser's name, address, and r^istration 
number under such section are provided to the seller. 
"(4) INFORMATION REPORTING.— 
"(A) RETURNS BY PRODUCERS AND IMPORTERS.—Each pro-
ducer or importer who makes a reduced-tax sale during the 
calendar year shall make a return (at such time and in such 
form as the Secretary may by r^ulations prescribe) show-
ing with respect to each such sale— 
102 STAT. 3614 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) the name, address, and registration number 
under section 4101 of the purchaser, 
"(ii) the amount of fuel sold, and 
"(iii) such other information as the Secretary may 
require. 
"(B) STATEMENTS TO PURCHASERS.—Every person required 
to make a return under subparagraph (A) shall furnish to 
each purchaser whose name is required to be set forth on 
such return a written statement showing the name and 
address of the person required to make such return, the 
registration number under section 4101 of such person, and 
the information required to be shown on the return with 
respect to such purchaser. The written statement required 
under the preceding sentence shall be furnished to the 
purchaser on or before January 31 of the year following the 
calendar year for which the return under subparagraph (A) 
is required to be made. 
"(C) RETURNS BY PURCHASERS.—Each person who uses 
during the calendar year fuel purchased in a reduced-tax 
sale shall make a return (at such time and in such form as 
the Secretary may by regulations prescribe) showing— 
"(i) whether such use was a nontaxable use (as de-
fined in section 6427(1X2)) or a use described in section 
6427(bXl) and the amount of fuel so used, 
"(ii) the date of the sale of the fuel so used, 
"(iii) the name, address, and registration number 
under section 4101 of the seller, and 
"(iv) such other information as the Secretary may 
require. 
"(D) REDUCED-TAX SALE.—For purposes of this paragraph, 
the term 'reduced tax sale' means any sale of taxable fuel 
on which the amount of tax otherwise required to be paid 
under section 4091 is reduced by reason of paragraph (1) 
^ 
(other than sales described in subsections (a) and (b) of this 
section)." 
(b) PENALTY FOR FAIUNG TO PROVIDE INFORMATION.— 
(1) Subparagraph (B) of section 6724(dXl) of the 1986 Code 
(defining information return) is amended by striking out "or" at 
the end of clause (ix), by striking out the period at the end of 
clause (x) and inserting in lieu thereof ", or", and by adding at 
the end thereof the following new clause: 
"(xi) subparagraph (A) or (C) of subsection (cX4), or 
subsection (d), of section 4093 (relating to information 
reporting with respect to tax on diesel and aviation 
fuels)." 
(2) Paragraph (2) of section 6724(d) of the 1986 Code (defining 
payee statement) is amended by striking out "or" at the end of 
subparagraph (S), by striking out the period at the end of 
subparagraph (T) and inserting in lieu thereof ", or", and by 
adding at the end thereof the following new subparagraph: 
"(U) section 4093(cX4)(B) (relating to certain purchasers of 
diesel and aviation fuels)." 
(3XA) The text of section 7232 of the 1986 Code is amended by 
striking out "or lubricating oil" and inserting in lieu thereof 
", lubricating oil, diesel fuel, or aviation fuel". 
(B) The heading for section 7232 of the 1986 Code is amended 
by striking out "OR LUBRICATING OIL" and inserting in lieu 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3615 
thereof ", LUBRICATING OIL, DIESEL FUEL, OR AVIA-
TION FUEL". 
(C) The table of sections for part II of subchapter A of chapter 
75 of the 1986 Code is amended by striking out "or lubricating 
oil" in the item relating to section 7232 and inserting in lieu 
thereof ", lubricating oil, diesel fuel, or aviation fuel", 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section shall 
take effect on January 1,1989. 
(2) REFUNDS WITH INTEREST FOR PRE-EFFECTIVE DATE PUR-
CHASES.— 
(A) IN GENERAL.—In the case of fuel— 
(i) which is purchased from a producer or importer 
during the period beginning on April 1, 1988, and 
ending on December 31,1988, 
(ii) which is used (before the claim under this 
subparagraph is filed) by any person in a nontaxable 
use (as defined in section 6427(1X2) of the 1986 Code), 
and 
(iii) with respect to which a claim is not permitted to 
be filed for any quarter under section 6427(i) of the 
1986 Code, 
the Secretary of the Treasury or the Secretary's delegate 
shall pay (with interest) to such person the amount of tax 
imposed on such fuel under section 4091 of the 1986 Code (to 
the extent not attributable to amounts described in section 
6427(1X3) of the 1986 Code) if claim therefor is filed not later 
than June 30, 1989. Not more than 1 claim may be filed 
under the preceding sentence and such claim shall not be 
taken into account under section 6427(i) of the 1986 Code. 
Any claim for refund filed under this paragraph shall be 
considered a claim for refund under section 6427(1) of the 
1986 Code. 
(B) INTEREST.—The amount of interest payable under 
5 
subparagraph (A) shall be determined under section 6611 of 
the 1986 Code except that the date of the overpa3mtient with 
respect to fuel purchased during any month shall be treated 
as being the 1st day of the succeeding month. No interest 
shall be paid under this paragraph with respect to fuel used 
by any agency of the United States. 
(C) REGISTRATION PROCEDURES REQUIRED TO BE SPECIFIED.— 
Not later than the 30th day after the date of the enactment 
of this Act, the Secretary of the Treasury or the Secretary's 
delegate shall prescribe the procedures for complying with 
the requirements of section 4093(cX3) of the 1986 Code (as 
added by this section). 
SEC. 3002. EXPEDITED REFUND FOR CERTAIN FUELS USED IN NON-
TAXABLE USES. 
(a) EXPEDITED REFUND.—Section 6427(i) of the 1986 Code (relating 
to time for filing claims; period covered) is amended by adding at the 
end thereof the following new paragraph: 
"(4) SPECIAL RULE FOR NONTAXABLE USES OF DIESEL FUEL AND 
AVIATION FUEL TAXED UNDER SECTION 4091.— 
"(A) IN GENERAL.—If at the close of any of the 
1st 3 
quarters of the taxable year of any person, at least $750 is 
payable under subsection (1) to such person with respect to 
26 use 4093 
note. 
Imports. 
Claims. 
Claims. 
Claims. 
102 STAT. 3616 
PUBLIC LAW 100-647—NOV. 10, 1988 
fuel used during such quarter or any prior quarter during 
the taxable year (and for which no other claim has been 
filed), a claim may be filed under subsection (1) with respect 
to such fuel. 
"(B) TIME FOR FIUNG CLAIM.—No claim filed under this 
paragraph shall be allowed unless filed during the 1st 
quarter following the last quarter included in the claim." 
(b) ALLOWANCE OF PAYMENT.—Paragraph (2) of section 6427(k) of 
the 1986 Code (relating to income tax credit in lieu of pa3mient), as 
amended by title I, is amended by striking out "paragraph (2) or (3)" 
and inserting in lieu thereof "paragraph (2), (3), or (4)". 
(c) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 6427(i) of the 1986 Code is 
amended by striking out "paraigraph (2)" and inserting in lieu 
thereof "paragraphs (2), (3), and (4)". 
(2) Paragraph (2XA) of section 6427(i) of the 1986 Code is 
amended by striking out "G),". 
26 use 6427 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
'^o*® 
apply to fuel used after December 31,1988. 
SEC. 3003. MARINE RETAILERS TREATED AS PRODUCERS. 
(a) IN GENERAL.—Subparagraph (B) of section 4092(bXl) of the 
1986 Code (relating to certain persons treated as producers) is 
amended by striking out the period at the end of clause (ii) and 
inserting in lieu thereof ", or" and by adding at the end thereof the 
following: 
"(iii) a retailer selling diesel fuel exclusively to pur-
chasers as supplies for commercial and noncommercial 
vessels. 
To the extent provided in regulations, a retailer shall not be 
treated as not described in clause (iii) by reason of selling de 
minimis amounts of diesel fuel other than sis supplies for 
commercial and noncommercial vessels." 
26 use 4092 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
^^^- 
apply to sales after December 31,1988. 
Subtitle B—Health Care Continuation Rules 
SEC. 3011. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIRE-
MENTS OF GROUP HEALTH PLANS. 
(a) IN GENERAL.—Chapter 43 of the 1986 Code (relating to quali-
fied pension, etc., plans) is amended by adding at the end thereof the 
following new section: 
"SEC. 4980B. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIRE-
MENTS OF GROUP HEALTH PLANS. 
"(a) GENERAL RULE.—There is hereby imposed a tax on the failure 
of a group health plan to meet the requirements of subsection (f) 
with respect to any qualified beneficiary. 
"(b) AMOUNT OF TAX.— 
"(1) IN GENERAL.—The amount of the t£« imposed by subsec-
tion (a) on any failure with respect to a qualified beneficiary 
shall be $100 for each day in the noncompliance period with 
respect to such failure. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3617 
"(2) NONCOMPLIANCE PERIOD.—For purposes of this section, 
the term 'noncompliance period' means, with respect to any 
failure, the period— 
"(A) be^ning on the date such failure first occurs, and 
"(B) ending on the earlier of— 
"(i) the date such failure is corrected, or 
"(ii) the date which is 6 months after the last day in 
the period applicable to the qualified beneficiary under 
subsection (0(2XB) (determined without regard to 
clause (iii) thereof). 
If a person is liable for tax under subsection (eXlXB) by reason 
of subsection (eX2XB) with respect to any failure, the noncompli-
ance period for such person with respect to such failure shall 
not begin before the 45th day after the written request 
described in subsection (eX2XB) is provided to such person. 
"(3) MINIMUM TAX FOR NONCOMPUANCE PERIOD WHERE FAIL-
URE D
I
S
C
O
V
E
R
E
D A
F
T
E
R N
O
T
I
C
E O
F EXAMINATION.—Notwithstand-
ing paragraphs (1) and (2) of subsection (c)— 
"(A) IN GENERAL.—In the case of 1 or more failures with 
respect to a qualified beneficiary— 
"(i) which are not corrected before the date a notice 
of examination of income tax liability is sent to the 
employer, and 
"(ii) which occurred or continued during the period 
under examination, 
the amount of tax imposed by subsection (a) by reason of 
such failures with respect to such beneficiary shall not be 
less than the lesser of $2,500 or the amount of tax which 
would be imposed by subsection (a) without regard to such 
paragraphs. 
"(B) HIGHER MINIMUM TAX WHERE VIOLATIONS ARE MORE 
THAN DE MINIMIS.—To the extent violations by the employer 
(or the plan in the case of a multiemployer plan) for any 
year are more than de minimis, subparagraph (A) shall be 
applied by substituting '$15,000' for '$2,500' with respect to 
the employer (or such plan). 
*(c) LIMITATIONS ON AMOUNT OF TAX.— 
"(1) 
TAX NOT TO APPLY WHERE FAILURE NOT DISCOVERED 
EXERCISING R
E
A
S
O
N
A
B
L
E DILIGENCE.—No tax shall be imposed by 
subsection (a) on any failure during any period for which it is 
established to the satisfaction of the Secretary that none of the 
persons referred to in subsection (e) knew, or exercising reason-
able diligence would have known, that such failure existed. 
"(2) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN 30 
DAYS.—No tax shall be imposed by subsection (a) on any failure 
if— 
"(A) such failure was due to reasonable cause and not to 
willful neglect, and 
"(B) such failure is corrected during the 30-day period 
beginning on the 1st date any of the persons referred to in 
subsection (e) knew, or exercising reasonable diligence 
would have known, that such failure existed. 
"(3) $100 UMrr ON AMOUNT OF TAX FOR FAILURES ON ANY DAY 
WITH RESPECT TO A QUALIFIED BENEFICIARY.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the maximum amount of tax imposed by sul^ection (a) 
102 STAT. 3618 
PUBLIC LAW 100-647—NOV. 10, 1988 
> 
on failures on any day during the noncompliance period 
with respect to a qualified beneficiary shall be $100. 
"(B) SPECIAL RULE WHERE MORE THAN i QUALIFIED BENE-
FICIARY.—If there is more than 1 qualified beneficiary with 
respect to the same qualifying event, the maximum amount 
of tax imposed by subsection (a) on all failures on any day 
during the noncompliance period with respect to such quali-
fied beneficiaries shall be $200. 
"(4) OVERALL UMITATION FOR UNINTENTIONAL FAILURES.—In 
the case of failures which are due to reasonable cause and not to 
willful neglect— 
"(A) SINGLE EMPLOYER PLANS.— 
"(i) IN GENERAL.—In the case of failures with respect 
to plans other than multiemployer plans, the tax im-
posed by subsection (a) for failures during the taxable 
year of the employer shall not exceed the amount equal 
to the lesser of^ 
"(I) 10 percent of the aggregate amount paid or 
incurred by the employer (or predecessor em-
ployer) during the preceding taxable year for group 
health plans, or 
"(II) $500,000. 
"(ii) TAXABLE YEARS IN THE CASE OF CERTAIN CON-
TROLLED GROUPS.—For purposes of this subparagraph, if 
not all persons who are treated as a single employer for 
purposes of this section have the same taxable year, the 
taxable years taken into account shall be determined 
under principles similar to the principles of section 
1561. 
"(B) MULTIEMPLOYER PLANS.— 
"(i) IN GENERAL.—In the case of fgdlures with respect 
to a multiemployer plan, the tax imposed by subsection 
(a) for failures during the taxable year of the trust 
forming part of such plan shall not exceed the amount 
equal to the lesser of— 
"(I) 10 percent of the amount paid or incurred by 
such trust during such taxable year to provide 
medical care (as defined in section 213(d)) directly 
or through insurance, reimbursement, or other-
wise, or 
"(II) $500,000. 
For purposes of the preceding sentence, all plans of 
which the same trust forms a part shall be treated as 1 
plan. 
"(ii) SPECIAL RULE FOR EMPLOYERS REQUIRED TO PAY 
TAX.—If an employer is assessed a tax imposed by 
subsection (a) by reason of a failure with respect to a 
multiemployer plan, the limit shall be determined 
under subparagraph (A) (and not under this subpara-
graph) and as if such plan were not a multiemployer 
plan. 
"(C) SPECIAL RULE FOR PERSONS PROVIDING BENEFITS.—In 
the case of a person described in subsection (eXlXB) (and not 
subsection (eXlXA)), the aggregate amount of tax imposed 
by subsection (a) for failures during a taxable year with 
respect to all plans shall not exceed $2,000,000. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3619 
"(5) WAIVER BY SECRETARY.—In the case of a failure which is 
due to reasonable cause and not to willful neglect, the Secretary 
may waive part or all of the tax imposed by subsection (a) to the 
extent that the pa3rment of such tax would be excessive relative 
to the failure involved. 
"(d) TAX NOT TO APPLY TO CERTAIN PLANS.—This section shall not 
apply to— 
"(1) any failure of a group health plan to meet the require-
ments of subsection (f) if all employers maintaining such plan 
normally employed fewer than 20 employees on a typical busi-
ness day during the preceding calendar year, 
"(2) any governmental plan (within the meaning of section 
414(d)), or 
"(3) any church plan (within the meaning of section 414(e)). 
"(e) LIABILITY FOR TAX.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, the following shall be liable for the tax imposed by 
subsection (a) on a failure: 
"(AXi) In the case of a plan other than a multiemployer 
plan, the employer. 
"(ii) In the case of a multiemployer plan, the plan. 
"(B) Each person who is responsible (other than in a 
capacity as an employee) for administering or providing 
benefits under the plan and whose act or failure to act 
caused (in whole or in part) the failure. 
"(2) 
SPECIAL RULES FOR PERSONS DESCRIBED IN PARAGRAPH 
( l ) ( B ) . — 
"(A) No LIABILITY UNLESS WRITTEN AGREEMENT.—Except 
in the case of liability resulting from the application of 
subparagraph (B) of this paragraph, a person described in 
subparagraph (B) (and not in subparagraph (A)) of para-
graph (1) shall be liable for the tax imposed by subsection 
(a) on any failure only if such person assumed (under a 
legally enforceable written agreement) responsibility for 
the performance of the act to which the failure relates. 
"(B) FAILURE TO COVER QUAUFIED BENEFICIARIES WHERE 
CURRENT EMPLOYEES ARE COVERED.—A person shall be 
treated as described in paragraph (1KB) with respect to a 
qualified beneficiary if— 
"(i) such person provides coverage under a group 
health plan for any similarly situated beneficiary 
under the plan with respect to whom a qualifying event 
has not occurred, and 
"(ii)the— 
"(I) employer or plan administrator, or 
"(11) in the case of a qualifying event described in 
subparagraph (C) or (E) of subsection (fK3) where 
the person described in clause (i) is the plan 
administrator, the qualified beneficiary, 
submits to such person a written request that such 
person make available to such qualified beneficiary the 
same coverage which such person provides to the bene-
ficiary referred to in clause (i). 
' 
"(f) CONTINUATION COVERAGE REQUIREMENTS OF GROUP HEALTH 
PLANS.— 
"(1) IN GENERAL.—A group health plan meets the require-
ments of this subsection only if each qualified beneficiary who 
102 STAT. 3620 
PUBLIC LAW 100-647—NOV. 10, 1988 
would lose coverage under the plan as a result of a qualifying 
event is entitled to elect, within the election period, continu-
ation coverage under the plan. 
"(2) CONTINUATION COVERAGE.—For purposes of paragraph (1), 
the term 'continuation coverage' means coverage under the 
plan which meets the following requirements: 
"(A) TYPE OF BENEFIT COVERAGE.—The coverage must 
consist of coverage which, as of the time the coverage is 
being provided, is identical to the coverage provided under 
the plan to similarly situated beneficiaries under the plan 
with respect to whom a qualifjdng event has not occurred. 
If coverage under the plan is modified for any group of 
similarly situated beneficiaries, the coverage shall also be 
modified in the same manner for all individuals who are 
qualified beneficiaries under the plan pursuant to this 
subsection in connection with such group. 
"(B) PERIOD OF COVERAGE.—The coverage must extend for 
at least the period beginning on the date of the qualifying 
event and ending not earlier than the earliest of the follow-
ing: 
"(i) MAXIMUM REQUIRED PERIOD.— 
"(I) GENERAL RULE FOR TERMINATIONS AND RE-
DUCED HOURS.—In the case of a qualif3dng event 
described in paragraph (3XB), except as provided in 
subclause (II), the date which is 18 months eifter 
the date of the qualifying event. 
"(II) SPECIAL RULE FOR MULTIPLE QUAUFYING 
EVENTS.—If a qualifying event (other than a 
qualifying event described in paragraph (3XF)) 
occurs during the 18 months after the date of a 
qualifying event described in paragraph (3XB), the 
date which is 36 months after the date of the 
qualifying event described in paragraph (3XB). 
"(Ill) SPECIAL RULE FOR CERTAIN BANKRUPTCY 
PROCEEDINGS.—In the case of a qualifying event 
described in paragraph (3XF) (relating to bank-
ruptcy proceedings), the date of the death of the 
covered employee or qualified beneficiary (de-
scribed in subsection (gXlXDXiii)), or in the case of 
the surviving spouse or dependent children of the 
covered employee, 36 months after the date of the 
death of the covered employee. 
"(IV) GENERAL RULE FOR OTHER QUAUFYING 
EVENTS.—In the case of a qualifjring event not 
described in paragraph (3XB) or (3XF), the date 
which is 36 months after the date of the qualifying 
event. 
"(ii) END OF PLAN.—The date on which the employer 
ceases to provide any group health plan to any 
employee. 
(iii) FAILURE TO PAY PREMIUM.—The date on which 
coverage ceases under the plan by reason of a failure to 
make timely pajrment of any premium required under 
the plEin with respect to the qualified beneficiary. The 
payment of any premium (other than any payment 
referred to in the last sentence of subparagraph (O) 
shall be considered to be timely if made within 30 days 
ifst'ST^f'"' 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3621 
after the date due or within such longer period as 
applies to or under the plan. 
"(iv) GROUP HEALTH PLAN COVERAGE OR MEDICARE 
ELiGiBiUTY.—The date on which the qualified bene-
ficiary first becomes, after the date of the election— 
"(I) covered under any other group health plan 
(as an employee or otherwise), or 
"(11) in the case of a qualified beneficiary other 
than a qualified beneficiary described in subsection 
(gXlXD) entitled to benefits under title XVIII of the 
Social Security Act. 
"(C) PREMIUM REQUIREMENTS.—The plan may require 
payment of a premium for any period of continuation cov-
erage, except that such premium— 
"(i) shall not exceed 102 percent of the applicable 
premium for such period, and 
"(ii) may, at the election of the payor, be made in 
monthly installments. 
If an election is made after the qualifying event, the plan 
shall permit payment for continuation coverage during the 
period preceding the election to be made within 45 days of 
the date of the election. 
"(D) 
NO REQUIREMENT OF INSURABIUTY.—The coverage 
may not be conditioned upon, or discriminate on the basis 
of lack of, evidence of insurability. 
"(E) (INVERSION OPTION.—In the case of a qualified bene-
ficiary whose period of continuation coverage expires under 
subparagraph (BXi), the plan must, during the 180-day 
period ending on such expiration date, provide to the quali-
fied beneficiary the option of enrollment under a conver-
sion health plan otherwise generally available under the 
plan. 
"(3) QuAUFYiNG EVENT.—For purposes of this subsection, the 
term 'qualifying event' means, with respect to any covered 
employee, any of the following events which, but for the 
continuation coverage required under this subsection, would 
result in the loss of coverage of a qualified beneficiary— 
"(A) The death of the covered employee. 
"(B) The termination (other than by reason of such 
employee's gross misconduct), or reduction of hours, of the 
covered employee's employment. 
"(C) The divorce or legal separation of the covered 
employee from the employee's spouse. 
"(D) The covered employee becoming entitled to benefits 
under title XVIII of the Social Security Act. 
"(E) A dependent child ceasing to be a dependent child 
under the generally applicable requirements of the plan. 
"(F) A proceeding in a case under title 11, United States 
Code, commencing on or after July 1, 1986, with respect to 
the employer 
from 
whose employment 
the 
covered 
employee retired at any time. 
In the case of an event described in subparagraph (F), a loss of 
coverage includes a substantial elimination of coverage with 
respect to a qualified beneficiary described in subsection 
(gXlXD) within one year before or after the date of commence-
ment of the proceeding. 
"(4) APPUCABLE PREMIUM.—For purposes of this subsection— 
102 STAT. 3622 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(A) IN GENERAL.—^The term 'applicable premium' means, 
with respect to any period of continuation coverage of 
qualified beneficiaries, the cost to the plan for such period 
of the coverage for similarly situated beneficiaries with 
respect to whom a qualifying event has not occurred (with-
out regard to whether such cost is paid by the employer or 
employee). 
* (B) SPECIAL RULE FOR SELF-INSURED PLANS.—To the 
extent that a plan is a self-insured plan— 
"(i) IN GENERAL.—Except as provided in clause (ii), 
the applicable premium for any period of continuation 
coverage of qualified beneficiaries shall be equal to a 
reasonable estimate of the cost of providing coverage 
for such period for similarly situated beneficiaries 
which— 
"(I) is determined on an actuarial basis, and 
"(II) takes into account such factors as the Sec-
retary may prescribe in regulations, 
"(ii) DETERMINATION ON BASIS OF PAST COST.—If a plan 
administrator elects to have this clause apply, the ap-
plicable premium for any period of continuation cov-
erage of qualified beneficiaries shall be equal to— 
"(I) the cost to the plan for similarly situated 
beneficiaries for the same period occurring during 
the preceding determination period under subpara-
graph (C), adjusted by 
"(II) the percentage increase or decrease in the 
implicit price deflator of the gross national product 
(calculated by the Department of C!ommerce and 
published in the Survey of Current Business) for 
the 12-month period ending on the last day of the 
sixth month of such preceding determination 
period, 
"(iii) CJLAUSE (ii) NOT TO APPLY WHERE SIGNIFICANT 
CHANGE.—A plan administrator may not elect to have 
clause (ii) apply in any case in which there is any 
significant difference between the determination period 
and the preceding determination period, in coverage 
under, or in employees covered by, the plan. The deter-
mination imder the preceding sentence for any deter-
mination period shall be made at the same time as the 
determination under subparagraph (C). 
"(C) DETERMINATION PERIOD.—The determination of any 
applicable premium shall be made for a period of 12 montli^ 
and shall be made before the beginning of such period. 
"(5) ELECTION.—For purposes of this subsection— 
"(A) ELECTION PERIOD.—The term 'election period' means 
the period which— 
"(i) begins not later than the date on which coverage 
terminates under the plan by reason of a qualifying 
event, 
"(ii) is of at least 60 days' duration, and 
"(iii) ends not earlier than 60 dajrs after the later of— 
"(I) the date described in clause (i), or 
"(II) in the case of any qualified beneficiary who 
receives notice under paragraph (6XD), the date of 
such notice. 
: - jj-^».*TKi:^-.r*5K.-, •< 
C 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3623 
"(B) 
EFFECT OF ELECTION ON OTHER BENEFICIARIES.— 
Except as otherwise specified in an election, any election of 
continuation coverage by a qualified beneficiary described 
in subparagraph (AXi) or (B) of subsection (gXl) shall be 
deemed to include an election of continuation coverage on 
behalf of any other qualified beneficiary who would lose 
coverage under the plan by reason of the qualifying event. 
If there is a choice among types of coverage under the plan, 
each qualified beneficiary is entitled to make a separate 
selection among such types of coverage. 
"(6) NOTICE REQUIREMENT.—In accordance with regulations 
prescribed by the Secretary— 
"(A) The group health plan shall provide, at the time of 
commencement of coverage under the plan, written notice 
to each covered employee and spouse of the employee (if 
any) of the rights provided under this subsection. 
"(B) The employer of an employee under a plan must 
notify the plan administrator of a qualifying 
event 
described in subparagraph (A), (B), (D), or (F) of paragraph 
(3) with respect to such employee within 30 days of the date 
of the qualifying event. 
"(C) Each covered employee or qualified beneficiary is 
responsible for notifying the plan administrator of the 
occurrence of any qualifying event described in subpara-
graph (C) or (E) of paragraph (3) within 60 days after the 
date of the qualifying event. 
"(D) The plan administrator shall notify— 
"(i) in the case of a qualifying event described in 
subparagraph (A), (B), (D), or (F) of paragraph (3), any 
qualified beneficiary with respect to such event, and 
"(ii) in the case of a qualifying event described in 
subparagraph (C) or (E) of paragraph (3) where the 
covered employee notifies the plan administrator under 
subparagraph (C), any qualified beneficiary with re-
spect to such event, 
of such beneficiary's rights under this subsection. 
For purposes of subparagraph (D), any notification shall be 
made within 14 days of the date on which the plan adminis-
trator is notified under subparagraph (B) or (C), whichever is 
applicable, and any such notification to an individual who is a 
qualified beneficiary as the spouse of the covered employee shall 
be treated as notification to all other qualified beneficiaries 
residing with such spouse at the time such notification is made. 
"(7) COVERED EMPLOYEE.—For purposes of this subsection, the 
term 'covered employee' means an individual who is (or was) 
provided coverage under a group health plan by virtue of the 
individual's employment or previous employment with an 
employer. 
'(g) DEFINITIONS.—For purposes of this section— 
"(1) QUAUFIEO BENEFICIARY.— 
"(A) IN GENERAL.—The term 'qualified 
beneficiary' 
means, with respect to a covered employee under a group 
health plan, any other individual who, on the day tefore 
the qualifying event for that employee, is a beneficiary 
under the plan— 
"(i) as the spouse of the covered employee, or 
"(ii) as the dependent child of the employee. 
102 STAT. 3624 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) 
SPECIAL RULE FOR TERMINATIONS AND REDUCED 
EMPLOYMENT.—In the case of a qualifying event described 
in subsection (f)(3)(B), the term 'qualified 
beneficiary' 
includes the covered employee. 
"(C) EXCEPTION FOR NONRESIDENT ALIENS.—Notwithstand-
ing subparagraphs (A) and (B), the term 'qualified bene-
ficiary' does not include an individual whose status as a 
covered employee is attributable to a period in which such 
individual was a nonresident alien who received no earned 
income (within the meaning of section 911(dX2)) from the 
employer which constituted income from sources within the 
United States (within the meaning of section 861(aX3)). If an 
individual is not a qualified beneficiary pursuant to the 
previous sentence, a spouse or dependent child of such 
individual shall not be considered a qualified beneficiary by 
virtue of the relationship of the individual. 
"(D) SPECIAL RULE FOR RETIREES AND WIDOWS.—In the case 
of a qualifying event described in subsection (fX3)(F), the 
term 'qualified beneficiary' includes a covered employee 
who had retired on or before the date of substantial elimi-
nation of coverage and any other individual who, on the day 
before such qualifjdng event, is a beneficiary under the 
plan— 
"(i) as the spouse of the covered employee, 
"(ii) as the dependent child of the covered employee, 
or 
"(iii) as the surviving spouse of the covered employee. 
"(2) GROUP HEALTH PLAN.—The term 'group health plan' has 
the meaning given such term by section 162(i)." 
"(3) PLAN ADMINISTRATOR.—The term 'plan administrator' has 
the meaning given the term 'administrator' by section 3(16XA) 
of the Employee Retirement Income Security Act of 1974. 
"(4) CORRECTION.—A failure of a group health plan to meet 
the requirements of subsection (f) with respect to any qualified 
beneficiary shall be treated as corrected if^ 
"(A) such failure is retroactively undone to the extent 
possible, and 
"(B) the qualified beneficiary is placed in a 
financial 
position which is as good as such beneficiary would have 
been in had such failure not occurred. 
For purposes of applying subparagraph (B), the qualified bene-
ficiary shall be treated as if he had elected the most favorable 
coverage in light of the expenses he incurred since the failure 
first occurred.", 
(b) TECHNICAL AMENDMENTS.— 
(1) Section 106 of the 1986 Code (relating to contributions by 
employer to accident and health plans) is amended to read as 
follows: 
"SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH 
PLANS. 
"Gross income of an employee does not include employer-provided 
coverage under an accident or health plan." 
(2) Subsection (i) of section 162 of the 1986 Code (relating to 
group health plans) is amended by striking out paragraph (2) 
and by redesignating paragraph (3) as paragraph (2). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3625 
(3) Section 162 of the 1986 Code is amended by striking out 
subsection (k) and by redesignating— 
(A) the subsection relating to stock redemption expenses 
as subsection (k), 
(B) the subsection relating to special rules for health 
insurance costs of self-employed individuals as subsection 
(l),and 
(C) the subsection relating to cross references as subsec-
tion (m). 
(4) Subparagraph (C) of section 414(nX3) of the 1986 Code, as 
amended by section lllB(a) of this Act, is amended by striking 
out "162(iX2), 162(kX2)," and by striking out "and 505" and 
inserting in lieu thereof "505, and 4980B". 
(5) Paragraph (2) of section 414(t) of the 1986 Code, as 
amended by section lllB(a) of this Act, is amended by striking 
. 
out "162(iX2), 162(kX2)," and by striking out "or 505" and insert-
ing in lieu thereof "505, or 4980B". 
(6) Paragraph (1) of section 607 of the Employee Retirement 
Income Security Act of 1974 is amended by striking out "section 29 use 1167. 
162(iX3) of the Internal Revenue Code of 1954" and inserting in 
lieu thereof "section 162(iX2) of the Internal Revenue Code of 
1986". 
(7) Paragraph (1) of section 2208 of the Public Health Service 
Act is amended by striking out "section 162(iX3) of the Internal 42 use 300bb-8. 
Revenue Code of 1954" and inserting in lieu thereof "section 
162(iX2) of the Internal Revenue Code of 1986". 
(c) CLERICAL AMENDMENT.—The table of sections for chapter 43 of 
the 1986 Code is amended by adding at the end thereof the following 
new item: 
"Sec. 4980B. Failure to satisfy continuation coverage requirements of group 
health plans." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 26 use 162 note. 
apply to taxable years beginning after December 31, 1988, but shall 
not apply to any plan for any plan year to which section 162(k) of 
the Internal Revenue Code of 1986 (as in effect on the day before the 
date of the enactment of this Act) did not apply by reason of section 
10001(eX2) of the Consolidated Omnibus Budget Reconciliation Act 
of 1985. 
Subtitle C—Employee BeneHt 
Nondiscrimination Rules 
SEC. 3021. MODIFICATIONS TO DISCRIMINATION RULES APPLICABLE TO 
CERTAIN EMPLOYEE BENEFIT PLANS. 
(a) MODIFICATIONS TO SECTION 89.— 
(1) DETERMINATIONS BASED ON TESTING YEAR.— 
(A) Section 89 of the 1986 Code (as amended by title I) is 
amended by striking out "plan year" each place it appears 
.
^ ; 
and inserting in lieu thereof "testing year". 
(B) Subsection (j) of section 89 of the 1986 Code is 
amended by adding at the end thereof the following new 
paragraph: 
"(13) TESTING YEAR.—The term 'testing year' means— 
"(A) any 12-month period beginning with the calendar 
month designated in the plan for purposes of this section, or 
102 STAT. 3626 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) if there is no such designation, the calendar year. 
No period may be designated under subparagraph (A) unless the 
same period is designated with respect to all other plans of the 
employer of the same type. Any designation under subpara-
graph (A) may be changed only with the consent of the Sec-
retary." 
(C) Subsection (c) of section 4976 of the 1986 Code (as 
added by title I) is amended— 
(i) by striking out "any plan year" in paragraph (1) 
and inserting in lieu thereof "any testing year (as 
defined in section 89(jX13))"; and 
(ii) by striking out "such plan year" each place it 
appears in paragraph (2XA) and inserting in lieu 
thereof "such testing year". 
(2) TIME FOR TESTING.— 
(A) IN GENERAL.—Subsection (g) of section 89 is amended 
by adding at the end thereof the following new paragraph: 
"(6) TIME FOR TESTING.— 
"(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the determination of whether any plan is a 
discriminatory employee benefit plan for any testing year 
shall be made on the basis of the facts as of the testing day. 
"(B) ADJUSTMENT WHERE BENEFIT OF HIGHLY COMPENSATED 
EMPLOYEE CHANGES.—If the employer-provided 
benefit 
(actually provided or made available) of a highly com-
pensated employee changes during the testing year by 
reason of any change in the terms of the plan or the making 
of an election by such employee, the amount taken into 
account as such employee's employer-provided benefit shall 
be adjusted to take into account such change and the 
portion of the testing year during which the changed bene-
fit is provided (or made available). 
"(C) TREATMENT OF NON-HIGHLY COMPENSATED EMPLOYEES 
WHERE CHANGE IN PLAN.—Rules similar to the rules of 
subparagraph (B) shall apply in the case of employees who 
are not highly compensated employees and who are affected 
by any change in the terms of the plan, except that the 
determination of such employees' employer-provided bene-
fits (actually provided or made available) shall be deter-
mined as of the date after such change selected by the 
employer and permitted under regulations prescribed by 
the Secretary. 
"(D) TESTING DAY.—For purposes of this paragraph, the 
term 'testing day' means— 
"(i) the day designated in the plan as the testing day 
for purposes of this paragraph, or 
"(ii) if there is no day so designated, the last day of 
the testing year. 
"(E) LIMITATIONS.— 
"(i) DESIGNATION MUST BE CONSISTENT FOR ALL PLANS 
OF SAME TYPE.—No day may be designated under 
subparagraph (DXi) with respect to any plan unless the 
same day is so designated with respect to all other 
plans of the employer of the same type. 
"(ii) DESIGNATION BINDING.—Any designation under 
subpar£igraph (DXi) shall apply to the testing year for 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3627 
which made and all subsequent years unless revoked 
with the consent of the Secretary. 
"(F) SPECIAL RULE FOR MULTIPLE EMPLOYER PLAN.—In the 
case of a multiemployer plan or any other plan maintained 
by more than 1 employer, each employer may, subject to 
such rules as the Secretary may prescribe, elect its ovm 
testing year under paragraph (13) of subsection (j) and its 
own testing date under this paragraph." 
(B) DESIGNATIONS FOR 1989 NOT BINDING.—Any designa- 26 use 89 note. 
tion of a testing day for a year b^inning in 1989 shall be 
disr^arded in determining the day which may be des-
ignated as the testing day for years b^inning sdfter 1989. 
(3) SAMPUNG.—Subsection (g) of section 89 of the 1986 Code is 
amended by adding at the end thereof the following new para-
graph: 
"(7) SAMPLING.—For purposes of determining whether a plan Discrimination, 
is a discriminatory employee benefit plan (but not for purposes prohibition. 
of identifying the highly compensated employees who have a 
discriminatory excess or the amount of any such excess), deter-
minations under this section may be made on the basis of a 
statistically valid random sample. The preceding sentence shall 
apply only if— 
"(A) the sampling is conducted by an independent person 
in a manner not inconsistent with r^ulations prescribed by 
the Secretary, and 
"(B) the statistical method and sample size result in a 95 
percent probability that the results will have a margin of 
error not greater than 3 percent." 
(4) SPECIAL VALUATION RULE FOR MULTIEMPLOYER PLANS.— 
Paragraph (3) of section 89(g) of the 1986 (}ode is amended by 
adding at the end thereof the following new subparagraph: 
"(E) SPECIAL RULE FOR MULTIEMPLOYER PLANS.— 
"(i) IN GENERAL.—Except as provided in r^ulations 
and clause (ii), an employer may treat the contribution 
such employer makes to a multiemployer plan on 
behalf of an employee as the employer-provided benefit 
of such employee under such plan, 
"(ii) ADJUSTMENT.—K— 
"(I) the allocation of plan benefits between 
highly compensated employees and other employ-
ees under a multiemployer plan (or within either 
of such groups) varies materially from the alloca-
tion of employer contributions to such plan, or 
"(n) the employer contributions relate to bene-
fits of different types, 
the employer-provided benefit determined under clause 
(i) shall be appropriately adjusted to take into account 
such material variation or such employer contribution, 
"(iii) EXCEPTION FOR PROFESSIONALS.—^This subpara-
graph shall not apply to any employer maintaining a 
multiemployer plan if such employer makes contribu-
tions to such plan on behalf of any individual perform-
ing services in the field of health, law, engineering, 
architecture, accounting, actuarial science, financial 
services, or consulting or in such other field as the 
Secretary may prescribe." 
(5) EXCLUDED EMPLOYEE REQUIREMENTS.— 
102 STAT. 3628 
PUBLIC LAW 100-647—NOV. 10, 1988 
(A) MULTIEMPLOYER PLANS.—Subsection (h) of section 89 
of the 1986 Code is amended by adding at the end thereof 
the following new paragraph: 
"(6) SPECIAL RULE FOR MULTIEMPLOYER PLAN.—Except as pro-
vided in regulations, any multiemployer plan shall not be taken 
into account in applying subparagraph (A), (B), (C), or (D) of 
paragraph (1) with respect to other plans of the employer. For 
purposes of this paragraph, a rule similar to the rule of subsec-
tion (gXSXEXiii) shall apply." 
(B) STUDENTS.—Paragraph (1) of section 89(h) of the 1986 
Code is amended by adding after subparagraph (F) the 
following new subparagraph: 
"(G) Employees who are students if— 
"(i) such students are performing services described 
in section 3121(bX10), and 
"(ii) core health coverage is made available to such 
students by such employer." 
(6) CloMPARABiUTY RULES.—Paragraph (1) of section 89(g) of 
the 1986 Code, as amended by section lllB(aX3), is amended by 
adding at the end thereof the following new subparagraphs: 
"(D) SPECIAL RULES FOR APPLYING SUBSECTION (f).— 
"(i) IN GENERAL.—For purposes of applying subsec-
tion (f)— 
"(I) except as provided in clause (ii), subpara-
graph (B) shall be applied by substituting '90 per-
cent' for '95 percent', and 
"(II) a group of plans of the same tj^pe shall be 
treated as comparable plans if the requirements of 
subparagraph (E) are met. 
"(ii) ELECTION TO USE LOWER PERCENTAGE IN DETER-
MINING COMPARABILITY.—If an election by the employer 
under this clause applies for the testing year— 
"(I) subclause (I) of clause (i) shall not apply, 
"(II) for purposes of appljdng subsection (f), 
subparagraph (B) of this paragraph shall be ap-
plied by substituting '80 percent' for '95 percent', 
and 
"(III) subsection (f) shall be applied with respect 
to all health plans maintained by the employer by 
substituting '90 percent' for '80 percent'. 
"(E) PLANS TREATED AS COMPARABLE IF EMPLOYEE COST 
DIFFERENCE IS $100 O
R LESS.— 
"(i) IN GENERAL.—A group of plans of the same type 
shall be treated as comparable with respect to a group 
of employees if— 
"(I) such plans are available to all employees in 
the group on the same terms, and 
"(II) the difference in annual cost to employees 
between the plans with the lowest and highest 
annual employee cost is not greater than $100. 
"(ii) (COORDINATION WITH SUBPARAGRAPH (B) .—Apian 
not in the group of plans described in clause (i) shall be 
treated as part of such group if, under subparagraph 
(B) (without regard to clause (iii) of this subparagraph), 
such plan is comparable to the plan in such group with 
the largest employer-provided benefit. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3629 
"(iii) OTHER PLANS PROVIDING COMPARABLE BENE-
FITS.—A plan not in the group of plans described in 
clause (i) shall be treated as part of such group with 
respect to an employee if— 
"(I) in the case of an employee who is not a 
highly compensated employee, such employee is 
eligible to participate in the plan in such group 
with the largest employer-provided benefit (with-
out regard to clause (ii)), 
"(11) in the case of an employee who is not a 
highly compensated employee, the annual cost to 
such employee under such plan is not lower than 
the lowest cost permitted within such group, and 
"(III) the employer-provided benefit under such 
plan is less than the employer-provided benefit 
under the plan in such group with the largest such 
benefit (without regard to clause (ii)). 
"(iv) SEPARATE APPLICATION OF REQUIREMENTS.—If an 
employer elects the application of paragraph (2XAXii), 
the amount under clause (i) shall be allocated among 
plans covering spouses and dependents and plans cover-
ing employees in such manner as the employer speci-
fies. 
"(v) CosT-OF-uviNG ADJUSTMENT.—In the case of test-
ing years beginning after 1989, the $100 amount under 
clause (i) shall be increased by the percentage (if any) 
by which— 
"(I) the CPI for the calendar year preceding the 
year in which the testing year begins, exceeds 
"(II) the CPI for 1988. 
For purposes of this clause, the CPI for any calendar 
year shall be determined under section 1(f).". 
(7) OTHER COVERAGE.— 
(A) Subparagraph (A) of section 89(gX2) of the 1986 Code 
is amended— 
(i) by striking out "subsection (e)" each place it ap-
pears and inserting in lieu thereof "subsection (e) or 
(f)", and 
(ii) by adding at the end thereof the following new 
sentence: "The provisions of the preceding sentence 
shall not apply for purposes of applying subsection (f) 
unless the requirements of subsection (f) would be met 
if such subsection were applied without regard to the 
preceding sentence and on the basis of eligibility to 
participate rather than coverage." 
(B) Subparagraph (D) of section 89(gX2) of the 1986 Code is 
amended by adding at the end thereof the following sen-
tence: "The Secretary shall make such adjustments as are 
necessary in appl3dng the rules of the preceding sentence to 
subsection (f).' 
(8) SWORN STATEMENTS.—Paragraph (2) of section 89(g) of the 
1986 Code is amended— 
(A) by adding at the end thereof the following new 
subparagraph: 
"(E) SPECIAL RULE.—No employee who is not a highly 
compensated employee may be disregarded under subpara-
graph (AXi) with respect to £iny health plan of the employer 
102 STAT. 3630 
PUBLIC LAW 100-647—NOV. 10, 1988 
unless under such plan such employee is entitled, when the 
coverage under the other he^th plan referred to in 
subparagraph (AXi) ceases, to elect coverage under the plan 
of the employer (whether or not an election is otherwise 
available). Such election is to be on the same terms as if 
such employee was making such election during a subse-
quent open season. Rules similar to the rules of the preced-
ing sentences of this subparagraph shall apply in the case 
of an employee treated as not having a spouse or depend-
ents or having a spouse or dependents covered by a health 
plan of another employer providing core benefits."; and 
(B) by striking out ' and' at the end of subparagraph 
(BKi), by striking out the period at the end of subparagraph 
(BXii) and inserting in lieu thereof ", and", and by adding at 
the end thereof the following new clause: 
"(iii) the health coverage (if any) received by the 
employee from the employer." 
(9) DEFiNmoN OF PLAN.—Paragraph (11) of section 89(j) of the 
1986 Code is amended by striking out "Each option" and insert-
ing in lieu thereof "Except as provided in subsection (gXD, each 
option". 
(10) MODIFICATION OF PENALTY.—Subparagraph (B) of section 
6652fkX2) of the 1986 Ckxle is amended to read as follows: 
"(B) the amount which bears the same ratio to the em-
ployer-provided benefit (within the meaning of section 89 
without regard to subsection (gXBXCXi) thereof) with respect 
to the employee to whom such failure relates as the amount 
of such benefit required to be but not shown on timely 
statements under sections 6051(a) and 6051(d) bears to the 
amount required to be shown.". 
01) CAFETERIA PLANS.—Subparagraph (D) of section 89(gX3) of 
the 1986 Code is amended to read as follows: 
"(D) SALARY REDUCTIONS.— 
"(i) IN GENERAL.—Except for purposes of subsections 
(dXlXAXii) and (jX5), any salary reduction shall be 
treated as an employer-provided benefit. 
"(ii) SPECIAL RULE FOR SUBSECTION (dXiXaXii).—Not-
withstanding clause (i), any salary reduction under a 
cafeteria plan (within the meaning of section 125) shall 
treated as an employer-provided benefit for purposes of 
subsection (dX IXAXii) if— 
"(I) the percentage of employees who are not 
highly compensated employees eligible to partici-
pate in the plan is not greater than the percentage 
of highly compensated employees so eligible, 
"(II) all employees eligible to participate in the 
plan are eligible under the same terms and condi-
tions, and 
"(III) no highly compensated employee eligible 
under the plan is eligible to participate in any 
other plan maintained by the employer for any 
benefit of the same type unless the benefit is avail-
able on the same terms and conditions to every 
employee who is not a highly compensated em-
ployee eligible to participate in the plan, 
"(iii) REGULATIONS.—Notwithstanding clause (i) or 
(ii), the Secretary may by regulations provide that any 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3631 
salary reduction shall or shall not be treated as an 
employer-provided benefit to prevent avoidance of the 
purposes of this section." 
(12) PART-TIME EMPLOYEES.—Paragraph (5) of section 89(j) of 
the 1986 Code is amended by striking out the last sentence 
thereof. 
(13) ACQUISITIONS AND DISPOSITIONS.— 
(A) Clause (ii) of section 89(jX8)(A) of the 1986 Code is 
amended to read as follows: 
"(ii) either— 
"(I) the coverage under such plan is not signifi-
cantly changed during the transition period (other 
than by reason of the change in members in such 
group), or 
"(II) such plan meets such other requirements as 
the Secretary may prescribe by regulation.". 
(B) Subclause (II) of section 410(bX6XCXi) of the 1986 Code 
is amended by inserting "or such plan meets such other 
requirements as the Secretary may prescribe by regula-
tion" before the end period. 
(14) DEPENDENT CARE ASSISTANCE.—Subparagraph (B) of sec-
tion 129(dX7) of the 1986 Code (as redesignated and amended by 
section 11 IB of this Act) is amended— 
(A) by striking out "(within the meaning of section 
414(qX7))", and 
(B) by adding at the end thereof the following new sen-
tence: "For purposes of this subparagraph, the term 'com-
pensation' has the meaning given such term by section 
414(qX7), except that, under rules prescribed by the Sec-
retary, an employer may elect to determine compensation 
on any other basis which does not discriminate in favor of 
highly compensated employees.". 
(15) REPORTING REQUIREMENTS.— 
(A) Section 6039D(d) of the 1986 Code is amended— 
(i) by adding at the end thereof the following new 
paragraph: 
"(3) SPECIAL RULE FOR MULTIEMPLOYER PLANS.—In the case of 
a multiemployer plan, the plan shall be required to provide any 
information required by this section which the Secretary deter-
mines, on the basis of the agreement between the plan and 
employer, is held by the plan (and not the employer)", and 
(ii) by inserting "AND SPECIAL RULES" after "DEFINI- 
• 
TiONs" in the heading thereof. 
(B) The amendments made by this paragraph shall apply 
26 USC 6039D 
to years beginning after 1984. 
note. 
(b) MODIFICATION TO DEFINITIONS OF HIGHLY (DOMPENSATED AND 
COMPENSATION AND TO SEPARATE LINE OF BUSINESS RULES.— 
(1) DEFINITION OF HIGHLY COMPENSATED.—Subsection (q) 
of 
section 414 of the 1986 Code is amended by adding at the end 
thereof the following new paragraph: 
"(12) 
SIMPLIFIED METHOD FOR DETERMINING HIGHLY COM-
PENSATED EMPLOYEES.— 
"(A) IN GENERAL.—If an election by the employer under 
this paragraph applies to any year, in determining whether 
an employee is a highly compensated employee for such 
year— 
102 STAT. 3632 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) subparagraph (B) of paragraph (1) shall be ap-
plied by substituting '$50,000' for '$75,000', and 
"(ii) subparagraph (C) of paragraph (1) shall not 
apply. 
'(B) REQUIREMENT FOR ELECTION.—An election under this 
paragraph shall not apply to any year unless— 
"(i) at all times during such year, the employer main-
tained significant business activities (and employed 
employees) in at least 2 significantly separate geo-
graphic areas, and 
"(ii) the employer satisfies such other conditions as 
the Secretary may prescribe." 
(2) LINE OF BUSINESS REQUIREMENTS.— 
(A) SAFE HARBOR RULE.—Paragraph (3) of section 414(r) of 
the 1986 Code is amended to read as follows: 
"(3) SAFE HARBOR RULE.— 
"(A) IN GENERAL.—^The requirements of subparagraph (C) 
of paragraph (2) shall not apply to any line of business if the 
highly compensated employee percentage with respect to 
such line of business is— 
"(i) not less than one-half, and 
"(ii) not more than twice, 
the percentage which highly compensated employees are of 
all employees of the employer. An employer shall be treated 
as meeting the requirements of clause (i) if at least 10 
percent of all highly compensated employees of the em-
ployer perform services solely for such line of business. 
'xB) DETERMINATION MAY BE BASED ON PREcaEDiNG YEAR.— 
The requirements of subparagraph (A) shall be treated as 
met with respect to any line of business if such require-
ments were met with respect to such line of business for the 
preceding year and if— 
"(i) no more than a de minimis number of employees 
were shifted to or from the line of business after the 
close of the preceding year, or 
"(ii) the employees shifted to or from the line of 
business after the close of the preceding year contained 
a substantially proportional number of highly com-
pensated employees. . 
(B) SEPARATE OPERATING UNITS.—Section 89(gX5) of the 
1986 Code is amended by adding at the end thereof the 
following new sentence: "In applying section 414(r)(7) for 
purposes of this section, an operating unit shall be treated 
as in a separate geographic area from another unit if such 
units are at least 35 miles apart.". 
(3) COMPENSATION FOR GROUP-LIFE INSURANCE PLANS.— 
(A) Paragraph (4) of section 890') of the 1986 Code is 
amended by adding at the end thereof the following new 
subparagraph: 
"(D) (JoMPENSATiON.—For purposes of applying this para-
graph— 
"(i) IN GENERAL.—Compensation shall be determined 
on any basis determined by the employer which does 
not discriminate in favor of highly compensated 
employees. 
' (ii) SPECIAL RULES FOR 1989 AND 1990.—In the case of 
testing years b^;inning in 1989 or 1990, the employer 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3633 
may elect to treat base compensation as compensa-
tion." 
(B) Subparagraph (A) of section 89gX4) of the 1986 Code is 
amended by striking out "(within the meaning of section 
414(s))". 
(c) TRANSITIONAL PROVISIONS FOR PURPOSES OF SECTION 89.— 
26 use 89 note. 
(1) TEMPORARY VALUATION RULES.—In the case of testing years 
beginning before the later of January 1, 1991, or the date 1 year 
after the Secretary of the Treasury or his delegate first issues 
such valuation rules as are necessary to apply the provisions of 
section 89 of the 1986 Code to health plans (or if later the 
effective date of such rules)— 
(A) Section 89(gX3XB) of the 1986 Code shall not apply. 
(BXi) Except as provided in clause (ii), the value of cov-
erage under a health plan for purposes of section 89 of the 
1986 Code shall be determined in substantially the same 
manner as costs under a health plan are determined under 
section 4980B(fK4) of the 1986 Code. 
(ii) For purposes of determining whether an employer 
meets the requirements of subsections (d), (e), and (f) of 
section 89 of the 1986 Code, value under clause (i) may be 
determined under any other reasonable method selected by 
the employer. 
(2) FORMER EMPLOYEES.—The amendments made by section 
1151 of the Reform Act shall not apply to former employees who 
separated from service with the employer before January 1, 
1989 (and were not reemployed on or sifter such date), and such 
former employees shall not be taken into account in determin-
ing whether the requirements of section 89 of the 1986 Code are 
met with respect to other former employees. The preceding 
sentence shall not apply to the extent that— 
(A) the value of employer-provided benefits provided to 
any such former employee exceeds the value of such bene-
fits which were provided under the terms of the plan as in 
effect on December 31,1988, or 
(B) the employer-provided benefits provided to such 
former employees are modified so as to discriminate in 
favor of such former employees who are highly com-
pensated employees. 
Any excess value under the preceding sentence shall be deter-
mined without regard to any increase required by Federal law, 
regulation or rule or any increase which is the same for employ-
ees separating on or before December 31, 1988, and employees 
separating after such date and which does not discriminate in 
favor of highly compensated employees who separated from 
service after December 31,1988. 
(3) WRITTEN PLAN REQUIREMENT.—The requirements of sec-
tion 89(kXlXA) of the 1986 Code shall be treated as met with 
respect to any testing year beginning in 1989, i
f
— 
(A) the plan is in writing before the close of such year, 
(B) the employees had reasonable notice of the plan's 
* 
essential features on or before the beginning of such year, 
and 
(C) the provisions of the written plan apply for the entire 
year. 
(4) RULES TO BE PRESCRIBED BEFORE NOVEMBER 15, 1988.—Not 
later than November 15, 1988, the Secretary of the Treasury or 
102 STAT. 3634 
PUBLIC LAW 100-647—NOV. 10, 1988 
his delegate shall issue such rules as may be necessary to carry 
out the provisions of section 89 of the 1986 Code. 
26 u s e 89 note. 
(d) EFFECTIVE D A T E S . — 
(1) SUBSECTION (a).—The amendments made by subsection (a) 
shall take effect as if included in the amendments made by 
section 1151 of the Tax Reform Act of 1986; except that the 
amendment made by subsection (aX8) shall apply to testing 
years beginning after December 31,1989. 
(2) SUBSECTION (b).—The amendments made by subsection (b) 
shall apply to years beginning after December 31,1986. 
Subtitle D—Estate and Gift Taxes 
SEC. 
3031. 
ESTATE 
TAX 
VALUATION 
FREEZES. 
(a) DEEMED GIFT.— 
(1) IN GENERAL.—Paragraph (4) of section 2036(c) of the 1986 
Code is amended to read as follows: 
"(4) TREATMENT OF CERTAIN TRANSFERS.— 
"(A) IN GENERAL.—For purposes of this subtitle, if, before 
the death of the original transferor— 
"(i) the original transferor transfers all (or any por-
tion of) the retained interest referred to in paragraph 
(1), or 
"(ii) the original transferee transfers all (or any por-
tion of) the transferred property referred to in para-
graph (1) to a person who is not a member of the 
original transferor's family, 
the original transferor shall be treated as having made a 
transfer by gift of property to the original transferee equal 
to the paragraph (1) inclusion (or proportionate amount 
thereof). Proper adjustments shall be made in the amount 
treated as a gift by reason of the preceding sentence to take 
into account prior transfers to which this subparagraph 
applied and take into account any right of recovery 
(whether or not exercised) under section 2207B. 
"(B) COORDINATION WITH PARAGRAPH ( D .—In any case to 
which subparagraph (A) applies, nothing in paragraph (1) 
or section 2035(dX2) shall require the inclusion of the trans-
ferred property (or proportionate amount thereof). 
"(C) SPECIAL RULE WHERE PROPERTY RETRANSFERRED.—In 
the case of a transfer described in subparagraph (AXii) from 
the original transferee to the original transferor, the para-
graph (1) inclusion (or proportion thereof) shall be reduced 
by the excess (if any) of— 
"(i) the fair market value of the property so trans-
ferred, over 
"(ii) the amount of the consideration paid by the 
original transferor in exchange for such property. 
"(D) DEFINITIONS.—For purposes of this paragraph— 
"(i) ORIGINAL TRANSFEROR.—The term 'original trans-
feror' means the person making the transfer referred 
to in paragraph (1). 
"(ii) 
ORIGINAL TRANSFEREE.—The term 
'original 
,. 
transferee' means the person to whom the transfer 
referred to in paragraph (1) is made. Such term in-
•*»:*,, ri;- • < iS-i-v" ''>^M^^*« ^•^Va^A'i^s 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3635 
eludes any member of the original transferor's family 
to whom the property is subsequently transferred. 
"(iii) PARAGRAPH (i) INCLUSION.—The term 'para-
graph (1) inclusion' means the amount which would 
have been included in the gross estate of the original 
transferor under subsection (a) by reason of paragraph 
(1) (determined without regard to sections 2032 and 
2032A) if the original transferor died immediately 
before the transfer referred to in subparagraph (A). 
The amount determined under the preceding sentence 
shall be reduced by the amount (if any) of the taxable 
gift resulting from the transfer referred to in para-
graph (IXB). 
"(iv) TRANSFERS TO INCLUDE TERMINATIONS, ETC.— 
Terminations, lapses, and other changes in any interest 
in property of the original transferor or original trans-
feree shall be treated as transfers. 
"(E) CONTINUING INTEREST IN TRANSFERRED PROPERTY MAY 
NOT BE RETAINED.—A transfer (to which subparagraph (A) 
would otherwise apply) shall not be taken into account 
under subparagraph (A) if the original transferor or the 
original transferee (as the case may be) retains a direct or 
indirect continuing interest in the property transferred in 
such transfer." 
(2) CROSS REFERENCE.—Subsection (d) of section 2501 of the 
1986 Code is amended by adding at the end thereof the follow-
ing: 
(3) For treatment of certain transfers related to estate tax 
valuation freezes as gifts to which this chapter applies, see 
section 2036(cX4)." 
(b) TREATMENT OF CERTAIN GRANTOR RETAINED INCOME TRUSTS.— 
Subsection (c) of section 2036 of the 1986 (Dode is amended by adding 
at the end thereof the following new paragraph: 
"(6) 
TREATMENT OF CERTAIN GRANTOR RETAINED INTEREST 
TRUSTS.— 
"(A) IN GENERAL.—For purposes of this subsection, any 
retention of a qualified trust income interest shall be dis-
regarded and the property with respect to which such 
interest exists shall be treated as held by the transferor 
while such income interest continues. 
"(B) QUALIFIED TRUST INCOME INTEREST.—For purposes of 
subpsu-agraph (A), the term 'qualified trust income interest' 
means any right to receive amounts determined solely by 
reference to the income from property held in trust if— 
"(i) such right is for a period not exceeding 10 years, 
"(ii) the person holding such right transferred the 
property to the trust, and 
"(iii) such person is not a trustee of such trust." 
Ot)) EXCEPTIONS.—Subsection (c) of section 2036 of the 1986 Code is 
amended by adding at the end thereof the following new para-
graphs: 
"(7) EXCEPTIONS.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply to a 
transaction solely by reason of 1 or more of the following: 
"(i) The receipt (or retention) of qualified debt. 
"(ii) Except as provided in regulations, the existence 
of an agreement for the sale or lease of goods or other 
102 STAT. 3636 
PUBLIC LAW 100-647—NOV. 10, 1988 
property to be used in the enterprise or the providing of 
services and— 
"(I) the agreement is an arm's length agreement 
for fair market value, and 
"(11) the agreement does not otherwise involve 
any change in interests in the enterprise, 
"(iii) An option or other agreement to buy or sell 
property at the fsiir market value of such property as of 
the time the option is (or the rights under the agree-
ment are) exercised. 
"(B) LIMITATIONS.— 
"(i) SERVICES PERFORMED AFTER TRANSFER.—In 
the 
case of compensation for services performed after the 
transfer referred to in paragraph (IXB), clause (ii) of 
subparagraph (A) shall not apply if such services were 
performed under an agreement providing for the 
performance of services over a period greater than 3 
years after the date of the transfer. For purposes of the 
preceding sentence, the term of any agreement in-
cludes any period for which the agreement may be 
extended at the option of the service provider. 
"(ii) AMOUNTS MUST NOT BE CONTINGENT ON PROFITS, 
ETC.—Clause (ii) of subparagraph (A) shall not apply to 
any amount determined (in whole or in part) by ref-
erence to gross receipts, income, profits, or similar 
items of the enterprise. 
"(C) QUALIFIED DEBT.—For purposes of this paragraph, 
except as provided in subparagraph (D), the term 'qualified 
debt'means any indebtedness if— 
"(i) such indebtedness— 
"(I) unconditionally requires the pa3mient of a 
sum certain in money in 1 or more fixed payments 
on specified dates, and 
"(II) h£is a fixed maturity date not more than 15 
years from the date of issue (or, in the case of 
indebtedness secured by real property, not more 
than 30 years from the date of issue), 
"(ii) the only other amount payable under such 
indebtedness is interest determined at— 
"(I) a fixed rate, or 
"(II) a rate which bears a fixed relationship to a 
specified market interest rate, 
(iii) the interest payment dates are fixed, 
"(iv) such indebtedness is not by its terms subordi-
nated to the claims of general creditors, 
"(v) except in a case where such indebtedness is in 
default as to interest or principal, such indebtedness 
does not grant voting rights to the person to whom the 
debt is owed or place any limitation on the exercise of 
voting rights by others, and 
"(vi) such indebtedness— 
"(I) is not (directly or indirectly) convertible into 
an interest in the enterprise which would not be 
qualified debt, and 
"(II) does not otherwise grant any right to ac-
quire such an interest. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3637 
The requirement of clause (i)(I) that the principal be pay-
able on 1 or more specified dates and the requirement of 
clause (iXII) shall not apply to indebtedness payable on 
demand if such indebtedness is issued in return for cash to 
be used to meet normal business needs of the enterprise. 
"(D) SPECIAL RULE FOR STARTUP DEBT.— 
"(i) IN GENERAL.—For purposes of this paragraph, the 
term 'qualified debt' includes any qualified startup 
debt. 
"(ii) QuAUFiED STARTUP DEBT.—For purposes of 
clause (i), the term 'qualified startup debt' means any 
indebtedness if— 
"(I) such indebtedness unconditionally requires 
the payment of a sum certain in money, 
"(II) such indebtedness was received in exchange 
for cash to be used in any enterprise involving the 
active conduct of a trade or business, 
"(III) the person to whom the indebtedness is 
owed has not at any time (whether before, on, or 
after the exchange referred to in subclause (II)) 
transferred 
any property (including goodwill) 
which was not cash to the enterprise or transferred 
customers or other business opportunities to the 
enterprise, 
"(IV) the person to whom the indebtedness is 
owed has not at any time (whether before, on, or 
after the exchange referred to in subclause (II)) 
held any interest in the enterprise (including an 
interest £is an officer, director, or employee) which 
was not qualified startup debt, 
"(V) any person who (but for subparagraph (AXi)) 
would have been an original transferee (as defined 
in paragraph (4XC)) participates in the active 
management (as defined in section 2032A(eX12)) of 
the enterprise, and 
"(VI) such indebtedness meets the requirements 
of clauses (v) and (vi) of subparagraph (C). 
"(8) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection, including such regulations as may 
be necessary or appropriate to prevent avoidance of the pur-
poses of this subsection through distributions or otherwise." 
(d) TREATMENT OF SPOUSE.—Subparagraph (C) of section 2036(cX3) 
of the 1986 Code is amended by striking out "An individual" and 
inserting in lieu thereof "Except as provided in regulations, an 
individual". 
(e) CLARIFICATION OF RETENTION TEST.—Subparagraph (B) of sec-
tion 2036(cXl) of the 1986 Code is amended by striking out "while" 
and all that follows down through the comma at the end of such 
subparagraph and inserting in lieu thereof "while retaining an 
interest in the income of, or rights in, the enterprise,". 
(f) RIGHT OF RECOVERY.— 
(1) IN GENERAL.—Subchapter C of chapter 11 of the 1986 Code 
is amended by inserting after section 2207A the following new 
section: 
102 STAT. 3638 
PUBLIC LAW 100-647—NOV. 10, 1988 
"SEC. 2207B. RIGHT OF RECOVERY 
WHERE 
DECEDENT 
RETAINED 
INTEREST. 
"(a) ESTATE TAX.— 
"(1) IN GENERAL.—If any part of the gross estate on which tax 
has been paid consists of the value of property included in the 
gross estate by reason of section 2036 (relating to transfers with 
retained life estate), the decedent's estate shall be entitled to 
recover from the person receiving the property the amount 
which bears the same ratio to the total tax under this chapter 
which has been paid as— 
"(A) the value of such property, bears to 
"(B) the taxable estate. 
"(2) DECEDENT MAY OTHERWISE DIRECT BY WILL.—Paragraph (1) 
shall not apply if the decedent otherwise directs in a provision 
of his will (or a revocable trust) speciHcally referring to this 
section. 
"(b) GIFT TAX.—If for any calendar year tax is paid under chapter 
12 with respect to any person by reason of property treated as 
transferred by such person under section 2036(cX4), such person 
shall be entitled to recover from the original transferee (as defined 
in section 2036(cX4XCXii)) the amount which bears the same ratio to 
'
^ 
the total tax for such year under chapter 12 as— 
"(1) the value of such property for purposes of chapter 12, 
bears to 
"(2) the total amount of the taxable gifts for such year. 
"(c) MORE THAN ONE RECIPIENT.—For purposes of this section, if 
there is more than 1 person receiving the property, the right of 
recovery shall be against each such person. 
"(d) PENALTIES AND INTEREST.—In the case of penalties and in-
terest attributable to the additional taxes described in subsections 
(a) and (b)> rules similar to the rules of subsections (a), (b), and (c) 
shall apply. 
"(e) No RIGHT OF RECOVERY AGAINST CHARITABLE REMAINDER 
TRUSTS.—No person shall be entitled to recover any amount by 
reason of this section from a trust to which section 664 applies 
(determined without regard to this section)." 
(2) CDNFORMING AMENDMENT.—The table of sections for sub-
chapter C of chapter 11 of the 1986 Code is amended by insert-
ing after the item relating to section 2207A the following new 
item: 
"Sec. 2207B. Right of recovery where decedent retained interest." 
(g) T R E A T M E N T OF CtoNSiDERATON.— 
(1) Paragraph (2) of section 2036(c) of the 1986 Code is 
amended to read as follows: 
"(2) SPECIAL RULES FOR CONSIDERATION FURNISHED BY FAMILY 
"(A) IN GENERAL.—The exception contained in subsection 
(a) for a bona fide sale shall not apply to a transfer described 
in paragraph (I) if such transfer is to a member of the 
transferor's family. 
"(B) TREATMENT OF CONSIDERATION.— 
(i) IN GENERAL.—In the case of a transfer described in 
paragraph (I), if— 
"(I) a member of the transferor's family provides 
consideration in money or money's worth for such 
member's interest in the enterprise, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3639 
"(11) it is established to the satisfaction of the 
Secretary that such consideration originally be-
longed to such member and was never received or 
acquired (directly or indirectly) by such member 
from the transferor for less than full and adequate 
consideration in money or money's worth, 
paragraph (1) shall not apply to the applicable fraction 
of the portion of the enterprise which would (but for 
this subparagraph) have been included in the gross 
estate of the transferor by reason of this subsection 
(determined without regard to any reduction under 
paragraph (5) for the value of the retained interest), 
"(ii) APPUCABLE FRACTION.—For purposes of clause 
(i), the applicable fraction is a fraction— 
"(I) the numerator of which is the amount of the 
consideration referred to in clause (i), and 
"(II) the denominator of which is the value of the 
portion referred to in clause (i) immediately after 
the transfer described in paragraph (1). 
"(iii) SECTION 2043 NOT TO APPLY.—The provisions of 
this subparagraph shall be in lieu of any adjustment 
under section 2043." 
(2) Paragraph (5) of section 2036(c) of the 1986 Code is 
amended to read as follows: 
"(5) ADJUSTMENTS.—Appropriate adjustments shall be made 
in the amount included in the gross estate by reason of this 
subsection for the value of the retained interest, extraordinary 
distributions, and changes in the capital structure of the enter-
prise after the transfer described in paragraph (1). 
(h) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in this subsection, any note. 
amendment made by this section shall take effect as if included 
in the provisions of the Revenue Act of 1987 to which such 
amendment relates. 
(2) SUBSECTION (a).—The amendments made by subsection (a) 
shall apply in cases where the transfer referred to in section 
2036(cXlXB) of the 1986 Code is on or after June 21, 1988. 
(3) SUBSECTION (f).—If an amount is included in the gross 
estate of a decedent under section 2036 of the 1986 Code other 
than solely by reason of section 2036(c) of the 1986 Code, the 
amendments made by subsection (f) shall apply to such amount 
only with respect to property transferred after the date of the 
enactment of this Act. 
(4) CORRECTION PERIOD.—If section 2036(cXl) of the 1986 C!ode 
would Ot>ut for this paragraph) apply to any interest arising 
from a transaction entered into during the period beginning 
after December 17, 1987, and ending before January 1, 1990, 
such section shall not apply to such interest if^ 
(A) during such period, such actions are taken as are 
necessary to have such section 2036(cXl) not apply to such 
transaction (and any such interest), or 
(B) the original transferor and his spouse on January 1, 
1990 (or, if earlier, the date of the original trans-
feror's death), does not hold any interest in the enterprise 
involved. 
26 use 2036 
102 STAT. 3640 
PUBLIC LAW 100-647—NOV. 10, 1988 
(5) CLARIFICATION OF EFFECTIVE DATE.—For purposes of section 
10402(b) of the Revenue Act of 1987, with respect to property 
transferred on or before December 17,1987— 
(A) any failure to exercise a right of conversion, 
(B) any failure to pay dividends, and 
(c) failures to exercise other rights specified in regula-
tions, 
shall not be treated as a subsequent transfer. 
Subtitle E—Indian Fishing Rights 
SEC. 3041. FEDERAL TAX TREATMENT OF INCOME DERIVED BY INDIANS 
FROM EXERCISE OF FISHING RIGHTS SECURED BY TREATY, 
ETC. 
(a) GENERAL RULES.—Subchapter C of chapter 80 of the 1986 Code 
(relating to provisions affecting more than one subtitle) is amended 
by adding at the end thereof the following new section: 
"SEC. 7873. INCOME DERIVED BY INDIANS FROM EXERCISE OF FISHING 
RIGHTS. 
"(a) IN GENERAL.— 
"(1) iNCOBflE AND SELF-EMPLOYMENT TAXES.—No tax shall be 
imposed by subtitle A on income derived— 
"(A) by a member of an Indian tribe directly or through a 
qualified Indian entity, or 
"(B) by a qualified Indian entity, 
from a fishing rights-related activity of such tribe. 
"(2) EMPLOYMENT TAXES.—No tax shall be imposed by subtitle 
C on remuneration paid for services performed in a fishing 
rights-related activity of an Indian tribe by a member of such 
tribe for another member of such tribe or for a qualified Indian 
entity. 
"(b) DEFINITIONS.—For purposes of this section— 
"(1) FISHING RIGHTS-RELATED ACTIVITY.—The term 'fishing 
rights-related activity' means, with respect to an Indian tribe, 
any activity directly related to harvesting, processing, or 
transporting fish harvested in the exercise of a rea^pcdzed 
fishing right of such tribe or to selling such fish but only if 
substantially all of such harvesting was performed by members 
of such tribe. 
"(2) RECOGNIZED FISHING RIGHTS.—The term 'recc^nized fish-
ing rights' means, with respect to an Indian tribe, fishing rights 
secured as of March 17,1988, by a treaty between such tribe and 
the United States or by an Executive order or an Act of 
Congress. 
"(3) QUALIFIED INDIAN ENTITY.— 
"(A) IN GENERAL.—The term 'qualified Indian entity* 
means, with respect to an Indian tribe, any entity if— 
"(i) such entity is engaged in a fishing rights-related 
activity of such tribe, 
"(ii) all of the equity interests in the entity are owned 
by qualified Indian tribes, members of such tribes, or 
their spouses, 
"(iii) except as provided in r^ulations, in the case of 
an entity which engages to any extent in any substan-
tial processing or transporting of fish, 90 percent or 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3641 
more of the annual gross receipts of the entity is 
derived from fishing rights-related activities of one or 
more qualified Indian tribes each of which owns at 
least 10 percent of the equity interests in the entity, 
and 
"(iv) substantially all of the management functions of 
the entity are performed by members of qualified 
Indian tribes. 
For purposes of clause (iii), equity interests owned by a 
member (or the spouse of a member) of a qualified Indian 
tribe shall be treated as owned by the tribe. 
"(B) QuAUFiED INDIAN TRIBE.—For purposes of subpara-
graph (A), an Indian tribe is a qualified Indian tribe with 
respect to an entity if such entity is engaged in a fishing 
rights-related activity of such tribe. 
"(c) SPECIAL RULES.— 
"(1) DISTRIBUTIONS FROM QUAUFIED INDIAN ENTITY.—For pur-
poses of this section, any distribution with respect to an equity 
interest in a qualified Indian entity of an Indian tribe to a 
member of such tribe shall be treated as derived by such 
member from a fishing rights-related activity of such tribe to 
the extent such distribution is attributable to income derived by 
such entity from a fishing rights-related activity of such tribe. 
"(2) DE MINIMIS UNRELATED AMOUNTS MAY BE EXCLUDED.—If, 
but for this paragraph, all but a de minimis amount— 
"(A) derived by a qualified Indian tribal entity, or by an 
individual through such an entity, is entitled to the benefits 
of paragraph (1) of subsection (a), or 
"(B) paid to an individuEil for services is entitled to the 
benefits of paragraph (2) of subsection (a), 
then the entire amount shall be entitled to the benefits of such 
paragraph." 
(b) CLERICAL AMENDMENT.—The table of sections for such sub-
chapter C is amended by adding at the end thereof the following 
new item: 
"Sec. 7873. Income derived by Indians from exercise of fishing rights." 
SEC. 3042. STATE TAX TREATMENT OF INCOME DERIVED BY INDIANS 
FROM EXERCISE OF FISHING RIGHTS SECURED BY TREATY, 
ETC. 
Section 2079 of the Revised Statutes (25 U.S.C. 71) is amended by 
adding at the end thereof the following new sentence: "Such trea-
ties, and any Executive orders and Acts of Congress under which the 
rights of any Indian tribe to fish are secured, shall be construed to 
prohibit (in addition to any other prohibition) the imposition under 
any law of a State or political subdivision thereof of any tax on any 
income derived from the exercise of rights to fish secured by such 
treaty. Executive order, or Act of Congress if section 7873 of the 
Internal Revenue Code of 1986 does not permit a like Federal tax to 
be imposed on such income." 
SEC. 3043. CONFORMING AMENDMENTS RELATING TO COVERAGE UNDER 
OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE PRO-
GRAM. 
(a) EXCLUSION FROM WAGES OF INCOME DERIVED BY INDIANS FROM 
EXERCISE OF FISHING RIGHTS.—Section 209 of the Social Security Act 
(42 U.S.C. 409) is amended— 
102 STAT. 3642 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) in subsection (r), by striking out "or" at the end; 
(2) in subsection (s), by striking out the period and inserting in 
lieu thereof "; or"; and 
(3) by inserting after subsection (s) the following new 
subsection: 
"(t) Remuneration consisting of income excluded from tax-
ation under section 7873 of the Internal Revenue Code of 1986 
(relating to income derived by Indians from exercise of fishing 
rights)." 
(b) EXCLUSION FROM NET EARNINGS FROM SELF-EMPLOYMENT OF 
INCOME DERIVED BY INDIANS FROM EXERCISE OF FISHING RIGHTS.— 
Section 211(a) of such Act (42 U.S.C. 411(a)) is amended— 
(1) in paragraph (12), by striking out "and" at the end; 
(2) in paragraph (13), by striking out the period and inserting 
in lieu thereof "; and"; and 
(3) by inserting after paragraph (13) the following new para-
graph: 
"(14) There shall be excluded income excluded from taxation 
under section 7873 of the Internal Revenue Code of 1986 (relat-
ing to income derived by Indians from exercise of fishing 
rights)." 
(c) CROSS-REFERENCES IN S E C A AND F I C A TO APPLICABLE INDIAN 
FISHING RIGHTS PROVISIONS.— 
(1) SECA.—Subsection (a) of section 1402 of the 1986 Code 
(relating to net earnings from self-emplojonent) is amended by 
striking out "and" at the end of paragraph (13), by striking out 
the period at the end of paragraph (14) and inserting in lieu 
thereof "; and", and by inserting after paragraph (14) the 
following new paragraph: 
"(15) in the case of a member of an Indian tribe, the special 
rules of section 7873 (relating to income derived by Indians from 
exercise of fishing rights) shall apply." 
(2) FICA.—Subsection (a) of section 3121 of the 1986 Code 
(relating to wages) is amended by striking out "or" at the end of 
paragraph (19), by striking out the period at the end of para-
graph (20) and inserting in lieu thereof "; or", and by inserting 
after paragraph (20) the following new paragraph: 
"(21) in the case of a member of an Indian tribe, any remu-
neration on which no tax is imposed by this chapter by reason of 
section 7873 (relating to income derived by Indians from exer-
cise of fishing rights)." 
26 use 7873 
SEC. 3044. EFFECTIVE DATE; NO INFERENCE CREATED. 
(a) EFFECTIVE DATE.—The amendments made by this subtitle shall 
apply to all periods beginning before, on, or after the date of the 
enactment of this Act. 
(b) No INFERENCE CREATED.—Nothing in the amendments made 
by this subtitle shall create any inference as to the existence or non-
existence or scope of any exemption from tax for income derived 
from fishing rights secured as of March 17,1988, by any treaty, law, 
or Executive Order. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3643 
TITLE IV—EXTENSIONS AND MODIFICA-
TIONS OF EXPIRING TAX PROVISIONS 
SEC. 4001. EXTENSION 
AND 
MODIFICATION 
OF 
EXCLUSION 
FOR 
EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE. 
(a) EXTENSION.—Subsection (d) of section 127 of the 1986 Code 
(relating to educational assistance programs) is amended by striking 
out "December 31,1987" and inserting in lieu thereof "December 31, 
1988". 
(b) RESTRICTIONS RELATING TO EDUCATION AT THE GRADUATE 
LEVEL.— 
(1) IN GENERAL.—Paragraph (1) of section 127(c) of the 1986 
(Dode is amended by adding at the end thereof the following new 
sentence: "The term 'educational assistance' also does not in-
clude any payment for, or the provision of any benefits with 
respect to, any graduate level course of a kind normally taken 
by an individual pursuing a program leading to a law, business, 
medical, or other advanced academic or professional degree." 
(2) SPECIAL RULE FOR TEACHING AND RESEARCH ASSISTANTS.— 
Subsection (d) of section 117 of the 1986 Code is amended by 
adding at the end thereof the following new paragraph: 
"(5) SPECIAL RULES FOR TEACHING AND RESEARCH ASSISTANTS.— 
In the case of the education of an individual who is a graduate 
student at an educational organization described in section 
170(bXlXAXii) and who is engaged in teaching or research activi-
ties for such organization, paragraph (2) shall be applied as if it 
did not contain the phrase '(below the graduate level)'." 
(c) EFFECTIVE DATES.—The amendments made by this section shall 
26 USC117 note. 
apply to taxable years beginning after December 31,1987. 
SEC. 4002. EXTENSION AND MODIFICATION OF EXCLUSION OF AMOUNTS 
RECEIVED UNDER GROUP LEGAL SERVICES PLANS. 
(a) EXTENSION.—Section 120(e) of the 1986 Ckxie is amended by 
striking out "1987" and inserting in lieu thereof "1988". 
(b) LIMITATION ON VALUE OF INSURANCE PROTECTION WHICH MAY 
B E Eb^CLUDED.— 
(1) IN GENERAL.—Section 120(a) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: 
"No exclusion shall be allowed under this section with respect to an 
individual for any taxable year to the extent that the value of 
insurance (whether through an insurer or self-insurance) against 
legal costs incurred by the individual (or his spouse or dependents) 
provided under a qusdified group legal services plan exceeds $70." 
(2) CONFORMING AMENDMENT.—Subparagraph (A) of section 
125(eX2) of the 1986 Code is amended by inserting "or any 
insurance under a qualified group legal services plan the value 
of which is so includable only because it exceeds the limitation 
of section 120(a)" after "section 79". 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
26 USC 120 note. 
apply to taxable years ending after December 31,1987. 
SEC. 4003. CARRYOVER OF POST-1987 LOW-INCOME HOUSING CREDIT 
DOLLAR AMOUNTS PERMITTED. 
(a) IN GENERAL.—Section 42(hXl) of the 1986 Code (relating to 
housing credit dollar amount may not be carried over, etc.), as 
102 STAT. 3644 
PUBLIC LAW 100-647—NOV. 10, 1988 
amended by section 1002(1X14)(A) of this Act, is amended by adding 
at the end thereof the following new subparagraph: 
"(E) EXCEPTION WHERE lo PERCENT OF COST INCURRED.— 
"(i) IN GENERAL.—An allocation meets the require-
ments of this subparagraph if such allocation is made 
with respect to a qualified building which is placed in 
service not later than the close of the second calendar 
year following the calendar year in which the alloca-
tion is made. 
"(ii) QUAUFIED BUILDING.—For purposes of clause (i), 
the term 'qualified building' means any building which 
is part of a project if the taxpayer's basis in such 
project (as of the close of the calendar year in which the 
allocation is made) is more than 10 percent of the 
taxpayer's reasonably expected basis in such project (as 
of the close of the second calendar year referred to in 
clause (i)). Such term does not include any existing 
building unless a credit is allowable under subsection 
(e) for rehabilitation expenditures paid or incurred by 
the taxpayer with respect to such building for a taxable 
year ending during the second calendar year referred 
to in clause (i) or the prior taxable year." 
(b) CONFORMING AMENDMENTS.— 
(1) Section 42(h)(lXB) of the 1986 Code, as amended by section 
1002 of this Act, is amended by striking out "(C) or (D)" and 
inserting in lieu thereof "(C), (D), or (E)". 
26 use 469 note. 
(2) Paragraph (3) of section 501(c) of the Reform Act is hereby 
repealed. 
(3) Subsection (n) of section 42 of the 1986 Code, as amended 
by title I of this Act, is amended to read as follows: 
"(n) TERMINATION.—The State housing credit ceiling under 
subsection (h) shall be zero for any calendar year after 1989 and 
subsection (hX4) shall not apply to any building placed in service 
after 1989." 
26 use 42 note. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to amounts allocated in calendar years after 1987. 
SEC. 4004. SIMPLIFICATION OF RULE WHERE PARTNERSHIP HOLDS 
QUALIFIED LOW-INCOME BUILDING. 
(a) IN GENERAL.—Subparagraph (B) of section 42(jX5) of the 1986 
Code, as amended by title I of this Act, is amended to read as 
follows: 
"(B) PARTNERSHIPS TO WHICH PARAGRAPH APPUES.—This 
paragraph shall apply to any partnership which has 35 or 
more partners unless the partnership elects not to have this 
paragraph apply." 
26 use 42 note. 
(b) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall take effect as if included in the amendments made by 
section 252 of the Reform Act. 
(2) PERIOD FOR ELECTION.—The period for electing not to have 
section 42(jX5) of the 1986 Code apply to any partnership shall 
not expire before the date which is 6 months after the date of 
the enactment of this Act. 
^'•"XfiU^?^" 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3645 
SEC. 4005. PROVISIONS RELATING TO MORTGAGE REVENUE BONDS AND 
MORTGAGE CREDIT CERTIFICATES. 
(a) EXTENSION OF AUTHORITY TO ISSUE BONDS AND CERTIFICATES.— 
(1) Subparagraph (B) of section 143(aXl) of the 1986 Code 
(relating to termination) is amended by striking out "Decem-
ber 31, 1988" each place it appears and inserting in lieu thereof 
"December 31,1989". 
(2) Subsection (h) of section 25 of the 1986 Code (relating to 
credit for interest on certain home mortgages), as amended by 
section 1013(aX26) of this Act, is amended by striking out "1988" 
and inserting in lieu thereof "1989". 
O
t
>
) CALCULATION OF INCOME LIMITS FOR QUAUFIED MORTGAGE 
BOND FINANCED HOMES IN HIGH HOUSING COST AREAS.—Section 
143(f) of the 1986 C!ode (relating to income requirements) is 
amended by adding at the end thereof the following new para-
graph: 
"(5) ADJUSTMENT OF INCOME REQUIREMENT BASED ON RELATION 
OF HIGH HOUSING COSTS TO INCOME.— 
"(A) IN GENERAL.—If the residence (for which financing is 
provided under the issue) is located in a high housing cost 
area and the limitation determined under this paragraph is 
greater than the limitation otherwise applicable under 
paragraph (1), there shall be substituted for the income 
limitation in paragraph (1), a limitation equal to the 
percentage determined under subparagraph (B) of the area 
median gross income for such area. 
"(B) INCOME REQUIREMENTS FOR RESIDENCES IN HIGH HOUS-
ING C
O
S
T AREA.—The percentage determined under this 
subparagraph for a residence located in a high housing cost 
area is the percentage (not greater than 140 percent) equal 
to the product of— 
"(I) 115 percent, and 
"(II) the amount by which the housing cost/income 
ratio for such area exceeds 0.2. 
"(C) HIGH HOUSING COST AREAS.—For purposes of this 
paragraph, the term 'high housing cost area' means any 
statistical area for which the housing cost/income ratio is 
greater than 1.2. 
"(D) HOUSING COST/INCOME RATIO.—For purposes of this 
paragraph— 
"(i) IN GENERAL.—The term 'housing cost/income 
ratio' means, with respect to any statistical area, the 
number determined by dividing— 
"(I) the applicable housing price ratio for such 
area, by 
"(II) the ratio which the area median gross 
income for such area bears to the median gross 
income for the United States. 
"(ii) APPUCABLE HOUSING PRICE RATIO.—For purposes 
of clause (i), the applicable housing price ratio for any 
area is the new housing price ratio or the existing 
housing price ratio, whichever results in the housing 
cost/income ratio being closer to 1. 
"(iii) NEW HOUSING PRICE RATIO.—The new housing 
price ratio for any area is the ratio which— 
102 STAT. 3646 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(I) the average area purchase price (as defined 
in subsection (eX2)) for residences described in 
subsection (eX3XA) which are located in such area 
bears to 
"(II) the average purchase price (determined in 
accordance with the principles of subsection (eX2)) 
for residences so described which are located in the 
United States, 
"(iv) EXISTING HOUSING PRICE RATIO.—The existing 
housing price ratio for any area is the ratio determined 
in accordance with clause (iii) but with respect to resi-
dences described in subsection (eX3XB)." 
(c) DETERMINATIONS OF FAMILY INCOME TO BE BASED ON FAMILY 
SIZE.—Subsection (f) of section 143 of the 1986 Code (relating to 
income requirements) is further amended by adding at the end 
thereof the following new paragraph: 
"(6) ADJUSTMENT TO INCOME REQUIREMENTS BASED ON FAMILY 
SIZE.—In the case of a mortgagor having a family of fewer than 
3 individuals, the preceding provisions of this subsection shall 
be applied by substituting— 
"(A) '100 percent' for '115 percent' each place it appears, 
and 
"(B) '120 percent' for '140 percent' each place it appears." 
(d) QUALIFIED MORTGAGE BONDS SUBJECT TO ARBITRAGE REBATE 
RULES APPUCABLE TO OTHER TAX-EXEMPT BONDS.— 
(1) Paragraph (1) of section 143(g) of the 1986 Code (relating to 
requirements related to arbitrage) is amended— 
(A) by striking out "paragraphs (2) and (3) of this subsec-
tion" and inserting in lieu thereof "paragraph (2) of this 
subsection and, in the case of an issue described in subsec-
tion (bXD, such issue also meets the requirements of para-
graph (3) of this subsection", and 
(B) by striking out "(other than subsection (f) thereof)". 
(2) Paragraph (1) of section 148(f) of the 1986 Code is amended 
by striking out "qualified mortgage bond or". 
(e) LOANS PROVIDED THROUGH QUAUFIED MORTGAGE ISSUE MUST 
ORIGINATE WITHIN 42 MONTHS OF DATE OF ISSUE.—Paragraph (2) of 
section 143(a) of the 1986 Code (defining qualified mortgage issue) is 
amended by adding at the end thereof the following new subpara-
graph: 
"(D) PROCEEDS MUST BE USED WITHIN 42 MONTHS OF DATE 
OF ISSUANCE.— 
"(i) IN GENERAL.—Except as otherwise provided in 
this subparagraph, an issue shall not meet the require-
ment of subparagraph (AXi) unless— 
"(I) all proceeds of the issue required to be used 
to Hnance owner-occupied residences are so used 
within the 42-month period beginning on the date 
of issuance of the issue (or, in the case of a refund-
ing bond, within the 42-month period beginning on 
the date of issuance of the original bond) or, to the 
extent not so used within such period, are used 
within such period to redeem bonds which are part 
of such issue, and 
"(II) no portion of the proceeds of the issue are 
used to m£ike or finance any loan (other than a 
loan which is a nonpurpose investment within the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3647 
meaning of section 148(fX6XA)) after the close of 
such period, 
"(ii) EXCEPTION.—Clause (i) (and clause (iv) of 
subparagraph (A)) shall not be construed to require 
amounts of less than $250,000 to be used to redeem 
bonds. The Secretary may by regulation treat related 
issues as 1 issue for purposes of the preceding 
sentence." 
(f) REPAYMENTS OF FINANCING PROVIDED BY A QUAUFIED MORT-
GAGE ISSUE MUST BE USED TO REDEEM BONDS.—Subparagraph (A) of 
section 143(aX2) of the 1986 Code is amended by striking out "and" 
at the end of clause (ii), by striking out the period at the end of 
clause (iii) and inserting in lieu thereof '\ and", and by adding at the 
end thereof the following: 
"(iv) except as provided in subparagraph (DXii), 
repayments of principal on financing provided by the 
issue are used not later than the close of the 1st 
semiannual period beginning after the date the prepay-
ment (or complete repa3rment) is received to redeem 
bonds which are part of such issue. 
Clause (iv) shall not apply to amounts received within 10 
years after the date of issuance of the issue (or, in the case 
of refunding bond, the date of issuance of the original 
bond)." 
(g) RECAPTURE OF PORTION OF FEDERAL SUBSIDY FROM USE OF 
MORTGAGE BONDS AND MORTGAGE CREDIT CERTIFICATES.— 
(1) IN GENERAL.—Section 143 of the 1986 Code (relating to 
mortgage revenue bonds) is aunended by adding at the end 
thereof the following new subsection: 
"(m) RECAPTURE OF PORTION OF FEDERAL SUBSIDY FROM USE OF 
QUALIFIED MORTGAGE BONDS AND MORTGAGE CREDIT CERTIFICATES.— 
"(1) IN GENERAL.—If, during the taxable year, any taxpayer 
disposes of an interest in a residence with respect to which 
there is or was any federally-subsidized indebtedness for the 
payment of which the taxpayer was liable in whole or part, then 
the taxpayer's tax imposed by this chapter for such taxable year 
shall be increased by the recapture amount with respect to such 
indebtedness. 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to— 
"(A) any disposition by reason of death, and 
"(B) any disposition which is more than 10 years after the 
testing date. 
"(3) FEDERALLY-SUBSIDIZED INDEBTEDNESS.—For purposes of 
this subsection— 
"(A) IN GENERAL.—The term 'federally-subsidized indebt-
edness' means any indebtedness if— 
"(i) financing for the indebtedness was provided in 
whole or part from the proceeds of any tax-exempt 
qualified mortgage bond, or 
"(ii) any credit was gdlowed under section 25 (relating 
to interest on certain home mortgages) to the taxpayer 
for interest paid or incurred on such indebtedness. 
"(B) EXCEPTION FOR HOME IMPROVEMENT LOANS.—Such 
term shall not include any indebtedness to the extent such 
indebtedness is federally-subsidized indebtedness solely by 
reason of being a qualified home improvement loan (as 
defined in subsection (kX4)). 
102 STAT. 3648 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(4) RECAPTURE AMOUNT.—For purposes of this subsection— 
"(A) IN GENERAL.—The recapture amount with respect to 
any indebtedness is the amount equal to the product of— 
"(i) the federally-subsidized amount with respect to 
the indebtedness, and 
"(ii) the holding period percentage. 
"(B) FEDERALLY-SUBSIDIZED AMOUNT.—The federally-sub-
sidized amount with respect to any indebtedness is the 
amount equal to 6.25 percent of the highest principal 
amount of the indebtedness for which the taxpayer was 
liable. 
"(C) HOLDING PERIOD PERCENTAGE.— 
"(i) DISPOSITIONS DURING IST 5 YEARS.—If the disposi-
tion of the taxpayer's interest in the residence occurs 
during the 5-year period beginning on the testing date, 
the holding period percentage is the percentage deter-
mined by dividing the number of full months during 
which the requirements of subparagraph (D) were met 
by 60. 
"(ii) DISPOSITIONS DURING 2D 5 YEARS.—If the disposi-
tion of the taxpayer's interest in the residence occurs 
during the 5-year period following the 5-year period 
described in clause (i), the holding period percentage is 
the percentage determined by dividing— 
"(I) the excess of 120 over the number of full 
months during which such requirements were met 
by 
"(II) 60. 
"(iii) RETIREMENTS OF INDEBTEDNESS.—If the feder-
ally-subsidized 
indebtedness is completely 
repaid 
during any month of the 10-year period beginning on 
the testing date, the holding period percentage for 
succeeding months shall be determined by reducing 
ratably over the remainder of such period (or, if lesser, 
5 years) the holding period percentage which would 
have been determined under this subparagraph had 
the taxpayer disposed of his interest in the residence on 
the date of the repayment. 
"(D) TESTING DATE.—The term 'testing date' means the 
earliest date on which all of the following requirements are 
met: 
"(i) The indebtedness is federally-subsidized indebted-
ness. 
"(ii) The taxpayer is liable in whole or part for 
payment of the indebtedness. 
"(5) REDUCTION OF RECAPTURE AMOUNT IF TAXPAYER MEETS 
CERTAIN INCOME UMITATIONS.— 
"(A) IN GENERAL.—The recapture amount which would 
(but for this paragraph) apply with respect to any disposi-
tion during a taxable year shall be reduced (but not below 
zero) by 2 percent of such amount for each $100 by which 
adjusted qualifjdng income exceeds the modified adjusted 
gross income of the taxpayer for such year. 
"(B) ADJUSTED QUAUFYiNG INCOME.—For purposes of this 
paragraph, the term 'adjusted qualifying income' me£ms the 
amount equal to the sum of— 
"(i) $5,000, plus 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3649 
"(ii) the product of— 
"(I) the highest family income which (as of the 
date the financing was provided) would have met 
the requirement of subsection (f) with respect to 
the residence, and 
"(II) the percentage equal to the sum of 100 
percent plus 5 percent for each full year during the 
period beginning on such date and ending on the 
date of the disposition. 
For purposes of clause (iiXD, highest family income shall be 
determined without regard to subsection (fX3XA) and on the 
basis of the number of members of the taxpayer's family as 
of the date of the disposition. 
"(C) MODIFIED ADJUSTED GROSS INCOME.—For purposes of 
this paragraph, the term 'modified acijusted gross income' 
means adjusted gross income— 
"(i) increased by the amount of interest received or 
accrued by the taxpayer during the taxable year which 
is excluded from gross income under section 103, and 
"(ii) decreased by the amount of gain (if any) included 
in gross income of the taxpayer by reason of the dis-
position to which this subsection applies. 
"(6) 
LIMITATION ON RECAPTURE AMOUNT BASED ON GAIN 
REALIZED.— 
"(A) IN GENERAL.—In no event shall the recapture 
amount of the taxpayer with respect to any indebtedness 
exceed 50 percent of the gain (if any) on the disposition of 
the taxpayer's interest in the residence. For purposes of the 
preceding sentence, gain shall be taken into account 
whether or not recognized, and the adjusted basis of the 
taxpayer's interest in the residence shall be determined 
without regard to sections 1033(b) and 1034(e) for purposes 
of determining gain. 
"(B) 
DISPOSITIONS OTHER THAN SALES, EXCHANGES, AND 
INVOLUNTARY CONVERSIONS.—In the casc of a disposition 
other than a sale, exchange, or involuntary conversion, gain 
shall be determined as if the interest had been sold for its 
fair market value. 
"(C) INVOLUNTARY CONVERSIONS RESULTING FROM CASUAL-
TIES.—In the case of property which (as a result of its 
destruction in whole or in part by fire, storm, or other 
casualty) is compulsorily or involuntarily converted, para-
graph (1) shall not apply to such conversion if the taxpayer 
purchases 
(during 
the 
period 
specified 
in 
section 
1033(aX2XB)) property for use as his principal residence on 
the site of the converted property. For purposes of subpara-
graph (A), the adjusted basis of the taxpayer in the resi-
dence shall not be adjusted for any gain or loss on a 
conversion to which this subparagraph applies. 
"(7) ISSUER TO INFORM MORTGAGOR OF FEDERALLY-SUBSIDIZED 
AMOUNT AND FAMILY INCOME UMiTS.—The issuer of the issue 
which provided the federally-subsidized indebtedness to the 
mortgagor shall— 
"(A) at the time of settlement, provide a written state-
ment informing the mortgagor of the potential recapture 
under this subsection, and 
102 STAT. 3650 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(B) not later than 90 days after the date such indebted-
ness is provided, provide a written statement to the mortga-
gor specifying— 
"(i) the federally-subsidized amount with respect to 
such indebtedness, and 
"(ii) the amounts described in paragraph (5)(B)(ii) 
for each category of family size for each year of the 
10-year period beginning on the date the financing was 
provided. 
"(8) SPECIAL RULES.— 
"(A) No BASIS ADJUSTMENT.—No adjustment shall be 
made to the basis of any property for the increase in tax 
under this subsection. 
"(B) SPECIAL RULE WHERE 2 OR MORE PERSONS HOLD IN-
TERESTS IN RESIDENCE.—Except as provided in subparagraph 
(C) and in regulations prescribed by the Secretary, if 2 or 
more persons hold interests in any residence and are jointly 
liable for the federally-subsidized indebtedness, the recap-
ture amount shall be determined separately with respect to 
their respective interests in the residence. 
"(C) TRANSFERS TO SPOUSES AND FORMER SPOUSES.—Para-
graph (1) shall not apply to any transfer on which no gain 
or loss is recognized under section 1041. In any such case, 
the transferee shall be treated under this subsection in the 
same manner as the transferor would have been treated 
had such transfer not occurred. 
"(D) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
this subsection, including regulations dealing with disposi-
tions of partial interests in a residence." 
(2) ISSUER INFORMATION REQUIREMENT.— 
(A) Subparagraph (A) of section 143(aX2) of the 1986 Code 
is amended by striking out "and (i)" and inserting in lieu 
thereof "(i), and (mX7)". 
(B) Subparagraph (C) of section 143(aX2) of the 1986 Code 
is amended by striking out "and (h)" and inserting in lieu 
thereof ", (h), and (mX7)". 
(3) BROKER REPORTING.—Subsection (e) of section 6045 of the 
1986 Code is amended by adding at the end thereof the following 
new paragraph: 
"(3) 
WHETHER 
SELLER'S FINANCING 
WAS FEDERALLY-SUB-
SIDIZED.—In the case of a real estate transaction involving a 
residence, the real estate broker shall specify on the return 
under subsection (a) and the statement under subsection (b) 
whether or not the financing (if any) of the seller was federally-
subsidized indebtedness (as defined in section 143(mX3))." 
(4) No CREDITS AGAINST TAX.—Paragraph (2) of section 260)) of 
the 1986 Code (relating to limitation based on tax liability; 
definition of tax liability), as amended by title I of this Act, is 
amended by striking out "and" at the end of subparagraph (K), 
by striking out the period at the end of subparagraph (L) and 
inserting in lieu thereof ", and", and by adding at the end 
thereof the following new subparagraph: 
"(M) section 143(m) (relating to recapture of portion of 
federal subsidy from use of mortgage bonds and mortgage 
credit certificates)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3651 
(5) RECAPTURE TAX NOT INCLUDED IN ESTIMATED TAXES.—Para-
graph (1) of section 6654(f) of the 1986 Code (relating to failure 
by individual to pay estimated income tax) is amended by 
inserting "(other than any increase in such tax by reason of 
section 143(m))" after "chapter 1". 
(6) AUTHORITY TO CHANGE PREPAYMENT ASSUMPTIONS FOR AR-
BITRAGE RESTRICTIONS.—Clause (iv) of section 143(g)(2)(B) of the 
1986 Code is amended by adding at the end thereof the following 
new sentence: 
"The Secretary may by regulation adjust the mortgage 
prepayment rate otherwise used in determining the 
effective rate of interest to the extent the Secretary 
determines that such an adjustment is appropriate by 
reason of the impact of subsection (m)." 
(7) CROSS REFERENCE.—Section 25 of the 1986 Code is amended 
by adding at the end thereof the following new subsection: 
"(j) RECAPTURE OF PORTION OF FEDERAL SUBSIDY FROM USE OF 
MORTGAGE CREDIT CERTIFICATES.— 
"For provisions increasing the tax imposed by this chapter to recapture 
a portion of the Federal subsidy from the use of mortgage credit certiH-
cates, see section 143(m)." 
(h) EFFECTIVE DATES.— 
26 use 143 note. 
(1) IN GENERAL.—Except as otherwise provided in this subsec-
tion, the amendments made by this section shall apply to bonds 
issued, and nonissued bond amounts elected, after December 31, 
1988. 
(2) SPECIAL RULES RELATING TO CERTAIN REQUIREMENTS AND 
REFUNDING BONDS.—In the case of a bond issued to refund (or 
which is part of a series of bonds issued to refund) a bond issued 
before January 1,1989— 
(A) the amendments made by subsections (b) and (c) shall 
apply to financing provided after the date of issuance of the 
refunding issue, and 
(B) the amendment made by subsection (f) shall apply to 
payments (including on loans made before such date of 
issuance) received on or after such date of issuance. 
(3) SUBSECTION (g).— 
(A) IN GENERAL.—Except as provided in subparagraph (B), 
the amendments made by subsection (g) shall apply to 
financing provided, and mortgage credit certificates issued, 
after December 31,1990. 
(B) EXCEPTION.—The amendments made by subsection (g) 
shall not apply to financing provided pursuant to a binding 
contract (entered into before June 23, 1988) with a home-
builder, lender, or mortgagor if the bonds (the proceeds of 
which are used to provide such financing) are issued— 
(i) before June 23,1988, or 
(ii) before August 1, 1988, pursuant to a written 
application (made before July 1, 1988) for State bond 
volume authority, 
(i) STUDY OF RECAPTURE PROVISIONS.—The Comptroller General of 
26 use 143 note. 
the United States shall conduct a study of section 143(m) of the 1986 
Code (as added by this section) and of alternatives to accomplish the 
purposes of such section. A report of such study shall be submitted Reports. 
not later than July 1,1990, to the Committee on Ways and Means of 
the House of Representatives and the Committee on Finance of the 
Senate. 
102 STAT. 3652 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 4006. EXTENSION OF CERTAIN BUSINESS ENERGY CREDITS. 
Each of the following provisions in the table under section 
46(bX2XA) of the 1986 Code are amended by striking out "Decem-
ber 31, 1988" and inserting in lieu thereof "December 31, 1989": 
(1) The item relating to the 10 percent credit in clause (viii). 
(2) The item relating to the 10 percent credit in clause (ix). 
(3) Clause (x). 
SEC. 4007. EXTENSION OF CREDIT FOR INCREASING RESEARCH ACTIVI-
TIES. 
(a) EXTENSION.—Subsection (h) of section 41 of the 1986 Code 
(relating to credit for increasing research activities) is amended— 
(1) by striking out "December 31, 1988" each place it appears 
and inserting in lieu thereof "December 31,1989", and 
(2) by striking out "January 1, 1989" each place it appears 
and inserting in lieu thereof "January 1,1990". 
26 use 41 note. 
(b) GAO STUDY.— 
(1) IN GENERAL.—The Comptroller General of the United 
States shall conduct a study of the credit provided by section 41 
ofthe 1986 Code. 
(2) REPORT.—The report of the study under paragraph (1) shall 
be submitted not later than December 31, 1989, to the Commit-
tee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate. 
SEC. 4008. DENIAL OF DEDUCTION FOR 50 PERCENT AMOUNTS ALLOWED 
AS A RESEARCH CREDIT. 
(a) IN GENERAL.—Section 280C of the 1986 Code (relating to 
certain expenses for which credits are allowable) is amended by 
adding at the end thereof the following new subsection: 
"(c) CREDIT FOR INCREASING RESEARCH ACTIVITIES.— 
"(1) IN GENERAL.—NO deduction shall be allowed for that 
portion of the qualified research expenses (as defined in section 
41(b)) or basic research expenses (as defined in section 41(eX2) 
otherwise allowable as a deduction for the taxable year which is 
equal to 50 percent of the amount of the credit determined for 
such taxable year under section 41(a). 
"(2) SIMILAR RULE WHERE TAXPAYER CAPITAUZES RATHER THAN 
DEDUCTS EXPENSES.—IF— 
"(A) 50 percent of the amount of the credit determined 
for the taxable year under section 41(aXl), exceeds 
"(B) the amount allowable as a deduction for such taxable 
year for qualified research expenses or basic research ex-
penses (determined without regard to paragraph (1)), 
the amount chargeable to capital account for the taxable year 
for such expenses shall be reduced by the amount of such 
excess. 
"(3) CONTROLLED GROUPS.—Paragraph (3) of subsection (b) 
shall apply for purposes of this subsection." 
(b) RESEARCH CREDIT TO BE ELECTIVE.— 
(1) IN GENERAL.—Section 41 of the 1986 CJode is amended by 
redesignating subsection (h) as subsection (i) and by inserting 
after subsection (g) the following new subsection: 
"(h) ELECTION TO HAVE RESEARCH CJREDIT NOT APPLY.— 
"(1) IN GENERAL.—A taxpayer may elect to have this section 
not apply for any taxable year. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3653 
"(2) TIME FOR MAKING ELECTION.—An election under para-
graph (1) for any taxable year may be made (or revoked) at any 
time before the expiration of the 3-year period beginning on the 
last day prescribed by law for filing the return for such taxable 
year (determined without regard to extensions). 
"(3) MANNER OF MAKING ELECTION.—An election under para-
graph (1) (or revocation thereof) shall be made in such manner 
as the Secretary may by regulations prescribe." 
(2) DEDUCTION FOR UNUSED RESEARCH CREDIT.— 
(A) Subsection (c) of section 196 of the 1986 Code is 
amended by striking out "and" at the end of paragraph (2), 
by striking out the period at the end of paragraph (3) and 
inserting in lieu thereof ", and", and by adding at the end 
thereof the following new paragraph: 
"(4) the research credit determined under section 41(a) for 
taxable years beginning after December 31,1988." 
(B) Subsection (d) of section 196 of the 1986 Code is 
amended to read as follows: 
"(d) SPECIAL RULE FOR INVESTMENT TAX CREDIT AND RESEARCH 
CREDIT.—Subsection (a) shall be applied by substituting an amount 
equal to 50 percent of for an amount equal to in the case of— 
"(1) the investment credit determined under section 46(a) 
(other than a credit to which section 48(q)(3) applies), and 
"(2) the research credit determined under section 41(a)." 
(c) TECHNICAL AMENDMENTS.— 
(1) Paragraph (1) of section 28(b) of the 1986 Code is amended 
by striking out "1988" and inserting in lieu thereof "1989". 
(2) Subsection (n) of section 6501 of the 1986 Code is amended 
by striking out "or 51(j)" and inserting in lieu thereof ", 41(h), or 
51(j)". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 41 note. 
apply to taxable years beginning after December 31,1988. 
SEC. 4009. ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDI- 
26 USC 861 note. 
TURES. 
(a) GENERAL RULE.—For purposes of sections 861(b), 862(b), and 
863(b) of the 1986 Code, qualified research and experimental 
expenditures shall be allocated and apportioned as follows: 
(1) Any qualified research and experimental expenditures 
expended solely to meet legal requirements imposed by a politi-
cal entity with respect to the improvement or marketing of 
specific products or processes for purposes not reasonably ex-
pected to generate gross income (beyond de minimis amounts) 
outside the jurisdiction of the political entity shall be allocated 
only to gross income from sources within such jurisdiction. 
(2) In the case of any qualified research and experimental 
expenditures (not allocated under paragraph (1)) to the extent— 
(A) that such expenditures are attributable to activities 
conducted in the United States, 64 percent of such expendi-
tures shall be allocated and apportioned to income from 
sources within the United States and deducted from such 
income in determining the amount of taxable income from 
sources within the United States, and 
(B) that such expenditures are attributable to activities 
conducted outside the United States, 64 percent of such 
expenditures shall be allocated and apportioned to income 
from sources outside the United States and deducted from 
102 STAT. 3654 
PUBLIC LAW 100-647—NOV. 10, 1988 
such income in determining the amount of taxable income 
from sources outside the United States. 
(3) The remaining portion of qualified research and experi-
mental expenditures (not allocated under paragraphs (1) and (2)) 
shall be apportioned, at the annual election of the taxpayer, on 
the basis of gross sales or gross income, except that, if the 
taxpayer elects to apportion on the basis of gross income, the 
amount apportioned to income from sources outside the United 
States shall be at least 30 percent of the amount which would be 
so apportioned on the basis of gross sales. 
(b) QuAUFiED RESEARCH AND EXPERIMENTAL EXPENDITURES.—For 
purposes of this section, the term "qualified research and experi-
mental expenditures" means amounts which are research and 
experimental expenditures within the meaning of section 174 of the 
1986 Code. For purposes of this subsection, rules similar to the rules 
of subsection (c) of section 174 of the 1986 Code shall apply. 
(c) SPECIAL RULES FOR EXPENDITURES ATTRIBUTABLE TO ACTIVITIES 
CONDUCTED IN SPACE, ETC.— 
(1) IN GENERAL.—Any qualified research and experimental 
expenditures described in paragraph (2)— 
(A) if incurred by a United States person, shall be allo-
cated and apportioned under this section in the same 
manner as if they were attributable to activities conducted 
in the United States, and 
(B) if incurred by a person other than a United States 
person, shall be allocated and apportioned under this sec-
tion in the same manner as if they were attributable to 
activities conducted outside the United States. 
(2) DESCRIPTION OF EXPENDITURES.—For purposes of paragraph 
(1), qualified research and experimental expenditures are de-
scribed in this paragraph if such expenditures are attributable 
to activities conducted— 
(A) in space, 
(B) on or under water not within the jurisdiction (as 
recognized by the United States) of a foreign country, 
possession of the United States, or the United States, or 
(C) in Antarctica. 
(d) AFFIUATED GROUP.— 
(1) Except as provided in paragraph (2), the allocation and 
apportionment required by subsection (a) shall be determined as 
if all members of the affiliated group (as defined in subsection 
(eX5) of section 864 of the 1986 Code) were a single corporation. 
(2) For purposes of the edlocation and apportionment required 
by subsection (a)— 
(A) sales and gross income from products produced in 
whole or in part in a possession by an electing corporation 
(within the meaning of section 936(hX5XE) of the 1986 
Code); and 
(B) dividends from an electing corporation, 
shall not be taken into account, except that this paragraph shall 
not apply to sales of (and gross income and dividends attrib-
utable to sales of) products with respect to which an election 
under section 936(hX5XF) of the 1986 Code is not in effect. 
(3) The qualified research and experimental expenditures 
taken into account for purposes of subsection (a) shall be ad-
justed to reflect the amount of such expenditures included in 
-. -d^v-t 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3655 
computing the cost-sharing amount (determined under section 
936(hX5XCXiXI) of the 1986 Code). 
(4) The Secretary of the Treasury or his delegate may pre-
scribe such regulations as may be necessary to carry out the 
purposes of this subsection, including regulations providing for 
' the source of gross income and the allocation and apportion-
ment of deductions to take into account the adjustments re-
quired by paragraph (3). 
(5) Paragraph (6) of section 864(e) of the 1986 Code shall not 
apply to qualified research and experimental expenditures. 
(e) YEARS TO WHICH SECTION APPLIES.— 
(1) IN GENERAL.—Except as provided in this subsection, this 
section shall apply to the taxpayer's 1st taxable year beginning 
after August 1,1987. 
(2) REDUCTION IN AMOUNTS TO WHICH SECTION APPUES.—Not-
withstanding paragraph (1), this section shall only apply to that 
portion of the qualified research and experimental expenditures 
for the taxable year referred to in paragraph (1) which bears the 
same ratio to the total amount of such expenditures as— 
(A) the lesser of 4 months or the number of months in the 
V 
taxable year, bears to 
(B) the number of months in the taxable year. 
SEC. 4010. EXTENSION AND MODIFICATION OF TARGETED JOBS CREDIT. 
(a) 2-YEAR EXTENSION.—Paragraph (4) of section 51(c) of the 1986 
Code (relating to termination) is amended by striking out "Decem-
ber 31, 1988'^ and inserting in lieu thereof "December 31, 1989". 
(b) EXTENSION OF AUTHORIZATION.—Paragraph (2) of section 261(f) 
of the Economic Recovery Tax Act of 1981 is amended by striking 
26 use 5i note. 
out "and 1988" and inserting in lieu thereof "1988, and 1989 . 
(c) ECONOMICALLY DISADVANTAGED YOUTH STATUS RESTRICTED TO 
INDIVIDUALS UNDER AGE 23.— 
(1) IN GENERAL.—Subparagraph (B) of section 51(dX3) of the 
1986 Code is amended by striking out "age 25" and inserting in 
lieu thereof "age 23". 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 26 USC 51 note, 
shall apply to individuals who begin work for the employer after 
December 31,1988. 
(d) REDUCTION IN PERCENTAGE OF CREDIT FOR SUMMER YOUTH 
EMPLOYEES.— 
(1) IN GENERAL.—Subparagraph (B) of section 51(dX12) of the 
1986 Code is amended by striking out clause (i) and by re-
designating clauses (ii) and (iii) as clauses (i) and (ii). 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 26 USC 51 note, 
shall apply to individueds who begin work for the employer after 
December 31,1988. 
SEC. 4011. TREATMENT OF PUBLICLY OFFERED REGULATED INVEST-
MENT COMPANIES UNDER 2-PERCENT FLOOR. 
(a) IN GENERAL.—Subsection (c) of section 67 of the 1986 Code, as 
amended by section 1001(f) of this Act, is amended to read as follows: 
"(c) DISALLOWANCE OF INDIRECT DEDUCTION THROUGH PASS-THRU 
ENTITY.— 
"(1) IN GENERAL.—The Secretary shall prescribe regulations 
Regulations, 
which prohibit the indirect deduction through pass-thru entities 
of amounts which are not allowable as a deduction if paid or 
incurred directly by an individual and which contain such 
102 STAT. 3656 
PUBLIC LAW 100-647—NOV. 10, 1988 
reporting requirements as may be necessary to carry out the 
purposes of this subsection. 
"(2) TREATMENT OF PUBUCLY OFFERED REGULATED INVESTMENT 
COMPANIES.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply with 
respect to any publicly offered regulated investment com-
pany. 
"(B) PUBUCLY OFFERED REGULATED INVESTMENT COMPA-
NIES.—For purposes of this subsection— 
"(i) IN GENERAL.—The term 'publicly offered regu-
lated investment company' means a regulated invest-
ment company the shares of which are— 
"(I) continuously offered pursuant to a public 
offering (within the meaning of section 4 of the 
Securities Act of 1933, as amended (15 U.S.C. 77a to 
77aa)), 
"(II) regularly traded on an established securities 
market, or 
"(III) held by or for no fewer than 500 persons at 
all times during the taxable year, 
"(ii) SECRETARY MAY REDUCE 500 PERSON REQUIRE-
MENT.—The Secretary may by regulation decrease the 
minimum shareholder requirement of clause (iXIH) in 
the case of regulated investment companies which 
experience a loss of shareholders through net redemp-
tions of their shares. 
"(3) TREATMENT OF CERTAIN OTHER ENTITIES.—Pareigraph (1) 
shall not apply— 
"(A) with respect to cooperatives and real estate invest-
ment trusts, and 
"(B) except as provided in regulations, with respect to 
estates and trusts. 
"(4) TERMINATION.—This subsection shall not apply to any 
taxable year beginning after December 31,1989." 
26 use 67 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1987. 
SEC. 4012. EXTENSION AND MODIFICATIONS OF PROVISIONS RELATING 
TO FINANCIAL INSTITUTIONS. 
(a) 1-YEAR EXTENSION.— 
(1) REORGANIZATIONS.—Paragraph (1) of section 904(c) of the 
26 use 368 note. 
Reform Act is amended by striking out "December 31, 1988" 
and inserting in lieu thereof "December 31,1989". 
(2) FSLIC FINANCIAL ASSISTANCE.—Paragraph (2XA) of section 
26 use 597 note. 
904(c) of the Reform Act is amended by striking out "December 
31, 1988" and inserting in lieu thereof "December 31, 1989". 
(3) NET OPERATING LOSS RULES.—The last sentence of section 
382(1X5XF) of the 1986 Ck)de is amended by striking out "Decem-
ber 31,1988" and inserting in lieu thereof "December 31,1989". 
(b) APPLICATION OF CERTAIN PROVISIONS TO BANKS.— 
(1) SPECIAL RULES FOR REORGANIZATIONS AND NET OPERATING 
(A) Section 368(aX3XD) of the 1986 Ckxie (as in effect 
before the amendment made by section 904(a) of the Reform 
Act) is amended by adding at the end thereof the following 
new clauses: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3657 
"(iv) In the case of a financial institution to which 
section 585 applies— 
"(I) the term 'title 11 or similar case' means only 
a case in which the applicable authority (which 
shall be treated as the court in such case) makes 
the certification described in subclause (II), and 
"(II) clause (ii) shall apply to such institution, 
except that for purposes of clause (iiXHI), the ap-
plicable authority must certify that the grounds set 
forth in such clause (modified in such manner as 
the Secretary determines necessary because such 
institution is not an institution to which section 
593 applies) exist with respect to such transferor or 
will exist in the near future in the absence of 
action by the applicable authority. 
For purposes of this clause, the term 'applicable 
authority' means the Comptroller of the Currency or 
the Federal Deposit Insurance Corporation, or if nei-
ther has the supervisory authority with respect to the 
transfer, the equivalent State authority. 
"(v) For purposes of this subparagraph, in applying 
section 593, the determination as to whether a corpora-
tion is a domestic building and loan association shall be 
made without regard to section 7701(aX19XC)." 
(B) Subclause (I) of section 382(lX5XFXiii) of the 1986 Code 
is amended 
by 
inserting 
"(as modified 
by 
section 
368(aX3XDXiv))" after "section 368(aX3XDXii)". 
(CXi) The amendment made by subparagraph (A) shall 
26 use 368 note. 
apply to acquisitions after the date of the enactment of this 
Act and before January 1,1990. 
(ii) The amendment made by subparagraph (B) shall 26 use 382 note. 
apply to any ownership change occurring after the date of 
the enactment of this Act and before January 1, 1990. 
(2) ASSISTANCE PAYMENTS.— 
(A) Section 597(a) of the 1986 Code (as in effect before the 
amendments made by section 904(b) of the Reform Act) is 
amended by adding at the end thereof the following new 
sentence: "Gross income of a bank does not include any 
amount of money or other property received from the 
Federal Deposit Insurance Corporation pursuant to sections 
13(c), 15(cXl), and 15(cX2) of the Federal Deposit Insurance 
Act (12 U.S.C. 1821(f) and 1823 (cXD and (cX2)), regardless of 
whether any note or other instrument is issued in exchange 
therefor." 
(B) Section 597(b) of the 1986 Code, as amended by subsec-
tion (cXD, is amended by adding at the end thereof the 
following new subsection: 
"(d) DOMESTIC BUILDING AND LOAN ASSOCIATION.—For purposes of 
this section, the term 'domestic building and loan association' has 
the meaning given such term by section 7701(aX19) without regard 
to subparagraph (C) thereof." 
(C) Section 5970)) of the 1986 Code (as so in effect) is 
amended by inserting "or bank" after "association". 
i 
(DXi) The heading for section 597 of the 1986 Code (as so 
in effect) is amended by inserting "or FDIC" after "FSLIC". 
102 STAT. 3658 
PUBLIC LAW 100-647—NOV. 10, 1988 
(ii) The item relating to section 597 in part II of sub-
chapter H of chapter 1 of the 1986 Code (as so in effect) is 
amended by inserting "or FDIC" after "FSLIC". 
26 use 597 note. 
(E) The amendments made by this paragraph shall apply 
to any transfer— 
(i) after the date of the enactment of this Act, and 
before January 1, 1990, unless such transfer is pursu-
ant to an acquisition occurring on or before such date 
of enactment, and 
(ii) after December 31,1989, if such transfer is pursu-
ant to an acquisition occurring after such date of enact-
ment and before January 1,1990. 
(c) CERTAIN TAX ATTRIBUTES REDUCED BY 50 PERCENT OF FINAN-
CIAL ASSISTANCE OF FSLIC AND FDIC; APPUCATION OF SECTION 
265.— 
(1) REDUCTION IN TAX ATTRIBUTES.—Section 597 of the 
1986 
(Dode is amended by adding at the end thereof the following new 
subsection: 
"(c) REDUCTION OF TAX ATTRIBUTES BY 50 PERCENT OF AMOUNTS 
EXCLUDABLE UNDER SUBSECTION (a).— 
"(1) IN GENERAL.—50 percent of any amount excludable under 
subsection (a) for any taxable year shall be applied to reduce the 
tax attributes of the taxpayer as provided in paragraph (2). 
"(2) TAX ATTRIBUTES REDUCED; ORDER OF REDUCTION.—The 
reduction referred to in paragraph (1) shall be made in the 
following tax attributes in the following order: 
"(A) NOL.—Any pre-assistance net operating loss for the 
taxable year. 
"(B) INTEREST.—The amount of any interest with respect 
to which a deduction is allowable for the taxable year. 
"(C) BUILT-IN PORTFOUO LOSSES.—Recognized built-in port-
folio losses for the taxable year. 
"(3) PRE-ASSISTANCE NET OPERATING LOSS.—For purposes of 
paragraph (2)(A)— 
"(A) IN GENERAL.—The pre-assistance net operating loss 
shall be determined in the same manner as a pre-change 
loss under section 382(d), except that— 
"(i) the applicable financial institution shall be 
treated as the old loss corporation, and 
"(ii) the determination date shall be substituted for 
the change date. 
"(B) ORDERING RULE.—The reduction under paragraph 
(2XA) shall be made in the carryovers in the order in which 
carryovers are taken into account under this chapter for 
the taxable year. 
"(4) RECOGNIZED BUILT-IN PORTFOUO LOSSES.—For purposes of 
paragraph (2XC), recognized built-in portfolio losses shall be 
determined in the same manner as recognized built-in losses 
under section 382(h), except that— 
"(A) the only assets taken into account shall be— 
"(i) the loan portfolio, 
"(ii) marketable securities (within the meaning of 
section 453(fX2)), and 
"(iii) property described in section 595(a), 
"(B) the rules of clauses (i) and (ii) of paragraph (3XA) 
shall apply, 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3659 
"(C) there shall be no limit on the number of years in the 
recognition period, and 
"(D) section 382(h) shall be applied without regard to 
paragraph (3)(B) thereof. 
"(5) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) APPUCABLE FINANCIAL INSTITUTION.—The term 'ap-
plicable financial institution' means the domestic building 
and loan association or bank the financial condition of 
which was determined by the Federal Savings and Loan 
Insurance Corporation or the Federal Deposit Insurance 
Corporation to require the financial assistance described in 
subsection (a). 
"(B) DETERMINATION DATE.—The term 'determination 
date' means the date of the determination under subpara-
graph (A). Except as provided by the Secretary, any subse-
quent revision or modification of such determination shall 
be treated as made on the original determination date. 
"(C) TAXABLE ASSET ACQUISITIONS.— 
"(i) IN GENERAL.—In the case of any acquisition of the 
assets of any applicable financial institution to which 
section 381 does not apply— 
"(I) paragraph (1) shall not apply to any amounts 
excludable under subsection (a) which are pay-
ments made at the time of the acquisition to the 
person acquiring such assets, and 
"(II) rights to receive future payments exclud-
able under subsection (a) in connection with the 
acquisition shall be treated as provided in clause 
(ii). 
"(ii) TREATMENT OF FUTURE PAYMENTS.— 
"(I) IN GENERAL.—Rights to receive future pay-
ments described in clause (iXH) shall be treated as 
assets to which basis is allocated. 
"(II) RECOVERY OF BASIS.—Any basis allocated 
under subclause (I) shall be recovered in such 
manner as the Secretary may provide, but in no 
event shall the amount recovered for any taxable 
year beginning before the taxable year in which 
the rights expire exceed the aggregate payments 
received with respect to such rights for all taxable 
years reduced by the amount of basis recovered 
with respect to such rights in preceding taxable 
years. 
"(Ill) APPUCATION OF PARAGRAPH (1).—Para-
graph (1) shall apply to pajrments described in 
subclause (I) in a t£Lxable year only to the extent 
such payments exceed the amount of basis recov-
ered in such taxable year. 
"(D) TREATMENT OF REPAYMENTS.—If a taxpayer repays 
an amount to which paragraph (1) applied in a preceding 
taxable year, there shall be allowed as a deduction for the 
taxable year of repajrment an amount equal to the reduc-
tion in tax attributes under paragraph (1) attributable to 
the amount repaid. 
"(E) CARRYOVERS.—If 50 percent of the amount exclud-
able under subsection (a) for any taxable year exceeds the 
102 STAT. 3660 
PUBLIC LAW 100-647—NOV. 10, 1988 
amount of the tax attributes described in paragraph (2) for 
such taxable year, then, for purposes of this subsection, the 
amount excludable under subsection (a) for the succeeding 
taxable year shall be increased by an amount equal to twice 
the amount of such excess. 
"(F) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions 
of this subsection. 
26 use 597 note. 
(2) AppucATiON OF SECTION 265.—Subparagraph (B) of section 
904(c)(2) of the Reform Act is amended by striking out "Section 
265(a)(1)" and inserting in lieu thereof "Section 265". 
26 use 597 note. 
(3) EFFECTIVE DATE.—The amendments made by this subsec-
tion shall apply to any transfer— 
(A) after December 31, 1988, and before January 1, 1990, 
unless such transfer is pursuant to an acquisition occurring 
before January 1,1989, and 
(B) after December 31, 1989, if such transfer is pursuant 
to an acquisition occurring after December 31, 1988, and 
before January 1,1990. 
In the case of a taxpayer to which the amendments made by 
subsection (bXl) applv, subparagraphs (A) and (B) shall be ap-
plied by substituting the date of the enactment of this Act" for 
^December 31,1988^'. 
TITLE V—REVENUE INCREASE 
PROVISIONS 
Subtitle A—Corporate Estimated Taxes 
SEC. 5001. CORPORATE ESTIMATED TAX PAYMENTS. 
(a) GENERAL RULE.—Paragraph (1) of section 6655(e) of the 1986 
Code (relating to annualization) is amended by striking out the last 
sentence. 
26 use 6655 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply to installments required to be made after December 31, 
1988. 
Subtitle B—Insurance Provisions 
SEC. 5011. LIMITATION ON UNREASONABLE MORTALITY AND OTHER EX-
PENSE CHARGES UNDER SECTION 7702. 
(a) GENERAL RULE.—Subparagraph (B) of section 7702(cX3) of the 
1986 Code (relating to guideline premium requirements) is amended 
by striking out clauses (i) and (ii) and inserting in lieu thereof the 
following: 
"(i) reasonable mortality charges which meet the 
requirements (if any) prescribed in regulations and 
which (except as provided in regulations) do not exceed 
the mortality charges specified in the prevailing 
commissioners' standard tables (as defined in section 
807(dX5)) as of the time the contract is issued, 
"(ii) any reasonable charges (other than mortality 
charges) which (on the basis of the company's experi-
,> 
:-t^ 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3661 
ence, if any, with respect to similar contracts) are 
reasonably expected to be actually paid, and". 
(b) SPECIAL RULES.—Paragraph (3) of section 7702(c) of the 1986 
Code is amended by adding at the end thereof the following new 
subparagraph: 
(D) SPECIAL RULES FOR SUBPARAGRAPH (BXii)-— 
"(i) CHARGES NOT SPECIFIED IN THE CONTRACT.—If any 
charge is not specified in the contract, the amount 
taken into account under subparagraph (B)(ii) for such 
charge shall be zero. 
"(ii) NEW COMPANIES, ETC.—If any company does not 
have adequate experience for purposes of the deter-
mination under subparagraph (BXii), to the extent pro-
vided in regulations, such determination shall be made 
on the basis of the industry-wide experience." 
(c) INTERIM RULES.— 
26 use 7702 
(1) REGULATIONS.—Not later than January 1, 1990, the Sec- note, 
retary of the Treasury (or his delegate) shall issue regulations 
under section 7702(cX3XBXi) of the 1986 Code (as amended by 
subsection (a)). 
(2) STANDARDS BEFORE REGULATIONS TAKE EFFECT.—In the case 
of any contract to which the amendments made by this section 
apply and which is issued before the effective date of the 
regulations required under paragraph (1), mortality charges 
which do not differ materially from the charges actually ex-
pected to be imposed by the company (taking into account any 
relevant characteristic of the insured of which the company is 
aware) shall be treated as meeting the requirements of clause (i) 
of section 7702(cX3XB) of the 1986 Code (as amended by subsec-
tion (a)). 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 7702 
apply to contracts entered into on or after October 21,1988. 
note. 
SEC. 5012. TREATMENT OF MODIFIED ENDOWMENT CONTRACTS. 
(a) DISTRIBUTION RULES.— 
(1) IN GENERAL.—Subsection (e) of section 72 of the 1986 Code 
(relating to amounts not received as annuities) is amended by 
adding at the end thereof the following new paragraph: 
"(10) TREATMENT OF MODIFIED ENDOWMENT CONTRACTS.— 
"(A) IN GENERAL.—Notwithstanding paragraph (5XC), in 
the case of any modified endowment contract (as defined in 
section 7702A)— 
"(i) paragraphs (2XB) and (4XA) shall apply, and 
"(ii) in applying paragraph (4XA), 'any person' shall 
be substituted for 'an individual'. 
"(B) 
TREATMENT OF CERTAIN BURIAL CONTRACTS.—Not-
withstanding subparagraph (A), paragraph (4XA) shall not 
apply to any assignment (or pledge) of a modified endow-
ment contract if such assignment (or pledge) is solely to 
cover the payment of expenses referred to in section 
7702(eX2XC)(iii) and if the maximum death benefit under 
such contract does not exceed $25,000," 
(2) TECHNICAL AMENDMENT.—Subparagraph (C) of section 
72(eX5) of the 1986 Code is amended by striking out "Except to 
the extent" and inserting in lieu thereof "Except as provided in 
paragraph (10) and except to the extent". 
(b) ADDITIONAL TAX.— 
102 STAT. 3662 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) IN GENERAL.—Section 72 of the 1986 Code (relating to 
annuities; certain proceeds of endowment and life insurance 
contracts) is amended by redesignating subsection (v) as subsec-
tion (w) and by inserting after subsection (u) the following new 
subsection: 
"(v) 10-PERCENT ADDITIONAL TAX FOR TAXABLE DISTRIBUTIONS 
FROM MODIFIED ENDOWMENT CONTRACTS.— 
"(1) IMPOSITION OF ADDITIONAL TAX.—If any taxpayer receives 
any amount under a modified endowment contract (as defined 
in section 7702A), the taxpayer's tax under this chapter for the 
taxable year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the portion of such 
amount which is includible in gross income. 
"(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS.— 
Paragraph (1) shall not apply to any distribution— 
"(A) made on or after the date on which the taxpayer 
attains age 59 ¥2, 
"(B) which is attributable to the taxpayer's becoming 
disabled (within the meaning of subsection (m)(7)), or 
"(C) which is part of a series of substantially equal peri-
odic payments (not less frequently than annually) made for 
the life (or life expectancy) of the taxpayer or the joint lives 
(or joint life expectancies) of such taxpayer and his bene-
ficiary." 
(2) TECHNICAL AMENDMENT.—Subparagraph (C) of section 
26(bX2) of the 1986 Code is amended by striking out "or (q)" and 
inserting in lieu thereof "(q), or (v)". 
(c) MODIFIED ENDOWMENT CONTRACT DEFINED.— 
(1) IN GENERAL.—Chapter 79 of the 1986 Code is amended by 
inserting after section 7702 the following new section: 
"SEC. 7702A. MODIFIED ENDOWMENT CONTRACT DEFINED. 
"(a) GENERAL RULE.—For purposes of section 72, the term 'modi-
fied endowment contract' means any contract meeting the require-
ments of section 7702— 
"(1) which— 
"(A) is entered into on or after June 21,1988, and 
"(B) fails to meet the 7-pay test of subsection Ot)), or 
"(2) which is received in exchange for a contract described in 
paragraph (1). 
"(b) 7-PAY TEST.—For purposes of subsection (a), a contract fails to 
meet the 7-pay test of this subsection if the accumulated amount 
paid under the contract at any time during the 1st 7 contract years 
exceeds the sum of the net level premiums which would have been 
paid on or before such time if the contract provided for paid-up 
future benefits after the payment of 7 level annual premiums, 
"(c) COMPUTATIONAL RULES.— 
"(1) IN GENERAL.—Except as provided in this subsection, the 
determination under subsection (b) of the 7 level annual pre-
miums shall be made— 
"(A) as of the time the contract is issued, and 
"(B) by applying the rules of section 770203X2) and of 
section 7702(e) (other than paragraph (2XC) thereof), except 
that the death benefit provided for the 1st contract year 
shall be deemed to be provided until the maturity date 
without regard to any scheduled reduction after the 1st 7 
contract years. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3663 
"(2) REDUCTION IN BENEFITS DURING 1ST 7 YEARS.— 
"(A) IN GENERAL.—If there is a reduction in benefits 
under the contract within the 1st 7 contract years, this 
section shall be applied as if the contract had originally 
been issued at the reduced benefit level. 
"(B) REDUCTIONS ATTRIBUTABLE TO NONPAYMENT OF PRE-
MIUMS.—Any reduction in benefits attributable to the 
nonpayment of premiums due under the contract shall not 
be taken into account under subparagraph (A) if the bene-
fits are reinstated within 90 days after the reduction in 
such benefits. 
"(3) TREATMENT OF MATERIAL CHANGES.— 
"(A) IN GENERAL.—If there is a material change in the 
benefits under (or in other terms of) the contract which was 
not reflected in any previous determination under this 
section, for purposes of this section— 
"(i) such contract shall be treated as a new contract 
entered into on the day on which such material change 
takes effect, and 
"(ii) appropriate adjustments shall be made in deter-
mining whether such contract meets the 7-pay test of 
subsection (b) to take into account the cash surrender 
value under the contract. 
"(B) TREATMENT OF CERTAIN INCREASES IN FUTURE BENE-
FITS.—For purposes of subparsigraph (A), the term 'material 
change' includes any increase in future benefits under the 
contract. 
Such term shall not include— 
"(i) any increase which is attributable to the pay-
ment of premiums necessary to fund the lowest level of 
future benefits payable in the 1st 7 contract years 
(determined after taking into account death benefit 
increases described in subparagraph (A) or (B) of sec-
tion 7702(eX2)) or to crediting of interest or other earn-
ings (including policyholder dividends) in respect of 
such premiums, and 
"(ii) to the extent provided in regulations, any cost-of-
living increase based on an established broad-based 
index if such increase is funded ratably over the 
remaining life of the the contract. 
"(4) SPECIAL RULE FOR CONTRACTS WITH DEATH BENEFITS UNDER 
$10,000.—In the case of a contract— 
"(A) which provides an initial death benefit of $10,000 or 
less, and 
"(B) which requires at least 7 nondecreasing annual pre-
mium payments, 
each of the 7 level annual premiums determined under subsec-
tion (b) (without regard to this paragraph) shall be increased by 
$75. For purposes of this paragraph, the contract involved and 
all contracts previously issued to the same insurer by the same 
company shall be treated as one contract. 
"(5) 
REGULATORY AUTHORITY FOR CERTAIN COLLECTION EX-
PENSES.—The Secretary may by regulations prescribe rules for 
taking into account expenses solely attributable to the collec-
tion of premiums paid more frequently than annually. 
102 STAT. 3664 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(d) DISTRIBUTIONS AFFECTED.—If a contract fails to meet the 7-pay 
test of subsection Ot)), such contract shall be treated as failing to 
meet such requirements only in the case of— 
"(1) distributions during the contract year in which the fail-
ure takes effect and during any subsequent contract year, and 
"(2) under regulations prescribed by the Secretary, distribu-
tions (not described in paragraph (1)) in anticipation of such 
failure. 
For purposes of the preceding sentence, any distribution which is 
made within 2 years before the failure to meet the 7-pay test shall 
be treated as made in anticipation of such failure. 
"(e) DEFINITIONS.—For purposes of this section— 
"(1) AMOUNT PAID.— 
"(A) IN GENERAL.—The term 'amount paid' means— 
"(i) the premiums paid under the contract, reduced 
by 
"(ii) amounts to which section 72(e) applies (deter-
mined without regard to paragraph (4)(A) thereof) but 
not including amounts includible in gross income. 
"(B) TREATMENT OF CERTAIN PREMIUMS RETURNED.—If, in 
order to comply with the requirements of subsection (b), 
any portion of any premium paid during any contract year 
is returned by the insurance company (with interest) within 
60 days after the end of such contract year, the amount so 
returned (excluding interest) shall be deemed to reduce the 
sum of the premiums paid under the contract during such 
contract year. 
"(C) INTEREST RETURNED INCLUDIBLE IN GROSS INCOME.— 
Notwithstanding the provisions of section 72(e), the amount 
of any interest returned as provided in subparagraph (B) 
shall be includible in the gross income of the recipient. 
"(2) CONTRACT YEAR.—The term 'contract year' means the 12-
month period beginning with the 1st month for which the 
contract is in effect, and each 12-month period beginning with 
the corresponding month in subsequent calendar years. 
"(3) OTHER TERMS.—Except as otherwise provided in this sec-
tion, terms used in this section shall have the same meaning as 
when used in section 7702." 
(2) CLERICAL AMENDMENT.—The table of sections for chapter 
79 of the 1986 Code is amended by inserting after the item 
relating to section 7702 the following new item: 
"Sec. 7702A. Modified endowment contract defined." 
(d) OTHER MODIFICATIONS.— 
(1) TREATMENT OF LOANS.—Subparagraph (A) of section 
72(eX4) of the 1986 Code (relating to loans treated as distribu-
tions) is amended by adding at the end thereof the following 
new sentence: "The preceding sentence shall not apply for 
purposes of determining investment in the contract, except that 
the investment in the contract shall be increased by any 
amount included in gross income by reason of the amount 
treated as received under the preceding sentence." 
(2) ANTI-ABUSE RULES.—Subsection (e) of section 72 of the 1986 
Code is amended by adding at the end thereof the following new 
paragraph: 
"(11) ANTI-ABUSE RULES.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3665 
"(A) IN GENERAL.—For purposes of determining the 
amount includible in gross income under this subsection— 
"(i) all modified endowment contracts issued by the 
same company to the same policyholder during any 12-
month period shall be treated as 1 modified endowment 
contract, and 
"(ii) all annuity contracts issued by the same com-
pany to the same policyholder during any 12-month 
period shall be treated as 1 annuity contract. 
"(B) 
REGULATORY AUTHORITY.—The Secretary may 
by 
regulations prescribe such additional rules as may be nec-
essary or appropriate to prevent avoidance of the purposes 
of this subsection through serial purchases of contracts or 
otherwise." 
(e) EFFECTIVE DATES.— 
26 use 7702A 
(1) IN GENERAL.—Except as otherwise provided in this subsec- note. 
tion, the amendments made by this section shall apply to 
contracts entered into on or after June 21,1988. 
(2) SPECIAL RULE WHERE DEATH BENEFIT INCREASES BY MORE 
THAN $150,000.—If the death benefit under the contract 
increases by more than $150,000 over the death benefit under 
the contract in effect on October 20, 1988, the rules of section 
7702A(cX3) of the 1986 Code (as added by this section) shall apply 
in determining whether such contract is issued on or after 
June 21,1988. The preceding sentence shall not apply in the case 
of a contract which, as of June 21,1988, required at least 7 level 
annual premium payments and under which the policyholder 
continues to make level annual premium payments over the life 
of the contract. 
(3) CERTAIN OTHER MATERIAL CHANGES TAKEN INTO ACCOUNT.— 
A contract entered into before June 21,1988, shall be treated as 
entered into after such date if— 
(A) on or after June 21,1988, the death benefit under the 
contract is increased (or a qualified additional benefit is 
increased or added) and before June 21, 1988, the owner of 
the contract did not have a unilateral right under the 
contract to obtain such increase or addition without provid-
ing additional evidence of insurability, or 
(B) the contract is converted after June 20, 1988, from a 
term life insurance contract to a life insurance contract 
providing coverage other than term life insurance coverage 
without regard to any right of the owner of the contract to 
such conversion. 
(4) CERTAIN EXCHANGES PERMITTED.—In the case of a modified 
endowment contract which— 
(A) required at least 7 annual level premium payments, 
(B) is entered into after June 20,1988, and before the date 
of the enactment of this Act, and 
(C) is exchanged within 3 months after such date of 
enactment for a life insurance contract which meets the 
requirements of section 7702A(b), 
the contract which is received in exchange for such contract 
shall not be treated as a modified endowment contract if the 
taxpayer elects, notwithstanding section 1035 of the 1986 Code, 
to recognize gain on such exchange. 
102 STAT. 3666 
PUBLIC LAW 100-647—NOV. 10, 1988 
(5) SPECIAL RULE FOR ANNUITY CONTRACTS.—In the case of 
annuity contracts, the amendments made by subsection (d) shall 
apply to contracts entered into after October 21,1988. 
SEC. 5013. VALUATION OF GROUP-TERM LIFE INSURANCE. 
(a) GENERAL RULE.—Subsection (c) of section 79 of the 1986 Code 
(relating to the determination of the cost of insurance) is amended 
by striking out the last sentence. 
26 use 79 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1988. 
SEC. 5014. STUDY. 
(a) GENERAL RULE.—The Secretary of the Treasury and 
the 
Comptroller General of the United States shall each conduct a study 
on— 
(1) the effectiveness of the revised tax treatment of life insur-
ance and annuity products in preventing the sale of life insur-
ance primarily for investment purposes, and 
(2) the policy justification for, and the practical implications 
of, the present-law treatment of the earnings on the cash 
surrender value of life insurance and annuity contracts in light 
of the reforms made by the Tax Reform Act of 1986. 
(b) REPORT.—Not later than June 1, 1989, the Secretary of the 
Treasury and the Comptroller General of the United States shall 
each 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 study conducted under subsection (a), together with 
such recommendations as they may deem advisable. 
Subtitle C—Loss Transfer Rules for Alaska 
Native Corporations 
26 u s e 1504 
SEC. 5021. REPEAL OF RULES PERMITTING LOSS TRANSFERS BY ALASKA 
no<^ 
NATIVE CORPORATIONS. 
(a) GENERAL RULE.—Nothing in section 60(bX5) of the Tax Reform 
Act of 1984 (as amended by section 1804(eX4) of the Tax Reform Act 
of 1986)— 
(1) shall allow any loss (or credit) of any corporation which 
arises after April 26, 1988, to be used to offset the income (or 
tax) of another corporation if such use would not be allowable 
without regard to such section 60(bX5) as so amended, or 
(2) shall allow any loss (or credit) of any corporation which 
arises on or before such date to be used to offset disqualified 
income (or tax attributable to such income) of another corpora-
tion if such use would not be allowable without regard to such 
section 60(bX5) as so amended. 
(b) EXCEPTION FOR EXISTING C!ONTRACTS.— 
(1) IN GENERAL.—Subsection (a) shall not apply to any loss (or 
credit) of any corporation if— 
(A) such corporation was in existence on April 26, 1988, 
and 
(B) such loss (or credit) is used to offset income assigned 
(or attributable to property contributed) pursuant to a bind-
ing contract entered into before July 26,1988. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3667 
(2) $40,000,000 UMITATION.—The aggregate amount of losses 
(and the deduction equivalent of credits £is determined in the 
same manner as under section 469(j)(5) of the 1986 Ck)de) to 
which paragraph (1) applies with respect to any corporation^ 
shall not exceed $40,000,000. For purposes of this paragraph, a 
Native Corporation and all other corporations all of the stock of ' 
which is owned directly by such corporation shall be treated as 
1 corporation. 
(3) SPECIAL RULE FOR CORPORATIONS UNDER TITLE ii.—In the 
case of a corporation which on April 26, 1988, was under 
the jurisdiction of a Federal district court under title 11 of the 
United States Code— 
(A) paragraph (IXB) shall be applied by substituting the 
date 1 year after the date of the enactment of this Act for 
"July 26,1988", 
(B) paragraph (1) shall not apply to any loss or credit 
which arises on or after the date 1 year after the date of the 
enactment of this Act, and 
(C) paragraph (2) shall be applied by substituting 
"$99,000,000" for "$40,000,000". 
(c) SPECIAL ADMINISTRATIVE RULES.— 
(1) NOTICE TO NATIVE CORPORATIONS OF PROPOSED TAX ADJUST-
MENTS.—Notwithstanding section 6103 of the 1986 Code, the 
Secretary of the Treasury or his delegate shall notify a Native 
Corporation or its designated representative of any proposed 
adjustment— 
(A) of the tax liability of a taxpayer which has contracted 
with the Native Corporation (or other corporation all of the 
stock of which is owned directly by the Native Corporation) 
for the use of losses of such Native Corporation (or such 
other corporation), and 
(B) which is attributable to an asserted overstatement of 
losses by, or misassignment of income (or income attrib-
utable to property contributed) to, an affiliated group of 
which the Native Corporation (or such other corporation) is 
a member. 
Such notice shall only include information with respect to the 
transaction between the taxpayer and the Native Corporation. 
(2) RIGHTS OF NATIVE CORPORATION.— 
(A) IN GENERAL.—If a Native Corporation receives a 
notice under paragraph (1), the Native Corporation shall 
have the right to— 
(i) submit to the Secretary of the Treasury or his 
delegate a written statement regarding the proposed 
adjustment, and 
(ii) meet with the Secretary of the Treasury or his 
delegate with respect to such proposed adjustment. 
The Secretary of the Treasury or his delegate may discuss 
such proposed adjustment with the Native Corporation or 
its designated representative. 
(B) EXTENSION OF STATUTE OF LIMITATIONS.—Subpara-
graph (A) shall not apply if the Secretary of the Treasury or 
his delegate determines that an extension of the statute of 
limitation is necessary to permit the participation described 
in subparagraph (A) and the taxpayer and the Secretary or 
his delegate have not agreed to such extension. 
102 STAT. 3668 
PUBLIC LAW 100-647—NOV. 10, 1988 
(3) JUDICIAL PROCEEDINGS.—In the case of any proceeding in a 
Federal court or the United States Tax CJourt involving a pro-
posed adjustment under paragraph (1), the Native Corporation, 
subject to the rules of such court, may file an amicus brief 
concerning such adjustment. 
(4) FAILURES.—For purposes of the 1986 Code, any failure by 
the Secretary of the Treasury or his delegate to comply with the 
provisions of this subsection shall not affect the validity of the 
determination of the Internal Revenue Service of any adjust-
ment of tax liability of any taxpayer described in paragraph (1). 
(d) DiSQUAUFiED INCOME DEFINED.—For purposes of subsection (a), 
the term "disqualified income" means any income assigned (or 
attributable to property contributed) after April 26, 1988, by a 
person who is not a Native Corporation or a corporation all the stock 
of which is owned directly by a Native Corporation. 
(e) BASIS DETERMINATION.—For purposes of determining basis for 
Federal tax purposes, no provision in any law (whether enacted 
before, on, or after the date of the enactment of this Act) shall affect 
the date on which the transfer to the Native Corporation is made. 
The preceding sentence shall apply to all taxable years whether 
beginning before, on, or after such date of enactment. 
Subtitle D—Estate and Gift Tax Provisions 
SEC. 5031. VALUATION TABLES. 
(a) GENERAL RULE.—Chapter 77 of the 1986 Code (relating to 
miscellaneous provisions) is amended by adding at the end thereof 
the following new section: 
"SEC. 7520. VALUATION TABLES. 
"(a) GENERAL RULE.—For purposes of this title, the value of any 
annuity, any interest for life or a term of years, or any remainder or 
reversionary interest shall be determined— 
"(1) under tables prescribed by the Secretary, and 
"(2) by using an interest rate (rounded to the nearest %oths 
of 1 percent) equal to 120 percent of the Federal midterm rate in 
effect under section 1274(dXl) for the month in which the 
valuation date falls. 
If an income, estate, or gift tax charitable contribution is allowable 
for any part of the property transferred, the taxpayer may elect to 
use such Federal midterm rate for either of the 2 months preceding 
the month in which the valuation date falls for purposes of para-
graph (2). In the case of transfers of more than 1 interest in the 
same property with respect to which the taxpayer may use the same 
rate under paragraph (2), the taxpayer shall use the same rate with 
respect to each such interest. 
"(b) SECTION NOT TO APPLY FOR CERTAIN PURPOSES.—This section 
shall not apply for purposes of part I of subchapter D of chapter 1 or 
any other provision specified in regulations, 
'^(c) TABLES.— 
"(1) IN GENERAL.—The tables prescribed by the Secretary for 
purposes of subsection (a) shall contain valuation factors for a 
series of interest rate categories. 
"(2) INITIAL TABLE.—Not later than the day 3 months after the 
date of the enactment of this section, the Secretary shall pre-
scribe initial tables for purposes of subsection (a). Such tables 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3669 
may be based on the same mortality experience as used for 
purposes of section 2031 on the date of the enactment of this 
section. 
"(3) REVISION FOR RECENT MORTALITY CHARGES.—Not later 
than December 31, 1989, the Secretary shall revise the initial 
tables prescribed for purposes of subsection (a) to take into 
account the most recent mortality experience available as of the 
time of such revision. Such tables shall be revised not less 
frequently than once each 10 years thereafter to take into 
account the most recent mortality experience available as of the 
time of the revision. 
"(d) VALUATION DATE.—For purposes of this section, the term 
'valuation date' means the date as of which the valuation is made. 
"(e) TABLES TO INCLUDE FORMULAS.—For purposes of this section, 
the term 'tables' includes formulas." 
(b) CLERICAL AMENDMENT.—The table of sections for chapter 77 of 
the 1986 Code is amended by adding at the end thereof the following 
new item: 
"Sec. 7520. Valuation tables." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 26 use 7520 
apply in cases where the date as of which the valuation is to be note. 
made occurs on or after the 1st day of the 6th calendar month 
beginning after the date of the enactment of this Act. 
SEC. 5032. RATE SCHEDULE FOR TAX ON ESTATES OF NONRESIDENTS 
NOT CITIZENS. 
(a) GENERAL RULE.—Subsection (b) of section 2101 of the 1986 Code 
(relating to computation of tax) is amended by striking out "a 
tentative tax computed in accordance with the rate schedule set 
forth in subsection (d)" each place it appears and inserting in lieu 
thereof "a tentative tax computed under section 2001(c)". 
, (b) AMOUNT OF UNIFIED CREDIT.— 
(1) IN GENERAL.—Subsection (c) of section 2102 of the 1986 
CvOo6 IS flmftTiHftfl—— 
(A) by striking out "$3,600" in paragraphs (1) and (2XA) 
and inserting in lieu thereof "$13,000", and 
(B) by striking out "$15,075" in paragraph (2XB) and 
inserting in lieu thereof "$46,800". 
(2) COORDINATION WITH TREATIES, ETC.—Paragraph (3) of sec-
tion 2102(c) of the 1986 Code is amended to read as follows: 
"(3) SPECIAL RULES.— 
"(A) 
COORDINATION WITH TREATIES.—To the extent re-
quired under any treaty obligation of the United States, the 
credit allowed under this subsection shall be equal to the 
amount which bears the same ratio to $192,800 as the value 
of the part of the decedent'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 wherever situated. 
"(B) COORDINATION WITH GIFT TAX UNIFIED CREDIT.—If a 
credit has been allowed under section 2505 with respect to 
any gift made by the decedent, each dollar amount con-
tained in paragraph (1) or (2) or subparagraph (A) of this 
paragraph (whichever applies) shall be reduced by the 
amount so allowed." 
(c) TECHNICAL AMENDMENT.—Subsection (d) of section 2101 of the 
1986 Code is hereby repealed. 
102 STAT. 3670 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 2101 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
"°^- 
apply to the estates of decedents d3dng after the date of the enact-
ment of this Act. 
SEC. 5033. DISALLOWANCE OF MARITAL DEDUCTION WHERE SPOUSE IS 
NOT CITIZEN OF UNITED STATES. 
(a) ESTATE TAX.— 
(1) IN GENERAL.—Section 2056 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(d) DISALLOWANCE OF MARITAL DEDUCTION WHERE SURVIVING 
SPOUSE NOT UNITED STATES CITIZEN.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), if the 
surviving spouse of the decedent is not a citizen of the United 
States— 
"(A) no deduction shall be allowed under subsection (a), 
and 
"(B) section 2040(b) shall not apply. 
"(2) MARITAL DEDUCTION ALLOWED FOR CERTAIN TRANSFERS IN 
TRUST.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply to any 
property passing to the surviving spouse in a qualified 
domestic trust. 
"(B) PROPERTY PASSING OUTSIDE OF PROBATE ESTATE.—If 
any property passes from the decedent to the surviving 
spouse of the decedent outside of the decedent's probate 
estate, for purposes of subparagraph (A), such property 
shall be treated as passing to such spouse in a qualii^ed 
domestic trust if such property is transferred to such a trust 
before the day on which the return of the tax imposed by 
section 2001 is made. 
"(3) ALLOWANCE OF CREDIT TO CERTAIN SPOUSES.—If— 
"(A) property passes to the surviving spouse of the de-
cedent (hereinafter in this paragraph referred to as the 
'first decedent'), 
"(B) without regard to this subsection, a deduction would 
be allowable under subsection (a) with respect to such 
property, and 
"(C) such surviving spouse dies and the estate of such 
surviving spouse is subject to the tax imposed by section 
2001, 
the Federal estate tax paid (or treated as paid under section 
2056A(bX6)) by the first decedent with respect to such property 
shall be allowed as a credit under section 2013 to the estate of 
such surviving spouse and the amount of such credit shall be 
determined under such section without regard to when the first 
decedent died." 
(2) TREATMENT OF QUALIFIED DOMESTIC TRUST.—Part IV 
of 
subchapter A of chapter 11 of the 1986 Code is amended by 
inserting aft«r section 2056 the following new section: 
"SEC. 2056A. QUALIFIED DOMESTIC TRUST. 
"(a) QUALIFIED DOMESTIC TRUST DEFINED.-For purposes of this 
section and section 2056(d), the term 'qualified domestic trust' 
means, with respect to any decedent, any trust if— 
"(1) the trust instrument requires that all trustees of the 
trust be individual citizens of the United States or domestic 
corporations. 
"'TP' •'*^-" A •'^^i^p(|ges'?*'«ffK'*!ra5»« 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3671 
"(2) the surviving spouse of the decedent is entitled to all the 
income from the property in such trust, payable annually or at 
more frequent intervals, 
"(3) such trust meets such requirements as the Secretary may 
by regulations prescribe to ensure the collection of any tax 
imposed by subsection 0)), and 
' (4) an election under this section by the executor of the 
decedent applies to such trust. 
"(b) TAX TREATMENT OF TRUST.— 
"(1) IMPOSITION OF ESTATE TAX.—There is hereby imposed an 
estate tax on— 
"(A) any distribution before the date of the death of the 
surviving spouse from a qualified domestic trust other than 
a distribution of income required under subsection (aX2), 
and 
"(B) the value of the property remaining in a qualified 
domestic trust on the date of the death of the surviving 
spouse. 
"(2) AMOUNT OF TAX.— 
"(A) IN GENERAL.—In the case of any taxable event, the 
amount of the estate tax imposed by paragraph (1) shall be 
the amount equal to— 
"(i) the tax which would have been imposed under 
section 2001 on the estate of the decedent if the taxable 
estate of the decedent had been increased by the sum 
of— 
"(I) the amount involved in such taxable event, 
plus 
"(II) the aggregate amount involved in previous 
taxable evente with respect to qualified domestic 
trusts of such decedent, reduced by 
"(ii) the tax which would have been imposed under 
section 2001 on the estate of the decedent if the taxable 
estate of the decedent had been increased by the 
amount referred to in clause (iXH). 
"(B) TENTATIVE TAX WHERE TAX OF DECEDENT NOT FINALLY 
DETERMINED.— 
"(i) IN GENERAL.—If the tax imposed on the estate of 
the decedent under section 2001 is not finally deter-
mined before the taxable event, the amount of the tax 
imposed by paragraph (1) on such event shall be deter-
mined by using the highest rate of tax in effect under 
section 2001 as of the date of the decedent's death. 
"(ii) REFUND OF EXCESS WHEN TAX FINALLY DETER-
MINED.—If— 
"(I) the amount of the tax determined under 
clause (i), exceeds 
"(II) the tax determined under subparagraph (A) 
on the basis of the final determination of the tax 
imposed by section 2001 on the estate of the 
decedent, 
such excess shall be allowed as a credit or refund if 
claim therefore is filed not later than 1 year after the 
date of such final determination. 
"(3) TAX IMPOSED WHERE TRUST CEASES TO QUALIFY.—If any 
person other than an individual citizen of the United States or a 
domestic corporation becomes a trustee of a qualified domestic 
102 STAT. 3672 
PUBLIC LAW 100-647—NOV. 10, 1988 
trust (or such trust ceases to meet the requirements of subsec-
tion (a)(3)), the tax imposed by paragraph (1) shall apply as if the 
surviving spouse died on the date on which such person became 
such a trustee or the date of such cessation, as the case may be. 
"(4) DUE DATE.—The estate tax imposed by paragraph (1) shall 
be due and payable on the 15th day of the 4th month following 
the calendar year in which the taxable event occurs. 
"(5) LiABiuTY FOR TAX.—Each trustee shall be personally 
liable for the amount of the tax imposed by paragraph (1). Rules 
similar to the rules of section 2204 shall apply for purposes of 
the preceding sentence. 
"(6) TREATMENT OF TAX.—For purposes of section 2056(d), any 
tax paid under paragraph (1) shall be treated as a tax paid 
under section 2001 with respect to the estate of the decedent. 
"(7) LIEN FOR TAX.—For purposes of section 6324, any tax 
imposed by paragraph (1) shall be treated as an estate tax 
imposed under this chapter with respect to a decedent dying on 
the date of the taxable event (and the property involved shall be 
treated as the gross estate of such decedent). 
"(8) TAXABLE EVENT.—The term 'taxable event' means the 
event resulting in tax being imposed under paragraph (1). 
"(c) DEFINITIONS.—For purposes of this section— 
"(1) PROPERTY INCLUDES INTEREST THEREIN.—The term 'prop-
erty' includes an interest in propertv. 
"(2) INCOME.—The term 'income has the meaning given to 
such term by section 6430t)). 
"(d) ELECTION.—An election under this section with respect to any 
trust shall be made by the executor on the return of the tax imposed 
by section 2001. Such an election, once made, shall be irrevocable." 
(3) CLERICAL AMENDMENT.—The table of sections for part IV of 
subchapter A of chapter 1 of the 1986 Code is amended by 
inserting after the item relating to section 2056 the following 
new item: 
"Sec. 2056A. Qualified domestic trusts." 
Ot)) GIFT TAX.—Section 2523 of the 1986 Code is amended by adding 
at the end thereof the following new subsection: 
"(i) DISALLOWANCE OF MARITAL DEDUCTION WHERE SPOUSE NOT 
CITIZEN.—If the spouse of the donor is not a citizen of the United 
States— 
"(1) no deduction shall be allowed under this section, 
"(2) section 2503(b) shall be applied with respect to gifts made 
by the donor to such spouse by substituting '$100,000' for 
'$10,000', and 
"(3) the principles of sections 2515 and 2515A (as such sections 
were in effect before their repeal by the Economic Recovery Tax 
Act of 1981) shall apply, except that the provisions of such 
section 2515 providing for an election shall not apply." 
(c) ESTATES OF NONRESIDENTS WHO ARE NOT CITIZENS BUT HAVE 
CITIZENS AS SPOUSES.—Subsection (a) of section 2106 of the 1986 
Code is amended by adding at the end thereof the following new 
paragraph: 
"(3) MARITAL DEDUCTION ALLOWED WHERE SPOUSE IS CITIZEN.— 
The amount which would be deductible with respect to property 
situated in the United States at the time of the decedent's death 
under the principles of section 2056." 
(d) EFFECTIVE DATE.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3673 
(1) The amendments made by subsections (a) and (c) shall 
26 USC 2056 
apply to estates of the decedents dying after the date of the note. 
enactment of this Act. 
(2) The amendments made by subsection (b) shall apply to 26 USC 2523 
gifts on or after July 14,1988. 
note. 
Subtitle E—Long-Term Contract Provisions 
SEC. 5041. LONG-TERM CONTRACT PROVISIONS. 
(a) GENERAL RULE.—Subsection (a) of section 460 of the 1986 Code 
is amended— 
(1) by striking out "70 percent" each place it appears (includ-
ing in the heading of paragraph (2)) and inserting in lieu thereof 
"90 percent", and 
(2) by striking out "30 percent" in paragraph (1)(B) and 
inserting in lieu thereof "10 percent". 
O
b
) SPECIAL RULES FOR RESIDENTIAL CONSTRUCTION CONTRACTS.— 
(1) EXCEPTION FOR HOME CONSTRUCTION CONTRACTS.—Para-
graph (1) of section 460(e) of the 1986 Code is amended to read as 
follows: 
"(1) IN GENERAL.—Subsections (a), 0>), and (c) (1) and (2) shall 
not apply to— 
"(A) any home construction contract, or 
"(B) any other construction contract entered into by a 
taxpayer— 
"(i) who estimates (at the time such contract is en-
tered into) that such contract will be completed within 
the 2-year period beginning on the contract commence-
ment date of such contract, and 
"(ii) whose average annual gross receipts for the 3 
taxable years preceding the taxable year in which such 
contract is entered into do not exceed $10,000,000. 
In the case of a home construction contract with respect to 
which the requirements of clauses (i) and (ii) of subparagraph 
(B) are not met, section 263A shall apply notwithstanding 
subsection (cX4) thereof." 
(2) SPECIAL TREATMENT FOR OTHER RESIDENTIAL CONSTRUCTION 
CONTRACTS.—Subsection (e) of section 460 of the 1986 Code 
is amended by adding at the end thereof the following new 
paragraph: 
"(5) SPECIAL RULE FOR RESIDENTIAL CONSTRUCTION CONTRACTS 
WHICH ARE NOT HOME CONSTRUCTION CONTRACTS.—In the Case of 
any residential construction contract which is not a home 
construction contract, subsection (a) shall be applied— 
"(A) by substituting '70 percent' for '90 percent' each 
place it appears, and 
"(B) by substituting '30 percent' for '10 percent'." 
(3) DEFINITIONS.—Subsection (e) of section 460 of the 1986 
Code is amended by adding at the end thereof the following new 
paragraph: 
"(6) DEFINITIONS RELATING TO RESIDENTIAL CONSTRUCTION CON-
TRACTS.—For purposes of this subsection— 
"(A) HOME CONSTRUCTION CONTRACT.—The term 'home 
construction contract' means any construction contract if 
80 percent or more of the estimated total contract costs (as 
of the close of the taxable year in which the contract was 
102 STAT. 3674 
PUBLIC LAW 100-647—NOV. 10, 1988 
entered into) are reasonably expected to be attributable to 
the building, construction, reconstruction, or rehabilitation 
of— 
"(i) dwelling units contained in buildings containing 
4 or fewer dwelling units, and 
"(ii) improvements to real property directly related 
to such dwelling units and located on the site of such 
dwelling units. 
For purposes of clause (i), each townhouse or rowhouse 
shall be treated as a separate building. 
"(B) RESIDENTIAL CONSTRUCTION CONTRACT.—The term 
'residential construction contract' means any contract 
which would be described in subparsigraph (A) if clause (i) of 
such subparagraph reads as follows: 
" '(i) dwelling units (as defined in section 167(k)), 
and'." 
(4) CERTAIN HOME CONSTRUCTION CONTRACTS NOT SUBJECT TO 
MINIMUM TAX.—Paragraph (3) of section 56(a) of the 1986 Code 
is amended by adding at the end thereof the following new 
sentence: "The preceding sentence shall not apply to any home 
construction contract (as defined in section 460(eX6)) with re-
spect to which the requirements of clauses (i) and (ii) of section 
460(eXlXB) are met." 
(c) REGULATORY AUTHORITY.—Section 460 of the 1986 Code is 
amended by adding at the end thereof the following new subsection: 
"(h) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including regulations to prevent the use of related 
parties, pass-thru entities, intermediaries, options, or other similar 
arrangements to avoid the application of this section." 
(d) SIMPUFIED LOOK-BACK METHOD FOR PASS-THRU ENTITIES.— 
Subsection (b) of section 460 of the 1986 (Dode is amended by adding 
at the end thereof the following new paragraph: 
"(5) SIMPUFIED LOOK-BACK METHOD FOR PASS-THRU ENTITIES.— 
"(A) IN GENERAL.—In the case of a pass-thru entity— 
"(i) the look-back method of paragraph (3) shall be 
applied at the entity level, 
"(ii) in determining overpajonents and underpay-
ments for purposes of applying paragraph (3XB)— 
"(I) any increase in the income under the con-
tract for any taxable year by reason of the alloca-
tion under paragraph (3XA) shall be treated as 
giving rise to an underpayment determined by 
appl}dng the highest rate for such year to such 
increase, and 
"(II) any decrease in such income for any taxable 
year by reason of such allocation shall be treated 
as giving rise to an overpayment determined by 
appljring the highest rate for such year to such 
decrease, and 
"(iii) any interest required to be paid by the taxpayer 
under paragraph (3) shall be paid by such entity (and 
any interest entitled to be received by the taxpayer 
under paragraph (3) shall be paid to such entity). 
"(B) EXCEPTIONS.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3675 
"(i) CLOSELY HELD PASS-THRU ENTITIES.—This para-
graph shall not apply to any closely held pass-thru 
entity. 
"(ii) FOREIGN CONTRACTS.—This paragraph shall not 
apply to any contract unless substantially all of the 
income from such contract is from sources in the 
United States. 
"(C) OTHER DEFINITIONS.—For purposes of this para-
graph— 
"(i) HIGHEST RATE.—The term 'highest rate' means— 
"(I) the highest rate of tax specified in section 11, 
or 
"(II) if at all times during the year involved more 
than 50 percent of thfe interests in the entity are 
held by individuals directly or through 1 or more 
other pass-thru entities, the highest rate of tax 
specified in section 1. 
"(ii) PASS-THRU ENTITY.—The term 'pass-thru entity' 
means any— 
"(I) partnership, 
"(II) S corporation, or 
"(III) trust, 
"(iii) CLOSELY HELD PASS-THRU ENTITY.—The term 
'closely held pass-thru entity' means any pass-thru 
entity if, at any time during any taxable year for which 
there is income under the contract, 50 percent or more 
(by value) of the beneficial interests in such entity are 
held (directly or indirectly) by or for 5 or fewer persons. 
For purposes of the preceding sentence, rules similar to 
the constructive ownership rules of section 1563(e) shall 
apply" 
(e) EFFECTIVE DATES.— 
26 use 460 note. 
(1) SUBSECTIONS (a), (b), AND (C) .— 
(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the amendments made by subsections (a), (b), 
and (c) shall apply to contracts entered into on or after 
June 21, 1988. 
(B) BINDING BIDS.—The amendments made by subsections 
(a), (b), and (c) shall not apply to any contract resulting from 
the accept^ce of a bid made before June 21, 1988. The 
preceding sentence shall apply only if the bid could not 
have been revoked or altered at any time on or after 
June 21, 1988. 
(C) SPECIAL RULE FOR CERTAIN SHIP CONTRACTS.—The 
amendments made by subsections (a), (b), and (c) shall not 
apply in the case of a qualified ship contract (as defined in 
section 10203flk)X2XB) of the Revenue Act of 1987). 
(2) SUBSECTION (d).—Tlie amendment made by subsection (d) 
shall apply as if included in the amendments made by section 
804 of the Reform Act; except that such amendment shall not 
apply to any contract completed in a taxable year ending before 
the date of the enactment of this Act, if the due date (deter-
mined with regard to extensions) for the return for such year is 
before such date of enactment. 
(d) STUDY.—The Secretary of the Treasury or his delegate shall 
conduct a study of the revenue realization method of accounting for 
long-term contracts and of improvements to the percentage of 
102 STAT. 3676 
PUBLIC LAW 100-647—NOV. 10, 1988 
Reports. 
completion method of accounting for such contracts. Not later than 
the date 6 months after the date of the enactment of this Act, the 
Secretary shall submit a report on such study to the Committee on 
Ways and Means of the House of Representatives and the Commit-
tee on Finance of the Senate. 
Subtitle F—Tax-Exempt Bond Provisions 
SEC. 5051. TREATMENT OF CERTAIN POOLED FINANCING BONDS. 
(a) IN GENERAL.—Section 149 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(f) TREATMENT OF CERTAIN POOLED FINANCING BONDS.— 
"(1) IN GENERAL.—Section 103(a) shall not apply to any pooled 
financing bond unless, with respect to the issue of which such 
bond is a part, the requirements of parsigraphs (2) and (3) are 
met. 
"(2) REASONABLE EXPECTATION REQUIREMENT.— 
"(A) IN GENERAL.—The requirements of this paragraph 
are met with respect to an issue if the issuer reasonably 
expects that as of the close of the 3-year period beginning 
on the date of issuance of the issue, at least 95 percent of 
the net proceeds of the issue (as of the close of such period) 
will have been used directly or indirectly to make or fi-
nance loans to ultimate borrowers. 
"(B) CERTAIN FACTORS MAY NOT BE TAKEN INTO ACCOUNT 
IN DETERMINING EXPECTATIONS.—Expectations as to changes 
in interest rates or in the provisions of this title (or in the 
regulations or rulings thereunder) may not be taken into 
account in determining whether expectetions are resison-
able for purposes of this paragraph. 
"(C) NET PROCEEDS.—For purposes of subparagraph (A), 
the term 'net proceeds' has the meaning given such term by 
section 150 but shall not include proceeds used to finance 
issuance costs and shall not include proceeds necessary to 
pay interest (during such period) on the bonds which are 
part of the issue. 
"(D) REFUNDING BONDS.—For purposes of subparagraph 
(A), in the case of a refunding bond, the date of issuance 
taken into account is the date of issuance of the original 
bond. 
"(3) COST OF ISSUANCE PAYMENT REQUIREMENTS.—The require-
ments of this paragraph are met with respect to an issue if— 
"(A) the payment of legal and underwriting costs associ-
ated with the issuance of the issue is not contingent, and 
"(B) at least 95 percent of the reasonably expected legal 
and underwriting costs Eissociated with the issuance of the 
issue are paid not later than the 180th day after the date of 
the issuance of the issue. 
"(4) POOLED FINANCING BOND.—For purposes of this subsec-
tion— 
"(A) IN GENERAL.—The term 'pooled financing bond' 
means any bond issued as part of an issue more than 
$5,000,000 of the proceeds of which are reasonably expected 
(at the time of the issuance of the bonds) to be used (or are 
intentionally used) directly or indirectly to make or finance 
loans to 2 or more ultimate borrowers. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3677 
"(B) EXCEPTIONS.—Such term shall not include any bond 
if— 
"(i) section 146 applies to the issue of which such 
bond is a part (other than by reason of section 141(bX5)) 
or would apply but for section 146(i), or 
"(ii) section 143(1X3) applies to such issue. 
"(5) DEFINITION OF LOAN; TREATMENT OF MIXED USE ISSUES.— 
"(A) LOAN.—For purposes of this subsection, the term 
'loan' does not include— 
"(i) any loan which is a nonpurpose investment 
(within the meaning of section 148(fK6XA), determined 
without regard to section 148(bX3)), and 
"(ii) any use of proceeds by an agency of the issuer 
unless such agency is a political subdivision or 
instrumentality of the issuer. 
"(B) PORTION OF ISSUE TO BE USED FOR LOANS TREATED AS 
SEPARATE ISSUE.—If Only a portion of the proceeds of an 
issue is reasonably expected (at the time of issuance of the 
bond) to be used (or is intentionally used) £is described in 
paragraph (4XA), such portion and the other portion of such 
issue shall be treated as separate issues for purposes of 
determining whether such portion meets the requirements 
of this subsection." 
(b) EFFECTIVE DATE.— 
26 use 149 note. 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to bonds issued after October 21,1988. 
(2) SPECIAL RULE FOR REFUNDING BONDS.—In the case of a bond 
issued to refund a bond issued before October 22,1988— 
(A) if the 3-year period described in section 149(fK2XA) of 
the 1986 Code would (but for this paragraph) expire on or 
before October 22, 1989, such period shall expire on Octo-
ber 21, 1990, and 
(B) if such period expires after October 22, 1989, the 
portion of the proceeds of the issue of which the refunded 
bond is a part which is available (on the date of issuance of 
the refunding issue) to provide loans shall be treated as 
proceeds of a separate issue (issued after October 21, 1988) 
for purposes of applying section 149(f) of the 1986 Code. 
SEC. 5052. TREASURY REGULATIONS RELATING TO STUDENT LOAN 
BONDS. 
If the Secretary of the Treasury or his delegate does not issue 
Reports, 
regulations under section 625 of the Tax Reform Act of 1984 and 
section 148(g) of the Internal Revenue Code of 1986 before July 1, 
1989, the Secretary or his delegate shall before such date submit to 
the Committee on Ways and Means of the House of Representatives 
and the Committee on Finance of the Senate a report explaining 
why such regulations were not issued. 
SEC. 5053. RESTRICTIONS ON BONDS USED TO PROVIDE RESIDENTIAL 
RENTAL PROPERTY FOR FAMILY UNITS. 
(a) 501(cX3) BONDS USED TO PROVIDE RESIDENTIAL RENTAL HOUS-
ING FOR FAMILY UNITS MUST MEET TARGETING REQUIREMENTS.— 
Section 145 of the 1986 Code (defining qualified 501(cX3) bond) is 
amended by redesignating subsection (d) as subsection (e) and by 
inserting after subsection (c) the following new subsection: 
102 STAT. 3678 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(d) 
RESTRICTIONS ON BONDS USED TO PROVIDE RESIDENTIAL 
RENTAL HOUSING FOR FAMILY UNITS.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, a bond which is part of an issue shall not be a 
qualified 501(cX3) bond if any portion of the net proceeds of the 
issue are to be used directly or indirectly to provide residential 
rental property for family units. 
"(2) EXCEPTION FOR BONDS USED TO PROVIDE QUAUFIED RESIDEN-
TIAL RENTAL PROJECTS.—Paragraph (1) shall not apply to any 
bond issued as part of an issue if the portion of such issue which 
is to be used as described in paragraph (1) is to be used to 
provide— 
"(A) a residential rental property for family units if the 
first use of such property is pursuant to such issue, 
"(B) qualified residentigd rental projects (as defined in 
section 142(d)), or 
"(C) property which is to be substantially rehabilitated in 
a rehabilitation beginning within the 2-year period ending 1 
year after the date of the acquisition of such property 
"(3) SUBSTANTIAL REHABILITATION.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), rules similar to the rules of section 48(gXlXC) shall 
apply in determining for purposes of paragraph (2XC) 
whether property is substantially rehabilitated. 
"(B) EXCEPTION.—For purposes of subparsigraph (A), 
clause (ii) of section 48(gXlXC) shall not apply, but the 
Secretary may extend the 24-month period in section 
48(gXlXCXi) where appropriate due to circumstances not 
within the control of the owner." 
(b) RESIDENTIAL RENTAL PROJECT NOT LOCATED WITHIN JURISDIC-
TION OF ISSUER TREATED AS INVESTMENT PROPERTY.—Paragraph (2) of 
section 148(b) of the 1986 Code (defining investment property) is 
amended by striking out "or" at the end of subparagraph (C), by 
striking out the period at the end of subparagraph (D) and inserting 
in lieu thereof ", or", and by adding at the end thereof the following 
new subparagraph: 
"(E) in the case of a bond other than a private activity 
bond, any residential rental property for family units which 
is not located within the jurisdiction of the issuer and which 
is not acquired to implement a court ordered or approved 
housing desegregation plan." 
26 u s e 145 note. 
(c) EFFECTIVE D A T E . — 
(1) IN GENERAL.—The amendments made by this section shall 
apply to obligations issued after October 21,1988. 
(2) EXCEPTION FOR CONSTRUCTION OR BINDING AGREEMENT.— 
(A) The amendments made by this section shall not apply 
to bonds (other than refunding bonds) with respect to a 
facility— 
(i)(I) the original use of which begins with the tax-
payer, and the construction, reconstruction, or re-
habilitation of which began before July 14, 1988, and 
was completed on or after such date, or 
(II) the original use of which be^ns with the tax-
payer and with respect to which a binding contract to 
incur significant expenditures for construction, recon-
struction, or rehabilitation was entered into before 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3679 
July 14, 1988, and some of such expenditures are in-
curred on or after such date, and 
(ii) described in an inducement resolution or other 
comparable preliminary approval adopted by an issu-
ing authority (or by a voter referendum) before July 14, 
1988. 
For purposes of the preceding sentence, the term "signifi-
cant expenditures" means expenditures greater than 10 
percent of the reasonably anticipated cost of the con-
struction, reconstruction, or rehabilitation of the facility 
involved, 
(B) Subparagraph (A) shall not apply to any bond issued 
after December 31, 1989, and shall not apply unless it is 
reasonably expected (at the time of issuance of the bond) 
that the facility will be placed in service before January 1, 
1990. 
(3) REFUNDINGS.—The amendments made by this section shall 
not apply to any bond issued to refund (or which is part of a 
series of bonds issued to refund) a bond issued before July 15, 
1988, if— 
(A) the average maturity date of the issue of which the 
refunding bond is a part is not later than the average 
maturity date of the bonds to be refunded by such issue, 
(B) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond, and 
(C) the proceeds of the refunding bond are used to redeem 
the refunded bond not later than 90 days after the date of 
the issuance of the refunding bond. 
For purposes of subparagraph (A), average maturity shall be 
determined in accordance with section 147(b) of the 1986 Code. 
Subtitle G—Excise Tax Provisions 
SEC. 5061. IMPOSITION OF EXCISE TAX ON MANUFACTURE OR IMPORTA-
TION OF PIPE TOBACCO. 
(a) IN GENERAL.—Section 5701 of the 1986 Code (relating to rate of 
tax on cigarettes, etc.) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the following new 
subsection: 
"(f) PIPE TOBACCO.—On pipe tobacco, manufactured in or imported 
into the United States, there shall be imposed a tax of 45 cents per 
pound (and a proportionate tax at the like rate on all fractional 
parts of a pound)." 
(b) PIPE TOBACCO DEFINED.—Section 5702 of the 1986 Ck)de (relat-
ing to definitions) is amended by adding at the end thereof the 
following new subsection: 
"(o) PIPE TOBACCO.—The term 'pipe tobacco' means any tobacco 
which, because of its appearance, type, packaging, or labeling, is 
suitable for use and likely to be offered to, or purchased by, consum-
ers as tobacco to be smoked in a pipe." 
(c) TECHNICAL AMENDMENTS.— 
(1) Subsection (c) of section 5702 of the 1986 Code (defining 
tobacco products) is amended by striking out "and smokeless 
tobacco" and inserting in lieu thereof "smokeless tobacco, and 
pipe tobacco". 
(2) Subsection (d) of section 5702 of the 1986 Ck)de (defining 
tobacco products) is amended by striking out "or smokeless 
102 STAT. 3680 
PUBLIC LAW 100-647—NOV. 10, 1988 
tobacco" and inserting in lieu thereof "smokeless tobacco, or 
pipe tobacco". 
(3) The chapter heading for chapter 52 of the 1986 Code is 
amended to read as follows: 
"CHAPTER 
52—CIGARS, CIGARETTES, SMOKELESS TO-
BACCO. PIPE TOBACCO, AND CIGARETTE PAPERS AND 
TUBES". 
(4) The table of chapters for subtitle E is amended by striking 
the item relating to chapter 52 and inserting in lieu thereof the 
following new item: 
"Chapter 52. Cigars, cigarettes, smokeless tobacco, pipe tobacco, and ciga-
rette papers and tubes". 
26 use 5701 
(d) EFFECTIVE DATE.— 
^°^- 
(1) IN GENERAL.—The amendments made by this section shall 
apply to pipe tobacco removed (within the meaning of section 
5702(k) of the 1986 Code) after December 31,1988. 
(2) TRANSITIONAL RULE.—Any person who— 
(A) on the date of the enactment of this Act, is engaged in 
business as a manufacturer of pipe tobacco, and 
(B) before January 1, 1989, submits an application under 
subchapter B of chapter 52 of the 1986 Code to engage in 
such business, 
may, notwithstanding such subchapter B, continue to engage in 
such business pending final action on such application. Pending 
such final action, all provisions of chapter 52 of the 1986 Code 
shall apply to such applicant in the same manner and to the 
same extent as if such applicant were a holder of a permit to 
manufacture pipe tobacco under such chapter 52. 
(e) FLOOR STOCKS TAX.— 
(1) IMPOSITION OF TAX.—On pipe tobacco manufactured in or 
imported into the United States which is removed before Janu-
ary 1, 1989, and held on such date for sale by any person, there 
is hereby imposed a tax of 45 cents per pound (and a propor-
tionate tax at the like rate on all fractional parts of a pound). 
(2) LIABILITY FOR TAX AND METHOD OF PAYMENT.— 
(A) LIABILITY FOR TAX.—A person holding pipe tobacco on 
January 1,1989, to which the tax imposed by paragraph (1) 
applies shall be liable for such tax. 
(B) METHOD OF PAYMENT.—The tax imposed by paragraph 
(1) shall be treated as a tax imposed by section 5701 of the 
1986 Code and shall be due and payable on February 14, 
1989, in the same manner as the tax imposed by such 
section is payable with respect to pipe tobacco removed on 
or after January 1,1989. 
(C) TREATMENT OF PIPE TOBACCO IN FOREIGN TRADE 
ZONES.—Notwithstanding the Act of June 18, 1934 (48 Stat. 
998, 19 U.S.C. 81a) or any other provision of law, pipe 
tobacco which is located in a foreign trade zone on Janu-
ary 1,1989, shall be subject to the tax imposed by paragraph 
(1) and shall be treated for purposes of this subsection as 
held on such date for sale if— 
(i) internal revenue taxes have been determined, or 
customs duties liquidated, with respect to such pipe 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3681 
tobacco before such date pursuant to a request made 
under the first proviso of section 3(a) of such Act, or 
(ii) such pipe tobacco is held on such date under the 
supervision of a customs officer pursuant to the second 
proviso of such section 3(a). 
Under regulations prescribed by the Secretary of the 
Treasury or his delegate, provisions similar to sections 5706 
and 5708 of the 1986 Code shall apply to pipe tobacco with 
respect to which tax is imposed by paragraph (1) by reason 
of this subparagraph. 
(3) PIPE TOBACCO.—For purposes of this subsection, the term 
"pipe tobacco" shall have the meaning given to such term by 
subsection (o) of section 5702 of the 1986 Code. 
(4) EXCEPTION WHERE UABIUTY DOES NOT EXCEED $I,OOO.—No 
tax shall be imposed by paragraph (1) on any person if the tax 
which would but for this paragraph be imposed on such person 
does not exceed $1,000. For purposes of the preceding sentence, 
all persons who are treated as a single taxpayer under section 
5061(eX3) of the 1986 Code shall be treated as 1 person. 
SEC. 5063. MODIFICATION OF DISTILLED SPIRITS TAX CREDIT FOR 
FLAVORS CONTENT. 
(a) IN GENERAL.—Subparagraph (B) of section 5010(cX2) of the 1986 
Code (defining flavors content) is amended by striking out the "and" 
at the end of clause (i), by redesignating clause (ii) as clause (iii), and 
by inserting after clause (i) the following new clause: 
"(ii) alcohol derived from flavors distilled at a dis-
tilled spirits plant, and". 
(h) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 5010 
apply with respect to distilled spirits withdrawn from bond after the "o**-
date of the enactment of this Act. 
Subtitle H—Other Revenue Increase Provisions 
SEC. 507L INCREASE IN PENALTY FOR BAD CHECKS. 
(a) GENERAL RULE.—Section 6657 of the 1986 Code (relating to bad 
checks) is amended— 
(1) by striking out "1 percent" and inserting in lieu thereof "2 
percent", 
(2) by striking out "$500" and inserting in lieu thereof "$750", 
and 
(3) by striking out "$5" and inserting in lieu thereof "$15". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 USC 6657 
shall apply to checks or money orders received after the date of the note. 
enactment of this Act. 
SEC. 5072. TIME FOR PAYMENT OF TAX ON REVERSION OF PENSION PLAN 
ASSETS. 
(a) IN GENERAL.—Section 4980(c) of the 1986 Code is amended by 
adding at the end thereof the following new paragraph: 
"(4) TIME FOR PAYMENT OF TAX.—For purposes of subtitle F, 
the time for pa)mient of the tax imposed by subsection (a) shall 
be the last day of the month following the month in which the 
employer reversion occurs." 
Ot)) EFFECTIVE DATE.—The amendment made by subsection (a) 26 USC 4980 
shall apply to reversions after December 31,1988. 
note. 
102 STAT. 3682 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 5073. DENIAL OF DEDUCTION FOR CERTAIN RESIDENTIAL TELE-
PHONE SERVICE. 
(a) GENERAL RULE.—Section 262 of the 1986 Code (relating to 
personal, living, and family expenses) is amended to read as follows: 
"SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES. 
"(a) GENERAL RULE.—Except as otherwise expressly provided in 
this chapter, no deduction shall be allowed for personal, living, or 
family expenses. 
"(b) TREATMENT OF CERTAIN PHONE EXPENSES.—For purposes of 
subsection (a), in the case of an individual, any charge (including 
taxes thereon) for basic local telephone service with respect to the 
1st telephone line provided to any residence of the taxpayer shall be 
treated as a personal expense." 
26 use 262 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1988. 
SEC. 5074. PARTNERSHIP REPORTING OF UNRELATED BUSINESS TAXABLE 
INCOME. 
(a) IN GENERAL.—Section 6031 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(d) SEPARATE STATEMENT OF ITEMS OF UNRELATED BUSINESS TAX-
ABLE INCOME.—In the case of any partnership regularly carrjdng on 
a trade or business (within the meaning of section 512(cXl)). the 
information required under subsection (b) to be furnished to its 
partners shall include such information as is necessary to enable 
each partner to compute its distributive share of partnership income 
or loss from such trade or business in accordance with section 
512(aXl), but without regard to the modifications described in para-
graphs (8) through (15) of section 512(b)." 
26 use 6031 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
^°^- 
shall apply to taxable years beginning after December 31, 1988. 
SEC. 5075. OPTIONS SUBJECT TO WASH SALE RULES. 
(a) IN GENERAL.—Subsection (a) of section 1091 of the 1986 Code 
(relating to losses from wash sales of stock or securities) is amended 
by adding at the end thereof the following sentence: "For purposes 
of this section, the term 'stock or securities' shall, except as provided 
in regulations, include contracts or options to acquire or sell stock or 
securities." 
26 use 1091 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
"o*®- 
shall apply with respect to any sale after the date of enactment of 
this Act, in taxable years ending after such date. 
SEC. 5076. INTEREST CHARGE O
N INSTALLMENT SALES OF CERTAIN 
PROPERTY. 
(a) GENERAL RULE.—Paragraph (1) of section 453A(b) of the 1986 
Code is amended to read as follows: 
"(1) IN GENERAL.—This section shall apply to any obligation 
which arises from the disposition of any property under the 
installment method, but only if the sales price of such property 
exceeds $150,000." 
(b) CLERICAL AMENDMENTS.— 
(1) The section heading of section 453A of the 1986 Code is 
amended by striking out "OF REAL PROPERTY". 
• • r - i ^ ^ l ^ " 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3683 
(2) The table of sections of subpart B of part II of subchapter 
A of chapter 1 of the 1986 Code is amended by striking out "of 
real property" in the item relating to section 453A. 
(c) EFFECTIVE DATE.— 
26 use 453A 
(1) IN GENERAL.—Except as provided in paragraph (2), the '^°**-
amendments made by this section shall apply to sales after 
December 31,1988. 
(2) BINDING CONTRACT, ETC.—The amendments made by this 
section shall not apply to any sale on or before December 31, 
1990, if— 
(A) such sale is pursuant to a written binding contract in 
effect on October 21,1988, and at all times thereafter before 
such sale, 
(B) such sale is pursuant to a letter of intent in effect on 
October 21,1988, or 
(C) there is a board of directors or shareholder approval 
for such sale on or before October 21,1988. 
SEC. 5077. APPLICATION OF NET OPERATING LOSS RULES TO STOCK 
ACQUIRED BY AN EMPLOYEE STOCK OWNERSHIP PLAN. 
(a) IN GENERAL.—Clause (ii) of section 382(1X3XC) of the 1986 Code 
is amended by striking "and" at the end of subclause (I), by striking 
the period at the end of subclause (II) and inserting in lieu thereof 
", and", and by adding at the end thereof the following: 
"(III) immediately after the acquisition the plan has 
a number of participants which is not less than 50 
percent of the average number of employees of the loss 
corporation during the 3-year period ending with such 
acquisition, 
for purposes of subclause (III), except as provided in regula-
tions, all members of an affiliated group which includes the 
loss corporation and which files a consolidated return shall 
be treated as 1 loss corporation." 
(b) EFFECTIVE DATE.— 
26 use 382 note. 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to acquisition after December 31,1988. 
(2) EXCEPTION.—The amendment made by subsection (a) shall 
not apply to acquisitions after December 31,1988, pursuant to a 
binding written contract entered into on or before October 21, 
1988. 
TITLE VI—OTHER SUBSTANTIVE 
REVENUE PROVISIONS 
Subtitle A—Provisions Relating to Individuals 
SEC. 6001. TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE 
BENEFIT OF AN INSTITUTION OF HIGHER EDUCATION. 
(a) IN GENERAL.—Section 170 of the 1986 Code is amended by 
redesignating subsection (m) as subsection (n) and by inserting after 
subsection (1) the following new subsection: 
"(m) TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE BENE-
FIT OF INSTITUTIONS OF HIGHER EDUCATION.— 
102 STAT. 3684 
PUBLIC LAW 100-647-NOV. 10, 1988 
"(1) IN GENERAL.—For purposes of this section, 80 percent of 
any amount described in paragraph (2) shall be treated as a 
charitable contribution. 
"(2) AMOUNT DESCRIBED.—For purposes of paragraph (1), an 
amount is described in this paragraph i
f
— 
"(A) the amount is paid by the taxpayer to or for the 
benefit of an educational organization— 
"(i) which is described in subsection (bXlXAXii), and 
"(ii) which is an institution of higher education (as 
defined in section 3304(f)), and 
"(B) such amount would be allowable as a deduction 
under this section but for the fact that the taxpayer re-
ceives (directly or indirectly) as a result of paying such 
amount the right to purchase tickets for seating at an 
athletic event in an athletic stadium of such institution. 
If any portion of a payment is for the purchase of such tickets, 
such portion and the remaining portion (if any) of such pay-
ment shall be treated as separate amounts for purposes of this 
subsection." 
26 u s e 170 note. 
O
t
>
) EFFECTIVE D A T E . — 
(1) IN GENERAL.—The amendment made by this section shall 
apply to taxable years beginning after December 31,1983. 
(2) WAIVER OF STATUTE OF LIMITATIONS.—If on the date of the 
enactment of this Act (or at any time within 1 year after such 
date of enactment) refund or credit of any overpayment of tax 
resulting from the application of section 170(m) of the 1986 (I!ode 
(£is added by subsection (a)) is barred by any law or rule of law, 
refund or credit of such overpayment shall, nevertheless, be 
made or allowed if claim therefore is filed before the date 1 year 
after the date of the enactment of this Act. 
SEC. 6002. NONRECOGNITION OF GAIN WHERE 1 SPOUSE DIES BEFORE 
OCCUPYING NEW RESIDENCE. 
(a) IN GENERAL.—Subsection (g) of section 1034 of the 1986 Code 
(relating to rollover of gain on sale of principal residence) is 
amended by adding at the end thereof the following: "For purposes of 
this subsection, except to the extent provided in regulations, in the 
case of an individual who dies after the date of the sale of the old 
residence and is married on the date of death, consent to the 
application of paragraph (2) by such individual's spouse and use of 
the new residence as the principal residence of such spouse shall be 
treated as consent and use by such individual." 
26 use 1034 
(b) EFFECTIVE DATE.—The amendment made by paragraph (1) 
note- 
shall apply to sales and exchanges of old residences (within the 
meaning of section 1034 of the 1986 Code) after December 31, 1984, 
in taxable years ending after such date. 
SEC. 6003. MEALS ON CERTAIN VESSELS AND OFFSHORE OIL PLATFORMS 
EXEMPT FROM 80 PERCENT LIMITATION ON DEDUCTION FOR 
MEALS. 
(a) IN GENERAL.—Paragraph (2) of section 274(n) of the 1986 Code 
(relating to only 80 percent of meal and entertainment expenses 
allowed as deduction), as amended by title I of this Act, is amended 
by striking out "or" at the end of subparagraph (D), by striking out 
the period at the end of subparagraph (E) and inserting in lieu 
thereof ", or", and by adding at the end thereof the following new 
subparagraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3685 
"(F) such expense is for food or beverages— 
"(i) required by Federal law to be provided to crew 
members of a commercial vessel, 
"(ii) provided to crew members of a commercial 
vessel— 
"(I) which is operating on the Great Lakes, the 
Saint Lawrence Seaway, or any inland waterway of 
the United States, and 
"(II) which is of a kind which would be required 
by Federal law to provide food and bevereiges to 
crew members if it were operated at sea, 
"(iii) provided on an oil or gas platform or drilling rig 
if the platform or rig is located offshore, or 
"(iv) provided on an oil or gas platform or drilling rig, 
or at a support camp which is in proximity and integral 
to such platform or rig, if the platform or rig is 
located in the United States north of 54 degrees north 
latitude. 
Clauses (i) and (ii) of subparagraph (F) shall not apply to vessels 
primarily engaged in providing luxury water transportation 
(determined under the principles of subsection (m))." 
(b) EFFECTIVE DATES.— 
26 use 2
7
4 note. 
(1) Clauses (i) and (ii) of section 274(nX2XF) of the 1986 Code, 
as added by subsection (a), shall apply to taxable years begin-
ning after December 31,1988. 
(2) Clauses (iii) and (iv) of section 274(nX2XF) of the 1986 Code, 
as added by subsection (a), shall apply to taxable years begin-
ning after December 31,1987. 
SEC. 6004. TREATMENT OF CERTAIN INNOCENT SPOUSES. 
Subsection (c) of section 424 of the Tax Reform Act of 1984 
(relating to innocent spouse relieved of liability in certain cases) is 26 use 6013 
amended by adding at the end thereof the following new paragraph: note. 
"(3) TRANSITIONAL RULE.—If— 
"(A) a joint return under section 6013 of the Internal 
Revenue Code of 1954 was filed before January 1, 1985, 
"(B) on such return there is an understatement (as de-
fined in section 6661(bX2XA) of such Code) which is attrib-
utable to disallowed deductions attributable to activities of 
one spouse, 
"(C) the amount of such disallowed deductions exceeds 
the taxable income shown on such return, 
"(D) without regard to any determination before Octo-
ber 21,1988, the other spouse establishes that in signing the 
return he or she did not know, and had no reason to know, 
that there was such an understatement, and 
"(E) the marriage between such spouses terminated and 
\ immediately after such termination the net worth of the 
other spouse was less than $10,000, 
notwithstanding any law or rule of law (including res judicata), 
the other spouse shall be relieved of liability for tax (including 
interest, penalties, and other amounts) for such taxable year to 
the extent such liability is attributable to such understatement, 
and, to the extent the liability so attributable has been collected 
from such other spouse, it shall be refunded or credited to such 
other spouse. No credit or refund shall be made under the 
preceding sentence unless claim therefor has been submitted to 
102 STAT. 3686 
PUBLIC LAW 100-647—NOV. 10, 1988 
the Secretary of the Treasury or his delegate before the date 1 
year after the date of the enactment of this paragraph, and no 
interest on such credit or refund shall be allowed for any period 
before such date of enactment.". 
20 u s e 1113b 
SEC. 6005. INTERIM TREATMENT OF CERTAIN AMOUNTS AWARDED TO 
note. 
CHRISTA McAULIFFE FELLOWS. 
(a) IN GENERAL.—In the case of an individual who is a Christa 
McAuliffe Fellow (as defined in section 561(b) of the Higher Edu-
cation Act of 1965) and is awarded a fellowship pursuant to section 
561 of such Act, for purposes of the 1986 Code, gross income shall not 
include any amount of such fellowship award— 
(1) which is expended for a project approved by the Secretary 
of Education pursuant to section 563(b) of such Act, and 
(2) which is not expended directly or indirectly for the per-
sonal use or benefit of such individual. 
(b) EFFECTIVE DATE.—Subsection (a) shall apply to amounts re-
ceived before July 1, 1990, in taxable years beginning before such 
date. 
SEC. 6006. ELECTION TO CLAIM CERTAIN UNEARNED INCOME OF CHILD 
ON PARENT'S RETURN. 
(a) IN GENERAL.—Subsection (i) of section 1 of the 1986 Code 
(relating to persons required to make returns of income) is amended 
by adding at the end thereof the following new paragraph: 
"(7) ELECTION TO CLAIM CERTAIN UNEARNED INCOME OF CHILD 
ON PARENT'S RETURN.— 
"(A) IN GENERAL.—If— 
"(i) any child to whom this subsection applies hsis 
gross income for the taxable year only from interest 
and dividends (including Alaska Permanent Fund 
dividends), 
"(ii) such gross income is more than $500 and less 
than $5,000, 
"(iii) no estimated tax payments for such year are 
made in the name and TIN of such child, and no 
amount has been deducted and withheld under section 
3406, and 
"(iv) the parent of such child (as determined under 
paragraph (5)) elects the application of subparagraph 
(B), 
such child shall be treated as having no gross income for 
such year and shall not be required to file a return under 
section 6012. 
"(B) INCOME INCLUDED ON PARENT'S RETURN.—In the case 
of a parent making the election under this paragraph— 
"(i) the gross income of each child to whom such 
election applies (to the extent the gross income of such 
child exceeds $1,000) shall be included in such parent's 
gross income for the taxable year, 
"(ii) the t€« imposed by this section for such year 
with respect to such parent shall be the amount equal 
to the sum of— 
"(I) the amount determined under this section 
after the application of clause (i), plus 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3687 
"(II) for each such child, the lesser of $75 or 15 
percent of the excess of the gross income of such 
child over $500, and 
"(iii) any interest which is an item of tax preference 
under section 57(aX5) of the child shall be treated as an 
item of tax preference of such parent (and not of such 
child). 
"(C) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
the purposes of this paragraph.' 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
26 use l note. 
apply to taxable years beginning after December 31,1988. 
SEC. 6007. JURY DUTY PAY REMITTED TO AN INDIVIDUAL'S EMPLOYER 
ALLOWED AS A DEDUCTION IN COMPUTING GROSS INCOME. 
(a) IN GENERAL.—Part VII of subchapter B of chapter 1 of the 1986 
Code (relating to additional itemized deductions for individuals) is 
amended by redesignating section 220 as section 221 and by insert-
ing after section 219 the following new section: 
"SEC. 220. JURY DUTY PAY REMITTED TO EMPLOYER 
"If— 
"(1) an individual receives payment for the discharge of jury 
duty, and 
"(2) the employer of such individual requires the individual to 
remit any portion of such pa)maent to the employer in exchange 
for payment by the employer of compensation for the period the 
individual was performing jury duty, 
then there shall be allowed as a deduction the amount so remitted.". 
(b) 
DEDUCTION 
ALLOWED IN ARRIVING 
AT ADJUSTED 
GROSS 
INCOME.—Subsection (a) of section 62 of the 1986 Code (defining 
adjusted gross income) is amended by inserting after paragraph (12) 
the following new paragraph: 
"(13) JURY DUTY PAY REMITTED TO EMPLOYER.—The deduction 
allowed by section 220.". 
(c) CLERICAL AMENDMENT.—The table of sections for part VII of 
subchapter B of chapter 1 of the 1986 Code is amended by striking 
out the item relating to section 220 and inserting in lieu thereof the 
following new items: 
"Sec. 220. Jury duty pay remitted to employer. 
"Sec. 221. Cross references.". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 62 note. 
apply £is if included in the amendments made by section 132 of the 
Tax Reform Act of 1986. 
SEC. 6008. BUSINESS USE OF AUTOMOBILES BY RURAL MAIL CARRIERS. 
26 USC 162 note. 
(a) GENERAL RULE.—In the case of any employee of the United 
States Postal Service who performs services involving the collection 
and delivery of mail on a rural route, such employee shall be 
permitted to compute the amount allowable as a deduction under 
chapter 1 of the Internal Revenue Code of 1986 for the use of an 
automobile in performing such services by using a standard mileage 
rate for all miles of such use equal to 150 percent of the basic 
standard rate. 
(b) SUBSECTION (a) NOT TO APPLY IF EMPLOYEE CLAIMS DEPRECIA-
TION DEDUCTIONS FOR AUTOMOBILE.—Subsection (a) shall not apply 
with respect to any automobile if, for any taxable year beginning 
102 STAT. 3688 
PUBLIC LAW 100-647—NOV. 10, 1988 
after December 31, 1987, the taxpayer claimed depreciation deduc-
tions for such automobile. 
(c) BASIC STANDARD RATE.—For purposes of this section, the term 
"basic standard rate" means the standard mileage rate which is 
prescribed by the Secretary of the Treasury or his delegate for 
computing the amount of the deduction for the business use of an 
automobile smd which— 
(1) is in effect at the time of the use referred to in subsection 
(a), 
(2) applies to an automobile which is not fully depreciated, 
and 
(3) applies to the first 15,000 miles (or such other number as 
the Secretary of the Treasury or his delegate may hereafter 
prescribe) of business use during the taxable year. 
(d) EFFECTIVE DATE.—The provisions of this section shall apply to 
taxable years beginning after December 31,1987. 
SEC. 6009. EXCLUSION FROM GROSS INCOME FOR INCOME FROM UNITED 
STATES SAVINGS BONDS USED TO PAY TUITION AND FEES. 
(a) IN GENERAL.—Part III of subchapter B of chapter 1 of the 1986 
Code (relating to items specifically excluded from gross income) is 
amended by redesignating section 135 as section 136 and by insert-
ing after section 134 the following new section: 
"SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY 
HIGHER EDUCATION TUITION AND FEES. 
"(a) GENERAL RULE.—In the case of an individual who pays quali-
fied higher education expenses during the taxable year, no amount 
shall be includible in gross income by reason of the redemption 
during such year of any qualified United States savings bond. 
"(b) LIMITATIONS.— 
"(1) LIMITATION WHERE REDEMPTION PROCEEDS EXCEED HIGHER 
EDUCATION EXPENSES.— 
"(A) IN GENERAL.—If— 
"(i) the aggregate proceeds of qualified United States 
savings bonds redeemed by the taxpayer during the 
taxable year exceed 
"(ii) the qualified higher education expenses paid by 
the taxpayer during such taxable year, 
the amount excludable from gross income under subsection 
(a) shall not exceed the applicable fraction of the amount 
excludable from gross income under subsection (a) without 
regard to this subsection. 
(B) APPUCABLE FRACTION.—For purposes of subpara-
graph (A), the term 'applicable fraction' means the fraction 
the numerator of which is the amount described in subpara-
graph (AXii) and the denominator of which is the amount 
described in subparagraph (AXi). 
"(2) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME.— 
"(A) IN GENERAL.—If the modified adjusted gross income 
of the taxpayer for the taxable year exceeds $40,000 
($60,000 in the case of a joint return), the amount which 
would (but for this paragraph) be excludable from gross 
income under subsection (a) shall be reduced (but not below 
zero) by the amount which bears the same ratio to the 
amount which would be so excludable as such excess bears 
to $15,000 ($30,000 in the case of a joint return). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3689 
"(B) INFLATION ADJUSTMENT.—In the case of any taxable 
year beginning in a calendar year after 1990, each dollar 
amount contained in subparagraph (A) shall be increased 
by an amount equal to— 
"(i) such dollar £unount, multiplied by 
"(ii) the cost-of-living adjustment under section l(fK3) 
for the calendar year in which the taxable year begins, 
determined by substituting 'calendar year 1989' for 
'calendar year 1987' in subparagraph (B) thereof. 
"(C) ROUNDING.—If any amount as adjusted under 
subparagraph (A) or (B) is not a multiple of $50, such 
amount shall be rounded to the nearest multiple of $50 (or 
if such amount is a multiple of $25, such amount shall be 
rounded to the next highest multiple of $50). 
"(c) DEFINITIONS.—For purposes of this section— 
"(1) 
QUAUFIED UNITED STATES SAVINGS BOND.—The 
t e r m 
'qualified United States savings bond' means any United States 
savings bond issued— 
"(A) after December 31,1989, 
"(B) to an individual who has attained age 24 before the 
date of issuance, and 
"(C) at discount under section 3105 of title 31, United 
States (Dode. 
"(2) QUAUFIED HIGHER EDUCATION EXPENSES.— 
"(A) IN GENERAL.—The term 'qualified higher education 
expenses' means tuition and fees required for the enroll-
ment or attendance of— 
"(i) the taxpayer, 
"(ii) the taxpayer's spouse, or 
"(iii) any dependent of the taxpayer with respect to 
whom the taxpayer is allowed a deduction under sec-
tion 151, 
at an eligible educational institution. 
"(B) EXCEPTION FOR EDUCATION INVOLVING SPORTS, ETC.— 
Such term shall not include expenses with respect to any 
course or other education involving sports, games, or hob-
bies other than as part of a degree program. 
"(3) EuGiBLE EDUCATIONAL INSTITUTION.—The term 'eligible 
educational institution' means— 
"(A) an institution described in section 1201(a) or 
subparagraph (C) or (D) of section 481(aXl) of the Higher 
Education Act of 1965 (as in effect on October 21,1988), and 
"(B) an area vocational education school (as defined in 
subparagraph (C) or (D) of section 521(3) of the Carl D. 
Perkins Vocational E^ducation Act) which is in any State (as 
defined in section 521(27) of such Act), as such sections are 
in effect on October 21,1988. 
"(4) MODIFIED ADJUSTED GROSS INCOME.—The term 'modified 
adjusted gross income' means the adjusted gross income of the 
taxpayer for the taxable year determined— 
"(A) without regard to this section and sections 911, 931, 
and 933, and 
"(B) after the application of sections 86, 469, and 219. 
"(d) SPECIAL RULES.— 
"(1) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS AND VETERANS 
BENEFITS.—The amount of qualified higher education expenses 
otherwise taken into account under suteection (a) respect to the 
102 STAT. 3690 
PUBLIC LAW 100-647—NOV. 10, 1988 
education of an individual shall be reduced (before the applica-
tion of subsection (h)) by the sum of the amounts received with 
respect to such individual for the taxable year as— 
"(A) a qualified scholarship which under section 117 is 
not includable in gross income, 
"(B) an educational assistance allowance under chapter 
30, 31, 32, 34, or 35 of title 38, United States Code, or 
"(C) a pa5anent (other than a gift, bequest, devise, or 
inheritance within the meaning of section 102(a)) for edu-
cational expenses, or attributable to attendance at an eli-
gible educational institution, which is exempt from income 
taxation by any law of the United States. 
"(2) No EXCLUSION FOR MARRIED INDIVIDUALS FILING SEPARATE 
RETURNS.—If the taxpayer is a married individual (within the 
meaning of section 7703), this section shall apply only if the 
taxpayer and his spouse file a joint return for the taxable year. 
"(3) REGULATIONS.—The Secretary may prescribe such regula-
tions as may be necessary or appropriate to carry out this 
section, including regulations requiring record keeping and 
information reporting." 
26 use 135 note. 
(b) PROMOTION OF PuBUC AWARENESS OF PROGRAM.—The Sec-
retary of the Treasury or his delegate shall take such actions as may 
be necessary to make the general public aware of the program 
established by this section. 
(c) TECHNICAL AMENDMENTS.— 
(1) Subparagraph (A) of section 86(bX2) of the 1986 Code is 
amended by inserting "135," before "911". 
(2) Clause (i) of section 219(gX3XA) of the 1986 Code is 
amended by striking "section 911" and inserting "sections 135 
and 911". 
(3) Subparagraph (D) of section 469(iX3) of the 1986 Code is 
amended by redesignating clauses (ii) and (iii) as clauses (iii) and 
(iv), respectively, and by inserting aifter clause (i) the following 
new clause: 
"(ii) the amount excludable from gross income under 
section 135,". 
(4) The table of sections for part III of subchapter B of chapter 
1 of the 1986 Code is amended by striking the last item and 
inserting the following new items: 
"Sec. 135. Income from United States savings bonds used to pay higher edu-
cation tuition and fees. 
"Sec. 136. Cross references to other Acts." 
26 use 86 note. 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to taxable years beginning after December 31,1989. 
26 use 135 note. 
(e) PARENTAL ASSISTANCE WiTH TuiTiON STAMP STUDY.—The Sec-
retary of the Treasury or his delegate, after consultation with the 
Secretary of Education or his delegate, shall conduct a study of the 
feasibility of using stamps or similar programs to encourage and 
facilitate savings by parents towards the purch£use of Series EE 
bonds eligible for the exclusion provided under the amendments 
made by this section. Not later than December 31, 1989, the Sec-
retary of the Treasury or his delegate shall submit the results of 
such study, together with any recommendations deemed appro-
priate, to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3691 
SEC. 6010. MODIFICATION OF ADDITIONAL EXEMPTION FOR STUDENT 
DEPENDENTS. 
(a) IN GENERAL.—Clause (ii) of section 151(cXlXB) of the 1986 Code 
(relating to additional exemption for dependents) is amended by 
inserting "who has not attained the age of 24 at the close of such 
calendar year" before the period. 
Qo) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 151 note. 
shall apply to taxable years beginning after December 31, 1988. 
SEC. 6011. PRINCIPAL RESIDENCE CAPITAL GAINS EXCLUSION. 
(a) IN GENERAL.—Subsection (d) of section 121 of the Internal 
Revenue Code of 1986 (relating to one-time exclusion of gain from 
sale of principal residence by individual who has attained age 55) is 
amended by adding at the end thereof the following new paragraph: 
"(9) DETERMINATION OF USE DURING PERIODS OF OUT-OF-RESIDENCE 
CARE.—In the case of a taxpayer who— 
"(A) becomes physically or mentally incapable of self-
care, and 
"(B) owns property and uses such property as the 
taxpayer's principal residence during the 5-year period de-
scribe in subsection (aX2) for periods aggregating at least 1 
year, 
then the taxpayer shall be treated as using such property as 
the taxpayer s principal residence during any time during such 
5-year period in which the taxpayer owns the property and 
resides in any facility (including a nursing home) licensed by a 
State or political suodivision to care for an individual in the 
taxpayer's condition." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 USC121 note. 
shall apply with respect to any sale or exchange after September 30, 
1988, in taxable years ending after such date. 
Subtitle B—Provisions Relating to Accounting 
and Agriculture 
SEC. 6026. AMENDMENTS TO UNIFORM CAPITALIZATION RULES. 
(a) TREATMENT OF CERTAIN PRODUCERS OF CREATIVE PROPERTY.— 
Section 263A of the 1986 Code is amended by redesignating subsec-
tion (h) as subsection (i) and by inserting after subsection (g) the 
following new subsection: 
"(h) EXEMPTION FOR FREE LANCE AUTHORS, PHOTOGRAPHERS, AND 
ARTISTS.— 
"(1) IN GENERAL.—Nothing in this section shall require the 
capitalization of any qualified creative expense. 
*(2) QUALIFIED CREATIVE EXPENSE.—For purposes of this 
subsection, the term 'qualified creative expense' means any 
expense— 
"(A) which is paid or incurred by an individual in the 
trade or business of such individual (other than as an 
employee) of being a writer, photographer, or artist, and 
' (B) which, without regard to this section, would be allow-
able as a deduction for the taxable year. 
Such term does not include any expense related to printing, 
photographic plates, motion picture films, video tapes, or simi-
lar items. 
102 STAT. 3692 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) WRITER.—The term 'writer' means any individual if 
the personal efforts of such individual create (or may 
reasonably be expected to create) a literary manuscript, 
musical composition (including any accompanjdng words), 
or dance score. 
"(B) PHOTOGRAPHER.—The term 'photographer' means 
any individual if the personal efforts of such individual 
create (or may reasonably be expected to create) a photo-
graph or photographic negative or transparency. 
"(C) ARTIST.— 
"(i) IN GENERAL.—The term 'artist' means any 
individual if the personal efforts of such individual 
create (or may reasonably be expected to create) a 
picture, painting, sculpture, statue, etching, drawing, 
cartoon, graphic design, or original print edition. 
"(ii) CRITERIA.—In determining whether any expense 
is paid or incurred in the trade or business of being 
an artist, the following criteria shall be taken into 
account: 
"(I) The originality and uniqueness of the item 
created (or to be created). 
"(II) The predominance of aesthetic value over 
utilitarian value of the item created (or to be 
created). 
"(D) TREATMENT OF CERTAIN PERSONAL SERVICE CORPORA-
TIONS.— 
"(i) IN GENERAL.—In the case of a personal service 
corporation, this subsection shall apply to any expense 
of such corporation which directly relates to the activi-
ties of the qualified employee-owner in the same 
manner as if such expense were incurred by such 
employee-owner. 
' (ii) QuAUFiED EMPLOYEE-OWNER.—The term 'quali-
fied employee-owner' means any individual who is an 
employee-owner of the personal service corporation and 
who is a writer, photographer, or artist, but only if 
substantially all of the stock of such corporation is 
owned by such individual and members of his family 
(as defined in section 267(cX4)). 
"(iii) PERSONAL SERVICE CORPORATION.—For purposes 
of this subparagraph, the term 'personal service cor-
poration' means any personal service corporation (as 
defined in section 269A(b))." 
(b) TREATMENT OF ANIMALS PRODUCED IN FARMING BUSINESS.— 
(1) IN GENERAL.—Subparagraph (A) of section 263A(dXl) of the 
1986 Code (relating to exception for farming businesses) is 
amended to read as follows: 
"(A) IN GENERAL.—This section shall not apply to any of 
the following which is produced by the taxpayer in a farm-
ing business: 
"(i) Any animal. 
"(ii) Any plant which has a preproductive period of 2 
years or less." 
(2) CONFORMING AMENDMENTS.— 
(A) The heading of paragraph (1) of section 263A(d) of the 
1986 Code is amended to read as follows: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3693 
"(1) SECTION NOT TO APPLY TO CERTAIN PROPERTY.—". 
(B) Subsections (dX3) and (e) of section 263A of the 1986 
Code are each amended by striking out "or animal" each 
place it appears. 
(c) TREATMENT OF PISTACHIO TREES.—Subparagraph (B) of section 
263A(dX3) of the 1986 Code (relating to certain persons not eligible) 
is amended to read as follows: 
"(B) CERTAIN PERSONS NOT EUGIBLE.—No election may be 
made under this paragraph by a corporation, partnership, 
or tax shelter, if such corporation, partnership, or tax 
shelter is required to use an accrual method of accounting 
under section 447 or 448(aX3)." 
(d) EFFECTIVE DATES.— 
26 u s e 263A 
(1) IN GENERAL.—Except as otherwise provided in this para- note. 
graph, the amendments made by this section shall take effect as 
if included in the amendments made by section 803 of the Tax 
Reform Act of 1986. 
(2) SUBSECTION (b).— 
(A) IN GENERAL.—The amendments made by subsection 
(b) shall apply to costs incurred after December 31, 1988, in 
taxable years ending after such date. 
(B) REVOCATION OF ELECTION.—If the taxpayer made an 
election under section 263A(dX3) of the 1986 Code for a 
taxable year beginning before January 1, 1989, such tax-
payer may, without the consent of the Secretary of the 
Treasury or his delegate, revoke such election effective for 
the taxpayer's 1st taxable year beginning after December 
31,1988. 
SEC. 6027. TREATMENT OF SINGLE PURPOSE AGRICULTURAL OR HORTI-
CULTURAL STRUCTURES. 
(a) IN GENERAL.—Paragraph (3) of section 168(e) of the 1986 Code 
(relating to classification of property) is amended by redesignating 
subparsigraphs (D) and (E) as subparagraphs (E) and (F), respec-
tively, and by inserting after subparagraph (C) the following new 
subparagraph: 
"(D) 10-YEAR PROPERTY.—The term '10-year property' in-
cludes any single purpose agricultural or horticultural 
structure (within the meaning of section 48(p))." 
0)) TECHNICAL AMENDMENTS.— 
(1) Subparagraph (C) of section 168(eX3) of the 1986 Code is 
amended by adding "and" at the end of clause (i), by striking 
out clause (ii), and by redesignating clause (iii) as clause (ii). 
(2) The table contained in subparagraph (B) of section 168(gX3) 
of the 1986 Code is amended by striking out all that follows the 
item relating to subparsigraph (CXD and inserting in lieu thereof 
the following new items: 
"(D) 
15 
"(EXi) 
24 
"(EXii) 
24 
"(F) 
50". 
(c) EFFECTIVE DATE.— 
26 use 168 note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to property placed 
in service after December 31,1988. 
(2) EXCEPTION.—The amendments made by this section shall not 
apply to any prop)erty if such property is placed in service before 
January 1,1990, and if such property— 
102 STAT. 3694 
PUBLIC LAW 100-647—NOV. 10, 1988 
(A) is constructed, reconstructed, or acquired by the tax-
payer pursuant to a written contract which w£is binding on 
July 14,1988, or 
(B) is constructed or reconstructed by the taxpayer and 
such construction or reconstruction began by July 14, 1988. 
SEC. 6028. TREATMENT OF PROPERTY USED IN A FARMING BUSINESS. 
(a) IN GENERAL.—Paragraph (2) of section 168(b) of the 1986 Code 
(as amended by title I) is amended by striking out "or" at the end of 
subparagraph (A), by redesignating subparagraph (B) as subpara-
graph (C), and by inserting after subparagraph (A) the following new 
subparagraph: 
"(B) any property used in a farming business (within the 
meaning of section 263A(eX4)), or". 
26 u s e 168 note. 
(b) EFFECTIVE D A T E . — 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to property placed 
in service after December 31,1988. 
(2) EXCEPTION.—The amendments made by this section shall 
not apply to any property if such property is placed in service 
before July 1,1989, and if such property— 
(A) is constructed, reconstructed, or acquired by the tax-
payer pursuant to a written contract which was binding on 
July 14,1988, or 
(B) is constructed or reconstructed by the taxpayer and 
such construction o;- reconstruction began by July 14, 1988. 
SEC. 6029. TREATMENT OF CERTAIN TREES. 
(a) IN GENERAL.—Subparagraph (D) of section 168(eX3) of the 1986 
Code (relating to classification of certain property), as amended by 
section 6027 of this Act, is amended to read as follows: 
"(D) 10-YEAR PROPERTY.—The term '10-year property' 
includes— 
"(i) any single purpose agricultural or horticultural 
structure (within the meaning of section 48(p)), and 
"(ii) any tree or vine bearing fruit or nuts." 
(b) ONLY STRAIGHT-LINE DEPRECIATION ALLOWED.—Paragraph (3) 
of section 168(b) of the 1986 Code is amended by adding at the end 
thereof the following new subparagraph: 
"(D) Property described in subsection (eX3XDXii)." 
(c) CLASS LIFE DETERMINATION.—The table contained in subpara-
graph (B) of section 168(gX3) of the 1986 C!ode, as amended by section 
6027 of this Act, is amended by striking out the item relating to 
subparagraph (D) and inserting in lieu thereof the following new 
item: 
"(DXi) 
15 
"(DKii) 
20". 
26 use 168 note. 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
apply to property placed in service after December 31, 1988. 
SEC. 6030. ONE-YEAR DEFERRAL OF PROCEEDS FROM LIVESTOCK SOLD 
ON ACCOUNT OF DROUGHT. 
(a) IN GENERAL.—Paragraph (1) of section 451(e) of the 1986 Code 
(relating to special rule for proceeds from livestock sold on account 
of drought) is amended by striking out "(other than livestock de-
scribed in section 1231(bX3))". 
26 use 451 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to sales or exchanges occurring after December 31, 1987. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3695 
SEC. 6031. CERTAIN REPLEDGES PERMITTED. 
26 USC 453A 
(a) GENERAL RULE.—Section 453A(d) of the 1986 Code (relating to 
pledges, etc., of installment obligations) shall not apply to any 
pledge after December 17, 1987, of an installment obligation to 
secure any indebtedness if such indebtedness is incurred to 
refinance 
indebtedness 
which 
was outstanding 
on 
Decem-
ber 17, 1987, and which was secured on such date and all times 
thereafter before such refinancing by a pledge of such installment 
obligation. 
(b) LIMITATION.—Subsection (a) shall not apply to the extent that 
the principal amount of the indebtedness resulting from the 
refinancing exceeds the principal amount of the refinanced indebted-
ness immediately before the refinancing. 
(c) CERTAIN REFINANCINGS PERMITTED.—For purposes of subsec-
tion (a), if^ 
(1) a refinancing is attributable to the calling of indebtedness 
by the creditor, and 
(2) such refinancing is not with the creditor under the re-
financed indebtedness or a person related to such creditor, 
such refinancing shall, to the extent the refinanced indebtedness 
qualifies under subsections (a) and (b), be treated as a continuation 
of such refinanced indebtedness. 
SEC. 6032. TREATMENT OF INDIRECT HOLDINGS THROUGH TRUSTS 
UNDER SECTION 448 OF THE 1986 CODE. 
(a) GENERAL RULE.—Paragraph (2) of section 448(d) of the 1986 
Code (defining qualified personal service corporation) is amended by 
adding at the end thereof the following new sentence: 
"To the extent provided in regulations which shall be prescribed 
by the Secretary, indirect holdings through a trust shall be 
taken into account under subparagraph (B)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 448 note. 
shall apply to taxable years beginning after December 31, 1986. 
SEC. 6033. DISASTER ASSISTANCE ACT PAYMENTS INCLUDED IN SPECIAL 
RULE FOR TAXABLE YEAR OF INCLUSION. 
(a) DISASTER ASSISTANCE PAYMENTS.—The second sentence of sec-
tion 451(d) of the 1986 Code (relating to special rule for crop insur-
ance proceeds or disaster payments) is amended by inserting "or 
title II of the Disaster Assistance Act of 1988," after "the Agricul-
tural Act of 1949, as amended,". 
(b) EFFECTIVE DATE.—The amendment made by paragraph (1) 
26 USC 451 note. 
shall apply to payments received before, on, or after the date of 
enactment of this Act. 
Subtitle C—Pensions and Employee BeneHts 
SEC. 6051. PROVISIONS RELATING TO BENEFITS UNDER DISCRIMINA-
TORY PLANS. 
(a) PROVISIONS NOT TO APPLY TO CHURCH PLANS.—Section 89(i) of 
the 1986 Code is amended by adding at the end thereof the following 
new paragraph: 
"(4) CHURCH PLANS.—The term 'statutory employee benefit 
plan' shall not include a plan maintained by a church for 
church employees. For purposes of this paragraph, the term 
'church' has the meaning given such term by section 
102 STAT. 3696 
PUBLIC LAW 100-647—NOV. 10, 1988 
3121(wX3XA), including a qualified church-controlled organiza-
tion (as defined in section 3121(w)(3XB))." 
(b) 
CAFETERIA PLANS MAINTAINED BY EDUCATIONAL INSTITU-
TIONS.—Section 125(cX2XC) of the 1986 Code is amended by adding at 
the end thereof the following new sentence: "In applying section 89 
to a plan described in this subparagraph, contributions under the 
plan shall be tested as of the time the contributions were made." 
26 use 89 note. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
take effect as if included in the amendments made by section 1151 of 
the Reform Act. 
SEC. 6052. MODIFICATIONS OF DISCRIMINATION RULES APPLICABLE TO 
CERTAIN ANNUITY CONTRACTS. 
(a) EXCLUDED EMPLOYEES.— 
(1) IN GENERAL.—The last sentence of section 4O30t)X12XA) of 
the 1986 Code is amended to read as follows: "Subject to the 
conditions applicable under section 410(bX4), there may be ex-
cluded for purposes of this subparagraph employees who are 
students performing services described in section 3121(bX10) and 
employees who normally work less than 20 hours per week." 
26 use 403 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall take effect as if included in the amendment made by 
section 1120(b) of the Reform Act. 
26 use 403 note. 
(b) SAMPUNG.—In the case of plan years beginning in 1989, 1990, 
or 1991, determinations as to whether a plan meets the require-
ments of section 4030t)X12) of the 1986 Code may be made on the 
basis of a statistically valid random sample. The preceding sentence 
shall apply only if— 
(1) the sampling is conducted by an independent person in a 
manner not inconsistent with regulations prescribed by the 
Secretary, and 
(2) the statistical method and sample size result in a 95 
percent probability that the results will have a margin of error 
not greater than 3 percent. 
SEC. 6053. REQUIRED DISTRIBUTION BEGINNING DATE FOR GOVERN-
MENTAL AND CHURCH PLANS. 
(a) IN GENERAL.—Section 401(aX9XC) of the 1986 Code is amended 
by adding at the end thereof the following new sentence: "In the 
case of a governmental plan or church plan (as defined in section 
89(iX4)), the required beginning date shall be the later of the date 
determined under the preceding sentence or April 1 of the calendar 
year following the calendar year in which the employee retires." 
26 use 401 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall take effect as if included in the amendments made by section 
1121 of the Reform Act. 
SEC. 6054. SECTION 415 LIMITATION FOR STATE AND LOCAL PLANS. 
(a) MODIFIED LIMITATIONS.—Section 415(b) of the 1986 Code is 
amended by adding at the end thereof the following new paragraph: 
"(10) 
SPECIAL RULE FOR STATE AND LOCAL GOVERNMENT 
PLANS.— 
"(A) LIMITATION TO EQUAL ACCRUED BENEFIT.—In the case 
of a plan maintained for its employees by any State or 
political 
subdivision thereof, or by any agency 
or 
instrumentality of the foregoing, the limitation with 
respect to a qualified participant under this subsection shall 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3697 
not be less than the accrued benefit of the participant 
under the plan (determined without regard to any amend-
ment of the plan made after October 14,1987). 
"(B) QuAUFiED PARTICIPANT.—For purposes of this para-
graph, the term 'qualified participant' means a participant 
who first became a participant in the plan maintained by 
the employer before Jgmuary 1,1990. 
"(C) ELECTION.—This paragraph shall not apply to any 
plan imless each employer maintaining the plan elects 
before the close of the 1st plan year beginning after Decem-
ber 31, 1989, to have this subsection (other than paragraph 
(2XG)) applied without regard to paragraph (2XF)." 
(b) EFFECTIVE DATES.— 
26 use 415 note. 
(1) IN GENERAL.—Except as provided in this subsection, the 
amendment made by this subsection apply to years beginning 
after December 31 1982. 
(2) ELECTION.—Section 415(bX10XC) of the 1986 Code (as added 
by subsection (a)) shall not apply to any year beginning before 
January 1,1990. 
SEC. 6055. MINIMUM PARTICIPATION STANDARDS. 
(a) IN GENERAL.—Section 401(aX26) of the 1986 Code, as amended 
by this Act, is amended by redesignating subparagraph (H) as 
subparagraph (I) and by inserting after subparagraph (G) the follow-
ing new subparagraph: 
"(H) 
SPECIAL RULE FOR CERTAIN POUCE OR FIREFIGHTERS.— 
"(i) IN GENERAL.—An employer may elect to have this 
paragraph applied separately with respect to any classifica-
tion of qualified public safety employees for whom a sepa-
rate plan is maintained. 
"(ii) QUAUFIED PUBUC SAFETY EMPLOYEE.—For purposes of 
this subparagraph, the term 'qualified public safety 
employee' means any employee of any police department or 
fire department organized and operated by a State or politi-
cal subdivision if the employee provides police protection, 
flrefighting services, or emergency medical services for 
any area within the jurisdiction of such State or political 
subdivision." 
0)) EFFECTIVE DATE.—The amendment made by this section shall 
26 use 401 note. 
take effect as if included in the amendments made by section 1112(b) 
of the Reform Act. 
SEC. 6056. STUDY OF EFFECT OF MINIMUM PARTICIPATION RULE ON 
EMPLOYERS REQUIRED TO PROVIDE CERTAIN RETIREMENT 
BENEFITS. 
(a) STUDY.—The Secretary of the Treasury or his del^ate shall 
conduct a study on the application of section 401(aX26) of the 
Internal Revenue Code of 1986 to Government contractors who— 
(1) are required by Federal law to provide certain employees 
specified retirement benefits, and 
(2) establish a separate plan for such employees while 
maintaining a separate plan for employees who are not entitled 
to such benefits. 
Such study shall consider the Federal requirements with respect to 
employee benefits for employees of Government contractors, 
whether a special minimum participation rule should apply to such 
102 STAT. 3698 
PUBLIC LAW 100-647—NOV. 10, 1988 
employees, and methods by which plans may be modified to satisfy 
minimum participation requirements. 
(b) REPORT.—The Secretary of the Treasury or his delegate shall 
report the results of the study under subsection (a) to the Committee 
on Finance of the Senate and the Committee on Ways and Means of 
the House of Representatives not later than September 1, 1989. 
SEC. 6057. PROHIBITION ON COLLECTIBLES NOT TO INCLUDE STATE 
COINS. 
(a) IN GENERAL.—Paragraph (3) of section 408(m) of the 1986 Code 
is amended to read as follows: 
"(3) EXCEPTION FOR CERTAIN COINS.—In the case of an individ-
ual retirement account, paragraph (2) shall not apply to— 
"(A) any gold coin described in paragraph (7), (8), (9), or 
(10) of section 5112(a) of title 31, 
"(6) any silver coin described in section 5112(e) of title 31, 
or 
"(C) any coin issued under the laws of any State." 
26 use 408 note. 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall apply to acquisitions after the date of the enactment of this 
Act. 
SEC. 6058. APPLICATION OF FUNDING RULES TO MULTIPLE EMPLOYER 
PLANS. 
(a) IN GENERAL.—Paragraph (4) of section 413(c) of the 1986 Code 
is amended to read as follows: 
"(4) FUNDING.— 
"(A) IN GENERAL.—In the case of a plan established after 
December 31, 1988, each employer shall be treated as 
maintaining a separate plan for purposes of section 412 
unless such plan uses a method for determining required 
contributions which provides that any employer contributes 
not less than the amount which would be required if such 
employer maintained a separate plan. 
(B) OTHER PLANS.—In the case of a plan not described in 
subparagraph (A), the requirements of section 412 shall be 
determined as if all participants in the plan were employed 
by a single employer unless the plan administrator elects 
not later than the close of the first plan year of the plan 
beginning after the date of enactment of the Technical and 
Miscellaneous Revenue Act of 1988 to have the provisions of 
subparagraph (A) apply. An election under the preceding 
sentence shall take effect for the plan year in wluch made 
and, once made, may be revoked only with the consent of 
the Secretary." 
(b) DEDUCTION LIMITATIONS.—Paragraph (6) of section 413(c) of the 
1986 diode is amended to read as follows: 
"(6) DEDUCTION UMITATIONS.— 
"(A) IN GENERAL.—In the case of a plan established after 
December 31, 1988, each applicable limitation provided by 
section 404(a) shall be determined as if each employer were 
maintaining a separate plan. 
"(B) OTHER PLANS.— 
"(i) IN GENERAL.—In the case of a plan not described 
in subparagraph (A), each applicable limitation pro-
vided by section 404(a) shall be determined as if all 
participants in the plan were employed by a single 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3699 
employer, except that if an election is made under 
paragraph (4XB), subparagraph (A) shall apply to such 
plan. 
"(ii) SPECIAL RULE.—If this subparagraph applies, the 
amounts contributed to or under the plan by each 
employer who maintains the plan (for the portion of 
the taxable year included within a plan year) shall be 
considered not to exceed any such limitation if the 
anticipated employer contributions for such plan year 
(determined in a reasonable manner not inconsistent 
with regulations prescribed by the Secretary) do not 
exceed such limitation. If such anticipated contribu-
tions exceed such a limitation, the portion of each such 
employer's contributions which is not deductible under 
section 404 shall be determined in accordance with 
regulations prescribed by the Secretary." 
(c) (CONFORMING AMENDMENT.—Section 413(c) of the 1986 (Dode is 
amended by striking out the last sentence and by inserting after 
paragraph (6) the following new paragraph: 
"(7) ALLOCATIONS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), allocations of amounts under paragraphs (4), (5), and (6) 
among the employers maintaining the plan shall not be 
inconsistent with regulations prescribed for this purpose by 
the Secretary. 
"(B) ASSET AND UABIUTIES OF PLAN.—For purposes of 
applying paragraphs (4XA) and (6XA), the assets and liabil-
ities of each plan shall be treated as the assets and liabil-
ities which would be allocated to a plan maintained by the 
employer if the employer withdrew from the multiple em-
ployer plan." 
(d) EFFECTIVE DATE.—Except as provided in paragraph (2), the 
26 USC 413 note. 
amendments made by this section shall apply to plan years begin-
ning after the date of the enactment of this Act. 
SEC. 6059. APPLICATION OF SECTION 415 LIMITATIONS TO POLICE AND 
FIREFIGHTERS. 
(a) IN GENERAL.—Clause (ii) of section 415(bX2XH) of the 1986 Code 
is amended by striking out "20 years" and inserting in lieu thereof 
"15 years". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
26 USC 415 note. 
apply as if included in the amendments made by section 1106(bX2) of 
the Reform Act. 
SEC. 6060. EXCISE TAX ON DISPOSITION OF STOCK BY AN ESOP NOT TO 
APPLY TO CERTAIN FORCED DISPOSITIONS. 
(a) IN GENERAL.—Subsection (e) of section 4978A of the 1986 
Code is amended by adding at the end thereof the following new 
paragraph: 
"(4) FORCED DISPOSITION OCCURRING BY OPERATION OF A STATE 
LAW.—Any forced disposition of qualified employer securities by 
the employee stock ownership plan of a corporation occurring 
by operation of a State law shall not be treated as a disposition. 
TTiis paragraph shall only apply to securities which, at the time 
such securities were purchased by the employee stock owner-
ship plan, were regularly traded on an established securities 
market." 
102 STAT. 3700 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 4978 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
^°^- 
shall take effect as if included in the amendment made by section 
10413 of the Revenue Act of 1987. 
26 u s e 133 note. 
SEC. 6061. LOANS TO ACQUIRE EMPLOYER SECURITIES. 
Notwithstanding the last sentence of section lllB(hX5XA) of this 
Act, the amendments made by paragraphs (1) and (2) of section 
lllB(h) of this Act shall not apply to any loan used to refinance a 
loan described in section 133(bXlXA) of the 1986 Code which is made 
before October 22, 1986, if the terms of the refinanced loan do not 
extend the total commitment period beyond the later of— 
(1) the term of the original securities acquisition loan, or 
(2) the amortization period used to determine the regular 
pa3nnents (prior to any final or balloon pa3nment) applicable to 
the original securities acquisition loan. 
SEC. 6062. EFFECTIVE DATE OF SECTION 415 LIMITATIONS OF COLLEC-
TIVELY BARGAINED AGREEMENTS. 
(a) IN GENERAL.—Paragraph (2) of section 1106(i) of the Reform 
26 use 415 note. Act is amended to read as follows: 
"(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a 
plan in effect before March 1, 1986, pursuant to 1 or more 
collective bargaining agreement^ between employee representa-
tives and 1 or more employers, the amendments made by this 
section (other than subsection (d)) shall not apply to contribu-
tions or benefits pursuant to such agreement in years beginning 
before October 1,1991." 
26 use 415 note. 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
take effect as if included in the provisions of section 1106 of the 
Reform Act. 
26 u s e 125 note. 
SEC. 6063. TREATMENT OF PRE-1989 ELECTIONS FOR DEPENDENT CARE 
ASSISTANCE UNDER CAFETERIA PLANS. 
For purposes of section 125 of the 1986 Code, a plan shall not be 
treated as failing to be a cafeteria plan solely because under the 
plan a participant elected before January 1, 1989, to receive re-
imbursement under the plan for dependent care assistance for 
periods after December 31,1988, and such assistance is includible in 
gross income under the provisions of the Family Support Act of 
1988. 
SEC. 6064. MODIFICATIONS TO SECTION 457. 
Government 
(a) CODIFICATION OF EXCEPTION FOR CERTAIN P L A N S . — 
organization 
(1) Subsection (e) of section 457 of the 1986 Code (as amended 
and employees. 
^^ section 1107 of the Reform Act) is amended by adding at the 
end thereof the following new paragraph: 
"(11) CERTAIN PLANS EXCEPTED.—Any bona fide vacation 
leave, sick leave, compensatory time, severance pay, disability 
pay, or death benefit plan shall be treated £is a plan not 
providing for the deferral of compensation." 
(2) Subsection (d) of section 457 of the 1986 Code (as in effect 
on the day before the date of the enactment of the Reform Act) 
is amended by adding at the end thereof the following new 
paragraph: 
"(10) CERTAIN PLANS EXCEPTED.—Any bona fide vacation 
leave, sick leave, compensatory time, severance pay, disability 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3701 
pay, or death benefit plan shall be treated as a plan not 
providing for the deferral of compensation." 
(b) 
TREATMENT OF NONELECTIVE DEFERRED COMPENSATION OF 
NONEMPLOYEES.— 
(1) Subsection (e) of section 457 of the 1986 Code (as amended 
by section 1107 of the Reform Act) is amended by adding at the 
end thereof the following new paragraph: 
"(12) EXCEPTION FOR NONELECTIVE DEFERRED COMPENSATION OF 
NONEMPLOYEES.— 
"(A) IN GENERAL.—This section shall not apply to 
nonelective deferred compensation attributable to services 
not performed as an employee. 
"(B) NONELECTIVE DEFERRED COMPENSATION.—For pur-
poses of subparagraph (A), deferred compensation shall be 
treated as nonelective only if all individuals (other than 
those who have not satisfied any applicable initial service 
requirement) with the same relationship to the payor are 
covered under the same plan with no individual variations 
or options under the plan." 
(2) Subsection (d) of section 457 of the 1986 Code (as in effect 
on the day before the date of the enactment of the Reform Act) 
is amended by adding at the end thereof the following new 
paragraph: 
"(11) EXCEPTION FOR NONELECTIVE DEFERRED COMPENSATION OF 
NONEMPLOYEES.— 
"(A) IN GENERAL.—This section shall not apply to 
nonelective deferred compensation attributable to services 
not performed as an employee. 
"(B) NONELECTIVE DEFERRED COMPENSATION.—For pur-
poses of subpar£^aph (a), deferred compensation shall be 
treated as nonelective only if all individuals (other than 
those who have not satisfied any applicable initial service 
requirement) with the same relationship to the payor are 
covered under the same plan with no individual variations 
or options under the plan." 
(c) SECTION NOT TO APPLY TO CHURCH PLANS.—Section 457(e) of 
the 1986 Code (as amended by section 1107 of the Reform Act) is 
amended by adding at the end thereof the following new paragraph: 
"(13) EXCEPTION FOR CHURCH PLANS.—The term 'eligible de-
ferred compensation plan' shall not include a plan maintained 
by a church for church employees. For purposes of this para-
graph, the term 'church' has the meaning given such term by 
section 3121(wX3XA), including a qualified church-controlled 
organization (as defined in section 3121(wX3XB))." 
(d) EFFECTIVE DATE.— 
26 use 457 note. 
(1) IN GENERAL.—The amendments made by this section shall 
apply to t£ixable years beginning after December 31,1987. 
(2) EXCEPTION FOR CERTAIN COLLECTIVELY BARGAINED PLANS.— 
(A) IN GENERAL.—Section 457 of the 1986 Code (as in 
effect before and after the amendments made by section 
1107 of the Reform Act) shall not apply to nonelective 
deferred compensation provided under a plan in existence 
on December 31,1987, and maintained pursuant to a collec-
tive bargaining agreement. 
(B) NONELECTIVE PLAN.—For purposes of this paragraph, 
a nonelective plan is a plan which covers a broad group of 
employees and under which the covered employees earn 
102 STAT. 3702 
PUBLIC LAW 100-647—NOV. 10, 1988 
nonelective deferred compensation under a de^ite, fixed 
and uniform benefit formula. 
(C) TERMINATION.—This paragraph shall cease to apply to 
a plan as of the effective date of the first material modifica-
tion of the plan agreed to after December 31,1987. 
(3) TREATMENT OF CERTAIN NONELECTIVE DEFERRED COMPENSA-
TION.—Section 457 of the 1986 Code shall not apply to amounts 
deferred under a nonelective deferred compensation plan main-
tained by an eligible employer described in section 457(eXlXA) 
of the 1986 Code (as in effect after the Reform Act)— 
(A) if such amounts were deferred from periods before 
July 14,1988, or 
(B)if-
(i) such amounts are deferred from periods on or 
after such date pursuant to an agreement which— 
(I) was in writing on such date, and 
(II) on such date provides for a deferral for each 
taxable year covered by the agreement of a fixed 
amount or of an amount determined pursuant to a 
fixed formula, and 
(ii) the individual with respect to whom the deferral 
is made was covered under such agreement on such 
date. 
Subparagraph (B) shall not apply to any taxable year ending 
after the date on which any modification of the amount or 
formula described in subparagraph (BXiXII) agreed to in writing 
before January 1, 1989, is effective. The preceding sentence 
shall not apply to a modification agreed to in writing before 
January 1, 1989, which does not increase any benefit of a 
participant. Amounts described in the first sentence of this 
paragraph shall be taken into account for purposes of applying 
section 457 of the 1986 Code to other amounts deferred under 
any eligible deferred compensation plan. 
(4) STUDY.—The Secretary of the Treasury or his delegate 
shall conduct a study on the tax treatment of deferred com-
pensation paid by State and local governments and tax-exempt 
organizations 
(including 
deferred 
compensation 
paid 
to 
Reports. 
independent contractors). Not later than January 1, 1990, the 
Secretary shall submit to the Committee on Ways and Means of 
the House of Representatives and the Committee on Finance of 
the Senate a report on the study conducted under this para-
graph together with such recommendations as he may deem 
advisable. 
26 u s e 401 note. 
SEC. 6065. EXCEPTION FOR GOVERNMENTAL PLANS. 
In the case of plan years beginning before January 1,1993, section 
401(aX26) of the 1986 Code shall not apply to any governmental plan 
(within the meaning of section 414(d) of such Code) with respect to 
employees who were participants in such plan on July 14, 1988. 
SEC. 6066. AIR TRANSPORTATION OF CARGO AND OF PASSENGERS 
TREATED AS SAME SERVICE FOR PURPOSES OF FRINGE 
BENEFITS INCLUSION. 
(a) IN GENERAL.—Subsection (h) of section 132 of the 1986 C!ode is 
amended by adding at the end thereof the following new paragraph: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3703 
"(8) AIR CARGO.—For purposes of subsection (b), the transpor-
tation of cargo by air and the transportation of passengers by 
air shall be treated as the same service." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 132 note. 
shall apply to transportation furnished after December 31, 1987, in 
taxable years ending after such date. 
SEC. 6067. SPECIAL RULE FOR APPLYING SPIN-OFF RULES TO BRIDGE 
BANKS. 
(a) IN GENERAL.—Section 414(1X2) of the 1986 Code is amended by 
adding at the end thereof the following new subparagraph: 
"(G) SPECIAL RULES FOR BRIDGE BANKS.—For purposes of this 
paragraph, in the case of a bridge bank established under 
section ll(i) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(i))— 
"(i) such bank shall be treated as a member of any 
controlled group which includes any insured bank (as 
defined in section 3(h) of such Act (12 U.S.C. 1813(h)))— 
"(I) which maintains a defined benefit plan, 
"(II) which is closed by the appropriate bank regu-
latory authorities, and 
"(III) any asset and liabilities of which are received 
by the bridge bank, and 
"(ii) the requirements of this paragraph shall not be 
treated £is met with respect to such plan unless during the 
180-day period beginning on the date such insured bank is 
closed— 
"(I) the bridge bank has the right to require the plan 
to transfer (subject to the provisions of this paragraph) 
not more than 50 percent of the excess assets (as 
defined in subparagraph (O) to a defined benefit plan 
maintained by the bridge bank with respect to partici-
pants or former participants (including retirees and 
beneficiaries) in the original plan employed by the 
bridge bank or formerly employed by the closed bank, 
and 
"(II) no other merger, spin-off, termination, or simi-
lar transaction involving the portion of the excess 
assets described in subclause (I) may occur without the 
prior written consent of the bridge bank." 
(b) STUDY.—The Secretary of the Treasury or his delegate, in 
26 USC 414 note. 
consultation with the Federal Deposit Insurance Corporation, shall 
conduct a study with respect to the proper method of allocating 
assets in the case of a transaction to which the amendment made by 
this subsection applies. The Secretary of the Treasury shall not later 
Reports. 
than January 1, 1990, report the results of such study to the 
Committee on Ways and Means of the House of Representatives and 
to the (Dommittee on Finance of the Senate. 
(c) EFFECTIVE DATE.—The amendment made by this section shall 
26 USC 414 note. 
take effect as if included in the amendments made by section 205(c) 
of this Act. 
SEC. 6068. INCOME AVERAGING ALLOWED TO LUMP-SUM DISTRIBUTIONS 
OF ALTERNATE PAYEES. 
(a) IN GENERAL.—Section 402(eX4) of the 1986 Code is amended by 
adding at the end thereof the following new subparagraph: 
102 STAT. 3704 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(O) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAYEES.—If 
any distribution or payment of the balance to the credit of 
an employee would be treated as a lump-sum distribution, 
then, for purposes of this subsection, the payment under a 
qualified domestic relations order (within the meaning of 
section 414(p)) of the balance to the credit of an alternate 
payee who is the spouse or former spouse of the employee 
shall be treated as a lump-sum distribution. For purposes of 
this subparagraph, the balance to the credit of the alternate 
payee shall not include any amount payable to the 
employee." 
26 use 402 note. 
Qo) EFFECTIVE DATE.—The amendment made by this section shall 
apply to taxable years ending after December 31,1984. 
SEC. 6069. INCREASE IN EMPLOYER REVERSION TAX. 
(a) IN GENERAL.—Section 4980(a) of the 1986 Code is amended by 
striking out "10 percent" and inserting in lieu thereof "15 percent". 
26 use 4980 
(b) EFFECTIVE DATE.— 
^ote. 
(1) IJJ GENERAL.—The amendment made by subsection (a) 
shall apply to reversions occurring on or after October 21, 1988. 
(2) EXCEPTION.—The amendment made by subsection (a) shall 
not apply to any reversion on or after October 21, 1988, pursu-
ant to a plan termination if— 
(A) with respect to plans subject to title IV of the Em-
ployee Retirement Income Security Act of 1974, a notice of 
intent to terminate required under such title was provided 
to participants (or if no participants, to the Pension Benefit 
Guaranty Corporation) before October 21,1988, 
(B) with respect to plans subject to title I of such Act, a 
notice of intent to reduce future accrueds required under 
section 204(h) of such Act was provided to participants in 
connection with the termination before October 21, 1988, 
(C) with respect to plans not subject to title I or IV of such 
Act, the Board of Directors of the employer approved the 
termination or the employer took other binding action 
before October 21,1988, or 
(D) such plan termination was directed by a final order of 
a court of competent jurisdiction entered before October 21, 
1988, and notice of such order was provided to participants 
before such date. 
26 use 89 note. 
SEC. 6070. DEFINITION OF PART-TIME EMPLOYEE FOR PURPOSES OP 
SECTION 89. 
For purposes of section 89(f) of the 1986 Code, in the case of a plan 
maintained by an employer which employs fewer than 10 employees 
on a normal working day during a plan year, section 89(h)(1)(B) of 
such Code shall be applied— 
(1) by substituting "35 hours" for "17^2 hours" in the case of a 
plan year beginning in 1989, and 
(2) by substituting "25 hours" for "17^2 hours" in the case of 
plan years beginning in 1990. 
All persons treated as 1 employer for purposes of subsection (b), (c), 
(m), (n), or (o) of section 414 of the 1986 Code shall be treated as 1 
employer for purposes of the preceding sentence. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3705 
SEC. 6071. RURAL TELEPHONE COOPERATIVES PERMITTED TO HAVE 
QUALIFIED CASH OR DEFERRED ARRANGEMENTS. 
(a) IN GENERAL.—Paragraphs (1) and (2) of section 401(k) of the 
1986 Code (relating to cash or deferred arrangements) are each 
amended by striking out "or a rural electric cooperative plan" and 
inserting in lieu thereof "or a rural cooperative plan". 
(b) RURAL COOPERATIVE PLAN DEFINED.— 
(1) Paragraph (7) of section 401(k) of the 1986 Code (as 
amended by title I) is amended to read as follows: 
"(7) RURAL COOPERATIVE PLAN.—For purposes of this sub-
section— 
"(A) IN GENERAL.—The term 'rural cooperative plan' 
means any pension plan— 
"(i) which is a defined contribution plan (as defined 
in section 414(i)), and 
"(ii) which is established and maintained by a rural 
cooperative. 
"(B) 
RURAL 
COOPERATIVE DEFINED.—For purposes 
of 
subparagraph (A), the term 'rural cooperative' means— 
"(i) any organization which— 
"(I) is exempt from tax under this subtitle or 
which is a State or local government or political 
subdivision thereof (or agency or instrumentality 
thereof), and 
"(II) is engaged primarily in providing electric 
service on a mutual or cooperative basis, 
"(ii) any organization described in paragraph (4) or 
(6) of section 501(c) and at least 80 percent of the 
members of which are organizations described in clause 
(i), 
"(iii) a cooperative telephone company described in 
section 501(c)(12), and 
"(iv) an organization which is a national association 
of organizations described in clause (i), (ii), or (iii)." 
(2) Subparagraph (B) of section 401(kX4) of the 1986 Code (as 
amended by title I) is amended by striking out "rural electric 
plan" and inserting in lieu thereof "rural cooperative plan". 
(c) AMENDMENTS TO SECTION 457.—Section 457 of the 1986 Code 
(as amended by section 1107 of the Reform Act) is gimended by 
striking out "rural electric cooperative plan" in subsection (cX2) and 
inserting in lieu thereof "rural cooperative plan". 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 401 note. 
apply to taxable years beginning after the date of the enactment of 
thus Act. 
SEC. 6072. STUDY OF TREATMENT OF CERTAIN TECHNICAL PERSONNEL. 
The Secretary of the Treasury or his delegate shall conduct a 
study of the treatment provided by section 1706 of the Reform Act 
(relating to treatment of certain technical personnel). The report of 
Reports. 
such study shall be submitted not later than September 1, 1989, to 
the Committee on Ways and Means of the House of Representatives 
and the Committee on Finance of the Senate. 
102 STAT. 3706 
PUBLIC LAW 100-647—NOV. 10, 1988 
Subtitle D—Insurance Provisions 
26 use 801 note. 
SEC. 6076. TREATMENT OF CERTAIN WORKERS' COMPENSATION FUNDS. 
(a) TREATMENT FOR TAXABLE YEARS BEGINNING BEFORE 1987.—In 
the case of any taxable year beginning before January 1, 1987, a 
deficiency shall not be assessed against (and if assessed, shall not be 
collected from) any qualified group self-insurers' fund to the extent 
such deficiency is attributable to the timing of policyholder dividend 
deductions. 
(b) QUALIFIED GROUP SELF-INSURERS' FUND.—For purposes of this 
section, the term "qualified group self-insurers' fund" means any 
group of 2 or more employers which has been in existence for not 
less than 2 years, and who enter into agreements to pool their 
liabilities under the State workers' disability compensation laws for 
the purpose of qualifying as a self-insurer under such laws, if— 
(1) the group has received a certificate of approval from, and 
is subject to regulation by, the State board or agency that is 
responsible for administering the State workers' disabUity com-
pensation laws, 
(2) each employer who is a member of the group, by written 
agreement, is jointly and severally bound to assume and dis-
charge, by payment, any lawful judgment or award entered by a 
court of competent jurisdiction or by the State agency respon-
sible for administering the State workers' disability compensa-
tion laws against a member of the group, 
(3) the group is prohibited by State law or r^ulation from 
using the monies collected for a purpose other than to pay, or to 
reserve against, claims under the State workers' disability com-
pensation laws and expenses, 
(4) the group is prohibited by State law or r^ulation from 
taking projected investment income into account in determining 
members' premiums, 
(5) the group is required by State law or r^ulation to submit 
to the State board or agency that is responsible for administer-
ing the State workers' disability compensation laws an audited 
financial statement, 
(6) the group's investments are limited by State law or r^ula-
tion to bonds, notes, or other evidences of indebtedness issued, 
assumed or guaranteed by the United States of America, or by 
an agency or instrumentsdity thereof, certificates of deposit in a 
federally insured bank, shares or savings deposits in a federally 
insured savings and loan association or credit union, and certifi-
cates of deposit issued by a commercial bank duly chartered 
under State law, and other investments which are approved by 
the State board or agency that is responsible for administering 
the State workers' disability compensation laws, and 
(7) the group exclusively covers workers' compensation liabil-
ity, is not a commercial insurance carrier or company licensed 
by the State board, agency, or commissioner responsible for 
r^ulating and licensing insurance carriers and companies; and 
is not subject to filing under the r^ulatory statements of the 
National Association of Insurance Commissioners. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3707 
SEC. 6077. SPECIAL ESTIMATED TAX PAYMENTS. 
(a) GENERAL RULE.—Part III of subchapter L of chapter 1 of the 
1986 Code (relating to provisions of general application) is amended 
by adding at the end thereof the following new section: 
"SEC. 847. SPECIAL ESTIMATED TAX PAYMENTS. 
"In the case of taxable years beginning after December 31,1987, of 
an insurance compeuiy required to discount unpaid losses (as defined 
in section 846)— 
"(1) ADDITIONAL DEDUCTION.—There shall be allowed as a 
deduction for the taxable year, if separate estimated tax pay-
ments are made as required by paragraph (2), an amount not to 
exceed the excess of— 
"(A) the amount of the undiscounted, unpaid losses (as 
defined in section 846(b)) attributable to losses incurred 
after December 31,1986, over 
"(B) the amount of the related discounted, unpaid losses 
determined under section 846, 
to the extent such amount was not deducted under this para-
graph in a preceding taxable year. Section 6655 shsdl be applied 
to any taxable year without regard to the deduction allowed 
under the preceding sentence. 
"(2) SPECIAL ESTIMATED TAX PAYMENTS.—The deduction under 
paragraph (1) shall be allowed only to the extent that special 
estimated tax pajrments are made in an simount equal to the tax 
benefit attributable to such deduction, on or before the date that 
any taxes (determined without regard to this section) for the 
taxable year for which the deduction is allowed are due to be 
paid. If a deduction would be allowed but for the fact that 
special estimated tax pa3nnents were not timely made, such 
deduction shall be allowed to the extent such payments are 
made within a reasonable time, as determined by the Secretary, 
if all interest and penalties, computed as if this sentence did not 
apply, are paid. If amounts are included in gross income under 
paragraph (5) or (6) for any taxable year and an additional tax is 
due for such year (or any other year) £is a result of such 
inclusion, an amount of special estimated tax pajonents equal to 
such additional tax shall be applied against such additional tax. 
If, after any such payment is so applied, there is an adjustment 
reducing the amount of such additional tax, in lieu of any credit 
or refund for such reduction, a special estimated tax pasnnent 
shall be treated as made in an amount equal to the amount 
otherwise allowable as a credit or refund. To the extent that a 
special estimated tax payment is not used to offset additional 
tax due for any of the first 15 taxable years beginning after the 
year for which the payment was made, such special estimated 
tax pajmient shall be treated as an estimated tax pa3maent made 
under section 6655 for the 16th year after the year for which the 
payment was made. 
(3) SPECIAL LOSS DISCOUNT ACCOUNT.—Each company which is 
allowed a deduction under paragraph (1) shall, for purposes of 
this part, establish and maintain a special loss discount account. 
"(4) ADDinoNS T
O SPECIAL LOSS DISCOUNT ACCOUNT.—There 
shall be added to the special loss discount account for each 
taxable year an amount equal to the amount allowed as a 
deduction for the taxable year under paragraph (1). 
102 STAT. 3708 
PUBLIC LAW 100-647—NOV. 10, 1988 
Regulations. 
"(5) SUBTRACTIONS FROM SPECIAL LOSS DISCOUNT ACCOUNT AND 
INCLUSION IN GROSS INCOME.—After applying paragraph (4), 
there shall be subtracted for the taxable year from the special 
loss discount account and included in gross income: 
"(A) The excess (if any) of the amount in the special loss 
discount account with respect to losses incurred in each 
taxable year over the amount of the excess referred to in 
paragraph (1) with respect to losses incurred in that year, 
and 
"(B) Any amount improperly subtracted from the special 
loss discount account under subparagraph (A) to the extent 
special estimated tax pajnnents were used with respect to 
such amount. 
"(6) RULES IN THE CASE OF LIQUIDATION OR TERMINATION OF 
TAXPAYER'S INSURANCE BUSINESS.— 
"(A) IN GENERAL.—If a company liquidates or otherwise 
terminates its insurance business and does not transfer or 
distribute such business in an acquisition of assets referred 
to in section 381(a), the entire amount remaining in such 
special loss discount account shall be subtracted and in-
cluded in gross income. Except in the case where a company 
transfers or distributes its insurance business in an acquisi-
tion of assets, referred to in section 381(a), if the company is 
not subject to the tax imposed by section 801 or section 831 
for any taxable year, the entire amount in the account at 
the close of the preceding taxable year shall be subtracted 
from the account in such preceding taxable year and in-
cluded in gross income. 
"(B) EUMINATION OF BALANCE OF PAYMENTS.—In any case 
to which subparagraph (A) applies, any special estimated 
tax pa3mient remaining after the credit attributable to the 
inclusion under subparagraph (A) shall be voided. 
"(7) MODIFICATION OF THE AMOUNT OF SPECIAL ESTIMATED TAX 
PAYMENTS IN THE EVENT OF SUBSEQUENT MARGINAL RATE REDUC-
TION O
R INCREASE.—In the event of a reduction in any tax rate 
provided under section 11 for any tax year after the enactment 
of this section, the Secretary shall prescribe regulations provid-
ing for a reduction in the amount of any special estimated tax 
pa)mients made for years before the effective date of such 
section 11 rate reductions. Such reduction in the amount of such 
payments shall reduce the amount of such payments to the 
amount that they would have been if the special deduction 
permitted under paragraph (1) had occurred during a year that 
the lower marginal rate under section 11 applied. Similar rules 
shall be applied in the event of a marginal rate increase. 
"(8) TAX BENEFIT DETERMINATION.—The tax benefit attrib-
utable to the deduction under paragraph (1) shall be determined 
under regulations prescribed by the Secretary, by taking into 
account tax benefits that would arise from the carryback of any 
net operating loss for the year, as well as current year tax 
benefits. Tax benefits for the current year and carryback years 
shall include those that would arise from the filing of a consoli-
dated return with another insurance company required to 
determine discounted, unpaid losses under section 846 without 
regard to the limitations on consolidation contained in section 
1503(c). 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3709 
"(9) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations— 
"(A) providing for the separate application of this section 
with respect to each accident year, and 
"(B) such adjustments in the application of this section as 
may be necessary to take into account the tax imposed by 
section 55." 
(b) CLERICAL AMENDMENT.—The table of sections for part III of 
subchapter L of chapter 1 of the 1986 Code is amended by adding at 
the end thereof the following new item: 
"Sec. 847. Special estimated tax payments." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 847 note, 
apply to taxable years beginning after December 31, 1987. 
SEC. 6078. CHURCH SELF-FUNDED DEATH BENEFIT PLANS TREATED AS 
LIFE INSURANCE. 
(a) IN GENERAL.—Section 7702 of the 1986 Code (defining life 
insurance contract) is amended by redesignating subsection (j) as 
subsection (k) and by inserting after subsection (i) the following new 
subsection: 
"(j) 
CERTAIN 
CHURCH 
SELF-FUNDED 
DEATH 
BENEFIT 
PLANS 
TREATED AS LIFE INSURANCE.— 
"(1) IN GENERAL.—In determining whether any plan or 
arrangement described in paragraph (2) is a life insurance 
contract, the requirement of subsection (a) that the contract be 
a life insurance contract under applicable law shall not apply. 
"(2) DESCRIPTION.—For purposes of this subsection, a plan or 
arrangement is described in this paragraph i
f
— 
"(A) such plan or arrangement provides for the payment 
of benefits by reason of the death of the individuals covered 
under such plan or arrangement, and 
"(B) such plan or arrangement is provided by a church for 
the benefit of its employees and their beneficiaries, directly 
or through an organization described in section 414(e)(3XA) 
or an organization described in section 414(e)(3)(B)(ii). 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) CHURCH.—The term 'church' means a church or a 
convention or association of churches. 
"(B) EMPLOYEE.—The term 'employee' includes an em-
ployee described in section 414(e)(3XB)." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 USC 7702 
shall take effect as if included in the amendment made by section 
note. 
221(a) of the Tax Reform Act of 1984. 
SEC. 6079. TREATMENT OF STRUCTURED SETTLEMENTS. 
(a) TREATMENT UNDER MINIMUM TAX.— 
(1) The last sentence of section 56(g)(4)(B)(iii) of the 1986 Code 
(as amended by title I) is amended to read as follows: "The 
preceding sentence shall not apply to any annuity contract 
which is held under a plan described in section 403(a) or which 
is described in section 72(uX3XC)." 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
26 USC 56 note, 
shall take effect as if included in the amendments made by 
section 701 of the Reform Act. 
(b) CERTAIN CREDITOR RIGHTS PERMITTED.— 
102 STAT. 3710 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) IN GENERAL.—Subsection (c) of section 130 of the 1986 Code 
(relating to certain personal injury liability assignments) is 
amended— 
(A) by striking out subparagraph (C) of paragraph (2) and 
redesignating subparagraphs (D) and (E) of paragraph (2) as 
subparagraphs (C) and (D), respectively, and 
(B) by adding at the end thereof the following new sen-
tence: 
"The determination for purposes of this chapter of when the recipi-
ent is treated as having received any payment with respect to which 
there has been a qualified assignment sheill be made without regard 
to any provision of such assignment which grants the recipient 
rights as a creditor greater than those of a general creditor." 
26 use 130 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph (1) 
shall apply to assignments after the date of the enactment of 
this Act. 
SEC. 6080. VARIABLE CONTRACTS INVESTED IN GOVERNMENT SECURI-
TIES PERMITTED. 
(a) IN GENERAL.—Subsection (h) of section 817 of the 1986 Code 
(relating to treatment of certain nondiversified contracts) is 
amended by adding at the end thereof the following new paragraph: 
"(6) 
GOVERNMENT 
SECURITIES 
FUNDS.—In 
determining 
whether a segregated asset account is adequately diversified for 
purposes of paragraph (1), each United States Government 
agency or instrumentality shall be treated as a separate issuer." 
26 use 817 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1987 
Subtitle E—Excise Tax Provisions 
26 use 5041 
note. 
SEC. 6101. AUTHORITY TO PRESCRIBE TOLERANCES FOR THE VOLUME 
OF WINE IN BOTTLES FOR PURPOSES OF THE EXCISE TAX ON 
WINE. 
(a) IN GENERAL.—Section 5041 of the 1986 Code (relating to imposi-
tion and rate of tax on wine) is amended by redesignating subsection 
(d) as subsection (e) and by inserting after subsection (c) the follow-
ing new subsection: 
"(d) TOLERANCES.—Where the Secretary finds that the revenue 
will not be endangered thereby, he may by regulation prescribe 
tolerances (but not greater than V2 of 1 percent) for bottles and other 
containers, and, if such tolerances are prescribed, no assessment 
shall be made and no tax shall be collected for any excess in any 
case where the contents of a bottle or other container are within the 
limit of the applicable tolerance prescribed." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to wine removed after December 31,1988. 
SEC. 6102. WHOLESALE DISTRIBUTORS TO ADMINISTER CLAIMS FOR 
REFUND OF GASOLINE TAX. 
(a) IN GENERAL.—Subsection (a) of section 6416 of the 1986 Code 
(relating to certain taxes and services) is amended by adding at the 
end thereof the following new parsigraph: 
"(4) WHOLESALE DISTRIBUTORS TO ADMINISTER CREDITS AND 
REFUNDS OF GASOLINE TAX.— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3711 
"(A) IN GENERAL.—For purposes of this subsection, a 
wholesale distributor who purchases any product on which 
tax imposed by section 4081 has been paid and who sells the 
product to its ultimate purchaser shall be treated as the 
person (and the only person) who paid such tax. 
"(B) WHOLESALE DISTRIBUTOR.—For purposes of subpara-
graph (A), the term 'wholesale distributor' has the meaning 
given such term by section 4092(bX2) (determined by 
substituting 'any product taxable under section 4081' for 'a 
taxable fuel' therein)." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
26 use 6416 
apply to fuel sold by wholesale distributors (as defined in section note. 
6416(a)(4XB) of the 1986 Code, as added by this section) after Septem-
ber 30,1988. 
SEC. 6103. AUTHORITY TO EXEMPT ARTICLES FROM EXCISE TAX ON 
HEAVY TRUCKS AND TRAILERS WHERE BENEFIT ACCRUES 
TO UNITED STATES. 
(a) IN GENERAL.—Section 4293 of the 1986 Code is amended by 
inserting "section 4051," after "section 4041,". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 4293 
shall take effect on the date of the enactment of this Act. 
note. 
SEC. 6104. APPLICATION 
OF 
REDUCED 
GASOLINE 
TAX 
RATE 
TO 
BLENDERS. 
(a) IN GENERAL.—Paragraph (1) of section 4081(c) of the 1986 Code 
(relating to gasoline mixed with alcohol at refinery, etc.) is amended 
by adding after the 1st sentence the following new sentence: "Sub-
ject to such terms and conditions as the Secretary may prescribe 
(including the application of section 4101), the treatment under the 
preceding sentence also shall apply to use in producing gasohol after 
the time of such removal or sale.". 
(b) EFFECTIVE DATE.—The amendment made by this section shall 26 USC 4081 
take effect on October 1,1989. 
note. 
SEC. 6105. CERTAIN EDUCATIONAL INSTITUTIONS EXEMPT FROM USER 
FEES ON PERMITS FOR INDUSTRIAL USE OF SPECIALLY DE-
NATURED DISTILLED SPIRITS. 
(a) IN GENERAL.—Section 5276 of the 1986 Code (relating to 
occupational tax) is amended by adding at the end thereof the 
following new subsection: 
"(c) EXEMPTION FOR CERTAIN EDUCATIONAL INSTITUTIONS.—Subsec-
tion (a) shall not apply with respect to any scientific university, 
college of learning, or institution of scientific research which— 
"(1) is issued a permit under section 5271(aX2), and 
"(2) with respect to any calendar year during which such 
permit is in effect, procures less than 25 gallons of specially 
denatured distilled spirits for experimental or research use but 
not for consumption (other than organoleptic tests) or sale." 
Ot)) CONFORMING AMENDMENT.—Section 5276(a) of the 1986 Code is 
amended by striking out "A permit" and inserting in lieu thereof 
"Except as provided in subsection (c), a permit". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 5276 
take effect on July 1,1989. 
note. 
102 STAT. 3712 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 6106. SMALL PRODUCERS EXEMPT FROM OCCUPATIONAL TAX ON 
DISTILLED SPIRITS PLANTS. 
(a) IN GENERAL.—Section 5081 of the 1986 Code (relating to imposi-
tion and rate of occupational tax) is amended by adding at the end 
thereof the following new subsection: 
"(c) EXEMPTION FOR SMALL PRODUCERS.—Subsection (a) shall not 
apply with respect to any taxpayer who is a proprietor of an eligible 
distilled spirits plant (as defined in section 5181(cX4))." 
(b) CONFORMING AMENDMENT.—Paragraph (1) of section 5081(b) of 
the 1986 Code (relating to reduced rates for small proprietors) is 
amended by inserting 'not described in subsection (c)" after "tax-
payer". 
26 use 5081 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
note. 
take effect on July 1,1989. 
SEC. 6107. QUARTERLY PAYMENT OF ARCHERY EXCISE TAX. 
(a) IN GENERAL.—Subsection (d) of section 6302 of the 1986 Code 
(relating to mode or time of collection) is amended to read as follows: 
"(d) 
TIME FOR PAYMENT OF MANUFACTURERS' EXCISE TAX ON 
SPORTING GTOODS.—The taxes imposed by subsections (a) and (b) of 
section 4161 (relating to taxes on sporting goods) shall be due and 
payable on the date for filing the return for such taxes." 
26 use 6302 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply with respect to articles sold by the manufacturer, pro-
ducer, or importer after December 31,1988. 
SEC. 6108. EXTENSION OF TIME FOR ENACTING AUTHORIZING LEGISLA-
TION RELATING TO THE OIL SPILL LIABILITY TRUST FUND. 
Subparagraph (B) of section 4611(fX2) of the 1986 Code (defining 
qualified authorizing legislation) is amended by striking out 
September 1, 1987" and inserting in lieu thereof "December 31, 
1990". 
SEC. 6109. DONATED CARGO EXEMPT FROM HARBOR MAINTENANCE TAX. 
(a) GENERAL RULE.—Section 4462 of the 1986 Code (relating to 
definitions and special rules) is amended by redesignating subsec-
tion (h) as subsection (i) and by inserting after subsection (g) the 
following new subsection: 
"(h) EXEMPTION FOR HUMANITARIAN AND DEVELOPMENT ASSIST-
ANCE CARGOS.—No tax shall be imposed under this subchapter on 
any nonprofit organization or cooperative for cargo which is owned 
or financed by such nonprofit organization or cooperative and which 
is certified by the United States Customs Service as intended for use 
in humanitarian or development assistance overseas." 
26 use 4462 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall take effect on April 1,1987. 
SEC. 6110. RELAY CARGO. 
(a) IN GENERAL.—Subsection (g) of section 4462 of the 1986 CJode is 
amended by adding at the end thereof the following new paragraph: 
"(3) RELAY CARGO.—Only 1 tax shall be imposed under section 
4461(a) on cargo (moving under a single bill of lading) which is 
unloaded from one vessel and loaded onto another vessel at any 
port in the United States for relay to or from any port in 
Alaska, Hawaii, or any possession of the United States. For 
purposes of this paragraph, the term 'cargo' does not include 
any item not treated as cargo under subsection (bX2)." 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3713 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
26 use 4462 
take effect on the date of the enactment of this Act. 
note. 
SEC. 6111. CLARIFICATION OF MEANING OF MANUFACTURE UNDER 
TRUCK EXCISE TAX. 
(a) IN GENERAL.—Paragraph (1) of section 4052(a) of the 1986 Code 
(defining first retail sale) is amended by striking out "manufacture, 
production" and inserting in lieu thereof "production, manufac-
ture". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 4052 
shall take effect on January 1,1988. 
note. 
Subtitle F—Foreign Provisions 
SEC. 6126. DUAL RESIDENT COMPANIES. 
26 USC 1502 
(a) GENERAL RULE.—In the case of a transaction which— 
(1) involves the transfer after the date of the enactment of 
this Act by a domestic corporation, with respect to which there 
is a qualified excess loss account, of its assets and liabilities to a 
foreign corporation in exchange for all of the stock of such 
foreign corporation, followed by the complete liquidation of the 
domestic corporation into the common parent, and 
(2) qualifies, pursuant to Revenue Ruling 87-27, as a reorga-
nization which is described in section 368(aXlXF) of the 1986 
Code, 
then, solely for purposes of appljdng Treasury Regulation section 
1.1502-19 to such qualified excess loss account, such foreign corpora-
tion shall be treated as a domestic corporation in determining 
whether such foreign corporation is a member of the affiliated group 
of the common parent. 
(b) TREATMENT OF INCOME OF NEW FOREIGN CORPORATION.— 
(1) IN GENERAL.—In any case to which subsection (a) applies, 
for purposes of the 1986 Code— 
(A) the source and character of any item of income of the 
foreign corporation referred to in subsection (a) shall be 
determined as if such foreign corporation were a domestic 
corporation, 
(B) the net amount of any such income shall be treated as 
subpart F income (without regard to section 952(c) of the 
1986 Code), and 
(C) the amount in the qualified excess loss account re-
ferred to in subsection (a) shall— 
(i) be reduced by the net amount of any such income, 
and 
(ii) be increased by the amount of any such income 
distributed directly or indirectly to the common parent 
described in subsection (a). 
(2) LIMITATION.—Paragraph (1) shall apply to any item of 
income only to the extent that the net amount of such income 
does not exceed the amount in the qualified excess loss account 
after being reduced under paragraph (IXC) for prior income. 
(3) BASIS ADJUSTMENTS NOT APPUCABLE.—To the extent para-
graph (1) applies to any item of income, there shall be no 
increase in basis under section 961(a) of such Code on account of 
such income (and there shall be no reduction in basis under 
102 STAT. 3714 
PUBLIC LAW 100-647—NOV. 10, 1988 
section 961(b) of such Code on account of an exclusion attrib-
utable to the inclusion of such income). 
(4) RECOGNITION OF GAIN.—For purposes of paragraph (1), if 
the foreign corporation referred to in subsection (a) transfers 
any property acquired by such foreign corporation in the trans-
action referred to in subsection (a) (or transfers any other 
property the bsisis of which is determined in whole or in part by 
reference to the basis of property so acquired) and (but for this 
paragraph) there is not full recognition of gain on such transfer, 
the excess (if any) of— 
(A) the fair market value of the property transferred, 
over 
(B) its adjusted basis, 
shall be treated as gain from the sale or exchange of such 
property and shall be recognized notwithstanding any other 
provision of law. Proper adjustment shall be made to the basis 
of any such property for gain recognized under the preceding 
sentence. 
(c) DEFINITIONS.—For purposes of this section— 
(1) COMMON PARENT.—The term "common parent" means the 
common parent of the affiliated group which included the 
domestic corporation referred to in subsection (aXD-
(2) QuAUFiED EXCESS LOSS ACCOUNT.—The term "qualified 
excess loss account" means any excess loss account (within the 
meaning of the consolidated return regulations) to the extent 
such account is attributable— 
(A) to taxable years beginning before January 1, 1988, 
and 
(B) to periods during which the domestic corporation was 
subject to an income tax of a foreign country on its income 
on a residence basis or without regard to whether such 
income is from sources in or outside of such foreign country. 
The amount of such account shall be determined as of imme-
diately after the transaction referred to in subsection (a) and 
without, except as provided in subsection (b), diminution for any 
future adjustment. 
(3) NET AMOUNT.—The net amount of any item of income is 
the amount of such income reduced by allocable deductions as 
determined under the rules of section 954(bX5) of the 1986 Code. 
(4) SECOND SAME COUNTRY CORPORATION MAY BE TREATED AS 
DOMESTIC CORPORATION IN CERTAIN CASES.—If— 
(A) another foreign corporation acquires from the 
common parent stock of the foreign corporation referred to 
in subsection (a) after the transaction referred to in subsec-
tion (a), 
(B) both of such foreign corporations are subject to the 
income tax of the same foreign country on a residence basis, 
and 
(C) such common parent complies with such reporting 
requirements as the Secretary of the Treasury or his dele-
gate may prescribe for purposes of this paragraph, 
such other foreign corporation shall be treated as a domestic 
corporation in determining whether the foreign corporation 
referred to in subsection (a) is a member of the affiliated group 
referred to in subsection (a) (and the rules of subsection (b) shall 
apply (i) to any gain of such other foreign corporation on any 
disposition of such stock, and (ii) to any other income of such 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3715 
other foreign corporation except to the extent it establishes to 
the satisfaction of the Secretary of the Treasury or his delegate 
that such income is not attributable to property acquired from 
the foreign corporation referred to in subsection (a)). 
SEC. 6127. ELECTION TO BE TREATED AS QUALIFIED ELECTING FUND TO 
BE MADE BY TAXPAYER. 
(a) GENERAL RULE.—Section 1295 of the 1986 Code (defining quali-
fied electing fund) is amended to read as follows: 
"SEC. 1295. QUALIFIED ELECTING FUND. 
"(a) GENERAL RULE.—For purposes of this part, any passive for-
eign investment company shall be treated as a qualified electing 
fund with respect to the taxpayer i
f
— 
"(1) an election by the taxpayer under subsection (b) applies to 
such company for the taxable year, and 
"(2) such company complies with such requirements as the 
Secretary may prescribe for purposes of— 
"(A) determining the ordinary earnings and net capital 
gain of such company, and 
"(B) otherwise carrying out the purposes of this subpart. 
"(b) ELECTION.— 
"(1) IN GENERAL.—A taxpayer may make an election under 
this subsection with respect to any passive foreign investment 
company for any taxable year of the taxpayer. Such an election, 
once made with respect to any company, shall apply to all 
subsequent taxable years of the taxpayer with respect to such 
company unless revoked by the taxpayer with the consent of the 
Secretary. 
"(2) WHEN MADE.—An election under this subsection may be 
made for any taxable year at any time on or before the due date 
(determined with regard to extensions) for filing the return of 
the tax imposed by this chapter for such taxable year. To the 
extent provided in regulations, such an election may be made 
later than as required in the preceding sentence where the 
taxpayer fails to make a timely election because the taxpayer 
reasonably believed that the company was not a passive foreign 
investment company." 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 1291(d) of the 1986 Code (as 
amended by title I) is amended by striking out "for each" in the 
material preceding subparagraph (A) and inserting in lieu 
thereof "with respect to the taxpayer for each". 
(2) Subparagraphs (AXi) and (BXi) of section 1291(dX2) of the 
1986 Code (as amended by title I) are each amended by striking 
out "for a taxable year" and inserting in lieu thereof "with 
respect to the taxpayer for a taxable year". 
(c) EFFECTIVE DATE.— 
26 use 1295 
(1) IN GENERAL.—The amendments made by this section shall 
note. 
take effect as if included in the amendments made by section 
1235 of the Reform Act. 
(2) TIME FOR MAKING ELECTION.—The period during which an 
election under section 1295(b) of the 1986 Code may be made 
shall in no event expire before the date 60 days after the date of 
the enactment of this Act. 
102 STAT. 3716 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 6128. TREATMENT OF CERTAIN UNITED STATES AFFILIATE OBLIGA-
TIONS. 
(a) GENERAL RULE.—Subparagraph (B) of section 127(g)(3) of the 
26 use 871 note. Tax Reform Act of 1984 is amended by inserting before the period at 
the end thereof the following: "as such principles are applied in 
Revenue Ruling 86-6, except that the maximum debt-to-equity ratio 
described in such Revenue Rulings shall be increased from 5-to-l to 
25-to-l". 
26 use 871 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years ending after the date of the enactment 
of this Act. 
SEC. 6129. TREATMENT OF CERTAIN INSURANCE BRANCHES OF FOREIGN 
CORPORATIONS. 
(a) GENERAL RULE.—Section 964 of the 1986 Code (relating to 
miscellaneous provisions) is amended by adding at the end thereof 
the following new subsection: 
"(d) TREATMENT OF CERTAIN BRANCHES.— 
"(1) IN GENERAL.—For purposes of this chapter, section 6038, 
section 6046, and such other provisions as may be specified in 
regulations— 
"(A) a qualified insurance branch of a controlled foreign 
corporation shall be treated as a separate foreign corpora-
tion created under the laws of the foreign country with 
respect to which such branch qualifies under paragraph (2), 
and 
"(B) except as provided in regulations, any amount di-
rectly or indirectly transferred or credited from such 
branch to one or more other accounts of such controlled 
foreign corporation shall be treated as a dividend paid to 
such controlled foreign corporation. 
"(2) QUALIFIED INSURANCE BRANCH.—For purposes of para-
graph (1), the term 'qualified insurance branch' means any 
branch of a controlled foreign corporation which is licensed and 
predominantly engaged on a permanent basis in the active 
conduct of an insurance business in a foreign country if^ 
"(A) separate books and accounts are maintained for such 
branch, 
"(B) the principal place of business of such branch is in 
such foreign country, 
"(C) such branch would be taxable under subchapter L if 
it were a separate domestic corporation, and 
"(D) an election under this paragraph applies to such 
branch. 
An election under this paragraph shall apply to the taxable 
year for which made and all subsequent taxable years unless 
revoked with the consent of the Secretary. 
"(3) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary or appropriate to carry out the 
purposes of this subsection." 
26 use 964 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years of foreign corporations beginning after 
December 31,1988. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3717 
SEC. 6130. TREATMENT OF CERTAIN INSTRUMENTS UNDER FOREIGN CUR-
RENCY RULES. 
(a) GENERAL RULE.—Clause (iii) of section 988(cXlXB) of the 1986 
Code (as amended by title I) is amended by striking out "unless such 
instrument would be marked to market under section 1256 if held 
on the last day of the taxable year". 
(b) SPECIAL RULES.—Paragraph (1) of section 988(c) of the 1986 
Code is amended by adding at the end thereof the following new 
subparagraphs: 
"(D) EXCEPTION FOR CERTAIN INSTRUMENTS MARKED TO 
MARKET.— 
"(i) IN GENERAL.—Clause (iii) of subparagraph (B) 
shall not apply to any regulated futures contract or 
nonequity option which would be marked to market 
under section 1256 if held on the last day of the taxable 
year, 
"(ii) ELECTION OUT.— 
"(I) IN GENERAL.—The taxpayer may elect to 
have clause (i) not apply to such taxpayer. Such an 
election shall apply to contracts held at any time 
during the taxable year for which such election is 
made or any succeeding taxable year unless such 
election is revoked with the consent of the 
Secretary. 
"(II) TIME FOR MAKING ELECTION.—Except as pro-
vided in regulations, an election under subclause 
(I) for any taxable year shall be made on or before 
the 1st day of such taxable year (or, if later, on or 
before the 1st day during such year on which the 
taxpayer holds a contract described in clause (i)). 
"(Ill) SPECIAL RULE FOR PARTNERSHIPS, ETC.—In 
the case of a partnership, an election under 
subclause (I) shall be made by each partner sepa-
rately. A similar rule shall apply in the case of an 
S corporation. 
"(iii) TREATMENT OF CERTAIN PARTNERSHIPS.—This 
subparagraph shall not apply to any income or loss of a 
partnership for any taxable year if such partnership 
made an election under subparagraph (EXiii)(V) for 
such year or any preceding year. 
"(E) SPECIAL RULES FOR CERTAIN FUNDS.— 
"(i) IN GENERAL.—In the case of a qualified fund, 
clause (iii) of subparagraph (B) shall not apply to any 
instnmient which would be marked to market under 
section 1256 if held on the last day of the taxable year 
(determined after the application of clause (iv)). 
"(ii) SPECIAL RULE WHERE ELECTING PARTNERSHIP DOES 
N
O
T QUALIFY.—If any partnership made an election 
under clause (iii)(V) for any taxable year and such 
partnership has a net loss for such year or any succeed-
ing year from instruments referred to in clause (i), the 
rules of clauses (i) and (iv) shall apply to any such loss 
year whether or not such partnership is a qualified 
fund for such year. 
102 STAT. 3718 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(iii) QuAUFiED FUND DEFINED.—For purposes of this 
subparagraph, the term 'qualiHed fund' means any 
partnership if— 
"(I) at all times during the taxable year (and 
during each preceding taxable year to which an 
election under subclause (V) applied), such partner-
ship has at least 20 partners and no single partner 
owns more than 20 percent of the interests in the 
capital or profits of the partnership, 
'(II) the principal activity of such partnership 
for such taxable year (and each such preceding 
taxable year) consists of bujdng and selling options, 
futures, or forwards with respect to commodities, 
"(III) at least 90 percent of the gross income of 
the partnership for the taxable year (and for each 
such preceding taxable year) consisted of income or 
gains described in subparagraph (A), (B), or (G) of 
section 7704(dXl) or gain from the sale or disposi-
tion of capital assets held for the production of 
interest or dividends, 
"(IV) no more than a de minimis amount of the 
gross income of the partnership for the taxable 
year (and each such preceding taxable year) was 
derived from bujdng and selling commodities, and 
"(V) an election under this subclause applies to 
the taxable year. 
An election under subclause (V) for any taxable year 
shall be made on or before the 1st day of such taxable 
year (or, if later, on or before the 1st day during such 
year on which the partnership holds an instrument 
referred to in clause (i)). Any such election shall apply 
to the taxable year for which made and all succeeding 
taxable years unless revoked with the consent of the 
Secretary, 
"(iv) TREATMENT OF CERTAIN CURRENCY CONTRACTS.— 
"(I) IN GENERAL.—Except as provided in regula-
tions, in the case of a qualified fund, any bank 
forward contract, any foreign currency futures con-
tract traded on a foreign exchange, or to the extent 
provided in regulations any similar instrument, 
which is not otherwise a section 1256 contract shall 
be treated as a section 1256 contract for purposes 
of section 1256. 
"(II) GAINS AND LOSSES TREATED AS SHORT-TERM.— 
In the case of any instrument treated as a section 
1256 contract under subclause (I), subparagraph 
(A) of section 1256(aX3) shall be applied by 
substituting '100 percent* for '40 percent' (and 
subparagraph (B) of such section shall not apply), 
"(v) SPECIAL RULES FOR CLAUSE (iii)(I).— 
"(I) CERTAIN GENERAL PARTNERS.—The interest of 
a general partner in the partnership shall not be 
treated as failing to meet the 20-percent ownership 
requirements of clause (iiiXD for any taxable year 
of the partnership if, for the taxable year of the 
partner in which such partnership taxable year 
ends, such partner (and each corporation filing a 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3719 
consolidated return with such partner) had no ordi-
nary income or loss from a section 988 transaction 
which is foreign currency gain or loss (as the case 
maybe). 
"(ID TREATMENT OF INCENTIVE COMPENSATION.— 
For purposes of clause (iiiXD, any income allocable 
to a general partner as incentive compensation 
based on profits rather than capital shall not be 
taken into account in determining such partner's 
interest in the profits of the partnership. 
"(Ill) TREATMENT OF TAX-EXEMPT PARTNERS.— 
Except as provided in regulations, the interest of a 
partner in the partnership shall not be treated as 
failing to meet the 20-percent ownership require-
ments of clause (iiiXD if none of the income of such 
partner from such partnership is subject to tax 
under this chapter (whether directly or through 1 
or more pass-thru entities). 
"(IV) LOOK-THRU RULE.—In determining whether 
the requirements of clause (iiiXI) are met with 
respect to any partnership, except to the extent 
provided in regulations, any interest in such part-
nership held by another partnership shall be 
treated as held proportionately by the partners in 
such other partnership, 
"(vi) OTHER SPECIAL RULES.—For purposes of this 
subparagraph— 
"(I) RELATED PERSONS.—Interests in the partner-
ship held by persons related to each other (within 
the meaning of sections 267(b) and 707(b)) shall be 
treated as held by 1 person. 
"(II) PREDECESSORS.—References to any partner-
ship shall include a reference to any predecessor 
thereof. 
"(Ill) INADVERTENT TERMINATIONS.—Rules simi-
lar to the rules of section 7704(e) shall apply. 
"(IV) 
TREATMENT 
OF 
CERTAIN 
DEBT 
INSTRUMENTS.—For purposes of clause (iiiXIV), any 
debt instrument which is a section 988 transaction 
shall be treated as a commodity." 
(c) AMENDMENT OF SECTION 1092(b).—Paragraph (2) of section 
1092(b) of the 1986 Code is amended by adding at the end thereof the 
following new subparagraph: 
"(D) TIMING AND CHARACTER AUTHORITY.—The regula-
tions prescribed under parsigraph (1) shall include regula-
tions relating to the timing and character of gains and 
losses in case of straddles where at least 1 position is 
ordinary and at least 1 position is capital." 
(d) EFFECTIVE DATE.— 
26 use 988 note. 
(1) IN GENERAL.—The amendments made by this section shall 
apply with respect to forward contracts, future contracts, op-
tions, and similar instruments entered into or acquired after 
October 21,1988. 
(2) TIME FOR MAKING ELECTION.—The time for making any 
election under subparagraph (D) or (E) of section 988(cXl) of the 
1986 Code shall not expire before the date 30 days after the date 
of the enactment of this Act. 
102 STAT. 3720 
PUBLIC LAW 100-647—NOV. 10, 1988 
(3) TRANSITIONAL RULES.— 
(A) The requirements of subclause (IV) of section 
988(cXlXEXiii) of the 1986 Code (as added by subsection Ot))) 
shall not apply to periods before the date of the enactment 
of this Act. 
(B) In the case of any partner in an existing partnership, 
the 20-percent ownership requirements of subclause (I) of 
such section 988(cXlXEXiii) shall be treated as met during 
any period during which such partner does not own a 
percentage interest in the capital or profits of such partner-
ship greater than 33^3 percent (or, if lower, the lowest such 
percentage interest of such partner during any prior period 
after October 21, 1988, during which such partnership is in 
existence). For purposes of the preceding sentence, the term 
"existing partnership" means any partnership if— 
(i) such partnership was in existence on October 21, 
1988, and principally engaged on such date in buying 
and selling options, futures, or forwards with respect to 
commodities, or 
(ii) a r^istration statement was filed with respect to 
such partnership with the Securities and Exchange 
Commission on or before such date and such r^istra-
tion statement indicated that the principal activity of 
such partnership will consist of buying and selling 
instruments referred to in clause (i). 
SEC 6131. TREATMENT OF INSURANCE COMPANIES UNDER CHAIN DEFI-
CIT RULE. 
(a) IN GENERAL.—Subparagraph (B) of section 952(cXl) of the 1986 
Code is amended by adding at the end thereof the following new 
clause: 
"(vii) SPECIAL RULES FOR INSURANCE INCOME.— 
"(D IN GENERAL.—An election may be made under this 
clause to have section 953(a) applied for purposes of this 
title without r^ard to the same country exception under 
paragraph (IXA) thereof. Such election, once made, may be 
revoked only with the consent of the Secretary. 
"(ID SPECIAL RULES FOR AFFILIATED GROUPS.—In the case 
of an affiliated group of corporations (within the meaning of 
section 1504 but without r^ard to section 1504(bX3) and by 
substituting 'more than 50 percent' for 'at least 80 percent' 
each place it appears), no election may be made under 
subclause (D for any controlled foreign corporation unless 
such election is made for all other controlled foreign cor-
porations who are members of such group and who were 
created or organized under the laws of the same country as 
such controlled foreign corporation. For purposes of clause 
(v), in determining whether any controlled corporation de-
scribed in the preceding sentence is a qualified insurance 
company, all such corporations shall be treated as 1 cor-
poration." 
26 use 952 note. 
(b) EFFBCTIVE DATE.—^The amendment made by this section shall 
take effect as if included in the amendments made by section 1221(f) 
of the Reform Act. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3721 
SEC. 6132. VIRGIN ISLANDS TREATED AS QUALIFIED BASIN COUNTRY. 
(a) IN GENERAL.—Subparagraph (B) of section 936(dX4) of the 1986 
Code is amended by inserting "and the Virgin Islands" after "sec-
tion 274(hX6XA)". 
OJ) EFFECTIVE DATE.—The amendment made by this section shall 
26 USC 936 note. 
apply to investments made after the date of the enactment of this 
Act. 
SEC. 6133. TREATMENT OF CERTAIN UNITED STATES OBLIGATIONS HELD 
BY POSSESSION BANKS. 
(a) IN GENERAL.—Subsection (e) of section 882 of the 1986 Code is 
amended— 
(1) by inserting "which is not portfolio interest (as defined in 
section 881(cX2))'^ before "shall", and 
(2) by striking out the last sentence thereof. 
(b) EXCLUSION FROM BRANCH PROFITS TAX.—Paragraph (2) of sec-
tion 884(d) of the 1986 Code is amended by striking out "or" at the 
end of subparagraph (C), by striking out the period at the end of 
subparagraph (D) and inserting in lieu thereof ", or" and by insert-
ing after subparagraph (D) the following new subparagraph: 
"(E) income treated as effectively connected with the conduct 
Business and 
of a trade or business within the United States under section 
industry. 
882(e)." 
(c) EFFECTIVE DATE.—The amendments made by this subsection 
26 USC 882 note. 
shall apply to taxable years beginning after December 31, 1988. 
SEC. 6134. TREATMENT OF CERTAIN GAMBLING WINNINGS RECEIVED BY 
NONRESIDENT ALIENS. 
(a) EXEMPTION FROM TAX.— 
(1) Section 871 of the 1986 Code (relating to tax on non-
resident alien individuals) is amended by redesignating subsec-
tion 0) as subsection (k) and by inserting after subsection (i) the 
following new subsection: 
"(j) EXEMPTION FOR CERTAIN GAMBUNG WINNINGS.—No tax shall 
be imposed under paragraph (IXA) of subsection (a) on the proceeds 
from a wager placed in any of the following games: blackjack, 
baccarat, craps, roulette, or big-6 wheel. The preceding sentence 
shall not apply in any case where the Secretary determines by 
regulation that the collection of the tax is administratively fea-
sible." 
(2) Subsection (c) of section 1441 of the 1986 Code is amended 
by adding at the end thereof the following new paragraph: 
"(11) CERTAIN GAMBUNG WINNINGS.—No tax shall be required 
to be deducted and withheld under subsection (a) from any 
amount exempt from the tax imposed by section 871(aXlXA) by 
reason of section 871(j)." 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
26 USC 871 note. 
shall take effect on the date of the enactment of this Act. 
SEC. 6135. ELECTION TO BE TREATED AS DOMESTIC CORPORATION. 
(a) IN GENERAL.—Section 953 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(d) ELECTION BY FOREIGN INSURANCE COMPANY To BE TREATED AS 
DOMESTIC CORPORATION.— 
"(1) IN GENERAL.—If— 
"(A) a foreign corporation is a controlled foreign corpora-
tion (as defined in section 957(a) by substituting 25 percent 
102 STAT. 3722 
PUBLIC LAW 100-647—NOV. 10, 1988 
or more' for 'more than 50 percent' and by using the 
definition of United States shareholder under 953(cXlXA)), 
"(B) such foreign corporation would qualify under part I 
or II of subchapter L for the taxable year if it were a 
domestic corporation, 
"(C) such foreign corporation meets such requirements as 
the Secretary shall prescribe to ensure that the taxes im-
posed by this chapter on such foreign corporation are paid, 
and 
"(D) such foreign corporation makes an election to have 
this paragraph apply and waives all benefits to such cor-
poration granted by the United States under any treaty, 
for purposes of this title, such corporation shall be treated as a 
domestic corporation. 
"(2) PERIOD DURING WHICH ELECTION IS IN EFFECT.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), an election under paragraph (1) shall apply to the 
taxable year for which made and all subsequent taxable 
years unless revoked with the consent of the Secretary. 
"(B) TERMINATION.—If a corporation which made an elec-
tion under pareigraph (1) for any taxable year fails to meet 
the requirements of subparagraphs (A), (B), and (C), of 
paragraph (1) for any subsequent taxable year, such elec-
tion shall not apply to any taxable year beginning after 
such subsequent taxable year. 
"(3) TREATMENT OF LOSSES.—If any corporation treated as a 
domestic corporation under this subsection is treated as a 
member of an affiliated group for purposes of chapter 6 (relating 
to consolidated returns), any loss of such corporation shall be 
treated as a dual consolidated loss (as defined in section 1503(d)). 
"(4) EFFECT OF ELECTION.— 
"(A) IN GENERAL.—For purposes of section 367, any for-
eign corporation making an election under paragraph (1) 
shall be treated as transferring (as of the 1st day of the 1st 
taxable year to which such election applies) all of its assets 
to a domestic corporation in connection with an exchange 
to which section 354 applies. 
"(B) 
EXCEPTION FOR PRE-1988 EARNINGS AND PROFIT.— 
"(i) IN GENERAL.—Earnings and profits of the foreign 
corporation accumulated in taxable years beginning 
before January 1, 1988, shall not be included in the 
gross income of the persons holding stock in such cor-
poration by reason of subparagraph (A). 
"(ii) TREATMENT OF DISTRIBUTIONS.—For purposes of 
this title, any distribution made by a corporation to 
which an election under paragraph (1) applies out of 
earnings and profits accumulated in taxable years 
beginning before January 1, 1988, shall be treated as a 
distribution made by a foreign corporation. 
"(iii) CERTAIN RULES TO CONTINUE TO APPLY TO PRE-
1988 EARNINGS.—The provisions specified in clause (iv) 
shall be applied without regard to paragraph (1), except 
that, in the case of a corporation to which an election 
under paragraph (1) applies, only earnings and profits 
accumulated in taxable years beginning before Janu-
ary 1,1988, shall be taken into account. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3723 
"(iv) SPECIFIED PROVISIONS.—The provisions specified 
in this clause are: 
"(I) Section 1248 (relating to gain from certain 
sales or exchanges of stock in certain foreign cor-
porations). 
"(11) Subpart F of part III of subchapter N to the 
extent such subpart relates to earnings invested in 
United States property or amounts referred to in 
clause (ii) or (iii) of section 951(a)(lXA). 
"(Ill) Section 884 to the extent the foreign cor-
poration reinvested 1987 earnings and profits in 
United States assets. 
"(5) EFFECT OF TERMINATION.—For purposes of section 367, 
if— 
"(A) an election is made by a corporation under para-
graph (1) for any taxable year, and 
"(B) such election ceases to apply for any subsequent 
taxable year, 
such corporation shall be treated as a domestic corporation 
transferring (as of the 1st day of such subsequent taxable year) 
all of its property to a foreign corporation in connection with gin 
exchange to which section 354 applies. 
"(6) ADDITIONAL TAX ON CORPORATION MAKING ELECTION.— 
"(A) IN GENERAL.—If a corporation makes an election 
under paragraph (1), the amount of tax imposed by this 
chapter for the 1st taxable year to which such election 
applies shall be increased by the amount determined under 
subparagraph (B). 
"(B) AMOUNT OF TAX.—The amount of tax determined 
under this paragraph shall be equal to the lesser of— 
"(i) % of 1 percent of the aggregate amount of capital 
and accumulated surplus of the corporation as of 
December 31,1987, or 
"(ii) $1,500,000." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 953 note. 
shall apply to taxable years beginning after December 31, 1987. 
SEC. 6136. TAX EXEMPTION FOR ENJEBI COMMUNITY TRUST FUND. 
48 USC 1681 
(a) IN GENERAL.—Any earnings on, and distributions from, the "° ® 
Enjebi Community Trust Fund created under section 103 of the 
Compact of Free Association Act of 1985 shall be exempt from all 
Federal, State, or local taxation. 
(b) EFFECTIVE DATE.—The provisions of subsection (a) shall apply 
to all taxable years whether beginning before, on, or after the date 
of the enactment of this Act. 
SEC. 6137. APPLICATION OF SECTION 912 TO JUDICIAL EMPLOYEES. 
(a) IN GENERAL.—Section 912(2) of the 1986 Code is amended by 
inserting "(or in the case of judicial officers or employees of the 
United States, in accordance with rules similar to such regulations)" 
after "President". 
0)) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 912 note. 
shall apply to allowances received after October 12, 1987, in taxable 
years ending after such date. 
102 STAT. 3724 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 6138. STUDY OF DEFINITION OF UNITED STATES RESIDENT. 
(a) IN GENERAL.—The Secretary of the Treasury or his delegate 
shall conduct a study of section 77010?) of the Internal Revenue Code 
of 1986, relating to the determination as to whether a person is a 
United States resident for purposes of Federal tax laws. Such study 
shall include an examination of— 
(1) the effect such determination has on Federal tax adminis-
tration and investment flows between the United States and 
other countries, 
(2) the coordination of such determination with any treaty 
obligations of the United States, 
(3) how such determination compares with the way such 
determination is made by our major trading partners, and 
(4) any estimated revenue gain or loss which would result 
from modifjdng such determination. 
Ot)) REPORT.—The Secretary of the Treasury or his delegate shall 
report before May 1, 1989, the results of the study conducted under 
subsection (a) to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives. 
SEC. 6139. SUNSET OF TREATY PROVISIONS. 
(a) IN GENERAL.—No provisions of the Tax Convention with the 
United Kingdom (on behalf of Bermuda) or the Tax Convention with 
Barbados, whether entered into on, before, or after the date of 
enactment of this Act shall prevent application of any provision of 
the Internal Revenue Code of 1986 imposing insurance excise taxes. 
In the case of a treaty entered into after the date of enactment of 
this Act, the preceding sentence shall not apply if such treaty by 
specific reference to this section of this Act clearly expresses the 
intent to override the provisions of this section. 
O
t
>
) SPECIAL RULE FOR CERTAIN TREATIES.—In the case of any treaty 
in effect on December 31, 1989, subsection (a) shall not apply to any 
premium allocable to insurance coverage for periods before Janu-
ary 1, 1990. 
48 use 1424c 
SEC. 6140. TREATMENT OF CERTAIN AWARDS BY THE DISTRICT COURT OF 
note. 
GUAM. 
For purposes of the internal revenue laws of the United States 
and Guam, gross income shall not include any amount received 
pursuant to any claim over which the District Court of Guam has 
jurisdiction by reason of section 204 of Public Law 95-134 (com-
monly referred to as the Omnibus Territories Act of 1977). This 
section shall be effective for taxable years beginning after Decem-
ber 31, 1985. 
Subtitle G—Estate Tax Provisions 
SEC. 6151. TREATMENT OF CERTAIN RENTS UNDER SECTION 2032A. 
(a) GENERAL RULE.—Subparagraph (A) of section 2032A(bX5) of the 
1986 Code (relating to special rules for surviving spouse) is amended 
by adding at the end thereof the following new sentence: "For 
purposes of subsection (c), such surviving spouse shall not be treated 
as failing to use such property in a qualified use solely because such 
spouse rents such property to a member of such spouse's family on a 
net cash basis." 
26 use 2032A 
0)) EFFECTIVE DATE.— 
note. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3725 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply with respect to rentals occurring after December 31, 
1976. 
(2) WAIVER OF STATUTE OF UMITATIONS.—If on the date of the 
enactment of this Act (or at any time within 1 year after such 
date of enactment) refund or credit of any overpayment of tax 
resulting from the application of the amendment made by 
subsection (a) is barred by any law or rule of law, refund or 
credit of such overpa5niient shall, nevertheless, be made or 
allowed if claim therefore is filed before the date 1 year after 
the date of the enactment of this Act. 
SEC. 6152. CLARIFICATION OF TREATMENT OF JOINT AND SURVIVOR 
ANNUITIES UNDER QTIP RULES. 
(a) ESTATE TAX.—Paragraph (7) of section 2056(b) of the 1986 Ckxie 
is amended by adding at the end thereof the following new subpara-
graph: 
"(C) TREATMENT OF SURVIVOR ANNUITIES.—In the case of 
an annuity where only the surviving spouse has the right to 
receive payments before the death of such surviving 
spouse— 
"(i) the interest of such surviving spouse shall be 
treated as a qualifying income interest for life, and 
"(ii) the executor shall be treated as having made an 
election under this subsection with respect to such 
annuity unless the executor otherwise elects on the 
return of tax imposed by section 2001. 
An election under clause (ii), once made, shall be irrev-
ocable " 
(b) GIFT TAX.—Subsection (f) of section 2523 of the 1986 Code is 
amended by adding at the end thereof the following new paragraph: 
"(6) TREATMENT OF JOINT AND SURVIVOR ANNUITIES.—In the 
case of a joint and survivor annuity where only the donor 
spouse and donee spouse have the right to receive payments 
before the death of the last spouse to die— 
"(A) the donee spouse's interest shall be treated as a 
qualifying income interest for life, 
"(B) the donor spouse shall be treated as having made an 
election under this subsection with respect to such suinuity 
unless the donor spouse otherwise elects on or before the 
date specified in paragraph (4XA), 
"(C) paragraph (5) and section 2519 shall not apply to the 
donor spouse's interest in the annuity, and 
"(D) if the donee spouse dies before the donor spouse, no 
amount shall be includible in the gross estate of the donee 
spouse under section 2044 with respect to such £mnuity. 
An election under subparagraph (B), once made, shall be irrev-
ocable." 
(c) EFFECTIVE DATES.— 
26 use 2056 
(1) IN GENERAL.—Except as otherwise provided in this subsec- note. 
tion— 
(A) the amendment made by subsection (a) shall apply 
with respect to decedents dying after December 31, 1981, 
and 
(B) the amendment made by subsection (b) shall apply to 
transfers after December 31,1981. 
102 STAT. 3726 
PUBLIC LAW 100-647—NOV. 10, 1988 
(2) NOT TO APPLY TO EXTENT INCONSISTENT WITH PRIOR 
RETURN.—In the case of any estate or gift tax return filed before 
the date of the enactment of this Act, the amendments made by 
this section shall not apply to the extent such amendments 
would be inconsistent with the treatment of the annuity on such 
return unless the executor or donor (as the case may be) other-
wise elects under this paragraph before the day 2 years after 
the date of the enactment of this Act. 
(3) EXTENSION OF TIME FOR ELECTION OUT.—The time for 
making an election under section 2056(bX7XCXii) or 2523(fK6XB) 
of the 1986 Code (as added by this subsection) shall not expire 
before the day 2 years after the date of the enactment of this 
Act (and, if such election is made within the time permitted 
under this paragraph, the requirement of such section 
2056(bX7XCXii) that it be made on the return shall not apply). 
Subtitle H—Tax-Exempt Bond Provisions 
SEC. 6176. CLARIFICATION OF SMALL ISSUE BOND DEFINITION OF MANU-
FACTURING FACILITY. 
(a) IN GENERAL.—Subparagraph (C) of section 144(aX12) of the 
1986 Oxie (defining manufacturing facility) is amended by adding at 
the end thereof the following new sentence: "For purposes of the 1st 
sentence of this subparagraph, the term 'manufacturing facility* 
includes facilities which are directly related and ancillary to a 
manufacturing facility (determined without regard to this sentence) 
if— 
"(i) such facilities are located on the same site as the 
manufacturing facility, and 
"(ii) not more than 25 percent of the net proceeds of 
the issue are used to provide such facilities." 
26 use 144 note. 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to bonds issued after the date of the enactment of 
this Act. 
(2) REFUNDINGS.—The amendment made by subsection (a) 
shall not apply to any bond issued to refund (or which is part of 
a series of bonds issued to refund) a bond issued on or before the 
date of the enactment of this Act if— 
(A) the average maturity date of the issue of which the 
refunding bond is a part is not later than the average 
maturity date of the bonds to be refunded by such issue, 
and 
(B) the amount of the refunding bond does not exceed the 
outstanding amount of the refunded bond. 
For purposes of subparagraph (A), average maturity shall be 
determined in accordance with section 147(b) of the 1986 (Dode. 
SEC. 6177. RULES APPLICABLE TO TAX AND REVENUE ANTICIPATION 
BONDS. 
(a) CHANGE IN PERIOD USED TO DETERMINE CUMULATIVE CASH FLOW 
DEFICIT.—Subclause (III) of section 148(fX4XBXiii) of the 1986 Code 
(relating to safe harbor for determining when proceeds of tax and 
revenue anticipation bonds are expended) is amended by striking 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3727 
out "the earliest of the maturity date of the issue, the date 6 months 
after such date of issuance," and inserting in lieu thereof "the 
earlier of the date 6 months softer such date of issuance." 
(b) DUE DATE FOR LAST INSTALLMENT OF ARBITRAGE REBATE.—Para-
graph (3) of section 148(f) of the 1986 Code is amended by adding at 
the end thereof the following new sentence: "In the case of a tax and 
revenue anticipation bond, the last installment shall not be required 
to be made before the date 8 months after the date of issuance of the 
issue of which the bond is a part." 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
26 use 148 note. 
apply to bonds issued after the date of the enactment of this Act. 
SEC 6178. AMENDMENT TO MORTGAGE BOND PURCHASE PRICE REGULA-
TIONS. 
The Secretary of the Treasury or his del^ate shall amend the 
r^ulations relating to mortgage bond purchase price requirements, 
with respect to any lease with a remaining term of at least 35 years 
and a specified ground rent for at least the first 10 years of such 
term but not for the entire term, to provide for a capitalized value of 
such lease equal to the present value of the current ground rent 
projected over the remaining term of the lease and discounted at 3 
percent or such other discount rate as the Secretary establishes. If 
such amendment is not made before the date of the enactment of 
this Act, such r^ulations shall be considered to include such 
amendment with respect to bonds issued after such date. 
SEC 6179. APPLICATION OF SECURITY INTEREST TEST TO BOND FINANC- 
26 USC 141 note. 
ING OF HAZARDOUS WASTE CLEAN-UP ACTIVITIES. 
Before January 1, 1989, the Secretary of the Treasury or his 
del^;ate shall issue guidance concerning the application of the 
private security or payment test under section 141(bX2) of the 
Internal Revenue Code of 1986 to tax-exempt bond financing by 
State and local governments of hazardous waste clean-up activities 
conducted by such governments where some of the activities occur 
on privately owned land. 
SEC 6180. TAX-EXEMPT FINANCING FOR CERTAIN RAIL FACILITIES. 
(a) IN GENERAL.—Subsection (a) of section 142 of the 1986 Code 
(relating to exempt facility bonds) is amended— 
(1) by striking out "or" at tjhe end of paragraph (9), 
(2) by striking out the period at the end of paragraph (10) and 
inserting in lieu thereof ", or", and 
(3) by adding at the end thereof the following new paragraph: 
"(11) high-speed intercity rail facilities." 
(b) DEFINITION AND SPECIAL RULES FOR HIGH-SPEED INTERCITY RAIL 
FACILITIES.— 
(1) IN GENERAL.—Section 142 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(i) HIGH-SPEED INTERCITY RAIL FACILITIES.— 
"(1) For purposes of subsection (aXll), the term 'high-speed 
intercity rsul facilities' means any facility (not including rolling 
stock) for the fixed guideway rail transportation of passengers 
and their baggage between metropolitan statistical areas 
(within the meaning of section 143(kX2)(B)) using vehicles that 
are reasonably expected to operate at speeds in excess of 150 
miles per hour between scheduled stops, but only if such facility 
102 STAT. 3728 
PUBLIC LAW 100-647—NOV. 10, 1988 
will be made available to members of the general public as 
passengers. 
"(2) ELECTION BY NONGOVERNMENTAL OWNERS.—A facility 
shall be treated as described in subsection (aXU) only if any 
owner of such facility which is not a governmental unit irrev-
ocably elects not to claim— 
"(A) any deduction under section 167 or 168, and 
"(B) any credit under this subtitle, 
with respect to the property to be financed by the net proceeds 
of the issue. 
"(3) USE OF PROCEEDS.—A bond issued as part of an issue 
described in subsection (aXU) shall not be considered an exempt 
facility bond unless any proceeds not used within a 3-year 
period of the date of the issuance of such bond are used (not 
later than 6 months after the close of such period) to redeem 
bonds which are part of such issue." 
(2) USE OF FACILITIES.—Subsection (c) of section 142 of the 1986 
Code (relating to special rules for airport, docks and wharves, 
and mass commuting facilities) is amended— 
(A) by striking out "paragraph (1), (2), or (3) of subsection 
(a)" each place it appears in paragraphs (1) and (2) thereof 
and inserting in lieu thereof "paragraph (1), (2), (3) or (11) of 
subsection (a)", and 
(B) by striking out "AND MASS COMMUTING FACILITIES" in 
the heading thereof and inserting in lieu thereof "MASS 
COMMUTING FACIUTIES AND HIGH-SPEED INTERCITY RAIL 
FACIUTIES". 
(3) PARTIAL EXCLUSION FROM VOLUME CAP.—Subsection (g) of 
section 146 of the 1986 Code (relating to an exception for certain 
bonds) is amended— 
(A) by striking out "and" at the end of paragraph (2), 
(B) by striking out the period at the end of paragraph (3) 
and inserting in lieu thereof ", and", and 
(C) by addmg at the end thereof the following new para-
graph: 
"(3) 75 percent of any exempt facility bond issued as part of 
an issue described in paragraph (11) of section 142(a) (relating to 
high-speed intercity rail facilities)." 
(4) LIMITATION REMOVED ON USE OF BOND PROCEEDS FOR LAND 
ACQUISITION.—Paragraph (3) of section 147(c) of the 1986 Code 
(relating to limitation on use for land acquisition) is amended by 
inserting "high-speed intercity rsiil facility" after 
"mass 
commuting facility" each place it appears. 
(5) SPECIAL RULE FOR PUBUC APPROVAL.—Paragraph (3) of 
section 147(f) of the 1986 (Dode (relating to public approval 
required for private activity bonds) is amended— 
(A) by inserting "or high-speed intercity rail facilities" 
after "airport" each place it appears, and 
(B) by inserting "OR HIGH-SPEED INTERCITY RAIL FACIU-
TIES" after "AIRPORTS" in the heading thereof. 
26 use 142 note. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to bonds issued after the date of enactment of this Act. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3729 
SEC. 6181. RULES RELATING TO REBATE ON EARNINGS ON BONA FIDE 
DEBT SERVICE FUND. 
(a) No REBATE WHERE EARNINGS DO NOT EXCEED $100,000.— 
Clause (ii) of section 148(fX4XA) of the 1986 Code is amended by 
striking "unless the issuer otherwise elects,". 
OJ) $100,000 LIMIT NOT TO APPLY TO CERTAIN ISSUES.—Subpara-
graph (A) of section 148(f)(4) of the 1986 Code is amended by adding 
at the end thereof the following new sentence: 
"In the case of an issue no bond of which is a private 
activity bond, clause (ii) shall be applied without regard to 
the dollar limitation therein if the average maturity of the 
issue (determined in accordance with section 147(bX2XA)) is 
at least 5 years and the rates of interest on bonds which are 
part of the issue do not vary during the term of the issue." 
(c) EFFECTIVE DATE; SPECIAL RULES.— 
26 use 148 note. 
(1) IN GENERAL.—The amendments made by this section shall 
apply to bonds issued after the date of the enactment of this 
Act. 
(2) ELECTION FOR OUTSTANDING BONDS.—Any issue of bonds 
other than private activity bonds outstanding as of the date of 
the enactment of this Act shall be allowed a 1-time election to 
apply the amendments made by subsection (b) to amounts 
deposited after such date in bona fide debt service funds of such 
bonds. 
(3) DEFINITION OF PRIVATE ACTIVITY BOND.—For purposes of 
this section and the last sentence of section 148(fK4XA) of the 
1986 Code (as added by subsection Ot))), the term 'private activity 
bond' shall include any qualified 501(cX3) bond (as defined 
under section 145 of the 1986 Code). 
SEC. 6182. BONDS ISSUED BY VOLUNTEER FIRE DEPARTMENTS. 
(a) OVERLAPPING AREAS.—Paragraph (2) of section 150(e) of the 
1986 Code (relating to bonds of certain volunteer fire departments) is 
amended by adding at the end thereof the following new sentence: 
"For purposes of subparagraph (A), other firefighting services 
provided in an area shall be disregarded in determining 
whether an organization is a qualified volunteer fire depart-
ment if such other firefighting services are provided by a quali-
fied volunteer fire department (determined with the application 
of this sentence) and such organization and the provider of such 
other services have been continuously providing firefighting 
services to such area since January 1,1981." 
O
t
>
) ACQUISITION OF LAND PERMITTED.—Subparagraph (B) of section 
150(eXl) of the 1986 Code is amended by inserting "(including land 
which is functionally related and subordinate thereto)" after "a 
firehouse". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC150 note. 
apply to bonds issued after the date of the enactment of this Act. 
SEC. 6183. DISREGARD OF POOLED FINANCINGS IN DETERMINATION OF 
QUALIFICATION FOR SMALL ISSUER EXCEPTION. 
(a) GENERAL.—Clause (ii) of section 148(fX4XC) of the 1986 Code (as 
amended by title I of this Act) is amended by redesignating 
subclauses (II) and (III) as subclauses (III) and (IV), respectively, and 
by inserting after subclause (I) the following new subclause: 
"(II) all bonds issued by a governmental unit on 
behalf of other governmental units with genergd 
102 STAT. 3730 
PUBLIC LAW 100-647—NOV. 10, 1988 
taxing powers not subordinate to such unit shall, 
for purposes of applying such subclause to such 
unit, be treated as not issued by such unit,". 
26 use 148 note. 
0)) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to bonds issued after December 31,1988. 
Subtitle I—Provisions Relating to Exempt 
Organizations 
26 use 513 note. SEC. 6201. CERTAIN GAMES OF CHANCE NOT TREATED AS UNRELATED 
TRADE OR BUSINESS. 
Section 1834 of the Reform Act is amended by adding at the end 
thereof the following new sentence: "The amendment made by this 
section shall apply to games of chance conducted after October 22, 
1986, in taxable years ending after such date". 
SEC. 6202. PURCHASE OF INSURANCE BY COOPERATIVE HOSPITAL SERV-
ICE ORGANIZATIONS. 
(a) IN GENERAL.—Subparagraph (A) of section 501(eXl) of the 1986 
Code is amended by inserting "(including the purchasing of insur-
ance on a group basis)" after "purchasing". 
26 use 501 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to purchases before, on, or after the date of the enact-
ment of this Act. 
26 use 501 note. 
SEC. 6203. CANCELLATION OF CERTAIN DEBTS ORIGINATED BY OR 
GUARANTEED BY THE UNITED STATES NOT TAKEN INTO AC-
COUNT IN DETERMINING TAX EXEMPT STATUS OF CERTAIN 
ORGANIZATIONS. 
Subparagraph (A) of section 501(cX12) of the 1986 Code shall be 
applied without taking into account any income attributable to the 
cancellation of any loan originally made or guaranteed by the 
United States (or any agency or instrumentality thereof) if such 
cancellation occurs after 1986 and before 1990. 
26 use 4940 
SEC. 6204. DETERMINATION OF OPERATING FOUNDATION STATUS FOR 
note. 
CERTAIN PURPOSES. 
For purposes of section 302(cX3) of the Deficit Reduction Act of 
1984, a private foundation which constituted an operating founda-
tion (as defined in section 4942(jX3) of the Internal Revenue Code of 
1986) for its last taxable year ending before January 1,1983, shall be 
treated as constituting an operating foundation as of January 1, 
1983. 
Omnibus 
Subtitle J—Taxpayer Rights and Procedures 
Taxpayer 
Bill of Rights. 
26 use 1 note. 
SEC. 6226. SHORT TITLE. 
This subtitle may be cited as the "Omnibus Taxpayer Bill of 
Rights". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3731 
PART I—TAXPAYER RIGHTS 
SEC. 6227. DISCLOSURE OF RIGHTS OF TAXPAYERS. 
26 USC 7801 
(a) IN GENERAL.—^The Secretary of the Treasury shall, as soon as 
practicable, but not later than 180 days after the date of the 
enactment of this Act, prepare a statement which sets forth in 
simple and nontechnical terms— 
(1) the rights of a taxpayer and the obligations of the Internal 
Revenue Service (hereinsdEter in this section referred to as the 
"Service") during an audit; 
(2) the procedures by which a taxpayer may appeal any 
adverse decision of the Service (including administrative and 
judicial appeals); 
(3) the procedures for prosecuting refund claims and filing of 
taxpayer complaints; and 
(4) the procedures which the Service may use in enforcing the 
internal revenue laws (including assessment, jeopardy assess-
ment, levy and distraint, and enforcement of liens). 
(b) TRANSMISSION TO Ck>iofrrTEES OF CONGRESS.—The Secretary of 
the Treasury shall transmit drafts of the statement required under 
subsection (a) (or proposed revisions of any such statement) to the 
Conmiittee on Ways and Means of the House of Representatives, the 
Committee on Finance of the Senate, and the Joint Committee on 
Taxation on the same day. 
(c) DISTRIBUTION.—^The statement prepared in accordance vdth 
subsections (a) and (b) shall be distributed by the Secretary of the 
Treasury to all taxpayers the Secretary contacts with respect to the 
determination or collection of any tax (other than by providing tax 
forms). The Secretary shall take such actions as the Secretary deems 
necessary to ensure that such distribution does not result in mul-
tiple statements being sent to any one taxpayer. 
SEC. 6228. PROCEDURES INVOLVING TAXPAYER INTERVIEWS. 
(a) IN GENERAL.—Chapter 77 of the 1986 Code (relating to mis-
cellaneous provisions) is amended by adding at the end thereof the 
following new section: 
'^EC. 7520. PROCEDURES INVOLVING TAXPAYER INTERVIEWS. 
"(a) RBOORDING OP INTERVIEWS.— 
"(1) RECORDING BY TAXPAYER.—^Any ofKcer or employee of the 
Internal Revenue Service in connection with any in-person 
interview with any taxpayer relating to the determination or 
collection of any tax shall, upon advance request of such tax-
payer, allow the taxpayer to make an audio recording of such 
interview at the taxpayer's own expense and with the tax-
payer's own equipment. 
(2) RECORDING BY nts OFFICER OR EMPLOYEE.—^An officer or 
employee of the Internal Revenue Service may record any 
interview described in paragraph (1) if such officer or 
employee— 
"(A) informs the taxpayer of such recording prior to the 
interview, and 
"(B) upon request of the taxpayer, provides the taxpayer 
with a transcript or copy of such recording but only if the 
taxpayer provides reimbursement for the cost of the tran-
scription and reproduction of such transcript or copy. 
"(b) SAFEGUARDS.— 
102 STAT. 3732 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) EXPLANATIONS OF PROCESSES.—^An officer or employee of 
the Internal Revenue Service shall before or at an initial inter-
view provide to the taxpayer— 
"(A) in the case of an in-person interview with the tax-
payer relating to the determination of any tax, an expla-
nation of the audit process and the taxpayer's rights under 
such process, or 
"(B) in the case of an in-person interview with the tax-
payer relating to the collection of any tax, an explanation of 
the collection process and the taxpayer's rights imder such 
process. 
"(2) RIGHT OF CONSULTATION.—If the taxpayer clearly states to 
an officer or employee of the Internal Revenue Service at any 
time during any interview (other than an interview iriitiated by 
an administrative summons issued under subchapter A of chap-
ter 78) that the taxpayer wishes to consult with an attorney, 
certified public accountant, enrolled agent, enrolled actuary, or 
any other person permitted to represent the taxpayer before the 
Internal Revenue Service, such officer or employee shall sus-
pend such interview r^ardless of whether the taxpayer may 
have answered one or more questions. 
"(c) REPRESENTATIVES HOLDING POWER OF ATTORNEY.—^Any attor-
ney, certified public accountant, enrolled agent, enrolled actuary, or 
any other person permitted to represent the taxpayer before the 
Internal Revenue Service who is not disbarred or suspended from 
practice before the Internal Revenue Service and who has a written 
power of attorney executed by the taxpayer may be authorized by 
such taxpayer to represent the taxpayer in any interview described 
in subsection (a). An officer or employee of the Internal Revenue 
Service may not require a taxpayer to accompany the representative 
in the absence of an administrative summons issued to the taxpayer 
under subchapter A of chapter 78. Such an officer or employee, with 
the consent of the immediate supervisor of such officer or employee, 
may notify the taxpayer directly that such officer or employee 
believes such representative is responsible for unreasonable delay or 
hindrance of an Internal Revenue Service examination or investiga-
tion of the taxpayer. 
"(d) SECTION NOT TO APPLY TO CERTAIN INVESTIGATIONS.—^This 
section shall not apply to criminal investigations or investigations 
relating to the int^rity of any officer or employee of the Internal 
Revenue Service." 
26 u s e 7605 
(b) REGULATIONS WiTH RESPBCT TO TiME AND P L A C E OF EXAMINA-
note. 
TiON.—^TTie Secretary of the Treasury or the Secretary's del^ate 
shall issue r^ulations to implement subsection (a) of section 7605 of 
the 1986 Code (relating to time and place of examination) within 
1 year after the date of the enactment of this Act. 
(c) CLERICAL AMENDMENT.—^The table of sections for chapter 77 of 
the 1986 Code is amended by adding at the end thereof the following 
new item: 
"Sec. 7520. Procedures involving taxpayer interviews." 
26 use 7520 
(d) E
^
F
F
B
C
T
i
V
E DATE.—^The amendments made by subsections (a) 
note. 
and (c) shall apply to interviews conducted on or after the date 
which is 90 days after the date of the enactment of this Act 
PUBLIC LAW 100-647—NOV. 10, 1988 
^^— 
102 STAT. 3733 
SEC. 6229. TAXPAYERS MAY RELY ON WRITTEN ADVICE OF INTERNAL 
REVENUE SERVICE. 
(a) IN GENERAL.—Section 6404 of the 1986 Code (relating to abate-
ments) is amended by adding at the end thereof the following new 
subsection: 
"(f) ABATEMENT OF ANY PENALTY OR ADDITION TO TAX ATTRIB-
UTABLE T
O ERRONEOUS WRITTEN ADVICE BY THE INTERNAL REVENUE 
SERVICE.— 
"(1) IN GENERAL.—The Secretary shall abate any portion of 
any penalty or addition to tax attributable to erroneous advice 
furnished to the taxpayer in writing by an officer or em-
ployee of the Internal Revenue Service, acting in such officer's 
or employee's official capacity. 
"(2) LIMITATIONS.—Paragraph (1) shall apply only if— 
"(A) the written advice was reasonably relied upon by the 
taxpayer and was in response to a specific written request 
of the taxpayer, and 
"(B) the portion of the penalty or addition to tax did not 
result from a failure by the taxpayer to provide adequate or 
accurate information. 
"(3) INITIAL REGULATIONS.—Within 180 days after the date of 
the enactment of this subsection, the Secretary shall prescribe 
such initial regulations as may be necessary to carry out this 
subsection." 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26USC6404 
shsdl apply with respect to advice requested on or after January 1, note. 
1989. 
SEC. 6230. TAXPAYER ASSISTANCE ORDERS. 
(a) IN GENERAL.—Subchapter A of chapter 80 of the 1986 Code 
(relating to general rules for application of the internal revenue 
laws) is amended by adding at the end thereof the following new 
section: 
"SEC. 7811. TAXPAYER ASSISTANCE ORDERS. 
"(a) AUTHORITY TO ISSUE.—Upon application filed by a taxpayer Regulations. 
with the Office of Ombudsman (in such form, manner, and at such 
time as the Secretary shall by regulations prescribe), the Ombuds-
man may issue a Taxpayer Assistmice Order if, in the determination 
of the Ombudsman, the taxpayer is suffering or about to suffer a 
significant hardship as a result of the manner in which the internal 
revenue laws are being administered by the Secretary. 
"(b) TERMS OF A TAXPAYER ASSISTANCE ORDER.—The terms of a 
Taxpayer Assistance Order may require the Secretary— 
"(1) to release property of the taxpayer levied upon, or 
"(2) to cease any action, or refrain from taking any action, 
with respect to the taxpayer under— 
"(A) chapter 64 (relating to collection), 
"(B) subchapter B of chapter 70 (relating to bankruptcy 
and receiverships), 
"(C) chapter 78 (relating to discovery of liability and 
enforcement of title), or 
"(D) any other provision of law which is specifically 
described by the Ombudsman in such order. 
"(c) AUTHORITY TO MODIFY OR RESCIND.—Any Teixpayer Assist-
ance Order issued by the Ombudsman under this section may be 
modified or rescinded only by the Ombudsman, a district director, a 
102 STAT. 3734 
PUBLIC LAW 100-647—NOV. 10, 1988 
service center director, a compliance center director, a regional 
director of appeals, or any superior of any such person. 
"(d) SUSPENSION OP RUNNING OF PERIOD OF LIBOTATION.—^The 
running of any period of limitation with respect to any action 
described in subsection (b) shall be suspended for— 
"(1) the period beginning on the date of the taxpayer's ap-
plication under subsection (a) and ending on the date of the 
Ombudsman's decision with respect to such application, and 
"(2) any period specified by the Ombudsman in a Taxpayer 
Assistance Order issued pursuant to such application. 
"(e) INDEPENDENT ACTION OF OicBUDSiifAN.—Nothing in this sec-
tion shall prevent the Ombudsman from taking any action in the 
absence of an application under subsection (a). 
"(f) OiiBUDSBCAN.—For purposes of this section, the term 'Ombuds-
man' includes any designee of the Ombudsman." 
(b) (CLERICAL AMENDBIENT.—^The table of sections for subchapter A 
of chapter 80 of the 1986 Code is amended by adding at the end 
thereof the following new item: 
"Sec. 7811. Taxpayer Assistance Orders." 
26 use 7811 
(c) ISSUANCE OF REGULATIONS.—^The Secretary of the Treasury or 
note. 
the Secretary's del^ate shall issue such r^ulations as the Sec-
retary deems necessary within 90 days of the date of the enactment 
of th^ Act in order to carry out the purposes of section 7811 of the 
1986 Oxie (as added by this section) and to ensure taxpayers uniform 
access to administrative procedures. 
26 use 7811 
(d) EFFECTIVE DATE.—^The amendments made by this section shall 
note. 
take effect on January 1,1989. 
26 use 7803 
SEC 6231. BASIS FOR EVALUATION OF INTERNAL REVENUE SERVICE 
note. 
EMPLOYEES. 
(a) IN GENERAL.—^The Internal Revenue Service shall not use 
records of tax enforcement results— 
(1) to evaluate employees directly involved in collection activi-
ties and their immediate supervisors, or 
(2) to impose or surest production quotas or goals with 
respect to individuals described in clause (i). 
Q
>
) APPUCATION OF IRS POUCY STATEMENT.—The Internal Reve-
nue Service shall not be treated as failing to meet the requirements 
of subsection (a) if the Service follows the policy statement of the 
Service r^arding employee evaluation (as in effect on the date of 
the enactment of this Act) in a manner which does not violate 
subsection (a). 
(c) CERTIFICATION.—^Each district director shall certify quarterly 
by letter to the Commissioner of Internal Revenue that tax enforce-
ment results are not used in a manner prohibited by subsection (a). 
(d) EFFECTIVE DATE.—^The provisions of this section shall apply to 
evaluations conducted on or after January 1,1989. 
SEC. 6232. PROCEDURES RELATING TO INTERNAL REVENUE SERVICE 
REGULATIONS. 
(a) IN GENERAL.—Section 7805 of the 1986 Code (relating to rules 
and r^ulations) is amended by adding at the end thereof the 
following new subsections: 
"(e) TraiPORART REGULATIONS.— 
"(1) ISSUANCE.—^Any 
temporary 
regulation issued by the Sec-
retsiiy shall also be issued as a proposed regulation. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3735 
"(2) 3-YEAR DURATION.—Any temporary regulation shall 
expire within 3 years after the date of issuance of such regula-
tion. 
"(f) 
IMPACT OF REGULATIONS ON SMALL BUSINESS REVIEWED.— 
After the publication of any proposed regulation by the Secretary 
and before the promulgation of any final regulation by the Secretary 
which does not supersede a proposed regulation, the Secretary shall 
submit such regulation to the Administrator of the Small Business 
Administration for comment on the impact of such regulation on 
small business. The Administrator shall have 4 weeks from the date 
of submission to respond." 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 7805 
apply to any regulation issued after the date which is 10 days after 
note, 
the date of the enactment of this Act. 
SEC. 6233. CONTENT OF TAX DUE, DEFICIENCY, AND OTHER NOTICES. 
(a) IN GENERAL.—Chapter 77 of the 1986 Code (relating to mis-
cellaneous provisions) is further amended by adding at the end 
thereof the following new section: 
"SEC. 7521. CONTENT OF TAX DUE, DEFICIENCY, AND OTHER NOTICES. 
"(a) GENERAL RULE.—Any notice to which this section applies 
shall describe the basis for, and identify the amounts (if any) of, the 
tax due, interest, additional amounts, additions to the tax, and 
Eissessable penalties included in such notice. An inadequate descrip-
tion under the preceding sentence shall not invalidate such notice. 
"(b) NOTICES TO WHICH SECTION APPUES.—This section shall apply 
to— 
"(1) any tax due notice or deficiency notice described in 
section 6155, 6212, or 6303, 
"(2) any notice generated out of any information return 
matching program, and 
"(3) the 1st letter of proposed deficiency which allows the 
taxpayer an opportunity for administrative review in the In-
ternal Revenue Service Office of Appeals." 
(b) CLERICAL AMENDMENT.—The table of sections for chapter 77 of 
the 1986 Code is further amended by adding at the end thereof the 
following new item: 
"Sec. 7521. Content of tax due, deficiency, and other notices." 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 7521 
apply to mailings made on or after January 1,1990. 
note. 
(d) REPORT.—Not later than July 1, 1989, the Secretary of the 
Treasury or his delegate shall submit a report to the Committee on 
Ways and Mesms of the House of Representatives and the Commit-
tee on Finance of the Senate on the steps taken to carry out the 
amendments made by this section. 
SEC. 6234. INSTALLMENT PAYMENT OF TAX LIABILITY. 
(a) IN GENERAL.—Subchapter A of chapter 62 of the 1986 Code 
(relating to place and due date for pa3mient of tax) is amended by 
adding at the end thereof the following new section: 
"SEC. 6159. AGREEMENTS FOR PAYMENT OF TAX LIABILITY IN INSTALL-
MENTS. 
"(a) 
AUTHORIZATION OF AGREEMENTS.—The Secretary is 
au-
thorized to enter into written agreements with any taxpayer under 
which such taxpayer is allowed to satisfy liability for pa3rment of 
102 STAT. 3736 
PUBLIC LAW 100-647—NOV. 10, 1988 
any tax in installment payments if the Secretary determines that 
such agreement will facilitate collection of such liahility. 
"(b) EXTENT TO WHICH AGREEMENTS REMAIN IN EFFECT.— 
"(1) IN GENERAL.—^Except as otherwise provided in this 
subsection, any agreement entered into by the Secretary under 
subsection (a) shall remain in efiTect for the term of the agree-
ment. 
"(2) INADEQUATE INFORMATION OR JEOPARDY.—^The Secretary 
may terminate any agreement entered into by the Secretary 
under subsection (a) if— 
"(A) information which the taxpayer provided to the 
Secretary prior to the date such agreement was entered 
into was inaccurate or incomplete, or 
"(B) the Secretary believes that collection of any tax to 
which an agreement under this section relates is in jeop-
ardy. 
"(3) SUBSEQUENT CHANGE IN FINANCIAL CONDITIONS.— 
"(A) IN GENERAL.—If the Secretary makes a determina-
tion that the financial condition of a taxpayer with whom 
the Secretary has entered into an agreement under subsec-
tion (a) has significantly changed, the Secretary may alter, 
modify, or terminate such agreement. 
"(B) NOTICE.—^Action may be taken by the Secretary 
under subparagraph (A) only if— 
"(i) notice of such determination is provided to the 
taxpayer no later than 30 days prior to the date of such 
action, and 
"(ii) such notice includes the reasons why the Sec-
retary believes a significant change in the financial 
conation of the taxpayer has occurred. 
"(4) FAILURE TO PAT AN INSTALLMENT OR ANY OTHER TAX 
LIABILITY WHEN DUB OR TO PROVIDE REQUESTED FINANCIAL 
INFORMATION.—^The Secretary may alter, modify, or terminate 
an agreement entered into by the Secretary under subsection (a) 
in the case of the failure of the taxpayer— 
"(A) to pay any installment at the time such installment 
payment is due under such agreement, 
"(B) to pay any other tax liability at the time such 
liability is due, or 
"
(
C
O to provide a financial condition update as requested 
by tiie SeCTetary." 
(b) CJONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 66010)) of the 1986 Code (relating 
to last day prescribed for payment) is amended by inserting "or 
any installment agreement entered into under section 6159" 
after "time for payment". 
(2) The table of sections for subchapter A of chapter 62 of the 
1986 Code is amended by adding at the end thereof the following 
new item: 
"Sec. 6159. Agreements for payment of tax liability in installments." 
26 use 6159 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
note. 
apply to agreements entered into after the date of the enactment of 
this Act. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3737 
SEC. 6235. ASSISTANT COMMISSIONER FOR TAXPAYER SERVICES. 
(a) IN GENERAL.—Section 7802 of the 1986 Code (relating to 
Commissioner of Revenue; Assistant Commissioner (Employee Plans 
and Exempt Organizations) is amended by adding at the end thereof 
the following new subsection: 
"(c) ASSISTANT COMMISSIONER (TAXPAYER SERVICES).—There is Establishment. 
established within the Internal Revenue Service an office to be 
known as the 'Office for Taxpayer Services' to be under the super-
vision and direction of an Assistant Commissioner of the Internal 
Revenue. The Assistant Commissioner shall be responsible for tax-
payer services such as telephone, walk-in, and taxpayer educational 
services, and the design and production of tax and informational 
forms." 
(b) ANNUAL REPORTS TO CONGRESS.—The Assistant Commissioner 
26 use 7802 
(Taxpayer Services) and the Taxpayer Ombudsman for the Internal note. 
Revenue Service shall jointly make an annual report regarding the 
quality of taxpayer services provided. Such report shall be made to 
the Committee on Finance of the Senate and the Committee on 
Ways and Means of the House of Representatives. 
(c) EFFECTIVE DATE.—The amendment made by subsection (a) shall 
26 use 7802 
teike effect on the date 180 days after the date of the enactment of note. 
this Act. 
PART II—LEVY AND LIEN PROVISIONS 
SEC. 6236. LEVY AND DISTRAINT. 
(a) NOTICE.—Section 6331(d) of the 1986 Code (relating to levy and 
distraint) is amended— 
(1) by striking out "10 days" in paragraph (2) and inserting in 
lieu thereof "30 days", 
(2) by striking out " 10-DAY REQUIREMENT" in the heading of 
paragraph (2) and inserting in lieu thereof "30-DAY REQUIRE-
MENT", and 
(3) by adding at the end thereof the following new paragraph: 
"(4) INFORMATION INCLUDED WITH NOTICE.—The notice re-
quired under parEigraph (1) shall include a brief statement 
which sets forth in simple and nontechnical terms— 
"(A) the provisions of this title relating to levy and sale of 
property, 
"(B) the procedures applicable to the levy and sale of 
property under this title, 
"(C) the administrative appeals available to the taxpayer 
with respect to such levy and sale and the procedures 
relating to such appeals, 
"(D) the alternatives available to taxpayers which could 
prevent levy on the property (including installment agree-
ments under section 6159), 
"(E) the provisions of this title relating to redemption of 
property and release of liens on property, and 
"(F) the procedures applicable to the redemption of prop-
erty and the release of a lien on property under this title." 
(b) EFFECT OF LEVY ON SALARY AND WAGES.— 
(1) IN GENERAL.—Subsection (e) of section 6331 of the 1986 
Code (relating to levy and distraint) is amended to read as 
follows: 
102 STAT. 3738 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(e) CONTINUING LEVY ON SALARY AND WAGES.—The effect of a 
levy on salaxy or wages payable to or received by a taxpayer shall be 
continuous from the date such levy is first made until such levy is 
released under section 6343." 
(2) CROSS REFERENCE.—Section 6331(f) of the 1986 Code (relate 
ing to cross references) is amended by adding at the end thereof 
the following new i>aragraph: 
"(3) For release and notice of release of levy, see section 6343." 
(c) INCREASE IN AMOUNTS OF (CERTAIN PROPERTY EXEBIFT FROM 
LEVY.— 
(1) FUEL, PROVISIONS, FURNITURE, PERSONAL EFFECTS.—^Para-
graph (2) of section 6334(a) of the 1986 Code (relating to property 
exempt from levy) is amended by striking out "$1,500" and 
inserting in lieu thereof "$1,650 ($1,550 in the case of levies 
issued during 1989)". 
(2) BOOKS AND TOOI^.—Pai^agraph (3) of section 6334(a) of the 
1986 Code is amended by striking out "$1,000" and inserting in 
lieu thereof "$1,100 ($1,050 in the case of levies issued during 
1989)". 
(3) WAGES, SALARY, AND OTHER INCOME.— 
(A) INCREASE IN AMOUNT EXEMPT.—Paragraph (1) of sec-
tion 6334(d) of the 1986 Code (relating to exempt amount of 
wages, salary, or other income) is amended to read as 
follows: 
"(1) INDIVIDUALS ON WEEKLY BASIS.—In the case of an individ-
ual who is paid or receives all of his wages, salary, and other 
income on a weekly basis, the amount of the wages, salary, and 
other income payable to or received by him during any week 
which is exempt from levy under subsection (aX9) shall be the 
exempt amount." 
(B) EIXEMPT AMOUNT DEFINED.—Subsection (d) of section 
6334 of the 1986 Code (relating to property exempt fix)m 
levy) is amended by redesignating paragraph (2) as para-
graph (3) and by inserting after paragraph (1) the following 
new paragraph: 
"(2) ExEiiCPT AMOUNT.—^For purposes of paragraph (1), the 
term 'exempt amount' means an amount equal to— 
"(A) the sum of— 
"(i) the standard deduction, and 
"(ii) the aggr^ate amount of the deductions for per-
sonal exemptions allowed the taxpayer under section 
151 in the taxable year in which such levy occurs, 
divided by 
"(B) 52. 
Unless the taxpayer submits to the Secretary a written and 
properly verified statement specifying the facts necessary to 
determine the proper amount under subparagraph (A), subpara-
graph (A) shall be applied as if the taxpayer were a married 
individual filing a separate return with only 1 personal exemp-
tion." 
(4) ADDITIONAL PROPERTY EXEMPT FROM LEVY.— 
(A) IN GENERAL.—Subsection (a) of section 6334 of the 
1986 Code (relating to property exempt from levy) is 
amended by adding at the end thereof the following new 
paragraphs: 
'-^"f-$^i.', 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3739 
"(11) CERTAIN PUBUC ASSISTANCE PAYMENTS.—Any amount 
payable to an individual as a recipient of public assistance 
under— 
"(A) title IV (relating to aid to families with dependent 
children) or title XVI (relating to supplemental security 
income for the aged, blind, and disabled) of the Social 
Security Act, or 
"(B) State or local government public assistance or public 
welfare programs for which eligibility is determined by a 
needs or income test. 
"(12) 
ASSISTANCE UNDER JOB TRAINING PARTNERSHIP ACT.— 
Any amount payable to a participant under the Job Training 
Partnership Act (29 U.S.C. 1501 et seq.) from funds appropriated 
pursuant to such Act. 
"(13) 
PRINCIPAL RESIDENCE EXEMPT IN ABSENCE OF CERTAIN 
APPROVAL O
R JEOPARDY.—Except to the extent provided in 
subsection (e), the principal residence of the taxpayer (within 
the meaning of section 1034)." 
(B) LEVY PERMITTED ON PRINCIPAL RESIDENCE IN CASE OF 
JEOPARDY OR APPROVAL BY CERTAIN OFFICIALS.—Section 6334 
of the 1986 Code is amended by adding at the end thereof 
the following new subsection: 
"(e) LEVY ALLOWED ON PRINCIPAL RESIDENCE IN CASE OF JEOPARDY 
O
R CERTAIN APPROVAL.—Property described in subsection (aX13) 
shall not be exempt from levy if— 
"(1) a district director or sissistant district director of the 
Internal Revenue Service personally approves (in writing) the 
levy of such property, or 
(2) the Secretary finds that the collection of tax is in 
jeopardy." 
(d) UNECONOMICAL LEVY; LEVY ON APPEARANCE DATE OF SUM-
MONS.—Section 6331 of the 1986 Code (relating to levy and distraint) 
is amended by redesignating subsection (f) as subsection (h) and by 
inserting after subsection (e) the following new subsections: 
"(f) UNECONOMICAL LEVY.—No levy may be made on any property 
if the amount of the expenses which the Secretary estimates (at the 
time of levy) would be incurred by the Secretary with respect to the 
levy and sale of such property exceeds the fair market value of such 
property at the time of levy. 
"(g) LEVY ON APPEARANCE DATE OF SUMMONS.— 
"(1) IN GENERAL.—No levy may be made on the property of 
any person on any day on which such person (or officer or 
employee of such person) is required to appear in response to a 
summons issued by the Secretary for the purpose of collecting 
any underpayment of tax. 
"(2) No APPUCATION IN CASE OF JEOPARDY.—This subsection 
shall not apply if the Secretary finds that the collection of tax is 
in jeopardy.' 
(e) SURRENDER OF BANK ACCOUNTS SUBJECT TO LEVY ONLY AFTER 
21 DAYS.— 
(1) IN GENERAL.—Section 6332 of the 1986 Code (relating to 
surrender of property subject to levy), as amended by title I of 
this Act is amended by redesignating subsections (c), (d), and (e) 
as subsections (d), (e), and (f), respectively, and by inserting after 
subsection (b) the following new subsection: 
"(c) SPECIAL RULE FOR BANKS.—Any bank (as defined in section 
408(n)) shall surrender (subject to an attachment or execution under 
> 
102 STAT. 3740 
PUBLIC LAW 100-647—NOV. 10, 1988 
judicial process) any deposits (including interest thereon) in such 
bank only after 21 days after service of levy." 
(2) CONFORMING AMENDMENTS.— 
(A) Subsection (a) of section 6332 of the 1986 Code is 
amended by striking out "subsection (b)" and inserting in 
lieu thereof "subsections (b) and (c)", 
(B) Subsection (e) of section 6332 of the 1986 Code, as 
redesignated by paragraph (1), is amended by striking out 
"subsection (cXD' and inserting in lieu thereof "subsection 
(dXl)". 
(f) RELEASE OP LEVY.—Subsection (a) of section 6343 of the 1986 
Code (relating to release of levy) is amended to read as follows: 
"(a) RELEASE OP LEVY AND NOTICE OF RELEASE.— 
"(1) IN GENERAL.—Under r^ulations prescribed by the Sec-
retary, the Secretary shall release the levy upon all, or part of, 
the property or rights to property levied upon and shall 
promptly notify the person upon whom such levy was made (if 
any) that such levy has been released if— 
"(A) the liability for which such levy was made is satis-
fied or becomes unenforceable by reason of lapse of time, 
"(B) release of such levy will facihtate the collection of 
such liability, 
"(C) the taxpayer has entered into an agreement under 
section 6159 to satisfy such liability by means of install-
ment pajrments, unless such agreement provides otherwise, 
"(D) the Secretary has determined that such levy is creat-
ing an economic hardship due to the financial condition of 
the taxpayer, or 
"(E) the fair market value of the property exceeds such 
liability and release of the levy on a part of such property 
could be made without hindering the collection of such 
liability. 
For purposes of subparagraph (C), the Secretary is not required 
to release such levy if such release would jeopardize the secured 
creditor status of the Secretary. 
"(2) ExPEDfFED DETERMINATION O
N CERTAIN BUSINESS PROP-
E
R
T
Y
.
—
^
I
n the case of any tangible personal property essential in 
carrying on the trade or business of the taxpayer, the Secretary 
shall provide for an expedited determination under paragraph 
(1) if levy on such tangible personal property would prevent the 
taxpayer from carrying on such trade or business. 
"(3) SUBSEQUENT LEVY.—^The release of levy on any property 
under paragraph (1) shall not prevent any subsequent levy on 
such property.' 
(g) RIGHT OF TAXPAYER TO REQUEST THAT SEIZED PROPERTY BE 
SOLD WITHIN 60 DAYS.—Section 6335 of the 1986 Code (relating to 
sale of seized property) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the following new 
subsection: 
"(f) RIGHT TO REQUEST SALE OF SEIZED PROPERTY WITHIN 60 
DAYS.—^The owner of any property seized by levy may request that 
the Secretary sell such property within 60 days after such request 
(or within such longer period as may be specified by the owner). The 
Secretary shall comply with such request unless the Secretary 
determines (and notifies the owner within such period) that such 
compliance would not be in the best interests of the United States." 
26 use 6331 
(h) EFFECTIVE DATE.— 
note. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3741 
(1) IN GENERAL.—The amendments made by this section 
(other than subsection (g)) shall apply to levies issued on or after 
July 1,1989. 
(2) SUBSECTION (g).—The amendment made by subsection (g) 
shall apply to requests made on or after January 1, 1989. 
SEC. 6237. REVIEW OF JEOPARDY LEVY AND ASSESSMENT PROCEDURES. 
(a) IN GENERAL.—Subsection (aXD of section 7429 of the 1986 Code 
(relating to review of jeopardy assessment procedures) is amended— 
(1) by inserting "or levy is made under section 6331(a) less 
than 30 days after notice and demand for payment is made 
under section 6331(a)," after "6862,", and 
(2) by inserting "or levy" after "such assessment". 
(b) ADMINISTRATIVE DETERMINATIONS.—Paragraph (3) of section 
7429(a) of the 1986 Code (relating to redetermination by the Sec-
retary) is amended to read as follows: 
"(3) REDETERMINATION BY SECRETARY.—After a request for 
review is made under paragraph (2), the Secretary shall deter-
mine— 
"(A) whether or not— 
"(i) the making of the assessment under section 6851, 
6861, or 6862, as the case may be, is reasonable under 
the circumstances, and 
"(ii) the amount so assessed or demanded as a result 
of the action taken under section 6851, 6861, or 6862 is 
appropriate under the circumstances, or 
"(B) whether or not the levy described in subsection (aXD 
is reasonable under the circumstances." 
(c) TAX COURT REVIEW JURISDICTION.—Subsection (b) of section 
7429 of the 1986 Code is amended to read as follows: 
"(b) JUDICIAL REVIEW.— 
"(1) PROCEEDINGS PERMITTED.—Within 90 days after the 
earlier of— 
"(A) the day the Secretary notifies the taxpayer of the 
Secretary's determination described in subsection (aX3), or 
"(B) the 16th day after the request described in subsection 
(aX2) was made, 
the taxpayer may bring a civil action against the United States 
for a determination under this subsection in the court with 
jurisdiction determined under paragraph (2). 
"(2) JURISDICTION FOR DETERMINATION.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the district courts of the United States shall have 
exclusive jurisdiction over any civil action for a determina-
tion under this subsection. 
"(B) TAX COURT.—If a petition for a redetermination of a 
deficiency under section 6213(a) has been timely filed with 
the Tax Court before the making of an assessment or levy 
that is subject to the review procedures of this section, and 
1 or more of the taxes and taxable periods before the Tax 
Court because of such petition is also included in the writ-
ten statement that is provided to the taxpayer under 
subsection (a), then the Tax Court also shall have jurisdic-
tion over any civil action for a determination under this 
subsection with respect to all the taxes and taxable periods 
included in such written statement. 
102 STAT. 3742 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(3) DETERMINATION BY COURT.—Within 20 days after a 
proceeding is commenced under paragraph (1), the court shall 
determine— 
"(A) whether or not— 
"(i) the making of the assessment under section 6851, 
6861, or 6862, as the case may be, is reasonable under 
the circumstances, and 
"(ii) the amount so assessed or demanded as a result 
of the action taken under section 6851, 6861, or 6862 is 
appropriate under the circumstances, or 
"(B) whether or not the levy described in subsection (aXD 
is reasonable under the circumstances. 
If the court determines that proper service was not made on the 
United States or on the Secretary, as may be appropriate, 
within 5 days after the date of the commencement of the 
proceeding, then the running of the 20-day period set forth in 
the preceding sentence shall not begin before the day on which 
proper service was made on the United States or on the Sec-
retary, as may be appropriate. 
"(4) ORDER OF COURT.—If the court determines that the 
making of such levy is unreasonable, that the making of such 
assessment is unreasonable, or that the amount assessed or 
demanded is inappropriate, then the court may order the Sec-
retary to release such levy, to abate such assessment, to redeter-
mine (in whole or in part) the amount assessed or demanded, or 
to take such other action as the court finds appropriate." 
(d) VENUE.—Section 7429(e) of the 1986 Code (relating to venue) is 
amended to read as follows: 
"(e) VENUE.— 
"(1) DISTRICT COURT.—A civil action in a district court under 
subsection (b) shall be commenced only in the judicial district 
described in section 1402(a) (1) or (2) of title 28, United States 
Code. 
"(2) TRANSFER OF ACTIONS.—If a civil action is filed under 
subsection (b) with the Tax Court and such court finds that 
there is want of jurisdiction because of the jurisdiction provi-
sions of subsection (bX2), then the Tax Court shall, if such court 
determines it is in the interest of justice, transfer the civil 
action to the district court in which the action could have been 
brought at the time such action was filed. Any civil action so 
transferred shall proceed as if such action had been filed in the 
district court to which such action is transferred on the date on 
which such action was actually filed in the Tax Court from 
which such action is transferred." 
(e) CONFORMING AMENDMENTS.— 
(1) Section 7429(c) of the 1986 Code (relating to extension of 
20-day period where taxpayer so requests) and section 7429(f) 
(relating to finality of determination) are amended by striking 
out "district" each place it appears. 
(2) Section 7429(g) of the 1986 Code (relating to burden of 
proof) is amended— 
(A) by inserting "the making of a levy described in 
subsection (aXl) or after "whether" in paragraph (1), 
C
B
) by striking out "TERMINATION" in the heading of 
paragraph (1) and inserting in lieu thereof "LEVY, TERMI-
NATION, , and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3743 
(C) by striking out "an action" and inserting in lieu 
thereof "a proceeding" in paragraphs (1) and (2). 
(3) The heading of section 7429 of the 1986 Code is amended by 
inserting "LEVY OR" after "JEOPARDY". 
(4) The table of sections for subchapter B of chapter 76 of the 
1986 Code is amended by inserting "levy or" after "jeopardy" in 
the item relating to section 7429. 
(f) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 7429 
apply to jeopardy levies issued and assessments made on or after note. 
July 1,1989. 
SEC. 6238. ADMINISTRATIVE APPEAL OF LIENS. 
(a) 
ESTABUSHMENT OF ADMINISTRATIVE APPEAL FOR DISPUTED 
LIENS.—Subchapter C of chapter 64 of the 1986 Code (relating to lien 
for taxes) is amended by redesignating section 6326 as section 6327 
and inserting after section 6325 the following new section: 
"SEC. 6326. ADMINISTRATIVE APPEAL OF LIENS. 
"(a) IN GENERAL.—In such form and at such time as the Secretary Regulations, 
shall prescribe by regulations, any person shall be allowed to appeal 
to the Secretary after the filing of a notice of a lien under this 
subchapter on the property or the rights to property of such person 
for a release of such lien alleging an error in the filing of the notice 
of such lien. 
"(b) CERTIFICATE OF RELEASE.—If the Secretary determines that 
the filing of the notice of any lien was erroneous, the Secretary shall 
expeditiously (and, to the extent practicable, within 14 days after 
such determination) issue a certificate of release of such lien and 
shall include in such certificate a statement that such filing was 
erroneous." 
(b) REGULATIONS.—The Secretary of the Treasury or the Sec- 26USC6326 
retary's delegate shall prescribe the regulations necessary to imple- note. 
ment the administrative appeal provided for in the amendment 
made by subsection (a) within 180 days after the date of the enact-
ment of this Act. 
(c) CLERICAL AMENDMENT.—The table of sections for subchapter C 
of chapter 64 of the 1986 Code is amended by striking out the item 
relating to section 6326 and inserting in lieu thereof the following: 
"Sec. 6326. Administrative appeal of liens. 
"Sec. 6327. Cross references.' 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 6326 
take effect on the date which is 60 days after the date regulations note. 
are issued under subsection (b). 
PART 
III—PROCEEDINGS 
BY 
TAXPAYERS 
SEC. 6239. AWARDING OF COSTS AND CERTAIN FEES IN ADMINISTRATIVE 
AND COURT PROCEEDINGS. 
(a) IN GENERAL.—Section 7430 of the 1986 Code is amended to read 
as follows: 
"SEC. 7430. AWARDING OF COSTS AND CERTAIN FEES. 
"(a) IN GENERAL.—In any administrative or court proceeding 
which is brought by or against the United States in connection with 
the determination, collection, or refund of any tax, interest, or 
penalty under this title, the prevailing party may be awarded a 
judgment or a settlement for— 
102 STAT. 3744 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(1) reasonable administrative costs incurred in connection 
with such administrative proceeding within the Internal Reve-
nue Service, and 
"(2) reasonable litigation costs incurred in connection with 
such court proceeding. 
"(b) LIMITATIONS.— 
"(1) 
REQUIREMENT 
THAT 
ADMINISTRATIVE 
REMEDIES 
BE 
EXHAUSTED.—^A judgment for reasonable litigation costs shall 
not be awarded under subsection (a) in any court proceeding 
unless the court determines that the prevailing party has 
exhausted the administrative remedies available to such party 
within the Internal Revenue Service. 
"(2) ONLY COSTS ALLOCABLE TO THE UNITED STATES.—An award 
under subsection (a) shall be made only for reasonable litigation 
and administrative costs which are allocable to the United 
States and not to any other party. 
"(3) EIxcLusiON OF DECLARATORY JUDGMENT PROCEEDINGS.— 
"(A) IN GENERAL.—No award for reasonable litigation 
costs may be made under subsection (a) with respect to any 
declaratory judgment proceeding. 
"(B) 
EXCEPTION FOR SECTION 501(CX3) DETERMINATION 
REVOCATION PROCEEDINGS.—Subparagraph (A) shall not 
apply to any proceeding which involves the revocation of a 
determination that the organization is described in section 
501(cX3). 
"(4) 
COSTS DENIED WHERE PARTY PREVAILING PROTRACTS 
PROCEEDINGS.—^No award for reasonable litigation and adminis-
trative costs may be made under subsection (a) with respect to 
any portion of the administrative or court proceeding during 
which the prevailing party has unreasonably protracted such 
proceeding. 
"(c) DEFINITIONS.—For purposes of this section— 
"(1) REASONABLE LITIGATION COSTS.—The term 'reasonable 
litigation costs' includes— 
"(A) reasonable court costs, and 
"(B) based upon prevailing market rates for the kind or 
quality of services furnished— 
"(i) the reasonable expenses of expert witnesses in 
connection with a court proceeding, except that no 
expert witness shall be compensated at a rate in excess 
of the highest rate of compensation for expert wit-
nesses paid by the United States, 
"(ii) the reasonable cost of any study, analysis, 
engineering report, test, or project which is found by 
the court to be necessary for the preparation of the 
party's case, and 
"(iii) reasonable fees paid or incurred for the services 
of attorneys in connection with the court proceeding, 
except that such fees shall not be in excess of $75 per 
hour unless the court determines that an increase in 
the cost of living or a special factor, such as the limited 
availability of qualified attorneys for such proceeding, 
justifies a higher rate. 
"(2) REASONABLE ADMINISTRATIVE COSTS.—The term 'reason-
able administrative costs' means— 
"(A) any administrative fees or similar charges imposed 
by the Internal Revenue Service, and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3745 
"(B) expenses, costs, and fees described in paragraph 
(IXB), except that any determination made by the court 
under clause (ii) or (iii) thereof shall be made by the 
Internal Revenue Service in cases where the determination 
under paragraph (4XB) of the awarding of reasonable 
administrative costs is made by the Internal Revenue Serv-
ice. 
Such term shall only include costs incurred on or after the 
earUer of (i) the date of the receipt 1^ the taxpayer of the notice 
of the decision of the Internal Revenue Service Office of 
Appeals, or (ii) the date of the notice of deficiency. 
"(3) ATTORNEY'S FEES.—^For purposes of paragraphs (1) and (2), 
fees for the services of an individual (whether or not an attor-
ney) who is authorized to practice before the Tax Court or 
before the Internal Revenue Service shall be treated as fees for 
the services of an attorney. 
"(4) PREVAILING PARTY.— 
"(A) IN GENERAL.—^The term 'prevailing psuty' means any 
party in any proceeding to which subjection (a) applies 
(other than the United States or any creditor of the tax-
payer involved)— 
"(i) which establishes that the position of the United 
States in the proceeding was not substantially justified, 
"(ii) which— 
"(I) has substantially prevailed with respect to 
the amount in controversy, or 
"dD has substantially prevailed with respect to 
the most significant issue or set of issues presented, 
and 
"(iii) which meets the requirements of the 1st sen-
tence of section 2412(dXlXB) of title 28, United States 
Code (as in effect on October 22, 1986) except to the 
extent differing procedures are established by rule of 
court and meets the requirements of section 
2412(dX2XB) of such title 28 (as so in effect). 
"(B) DETEmiaNATION AS TO PREVAILING PARTY.—Any 
determination under subparagraph (A) as to whether a 
party is a prevailing party shall be inade by agreement of 
the parties or— 
"(i) in the case where the final determination with 
respect to the tax, interest, or penalty is made at the 
administrative level, by the Internal Revenue Service, 
or 
"(ii) in the case where such final determination is 
made by a court, the court 
"(5) ADMINISTRATIVE PROCEEDINGS.—^The term 'administrative 
proceeding* means any procedure or other action before the 
Internal Revenue Service. 
"(6) COURT PROCEEDINGS.—^The term 'court proceeding' means 
any civil action brought in a court of the United States (includ-
ing the Tax Court and the United States Claims Court). 
(7) POSITION OP UNITED STATES.—The term 'position of the 
United States' means— 
"(A) the position taken by the United States in a judicial 
proceeding to which subsection (a) applies, and 
"(B) the position taken in an administrative proceeding to 
which subsection (a) applies as of the earlier o
f
— 
102 STAT. 3746 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(i) the date of the receipt by the taxpayer of the 
notice of the decision of the Internal Revenue Service 
Office of Appeals, or 
"(ii) the date of the notice of deficiency. 
"(d) SPEXHAL RULES FOR PAYMENT OP COSTS.— 
"(1) REASONABLE 
ADMINISTRATIVE COSTS.—^An award for 
reasonable administrative costs shall be payable out of funds 
appropriated under section 1304 of title 31, United States Code. 
"(2) REASONABLE LITIGATION COSTS.—^An award for reasonable 
litigation costs shall be payable in the case of the Tax Court in 
the same maimer as such an award by a district court. 
"(e) MULTIPLE ACTIONS.—For purposes of this section, in the case 
of— 
"(1) multiple actions which could have been joined or consoli-
dated, or 
"(2) a case or cases involving a return or returns of the same 
taxpayer (including joint returns of married individuals) which 
could have been joined in a single court proceeding in the same 
court, 
such actions or cases shall be treated as 1 court proceeding r^ard-
less of whether such joinder or consolidation actually occurs, unless 
the court in which such action is brought determines, in its discre-
tion, that it would be inappropriate to treat such actions or cases as 
joined or consolidated. 
"(f) RIGHT OP APPEAL.— 
"(1) COURT PROCEEDINGS.—^An order granting or denying (in 
whole or in part) an award for reasonable litigation or adminis-
trative costs under subsection (a) in a court proceeding, may be 
incorporated as a part of the decision or judgment in the court 
proceeding and shall be subject to appeal in t£e same manner as 
the decision or judgment. 
"(2) ADMINISTRATIVE PROCEEDINGS.—^A decision granting or 
denying (in whole or in part) an award for reasonable adminis-
trative costs under subsection (a) by the Internal Revenue 
Service shall be subject to appeal to the Tax Court under rules 
similar to the rules under section 7463 (without r^ard to the 
amount in dispute)." 
(b) CONFORMING AMENDMENT.—Section 504 of title 5, United 
States Code, is amended by adding at the end thereof the following 
new subsection: 
"(f) No award may be made under this section for costs, fees, or 
other expenses which may be awarded under section 7430 of the 
Internal Revenue Code of 1986." 
(c) CLERICAL AMENDMENT.—^The table of sections for subchapter B 
of chapter 76 of the 1986 Code is amended by striking out "court" in 
the item relating to section 7430. 
26 use 7430 
(d) EFFECTIVE DATE.—^The amendments made by this section shall 
note. 
apply to proceedings commencing after the date of the enactment of 
this Act. 
SEC «240. CIVIL CAUSE OF ACTION FOR DAMAGES SUSTAINED DUE TO 
FAILURE TO RELEASE LIEN. 
(a) IN GENERAL.—Subchapter B of chapter 76 of the 1986 Code 
(relating to proceedings by taxpayers and third parties) is amended 
by redesignating section 7432 as section 7433 and by inserting after 
section 7431 the following new section: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3747 
"SEC. 7432. CIVIL DAMAGES FOR FAILURE TO RELEASE LIEN. 
"(a) IN GENERAL.—If any officer or employee of the Internal 
Revenue Service knowingly, or by reason of negligence, fails to 
release a lien under section 6325 on property of the taxpayer, such 
taxpayer may bring a civil action for damages against the United 
States in a district court of the United States. 
"(b) DAMAGES.—In any action brought under subsection (a), upon 
a finding of liability on the part of the defendant, the defendant 
shall be liable to the plaintiff in an amount equal to the sum of— 
"(1) actual, direct economic damages sustained by the plaintiff 
which, but for the actions of the defendant, would not have been 
sustained, plus 
"(2) the costs of the action. 
"(c) PAYMENT AUTHORITY.—Claims pursuant to this section shall 
be payable out of funds appropriated under section 1304 of title 31, 
United States Code. 
"(d) LIMITATIONS.— 
"(1) 
REQUIREMENT 
THAT 
ADMINISTRATIVE 
REMEDIES 
BE 
EXHAUSTED.—A judgment for damages shall not be awarded 
under subsection (b) unless the court determines that the plain-
tiff has exhausted the administrative remedies available to such 
plaintiff within the Internal Revenue Service. 
"(2) MITIGATION OP DAMAGES.—The amount of damages 
awarded under subsection (bXD shall be reduced by the amount 
of such damages which could have reasonably been mitigated by 
the plaintiff. 
"(3) 
PERIOD FOR BRINGING ACTION.—Notwithstanding 
any 
other provision of law, an action to enforce liability created 
under this section may be brought without regard to the 
amount in controversy and may be brought only within 2 years 
after the date the right of action accrues. 
"(e) NOTICE OP FAILURE TO RELEASE LIEN.—The Secretary shall by Regulations. 
r^ulation prescribe reasonable procedures for a taxpayer to notify 
the Secretary of the failure to release a lien under section 6325 on 
property of the taxpayer." 
"(b) CLERICAL AMENDMENT.—The table of sections for subchapter 
B of chapter 76 of the 1986 (Dode is amended by striking out the item 
relatmg to section 7432 and inserting in lieu thereof the following 
new items: 
"Sec. 7432. CivU damages for failure to release lien. 
"Sec. 7433. Cross references." 
(c) EPPECTIVE DATE.—The amendments made by this section shall 
26 use 7432 
apply to notices provided by the taxpayer of the failure to release a note. 
lien, and damages arising, after December 31,1988. 
SEC. 6241. CIVIL CAUSE OF ACTION FOR DAMAGES SUSTAINED DUE TO 
CERTAIN UNAUTHORIZED ACTIONS BY INTERNAL REVENUE 
SERVICE. 
(a) IN GENERAL.—Subchapter B of chapter 76 of the 1986 Code 
(relating to proceedings by taxpayers and third parties) is further 
amended by redesignating section 7433 as section 7434 and by 
inserting after section 7432 the following new section: 
102 STAT. 3748 
PUBLIC LAW 100-647—NOV. 10, 1988 
"SEC. 7433. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION 
ACTIONS. 
"(a) IN GENERAL.—If, in connection with any collection of Federal 
tax with respect to a taxpayer, any officer or employee of the 
Internal Revenue Service recklessly or intentionally disregards any 
provision of this title, or any regulation promulgated under this 
title, such taxpayer may bring a civil action for damages against the 
United States in a district court of the United States. Except as 
provided in section 7432, such civil action shall be the exclusive 
remedy for recovering damages resulting from such actions. 
"(b) DAMAGES.—In any action brought under subsection (a), upon 
a finding of liability on the part of the defendant, the defendant 
shall be liable to the plaintiff in an amount equal to the lesser of 
$100,000 or the sum of— 
"(1) actual, direct economic damages sustained by the plaintiff 
as a proximate result of the reckless or intentional actions of 
the officer or employee, and 
"(2) the costs of the action. 
"(c) PAYMENT AUTHORITY.—Claims pursuant to this section shall 
be payable out of funds appropriated under section 1304 of title 31, 
United States Code. 
"(d) LIMITATIONS.— 
"(1) 
REQUIREMENT 
THAT 
ADMINISTRATIVE 
REMEDIES BE 
EXHAUSTED.—A judgment for damages shall not be awarded 
under subsection (b) unless the court determines that the plain-
tiff has exhausted the administrative remedies available to such 
plaintiff within the Internal Revenue Service. 
"(2) MITIGATION OF DAMAGES.—The amount of damages 
awarded under subsection (b)(1) shall be reduced by the amount 
of such damages which could have reasonably been mitigated by 
the plaintiff. 
"(3) PERIOD FOR BRINGING ACTION.—Notwithstanding 
any 
other provision of law, an action to enforce liability created 
under this section may be brought without regard to the 
amount in controversy and may be brought only within 2 years 
after the date the right of action accrues." 
(b) DAMAGES FOR FRIVOLOUS OR GROUNDLESS CLAIMS.— 
(1) IN GENERAL.—Section 6673 of the 1986 Code (relating to 
damages assessable for instituting proceedings before the Tax 
Court primarily for delay, etc.) is amended by inserting "(a) IN 
GENERAL.—" before "Whenever" and by adding at the end 
thereof the following new subsection: 
"(b) CLAIMS UNDER SECTION 7433.—Whenever it appears to the 
court that the taxpayer's position in proceedings before the court 
instituted or maintained by such taxpayer under section 7433 is 
frivolous or groundless, damages in an amount not in excess of 
$10,000 shall be awarded to the United States by the court in the 
court's decision. Damages so awarded shall be assessed at the same 
time as the decision and shall be paid upon notice and demand from 
the Secretary." 
(2) CLERICAL AMENDMENT.—The heading for section 6673 of 
the 1986 Code is amended by striking out "TAX". 
(c) CLERICAL AMENDMENT.—The table of sections for subchapter B 
of chapter 76 of the 1986 Code is further amended by striking out 
the item relating to section 7433 and inserting in lieu thereof the 
following new items: 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3749 
"Sec. 7433. Civil damages for certain unauthorized collection actions. 
"Sec. 7434. Cross references." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 6673 
apply to actions by officers or employees of the Internal Revenue note. 
Service after the date of the enactment of this Act. 
SEC. 6242. ASSESSABLE PENALTY FOR IMPROPER DISCLOSURE OR USE 
OF INFORMATION BY PREPARERS OF RETURNS. 
(a) IN GENERAL.—Part I of subchapter B of chapter 68 of the 1986 
Code (relating to assessable penalties) is amended by adding at the 
end thereof the following new section: 
"SEC. 6712. DISCLOSURE OR USE OF INFORMATION BY PREPARERS OF 
RETURNS. 
"(a) IMPOSITION OF PENALTY.—If any person who is engaged in the 
business of preparing, or providing services in connection with the 
preparation of, returns of taix imposed by chapter 1, or any person 
who for compensation prepares any such return for any other 
person, and who— 
"(1) discloses any information furnished to him for, or in 
connection with, the preparation of any such return, or 
"(2) uses any such information for any purpose other than to 
prepare, or assist in preparing, any such return, 
shall pay a penalty of $250 for each such disclosure or use, but the 
total amount imposed under this subsection on such a person for 
any calendar year shgdl not exceed $10,000. 
"(b) EXCEPTIONS.—The rules of section 7216(b) shall apply for 
purposes of this section. 
"(c) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B of 
chapter 63 (relating to deficiency procedures for income, estate, gift, 
and certain excise taxes) shall not apply in respect of the assessment 
or collection of any penalty imposed by this section." 
(b) CRIMINAL PENALTY TO APPLY ONLY WHERE KNOWING OR RECK-
LESS DISCLOSURE OR USE.—The material preceding paragraph (1) of 
section 7216(a) of the 1986 Code is amended by striking out "and 
who—" and inserting in lieu thereof "and who knowingly or reck-
lessly—". 
(c) CLERICAL AMENDMENT.—The table of sections for part I of 
subchapter B of chapter 68 of the 1986 Code is amended by adding at 
the end thereof the following new item: 
"Sec. 6712. Disclosure or use of information by preparers of returns." 
(d) EFFECTIVE DATE.—The amendments made by this section shall 
26 USC 6712 
apply to disclosures or uses after December 31,1988. 
note. 
PART IV—TAX COURT JURISDICTION 
SEC. 6243. JURISDICTION TO RESTRAIN CERTAIN PREMATURE ASSESS-
MENTS. 
(a) IN GENERAL.—Section 6213(a) of the 1986 Code (relating to time 
for filing petition and restriction on assessment) is amended by 
striking out the period at the end of the last sentence and inserting 
in lieu thereof ", including the Tax Court. The Tax Court shall have 
no jurisdiction to enjoin any action or proceeding under this subsec-
tion unless a timely petition for a redetermination of the deficiency 
has been filed and then only in respect of the deficiency that is the 
subject of such petition." 
102 STAT. 3750 
PUBLIC LAW 100-647—NOV. 10, 1988 
(b) APPEAL OP ORDER RESTRAINING ASSESSMENT, ETC.—Section 
7482(a) of the 1986 Code (relating to jurisdiction on appeal) is 
amended by adding at the end thereof the following new paragraph: 
"(3) CERTAIN ORDERS ENTERED UNDER SECTION 6213(a).—^An 
order of the Tax Court which is entered under authority of 
section 6213(a) and which resolves a proceeding to restrain 
assessment or collection shall be treated as a decision of the Tax 
Court for purposes of this section and shall be subject to the 
same review by the United States (Ilourt of Appeals as a similar 
order of a district court." 
26 use 6213 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
note. 
apply to orders entered after the date of the enactment of this Act. 
SEC. 6244. JURISDICTION TO ENFORCE OVERPAYMENT DETERMINA-
TIONS. 
(a) IN GENERAL.—Section 6512(b) of the 1986 (Dode (relating to 
overpayment determined by the Tax Court) is amended by striking 
out "paragraph (2)" and inserting in lieu thereof "paragraph (3)" in 
paragraph (1), by redesignating paragraph (2) as paragraph (3), and 
by inserting the following new paragraph after paragraph (1): 
"(2) JURISDICTION TO ENFORCE.—If, after 120 days after a 
decision of the Tax Court has become final, the Secretary has 
failed to refund the overpayment determined by the Tax (3ourt, 
together with the interest thereon as provided in subchapter B 
of chapter 67, then the Tax Court, upon motion by the taxpayer, 
shall have jurisdiction to order the refund of such overpayment 
and interest." 
(b) AMENDIICENTS ADDING CJROSS REFERENCES.— 
(1) Section 6214(e) of the 1986 Oxie is amended by striking out 
"REFERENCE.—" and inserting in lieu thereof "REFERENCES.—" 
in the heading, by designating the undesignated paragraph as 
paragraph (1), and by adding at the end thereof the following 
new paragraph: 
"(2) For provision giving Tax Court jurisdiction to order a refund of an 
overpayment and to award sanctions, see section 6512(bK2)." 
(2) Section 6512(c) of the 1986 Ckxle is amended by striking out 
"REFERENCE.—" and inserting in lieu thereof "REFERENCES.—" 
in the heading, by designating the undesignated paragraph as 
paragraph (1), and by adding at the end thereof the following 
new paragraph: 
**(2) For provision giving the Tax Court jurisdiction to award reason-
able litigation costs in proceedings to enforce an overpayment determined 
by such court, see section 7430." 
26 use 6214 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
note. 
apply to overpayments determined by the Tax Court which have not 
yet been refunded by the 90th day after the date of the enactment of 
this Act. 
SEC 6245. JURISDICTION TO REVIEW CERTAIN SALES OF SEIZED PROP-
ERTY. 
(a) JURISDICTION TO REVIEW CERTAIN SALES OF PROPERTY.—Section 
6863(bX3) of the 1986 Code (relating to stay of sale of seized property 
pending Tax Court decision) is amended by adding at the end 
thereof the following new subparagraph: 
"(C) REVIEW BY TAX COURT.—If, but for the application of 
subparagraph (B), a sale would be prohibited by subpai^agraph 
(AXiii), then the Tax Court shall have jurisdiction to review tiie 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3751 
Secretary's determinatioii under subparagraph (B) that the 
property may be sold. Such review may be commenced upon 
motion by either the Secretary or the taxpayer. An order of the 
Tax Court disposing of a motion under this paragraph shall be 
reviewable in the same manner as a decision of the Tax Court." 
(b) EFFECTIVE DATE.—^The amendments made by this section shall 26 use 6863 
take effect on the 90th day after the date of the enactment of this note. 
Act. 
SEC 6246. JURISDICTION TO REDETERMINE INTEREST ON DEFICIENCIES. 
(a) IN GENERAL.—Section 7481 of the 1986 Code (relatii^ to date 
when Tax Court decision becomes final) is amended by adding at the 
end thereof the following new subsection: 
"(c) 
JURISDICTION OVER INTEREST DETERMINATIONS.—Notwith-
standing subsection (a), if— 
"(1) an assessment has been made by the Secretary under 
section 6215 which includes interest as imposed by this title, 
"(2) the taxpayer has paid the entire amount of the deficiency 
plus interest claimed by the Secretary, and 
"(3) within 1 year after the date the decision of the Tax Court 
becomes final under subsection (a), the taxpayer files a petition 
in the Tax Court for a determination that the amount of 
interest claimed by the Secretary exceeds the amount of 
interest imposed by this title, 
then the Tax Court may reopen the case solely to determine 
whether the taxpayer has made an overpayment of such interest 
and the amount of any such overpayment. If the Tax Court deter-
mines under this subscK^tion that the taxpayer has made an overpay-
ment of interest, then that determination shall be treated under 
section 6512(bXl) as a determination of an overpayment of tax. An 
order of the Tax Court redetermining the interest due, when entered 
upon the records of the court, shall be reviewable in the same 
manner as a decision of the Tax Court." 
0>) CONFORMING AMENDMENTS.— 
(1) Section 6512(a) of the 1986 Code (relating to effect of 
petition to Tax Court) is amended by inserting after "section 
6213(a)" the following: "(or 7481(c) with respect to a determina-
tion of statutory interest)". 
(2) Subsection (a) of section 7481 of the 1986 Clode is amendc-i 
by striking out "subsection (b)" and inserting in lieu thereof 
"subsections (b) and (c)". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
26 use 6512 
apply to assessments of deficiencies redetermined by the Tax C]k)urt note. 
made after the date of the enactment of this Act. 
SEC. 6247. JURISDICTION TO MODIFY DECISIONS IN CERTAIN ESTATE TAX 
CASES. 
(a) IN GENERAL.—Section 7481 of the 1986 Code (relating to date 
when Tax Court decision becomes final), as amended by section 
783(a), is further amended by adding at the end thereof the following 
new subsection: 
"(d) DECISIONS RELATING TO INSTATE TAX EXTENDED UNDER SEC-
TION 6166.—If with respect to a decedent's estate subject to a 
decision of the Tax Court— 
"(1) the time for payment of an amount of tax imposed by 
chapter 11 is extended under section 6166, and 
102 STAT. 3752 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(2) there is treated as an administrative expense under 
section 2053 either— 
"(A) any amount of interest which a decedent's estate 
pays on any portion of the tax imposed by section 2001 on 
such estate for which the time of payment is extended 
under section 6166, or 
"(B) interest on any estate, succession, legacy, or inheri-
tance tax imposed by a State on such estate during the 
period of the extension of time for payment under section 
6166, 
then, upon a motion by the petitioner in such case in which such 
time for payment of tax has been extended under section 6166, the 
Tax Court may reopen the case solely to modify the Court's decision 
to reflect such estate's entitlement to a deduction for such adminis-
tration expenses under section 2053 and may hold further trial 
solely with respect to the claim for such deduction if, within the 
discretion of the Tax Court, such a hearing is deemed necessary. An 
order of the Tax Court disposing of a motion under this subsection 
shall be reviewable in the same manner as a decision of the Tax 
Court, but only with respect to the matters determined in such 
order." 
ft>) CONFORMING AMENDMENTS.— 
(1) Section 6512(a) of the 1986 Code (relating to effect of 
petition to Tax Court), as amended by this part, is further 
amended by striking out "interest)" and inserting in lieu 
thereof "interest or section 7481(d) solely with respect to a 
determination of estate tax by the 'Tax Court)". 
(2) Subsection (a) of section 7481 of the 1986 C!ode, as amended 
by this part, is further amended by striking out "subsections (b) 
and (c)' and inserting in lieu thereof "subsections (b), (c), and 
(d)". 
26 use 6512 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
note. 
be effective with respect to Tax Court cases for which the decision is 
not final on the date of the enactment of this Act. 
Subtitle K—Other Administrative Provisions 
SEC. 6251. EXCHANGE OF INFORMATION. 
Clause (i) of section 6103(b)(5XB) of the 1986 Code (defining State) 
is amended by striking out "2,000,000" and inserting in lieu thereoif 
"250,000". 
SEC. 6252. PROVISIONS RELATING TO PREVIOUSLY REQUIRED STUDIES. 
(a) REPEAL OF REQUIREMENT FOR CERTAIN STUDIES.— 
(1) PIK STUDY.—Section 6 of the Payment-in-Kind Tcix Treat-
26 use 61 note. 
ment Act of 1983 is hereby repealed. 
(2) ACCOUNTING METHODS FOR INVENTORY.—Section 238 of the 
26 use 471 note. 
Economic Recovery Tax Act of 1981 is hereby repealed. 
(b) CHANGES IN DUE DATES FOR CERTAIN PERIODIC STUDIES.— 
26 u s e 936 note. 
(1) REPORTS ON POSSESSIONS CORPORATIONS.—Effective for 
reports for calendar years after 1982, subsection (a) of section 
441 of the Tax Reform Act of 1984 is amended by striking out 
•'shall," and all that follows through "setting forth" and insert-
ing in lieu thereof "shall, during 1988 and each fourth calendar 
year thereafter, submit a report to the Congress (using the most 
recent information available) setting forth". 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3753 
(2) REPORTS ON FSC PROVISIONS.— 
(A) Subsection (a) of section 804 of the Tax Reform Act of 
1984 is amended by striking out "shall," and all that follows 
26 use 921 note. 
through "setting forth" and inserting in lieu thereof "shall, 
during 1990 and each fourth calendar year thereafter, 
submit a report to the Congress (using the most recent 
information available) setting forth", 
(B) The amendment made by subparagaph (A) shall take Effective date. 
effect £is if included in the amendmente made by section 
26 USC 921 note. 
804(a) of the Tax Reform Act of 1984. 
SEC. 6253. REPEAL OP SECRETARIAL AUTHORITY TO PRESCRIBE CLASS 
LIVES. 
Paragraph (1) of section 168(i) of the 1986 Code is amended to read 
as follows: 
"(1) CLASS UFE.—Except as provided in this section, the term 
'class life' means the cleiss life (if any) which would be applicable 
with respect to any property as of January 1, 1986, under 
subsection (m) of section 167 (determined without regard to 
paragraph (4) and as if the taxpayer had made an election under 
such subsection). The Secretary, through an office established in 
the Treasury, shall monitor and analyze actual experience with 
respect to all depreciable assets." 
SEC. 6254. AMENDMENTS RELATED TO CRUDE OIL WINDFALL PROFIT 
26 USC 4997 
TAX ACT OF 1980. 
note. 
The reporting requirements of section 4997 of former chapter 45 of 
subtitle D of the Internal Revenue (Dode of 1986, and the related 
regulations thereunder, are repealed: Provided, That this repeal is 
effective only for crude oil removed after December 31, 1987, for 
which no tax is due or withheld under former chapter 45 of subtitle 
D of the Internal Revenue C!ode of 1986. 
Subtitle L—Provisions Relating to 
Corporations and Personal Holding Companies 
SEC. 6276. AUTHORITY TO PAY REFUNDS TO CERTAIN FIDUCIARIES OF 
INSOLVENT MEMBERS OF AFFILIATED GROUPS. 
Section 6402 of the 1986 (Dode (relating to authority to make 
credits or refunds) is amended by adding at the end thereof the 
following new subsection: 
"(i) REFUNDS TO CERTAIN FIDUCIARIES OF INSOLVENT MEMBERS OF 
AFFILIATED GROUPS.—Notwithstanding any other provision of law, 
in the case of an insolvent corporation which is a member of an 
affiliated group of corporations filing a consolidated return for any 
taxable year and which is subject to a statutory or court-appointed 
fiduciary, the Secretary may by regulation provide that any refund 
for such taxable year may be paid on behalf of such insolvent 
corporation to such fiduciary to the extent that the Secretary deter-
mines that the refund is attributable to losses or credits of such 
insolvent corporation." 
SEC. 6277. APPLICATION OF NET OPERATING LOSS LIMITATIONS TO 
BANKRUPTCY REORGANIZATIONS. 
(a) 
TIME 
FOR 
DETERMINING WHETHER 
OWNERSHIP CHANGE 
OCCURS.—Section 621(fX5) of the Tax Reform Act of 1986 is amended 
26 USC 382 note. 
102 STAT. 3754 
PUBLIC LAW 100-647—NOV. 10, 1988 
by adding at the end thereof the following new sentence: "The 
determination as to whether an ownership change has occurred 
during the period beginning January 1, 1987, and ending on the 
final settlement of any reorganization or proceeding described in the 
preceding sentence shall be redetermined as of the time of such final 
settlement." 
(b) ELECTION TO HAVE NEW RULES APPLY.—Section 621(f)(5) of the 
26 use 382 
Tax Reform Act of 1986 is amended by striking out "In" and 
^°^^- 
inserting in lieu thereof "Unless the taxpayer elects not to have the 
provisions of this paragraph apply, in". 
26 use 382 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
note. 
take effect as if included in section 621(fX5) of the Tax Reform Act of 
1986. 
26 u s e 7503 
SEC. 6278. APPLICATION OF SECTION 7503 OF 1986 CODE FOR PURPOSES 
note. 
OF SECTION 10222(b) OF REVENUE ACT OF 1987. 
Section 7503 of the 1986 Code shall apply for purposes of deter-
mining whether any disposition meets the requirements of section 
10222a)X2XB) of the Revenue Act of 1987. If any disposition meets 
the requirements of such section by reason of the preceding sen-
tence, for all purposes of the 1986 Code, such disposition shall be 
deemed to have occurred on December 31,1988. 
SEC. 6279. INTEREST EARNED BY BROKERS OR DEALERS NOT TAKEN 
INTO ACCOUNT AS PERSONAL HOLDING COMPANY INCOME. 
(a) IN GENERAL.—Paragraph (1) of section 543(a) of the 1986 Code 
is amended by striking out "and" at the end of subparagraph (B), by 
striking out the period at the end of subparagraph (C) and inserting 
in lieu thereof ", and" and by adding at the end thereof the 
following new subparagraph: 
"(D) interest received by a broker or dealer (within the me£in-
ing of section 3(a) (4) or (5) of the Securities and Exchange Act of 
1934) in connection with— 
"(i) any securities or money market instruments held as 
property described in section 1221(1), 
"(ii) margin accounts, or 
"(iii) any financing for a customer secured by securities or 
money market instruments." 
26 use 543 note. 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
apply to interest received after the date of the enactment of this Act, 
in taxable years ending after such date. 
26 u s e 543 note. 
SEC. 6280. TREATMENT OF CERTAIN BANK HOLDING COMPANIES. 
(a) GENERAL RULE.—For purposes of subtitle A of the 1986 Code, 
the term "personal holding company income" shall not include any 
dividend received by a qualified bank holding company from a 
25-percent owned bank during any taxable year ending in 1989 or 
1990. 
(b) $3,000,000 LIMITATION.—The aggregate amount excluded from 
the personal holding company income of any qualified bank holding 
company under subsection (a) for the taxable year shall not exceed 
$3,000,000. 
(c) QuAUFiED BANK HOLDING COMPANY.—For purposes of this 
section, the term "qualified bank holding company" means any 
bank holding company (as defined in section 2(a) of the Bank 
Holding Company Act of 1956) if 80 percent or more (by value) of the 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3755 
assets of such company at all times during the taxable year consist 
of stock in 1 or more 25-percent owned banks. 
(d) 25-PERCENT OWNED BANK.—For purposes of this section, the 
term "25-percent owned bank" means any bank (as defined in 
section 581 of the 1986 Code) if at legist 25 percent of the stock of 
such bank (by vote and value) is owned by the bank holding com-
pany. 
SEC. 6281. AUTHORITY TO WAIVE APPRAISAL REQUIREMENT FOR CER- 
26 USC 170 note. 
TAIN CHARITABLE CONTRIBUTIONS OF PROPERTY. 
Notwithstanding paragraph (2) of section 155(a) of the Tax Reform 
Act of 1984, the Secretary of the Tresisury or his delegate may in the 
regulations prescribed pursuant to such section waive the require-
ment of a qualified appraisal in the case of a qualified contribution 
(within the meaning of section 170(eX3XA) of the 1986 Code) of 
property described in section 1221(1) with a claimed value in excess 
of $5,000. 
SEC. 6282. DISTRIBUTIONS BY COOPERATIVE HOUSING CORPORATIONS. 
(a) IN GENERAL.—Section 216 of the 1986 Code is amended by 
adding at the end thereof the following new subsection: 
"(e) 
DISTRIBUTIONS BY COOPERATIVE HOUSING ASSOCIATIONS.— 
Except £is provided in regulations, no gain or loss shall be recognized 
on the distribution by a cooperative housing association of a dwelling 
unit to a stockholder in such corporation if such distribution is 
in exchange for the stockholder's stock in such corporation and such 
exchange qualifies for nonrecognition of gain under section 1034(f)." 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
26 USC 216 note. 
take effect as if included in the amendments made by section 631 of 
the Tax Reform Act of 1986. 
Subtitle M—Miscellaneous Provisions 
SEC. 6301. REPEAL OF LIMIT ON LONG-TERM BONDS. 
The last sentence of section 3102(a) of title 31, United States Code, 
is hereby repealed. 
SEC. 6302. ONE-YEAR EXTENSION OF CREDIT FOR PRODUCING FUEL 
FROM A NONCONVENTIONAL SOURCE. 
Clauses (i) and (ii) of section 29(f)(lXA) of the 1986 Code (relating to 
application of section) are each amended by striking out "January 1, 
1990" and inserting in lieu thereof "January 1,1991". 
SEC. 6303. CERTAIN DISCHARGE OF DEBT INCOME NOT INCLUDED IN 
ADJUSTED BOOK INCOME. 
(a) GENERAL RULE.—Paragraph (2) of section 56(f) of the 1986 Code 
(defining adjusted net book income) is amended by redesignating 
subparagraph (I) as subparagraph (J) and by inserting after subpara-
graph (H) the following new subparagraph: 
"(I) EXCLUSION OF CERTAIN INCOME FROM TRANSFER OF 
S
T
O
C
K FOR DEBT.—In determining adjusted net book income, 
there shall not be taken into account any income resulting 
from the transfer of stock by the corporation issuing such 
stock to a creditor in satisfaction of its indebtedness. The 
preceding sentence shall apply only in the case of a debtor 
in a title 11 case (as defined in section 108(dX2)) or to the 
102 STAT. 3756 
PUBLIC LAW 100-647—NOV. 10, 1988 
extent the debtor is insolvent (as defined in section 
108(dX3))." 
26 use 56 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years b^inning after December 31, 1986. 
SEC. 6304. NONCONVENTIONAL FUELS CREDIT. 
(a) IN GENERAL.—Section 53(dXlXB) of the 1986 Code (relating to 
credit not allowed for exclusion preferences) is amended by adding 
at the end thereof the following new clause: 
"(iii) SPECIAL RULE.—The adjusted net minimum tax 
for the taxable year shall be increased by the amount 
of the credit not allowed imder section 29 (relating to 
credit for producing fuel from a nonconventional 
source) solely by reason of the application of section 
29(bX5)(B)." 
26 use 53 note. 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
take effect as if included in the amendments made by section 701 of 
the Tax Reform Act of 1986. 
26 use 3121 
SEC. 6305. TREATMENT OF CERTAIN FAMILY SERVICES PROVIDERS. 
State and local 
(*) I^ GENERAL.—^A State may treat a person who renders depend-
governments. 
ent care or similar services as other than an employee emplojnnent 
tax purposes for the applicable period if all of the following condi-
tions are satisfied with respect to such person for such applicable 
period: 
(i) The person does not provide any dependent care or similar 
services in any facihty owned or operat€xi by the State. 
(ii) The person is compensated by the State for such services, 
directly or indirectly, out of funds provided pursuant to chapter 
7 of title 42 of the United States CJode, or the provisions and 
amendments made by the Family Security Act of 1988. 
(iii) The State does not treat the person, with respect to the 
provision of dependent care or similar services, as an employee 
for emplojrment tax purposes. 
(iv) The State files all Federal income tax returns (including 
information returns) required to be filed with respect to such 
person on a basis consistent with the State's treatment of such 
person as other than an employee b^inning on the date of the 
enactment of this section. 
(v) No more than ten percent of the State's employees are 
provided with insurance under title II of the Social Security Act 
pursuant to voluntary agreements with the Secretary of Health 
and Human Services under section 218 of such title. 
(b) STATE.—For purposes of this section, the term "State" shall 
mean the government of the United States, District of Columbia, 
any State or political subdivision thereof, and any agency or 
instrumentality of any of the forgoing. 
(c) EMPLOYMENT TAX.—For purposes of this section, the term 
"employment tax" means any tax imposed by subtitle C of the 
Internal Revenue Code of 1986. 
(d) APPLICABLE PERIOD.—For purposes of this section, the term 
"applicable period" means the period b^inning on January 1, 1984 
and ending on December 31,1990. 
(e) REPORT.—^The Secretary of the Treasury shall report to the 
Senate Committee on Finance and the House Committee on Ways 
and Means on the text status of day care providers compenstated 
'»4F»'T7.3«5-
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3757 
pursuant to the program described in this section no later than 
December 31, 1989. 
TITLE VII—RAILROAD UNEMPLOYMENT 
AND RETIREMENT PROGRAMS 
SEC. 7001. SHORT TITLE. 
This title may be cited as the "Railroad Unemployment Insurance 
and Retirement Improvement Act of 1988". 
SEC. 7002. REFERENCES TO RAILROAD UNEMPLOYMENT INSURANCE ACT. 
Except as otherwise expressly provided, whenever in this title an 
amendment or repesd is expressed in terms of an amendment to, or 
repeal of, a section or provision, the reference shall be considered to 
be made to a section or other provision of the Railroad Unemploy-
ment Insurance Act. 
Subtitle A—Financing Provisions 
Railroad 
Unemployment 
Insurance and 
Retirement 
Improvement 
Act of 1988. 
26 u s e 367 note. 
SEC. 7101. AMENDMENTS RELATING TO DEFINITION OF 
TION". 
•COMPENSA-
(a) IN GENERAL.—Section l(i) is amended— 
(1) by inserting "(1) IN GENERAL.—" after "(i)"; 
(2) by striking out ": Provided, however. That in comput-
ing" and all that follows through "1983, shall be recognized." 
and inserting in lieu thereof ", except that in computing the 
compensation paid to any employee, no part of any month's 
compensation in excess of the monthly compensation base (as 
defined in subdivision (2)) for any month shall be recognized."; 
and 
(3) by adding at the end thereof the following new subdivision: 
"(2) MONTHLY COMPENSATION BASE.— 
"(A) IN GENERAL.—For purposes of subdivision (1), the term 
'monthly compensation base' means the amount— 
"(i) of $400 for calendar months before January 1, 1984, 
"(ii) of $600 for calendar months after December 31, 1983 
and before January 1,1989; and 
"(iii) computed under subparagraph (B) for months after 
December 31,1988. 
"(B) COMPUTATION.— 
"(i) IN GENERAL.—The amount of the monthly compensa-
tion base for each calendar year beginning after December 
31,1988, is the greater of— 
"(I) $600; or 
"(II) the amount, as rounded under clause (iii) if 
applicable, computed under the formula: 
45 u s e 351. 
102 STAT. 3758 
PUBLIC LAW 100-647—NOV. 10, 1988 
A-37,800 . 
J=600( 1 + 
56,700 
"(ii) MEANING OP SYMBOLS.—For the purposes of the for-
mula in clause (i)— 
"(I) 'B' is the dollar amount of the monthly com-
pensation base; and 
"(II) 'A' is the amount of the applicable base with 
respect to tier 1 taxes, for the calendar year for which 
the monthly compensation base is being computed, as 
determined under section 3231(eX2) of the Internal 
Revenue Code of 1986. 
"(iii) ROUNDING RULE.—If the monthly compensation base 
computed under this formula is not a multiple of $5, it shall 
be rounded to the nearest multiple of $5, with such round-
ing being upward in the event the amount computed is 
equidistant between two multiples of $5.". 
(b) CoNFOR&oNG AMENDMENT WITH RESPECT TO SuBsroiARY REMU-
45 use 351. 
NERATION RULE.—Section l(k) is amended by striking out "$1,500" 
and inserting in lieu thereof "an amount that is equal to 2.5 times 
the monthly compensation base for months in such base year £is 
computed under section l(i) of this Act". 
(c) CONFORMING AMENDBIIENT WITH RESPECT TO LIMITATION ON 
45 use 352. 
TAKING 
ACCOUNT OF MONEY REMUNERATION.—Section 
2(c) 
is 
amended by striking out "not in excess of $775 in any month shall 
be taken into account:" and inserting in lieu thereof "shall be taken 
into account that is not in excess of $775 in any month before 1989 
and, in any month in a base year after 1988, is not in excess of an 
amount that bears the same ratio to $775 as the monthly compensa-
tion base for that year as computed under section l(i) of this Act 
bears to $600:". 
(d) CONFORMING AMENDMENTS WITH RESPECT TO REQUIRED 0 ) M -
45 use 354. 
PENSATION AMOUNT.—^Section 4(a-2XiXA) is amended by striking out 
the semicolon at the end and inserting in lieu thereof "and before 
1989 or, if any part of such compensation is paid in a calendar year 
after 1988, not less than an amount that is equal to 2.5 times the 
monthly compensation base for months in such calendar year, as 
computed under section l(i) of this Act;". 
45 use 362. 
(e) DUTY OF BOARD TO MAKE CERTAIN COMPUTATIONS.—Section 12 
is amended by adding at the end the following new subsection: 
"(r) DUTY OF BOARD TO MAKE CERTAIN (COMPUTATIONS.— 
"(1) COMPENSATION BASE.—On or before December 1,1988, and 
on or before December 1 of each year thereafter, the Board shall 
compute— 
"(A) in accordance with section l(i), the monthly com-
pensation base which shall be applicable with respect to 
months in the next succeeding calendar year; and 
"(B) the amounts described in section l(k), section 2(c), 
section 3, and section 4(a-2XiXA) that are related to changes 
in the monthly compensation base. 
"(2) MAXIMUM DAILY BENEFIT RATE.—On or before June 1, 
1989, and on or before June 1 of each year thereafter, the Board 
' 
f-ii^^^-'^' 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3759 
shall compute in accordance with section 2(aX3) the maximum 
daily benefit rate which shall be applicable with respect to days 
of unemplo3nnent and days of sickness in registration periods 
beginning after June 30 of that year. 
"(3) NOTICE IN FEDERAL REGISTER AND TO EMPLOYERS.—Not 
later than 10 days after each computation made under this 
subsection, the Board shall publish notice in the Federal Reg-
ister and shall notify each employer and employee representa-
tive of the amount so computed.", 
(f) EFFECTIVE DATE.—The amendments made by this section shall 45 USC 351 note. 
take effect upon the date of the enactment of this Act. 
SEC. 7102. CONTRIBUTION ADJUSTMENTS. 
(a) EMPLOYER CONTRIBUTIONS AND EXPERIENCE RATING.—Section 8 45 use 358. 
is amended by striking out "(a) Every employer" and all that follows 
through the end of subsection (a) and inserting in lieu thereof the 
following: 
"(a) EMPLOYER CONTRIBUTION.— 
"(1) IN GENERAL.— 
"(A) GENERAL RULE.— 
"(i) CONTRIBUTION RATE GENERALLY.—Every employer 
shall pay a contribution, with respect to having 
employees in his service, equal to the percentage deter-
mined under subparagraph (B), (C), or (D), whichever is 
applicable, of so much of the compensation paid in any 
calendar month by such employer to any employee as is 
not in excess of the monthly compensation base for that 
month as computed under section l(i). 
"(ii) MULTIPLE EMPLOYER UMITATION.— If compensa-
tion is paid to an employee by more than one employer 
in any calendar month— 
"(I) the contributions required by this subsection 
shall not apply to any amount of the aggregate 
compensation paid to such employee by all such 
employers in such calendar month which is in 
excess of such monthly compensation base; and 
"(II) each employer (other than a subordinate 
unit 
of a 
national-railway-labor-organization 
employer) shall be liable for that portion of the 
contribution with respect to such compensation 
paid by all such employers which the compensation 
paid by him to such employee bears to the total 
compensation paid in such month by all such em-
ployers to such employee. 
In the event that the compensation paid by such 
employers to the employee in such month is less than 
such monthly compensation base, each subordinate 
unit of a national-railway-labor-organization employer 
shall be liable for such portion of any additional con-
tribution as the compensation paid by such employer to 
such employee in such month bears to the total com-
pensation paid by all such employers to such employee 
in such month. 
"(B) TRANSITIONAL RULE.— 
"(i) 1ST, 2D, AND 3D CALENDAR YEARS.—Except as pro-
vided in clause (vi), with respect to compensation paid 
102 STAT. 3760 
PUBLIC LAW 100-647—NOV. 10, 1988 
in calendar years 1988,1989, and 1990, the contribution 
rate shall be 8 percent. 
"(ii) 4TH CALENDAR YEAR.—With respect to compensa-
tion paid in calendar year 1991, the contribution rate 
shall be the smaller of— 
"(I) the maximum contribution limit computed 
under paragraph (20); or 
"(II) the percentage computed pursuant to the 
following formula: 
2A+B 
R= 
"(iii) 5TH CALENDAR YEAR.—With respect to com-
pensation paid in calendar year 1992, the contribution 
rate shall be the smaller of— 
"(I) the maximum contribution limit computed 
under paragraph (20); or 
"(II) the percentage computed pursuant to the 
following formula: 
A+2C 
R= 
"(iv) MEANING OF SYMBOLS.—For purposes of the for-
mulas in clauses (ii) and (iii)— 
"(I) *R' is the applicable contribution 
rate 
expressed as a percentage for months in the 
calendar year; 
"(II) 'A' is the contribution rate determined 
under clause (i); 
"(III) *B' is the percentage rate for the employer, 
as determined under subparagraph (C), for cal-
endar year 1991; and 
"(IV) 'C is the percentage rate for the employer, 
as determined under subparagraph (C), for cal-
endar year 1992. 
"(v) SPECIAL RULE FOR CERTAIN COMPUTATIONS.—For 
purposes of computing B and C in such formulas— 
"(I) the percentage 
rate 
computed 
under 
subparagraph (C), if more than the maximum con-
tribution limit computed under paragraph (20) 
shall not be reduced to that limit; and 
"(II) any computations which under subpara-
graph (C) are to be made on the basis of a 4-quarter 
or a 12-quarter period ending on a given June 30 
shall be made on the basis of a period beginning on 
January 1, 1990, and ending on that June 30, and 
the amount so computed shall be increased to an 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3761 
amount that bears the same ratio to the amount so 
computed as 4 or 12, as appropriate, bears to the 
number of calendar quarters in the period on 
which the computation was based, 
"(vi) SPECIAL TRANSITION RULE FOR PUBUC COMMUTER 
RAILROADS.—With respect to each of calendar years 
1989 and 1990, the contribution of an employer which 
on the date of the enactment of the Railroad 
Unemployment Insurance and Retirement Improve-
ment Act of 1988 is a publicly funded and publicly 
operated carrier providing rail commuter service shall 
be equal to the amount of benefits attributable to such 
carrier, plus an amount equal to 0.65 percent of the 
total compensation paid by that employer in that year 
on which that employer's contribution would be based 
under clause (i) if such employer's contribution were 
determined under that clause. 
"(C) EXPERIENCE-RATED CONTRIBUTIONS.—With respect to 
compensation paid in a calendar year that begins after 
December 31,1992, the contribution rate for each employer 
shall be determined as follows: 
"(i) STEP i.—Compute the employer's benefit ratio as 
of the preceding June 30 to 4 decimal points in accord-
ance with paragraph (2). 
"(ii) STEP 2.—Subtract the employer's reserve ratio as 
of the preceding June 30 as computed to 4 decimal 
points in accordance with paragraph (4). 
"(iii) STEP 3.—Subtract the pooled credit ratio for the 
calendar year, if any, as computed to 4 decimal points 
in accordance with paragraph (12). 
"(iv) STEP 4.—Multiply by 100 the total arrived at 
under the steps set forth in clauses (i) through (iii) so as 
to obtain a percentage rate, which shall be rounded to 
the nearest 100th of 1 percent. If the total arrived at 
under such steps is 0 or less than 0, the percentage rate 
as so computed shall be 0. 
"(v) STEP 5.—Add 0.65 to the percentage rate arrived 
at under clause (iv), representing the portion of the 
employer's contribution which is to be deposited to the 
credit of the fund under subsection (i). 
"(vi) STEP 6.—Add the surcharge rate for the cal-
endar year, if any, £is computed under paragraph (14). 
"(vii) STEP 7.—Add the pooled charge ratio for the 
calendar year, if any, as computed to 4 decimal points 
under paragraph (13) and multiplied by 100. 
"(viii) STEP 8.—Reduce the precentage rate computed 
in accordance with the preceding steps to the maxi-
mum contribution limit computed under paragraph 
(20), if such rate is higher thsm such limit. The rate 
computed in accordance with the preceding steps, after 
any reduction under this clause, is the contribution 
rate. 
"(D) NEW-EMPLOYER CONTRIBUTION RATES.—Notwithstand-
ing subparagraphs (B) and (C), the contribution :ate ap-
plicable to a new employer who does not become subject to 
this Act until after December 31, 1989, shall be determined 
as follows: 
102 STAT. 3762 
PUBLIC LAW 100-647-NOV. 10, 1988 
"(i) 1ST CALENDAR YEAR.—With respect to compensa-
tion paid in calendar months before the end of the first 
full calendar year in which the employer is subject to 
this Act, the contribution rate shall be the average 
contribution rate paid by all employers during the 3 
calendar years preceding the calendar year before the 
calendar year in which the compensation is paid. The 
average contribution rate shgdl be determined— 
"(I) by dividing the aggregate contributions paid 
by all employers under this subsection in those 3 
calendar years by the aggregate compensation with 
respect to which such contributions were paid; and 
"(ID by multiplying the resulting ratio as com-
puted to 4 decimal points by 100. 
"(ii) 2D CALENDAR YEAR.—With respect to compensa-
tion paid in calendar months in the next calendar year, 
the contribution rate shall be the smaller of— 
"(I) the maximum contribution limit computed 
under paragraph (20); or 
"(II) the percentage rate computed pursuant to 
the following formula: 
- ( 
2(A2)+B 
"(iii) 3D CALENDAR YEAR.—With respect to compensa-
tion paid in calendar months in the third full calendar 
year in which the employer is subject to the coverage of 
this Act, the contribution rate shall be the smaller of— 
"(I) the maximum contribution limit computed 
under paragraph (20); or 
"(II) the percentage rate computed pursuant to 
the following formula: 
A3+2C 
R= 
"(iv) SUBSEQUENT CALENDAR YEARS.—With respect to 
all calendar months in calendar years subsequent to 
that calendar year, the contribution rate shall be deter-
mined under subparagraph (C). 
"(v) MEANING OF SYMBOLS.—For purposes of the for-
mulas in clauses (ii) and (iii)— 
"(I) 'R' is the applicable contribution 
rate 
expressed as a percentage for months in the 
calendar year; 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3763 
"(11) 'Al' is the contribution rate determined 
under clause (i) for such employer's first full cal-
endar year; 
"(III) *A2' is the contribution rate which would 
have been determined under clause (i) if the 
employer's second calendar year had been its first 
full calendar year; 
"(IV) 'A3' is the contribution rate which would 
have been determined under clause (i) if the 
employer's third calendar year had been such 
employer's first full calendar year; 
(V) 'B' is the contribution rate for the employer 
as determined under subparagraph (C) for the 
employer's second full calendar year; and 
(VI) *C' is the contribution rate for the employer 
as determined under subparagraph (C) for the 
employer's third full calendar year. 
"(vi) SPECIAL RULE FOR CERTAIN COMPUTATIONS.—For 
purposes of computing B and C in such formulas— 
"(I) the 
percentage 
rate 
computed 
under 
subparagraph (C), shall not be reduced under 
clause (viii) of that subparagraph; and 
"(II) any computations which under subpara-
graph (C) are to be made on the basis of a 4-quarter 
or 12-quarter period ending on a given June 30 
shall be made on the basis of a period commencing 
with the first day of the first calendar quarter that 
begins after the date on which the employer first 
commenced paying compensation subject to this 
Act and ending on that June 30, and the amount so 
computed shall be increased to an amount that 
bears the same ratio to the amount so computed as 
4 or 12, as appropriate, bears to the number of 
calendar quarters in the period on which the com-
putation was based. 
"(2) BENEFIT RATIO.—An employer's benefit ratio as of any 
given June 30 shall be determined by dividing all benefite 
charged to the employer under paragraph (15) during the 12 
calendar quarters ending on such June 30 by the employer's 
3-year compensation base as of such June 30 as computed under 
paragraph (3). 
"(3) 3-YEAR COMPENSATION BASE.—An employer's 3-year com-
pensation base as of any given June 30 is the aggregate com-
pensation with respect to which contributions were paid by the 
wnployer under this subsection in the 12 calendar quarters 
ending on such June 30. 
"(4) RESERVE RATIO.—An employer's reserve ratio as of any 
given June 30 shall be computed by dividing the employers 
reserve balance as of such June 30, as computed under para-
graph (6), by that employer's 1-year compensation base as of 
such June 30, as computed under paragraph (5). The employer's 
reserve ratio may be either a positive or a negative figure, 
depending upon whether the employer's reserve balance is a 
positive or negative figure. 
"(5) 1-YEAR COMPENSATION BASE.—An employer's 1-year com-
pensation base as of any given June 30 is the aggregate com-
pensation with respect to which contributions were paid by the 
102 STAT. 3764 
PUBLIC LAW 100-647—NOV. 10, 1988 
employer under this subsection in the 4 calendar quarters 
ending on such June 30. 
"(6) RESERVE BALANCE.—An employer's reserve balance as of 
any given June 30 shall be determined by subtracting the 
employer's cumulative benefit balance as of such June 30, 
computed under paragraph (7), from the employer's net cumu-
lative contribution balance as of such June 30, computed under 
paragraph (8). An employer's reserve balance may be either 
positive or negative, depending upon whether or not that 
employer's net cumulative contribution balance exceeds the 
employer's cumulative benefit balance. 
(7) CUMULATIVE BENEFIT BALANCE.—An employer's cumu-
lative benefit balance as of any given June 30 shall be deter-
mined by adding— 
"(A) the net amount of the benefits charged to the 
employer under paragraph (15) on or after January 1, 1990; 
ana 
"(B) the cumulative 
amount 
of the employer's 
unallocated charges for the same period, if any, as com-
puted under paragraph (9). 
"(8) NET CUMULATIVE CONTRIBUTION BALANCE.—An employer's 
net cumulative contribution balance as of any given June 30 
shall be determined as follows: 
"(A) STEP i.—Compute the sum of 
"(i) all contributions paid by the employer pursuant 
to this subsection; 
"(ii) that portion of the tax imposed under section 
3321(a) of the Internal Revenue Code of 1986 that is 
attributable to the surtax rate under section 516(b) of 
the Railroad Unemployment Insurance and Retirement 
Improvement Act of 1988; and 
' (iii) any taxes paid by the employer pursuant to 
section 3321(a) of the Internal Revenue Code of 1986 
(after the outstanding balance of loans made under 
section 10(d) before October 1, 1985, plus interest, have 
been paid); 
on or after January 1,1990. 
"(B) STEP 2.—Subtract an amount equal to the amount of 
such contributions deposited to the credit of the fimd imder 
subsection (i). 
"(C) STEP 3.—Add an amount equal to the aggregate 
amount by which such contributions were reduced in prior 
calendar years as a result of pooled credits, if any, under 
paragraph (IXCXiii). 
"(9) 
UNALLOCATED CHARGE.—An employer's 
unallocated 
charge as of any given June 30 is the amoimt that as of such 
Jime 30 bears the same ratio to the system unallocated charge 
balance, computed under paragraph (10), as the employer's 
1-year compensation base, computed under paragraph (5), bears 
to the system compensation base computed under paragraph 
(11). 
"(10) SYSTEM UNALLOCATED CHARGE BALANCE.—The S3rstem 
unallocated charge balance as of any given June 30 shall be 
determined as follows: 
"(A) STEP i.—Compute the aggregate amount of all 
interest paid by the account on loans from the Railroad 
Retirement Account after September 30, 1985, pursuant to 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3765 
section 10(d), during the 4 calendar quarters ending on that 
June 30. 
"(B) STEP 2.—^Add the aggr^ate amount of any additions 
to the system unallocated cha^e balance specified in para-
graphs (15) and (16), during that period. 
"(C) STEP 3.—Add the aggr^ate amount of any other 
expenditures by the account during that period not charge-
able to any individual employer under paragraph (15) or to 
the fund under section 11. 
"(D) STEP 4.—Subtract the agp^ate amount of all 
income to the account, under section 10(aXiv) or section 
10(aXvii), during that period. 
"(JE) STEP s.—Subtract the aggr^ate amount of all trans-
fers to the account, pursuant to section 11(d), during that 
period. 
"(F) STEP 6.—Subtract the aggr^ate amount of all other 
income and receipts of the account, during that period, 
which are not assigned to individual employer balances. 
"(G) STEP 7.—Subtract the net cumulative contribution 
balance of each employer whose balance has been cancelled 
pursuant to paragraph (16), during that period, calculated 
as of the date of such cancellation. 
"(11) SYSTEM COMPENSATION BASE.—^The system compensation 
base as of any given June 30 shall be determined by adding 
together the amounts of the 1-year compensation bases of all 
employers and employee representatives subject to this Act, 
computed in accordance with paragraph (5), as of such June 30. 
"(12) POOLED CREDIT RATIO.—^The pooled credit ratio, if any, 
for a calendar year shall be determined as follows: 
"(A) STEP i.—Compute the balance to the credit of the 
account as of the close of business on the preceding June 30, 
including any amounts in the account attributable to loans 
made under section 10(d) before October 1, 1985, but dis-
r^arding the obligation to repay such loans and interest 
thereon. In determining such balance as of June 30 of any 
year, so much of the trance to the credit of the railroad 
unemployment insurance administration fund as of the 
close of business on such date as is in excess of $6,000,000 
shall be deemed to be part of the balance to the credit of 
such account. There voll be a pooled credit ratio for the 
calendar year only if that balance is in excess of the greater 
of $250,000,000 or of the amount that bears the same ratio 
to $250,000,000 as the system compensation base as of that 
June 30 bears to the system compensation base as of 
June 30, 1991, as computed in accordance with para-
graph (11). 
"(B) STEP 2.—If there is such an excess amount, divide 
that excess amount by the system compensation base as of 
the June 30 preceding the calendar year. The result is the 
pooled credit ratio for the calendar year. 
"(13) POOLED CHARGE RATIO.—TTie pooled charge ratio, if any, 
for a calendar year shall be determined as follows: 
"(A) STTEP 1.—^With respect to each employer whose con-
tribution rate for that calendar year as computed through 
step 6 under paragraph (IXC) was greater than the maxi-
mum contribution limit computed under paragraph (20), 
multiply the employer's 1-year compensation ba^ as of the 
102 STAT. 3766 
PUBLIC LAW 100-647—NOV. 10, 1988 
preceding June 30, as computed in accordance with para-
graph (5), by the difference between— 
"(i) the percentage rate determined under subpara-
graph (B), (C), or (D) of paragraph (1) before the reduc-
tion to the maximum contribution limit; and 
"(ii) the maximum contribution limit. 
"(B) STEP 2.—Add the amounts arrived at under step 1 so 
as to obtain an aggregate amount for all such employers. 
"(C) STEP 3.—For each employer whose contribution rate 
as computed through step 3 under paragraph (IXC) was less 
than 0, the percentage rate by which such employer's rate 
was raised in order to bring that rate to 0 shall be multi-
plied by that employer's 1-year compensation base as of the 
preceding June 30. Subtract the toted of the amounts com-
puted under the preceding sentence for all employers from 
the amount arrived at in step 2. 
"(D) STEP 4.—Divide the aggregate amount arrived at 
under step 3 by the system compensation base as of the 
preceding June 30 as computed under paragraph (11) minus 
the one-year compensation base of those employers whose 
rates computed through step 6 of paragraph (IXC) exceeded 
the maximum contribution rate computed under paragraph 
(20). The result is the pooled charge ratio for the calendar 
year. 
"(14) SURCHARGE RATE.—The surcharge rate for a calendar 
year, if any, shall be determined as follows: 
"(A) STEP i.—(Dompute the balance to the credit of the 
account as of the close of business on the preceding June 30, 
including any amounts in the account attributable to loans 
made under section 10(d) before October 1, 1985, but dis-
regarding the obligation to repay such loans and interest 
thereon. In determining such balance as of June 30 of any 
year, so much of the balance to the credit of the railroad 
unemployment insurance administra!tion fund as of the 
close of business on such date as is in excess of $6,000,000 
shall be deemed to be part of the balance to the credit of 
such account. There will be a surcharge rate for the cal-
endar year only if that balance is less than the greater of 
$100,000,000 or of the amount that bears the same ratio to 
$100,000,000 as the system compensation base as of that 
June 30 bears to the system compensation base as of 
June 30, 1991, as computed in accordance with para-
graph (11). 
"(B) STEP 2.—(i) If the balance to the credit of the account 
is less than the greater of the amounts referred to in the 
2nd sentence of step 1 but is equal to or more than the 
greater of $50,000,000 or of the amount that bears the same 
ratio to $50,000,000 as the system compensation base as of 
that June 30 bears to the system compensation base as of 
June 30,1991, then the surcharge rate for the calendar year 
shall be 1.5 percent. 
"(ii) If the balance to the credit of the account is less than 
the greater of the amounts referred to in the clause (i), but 
greater than or equal to zero, then the surcharge rate for 
the calendar year shall be 2.5 percent. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3767 
"(iii) If the balance to the credit of the account is less 
than zero, the surcharge rate for the calendar year shall be 
3.5 percent. 
"(15) CHARGEABLE BENEFITS.— 
"(A) IN GENERAL.—Beginning January 1, 1990, all bene-
fits paid to an employee for days of unemplojnnent or days 
of sickness shall be charged to that employee's base year 
employer by adding amounts equal to the amounts of such 
benefits to the employer's cumulative benefit balance 
except that benefits paid by reason of strikes or work 
stoppages growing out of labor disputes shall not be added 
to the employer's cumulative benefit balance but instead 
shall be added to the system un£dlocated charge balance. 
"(B) ADJUSTMENTS.—A sum equsd to each 
amount 
realized in recovery for overpa)rment, erroneous pajnnent, 
or reimbursement of benefits and credited to the account 
pursuant to section 10(aXv) or 10(aXviii) shall be subtracted 
from the cumulative benefit balances of the employers of 
the employees to whom such an amount was paid as a 
benefit in the proportion to the amount by which each such 
employer's cumulative benefit balance was increased as a 
result of the payment of the benefit. 
"(C) MULTIPLE EMPLOYERS.— 
"(i) IN GENERAL.—All benefits paid to an employee 
who had more than 1 base-year employer shall be 
charged to the cumulative benefit balances of the 
employee's base year employers— 
"(I) in reverse chronological order of the employ-
ee's employment with each such employer in the 
base year if the employer at the time of the claim 
was the last base year employer, and the amount 
charged to each employer snail not exceed the 
compensation paid by that employer to the 
employee in the base year; and 
' (II) in all other cases, in the same ratio as the 
compensation paid to such employee by the 
employer bears to the total of such compensation 
paid to such employees by all such employers in the 
base year, 
"(ii) SPECIAL RULE FOR EMPLOYER WITH CANCELLED 
BALANCES.—All benefits chargeable under this subpara-
graph to an employer for which the Board has can-
celled balances under paragraph (16) shall be added to 
the system unedlocated charge balance. 
"(16) DEFUNCT EMPLOYER.—Whenever the Board determines, 
pursuant to such regulations as the Board may prescribe, that 
an employer has permanently ceased to pay compensation with 
respect to which contributions are payable pursuant to this 
subsection, the Board shall, effective on the date of the Board's 
determination, transfer the employer's net cumulative contribu-
tion balance as a subtraction from, and cumulative benefit 
balance as an addition to, the system unallocated charge bal-
ance and cancel all other accumulations of the employer. 
"(17) INDIVIDUAL EMPLOYER RECORD.— 
"(A) IN GENiaiAL.—As of January 1,1990, the Board shall 
commence maintaining an individual employer record with 
respect to each employer, and the records necessary to 
102 STAT. 3768 
PUBLIC LAW 100-647—NOV. 10, 1988 
determine pooled charges, pooled credits and unallocated 
charge balances for the system. Whenever a new employer 
b^ins paying compensation with respect to which contribu-
tions are payable pursuant to this subsection, the Board 
shall establish and maintain an individual employer record 
for such employer. 
"(B) DEFINITION.—^As used in this paragraph, the term 
'individual employer record' means a record of an individ-
ual employer's benefit ratio, reserve ratio, 1-year compensa-
tion base, 3-year compensation base, unallocated charge, 
reserve balance, net cumulative contribution balance, and 
cumulative benefit balance. 
"(18) JOINT EBIPLOYER RECORDS.—Pursuant to r^ulations pre-
scribed by the Board, the Board may allow 2 or more employers, 
upon application, to establish and maintain, or to discontinue, a 
joint individual employer record for such employers as though 
such joint record constituted a single employer's individual 
employer record. 
"(19) MERGERS, CONSOLIDATIONS, OR OTHER CHANGES IN 
EMPLOYER IDENTITY.— 
"(A) WITH OTHER EMPLOYERS.—^In the event of a merger, 
consolidation, unification, or reorganization in which an 
employer combines with another employer and the com-
bination entails no partitioning of the property of the 
employer, the individual employer records of the 2 employ-
ers shall be combined into a joint individual employer 
record if the parties request such joint treatment pursuant 
to paragraph (18) or if the Board otherwise determines, 
pursuant to regulations prescribed by the Board, that such 
joint treatment is desirable. 
"(B) WITH NONEMPLOYERS.—In the event of a merger, 
consolidation, unification, or reorganization in which an 
employer combines with another entity that is not an 
employer, the employer's individual einployer record shall 
attach to the combined entity. 
"(C) SALE OP ASSETS.—fii the event property of an 
employer is sold or transferred to another employer or other 
entity, or is partitioned among 2 or more employers or 
entities, the cumulative benefit balance, net cumulative 
contribution balance, 1-year compensation base, and 3-year 
compensation base of the employer shall be prorated among 
the employers which receive the property, including any 
entities which become employers by virtue of such transfer 
or partition, in such equitable manner as the Board by 
r^ulation shall prescribe. 
"(D) REINCORPORATION.—^The cumulative benefit balance, 
net cumulative contribution balance, 1-year compensation 
base, and 3-year compensation base of an employer that 
reincorporates or otlierwise alters its corporate identity in a 
transaction not involving a meiiger, consolidation, or unifi-
cation shall attach to the reincorporated or altered entity. 
"(E) ABANDONMENT.—^If an employer abandons property 
or discontinues service but continues to operate as an 
employer, the employer's individual employer record shall 
continue to be calculated as provided in this subsection 
without retroactive a4justment. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3769 
"(20) MAXIMUM CONTRIBUTION UMIT.—The maximum con-
tribution limit with respect to a calendar year is 12 percent, 
unless a 3.5 percent surcharge under parsigraph (14) is in effect 
with respect to that calendar year. If such a surcharge is in 
effect the maximum contribution limit with respect to that 
calendar year is 12.5 percent. 
"(21) SPECIAL RULES FOR CERTAIN COMPUTATIONS UNDER PARA-
GRAPH (1) (c).—(A) Any computation that is to be made under 
paragraph (IXC) on the basis of a 12-quarter period ending on a 
given June 30 shall be made on the basis of a period— 
"(i) beginning on the later of— 
"a) January 1,1990; 
"(II) the first day of the first calendar quarter that 
begins after the date on which the employer first began 
to pay compensation subject to this Act; or 
"(III) July 1 of the third calendar year preceding that 
June 30; and 
"(ii) ending on that June 30. 
"(B) The amount computed under subparagraph (A) shall be 
increased to an amount that bears the same ratio to the amount 
so computed as 12 bears to the number of calendar quarters on 
which the computation is based.". 
(b) EMPLOYEE REPRESENTATIVE CONTRIBUTION.—Subsection (b) of 
section 8 is amended to read as follows: 
45 USC 358. 
"(b) EMPLOYEE REPRESENTATIVE CONTRIBUTION.—Each employee 
representative shall pay a contribution with respect to so much of 
the compensation paid to him for services performed as an employee 
representative as is not in excess of the monthly compensation base 
computed in accordance with section l(i), at a rate which shall be 
determined under subsection (a) in the same manner and with the 
same effect as if the employee organization by which such employee 
representative is employed were an employer as defined in this 
Act.". 
(c) EXTENSION OF REMEDIES.—Section 8(h) is amended by adding at 
the end the following: "The remedies available under the first 
sentence of this subsection for an employer or employee representa-
tive who contests the amount of contributions payable by him shall 
also apply with respect to a contention that the contribution rate 
determined by the Board under subsection (a) or (b) to be applicable 
to such employer or employee representative is inaccurate or other-
wise improper.". 
(d) BOARD PROCLAMATION OF BALANCE.—Section 8 is amended— 
(1) by redesignating subsections (c) through (h) as subsections 
(f) through (k), respectively; and 
(2) by inserting after subsection (b) the following new 
subsections: 
"(c) BOARD PROCLAMATION OF BALANCE.— 
"(1) IN GENERAL.—Not later than October 15, 1990, and Octo-
ber 15 of each year thereafter the Board shall proclaim— 
"(A) the balance to the credit of the account as of the 
preceding June 30 for purposes of paragraphs (12) and (14) 
of subsection (a); 
"(B) the balance of any advances to the account under 
section ICKd) after September 30, 1985, that has not been 
repaid with interest as provided in such section as of 
September 30 of that year; 
102 STAT. 3770 
PUBLIC LAW 100-647—NOV. 10, 1988 
Federal 
Register, 
publication. 
45 u s e 358 note. 
45 u s e 358. 
45 u s e 360. 
45 u s e 361. 
45 u s e 358 note. 
"(C) the system compensation base as of that June 30 as 
computed in accordance with paragraph (11) of that 
subsection; 
"(D) the system unallocated charge balance as of that 
June 30, as computed in accordance with paragraph (10) of 
that subsection; and 
"(E) the pooled credit ratio, the pooled charge ratio, and 
the surcharge rate, if any, as determined under paragraph 
(12), (13), or (14) of that subsection and applicable in the 
following calendar year. 
"(2) PuBucATiON OF NOTICE.—As soon £is is practicable after 
such proclamation, the Board shall publish notice in the Fed-
eral Register of the amounts so determined and proclaimed. 
"(d) NOTIFICATIONS BY BOARD.—(1) Not later than the last day of 
any calendar quarter that begins after March 31, 1990, the Board 
shall notify each employer and employee representative of its net 
cumulative contribution balance and cumulative benefit balance as 
of the end of the preceding calendar quarter, as computed in accord-
ance with paragraphs (7) and (8) of subsection (a) as of the last day of 
such preceding calendar quarter rather than as of a given June 30 if 
such last day is not a June 30. 
"(2) Not later than October 15, 1990, and October 15 of each year 
thereafter, the Board shall notify each employer and employee 
representative of its benefit ratio, reserve ratio, 1-year compensation 
base, 3-year compensation base, unallocated charge, and reserve 
balance as of the preceding June 30 as computed in accordance with 
paragraphs (2), (3), (4), (5), (6), and (9) of subsection (a), and of the 
contribution rate applicable to the employer or employee represent-
ative in the following calendar year as computed under paragraphs 
(1) (B), (C), or (D) of that subsection. 
"(e) INFORMATION TO VERIFY ACCURACY TO BE MADE AVAILABLE.— 
Notwithstanding any other provision of law, upon request by an 
employer or employee representative, the Board shall make avail-
able to such employer or employee representative any information 
available to the Board which may be necessary to verify the 
accuracy of a contribution rate determined by the Board to be 
applicable to such employer or employee representative, or of any 
component of that contribution rate including the accuracy of the 
employer's individual employer record, upon payment by such 
employer or employee representative to the Board of the cost 
incurred by the Board in making such information available. The 
amounts so paid to the Board shall be credited to and deposited in 
the fund.". 
(e) EFFECTIVE DATE.—The amendments made by this section shall 
take effect upon the date of the enactment of this Act. 
SEC. 7103. ADMINISTRATIVE EXPENSES. 
(a) CHANGE IN PERCENTAGE TO BE DEPOSITED IN FUND.—Section 
8(i), as so redesignated by section 512(d), is amended by striking out 
"0.5" and inserting in lieu thereof "0.65". 
(b) CONFORMING AMENDMENTS.—(1) Section ICKa) is amended by 
striking out "0.5" and inserting in lieu thereof "0.65". 
(2) Section 11(a) is sunended by striking out "0.5" and inserting in 
lieu thereof "0.65". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply with respect to compensation paid in months beginning after 
September 30,1988. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3771 
SEC 7104. NOTIFICATION TO EMPLOYER. 
(a) IN CONNECTION WITH CLAIM.—Section 5(b) is amended by 
45 use 355. 
adding at the end thereof the following: "When a claim for benefits 
is filed with the Board, the Board shall provide notice of such claim 
to the claimant's base-year employer or employers and afford such 
employer or employers an opportunity to submit information rel-
evant to the claim before making an initial determination on the 
claim. When the Board initially determines to pay benefits to a 
claimant under this Act, the Board shall provide notice of such 
determination to the claimant's base-year employer or employers.". 
(b) IN CONNECTION WITH ADMINISTRATIVE REVIEW.—Section 5(c) is 
amended— 
(1) by mserting "(1)" after "(c)"; 
(2) by inserting at the end of the first paragraph the following: 
"In any such case the Board or the person or reviewing body so 
established or assigned shall, by publication or otherwise, notify 
all parties properly interested of their right to participate in the 
hearing and of the time and place of the hearing."; 
(3) by inserting "(2)" at the b^inning of the second 
paragraph; 
(4) by inserting after the second paragraph the following: 
"(3) Any base-year employer of a claimant whose claim for bene-
fits has been granted in whole or in part, either in an initial 
determination with respect thereto or in a determination after a 
hearing pursuant to paragraph (1), and who contends that the 
determination is erroneous for a reason or reasons other than a 
reason that is reviewable under paragraph (4), may appeal to the 
Board for review of such determination. Despite such an appeal, the 
benefits awarded shall be paid to such claimEmt, subject to recovery 
by the Board if and to the extent found on the appeal to have been 
erroneously awarded. The Board shall take such action as is appro-
priate to recover the amount of such benefits including if feasible 
adjustment in subsequent payments pursuant to the fii^t two para-
graphs of section 2(d) of this Act. Upon an appeal, the Board shall 
review the determination appealed from and for such review may 
designate one of its officers or employees to receive evidence and 
report to the Board thereof together with recommendations. In any 
such case the Board or the person so designated shall, by publication 
or otherwise, notify all parties properly interested of their right to 
participate in the proceeding and, if a hearing is to be held, of the 
time and place of tiie hearing. At the request of any party properly 
interested the Board shall provide for a hearing, and may provide 
for a hearing on its own motion. The Board shall prescribe r^ula- 
Regulations. 
tions governing the appeals provided for in this paragraph and for 
decisions upon such appeal."; 
(5) by inserting "(4)" at the b^inning of the third paragraph; 
(6) by inserting "(5)^' at the b^^inning of the fourth paragraph; 
(7) by striking out "two" in the firat sentence of the fourth 
paragraph and inserting in lieu thereof "three"; 
(8) by inserting before the final paragraph the following: 
"(6) For purposes of this subsection and subsections (d) and (f), anv 
base-year employer of the claimant is a properly inter^tted party.'; 
and 
(9) by inserting "(7)" at the b^inning of the final paragraph. 
(c) IN CONNECTION WITH JUDICIAL REVIEW.—Section 5(f) 
is 
amended— 
102 STAT. 3772 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) by inserting after "member," in the first sentence "or any 
base-year employer of the claimant,"; and 
(2) by inserting after the second sentence the following: "A 
copy of such petition also shall forthwith be served upon any 
other properly interested party, and such party shall be a party 
to the review proceeding.". 
(d) Ck>NFORiiaNG AMENDMENTS WITH RESPECT TO LIMITATION ON 
45 use 362. 
ADMINISTRATIVE DISCLOSURE.—Section 12(d) is amended— 
(1) by striking out "and" where it appears before "(iii)"; and 
(2) by striking out the period at the end of the first sentence 
and inserting in lieu thereof the following: "; and (iv) the Board 
shall disclose to any base-year employer of a claimant for 
benefits any information, including information as to the claim-
ant's identity, that is necessary or appropriate to notify such 
employer of the claim for benefits or to full and fair participa-
tion by such employer in an appeal, hearing, or other proceed-
ing relative to the claim pursuant to section 5 of this Act.". 
(e) O)NF0RMiNG AMENDMENT WITH RESPECT TO COURT PROCEED-
INGS LIMITATION.—Section 12(n) is amended by striking out "court" 
in the proviso to the second paragraph. 
45 use 355 note. 
(f) EFFECTIVE DATE.—^The amendments made by this section shall 
take eftlect on January 1,1990. 
45 use 369. 
SEC 7105. ANNUAL REPORT. 
On or before July 1 of 1989, and of each calendar year thereafter, 
the Railroad Retirement Board shall submit to the Congress a 
report on the financial status of the railroad unemplo3mient insur-
ance system under various economic and employment assumptions. 
Such report shall include any recommendation for financing 
changes which might be advisable, including any adjustment the 
Railroad Retirement Board recommends regarding the rates of 
employer contributions. 
SEC 7106. AMENDMENTS RELATING TO RAILROAD UNEMPLOYMENT 
REPAYMENT TAX. 
(a) IN GENERAL.—Chapter 23A of the 1986 Code (relating to rail-
road unemployment repayment tax) is amended to read as follows: 
"CHAPTER 23A. RAILROAD UNEMPLOYMENT REPAYMENT 
TAX 
"Sec. 3321. Imposition of tax. 
"Sec. 3322. Definitions. 
"SEC 332L IMPOSITION OF TAX. 
"(a) GENERAL RULE.—There is hereby imposed on every rail 
employer for each calendar month an excise tax, with respect to 
having individuals in his employ, equal to 4 percent of the total rail 
wages paid by him during such month. 
"(b) TAX ON E^MPLOYEE REPRESENTATIVES.— 
"(1) IN GENERAL.—There is hereby imposed on the income of 
each employee representative a tax equal to 4 percent of the rail 
wages paid to him during the calendar month. 
"(2) DETERMINATION OF WAGES.—The rail wages of an 
employee representative for purposes of paragraph (1) shall be 
determined in the same manner and with the same effect as if 
the employee organization by which such employee representa-
tive is employed were a rail employer. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3773 
"(c) TERMINATION IF LOANS TO RAILROAD UNEMPLOYMENT FUND 
REPAID.—The tax imposed by this section shall not apply to rail 
wages psiid on or after the 1st day of any calendar month if, as of 
such 1st day, there is— 
"(1) no balance of transfers made before October 1, 1985, to 
the railroad unemplo5nnent insurance account under section 
10(d) of the Railroad Unemployment Insurance Act, and 
"(2) no unpaid interest on such transfers. 
"SEC. 3322. DEFINITIONS. 
"(a) RAIL EMPLOYER.—For purposes of this chapter, the term 'rail 
employer' means any person who is an employer as defined in 
section 1 of the Railroad Unemployment Insurance Act. 
"(b) RAIL WAGES.—For purposes of this chapter, the term 'rail 
wages* means, with respect to any calendar month, so much of the 
remuneration paid during such month which is subject to contribu-
tions under section 8(a) of the Railroad Unemployment Insurance 
Act. 
"(c) EMPLOYEE REPRESENTATIVE.—For purposes of this chapter, the 
term 'employee representative* has the meaning given such term by 
section 1 of the Railroad Unemplojnnent Insurance Act. 
"(d) CERTAIN RULES MADE APPUCABLE.—For purposes of this chap-
ter, rules similar to the rules of section 3307 and 3308 shall apply." 
(b) CONTINUATION OF SURTAX RATE THROUGH 1990.— 
26 use 3321 
(1) IN GENERAL.—In the case of any calendar month beginning note. 
before January 1,1991— 
(A) there shall be substituted for "4 percent" in subsec-
tions (a) and (b) of section 3321 of the 1986 Code the 
percentage equal to the sum of— 
(i) 4 percent, plus 
(ii) the surtax rate (if any) for such calendar month, 
and 
(B) subsection (c) of such section shall not apply to so 
much of the tax imposed by such section as is attributable 
to the surtax rate. 
(2) SURTAX RATE.—For purposes of paragraph (1), the surtax 
rate shall be— 
(A) 3.5 percent for each month during a calendar year if, 
as of September 30, of the preceding calendar year, there 
was a balance of transfers (or unpaid interest thereon) 
made after September 30, 1985, to the railroad unemploy-
ment insurance account under section 10(d) of the Railroad 
Unemployment Insuremce Act, and 
(B) zero for any other calendar month. 
(c) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 6157 of the 1986 Code (relating to 
quarterly pajnuent of railroad unemplojrment repayment tax) is 
hereby repealed. 
(2) Paragraph (2) of section 6201(b) of the 1986 Code (relating 
to amount not to be assessed) is amended by striking out "or tax 
imposed by section 3321'*. 
(3) Section 6317 of the 1986 Code (relating to pa5niients of 
Federal unemployment t£ix for calendar quarter) is amended— 
(A) by striking out "or tax imposed by section 3321", and 
(B) by striking out "and 23A, as the case may be,**. 
102 STAT. 3774 
PUBLIC LAW 100-647—NOV. 10, 1988 
(4) Subsection (e) of section 6513 of the 1986 Ckxie (relating to 
payments of Federal unemplo3mient tax) is amended by striWng 
out the last sentence. 
(5) Subsection (i) of section 6601 of the 1986 Code (relating to 
exception as to Federal unemplo3mient tax) is Eimended by 
striking out "or 3321". 
(6) Subparagraph (A) of section 232(aX2) of the Railroad 
45 use 23in 
Retirement Revenue Act of 1983 is amended by striking out "is 
note. 
attributable to the beisic rate under section 3321(cXlXA) of the 
Internal R;evenue Code of 1954" and inserting in lieu thereof "is 
not attributable to the surtax rate under section 516(b) of the 
Railroad Unemployment Insurance and Retirement Improve-
ment Act of 1988". 
(7) Subparagraph (B) of section 232(aX2) of such Act is 
amended by striking out "section 3321(cXlXB) of such Code" and 
inserting in lieu thereof "section 516(b) of such Act". 
26 use 3321 
(d) EFFECTIVE DATE.—The amendments made by this section, and 
^°^- 
the provisions of subsection (b), shall apply to remuneration paid 
after December 31,1988. 
45 u s e 352 note. 
SEC. 7107. GAO STUDY OF FRAUD AND PAYMENT ERRORS. 
The Comptroller General shall study the frequency of fraud and 
payment errors in the railroad unemployment compensation pro-
Reports, 
gram. Not later than 1 year after the date of the enactment of this 
Act, the Comptroller General shedl report to Congress the results of 
such study. Such report shall include— 
(1) estimates of rates and amounts of annual losses due to 
fraud and overpajmtient; 
(2) comparisons of such rates with the rates of losses in other 
Federal programs which experience such losses; 
(3) recommendations for legislative measures that could be 
taken to reduce the losses in the railroad unemployment com-
pensation program arising from fraud and payment errors; and 
(4) such other matters relating to such fraud and payment 
errors as the Comptroller General determines are appropriate. 
SEC. 7108. ONE-YEAR EXTENSION OF TIME LIMIT FOR FILING REPORT BY 
COMMISSION ON RAILROAD RETIREMENT REFORM. 
Section 9033(f) of the Omnibus Budget Reconciliation Act of 1987 
45 use 23ln 
(101 Stat. 1330-298) is amended by striking "October 1, 1989" and 
note. 
inserting "October 1,1990". 
Subtitle B—BeneHt and Other Adjustments 
SEC. 7201. WAITING PERIOD FOR BENEFITS AND BENEFIT INCREASES. 
45 use 352. 
(a) IN GENERAL.—Section 2(a) is amended— 
(1) by inserting "(1)" after "(a)"; 
(2) by striking out "Benefits" the first place it appears and all 
that follows through the end of the first paragraph, and insert-
ing in lieu thereof the following: 
"(AXi) Except as otherwise provided in this subparagraph, benefits 
shall be payable to any qualified employee for each day of 
unemployment in excess of 4 during any registration period. 
"(ii) No benefits sheill be payable for days of unemployment during 
the first registratioi^ period within a benefit year in which the 
employee has more than 4 days of unemplojmient. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3775 
"(iii) In any case in which the Board finds that an employee's 
unemployment was due to a stoppage of work because of a strike in 
the establishment, premises, or enterprise at which such employee 
was last employed, no benefits shall be payable for the first 14 days 
of unemployment due to such stoppage of work. However, for subse-
quent days of unemployment due to such stoppage of work, benefits 
shall be payable to days in excess of 4 during any r^istration 
period. 
"(BXi) E!xcept as otherwise provided in this subparagraph, benefits 
shall be payaMe to any qualified employee for each day of sickness 
after the 4th consecutive day of siclmess in a period of continuing 
sickness but excluding 4 days of sickness in any r^istration period. 
"(ii) No benefits shall be payable for days of sickness in the first 
r^istration period within a benefit year in which the employee has 
both 4 consecutive days of sickness and more than 4 days of sickness. 
"(iii) For the purposes of this subparagraph, a period of continuing 
sickness means (D a period of consecutive days of sickness, whether 
from one or more causes, or (II) a period of successive days of 
sickness due to a single cause without interruption of more than 90 
consecutive days which are not days of sickness."; 
(3) by inserting "(2)" at the b^inning of the second para-
graph; 
(4) by striking out "and" after "shall not exceed $24 per day of 
such unemployment or sickness" in the second paragraph and 
inserting in Ueu thereof a comma; 
(5) by inserting "but before July 1, 1988," after "June 30, 
1976," in the second paragraph; 
(6) by striking out the period at the end of the first sentence of 
the second paragraph and inserting in lieu thereof ", that for 
r^istration periods beginning after June 30, 1988, but before 
July 1, 1989, such amount shall not exceed $30 per day of 
unemployment or sickness, and that for r^^tration periods 
b^inning after June 30,1989, such amount shall not exceed the 
maximum daily benefit rate provided in paragraph (3) of this 
subsection."; 
(7) by inserting after the second paragraph the following new 
paragraph: 
"(3KA) The maximum daily benefit rate which the Board is 
required to compute under section 12(rX2) shall be the amount com-
puted pursuant to the following formula, but shall be not less than 
$30: 
BR 
=25fl+ 
* - « • 
V 
900 
*(B) For purposes of such formula— 
"(i) 'BR' represents the maximum daily benefit rate; and 
"(ii) *A' represents the amount obtained by dividing the 
amount of the 'applicable base' with respect to tier 1 taxes as 
determined under section 3231(eX2) of the Internal Revenue 
102 STAT. 3776 
PUBLIC LAW 100-647—NOV. 10, 1988 
Code of 1986 for the calendar year in which the benefit year 
begins by 60, with this quotient being rounded down to the 
nearest multiple of $100. 
"(C) If the maximum daily benefit rate computed under such 
formula is not a multiple of $1, it shall be rounded to the nearest 
multiple of $1, with such rounding being upward in the event the 
amount computed is equidistant between two multiples of $1."; and 
(8) by inserting (4)" at the beginning of the last paragraph. 
45 use 352 note. 
Qji) EFFECTIVE DATES.—(1) Except as provided in paragraph (2), the 
amendments made by subsection (a) shall take effect on the date of 
the enactment of this Act. 
(2) The amendments made by par£igraph (2) of subsection (a) shall 
apply with respect to registration periods beginning after June 30, 
1988. 
SEC. 7202. QUALIFYING CONDITION. 
45 use 353. 
(a) IN GENERAL.—Section 3 is amended— 
(1) by inserting "with respect to the base year" after "his 
compensation"; and 
(2) by striking "$1,500 with respect to the base year" and 
inserting in lieu thereof "2.5 times the monthly compensation 
base for months in such base year as computed under section 
l(i) of this Act". 
45 use 353 note. 
0>) EFFECTIVE DATE.—The amendments made by this section shall 
take effect on the date of the enactment of this Act. 
SEC. 7203. INCREASE IN MAXIMUM PERMITTED SUBSIDIARY REMUNERA-
TION. 
45 use 351. 
(a) IN GENERAL.—The second paragraph of section l(k) is amended 
by striking out "$10" and inserting "$15 in lieu thereof. 
45 use 351 note. 
0)) EFFECTIVE DATE.—The amendment made by this section shall 
take effect on July 1,1988. 
Subtitle C—Retirement Act Amendments 
SEC. 7301. ADDITIONAL LUMP SUM PAYMENT IN CERTAIN CASES. 
45 use 23le. 
Section 6 of the Railroad Retirement Act of 1974 is amended by 
adding at the end thereof the following new subsection: 
"(eXD Every individual who will have completed ten years of 
service at the time of his retirement or death, who will have 
received compensation in the nature of separation or severance pay 
on or after January 1, 1985, and who would have been credited with 
additional months of service pursuant to section 3(iX4) of this Act 
except for the fact that such individual was not in an emplo5mient 
relation to one or more employers nor an employee representative 
in such months, shall, at the time his annuity under section 2(aXl) of 
this Act begins to accrue, be entitled to a lump sum in the amount 
provided under subdivision (2) of this subsection. If the full amount 
of a lump sum under this subsection cannot be determined at the 
time an individual's annuity under section 2(aXl) begins to accrue, 
such lump sum shall be payable at such time thereafter as such 
amount can be determined. If an individual otherwise eligible for a 
limip sum under this section dies before he becomes entitled to an 
annuity under section 2(aXl), or before he receives payment of such 
lump sum, such lump sum shall be payable to the person, if any, 
who is determined by the Board to be such individual's widow or 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3777 
widower and who will not have died before receiving pa3rment of 
such lump sum. If there be no such widow or widower, such lump 
sum shall be payable to the children, grandchildren, parents, broth-
ers and sisters, or the estate of the deceased individual in the same 
manner as if such lump sum were a lump sum payable under 
subsection (cXD of this section. 
"(2) The lump sum provided under subdivision (1) of this subsec-
tion shall be in an amount equal to the product of (A) the compensa-
tion attributable to the additional months of service which would 
have been credited to the individual due to the receipt of payments 
in the nature of separation or severance pay pursuant to section 
3(iX4) of this Act if such individual had remained in an employment 
relation to one or more employers or had continued to be an 
employee representative and (B) the rate of tax, or rates of tax, 
imposed on tlie compensation described in clause (A) of this subdivi-
sion by section 3201(b) of the Internal Revenue Code of 1986.". 
SEa 7302. DELETION OF LAST PERSON SERVICE AS A DISQUALIFICATION. 
(a) IN GENERAL.—Section 2(e) of the Railroad Retirement Act of 
1974 is amended— 
45 use 23ia. 
(IXA) in subdivision (1), by striking out "any person, whether 
or not"; and 
(B) by striking out "(but with the" and all that follows 
through "political subdivision of a State"; 
(2) in subdivision (2), by striking out "and of the person, or 
persons, by whom he was last employed"; and 
(3) in subdivision (3), by striking out "or to the last person, or 
persons, by whom he was employed prior to the date on wMch 
the annuity under subsection (aXD bc^an to accrue". 
(b) DEDUCTION FOR WORK.—Section 2(f) of such Act is amended by 
adding at the end thereof the following new subdivision: 
"(6XA) Except as provided in subparagraph (B)— 
"(i) that portion of the annuity for any month of an individual 
as is computed under section 30>) and as adjusted under section 
3(g), plus any supplemental amount for such month under 
section 3(e), and that portion of the annuity for any month of a 
spouse as is computed under section 4(b) and as adjusted under 
section 4(d), shall each be subject to a deduction of $1 for each $2 
of compensation received by such individual from compensated 
service rendered in such month to the last person, or persons, by 
whom such individual was employed before the date on which 
the annuity of such individual under subsection (aXD b^an to 
accrue; and 
"(ii) that portion of the annuity for any month of a spouse as 
is computed under section 4(b) and as adjusted under section 
4(d) shall be subject to a deduction of $1 for each $2 of com-
pensation received by such spouse from compensatied service 
rendered in such month to the last person, or persons, by whom 
such spouse was employed before the date on which the annuity 
of such spouse under subsection (cXD b^an to accrue. 
"(B) Any deductions imposed by this subdivision for any month 
shall not exceed 50 percent of the annuity amount for such month to 
which such deductions apply.". 
(c) EFFBCTTVE DATE.—^The amendments made by this section shall 
45 USC 23la 
apply to annuities payable under the Railroad Retirement Act of ^°^-
1974 for months beginning after the date of enactment of this Act. 
102 STAT. 3778 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 7303. EARNINGS OF DISABILITY ANNUITANTS. 
(a) IN GENERAL.—Section 2(eX4) of the Railroad Retirement Act of 
45 use 231a. 
1974 is amended— 
(1) by striking out "$200 in earnings" and inserting in lieu 
thereof "$400 in earnings (after deduction of disability related 
work expenses)"; 
(2) by striking out "$2,400" each place it appears and insert-
ing in lieu thereof "$4,800 (after deduction of disability related 
work expenses)"; 
(3) by striking out "$200" each place it appears and inserting 
in lieu thereof "$400"; and 
(4) by striking out "$100" and inserting in lieu thereof "$200". 
45 use 231a 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
note. 
apply with respect to months in calendar years beginning after 
December 31,1988. 
SEC. 7304. ALLOWANCE OF CREDIT FOR MILITARY SERVICE. 
(a) IN GENERAL.—Section l(gX2) of the Railroad Retirement Act of 
45 use 231. 
1974 is amended by adding at the end thereof the following: 
"For purposes of section 3(iX2) of this Act, the period beginning on 
June 15,1948, and ending on December 15,1950, shall be deemed to 
be a war service period with respect to any individual who without 
intervening emplojnnent not covered by this Act rendered service as 
an employee to an employer under this Act in the year such 
individual was released from active military service or in the year 
immediately following such year.". 
45 use 231 note. 
(b) EFFECTIVE DATE.—The amendment made by this section shall 
apply with respect to annuities accruing in months after the date of 
enactment of this Act. 
TITLE VIII—AMENDMENTS RELATING TO 
SOCIAL SECURITY ACT PROGRAMS 
Subtitle A—Old-Age, Survivors, and Disability 
Insurance and Related Provisions 
SEC. 8001. INTERIM DISABILITY BENEFITS IN CASES OF DELAYED FINAL 
DECISIONS. 
(a) DISABILITY BENEFITS UNDER TITLE II.—Section 223 of the Social 
Security Act (42 U.S.C. 423) is amended— 
(1) by redesignating subsection (h) as subsection (i); and 
(2) by inserting after subsection (g) the following new 
subsection: 
"Interim Benefits in Cases of Delayed Final Decisions 
"(hXl) In any case in which an administrative law judge has 
determined after a hearing as provided under section 205(b) that an 
individual is entitled to disability insuremce benefits or child's, 
widow's, or widower's insurance benefits based on disability and the 
Secretary has not issued his final decision in such case within 110 
days after the date of the administrative law judge's determination, 
such benefits shall be currently paid for the months during the 
period beginning with the month preceding the month in which 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3779 
such 110-day period expires and ending with the month preceding 
the month in which such final decision is issued. 
"(2) For purposes of paragraph (1), in determining whether the 
110-day period referred to in paragraph (1) has elapsed, any period 
of time for which the action or inaction of such individual or such 
individual's representative without good cause results in the delay 
in the issuance of the Secretary's final decision shall not be taken 
into account to the extent that such period of time exceeds 20 
calendar days. 
"(3) Any benefits currently paid under this title pursuant to this 
subsection (for the months described in paragraph (1)) shall not be 
considered overpayments for any purpose of this title (unless pay-
ment of such benefits was fraudulently obtained), and such benefits 
shall not be treated as past-due benefits for purposes of section 
2060t)Xl).". 
(b) BENEFITS UNDER TITLE XVL—Section 1631(a) of such Act (42 
U.S.C. 1383(a)) is amended by adding at the end the following new 
paragraph: 
"(8KA) In any case in which an administrative law judge has Blind persons. 
determined after a hearing as provided in subsection (c) that an 
individual is entitled to benefits based on disability or blindness 
under this title and the Secretary has not issued his final decision in 
such case within 110 days after the date of the administrative law 
judge's determination, such benefits shall be currently paid for the 
months during the period beginning with the month in which such 
110-day period expires and ending with the month in which such 
final decision is issued. 
"(B) For purposes of subparagraph (A), in determining whether 
the 110-day period referred to in subparagraph (A) has elapsed, any 
period of time for which the action or inaction of such individual or 
such individual's representative without good cause results in the 
delay in the issuance of the Secretary's fined decision shall not be 
taken into account to the extent that such period of time exceeds 20 
calendar days. 
"(C) Any benefits currently paid under this title pursuant to this 
pareigraph (for the months described in subparagraph (A)) shall not 
be considered overpayments for any purposes of this title, unless 
pajrment of such benefits was fraudulently obtained.". 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
42 use 423 note. 
apply to determinations by administrative law judges of entitlement 
to benefits made after 180 days after the date of the enactment of 
this Act. 
SEC. 8002. APPLICATION OF EARNINGS TEST IN YEAR OF INDIVIDUAL'S 
DEATH. 
(a) YEAR IN WHICH INDIVIDUAL WOULD HAVE ATTAINED RETIRE-
MENT AGE BUT FOR THE INDIVIDUAL'S DEATH IN SUCH YEAR TREATED 
AS A YEAR THROUGHOUT WHICH THE EARNINGS TEST FOR INDIVIDUALS 
WHO HAVE ATTAINED RETIREMENT AGE IS APPUCABLE.—Paragraph 
(3) of section 203(f) of the Social Security Act (42 U.S.C. 403(fK3)) is 
amended by inserting "(or, but for the individual's death, would 
have attained)" after "who has attained". 
(b) ELIMINATION OF THE SHORT TAXABLE YEAR IN THE YEAR OF 
DEATH FOR PURPOSES OF THE EARNINGS TEST.—Paragraph (3) of 
section 203(f) of such Act is further amended— 
(1) by inserting after the first sentence the following new 
sentence: "For purposes of the preceding sentence, notwith-
102 STAT. 3780 
PUBLIC LAW 100-647—NOV. 10, 1988 
standing section 211(e), the number of months in the taxable 
year in which an individual dies shall be 12."; and 
(2) in the last sentence, by striking "preceding sentence" and 
inserting "first sentence of this paragraph", 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
apply to deaths after the date of the enactment of this Act. 
42 use 403 note. SEC. 8003. PHASEOUT OF REDUCTION IN WINDFALL BENEFITS. 
(a) IN GENERAL.—Section 215(aX7XD) of the Social Security Act (42 
U.S.C. 415(a)(7)(D)) is amended— 
(1) by striking "more than 25 years of coverage" in the second 
sentence and inserting "more than 20 years of coverage"; and 
(2) by striking "shall (if such percent is smaller than the 
percent specified in whichever of the following clauses applies) 
be deemed to be—" and inserting "shall (if such percent is 
smaller than the applicable percent specified in the following 
table) be deemed to be the applicable percent specified in the 
following table:"; and 
(3) by striking clauses (i) through (iv) and inserting the follow-
ing table: 
"If the number of such individual's 
yean of coverage (as so 
The applicable 
defined) is: 
percent is: 
29 
85 percent 
28 
80 percent 
27 
75 percent 
26 
70 percent 
25 
65 percent 
24 
60 percent 
23 
55 percent 
22 
50 percent 
21 
45 percent.". 
42 use 415 note. 
(b) EFFECTIVE DATE.—^The amendments made by subsection (a) 
shall apply to benefits payable for months after December 1988. 
SEC 8004. DENIAL OF BENEFITS TO INDIVIDUALS DEPORTED OR 
ORDERED DEPORTED ON THE BASIS OF ASSOCIATIONS WITH 
THE NAZI GOVERNMENT OF GERMANY DURING WORLD WAR 
IL 
(a) IN GENERAL.—Section 202(nXl) of the Social Security Act (42 
U.S.C. 402(nXl)) is amended by striking "or (18)" in the matter 
preceding subparagraph (A) and inserting "(18), or (19)". 
(b) TIME OF DEPORTATION.—Section 202(n) of such Act is further 
amended by addii^ at the end the foUoMdng new paragraph: 
"(3) For purposes of paragraphs (1) and (2) of this subsection, an 
individual against whom a final order of deportation has been issued 
under paragraph (19) of section 241(a) of the Immigration and 
NationaUty Act (relating to persecution of others on account of race, 
religion, national origin, or political opinion, under the direction of 
or in association with the Nazi government of Germany or its allies) 
shall be considered to have been deported under such paragraph (19) 
as of the date on which such order became final.". 
42 use 402 note. 
(c) EFFECTIVE DATE.—^Tho amendments made by this section shall 
apply only in the case of deportations occurring, and final orders of 
deportation issued, on or after the date of enactment of this Act, and 
only to benefits for months beginning (and deaths occurring) on or 
after such date. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3781 
SEC 8005. MODIFICATIONS IN THE TERM OF OFFICE OF PUBLIC MEM-
BERS OF THE BOARD OF TRUSTEES OF THE SOCIAL SECU-
RITY TRUST FUNDS. 
(a) IN GENERAL.—Sections 201(c), 1817(b), and 1841(b) of the Social 
Security Act (42 U.S.C. 401(c), 1395i(b), 1395t(bXi)) are each amended 
by inserting after the first sentence the following: "A member of the 
Board of Trustees serving as a member of the pubUc and nominated 
and confirmed to fill a vacancy occurring during a term shall be 
nominated and confirmed only for the remainder of such term. An 
individual nominated and confirmed as a member of the public may 
serve in such position after the expiration of such member's term 
until the earlier of the time at which the member's successor takes 
office or the time at which a report of the Board is first issued under 
paragraph (2) after the expiration of the member's term.'\ 
(b) EFFECTIVE DATE.—llie amendments made by this section shall 42 USC 401 note. 
apply to members of the Boards of Trustees of the Federal Old-Age 
and Survivors Insurance Trust Fund and the Federal Disability 
Insurance Trust Fund, of the Federal Hospital Insurance Trust 
Fund, and of the Federed Supplementary Medical Insurance Trust 
Fund serving on such Boards of Trustees as members of the public 
on or after the date of the enactment of this Act. 
SEC. 8006. CONTINUATION OF DISABILITY BENEFITS DURING APPEAL. 
Subsection (g) of section 223 of the Social Security Act (42 U.S.C. 
423(g)) is amended— 
(1) in paragraph (IXiii), by striking "June 1989" and inserting 
"June 1990"; and 
(2) in paragraph (3XB), by striking "January 1, 1989" and 
inserting "January 1,1990". 
SEC. 8007. EXEMPTION FROM SOCIAL SECURITY FOR EMPLOYERS AND 
EMPLOYEES WHO ARE BOTH MEMBERS OF CERTAIN RELI-
GIOUS FAITHS. 
(a) ExEBfPTioN FROM OOA^ERAGE UNDER SOCIAL SECURITY.— 
(1) IN GENERAL.—Subchapter C of chapter 21 of the Internal 
Revenue Code of 1986 (general provisions under Federal Insur-
ance Contributions Act) is amended by redes^nating section 
3127 as section 3128, and by inserting after section 3126 the 
foUowing new section: 
•«EC 3127. EXEMPTION FOR EMPLOYERS AND THEIR EMPLOYEES 
WHERE BOTH ARE MEMBERS OF RELIGIOUS FAITHS OP-
POSED TO PARTICIPATION IN SOCIAL SECURITY ACT PRO-
GRAMS. 
"(a) IN GENERAL.—Notwithstanding any other provision of this 
chapter (and under r^ulations prescribed to carry out this section), 
in any case where— 
"(1) an employer is a member of a recognized religious sect or 
division thereof described in section 140^X1) and an adherent 
of established tenets or teachings of such sect or division as 
described in such section, and has filed and had approved under 
subsection (b) an application (in such form and manner, and 
with such official, as may be prescribed by such r^ulations) for 
an exemption from the taxes imposed by section 3111, and 
"(2) an employee of such employer who is also a member of 
sudh a religious sect or division and an adherent of its estab-
lished tenets or teachings has filed and had approved under 
102 STAT. 3782 
PUBLIC LAW 100-647—NOV. 10, 1988 
subsection (b) an identical application for exemption from the 
taxes imposed by section 3101, 
such employer shall be exempt from the taxes imposed by section 
3111 with respect to wages paid to each of his employees who meets 
the requirements of paragraph (2) and each such employee shall be 
exempt from the taxes imposed by section 3101 with respect to such 
wages paid to him by such employer. 
"(b) APPROVAL OF APPUCATION.—An application for exemption 
filed by an employer under subsection (a)(1) or by an employee 
under subsection (aX2) shall be approved only if— 
"(1) such application contains or is accompanied by the evi-
dence described in section 1402(g)(1)(A) and a waiver described 
in section 1402(g)(1)(B), 
"(2) the Secretary of Health and Human Services makes the 
findings (with respect to such sect or division) described in 
section 1402(g)(1) (C), (D), and (E), and 
"(3) no benefit or other payment referred to in section 
1402(g)(lXB) became payable (or, but for section 203 or 222(b) of 
the Social Security Act, would have become payable) to the 
individual filing the application at or before the time of such 
filing. 
"(c) EFFECTIVE PERIOD OF EXEMPTION.—An exemption granted 
under this section to any employer with respect to wages paid to any 
of his employees, or granted to any such employee, shall apply with 
respect to wages paid by such employer during the period— 
"(1) commencing with the first day of the first calendar 
quarter, after the quarter in which such application is filed, 
throughout which such employer or employee meets the ap-
plicable requirements specified in subsections (a) and (b), and 
"(2) ending with the last day of the calendar quarter preced-
ing the first calendar quarter thereafter in which (A) such 
employer or the employee involved ceases to meet the ap-
plicable requirements of subsection (a), or (B) the sect or division 
thereof of which such employer or employee is a member is 
found by the Secretary of Health and Human Services to have 
ceased to meet the requirements of subsection (bX2).". 
(2) CLERICAL AMENDMENT.—The table of sections for such 
subchapter C of such Code is amended by striking the last item 
and inserting the following: 
"Sec. 3127 Exemption for employers and their employees where both are 
members of religious faiths opposed to participation in Social 
Security Act programs. 
"Sec. 3128. Short title.". 
(b) CONFORMING EXEMPTION FROM EUGIBIUTY FOR BENEFITS.— 
Section 202(v) of the Social Security Act (42 U.S.C. 402(v)) is 
amended— 
(1) by inserting "(1)" after "(v)"; 
(2) by inserting "and subject to paragraph (3)," after "title,"; 
(3) by striking "waiver; except that" and all that follows and 
inserting "waiver."; and 
(4) by adding at the end the following new paragraphs: 
"(2) Notwithstanding any other provision of this title, and subject 
to paragraph (3), in the case of any individual who files a waiver 
pursuant to section 3127 of the Internal Revenue Code of 1986 and is 
granted a tax exemption thereunder, no benefits or other payments 
shall be payable under this title to him, no pa5mients shall be made 
on his behalf under part A of title XVIII, and no benefits or other 
note. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3783 
payments under this title shall be payable on the basis of his wages 
and self-emplojmient income to any other person, after the filing of 
such waiver. 
"(8) If, after an exemption referred to in paragraph (1) or (2) is 
granted to an individual, such exemption ceases to be effective, the 
waiver referred to in such paragraph shall cease to be applicable in 
the case of benefits and other payments under this title and part A 
of title XVIII to the extent based on— 
"(A) his wages for and after the calendar year following the 
calendar year in which occurs the failure to meet the require-
ments of section 1402(g) or 3127 on which the cessation of such 
exemption is based, and 
"(B) his self-employment income for and after the taxable 
year in which occurs such failure.". 
(c) CONFORMING AMENDMENTS REMOVING TIME LIMITS ON S E C A 
EXEMPTION APPLICATIONS.—Section 1402(g) of the Internal Revenue 
Code of 1986 is amended— 
(1) by striking paragraphs (2) and (4); and 
(2) by redesignating paragraphs (3) and (5) as paragraphs (2) 
and (3), respectively. 
(d) EFFECTIVE DATES.—The amendments made by subsection (a) ^^^Y^^ ^^^^ 
shall apply to wages paid after December 31, 1988. The amendments 
made by subsection (b) shall apply to benefits paid for (and items 
and services furnished in) months after December 1988. The amend-
ments made by subsection (c) shall apply to applications for exemp-
tions filed on or after the date of the enactment of this Act. 
SEC. 8008. BLOOD DONOR LOCATOR SERVICE. 
(a) EXPLICIT AUTHORIZATION OF USE OF SOCIAL SECURITY ACCOUNT 
NUMBER TO ASSIST IN IDENTIFICATION OF BLOOD DONORS.—Section 
205(c)(2) of the Social Security Act (42 U.S.C. 405(c)(2)) is amended— 
(1) by redesignating subparagraph (D) as subparagraph (E); 
and 
(2) by inserting after subparagraph (C) the following new 
subparagraph: 
"(D)(i) It is the policy of the United States that— 
"(I) any State (or any political subdivision of a State) and any 
authorized blood donation facility may utilize the social security 
account numbers issued by the Secretary for the purpose of 
identifying blood donors, and 
"(II) any State (or political subdivision of a State) may require 
any individual who donates blood within such State (or political 
subdivision) to furnish to such State (or political subdivision), to 
any agency thereof having related administrative responsibility, 
or to any authorized blood donation facility the social security 
account number (or numbers, if the donor has more than one 
such number) issued to the donor by the Secretary, 
"(ii) If and to the extent that any provision of Federal law enacted 
before the date of the enactment of this subparagraph is inconsist-
ent with the policy set forth in clause (i), such provision shall, on 
and after such date, be null, void, and of no effect, 
"(iii) For purposes of this subparagraph— 
"(I) the term 'authorized blood donation facility' means an 
entity described in section 1141(hXlXB), and 
"(II) the term 'State' includes the District of Columbia, the 
Commonwealth of Puerto Rico, the Virgin Islands, Guam, the 
102 STAT. 3784 
PUBLIC LAW 100-647—NOV. 10, 1988 
42 use 
1320b-ll. 
Regulations. 
Records. 
Classified 
information. 
Commonwealth of the Northern Marianas, and the Trust Terri-
tory of the Pacific Islands.". 
(b) ESTABUSHMENT OF BLOOD D O N O R LOCATOR SERVICE.— 
(1) IN GENERAL.—Part A of title XI of such Act (42 U.S.C. 1301 
et seq.) is amended by adding at the end the following new 
section: 
"BLOOD DONOR LOCATOR SERVICE 
"SEC. 1141. (a) IN GENERAL.—The Secretary shall establish and 
conduct a Blood Donor Locator Service, under the direction of the 
Commissioner of Social Security, which shall be used to obtain and 
transmit to any authorized person (as defined in subsection (hXD) 
the most recent mailing address of any blood donor who, as in-
dicated by the donated blood or products derived therefrom or by the 
history of the subsequent use of such blood or blood products, has or 
may have the virus for acquired immune deficiency syndrome, in 
order to inform such donor of the possible need for medical care and 
treatment. 
"(b) PROVISION OF ADDRESS INFORMATION.—Whenever the Sec-
retary receives a request, filed by an authorized person (as defined 
in subsection (hXD), for the mailing address of a donor described in 
subsection (a) and the Secretary is reasonably satisfied that the 
requirements of this section have been met with respect to such 
request, the Secretary shall promptly undertake to provide the 
requested address information from— 
"(1) the files and records maintained by the Social Security 
Administration, and 
"(2) such files and records obtained pursuant to section 
6103(mX6) of the Internal Revenue Code of 1986 £is the Secretary 
considers necessary to comply with such request. 
"(c) MANNER AND FORM OF REQUESTS.—A request for address 
information under this section shall b^ filed in such manner and 
form as the Secretary shall by regulation prescribe, shall include the 
blood donor's social security account number, and shall be accom-
panied or supported by such documents as the Secretary may deter-
mine to be necessary. 
"(d) PROCEDURES AND SAFEGUARDS.—Any authorized person shall, 
as a condition for receiving address information from the Blood 
Donor Locator Service— 
"(1) establish and maint£iin, to the satisfaction of the Sec-
retary, a system for standardizing records with respect to any 
request, the reason for such request, and the date of such 
request made by or of it and any disclosure of address informa-
tion made by or to it, 
"(2) establish and maintain, to the satisfaction of the Sec-
retary, a secure area or place in which such address information 
and all related blood donor records shall be stored, 
"(3) restrict, to the satisfaction of the Secretary, access to the 
address information and related blood donor records only to 
persons whose duties or responsibilities require access and to 
whom disclosure may be made under the provisions of this 
section, 
"(4) provide such other safeguards which the Secretary deter-
mines (and which the Secretary prescribes in regulations) to be 
necessary or appropriate to protect the confidentiality of the 
address information and related blood donor records. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3785 
"(5) furnish a report to the Secretary, at such tune and Reports. 
containing such information as the Secretary may prescribe, 
which describes the procedures established and utilized by the 
authorized person for ensuring the confidentiality of address 
information and related blood donor records required under this 
subsection, and 
"(6) destroy such address information and related blood donor 
records, upon completion of their use in providing the notifica-
tion for which the information was obtained, so as to make such 
information and records undisclosable. 
If the Secretary determines that any authorized person has failed to, 
or does not, meet the requirements of this subsection, the Secretary 
may, after any proce^lings for review established under subsection 
(f), take such actions as are necessary to ensure such requirements 
are met, including refusing to disclose address information to such 
authorized person until the Secretary determines that such require-
ments have been or will be met. In the case of any authorized person 
who discloses any address information received pursuant to this 
section or any related blood donor records to any agent, this subsec-
tion shall apply to such authorized person and each such agent 
(except that, in the case of an agent, any report to the Secretary or 
other action with respect to the Secretary shall be made or taken 
through such authorized person). The Secretary shall destroy all 
related blood donor records in the possession of the Department of 
Health and Human Services upon completion of their use in 
transmitting mailing addresses as required under subsection (a), so 
as to make such records undisclosable. 
"(e) ARRANGEBCENTS WITH STATE AGENCIES AND AUTHORIZED PER-
SONS.—^The Secretary, in carrying out the Secretary's duties and 
functions under this section, shall enter into arrangements— 
"(1) with State agencies to accept and to transmit to the 
Secretary requests for address information under this section 
and to accept and to transmit such information to authorized 
persons, and 
"(2) with State agencies and authorized persons otherwise to 
cooperate with the Secretary in carrying out the purposes of 
this section. 
"(f) PROCEDURES FOR ADMINISTRATIVE REVIEW.—^The Secretary Regulations. 
shall by r^ulation prescribe procedures which provide for adminis-
trative review of any determination that any authorized person has 
failed to meet the requirements of this section. 
"(g) UNAUTHORIZED DISCLOSURE OP INFORMATION.—Paragraphs (1), 
(2), and (3) of section 7213(a) of the Internal Revenue Code of 1986 
shall apply with respect to the unauthorized willful disclosure to 
any person of address information or related blood donor records 
acquired or maintained by or under the Secretary, or pursuant to 
this section by any authorized person, or of information derived 
from any such address information or related blood donor records, in 
the same manner and to the same extent as such paragraphs apply 
with respect to unauthorized disclosures of return and return 
information described in such paragraphs. Paragraph (4) of section 
7213(a) of such Ckxie shall apply with respect to the wUlfiil offer of 
any item of material value in exchange for any such address 
information or related blood donor record in the same manner and 
to the same extent as such paragraph applies with respect to offers 
(in exchange for any return or return information) descrU)ed in such 
paragraph. 
102 STAT. 3786 
PUBLIC LAW 100-647—NOV. 10, 1988 
"(h) DEFINITIONS.—For purposes of this section— 
"(1) AUTHORIZED PERSON.—The term 'authorized person' 
means— 
"(A) any agency of a State (or of a political subdivision of 
a State) which has duties or authority under State law 
relating to the public health or otherwise has the duty or 
authority under State law to r^ulate blood donations, and 
"(B) any entity engaged in the acceptance of blood dona-
tions which is licensed or roistered by the Food and Drug 
Administration in connection with the acceptance of such 
blood donations, and which, in accordance with such regula-
tions as may be prescribed by the Secretary, provides for— 
"(i) the confidentiality of any address information 
received pursuant to this section and related blood 
donor records, 
"(ii) blood donor notification procedures for individ-
uals with respect to whom such information is re-
quested and a finding has been made that they have or 
may have the virus for acquired immune deficiency 
syndrome, and 
"(iii) counseling services for such individuals who 
have been found to have such virus. 
"(2) RELATED BLOOD DONOR RECORD.—The term 'related blood 
donor record' means any record, list, or compilation which 
indicates, directly or indirectly, the identity of any individual 
with respect to whom a request for addi^s information has 
been made pursuant to this section. 
"(3) STATE.—The term 'State' includes the District of Ck)lum-
bia, the Oommonwealth of Puerto Rico, the Vii^^ Islands, 
Guam, the (Ik>mmonwealth of the Northern Marianas, and the 
Trust Territory of the Pacific Islands.". 
42 u s e 1320b-ll 
(£) TiME LIMIT FOR ESTABLISHMENT OF BLOOD DONOR LOCATOR 
" 
SERVICE.—^The Secretary of Health and Human Services shall 
establish the Blood Donor Locator Service pursuant to section 
1141 of the Social Security Act not later than 180 days after the 
date of the enactment of this Act. 
(c) DISCLOSURE OF TAXPAYER ADDRESSES TO BLOOD DONOR LOCATOR 
SERVICE.— 
(1) IN GENERAL.—Subsection (m) of section 6103 of the In-
ternal Revenue Ckxle of 1986 (relatii^ to disclosure of taxpayer 
identity information) is amended by adding at the end the 
following new paragraph: 
"(6) BLOOD DONOR LOCATOR SERVICE.— 
"(A) IN GENERAL.—Upon written request pursuant to 
section 1141 of the Social Security Act, the Secretary shall 
disclose the mailing address of taxpayers to officers and 
employees of the Blood Donor Locator Service in the 
Department of Health and Human Services. 
AIDS. 
"(B) RESTRICTION ON DISCLOSURE.—The Secretary shall 
disclose return information under subparagraph (A) only 
for purposes of, and to the extent necessary in, assisting 
under the Blood Donor Locator Service authorized persons 
(as defined in section 1141(hXl) of the Social Security Act) 
in locating blood donors who, as indicated by donated blood 
or products derived therefrom or by the history of the 
subsequent use of such blood or blood products, have or may 
have the virus for acquired immune deficiency syndrome. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3787 
in order to inform such donors of the possible need for 
medical care and treatment. 
"(Q SAFEGUARDS.—^The Secretary shall destroy all re-
lated blood donor records (as defined in section 114 l(hX2) of 
the Social Security Act) in the possession of the Department 
of the Treasury upon completion of their use in making the 
disclosure required under subparagraph (A), so as to make 
such records undisclosable.". 
(2) SAFEGUARDS.— 
(A) IN GENERAL.—^Paragraph (4) of section 6103(p) of such 
Coide (relating to saf^uards) is amended— 
(i) in subparagraph (F)— 
(I) by striking "manner, and" at the end of clause 
(i) and inserting "manner,"; 
(ID by adding "and" at the end of clause (iiXni); 
and 
(HI) by inserting after clause (iiXHI) the follow-
ing new clause: 
"(iii) in the case of the Department of Health and 
Human Services for purposes of subsection (mX6), de-
stroy all such return information upon completion of 
its use in providii^ the notification for which the 
information was obtained, so as to make such informa-
tion undisclosable;"; 
(ii) in the last sentence, by striking "subsection (mX2) 
or (4)" and inserting "subs€K:tion (m) (2), (4), or (6)"; and 
(iii) by adding at the end the following new sentence: 
"For purposes of applying this paragraph in any case to 
which subsection (mX6) applies, the term 'return 
information' includes related blood donor records (as 
defined in section 1141(hX2) of the Social Security 
Act)."-
(B) CioNFORMiNG AMENDMENT.—Paragraph (2) of section 
7213(a) of such Code (relating to unauthorized disclosure of 
returns and return information) is amended by striking 
"(m) (2) or (4)" and inserting "(m) (2), (4), or (6)". 
SEC 8009. REQUIREMENT OF SOCIAL SECURITY A
C
C
O
U
N
T NUMBER AS A 
CONDITION FOR RECEIPT OF SOCIAL SECURITY BENEFITS. 
(a) IN GENERAL.—Section 205(cX2) of the Social Security Act (42 
U.S.C. 405(cX2)) is amended— 
(1) in subparagraph (BXi) in the matter preceding subclause (I), 
by inserting "and subparagraph (E)" after "subparagraph (A)"; 
(2) by redesignatii^ subparagraph (E) (as redesignated by 
section 8008(aXl)) as subparagraph (F); and 
(3) by inserting after subparagraph (D) (as added by section 
80()8(aX2)) the following new subparagraph: 
"(ED The Secretary shall require, as a condition for receipt of 
benefits under this title, that an individual furnish satisfactory 
proof of a social security account number assigned to such individual 
by the Secretary or, in the case of an individual to whom no such 
number has been assigned, that such individual make proper 
application for assignment of such a number.". 
(b) EIFFBCTIVE DATE.—^The amendments made by this section shall 
42 USC 405 note. 
apply to benefits entitlement to which commences after the sixth 
month following the month in which this Act is enacted. 
102 STAT. 3788 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 8010. SUBSTITUTION OF CERTIFICATE OF ELECTION FOR APPLICA-
TION TO ESTABLISH ENTITLEMENT FOR CERTAIN REDUCED 
WIDOW'S AND WIDOWER'S BENEFITS. 
(a) WIDOW'S INSURANCE BENEFITS.—Section 202(e) of the Social 
Security Act (42 U.S.C. 402(e)) is amended— 
(1) by redesignating paragraph 
(l)(CXii) as 
paragraph 
(l)(CXiii); 
(2) by striking paragraph (l)(C)(i) and inserting the following: 
"(CXi) has filed application for widow's insurance benefits, 
"(ii) was entitled to wife's insurance benefits, on the basis of 
the wages and self-employment income of such individu£il, for 
the month preceding the month in which such individual died, 
and— 
"(I) has attained retirement age (as defined in section 
216(1)), 
"(II) is not entitled to benefits under subsection (a) or 
section 223, or 
"(III) has in effect a certificate (described in paragraph 
(8)) filed by her with the Secretary, in accordance with 
regulations prescribed by the Secretary, in which she elects 
to receive widow's insurance benefits (subject to reduction 
as provided in subsection (q)), or"; and 
(3) by adding at the end the following new paragraph: 
"(8) Any certificate filed pursuant to paragraph (l)(CXiiXIII) shall 
be effective for purposes of this subsection— 
"(A) for the month in which it is filed and for any month 
thereafter, and 
"(B) for months, in the period designated by the individual 
filing such certificate, of one or more consecutive months (not 
exceeding 12) immediately preceding the month in which such 
certificate is filed; 
except that such certificate shall not be effective for any month 
before the month in which she attains age 62.". 
Ot)) WIDOWER'S INSURANCE BENEFITS.—Section 202(f) of such Act 
(42 U.S.C. 402(f)) is amended— 
(1) by redesignating paragraph 
(IXCXii) as paragraph 
(IXCXiii); 
(2) by striking paragraph (IXCXi) and inserting the following: 
"(CXi) has filed application for widower's insurance benefits, 
"(ii) was entitled to husband's insurance benefits, on the basis 
of the wages and self-employment income of such individual, for 
the month preceding the month in which such individual died, 
and— 
"(D has attained retirement age (as defined in section 
216a)), 
"(Q) is not entitled to benefits under subsection (a) or 
section 223, or 
"(HI) h£is in effect a certificate (described in paragraph 
(8)) filed by him with the Secretary, in accordance with 
r^ulations prescribed by the Secretary, in which he elects 
to receive widower's insurance benefits (subject to reduction 
as provided in subsection (q)), or"; and 
(3) by adding at the end the following new paragraph: 
"(8) Any certificate filed pursuant to paragraph (lXCXii)(IID shall 
be effective for purposes of this subsection— 
, -gMheJU* 
PUBLIC LAW 100-647—NOV. 10, 1988 
* 
102 STAT. 3789 
"(A) for the month in which it is filed and for any month 
thereafter, and 
"(B) for months, in the period designated by the individual 
filing such certificate, of one or more consecutive months (not 
exceedmg 12) immediately preceding the month in which such 
certificate is filed; 
except that such certificate shall not be effective for any month 
before the month in which he attains age 62.". 
(c) EFFBCTIVE DATE.—^The amendments made by this section shall 42 use 402 note. 
apply to benefits payable under section 202(e) or section 202(f) of the 
Social Security Act on the basis of the wages and self-employment 
income of an individual who dies after the month in which tins Act 
is enacted. 
SEC 8011. CALCULATION OF THE WINDFALL BENEFIT GUARANTEE 
AMOUNT BASED ON PENSION AMOUNTS PAYABLE IN THE 
FIRST MONTH OF CONCURRENT ENTITLEMENT RATHER 
THAN CONCURRENT EUGIBILITY. 
(a) IN GENERAL.—Section 215(a)(7) of the Social Security Act (42 
U.S.C. 415(aX7)) is amended— 
(1) in subparagraph (A), by striking "with respect to the 
initial month in which liie individual becomes eligible for such 
benefits"; 
(2) in the second sentence of subparagraph (BXi), by striking 
"eligibility for old-age or disability insurance benefits" and 
inserting "concurrent entitlement to such monthly periodic 
payment and old-age or disability insurance benefits"; and 
(3) in subparagraph (C), by striking clause (iii) and redesignat-
ing clause (iv) as clause (iii). 
(b) (JoNFORMiNG AMENDMENT.—Section 215(dX5Xii) of such Act (42 
U.S.C. 415(dK5Xii)) is amended by striking "his or her eli^ility for 
old-age or disiability insurance benefits" and inserting "such concur-
rent entitlement". 
(c) EFFECTIVE DATE.—^The amendments made by this section shall 
42 use 415 note. 
apply to benefits based on applications filed after the month in 
which this Act is enacted. 
SEC 8012. CONSOLIDATION OF REPORTS ON CONTINUING DISABILITY 
REVIEWS. 
(a) IN GENERAL.—Section 221(iX3) of the Social Security Act (42 
U.S.C. 421(iX3)) is amended by striking "semiannually" and insert-
ing "annually**. 
(b) EIFFECTIVE DATE.—^The amendment made by this section shall 
42 use 421 note. 
apply to reports required to be submitted after the date of the 
enactment of this Act. 
SEC 8013. EXCLUSION OF EMPLOYEES SEPARATED FROM EMPLOYMENT 
BEFORE JANUARY 1.1989, FROM RULE INCLUDING AS WAGES 
TAXABLE UNDER PICA CERTAIN PAYMENTS FOR GROUP-
TERM LIFE INSURANCE. 
note. 
(a) IN GENERAL.—Subsection (b) of section 9003 of the Omnibus 
Budget Reconciliation Act of 1987 (101 Stat. 1330-287) is amended by 
26 use 3i2i 
stri^ng 'December 31, 1987." and inserting "December 31, 1987, 
^ 
except that such amendments shall not apply with respect to pay-
ments by the employer (or a successor of such employer) for group-
term life insurance for such employer's former employees who 
separated firom employment with the employer on or before Decem-
102 STAT. 3790 
PUBLIC LAW 100-647—NOV. 10, 1988 
ber 31, 1988, to the extent that such pajTnents are not for coverage 
for any such employee for any period for which such employee is 
employed by such employer (or a successor of such employer) after 
the date of such separation.". 
26 use 3121 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
"*'*®' 
shall apply as if such amendment had been included or reflected in 
section 9003(b) of the Omnibus Budget Reconciliation Act of 1987 at 
the time of its enactment. 
SEC. 8014. CLARIFICATION OF APPLICABILITY OF GOVERNMENT PEN-
SION OFFSET TO CERTAIN FEDERAL EMPLOYEES. 
(a) CLARIFICATION OF TREATMENT OF FOREIGN SERVICE RETIREES.— 
Subsections 
(b)(4XAXii)(II), 
(c)(2)(AXii)(II), 
(eX7)(AXiiXII), 
(fK2)(AXiiXn), and (gX4XAXiiXn) of section 202 of the Social Security 
Act (42 U.S.C. 402 (b)(4XA)(ii)(n), (cX2XAXiiXII), (e)(7)(AXiiXII), 
(f)(2)(AXiiXII), (gX4)(AXiiXII)) are each amended by striking "chapter 
84 of title 5, United States Code," and inserting "the Federal 
Employees' Retirement System provided in chapter 84 of title 5, 
United States Code, or the Foreign Service Pension System provided 
in subchapter II of chapter 8 of title I of the Foreign Service Act of 
1980". 
42 u s e 402 note. 
(b) TREATMENT OF EMPLOYEES W H O S E 
FEDERAL EMPLOYMENT 
TERMINATED AFTER MAKING AN ELECTION INTO SOCIAL SECURITY 
COVERAGE BUT BEFORE THE EFFECTIVE DATE OF THE ELECTION.— 
Subsections 
(b)(4)(AXi), 
(cX2)(AXi), 
(e)(7XAXi), 
(fK2)(AXi), and 
(gX4)(A)(i) of section 202 of the Social Security Act (42 U.S.C. 402 
(bX4XAXi), (cX2)(AXi), (e)(7XAXi), (fX2XAXi), (gX4XAXi)) shall not apply 
with respect to monthly periodic benefits of any individual based 
solely on service which was performed while in the service of the 
Federal Government if— 
(1) such person made, before January 1, 1988, an election 
pursuant to law to become subject to the Federal Employees' 
Retirement System provided in chapter 84 of title 5, United 
States Code, or the Foreign Service Pension System provided in 
subchapter II of chapter 8 of title I of the Foreign Service Act of 
1980 (or such person made such an election on or after January 
1, 1988, and before July 1, 1988, pursuant to regulations of the 
Office of Personnel Management relating to belated elections 
and correction of administrative errors (5 CFR 846.204) as in 
effect on the date of the enactment of this Act), and 
(2) such service terminated before the date on which such 
election became effective. 
42 use 402 note. 
(c) EFFECTIVE DATE.—The preceding provisions of this section 
(including the amendments made by subsection (a)) shall apply as if 
they had been included or reflected in the provisions of section 9007 
of the Omnibus Budget Reconciliation Act of 1987 (101 Stat. 1330-
289) at the time of its enactment. 
SEC. 8015. AMENDMENTS TO RULES GOVERNING SOCIAL SECURITY COV-
ERAGE OF FEDERAL EMPLOYMENT. 
(a) CLARIFICATION OF AUTHORITY TO MAKE DETERMINATIONS CON-
CERNING 
THE 
SOCIAL 
SECURITY 
COVERAGE OF FEDERAL EM-
PLOYEES.— 
(1) 
AMENDMENTS TO THE SOCIAL SECURITY ACT.—Section 
205(pXl) of the Social Security Act (42 U.S.C. 405(pXl)) is 
amended— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3791 
(A) by striking "whether an individual has performed 
such service, the periods of such service," in the first sen-
tence; 
(B) by striking "which constitute wages under the provi-
sions of section 209" in the first sentence; 
(C) by striking "wages were" in the first sentence and 
inserting "remuneration was"; and 
(D) by adding at the end the following new sentence: 
"Nothing in this paragraph shall be construed to affect the 
Secretary's authority to determine under sections 209 and 
210 whether any such service constitutes employment, the 
periods of such employment, and whether remuneration 
peiid for any such service constitutes wages.". 
(2) AMENDMENTS TO FICA.—Section 3122 of the Internal Reve-
nue Code of 1986 (relating to Federal service) is amended— 
(A) by striking "the determination whether an individual 
has performed service which constitutes employment as 
defined in section 3121(b)," in the first sentence; 
(B) by striking "which constitutes wages as defined in 
section 3121(a)" in the first sentence; and 
(C) by inserting after the first sentence the following new 
sentence: "Nothing in this paragraph shall be construed to 
affect the Secretary's authority to determine under subsec-
tions (a) and (b) of section 3121 whether any such service 
constitutes employment, the periods of such emplojnnent, 
and whether remuneration paid for any such service con-
stitutes wages.". 
(3) EFFECTIVE DATE.—The amendments made by paragraphs 26 use 3122 
(1) and (2) shall apply to determinations relating to service "°*®-
commenced in any position on or after the date of the enact-
ment of this Act. 
(b) CLARIFICATION OF TREATMENT OF SERVICE COVERED UNDER THE 
FOREIGN SERVICE PENSION SYSTEM.— 
(1) AMENDMENT TO THE SOCIAL SECURITY ACT.—Subparagraph 
(H) of section 210(aX5) of the Social Security Act (42 U.S.C. 
410(aX5XH)) is amended to read as follows: 
"(H) service performed by an individual— 
"(i) on or after the effective date of an election by 
such individual, under section 301 of the Federal 
Employees' Retirement System Act of 1986 or section 
307 of the Central Intelligence Agency Retirement Act 
of 1964 for Certain Employees, to become subject to the 
Federal Employees' Retirement System provided in 
chapter 84 of title 5, United States CJode, or 
"(ii) on or after the effective date of an election by 
such individual, under regulations issued under section 
860 of the Foreign Service Act of 1980, to become 
subject to the Foreign Service Pension System provided 
in subchapter II of chapter 8 of title I of such Act;". 
(2) AMENDMENT TO FICA.—Subparagraph (H) of section 
3121(bX5) of the Internal Revenue Code of 1986 (relating to 
employment) is amended to read as follows: 
"(H) service performed by an individual— 
"(i) on or after the effective date of an election by 
such individual, under section 301 of the Federal 
Employees' Retirement System Act of 1986 or section 
307 of the Central Intelligence Agency Retirement Act 
note. 
102 STAT. 3792 
PUBLIC LAW 100-647—NOV. 10, 1988 
of 1964 for Certain Employees, to become subject to the 
Federal Employees' Retirement System provided in 
chapter 84 of title 5, United States Code, or 
"(ii) on or after the efTective date of an election by 
such individual, under r^ulations issued under section 
860 of the Forei^ Service Act of 1980, to become 
subject to the Foreign Service Pension System provided 
in subchapter II of chapter 8 of title I of such Act;". 
26 use 3121 
(3) EFFECTIVE DATE.—^The amendments made by this subsec-
tion shall apply as if such amendments had been included or 
reflected in section 304 of the Federal Employees' Retirement 
System Act of 1986 (100 Stat. 606) at the time of its enactment, 
(c) CONTINUATION OF SOCIAL SECUMTY COVERAGE OF FEDERAL 
SERVICE AFTER ANT INITIAL COVERAGE OF SUCH SERVICE.— 
(1) AMENDBIENT TO THE SOCIAL SECURITY ACT.—Paragraph (5) 
of section 210(a) of the Social Security Act (42 U.S.C. 410(aX5)) is 
amended, in the matter following subparagraph (B)(ii), by 
inserting after "with respect to" the following: "any such serv-
ice performed on or after any date on which such individual 
performs". 
(2) AMENDMENT TO FICA.—^Paragraph (5) of section 3121(b) of 
the Internal Revenue Code of 1986 (relating to employment) is 
amended, in the matter following subparagraph (BXii), by 
inserting after "with respect to" the following: "any such serv-
ice performed on or after any date on which such individual 
performs". 
26 use 3121 
(3) EIFFECTTVE DATE.—^The amendments made by this subsec-
^°^^- 
Hon shall apply to any individual only upon the performance by 
such individual of service described in subparagraph (C), (D), (E), 
(F), (G), or (H) of section 210(aX5) of the Social Security Act (42 
U.S.C. 41(KaX5)) on or after the date of the enactment of this 
Act. 
SEC. 8016. TECHNICAL CORRECTIONS IN OASDI PROVISIONS. 
(a) TECHNICAL CORRECTIONS.—(1) Section 205(cX2XCXiii) of the 
42 use 405. 
Social Security Act is amended by striking "the Social Security Act" 
and inserting "this Act". 
(2) Section 211(aX7) of such Act (as amended by section 9023a>Xl) 
42 use 411. 
of Public Law 100-203) is amended by inserting "of the Internal 
Revenue Oxle of 1986" before the semicolon at the end. 
(3XA) Subsection (d) of section 3121 of the Internal Revenue Oxle 
of 1986 (as amended by section 9002(bX2) of Public Law 99-509) is 
amended— 
(i) by redesignating paragraph (3) as paragraph (4), by striking 
"; or" at the end of such paragraph and inserting a period, and 
by moving such paragraph (as so redesignated and amended) to 
the end of the subsection; and 
(ii) by redesignating paragraph (4) as paragraph (3), and by 
striking the period at the end and inserting "; or". 
(B) Section 3306(i) of such Code (as amended by section 9002(bX2) 
of Public Law 99-509) is amended by striking "paragraph (3) and 
subparagraphs (B) and (Q of paragraph (4)" and inserting "para-
graph (4) and subparagiaphs (B) and (C) of paragraph (3)". 
26 use 3121. 
(4) Section 13303(cX2) of Public Law 99-272 is amended— 
(A) by striking "312(b)" and inserting "3121(b)"; 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3793 
(B) by striking "is amended" and inserting ", and paragraph 
(20) of section 210(a) of the Social Security Act, are each 
42USC410. 
amended"; and 
(C) by striking "after 'service' " and inserting "before 'per- 
26 USC 3121; 
formed'". 
» 
*
- 
42USC410. 
(5) Section 9006(bXl) of Public Law 100-203 is amended by striking 
26 USC 3111. 
"3111(a)" and inserting "3111". 
(b) EFFECTIVE DATE.—(1) Except as provided in paragraph (2), the 
26 USC 3iil 
amendments made by this section shall be effective on the date of 
"°^-
the enactment of this Act. 
(2) Any amendment made by this section to a provision of a 
particular Public Law which is referred to by its number, or to a 
provision of the Social Security Act or the Internal Revenue Code of 
1986 as added or amended by a provision of a particular Public Law 
which is so referred to, shall be effective as though it had been 
included or reflected in the relevant provisions of that Public Law at 
the time of its enactment. 
SEC. 8017. CERTAIN CASH WAGES PAID TO SEASONAL AGRICULTURAL 
LABORERS EXCLUDED FROM OASDI COVERAGE. 
(a) SOCIAL SECURITY ACT AMENDMENT.—Paragraph (2) of section 
209(h) of the Social Security Act is amended to read as follows: 42 USC 409. 
"(2) Cash remuneration paid by an employer in any calendar 
year to an employee for agricultural labor unless— 
"(A) the cash remuneration paid in such year by the 
employer to the employee for such labor is $150 or more, or 
"(B) the employer's expenditures for agricultural labor in 
such year equal or exceed $2,500, 
except that subparagraph (B) shall not apply in determining 
whether remuneration paid to an employee constitutes 'wages' 
under this section if such employee (i) is employed as a hand 
harvest laborer and is paid on a piece rate basis in an operation 
which has been, and is customarily and generally recognized as 
having been, paid on a piece rate basis in the region of employ-
ment, (ii) commutes dguly from his permanent residence to the 
farm on which he is so employed, and (iii) has been employed in 
agriculture less than 13 weeks during the preceding calendar 
year;". 
Ot)) FICA AMENDMENT.—Subparagraph (B) of section 3121(aX8) of 
the 1986 Code (relating to wages) is amended to read as follows: 
"(B) cash remuneration paid by an employer in any calendar 
year to an employee for agricultural labor unless— 
"(i) the cash remuneration paid in such year by the 
employer to the employee for such labor is $150 or more, or 
"(ii) the employer's expenditures for agricultural labor in 
such year equal or exceed $2,500, 
except that clause (ii) shall not apply in determining whether 
remuneration paid to an employee constitutes 'wages' under 
this section if such employee (I) is employed as a hand harvest 
laborer and is paid on a piece rate basis in an operation which 
has been, and is customarily and generally recognized as having 
been, paid on a piece rate basis in the region of emplo3maent, (II) 
commutes daily from his permanent residence to the farm on 
which he is so employed, and (III) has been employed in agri-
culture less than 13 weeks during the preceding calendar 
year;". 
102 STAT. 3794 
PUBLIC LAW 100-647—NOV. 10, 1988 
26 use 3121 
(c) EIFFBCTIVE DATE.—^Thc amendments made by this section shall 
"°^- 
take effect as if included in the amendments made by section 9002 of 
the Omnibus Budget Reconciliation Act of 1987. 
26 use 3121 
SEC 8018. CERTAIN EMPLOYER PENSION CONTRIBUTIONS NOT IN-
note. 
CLUDED IN FICA WAGE BASE. 
In the case of any State (within the meaning of section 3121(eXl) 
of the Internal Revenue Code of 1986) or political subdivision thereof 
which received a letter ruling of the Internal Revenue Service 
issued after December 31,1983, and before the date of the enactment 
of this Act maintaining that any amount treated as an employer 
contribution under section 414GiX2) of the Internal Revenue Code of 
1986 is excluded &om the definition of "wages" for purposes of tax 
liability under section 3121(vXlXB) of such Code, such State or 
political subdivision shall be relieved of any liability for taxes under 
such section 3121(vXlXB) which, in good faith reliance on such letter 
ruling, were not paid and which would otherwise have been required 
to be paid O^ut for this section) on or before the earlier of the date of 
the enactment of this Act or the date of the receipt of a notice of 
revocation from the Internal Revenue Service of such letter ruling. 
AIDS. 
SEC 8019. REPORTS REGARDING CERTAIN DISABILITY-RELATED BENE-
FITS. 
(a) EuGiBiuTT F
O
R BENEFITS.—Not later than 180 days after the 
date of the enactment of this Act, the Secretary of Health and 
Human Services shall submit to the Committee on Ways and Means 
of the House of Representatives and the Committee on Finance of 
the Senate a report providing information on— 
(1) the number of individuals with the complex related to 
acquired immune deficiency sjmdrome (hereinafter in this sec-
tion referred to as "AEDS-related complex") who have made 
application for disability-related benefits under titles n and 
XVI of the Social Security Act during fiscal years 1988, 1987, 
and, to the extent feasible, 1986; 
(2) the number of such applications approved, denied (by 
reason of denial), and reversed upon appeal; 
(3) the rates of allowance and denial of such applications by 
State and r^on, to the extent feasible; 
(4) the criteria, guidelines, or other information used to deter-
mine eligibility (including copies of the documents setting forth 
such criteria, guidelines, and information) including ii^orma-
tion about any changes in criteria that are under consideration; 
(5) the total costs of disability-related benefits provided to 
individuals with AIDS-related complex during fiscal years 1988, 
1987, and to the extent feasible, 1986; and 
(6) to the extent available, the projected number of such 
applications that will likely be approved and denied and the 
estimated costs of such benefits for the next 3 fiscal years. 
(b) COORDINATION OF FEDERAL AND STATE DISABILITY PROGRAIIS.— 
Not later than 180 days after the date of the enactment of this Act, 
the Secretary of Health and Human Services shall submit to the 
Committee on Ways and Means of the House of Representatives and 
the Committee on Finance of the Senate a report describing what 
arrangements, if any, now exist to provide for coordination between 
the Social Security Administration and State disability agencies 
with respect to the provision of disability-related benefits under 
titles n and XVI of the Social Security Act and State disability 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3795 
insurance prc^ams to individuals with acquired immune deficiency 
syndrome or AH^related complex and to make such individuals 
applying for any such benefits aware of the full range of Federal and 
State disability-related benefits for which such individuals may be 
eligible. 
Subtitle B—Public Assistance Provisions 
SEC 8101. EXTENSION OF PROHIBITION AGAINST IMPLEMENTATION OF 
CERTAIN PROPOSED REGULATIONS. 
Section 9118 of the Omnibus Budget Reconciliation Act of 1987 (42 
U.S.C. 1383c) is amended by striking "October 1,1988" and inserting 
"September 30,1989". 
SEC. 8102. REVIEW OF POLICY GOVERNING USE OF AFDC FUNDS TO MEET 
EMERGENCY NEEDS OF FAMILIES ELIGIBLE FOR AFDC 
THROUGH EMERGENCY ASSISTANCE OR SPECL4L NEEDS 
PAYMENTS; REPORT TO CONGRESS. 
(a) REVIEW OP POLICY.—^The Secretary of Health and Human 
Services shall review the policies in effect, as of the date of the 
enactment of this section, with respect to the use by States of 
amounts paid to such States under tiie program of aid to families 
with dependent children under part A of title IV of the Social 
Security Act, in the form of payments of aid to meet special needs or 
emergency assistance under section 406(e) of such Act to meet 
emei^ency needs of families who are eligible for such aid. 
(b) REPORT TO CONGRESS.—Not later than July 1, 1989, the Sec-
retary of Health and Human Services shall submit to the Congress a 
report containing recommendations for l^;islative and r^ulatory 
changes designed to— 
(1) improve the ability of the program of aid to families with 
dependent children under part A of title IV of the Social 
Security Act to respond to emergency needs of families who are 
eligible for such aid; and 
(2) eliminate the use of funds provided to States imder such 
program to pay for the provision of shelter in commercial or 
similar transient facilities. 
SEC 8103. DISREGARD OF CERTAIN HOUSING ASSISTANCE PAYMENTS IN 
DETERMINING INCOME AND RESOURCES UNDER SSI PRO-
GRAM. 
(a) INCOME.—Section 1612(b) of the Social Security Act is 42USCi382a. 
amended— 
(1) by striking "and" after the semicolon at the end of para-
graph (12); 
(2) by striking the period at the end of paragraph (13) and 
inserting "; and ; and 
(3) by adding after paragraph (13) the following new 
paragraph: 
"(14) assistance paid, with respect to the dwelling unit occu-
pied by such individual (or such individual and spouse), under 
the United States Housing Act of 1937, the National Housing 
Act, section 101 of the Housing and Urban Development Act of 
1965, title V of the Housing Act of 1949, or section 202(h) of the 
Housing Act of 1959.". 
O
i
>
) RESOURCES.—Section 1613(a) of such Act is amended— 
42 use I382b. 
note. 
102 STAT. 3796 
PUBLIC LAW 100-647—NOV. 10, 1988 
(1) by striking "and" after the semicolon at the end of para-
graph (6); 
(2) by striking the period at the end of paragraph (7) and 
inserting "; and ; and 
(3) by inserting after paragraph (7) the following new 
paragraph: 
"(8) the value of assistance referred to in section 1612(bX14), 
paid with respect to the dwelling unit occupied by such individ-
ual (or such individual and spouse).". 
42 use 1382a 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
be effective as though they had been included in section 162 of the 
Housing and Community Development Act of 1987 at the time of its 
enactment. 
SEC. 8104. FOSTER CARE INDEPENDENT LIVING INITIATIVES. 
(a) EXTENSION OF INDEPENDENT LIVING PROGRAM.—Section 477 of 
the Social Security Act (42 U.S.C. 677) is amended— 
(1) by striking "1987 and 1988" in subsections (a) and (eXD 
and inserting "1987,1988, and 1989"; 
(2) by striking "for fiscal year 1988" and all that follows in 
subsection (c) and inserting "for the fiscal year 1988 or 1989, 
such description and assurances must be submitted prior to 
February 1 of such fiscal year."; 
(3) by striking "Not later than March 1, 1988" in subsection 
(g)(1) and inserting "Not later than the first January 1 following 
the end of each fiscal year"; 
(4) by inserting "during such fiscal year" in subsection (gXD 
d^kd? CflrriGcl out 
(5) by striking "(2) Not later than July 1, 1988," in subsection 
(g)(2) and inserting the following: 
"(2XA) Not later than July 1, 1988, the Secretary shall submit an 
interim report on the activities carried out under this section. 
"(B) Not later than March 1,1989,"; and 
(6) by striking "fiscal year 1987" in subsection (gX2) and 
inserting "fiscal years 1987 and 1988". 
(b) PERMISSION TO EXPEND UNOBUGATED FUNDS APPROPRIATED FOR 
1987 IN 1989.—Subsection (f) of section 477 of such Act (42 U.S.C. 
677(f)) is amended by inserting sifter and below paragraph (3) the 
following: 
"Notwithstanding paragraph (3), payments made to a State under 
this section for the fiscal year 1987 and unobligated may be ex-
pended by such State in the fiscal year 1989.". 
(c) INCLUSION IN INDEPENDENT LIVING PROGRAM OF NON-AFDC 
FOSTER CARE CHILDREN.—Subsection (a) of section 477 of such Act 
(42 U.S.C. 677(a)) is amended— 
(1) by inserting "(1)" before "Payments"; 
(2) by striking "children" and all that follows through "age 
16," and inserting "children described in paragraph (2) who 
have attained age 16"; and 
(3) by adding at the end the following new paragraph: 
"(2) A program established and carried out under paragraph (1)— 
"(A) shall be designed to assist children with respect to whom 
foster care maintenance pajrments are being made by the State 
imder this part, and 
"(B) may at the option of the State also include any or all 
other children in foster care under the responsibility of the 
State.". 
' ' ' I ^ ^ ' -
PUBLIC LAW 100-647—NOV. 10, 1988 
• 
102 STAT. 3797 
(d) INCLUSION IN INDEPENDENT LIVING PROGRAM OF CERTAIN 
FORMER FOSTER CARE CHILDREN.—Paragraph (2) of section 477(a) of 
the Social Security Act (42 U.S.C. 677(aX2)) (as added by subsection 
(c) of this section) is further amended— 
(1) by striking "and" in subparagraph (A); 
(2) by striking the period at the end of subparagraph (B) and 
inserting ", and '; and 
(3) by adding at the end the following new subparagraph: 
"(C) may at the option of the State also include any child to 
whom foster care maintenance payments were previously made 
by a State under this part and whose pajnnents were discon-
tinued on or after the date such child attained age 16, and any 
child who previously was in foster care described in subpara-
graph (B) and for whom such care was discontinued on or after 
the date such child attained age 16, but such child may not be so 
included after the end of the 6-month period beginning on the 
date of discontinuance of such paymente or care; and a written 
transitional independent living plan of the type described in 
subsection (dX6) shall be developed for such child as a part of 
such program.". 
(e) DETERMINATION OF SERVICES NEEDED FOR TRANSITION TO 
INDEPENDENT LIVING.—Subparagraph (C) of section 475(5) of such 
Act (42 U.S.C. 675(5XC)) is amended by inserting "and, in the case of 
a child who has attained age 16, the services needed to assist the 
child to make the transition from foster care to independent living" 
before the semicolon. 
(f) LIMITATION ON USE OF FUNDS.—Paragraph (3) of section 477(e) 
of such Act (42 U.S.C. 677(eX3)) is amended by adding at the end the 
following: "Amounts payable under this section may not be used for 
the provision of room or board.". 
(g) EFFECTIVE DATES.—(1) The amendments made by subsections 42 use 677 note, 
(a), (b), and (e) shall take effect on October 1,1988. 
(2) The amendments made by subsections (c), (d), and (f) shall take 
effect on the date of the enactment of this Act. 
SEC. 8105. TECHNICAL CORRECTIONS TO FAMILY SUPPORT ACT OF 1988. 
Effective date. 
Effective on the date of the enactment of the Family Support Act 
of 1988— 
(1) section 401(cXl) of such Act is amended by inserting "(as 42 use 607. 
amended by paragraph (4XB) of this subsection)" before "is 
amended—"; 
(2) section 401(cX4)(B) of such Act is amended by striking "(as 
amended by paragraph (1) of this subsection)"; 
(3) section 202(b) of such Act is amended by striking para- 42 use 607. 
graph (10); 
(4) section lll(eXl) of such Act is amended by striking 42 use 666. 
"before" cuid inserting in lieu thereof "after"; 
(5) section 4O70t)XlXBXiiiXI) of the Social Security Act (as 
amended by section 202(bX8XA) of the Family Support Act of 
1988 and redesignated by section 401(bXl) of that Act) is 42 use 607. 
amended by striking "409(aX19XA)" and inserting in lieu thereof 
"402(aX19XA)"; 
(6) section 469 of the Social Security Act (as added by section 
129 of the Family Support Act of 1988) is amended— 
42 use 669. 
(A) by striking "of title IV of the Social Security Act"; 
and 
(B) by striking "of title IV of such Act"; and 
102 STAT. 3798 
PUBLIC LAW 100-647—NOV. 10, 1988 
(7) section 418 of the Social Security Act (as added by section 
42 use 617. 
603(a) of the Family Support Act of 1988) is redesignated as 
section 417. 
Subtitle C—National Commission on Children 
SEC. 8201. DELAY IN REPORTING DATE FOR NATIONAL COMMISSION ON 
CHILDREN. 
Section 1139 of the Social Security Act (42 U.S.C. 1320b-9) is 
amended— 
(1) by striking "September 30, 1988" in subsection (d) and 
inserting "March 31, 1990"; 
(2) by striking "March 31, 1989" in subsection (d) and insert-
ing "September 30,1990"; 
(3) by striking "March 31, 1989" in subsection (eXlXA) and 
inserting "September 30,1990"; 
(4) by striking "March 31, 1989" in subsection (e)(4XB) and 
inserting September 30,1990"; and 
(5) by inserting "for each of fiscal years 1989 and 1990" after 
"section" in subsection 0
*
)
-
Subtitle D—Unemployment Compensation 
SEC. 8301. SELF-EMPLOYMENT DEMONSTRATION PROJECT. 
Section 9152(g) of the Omnibus Budget Reconciliation Act of 1987 
26 use 3304 
(Public Law 100-203) is amended— 
^°^- 
(1) in p£u*agraph (1), by striking "two" in the first sentence 
and inserting "three"; and 
(2) in paragraph (2), by striking "four" and inserting "six". 
Subtitle E—Medicare and Medicaid 
PART I—PROVISIONS RELATING TO PART A OF 
MEDICARE 
SEC. 8401. EXTENSION OF DISPROPORTIONATE SHARE PROVISIONS. 
Paragraphs 
(2XCXiv), 
(3XCXiiXI), 
(3XCXiiXII), 
(5XBXiiXI), 
(5XBXiiXII), and (5XFXi) of section 1886(d) of the Social Security Act 
(42 U.S.C. 1395ww(d)) are each amended by striking "1990'^^ and 
inserting "1995". 
SEC. 8402. MAINTENANCE OF BAD DEBT COLLECTION POLICY. 
Records. 
Effective as of the date of the enactment of the Omnibus Budget 
^^^™^- 
Reconciliation Act of 1987, section 4008(c) of such Act is amended by 
l«tY 
^^^^^ 
inserting after "reasonable collection effort" the following: ", includ-
ing criteria for indigency determination procedures, for record keep-
ing, and for determining whether to refer a claim to an external 
collection agency". 
SEC. 8403. APPLICATION OF WAGE INDICES IN CASE OF AREAS AFFECTED 
BY SECTION 4005(A)(1) OF OBRA OF 1987. 
(a) COMPUTATION OF INDICES FOR FiSCAL Y E A R S 1990 AND 1991.— 
Section 1886(dX8) of the Social Security Act (42 U.S.C. 1395ww(dX8)) 
is amended— 
note. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3799 
(1) in subparagraph (C)— 
(A) by striking "subparagraph (B)" each place it appears 
and inserting "subparagraphs (B) and (C)", and 
(B) by redesignating such subparagraph as subparagraph 
(D); and 
(2) by inserting after subparagraph (B) the following new 
subparagraph: 
"(CXi) If the application of subparagraph (B), by treating hospitals 
located in a rural county or counties as being located in an urban 
area, reduces the wage index for that urban area (as applied under 
this subsection), the Secretary shall calculate and apply such wage 
index under this subsection separately to hospitals located in such 
urban area (excluding all the hospitals so treated) and to the 
hospitals so treated (as if each affected rural county were a separate 
urban area). If the application of subparagraph (B), by treating the 
hospitals located in a rural county or counties as not being located 
in the rural area in a State, reduces the wage index for that rural 
area (as applied under this subsection), the Secretary shall calculate 
and apply such wage index under this subsection as if the hospitals 
so treated had not been excluded from calculation of the wage index 
for that rural area. 
"(ii) Clause (i) shall only apply to discharges occurring on or after 
October 1,1989, and before October 1,1991.". 
(b) HHS REPORT ON ADJUSTMENT OF HOSPITAL WAGE INDICES FOR 
FISCAL YEAR 1989.— 
(1) The Secretary of Health and Human Services shall report 
to the Congress, not later than 60 days after the date of the 
enactment of this Act, on alternative methods for reimburse-
ment under section 1886(d) of the Social Security Act to hos-
pitals located in affected areas described in paragraph (2) for 
hospital discharges occurring in fiscal year 1989 that would 
result in aggregate pajnnents under title XVIII of such Act to 
hospitals in such areas in an amount no less than would have 
been paid without the enactment of the amendments made by 
section 4005(aXl) of the Omnibus Budget Reconciliation Act of 
1987. In reporting concerning alternative methods, the Sec-
retary shall consider both legislative and administrative actions 
that would result in an aggregate increase in payments under 
such title and legislative and administrative actions that would 
not result in such an aggregate increase. 
(2) An affected area described in this paragraph is an area for 
which the area wage index for fiscal year 1989 (described in 
section 1886(dX3)(E) of the Social Security Act) was reduced 
below the amount otherwise applicable as a result of the amend-
ments made by section 4005(aXl) of the Omnibus Budget Rec-
onciliation Act of 1987. 
(c) PROPAC STUDY AND REPORT.—The Prospective Payment 
Assessment Commission shall study and make a report to Congress 
within 9 months after the date of the enactment of this Act on the 
appropriate payment for hospitals affected by subparagraphs (B) 
and (C) of section 1886(dX8) of the Social Security Act (as amended 
by subsection (a) of this section) and the appropriate treatment of 
the wage and wage-related costs of such hospitals in computing area 
wage indices. 
Health care 
facilities. 
Rural areas. 
Urban areas. 
102 STAT. 3800 
PUBLIC LAW 100-647—NOV. 10, 1988 
SEC. 8404. DEMONSTRATION PROJECTS WITII RESPECT TO CHRONIC VEN-
TILATOR-DEPENDENT UNITS IN HOSPITALS. 
(a) IN GENERAL.—Section 429(a) of the Medicare Catastrophic 
42 use I395b-l 
Coverage Act of 1988 is amended by striking "up to" each place it 
^ 
appears and inserting "at least". 
42 use I395b-l 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
" 
shall take effect as if included in the Medicare Catastrophic Cov-
erage Act of 1988. 
42 use 1395ww SEC 8405. ELECTION OF PERSONNEL POUCY FOR PROPAC EMPLOYEES. 
With respect to employees of the Prospective Payment Assess-
ment Commission hired before December 22, 1987, such employees 
shall have the option to elect within 60 days of the date of enact-
ment of this Act to be covered under either the personnel policy in 
effect with respcict to such employees before December 22, 1987, or 
under the employees coverage provided under the last sentence of 
section 1886(eX6XD) of the Social Security Act 
PART 
II—RELATING 
TO 
PARTS 
A 
AND 
B 
OF 
MEDICARE 
PROGRAM 
42 use 1395b-l 
SEC. 8411. TREATMENT OF CERTAIN NURSING EDUCATION PROGRAMS. 
(a) DEMONSTRATION OF JOINT NUBSING GRADUATE EDUCATION PRO-
GRAMS.— 
(1) The Secretary of Health and Human Services shall provide 
for demonstration programs under this subsection in each of 5 
hospitals for cost reporting periods beginning on or after July 1, 
1989, and before July 1,1994. 
(2) Under each demonstration project, subject to paragraph 
(4), the reasonable costs incurred by a hospital pursuant to a 
written agreement with an educational institution for the 
activities described in paragraph (3) conducted as part of an 
approved educational program tiiat— 
(A) involves a substantial clinical component (as deter-
mined by the Secretary), and 
(B) leads to a master's or doctoral d^ree in nursing, 
shall be allowable as reasonable costs under title XVIQ of the 
Social Security Act and reimbursed under such title on the 
same basis as if they were allowable direct costs of a hospital-
operated approved educational program (other than an 
approved graduate medical education program). 
(3) The activities described in this paragraph are the activities 
for which the reasonable costs of conducting such activities are 
allowable under title XVm of the Social Security Act if con-
ducted under a hospital-operated approved educational program 
(other than an approved graduate medical education program), 
but only to the extent such activities are directly related to the 
operation of the educational program conducted pursuant to the 
written agreement between the hospital and tiie educati<mai 
institution. 
(4) The amount paid under a demonstration program under 
this subsection to a hospital for a cost reporting period may not 
exceed $200,000. 
Reports. 
(5) The Secretary shall report to CTongress, by not later than 
January 1, 1995, on the demonstration programs conducted 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3801 
under this subsection and on the supply and characteristics of 
nurses trained under such pn^rams. 
(b) JOINT UNDERGRADUATE EDUCATION PROGRAM.—^In the case of a 
hospital which (1) was paid under a waiver under section 402 of the 
Sodal Security Amendments of 1967 and section 222 of the Social 
Security Amendments of 1972, which waiver expired on September 
30, 1985, and (2) during its cost reporting period b^inning in fiscal 
year 1985 and for each subsequent cost reporting period, has been 
and is associated with, and has incurred and incurs substantial costs 
with respect to, a nursing collie with which it has shared and 
shares common directors, educational activities of the nursing col-
l i e shall be considered to be educational activities operated directly 
by such hospital for purposes of title XVIII of the Social Security 
Act, and shall be allowable as reasonable costs under such title and 
reimbursed under such title on the same basis as if they were 
aUowable direct costs of a hospital-operated approved educational 
program (other than an approved graduate medical education pro-
gram), for hospital cost reporting periods b^inning in fiscal years 
1989,1990, and 1991. 
SEC 8412. ELIMINATION OF WAIVERS OF 50:50 RULE FOR HMO ENROLL-
MENT. 
(a) IN GENERAL.— 
(1) Section 1876(f) of the Social Security Act (42 U.S.C. 
1395nun(f)), as amended by section 4018(a) of the Omnibus 
Budget Rm)nciliation Act of 1987, is amended by striking para-
graph (3) and by redesignating paragraph (4) as paragraph (3). 
(2) Subsection (c) of section 4018 of the Omnibus Budget 
Reconciliation Act of 1987 is repealed. 
(b) EFFECTIVE DATE.—^The amendments made by subsection (a) 
shall not apply to contracts in effect on the date of the enactment of 
this Act or extensions (not exceeding 90 days) thereof. 
SEC 8413. INCREASE IN AUTHORIZATION FOR THE PATIENT OUTCOME 
ASSESSMENT RESEARCH PROGRAM. 
Section 1875(cX3) of the Social Security Act (42 U.S.C. 139511(cX3)) 
is amended to read as follows: 
"(3XA) For purposes of carrjring out the research program, there 
are authorized to be appropriated— 
"(i) from the Federal Hospital Insurance Trust Fund two-
thirds of the amount specified in subparagraph (B), and 
"(ii) from the Federal Supplementary Medical Insurance 
Trust Fund one-third of the amount specified in subpara-
graph (B). 
"(B) Tlie amount specified in this subparagraph is— 
"(i) $7,500,000 for fiscal year 1988, 
"(ii) $10,000,000 for fiscal year 1989, 
"(iii) $20,000,000 for fiscal year 1990, and 
"(iv) $30,000,000 for fiscal year 1991.". 
SEC 8414. DELAY IN REPORTING DEADLINE FOR THE UNITED STATES 
BIPARTISAN COMMISSION ON COMPREHENSIVE HEALTH 
CARE. 
Section 406 of the Medicare (Catastrophic CJoverage Act of 1988 is 
amended by striking "date of the enactment of this Act" each place 
it appears and inserting "effective date of the first Act providing 
appropriations for the Commission". 
Health care 
facilities. 
101 Stat. 
1330-66. 
42 u s e 1395mm 
note. 
42 u s e 1395b 
note. 
102 STAT. 3802 
PUBLIC LAW 100-647—NOV. 10, 1988 
PART III—PROVISIONS RELATING TO PART B O F 
MEDICARE 
42 use 1395/. 
42 use 1395/ 
note. 
Reports. 
42 use 1395/ 
note. 
SEC 8421. TRIP FEES FOR CXINICAL LABORATORIES. 
(a) IN GENERAL.—Section 1833(hX3) of the Social Security Act (42 
U.S.C. 13951(hX3)) is amended by adding at the end the following 
new sentence: "In establishing a fee to cover the transportation and 
personnel expenses for trained personnel to travel to the location of 
an individual to collect a sample, the Secretary shall provide a 
method for computing the fee based on the number of miles traveled 
and the personnel costs associated with the collection of each 
individual sample, but the Secretary shall only be required to apply 
such method in the case of tests furnished during the period b ^ ^ -
ning on April 1, 1989, and ending on December 31, 1990, by a 
laboratory that establishes to the satisfaction of the Secretary 0>ased 
on data for the 12-month period ending June 30, 1988) that (i) the 
laboratory is dependent upon payments under this title for at least 
80 percent of its collected revenues for clinical diagnostic laboratory 
tests, (ii) at least 85 percent of its gross revenues for such tests are 
attributable to tests performed w i ^ respect to individuals who are 
homebound or who are residents in a nursing facility, and (iii) the 
laboratory provided such tests for residents in nursing facilities 
representing at least 20 percent of the number of such facilities in 
the State in which the laboratory is located.". 
(b) BUDGET NEUTRALITY.—^The Secretary of Health and Human 
Services shall adjust the fees for transportation and personnel 
established under section 1833(hX3XB) of the Social Security Act for 
tests not covered under the amendment made by subsection (a) in 
such manner that the total cost of fees under such section is the 
same as would have been the case without such amendment. 
(c) STUDY.—^The Secretary of Health and Human Services shall 
study reimbursement for specimen collection and transportation 
and personnel costs under section 1833(hX3) of the Social Security 
Act and shall report to the Committees on Ways and Means and 
Energy and Conunerce of the House of Representatives and the 
Committee on Finance of the Senate by May 1, 1989. The study 
shaU— 
(1) survey carrier policies r^arding such reimbursement, 
(2) report on concerns expressed by clinical diagnostic labora-
tories concerning such reimbursement, and 
(3) make recommendations to assure that such reimburse-
ment is reasonable, covers the costs involved, and assures ade-
quate access to clinical laboratory services for nursing facility 
residents. 
SEC. 8422. BUDGET NEUTRALITY ADJUSTMENT FOR CERTIFIED REG-
ISTERED NURSE ANESTHETISTS. 
(a) IN GENERAL.—Section 18330X3X6) of the Social Security Act 
(42 U.S.C. 1395iaX3XB)) is amended by inserting "plus appUcable 
coinsurance" after "would have been paid". 
QD) EFFECTIVE DATE.—^The amendment made by subsection (a) 
shall become effective as if included in the amendment made by 
section 9320(eX2) of the Omnibus Budget Reconciliation Act of 1986. 
PUBLIC LAW 100-647—NOV. 10,1988 
102 STAT. 3803 
SEC. 8423. COVERAGE OF PSYCHOLOGISTS' SERVICES WHEN PROVIDED 
OFF-SITE AS PART OF A TREATMENT PLAN. 
(a) IN GENERAL.—Section 1861(ii) of the Social Security Act (42 
U.S.C. 1395x(ii)) is amended— 
(1) by inserting "on-site" before "at a community mental 
health center", and 
(2) by inserting ", and such services that are necessarily 
furnished off-site (other than at an off-site office of such 
psychologist) as part of a treatment plan because of the inability 
of the individual furnished such services to travel to the center 
by reason of physical or mental impairment, because of institu-
tionalization, or because of similar circumstances of the individ-
ual," after "Public Health Service Act)". 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall be effective with respect to services furnished on or after 
January 1,1989. 
SEC. 8424. NONAPPLICATION OF CERTAIN REQUIREMENTS TO PHYSICAL 
THERAPISTS. 
(a) IN GENERAL.—Section 1861(p) of the Social Security Act (42 
U.S.C. 1395x(p)) is amended by adding at the end the following new 
sentence: "Nothing in this subsection shall be construed as requir-
ing, with respect to outpatients who are not entitled to benefits 
under this title, a physical therapist to provide outpatient physical 
therapy services only to outpatients who are under the care of a 
physician or pursuant to a plan of care established by a physician.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall become effective with respect to services provided after Decem-
ber 31,1988. 
SEC. 8425. FUNCTIONS OF PHYSICIAN PAYMENT REVIEW COMMISSION. 
(a) ADDITIONAL FUNCTION.—Section 1845(bX2) of the Social 
Security Act (42 U.S.C. 1395w-l(bX2)) is amended— 
(1) by striking "and" at the end of subparagraph (G), 
(2) by striking the period at the end of subparagraph (H) and 
inserting "; an(f', and 
(3) by adding at the end the following new subparagraph: 
"(I) consider policies for moderating the rate of increase in 
expenditures under this part and the rate of increase in utiliza-
tion of services under this part.". 
(b) EFFECTIVE DATE.—The amendments made by subsection (a) 
shall take effect on the date of the enactment of this Act and shall 
first apply to recommendations submitted in 1989. 
SEC. 8426. MORATORIUM ON LABORATORY PAYMENT DEMONSTRATION 
EXTENDED. 
Section 9204(a) of the Consolidated Omnibus Budget Reconcili-
ation Act of 1985, as amended by section 9339(e) of the Omnibus 
Budget Reconciliation Act of 1986 and section 4085(c) of the Omni-
bus Budget Reconciliation Act of 1987, is amended by striking 
"January 1,1989" and inserting "January 1,1990". 
SEC. 8427. PAYMENT FOR MEDICAL ESCORT OR MEDICAL ATTENDANT ON 
COMMERCIAL AIRLINER ALLOWED. 
(a) IN GENERAL.—The Secretary of Health and Human Services 
shall provide that in cases where (as of the date of the enactment of 
this Act) transportation on a commercial airliner is covered under 
42 use 1395x 
note. 
42 use 1395x 
note. 
42 use 1395W-1 
note. 
42 use 1
3
9
5
W
W 
note. 
42 use 1395x 
note. 
102 STAT. 3804 
PUBLIC LAW 100-647—NOV. 10, 1988 
section 1861(sX7) of the Social Security Act, the Secretary shall also 
provide for payment for medically necessary services of a medical 
escort or medical attendant. 
(b) EFFECTIVE PERIOD.—Subsection (a) shall apply to payment for 
services furnished during the 5-year period beginning on July 1, 
1989. 
PART IV—PROVISIONS RELATING TO MEDICAID 
State and local 
governments. 
42 u s e 1396n 
note. 
SEC. 8431. DELAY IN ISSUANCE OF FINAL REGULATIONS CONCERNING 
THE USE OF VOLUNTARY CONTRIBUTIONS AND PROVIDER-
PAID TAXES BY STATES TO RECEIVE FEDERAL MATCHING 
FUNDS. 
The Secretary of Health and Human Services shall not issue any 
fingJ regulation prior to May 1, 1989, changing the treatment of 
voluntary contributions or provider-paid taxes utilized by States to 
receive Federal matching funds under title XIX of the Socigd Secu-
rity Act. 
SEC. 8432. MEDICAID LONG-TERM CARE WAIVER PROGRAM. 
(a) MODIFICATION OF FORMULA.—Section 1915(dX5XB) of the Social 
Security Act (42 U.S.C. 1396n(dX5XB)) is amended by adding at the 
end the following new clause: 
"(iv) If there is enacted after December 22, 1987, an Act which 
amends this title and which results in an increase in the aggregate 
gimount of medical assistance under this title for nursing facility 
services and home and community-based services for individuals 
who have attained the age of 65 years, the Secretary, at the request 
of a State with a waiver under this subsection for a waiver year or 
years and in close consultation with the State, shall adjust the 
projected amount computed under this subparagraph for the waiver 
year or years to take into account such increase.". 
01)) TECHNICAL MODIFICATIONS.—Clauses (i) and (ii) of section 
1915(dX5XB) of such Act (42 U.S.C. 1396n(dX5XB)) are amended— 
(1) by inserting "(rounded to the nearest quarter of a year)" 
after "the number of years" each place it appears, 
(2) by striking "before the waiver year" each place it appears 
and inserting "at the end of the waiver year", 
(3) by striking "between the base year and the waiver year" 
each place it appears and inserting "between the beginning of 
the base year and the beginning of the waiver year", and 
(4) by inserting "(rounded to the nearest quarter of a year)" 
after "for each year" each place it appears. 
(c) EFFECTIVE DATE.—The amendments made by this section shall 
apply to waiver years beginning during or after fiscal year 1989. 
SEC. 8433. EXTENSION OF TIME PERIOD FOR SUBMISSION OF CORREC-
TION AND REDUCTION PLANS FOR CERTAIN INTERMEDIATE 
CARE FACILITIES FOR THE MENTALLY RETARDED. 
(a) IN GENERAL.—Section 1922 of the Social Security Act (42 U.S.C. 
1396r-3) is amended— 
(1) in subsection (a), by striking "residents" and inserting 
"residents (including failure to provide active treatment)"; 
(2) in subsection (cX5), by inserting ", and to provide active 
treatment for," after "health and safety of; and 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3805 
(3) in subsection (f), by striking "within 3 years after the 
effective date of final rc^gulations implementing this section" 
and inserting 'l>y January 1,1990". 
(b) EKFKUI'IVB DATE.—^The amendments made by subsection (a) 42 use i396r-3. 
shaU become effective on the date of the enactment of this Act, and 
shall apply to any proceeding where there has not yet been a final 
determination by l^e Secretary (as defined for purposes of judicial 
review) as of the date of the ens^;tment of this Act. 
SEC 8434. CORRECTION RELATING TO MEDICARE BUY-IN. 
(a) IN GraraRAL.—Section 1905(pXl) of the Social Security Act (42 
U.S.C. 1396d(pXl)) is amended by striking subparagraph (B) and 
redesignating subparagraphs (C) and (D) as subparagraphs (B) and 
(O, respectively. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1902(aX10) of such Act (42 U.S.C. 1396a(aX10)) is 
amended, in the subdivision (VHI) following subparagraph (E), 
by inserting "who is only entitled to medical assistance because 
^ e individual is such a beneficiary" after "1905(pXl)". 
(2) Section 1902(mX4XA) of such Act (42 U.S.C. 1396a(mX4XA)) 
is 
amended 
by 
striking 
"1905(pXlXC)" 
and 
inserting 
"1905(pXlXB)". 
(3) Section 1905(a) of such Act (42 U.S.C. 1396d(a)) is amended, 
in the matter before clause (i), by striking "in the case of a 
qualified medicare beneficiary" and inserting "in the case of 
medicare cost-sharing with respect to a qualified medicare bene-
ficiary**. 
(4) Section 1905(pX2XA) of such Act (42 U.S.C. 1396d(pX2XA)), 
as amended by section 608(dX14) of the Family Support Act of 
1988, is amended by striking "(IXC)" and inserting "(IXB)". 
(c) EIFVHCTIVE DATE.—^The amendment made by this section shall 
be effective as if included in the enactment of section 301 of the 
Medicare Catastrophic Coverage Act of 1988. 
42 u s e 1396a 
note. 
State and local 
governments. 
42 u s e 1396a 
note. 
SEC 8435. CLARIFICATION OF FEDERAL FINANCIAL PARTiaPATION FOR 
CASE-MANAGEMENT SERVICES. 
The Secretary of Health and Human Services may not fail or 
refiise to approve an amendment to a State plan under title XIX of 
the Social Security Act that provides for coverage of case-manage-
ment services described in section 1915(gX2) of such Act, or to deny 
payment to a State for such services under section 1903(aXl) of such 
Act on the basis that a State is required to provide such services 
under State law or on the basis that the State had paid or is payii^ 
for such services from non-Federal fimds before or after Apnl 7, 
1986. Nothing in this section shall be construed as requiring the 
Secretary to make payment to a State under section 1903(aXl) of 
such Act for such case-management services which are provided 
without charge to the users of such services. 
SEC. 8436. DETERMINATION OF PREMIUM AMOUNTS FOR EXTENDED 
MEDICAL ASSISTANCE. 
(a) 
TAKING 
INTO 
ACCOUNT 
CHILD 
CARE 
COSTS.—Section 
1925(dX5XC) of the Social Security Act, as inserted by section 
303(aXl) of the Family Support Act of 1988, is amended by inserting 42 use i396r-6. 
"Qess the average monthly costs for such child care as is necessary 
for the employment of the caretaker relative)" sdfter "gross monthly 
earnings". 
102 STAT. 3806 
PUBLIC LAW 100-647—NOV. 10, 1988 
42 u s e l396r-6 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
"°*®- 
shall be effective as if included in the enactment of the Family 
Support Act of 1988. 
SEC. 8437. CLARIFICATION OF WAIVER FOR H
O
M
E AND C
O
M
M
U
N
I
T
Y
-
BASED SERVICES FOR INDIVIDUALS W
H
O W
O
U
L
D OTHER-
WISE REQUIRE HOSPITAL O
R FACILITY CARE. 
(a) IN GENERAL.—Section 1915(cX7XA) of the Social Security Act 
(42 U.S.C. 1396n(cX7XA)) is amended— 
(1) by striking "who are inpatients in hospitals," and insert-
ing "who are inpatients in, or who would require the level of 
care provided in, hospitals,"; and 
(2) by striking "who are inpatients of those respective facili-
ties." and inserting "who are inpatients in, or who would 
require the level of care provided in, those respective facilities.". 
42 use I396n 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
"°*®' 
shall apply with respect to waiver applications submitted before, on, 
or after the date of the enactment of this Act. 
TITLE IX—TRADE PROVISIONS 
SEC. 9001. TRADE TECHNICAL AMENDMENTS. 
(a) IN OENERAL. 
(1) Section 121 of the Trade Act of 1974 (19 U.S.C. 2131) is 
amended by striking out "(d) There are" and inserting in lieu 
thereof "There are". 
(2XA) Paragraph (6) of section 203(e) of the Trade Act of 1974 
(19 U.S.C. 2253(e)) is amended— 
(i) by striking out "(A) the application" in subparagraph 
(B) and inserting in lieu thereof "(i) the application , and 
(ii) by striking out "(B) the designation" in subparagraph 
(B) and inserting in lieu thereof "(ii) the designation". 
(B) Paragraph (2) of section 1214(j) of the Omnibus Trade and 
19 use 2253. 
Competitiveness Act of 1988 is amended— 
(i) by striking out "Section 203(f)" and inserting in lieu 
thereof "Paragraph (6) of section 203(e)", 
(ii) by strilung out "in paragraph (1)" and inserting in 
lieu thereof "in subparagraph (AXi)", and 
(iii) by striking out "in paragraph (3)" £md inserting in 
lieu thereof "in subparagraph (BXi) • 
(3) Section 1215 of the Omnibus Trade and (Dompetitiveness 
19 use 2138. 
Act of 1988 is amended by striking out "1212(jXl)" and inserting 
in lieu thereof "1214(jXl)'^. 
19 use 1677-2. 
(4) Section 771B of the Tariff Act of 1930 is amended to read 
as follows: 
"SEC. 771B. CALCULATION OF SUBSIDIES ON CERTAIN PROCESSED AGRI-
CULTURAL PRODUCTS. 
"In the case of an agricultural product processed from a raw 
agricultural product in which— 
"(1) the demand for the prior stage product is substantially 
dependent on the demeuid for the latter stage product, and 
(2) the processing operation adds only limited value to the 
raw commodity. 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3807 
subsidies found to be provided to either producers or processors of 
the product shall be deemed to be provided with respect to the 
manufacture, production, or exportation of the processed product.". 
(5) Paragraph (19) of section 771 of the Tariff Act of 1930 (19 
U.S.C. 1677), as added by section 1335 of the Omnibus Trade and 
Competitiveness Act of 1988, is redesignated as paragraph (20). 
(6) Subsection (e) of section 1337 of the Omnibus Trade and 
Competitiveness Act of 1988 is amended by striking out 1
9 use 1671 
"1321(b)" and inserting in lieu thereof "1322". 
^°^ 
(7) Paragraph (6) of section 1342(a) of the Omnibus Trade and 
Competitiveness Act of 1988 is amended by striking out "by 1
9 use 1337. 
paragraph (5XB)" and inserting in lieu thereof "by paragraph 
(5)(A)". 
(8) Section 204 of the Trade Act of 1974 is amended by 19USC2254. 
redesignating subsections (d) and (e) as subsections (c) and (d), 
resoectivelv. 
(9) Subsection (d) of section 701 of the Tariff Act of 1930 (19 
U.S.C. 1671) is amended by redesignating the subsection (d) 
relating to a cross reference as subsection (f). 
(10) Subsection (a) of section 162 of the Trade Act of 1974 (19 
U.S.C. 2212(a)) is amended— 
(A) by striking out "chapter 1 or", and 
(B) by inserting "or under section 1102 of the Omnibus 
Trade and Competitiveness Act of 1988" after "or 124". 
(11) Item 735.24 of the Tariff Schedules of the United States is 
amended by striking out "5.52% ad val." and inserting in lieu 
thereof "4.64% ad val.". 
(12) Subparagraph (B) of section 337(nX2) of the Tariff Act of 
1930 (19 U.S.C. 1337(nX2XB)) is amended by striking out "under 
subsection (h)" and inserting in lieu thereof "under subsection 
(j)". 
(13) Subsection (g) of section 1214 of the Omnibus Trade and 
Competitiveness Act of 1988 is amended to read as follows: 1
9 use 58c. 
"(g) COBRA O
F 1985.—Section 13031 of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 (19 U.S.C. 58c) is amended— 
"(1) by striking out 'schedule 8 of the Tariff Schedules of the 
United States except item 806.30 or 807.00' in subsection 
(aX9XA) and inserting in lieu thereof 'chapter 98 of the Har-
monized Tariff Schedule of the United States, except sub-
heading 9802.00.60 or 9802.00.80'; 
"(2) by striking out 'General Headnote 3(e) (vi) or (vii)' in 
subsection (a)(9XC) and inserting in lieu thereof 'general note 
3(cXv)'; 
"(3) by striking out 'Schedules' in subsection (aX9XC) and 
inserting in lieu thereof 'Schedule'; 
"(4) by striking out 'item 806.30' wherever it appears in 
subsection (bX8XA) and inserting in lieu thereof 'subparagraph 
9802.00.60'; 
"(5) by striking out 'item 807.00' wherever it appears in 
subsection (bX8XA) and inserting in lieu thereof 'subparagraph 
9802.00.80'; and 
"(6) by striking out 'headnote 2 of the General Headnotes and 
Rules of Interpretation of the Tariff Schedules of the United 
States' in subsection (cX3) and inserting in lieu thereof 'general 
note 2 of the Harmonized Tariff Schedule of the United 
States'.". 
102 STAT. 3808 
PUBLIC LAW 100-647—NOV. 10, 1988 
(14) Subparagraph (D) of section 1214(qX2) of the Omnibus 
19 use 2703. 
Trade and Competitiveness Act of 1988 is amended— 
(A) by striking out "TSUS" in clause (iv) and inserting in 
lieu thereof "TSUS;", 
(B) by striking out "HTS" in clause (iv) and inserting in 
lieu thereof "HTS; and", and 
(C) by striking out "subparagraph (E)" in clause (vi) and 
inserting in lieu thereof "subparagraph (D)". 
(15) Section 330(cX3XAXi) of the Tariff Act of 1930 (19 U.S.C. 
1330(cX3XAXi)) is amended by striking out "most recently ap-
pointed to" and inserting in lieu thereof "with the shortest 
neriod of service on . 
(16) Subsection (g) of section 332 of the Tariff Act of 1930 (19 
U.S.C. 1332(g)) is amended by striking out "report to Congress, 
on the first" and inserting in lieu thereof "report to Congress on 
the first". 
(17) Subsection (i) of section 1121 of the Omnibus Trade and 
Ante, p. 1138. 
Competitiveness Act of 1988 is amended by striking out "subsec-
tion (c) apply" and inserting in lieu thereof "subsection (£) 
apply". 
(18) Subsection (b) of section 1902 of the Omnibus Trade and 
19 use 1507 
Competitiveness Act of 1988 (102 Stat. 1313) is amended by 
'^o^ 
striking out "1987" and inserting in lieu thereof "1988". 
(19) Item 909.35 of the Appendix to the Tariff Schedules of the 
United States is amended by striking out "3.6% ad val. (I)". 
(20) Subparagraph (B) of section 236(aX6) of the Trade Act of 
1974 (19 U.S.C. 2296(aX6XB)) is amended by striking out "in 
subparagraph (A) or (B) of paragraph (1)" and inserting in lieu 
thereof "in clause (i) or (ii) of subparagraph (A)". 
(21) Subsection (g) of section 1430 of the Omnibus Trade and 
19 use 2397 
Competitiveness Act of 1988 (102 Stat. 1257) is amended by 
"°*®- 
striking out "apply to with" and inserting in lieu thereof "apply 
with". 
19 use 58c note. 
(b) EFFECTIVE DATE.—The amendments made by this section shall 
be applied as if such amendments took effect on August 23, 1988. 
SEC. 9002. FOREIGN TRADE ZONES. 
Section 3 of the Act of June 18, 1934 (48 Stat. 999, chapter 590; 19 
U.S.C, 81c) is amended by adding at the end thereof the following 
new subsection: 
Petroleum and 
"(d) In regard to the calculation of relative values in the oper-
P®^°^®"™ 
ations of petroleum refineries in a foreign trade zone, the time of 
products. 
separation is defined as the entire manufacturing period. The price 
of products required for computing relative values shall be the 
average per unit value of each product for the manufacturing 
period. Definition and attribution of products to feedstocks for 
petroleum manufacturing may be either in accordance with Indus-
try Standards of Potential Production on a Practical Operating 
Basis as verified and adopted by the Secretary of the Treasury 
(known as producibility) or such other inventory control method as 
approved by the Secretary of the Treasury that protects the 
revenue.". 
SEC. 9003. REPORT 
ON 
SMALL 
BUSINESS 
INNOVATION 
RESEARCH 
PROGRAM. 
Section 6 of the Small Business Innovation Development Act of 
1982 (15 U.S.C. 638, note) is amended— 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3809 
Research and 
development. 
Exports. 
(1) by striking out the last sentence of subsection (a), £is added 
by section 8008 of the Omnibus Trade and Competitiveness Act 
of 1988 (PubUc Law 100-418), and 
(2) by adding at the end thereof the following new subsection: 
"(c) Not later than July 1, 1989, the Comptroller General shall Small business. 
transmit to the appropriate committees of the House of Representa-
tives and the Senate recommendations as to the advisability of 
amending the Small Business Innovation Research program to— 
"(1) increase each agency's share of research and development 
expenditures devoted to it by 0.25 percent per year, until it is 3 
percent of the total extramural research and development 
funds, and targeting a portion of the increment at products with 
commercialization or export potential; 
"(2) make the Small Business Innovation Research program 
permanent with a formal congressional review every 10 years, 
beginning in 1993; 
(3) allocate a modest but appropriate share of each agency's 
Small Business Innovation R ^ a r c h fund for administrative 
purposes for effective management, quality maintenance, and 
the elimination of program delays; and 
"(4) include within the Small Business Innovation and Re-
search program all agencies expending between $20,000,000 and 
$100,000,000 in extramural research and development funds 
annually.". 
SEC. 9004. EXTENSION OF CERTAIN EXISTING SUSPENSIONS OF DUTY 
AND DUTY REDUCTIONS. 
(a) EXTENSIONS UNTIL JANUARY 1, 1993.—Each of the following 
items of the Appendix to the Tariff Schedules of the United States 
are amended by striking out the date in the effective date column 
and inserting in lieu thereof "12/31/92": 
(1) Item 903.29 (relating to fresh, chilled, or frozen brussels 
sprouts). 
(2) Item 906.30 (relating to 3,5,6-trichlorosalicylic acid). 
(3) Item 906.32 (m-Aminophenol). 
(4) Item 906.38 (p-acetaminobenzenesulfonyl chloride). 
(5) Item 906.51 (carboxylic acid disolvate). 
(6) Item 906.53 (relating to dicyclomine hydrochloride and 
mepenzolate bromide). 
(7) Item 906.54 (relating to desipramine hydrochloride). 
(8) Item 906.99 (relating to rifampin). 
(9) Item 907.03 (relating to m-xylenediamine). 
(10) 
Item 
907.04 
(relating 
to 
l,3-bis(aminomethyl) 
cyclohexane). 
(11) Item 907.06 (relating to 4,4'bis(a,a-dimethylbenzyl) 
diphenylamine). 
(12) Item 907.08 (relating to 4-chloro-3-methylphenol). 
(13) Item 907.16 (relating to uncompounded allyl resins). 
(14) Item 907.18 (relating to certain forms of amiodarone). 
(15) Item 907.25 (relating to terfenadine). 
(16) Item 907.42 (relating to clomiphene citrate). 
(17) Item 907.51 (relating to certain 3^trium materials and 
compounds). 
(18) Item 907.65 (relating to tartaric acid). 
(19) Item 907.66 (relating to potassium salts: Antimony tar-
(20) Item 907.68 (relating to cream of tartar). 
102 STAT. 3810 
PUBLIC LAW 100-647—NOV. 10, 1988 
(21) Item 907.69 (relating to sodium tartrate). 
(22) Item 907.76 (relating to lactulose). 
(23) Item 910.00 (relating to diamond tool and drill blanks). 
(24) Item 911.50 (relating to unwrought lead). 
(25) Item 912.13 (relating to certain power-driven flat knitting 
machines and parts thereof). 
(b) OTHER EXTENSIONS.— 
(1) Item 907.00 (relating to p-hydroxybenzoic acid) is amended 
by striking out "9/30/85" and inserting in lieu thereof 
"12/31/88". 
(2) Item 907.22 (relating to caffeine) is amended by striking 
out "On or before 12/31/87" and inserting in lieu thereof "On or 
before the earlier of 12/31/92 or the date on which the rate of 
duty imposed by the European Communities on articles de-
scribed in item 437.02 exceeds the rate of duty imposed by the 
United States on such articles that was in effect on 6/30/88" 
Manassas 
National 
Battlefield Park 
Amendments of 
1988. 
Virginia. 
Conservation. 
16 u s e 429b 
note. 
Real property. 
TITLE X—MANASSAS NATIONAL 
BATTLEFIELD PARK 
SEC. 10001. SHORT TITLE. 
This title may be cited as the 
Park Amendments of 1988". 
'Manassas NationcQ Battlefield 
SEC. 10002. ADDITION TO MANASSAS NATIONAL BATTLEFIELD PARK. 
The first section of the Act entitled "An act to preserve within 
Manassas National Battlefield Park, Vii^inia, the most important 
historic properties relating to the battle of Manassas, and for other 
purposes", approved April 17, 1954 (16 U.S.C. 429b), is amended— 
(1) by inserting "(a)" after "That"; and 
(2) by adding at the end thereof the following: 
"(bXl) In addition to subsection (a), the boundaries of the park 
shall include the area, comprising approximately 600 acres, which is 
south of U.S. Route 29, north of Interstate Route 66, east of Route 
705, and west of Route 622. Such area shall hereafter in this Act be 
referred to as the 'Addition'. 
"(2XA) Notwithstanding any other provision of law, effective on 
the date of enactment of the Manassas National Battlefield Park 
Amendments of 1988, there is hereby vested in the United States all 
right, title, and interest in and to, and the right to immediate 
possession of, all the real property within the Addition. 
"(B) The United States shall pay just compensation to the owners 
of any property taken pursuant to this paragraph and the full faith 
and credit of the United States is hereby pledged to the payment of 
any judgment entered against the United States with respect to the 
taking of such property. Payment shall be in the amount of the 
agreed n^otiated value of such property or the valuation of such 
property awarded by judgment and shall be made from the perma-
nent judgment appropriation established pursuant to 31 U.S.C. 1304. 
Such payment shall include interest on the value of such property 
which shall be compounded quarterly and computed at the rate 
applicable for the period involved, as determined by the Secretary of 
the Treasury on the basis of the current average market jdeld on 
outstanding marketable obligations of the United States of com-
parable maturities from the date of enactment of the Manassas 
PUBLIC LAW 100-647—NOV. 10, 1988 
102 STAT. 3811 
National Battlefield Park Amendments of 1988 to the last day of the 
montii preceding the date on which payment is made. 
*'(C) In the sJbsenoe of a negotiated settlement, or an action by the 
owner, within 1 year after tibe date of enactment of the Manassas 
National Battlefield Park Amendments of 1988, the Secretary may 
initiate a proceeding at anytime seeking in a court of competent 
jurisdiction a determination of 
just compensation with respect to the 
taking of such property. 
"(3) Not later than 6 months after the date of enactment of the 
Manassas National Battlefield Park Amendments of 1988, the Sec-
retary shall publish in the Federal Register a detailed description 
and map depicting the boundaries of the Addition. The map shall be 
on file and available for public inspection in the offices of the 
National Park Service, Department of the Interior. 
"(c) The Secretary shall not allow any unauthorized use of the 
Addition after the enactment of the Manassas National Battlefield 
Park Amendments of 1988, except that the Secretary may permit 
the orderly termination of all operations on the Addition and the 
removal of equipment, facilities, and personal property from the 
Addition.". 
SEC 10003. VISUAL PROTECTION. 
Section 2(a) of the Act entitled "An Act to preserve within Manas-
sas National Battlefield Park, Virginia, the most important historic 
properties relating to the battle of Manassas, and for other pur-
poses", approved April 17, 1954 (16 U.S.C. 429b-l), is amended— 
(1) by inserting "(1)" after "(a)"; and 
(2) by adding at the end thereof the following: 
"(2) The Secretary shall cooperate with the (Jommonwealth of 
Virginia, the political subdivisions thereof, and other parties as 
designated by the Commonwealth or its political subdivisions in 
order to promote and achieve scenic preservation of views from 
within the park through zoning and such other means as the parties 
determine feasible.". 
SEC 10004. mCHWAY RELOCATION. 
(a) STUDY.—^The Secretary of the Interior (hereafter in this section 
referred to as the "Secretary"), in consultation and consensus with 
the Commonwealth of Virginia, the Federal Highway Administra-
tion, and Prince William County, shall conduct a study regarding 
the relocation of highways (known as routes 29 and 234) in, and in 
the vicinity of, the Manassas National Battlefield Park Oiereinafter 
in this section referred to as the "park"). The study shall include an 
assessment of the available alternatives, together with cost esti-
mates and recommendations r^arding preferred options. The study 
shall specifically consider and develop plans for the closing of those 
public highways (known as routes 29 and 234) that transect the park 
and shall include analysis of the timing and method of such closures 
and of means to provide alternative routes for trafiGic now 
transecting the park. The Secretary shall provide for extensive 
public involvement in the preparation of the study. 
(b) DETERMINATION.—^Withm 1 year after the enactment of this 
Act, the Secretary shall complete the study under subsection (a). 
The study shall determine when and how the highways (known as 
routes 29 and 234) should be closed. 
(c) ASSISTANCE.—^The Secretary shall provide funds to the appro-
priate construction agency for the construction and improvement of 
Federal 
Register, 
publication. 
Public 
information. 
16 use 429b 
note. 
102 STAT. 3812 
PUBLIC LAW 100-647—NOV. 10, 1988 
the highways to be used for the rerouting of traffic now utilizing 
highways (known as routes 29 and 234) to be closed pursuant to 
subsection (b) if the construction and improvement of such alter-
natives are deemed by the Secretary to be in the interest of protect-
State and local 
ing the integrity of the park. Not more than 75 percent of the costs 
governments. 
Q£ g^^jj construction and improvement shall be provided by the 
Secretary and at least 25 percent shall be provided by State or local 
governments from any source other than Federal funds. Such 
construction and improvement shall be approved by the Secretary of 
Transportation. 
(d) AUTHORIZATION.—There is authorized to be appropriated to the 
Secretary not to exceed $30,000,000 to prepare the study required by 
subsection (a) and to provide the funding described in subsection (c). 
Approved November 10, 1988. 
LEGISLATIVE HISTORY—H.R. 4333 (S. 2238): 
HOUSE REPORTS: No. 100-795 (Comm. on Ways and Means) and No. 100-1104 
(Comm. of C!onference). 
SENATE REPORTS: No. 100-445 accompanying S. 2238 (Comm. on Finance). 
CONGRESSIONAL RECORD, Vol. 134 (1988): 
Aug. 4, considered and passed House. 
Oct. 6, 7, S. 2238 considered in Senate. 
Oct. 11, H.R. 4333 considered and passed Senate, amended. 
Oct. 21, House and Senate agreed to conference report.